Albany International Corp. Q4 2007 Earnings Call Transcript

Feb.11.08 | About: Albany International (AIN)

Albany International Corp. (NYSE:AIN)

Q4 2007 Earnings Call

February 11, 2008 9:00 am ET

Executives

Michael C. Nahl - EVP, CFO

Joseph G. Morone - President, CEO

Unidentified Company Representative

Analysts

John S. Emrich - Iron Works Capital

Mark Connelly - Credit Suisse

Arnold Ursaner - CJS Securities

[Andy Singer] - [Flat Rock]

Ned Borland - Next Generation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Albany International fourth quarter earnings call. (Operator Instructions)

I would now like to turn the conference over to the Executive Vice President and Chief Financial Officer, Mr. Michael Nahl.

Please go ahead, sir.

Michael C. Nahl - EVP, CFO

Thank you very much, [Art]. Good morning. [break in audio] reminder that the comment about forward-looking references in the financial release also applies to the contents of this call.

Before we begin, I'd like to point out a small error in the earnings release. In the table on the bottom of Page 3, PMC operating income for the third quarter of 2006 should read 23,799 rather than the 20,424 shown. Remember that these numbers are in thousands.

That also results in a mistake on Page 6 in the middle paragraph, where the third line refers to a 21% increase in operating income Q4 to Q4. This should instead be 7%.

Those are not restatements of 2006 results, but are corrections to this release since the numbers for 2006 were correctly stated in 2006. We will issue a formal correction during the day, but wanted you to be aware of it. There was no error in any of the 2007 results.

Now for the operating commentary, we'll turn the call over to our President and Chief Executive Officer, Joe Morone.

Joseph G. Morone - President, CEO

Thank you, Michael. As always -- good morning, everyone -- as always, we'll open the call with my commentary, the text of which we publish with the release. Michael will follow with some amplifying comments this time about the strength of our balance sheet and cash flow potential, and then we'll turn to your questions.

We began 2007 with two tightly connected objectives -- for the short-term, restore profits to the levels we experienced before the 2006 pricing disruption in the European PMC market, and for the long-term lay a sustainable foundation for our cash and grow strategy. By year's end, as reflected in our Q4 results, we had substantially achieved both objectives.

We responded to the 2006 pricing disruption by initiating, in Q3 2006, a deliberate, intensive, three-year process of restructuring and performance-improvement initiatives. The announced shutdown of our forming plant in Montgomery, Alabama, was the latest step in this process. By late 2009, we will have streamlined our manufacturing footprint in Europe and North America, and expanded it dramatically in South America and Asia; reshaped and strengthened virtually every function in every business unit in every region of the world; and fully implemented a shared services center in Europe, a unified, comprehensive ERP system, and a global procurement organization. This transformation process is on schedule, contributed to the improvement in profitability in Q4, and is a major reason that we remain optimistic about the prospects for strong cash flow generation in 2009.

It is not possible to understand our Q4 results (or those of any other quarter during this period of intense transformation) without considering the impact on net income of the costs of these initiatives, especially when comparing results to quarters preceding or following this period of transformation. For this reason, we have adopted the practice of itemizing these costs each quarter. In Q4 2007, these costs had the effect of reducing net income by $0.26 per share. Without the costs and discrete income tax adjustments, our net income would have been $0.49 per share. This compares favorably to $0.42 in Q4 2006, and more significantly, to the $0.44 and $0.38 per share in the Q4s of '05 and '04, which preceded the European pricing disruption. Moreover, unlike the results in those earlier periods, the Q4 2007 results include an $0.08 per share loss in a very promising aerospace composites business. In previous earnings releases, I talked about our desire to return to the profit levels of Q2 2006. Taking into account the factors above, along with a seasonal effect on December PMC sales in North America, we have substantially achieved this objective.

Turning to the individual business segments, in PMC, excluding the Q4 '06 effect of changes in contract terms with a major customer, Q4 '07 net sales increased by 6% and operating income increased by 21%. The top-line performance was influenced by all of the now familiar trends: sales growth in Asia and South America, fuelled by rapidly growing markets; lower sales in North America, with the continuing shrinkage of the number of paper machines partially offset by market share gains resulting from our superior performance in the field; and higher sales in Europe, with the lower prices resulting from the '06 disruption more than offset by growth in volume.

We have not seen any significant change in the underlying forces at work in the PMC market. The emerging markets in Asia and South America continue to grow, while the mature markets in North America and Western Europe continue to face top-line pressure, a shrinking number of paper machines and continuing threat of competitive price pressure. This means that sustained growth in profit and cash generation in our core business will be driven not as it has been in the past by market growth in these traditional markets, but by performance-based market share gains in those markets, growth in Asia and South America, and fundamentally lower costs. This is precisely what drove PMC performance in Q4, and we expect more of the same in 2008.

Turning next to Albany Engineered Composites, which for this last quarter of the year is still included in the Applied Technologies segment, on the surface AEC performed poorly in Q4, with an operating loss of $3.0 million or $0.08 per share. But underneath the surface, we saw encouraging signs of progress, both in the steps being taken to turn the corner on profitability, and in increasing visibility about the long-term growth potential of the business. As I have discussed in previous earnings releases, the poor bottom-line performance stems from the combination of the inefficiencies that accompany steep ramp-ups in production in a still small business, coupled with rapidly escalating expenditures in R&D and engineering. In the second half of Q4, and again at the start of 2008, we began to see sustained improvement in the performance parameters that drive production efficiency. I suggested in our Q3 2007 earnings release that AEC should turn profitable in the second half of '08, and that still appears to be the case.

With each passing quarter, we develop a firmer appreciation of the growth potential of this business. In the Q3 2006 earnings release, I told investors that we thought AEC had the potential for at least 25% per annum growth for the next five years. Given the 2007 AEC sales of $30.5 million, this would make AEC a potential $150 million business by the middle of the next decade. With an additional year of experience, we now view that estimate as overly conservative. In 2007, net sales grew 31% compared to 2006. For the next five years, we believe AEC has the potential to grow at least 35% per annum. But more importantly, we now believe this business has the potential - and it's important to underscore the word potential at this point - it has the potential to be significant larger than the $150 million enterprise than we envisioned a year ago, and it has the potential to become a second core business of the company.

According to independent estimates, the total aerospace composites market will grow to around $25 billion in 2016. Of that $25 billion market, about $3 billion is addressable by our unique technology, and a total of $13 billion is addressable by a combination of our unique capabilities and more conventional composites capabilities.

The aerospace composites market is being shaped by two major waves of growth. The current wave, just beginning, is being driven by the new generation of long-haul aircraft - the Boeing 787 and the Airbus 380. Except for the landing gear braces that we are developing with Messier-Dowty and one other relatively small project, we are not participating in the 787 wave as AEC started up far too late to participate in the critical development projects. Much of the short-term AEC growth results from participation on smaller platforms that have already been certified and are in production, like the Eclipse VLJ.

The second wave of growth, which hits early to mid-next decade, is driven by the next generation single-aisle aircraft, the successor to the Boeing 737 and the Airbus A320. For these platforms, our timing is excellent. We've made good progress on positioning AEC to be a supplier of parts for the next generation engines for these new short-haul aircraft, and we're increasingly hopeful of participating in airframe applications as well.

It is this second wave of growth opportunities that is driving our rapidly increasing expenditures in R&D and engineering, and it will be our performance in pursuit of the development opportunities created by this second wave that will dictate whether or not by the end of this decade we are viewing AEC as a healthy and an important part of the Albany portfolio of business or as something altogether more significant than that. It's too early to tell, but we're encouraged by the progress we made in Q4 in the pursuit of second wave development contracts and partnerships.

As for the rest of the Applied Technologies segment, compared to Q4 '06 sales grew by 15% and operating income by 48%, strong performances driven by growth in the power generation filtration business in China.

Another highlight of the quarter was the successful start up of our new Engineered Fabrics plant in Kaukauna, Wisconsin. As we look to the prospects of this segment in 2008 and beyond, the key for us is the potential for sustained profitability and cash generation. For example, the Engineered Fabrics business, which has a mission of applying our permeable belts technology to process industries outside of the paper industry has growth potential -- sustainable growth potential -- of about 5% per year and sustainable profit and cash generation potential comparable to PMC in its steady state.

Albany Door Systems, our third business segment, had an outstanding Q4. Sales grew by 31% compared to Q4 '06, and reflecting the efforts to improve margins that I've alluded to in previous earnings releases, operating income more than doubled, growing by 127%. The results were driven by across-the-board top line strength in both product and aftermarket and in each region of the world.

Looking forward to 2008, we expect continued progress in the European aftermarket, growing momentum in North America as the consolidation of operations and product lines with R-Bac is completed, and progress in laying the foundation for growth in China, where we are now establishing a standalone manufacturing facility that will produce our full range of products.

Keep in mind that this is not a capital intensive business. Growth is driven primarily by breadth and performance of product line and strength of distribution channels. On both fronts, we expect good progress in '08. The only caution flag for this business in 2008 is the prospect of recession, which in the past has had a marked effect on demand for high-performance doors.

In sum, in Q4 2007 and more generally in 2007 overall, we accomplished our twin objectives of restoring near-term profitability while continuing to lay the long-term foundation for the cash and grow strategy.

As for 2008, we expect more of the same -- continued improvement in profitability and continued internal transformation. The risks associated with pursuing the first while undergoing the second are magnified in the recessionary environment, but we remain confident nonetheless that by the second half of 2009 the transformation will be complete, the cash and grow strategy will be fully implemented, and the results will be increasingly reflected in our financial reports.

Michael?

Michael C. Nahl - EVP, CFO

Thank you, Joe.

As always, our objective is to provide our investors with as much clarity as possible, as is evident from the extensive level of detail provided in our release. Today I'll add some comments regarding the balance sheet and cash flow.

At the end of 2007 we had a total of $480 million of debt with an average remaining life of 5.2 years and cash plus cash value of company owned life insurance totalling $117 million. That's net debt, as defined in our principle credit agreement, of $363 million.

The average interest rate applicable to our total debt at the end of December was 4.28%. We have no significant refinancing requirements until 2011.

Included in our debt was $116 million drawn on our $460 million revolving credit facility. The rate of interest we pay on borrowings under the revolving credit is based on our leverage ratio, defined in the agreement as our net debt divided by adjusted EBITDA.

Our leverage ratio at the end of the fourth quarter was 2.45 compared with 2.44 at the end of the third quarter. At that ratio, our interest rate is 100 basis points over LIBOR. This morning, three-month LIBOR is 3.07%.

Shifting next to cash flow, our net debt increased $17.8 million in the fourth quarter of 2007 and $93.8 million for the year. For the full year 2007, after capital expenditures of $149.2 million, investments in SAP implementation and information technology of $16 million, and paying dividends of $12.3 million, our net debt increased $93.8 million for the year.

For the full year 2008, we currently expect net cash use to be less than $25 million, assuming neither any acquisitions or serious economic recession.

Interest expense and net debt are expected to peak in the fourth quarter of 2008 and to decline significantly in 2009.

[inaudible] our capital expenditures of $149.2 million in 2007, we're below the low end of the $160 million to $180 million range we had projected, and as a result we are carrying forward into 2008 approximately $20 million to $25 million more than we had planned when we estimated the Capex range for 2007 in our last earnings call.

Of the capital we spent in 2007, $117.5 million was for the Paper Machine Clothing segment, $13.5 million for Engineered Composites, $17.5 million for the remainder of the Applied Technologies segment, and the balance for the Door Systems segment and other.

Capital expenditures in 2008 are expected to be around $140 million. This is higher than our prior estimate of around $110 million because of the higher carryover noted earlier and because attractive capital expenditure opportunities in our Engineered Composites business are higher than previously thought.

Of the $140 million we plan to spend, $100 to $110 million is for our Paper Machine Clothing business and over half of that amount is for our Asia and South American manufacturing capacity expansions.

We expect to spend approximately $25 to $30 million for Albany Engineered Composites, with the balance of the expenditures going to the remainder of the Applied Technologies segment and to the Door business.

The large investment in Engineered Composites in 2008 is associated with four activities - first, a major expansion of our manufacturing plant in Boerne, Texas; second, key equipment to support the production ramp up required for the Messier-Dowty composite landing gear brace program for the Boeing 787 program; third, completion of the expansion of the Rochester, New Hampshire composites facility which was largely completed in 2007, and fourth, key equipment at both locations to support growth programs with our principal customers.

Joe mentioned that we remain optimistic about the prospects for strong cash flow generation in 2009. Just a few comments about the transition from substantial cash use in 2007 to moderate use in 2008 to substantial cash generation in 2009.

Upon completion of the currently planned $140 million capital expenditures in 2008, Capex is expected to decline to around $65 million in 2009. The $69 million estimated Capex for 2009 is likely to include about $35 to $40 million for PMC, with the balance to Applied Technologies and Door Systems segments.

Depreciation and amortization in 2009 are expected to total approximately $71 million and $10 million respectively.

We continue to be optimistic about the prospects for strong cash flow generation in 2009 and beyond. The business outlook and actions we have taken will certainly help, as will a substantial decline in PMC capital expenditures next year, along with the potential to reduce working capital as we settle into our now fewer and lower cost manufacturing facilities.

Art, that completes our formal presentation. We'd be happy to take any questions at this time.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of John Emrich with Iron Works Capital. Please go ahead.

John S. Emrich - Iron Works Capital

Thanks. Hi, Joe. Hi, Michael.

Joseph G. Morone - President, CEO

Hi, John.

Michael C. Nahl - EVP, CFO

Hey, John.

John S. Emrich - Iron Works Capital

Starting with kind of the pro forma operating income margin, if you will, for the quarter, we've got in there would -- I took out the $10 million of the expenses that you called out, and we've also got a $3 million -- I'm trying to figure out the differences between this quarter and two Decembers ago and the difference between now and June '06 -- you got a $3 million pre-tax loss from the Composite business, correct?

Michael C. Nahl - EVP, CFO

Correct.

John S. Emrich - Iron Works Capital

And you also have -- how much in the way of expensed SAP implementation was there in the quarter ballpark?

Michael C. Nahl - EVP, CFO

SAP is part of the performance improvement initiatives listed on Page 4, on the Table 3 of Page 4, John.

John S. Emrich - Iron Works Capital

So part of the $10 that I've already called out?

Michael C. Nahl - EVP, CFO

No.

John S. Emrich - Iron Works Capital

No?

Michael C. Nahl - EVP, CFO

Yes, it is.

John S. Emrich - Iron Works Capital

Yes, it is. Okay, so just in general, when I was thinking of returning to the Q2 '06 profit levels by the end of this quarter, I was looking at a gross margin of 40%, an operating margin of over 11% back then. And what you're saying is we're there excepting for the two things, the seasonality of PMC and the operating loss in Composite. Am I missing anything else that I should be --

Michael C. Nahl - EVP, CFO

That's it.

John S. Emrich - Iron Works Capital

That's it, right?

Michael C. Nahl - EVP, CFO

That's right.

John S. Emrich - Iron Works Capital

So come June of '06 --

Michael C. Nahl - EVP, CFO

That comes up to be about $0.63 per share.

John S. Emrich - Iron Works Capital

Right. So coming to June of '08 -- excuse me --we should be looking at a margin structure like that, like we had back in June of '06?

Michael C. Nahl - EVP, CFO

Well, at --

John S. Emrich - Iron Works Capital

Excepting the Composite business and the SAP expense.

Michael C. Nahl - EVP, CFO

Yeah, at the operating income level, John.

John S. Emrich - Iron Works Capital

Yeah. I noticed that. It looks like the gross margin is much lower, but you've actually taken out more, it appears, SG&A expense over the last four quarters, which is not what I would have guessed. But is that really what's --

Michael C. Nahl - EVP, CFO

Well, I think over time, as we complete this three-year march we're on we're should see improvements in gross margin, we should see reductions in SG&A, and we should see improvements [break in audio] on the bottom line.

But you have to also remember that there's a big difference in our business mix between late '05, early '06 and where we'll be next year, and that's been a very explicit part of the story is that the growth in the emerging businesses is certainly a piece of what leads to the steady improvement.

John S. Emrich - Iron Works Capital

And on that, Joe - I mean, Michael - I remember even two years ago you thinking that long term the return on capital of those nascent businesses and now specifically Composites would actually - it would have a higher return on capital profile than the PMC business.

Michael C. Nahl - EVP, CFO

Right.

John S. Emrich - Iron Works Capital

Yeah. You still believe that?

Michael C. Nahl - EVP, CFO

Right. And the way we break it down, we use PMC as a benchmark. So when we look at Doors, the start of one end, we see significantly higher growth, lower profitability, positive cash flow generation barring a recession, but lower than PMC. But on the other hand, much lower capital intensity, so pretty highly -

Joseph G. Morone - President, CEO

Right. Higher return on capital.

John S. Emrich - Iron Works Capital

Right. Exactly. And then lastly, given your $25 million or less net cash use in '08 and given your Capex forecast and I'm guessing maybe even the dividend, you're looking at cash from operations of $115 to $125 million in '08 to get to that net cash usage number?

Michael C. Nahl - EVP, CFO

We'll let you do your own math.

John S. Emrich - Iron Works Capital

Yeah. Okay. Thank you.

Joseph G. Morone - President, CEO

Thanks, John.

Operator

Our next question comes from the line of Mark Connelly with Credit Suisse. Please go ahead.

Mark Connelly - Credit Suisse

Thank you. Joe, a couple of things on PMC.

If we look at demand in Europe right now, not for Albany's business but overall, would you characterize that market as stable or slipping?

And the second half of the question is: If we do see the European market start to slide, what would you expect would happen next? You've strengthened your European position quite a lot, but, you know, do you have a sense that customers in Europe would shut capacity quickly, and who's going to be more exposed to that? Is it going to be you or is it going to be the other players?

Joseph G. Morone - President, CEO

Morning, Mark.

You know, that's a question we spend a lot of time on, and I think you're seeing the same trends we're seeing. The combination of exchange rates on the one hand hurting Euro exports and the growth of the Chinese paper - Asian paper industry - on the other, wiping out that export market for West European paper makers puts a real squeeze on them.

We think the most likely outcome is reductions in capacity in Europe. And the reason we've been on a three-year transformation process rather than a year and a half is because that pricing disruption in '06 in PMC in West Europe was, for us, a wake-up call to much larger structural issues in Europe and also in North America. That's what I tried to say in the call.

These are mature markets; we're going to continue to see top line pressure. We're expecting to continue to see top line pressure in PMC in both North America and Western Europe. We'll continue to see reductions in paper machine capacity. What we've seen in North America we're expecting to see in West Europe, and our whole three-year transformation process is based on that presumption.

So we're anticipating more of the same, which means the way we compete globally is we have to gain share based on performance in West Europe and North America. We have to grow with the growing markets - South America and Asia - and then we have to race to get lower costs. And we're on all three paths.

We've pretty much blown by the short-term target of restoring profitability from those '06 price disruptions, but we're not stopping there and we're far from the finish line of our internal transformation precisely because we expect more pressure to come in West Europe.

Mark Connelly - Credit Suisse

Is your European market share higher or lower than it was before the disruptions?

Joseph G. Morone - President, CEO

We don't typically disclose it, but if you look at this in terms of volume, it's higher.

Michael C. Nahl - EVP, CFO

He also asked a question about what you're expecting with regard to the paper companies' capacity.

Joseph G. Morone - President, CEO

I'm sorry if I didn't make that clear, Mark.

What I was referring to was our expectation that we will see more consolidation in West Europe among some of the leading paper companies.

Mark Connelly - Credit Suisse

Okay.

Joseph G. Morone - President, CEO

And that we've built over the past year and a half our strategy with that expectation in mind, so we think we're prepared for it.

Mark Connelly - Credit Suisse

Very good. Just one question on the Door business. Obviously, you did an acquisition; you've reshuffled management fairly substantially. How much of the strength that we're seeing now do you think relates to the reorganization versus just, you know, latent economic strength?

Joseph G. Morone - President, CEO

You know, most of the strength in Q4 - a lot of that strength was Europe. We haven't yet seen the full effects of the combination in North America, and that's one of the reasons we're optimistic about '08.

Mark Connelly - Credit Suisse

Okay. Okay, so you may have a little bit of a tailwind even as the economic side slows down?

Joseph G. Morone - President, CEO

We have the tailwind in all three sectors of the world, but again this, we've seen  you've seen what's happened before to this business in a recession and that's, you know, we have to keep that target out in front of investors.

Mark Connelly - Credit Suisse

Okay. Okay. And just two more questions, Joe.

First, on Applied Technologies, you talk about the second half of '08 getting to profitable, how should we be thinking about Applied Technologies' margins across, say, the next two years? Should we be thinking about a gradual recovery or should we be thinking about a recovery but a continued, lumpy, you know, upanddown margin quarter to quarter?

Joseph G. Morone - President, CEO

Yeah. You're talking about the Composites business?

Mark Connelly - Credit Suisse

Primarily, yeah.

Joseph G. Morone - President, CEO

Because we do intend to break out as a separate segment beginning with Q1 '08  which should help you and our investors track this a little more clearly  I think lumpy is a good word just because of the - I think that's a great characterization because of the nature of this business. We will have quarters where, year-to-year, sales will be up 10% and then the next quarter it might be up 50%. And when you get that kind of fluctuation at the top line, you clearly get, as you characterize it, lumpiness on the bottom line.

And it's a function of how shipments get released to customers. If a major customer like an Eclipse slows down its deliveries, then our deliveries get slowed down and our sales get slowed down and vice versa. If we get a sudden surge of requirements for shipping landing gear braces for Boeing - from Messier-Dowty and then to Boeing, then we'll see that kind of lumpiness.

I think you've got it right.

Mark Connelly - Credit Suisse

Now related to that, you know, if we look at the delays we've been seeing across, you know, several aerospace platforms, at the end of the day you guys weren't really, you know, a meaningful factor in some of these big ones that are in the headlines right now. But when you look at the delays in aggregate, is this good for you or bad for you that these projects are getting delayed?

Joseph G. Morone - President, CEO

It really helps. I mean, our - if you look at what's dragging down income in this business today, there are two factors. The first is production inefficiencies in a small business - it's basically the plant down in Boerne, Texas - where they've had a huge surge in shipment requests and just trying to get up a learning curve overnight is just a fundamentally inefficient process. So anything that buys us time, it's not loss of sales. It's just rescheduling of sales a little bit farther out. That gives us more time to get up the learning curve and get through the inefficiencies. So that's one variable that's clearly affected in a good way by the sort of delays that we've read about with Boeing, for example.

The other big factor that's affecting profitability is we're ramping up as rapidly as we can our engineering and R&D capability in this business in order to take advantage of all of the second wave development opportunities that are coming our way. That's not going to change. We're going to continue to invest heavily, spend heavily in R&D and engineering. And that isn't as directly affected by the delays. In fact, it's not affected at all.

Mark Connelly - Credit Suisse

Okay. Just one financial question for you, Michael.

Originally - or prior to your comments - I had moderately frontloaded my Capex assumptions for 2008 just a little bit. I'm just wondering with this shift of Capex from 2007 into '08 whether there's more frontloading now or what -

Michael C. Nahl - EVP, CFO

There clearly is more frontloading now. You're absolutely spot on.

Mark Connelly - Credit Suisse

Okay. Thanks very much.

Joseph G. Morone - President, CEO

Thanks, Mark.

Operator

Our next question comes from the line of Arnie Ursaner - please go ahead - with CJS Securities.

Joseph G. Morone - President, CEO

Hey, Arnie.

Arnold Ursaner - CJS Securities

Hi, good morning.

Michael C. Nahl - EVP, CFO

Hi, Arnie.

Arnold Ursaner - CJS Securities

A couple of starting questions. Geographic trends in PMC for Q4, please, by region?

Michael C. Nahl - EVP, CFO

In terms of sales, Arnie, flat to down in North America.

Arnold Ursaner - CJS Securities

Can you quantify that a little more than just flat to down, because you have in the past.

Michael C. Nahl - EVP, CFO

We have?

Arnold Ursaner - CJS Securities

I think so.

Michael C. Nahl - EVP, CFO

It's down 2% to 3%.

Arnold Ursaner - CJS Securities

Okay.

Michael C. Nahl - EVP, CFO

In [inaudible] America. It's up in West Europe pretty sharply, and in our emerging markets, nice growth - a combination of South America and Asia.

Arnold Ursaner - CJS Securities

But again, no quantification on any of those?

Michael C. Nahl - EVP, CFO

We'd rather not.

Arnold Ursaner - CJS Securities

Okay. On Albany Door, you clearly already indicated that the majority of the growth was from Europe. I know you would prefer probably not to separate out organic growth versus acquisition growth, but to the extent most of it was international, would it be fair to say that nearly all of the growth was organic?

Michael C. Nahl - EVP, CFO

Yes.

Arnold Ursaner - CJS Securities

Okay. Can you break out EFC growth specifically, or the EFT performance specifically? [It's half] of Applied Tech. What did it do in the quarter?

Michael C. Nahl - EVP, CFO

Yeah, EF - is it Engineered Fabrics?

Arnold Ursaner - CJS Securities

Yes.

Michael C. Nahl - EVP, CFO

Was as opposed to the filtration and [primal op] businesses?

Arnold Ursaner - CJS Securities

Correct.

Michael C. Nahl - EVP, CFO

Yeah, it was basically flat.

Arnold Ursaner - CJS Securities

Okay. The rest of my questions I think are going to relate to aerospace. So for the first time you've actually disclosed a specific number, an operating loss, for AEC in the quarter so now, given that, it's going to lead to a whole series of questions. You also indicated you intend to separate it out anyways by Q1, so I'm going to ask a series of questions related to that.

You mentioned for the year revenue was up 31%. You mentioned in Q3 that it had been up 46%. Can you give us an actual Q4 revenue this year and a Q4 revenue last year?

Michael C. Nahl - EVP, CFO

I think that AEC sales Q4 to Q4 was up 17%. We can get you a more precise number, but I think that that's - 16%.

Arnold Ursaner - CJS Securities

Do we have an actual Q4 revenue for AEC?

Michael C. Nahl - EVP, CFO

Yeah. I think I mentioned it in the release. For the year it was 39.

Arnold Ursaner - CJS Securities

Right. What was it for Q4?

Michael C. Nahl - EVP, CFO

Oh, 8 - 8.1.

Arnold Ursaner - CJS Securities

Okay. And you mentioned it lost $3 million this year, operating loss of $3 million this year. What was its operating performance last year in Q4?

Michael C. Nahl - EVP, CFO

Let's see. You know, we - Arnie, you're asking us for information that we intend to start publishing in Q1 '08, for all the reasons that you're asking.

Arnold Ursaner - CJS Securities

Okay. Joe, you're obviously - we've talked about and you've spoken about your general view, being conservative about the business. By shifting your view to a 35% per annum growth compounded rate, are you basing that on what you have in hand or are you basing that on future development programs you hope to win or hope to develop?

Joseph G. Morone - President, CEO

We base it on a very careful analysis of the projects that we have in hand.

Arnold Ursaner - CJS Securities

Okay, maybe I'll ask it a slightly different way. In your prepared remarks you speak about being involved in next generation engines, so perhaps you could expand what it is you're doing there, but then you also speak to an opportunity in airframe applications. Are both embedded in this new revised guidance?

Joseph G. Morone - President, CEO

The whole point of the wave one, wave two timing, Arnie, is that 35% per annum for the next five years is pre-wave two. So there's two simultaneous waves of activity going on in our business. One is rapid short-term growth to meet selling into existing aerospace platforms and rapid expansion of development projects to position us for the next big wave of aerospace growth, which kicks in after the five-year period.

Michael C. Nahl - EVP, CFO

In that 35% growth rate, Arnie, we have included - over 80% of what is in that growth rate is absolutely totally in hand. And we've put a very, very, very conservative estimate in connection with the things that are in process but not contractual at this point. So I think we're feeling very, very comfortable with that number.

Arnold Ursaner - CJS Securities

You also mentioned, again, you will be carving out the information on this subsidiary or providing the information on the subsidiary. Is part of that - Joe, I know you've been focused on shareholder value - is part of your reason for giving out lots of additional information the possibility that you may do a carve-out IPO or some other monetization transaction to enhance -

Joseph G. Morone - President, CEO

You're ahead of us, Arnie. At this point we're focused on execution. We do think this is, as I tried to make clear, we think this is a potentially very important part of our future which does, as we execute and fulfil some of these projections, create all kinds of options for us. But we're - and if you know the way Michael and I think and the Board, our Board, thinks - we consider these options all the time.

But right now all the focus is on execution. It's way premature to think about anything else right now.

Arnold Ursaner - CJS Securities

Final question, if I can, on Albany Doors. You indicated in your release you're going to be building a manufacturing facility in China. When will that be operational? What is the capacity of that plant? And also, as you're focusing on Albany Door, can you give us an update on your whole aftermarket strategy and where we stand there?

Joseph G. Morone - President, CEO

Yeah, the plant will be operational this year. We haven't really gotten into capacity disclosures and we really don't want to at this point, but suffice it to say that it's a substantial expansion of our production capability in the Pacific region.

The aftermarket business is proving to be appealing and profitable in Europe where there appear to be real opportunities for forward integration. It does not appear to be a serious opportunity in North America where, for purely historical reasons, the channels of distribution are independently owned by in some cases some very large third-party distributors. So in North America, we really need to work with the channels, and it's one of the reasons why breadth of product line is so important and why that R-Bac acquisition was so important to us.

In Europe, there's more of a tradition of the product supplier forward integrating into the distribution channel and owning the distribution channel, so there's much more opportunity there.

And that's what we're seeing and that's how our strategy is progressing is to pursue the aftermarket with vigour in Europe; to not do so in North America.

Unclear at this point on how it will play out in Asia - that market is still very young.

Arnold Ursaner - CJS Securities

Just one clarification. Your potential cost savings for '08 is now higher than it's been. Does that reflect Montgomery, Alabama? Is that the difference between the two numbers?

Michael C. Nahl - EVP, CFO

No, Arnie. Montgomery, Alabama is not in those numbers.

Arnold Ursaner - CJS Securities

So if we were to add that, since it's now announced, how much, you know, what do you think that incremental savings could move from?

Michael C. Nahl - EVP, CFO

We haven't released those numbers yet, and when we will, to be - you should be prudent and assume that those savings, because of inventory effects, will play out in '09.

Arnold Ursaner - CJS Securities

Thank you very much.

Joseph G. Morone - President, CEO

Thank you.

Operator

We have a follow up from the line of John Emrich with Iron Works Capital. Please go ahead.

John S. Emrich - Iron Works Capital

Yeah, three quick ones, please.

The tax rate used in the $1.20 calculation. Is it closer to the 31% for '08 or the 24% for '07?

Unidentified Company Representative

It's in between the two tax rates. It's closer to the 24%.

John S. Emrich - Iron Works Capital

And is not the, I guess, why would you not use the expected tax rate for '08 in that - since that's where we're going to see it - in that estimate that you provided us? I thought the '08 tax rate was going to be closer to the low 30s.

Michael C. Nahl - EVP, CFO

We did use 25% in that rate - in that estimate.

John S. Emrich - Iron Works Capital

Is the expected tax rate, then, for '08 now in the mid-20s and not the low 30s?

Michael C. Nahl - EVP, CFO

It is expected at 25%, John.

John S. Emrich - Iron Works Capital

For '08?

Michael C. Nahl - EVP, CFO

Correct.

John S. Emrich - Iron Works Capital

Wow, okay. And with China, what's the progression of serving Asia out of Asia and then eventually someday serving Europe out of Asia or other parts of the world as well?

Joseph G. Morone - President, CEO

Well, what we've talked about publicly is that our first priority is to have significantly reduced shipments from outside of Asia - from Europe, for example  into Asia, and at the same time to position ourselves to grow with Asia.

Those are the top priorities.

John S. Emrich - Iron Works Capital

Okay. So we're not yet talking about the potential of serving Europe out of Asia someday down the road.

Joseph G. Morone - President, CEO

We haven't publicly, John.

John S. Emrich - Iron Works Capital

Okay. And lastly, what's the run rate now of the percentage of total revenue that is international, outside North America, for the company?

Michael C. Nahl - EVP, CFO

63%.

John S. Emrich - Iron Works Capital

63%? Thank you very much.

Operator

(Operator Instructions) And we have a question from the line of [Andy Singer] with [Flat Rock]. Please go ahead.

Andy Singer - Flat Rock

Hi, guys. The Doors business operating margin looked like it was around 11.5%, which is the best we've seen in a long time. Is that [inaudible] continue into '08?

Joseph G. Morone - President, CEO

Barring recession, there's a lot of momentum in that business, so yes.

But, you know, but just so you understand the potential that a recession can have, these new door sales are, for the customer, a capital expenditure. And, you know, if we hit a hard recession, then they'll cut back on Capex.

Andy Singer - Flat Rock

Sure. And the PMC - sorry, go ahead.

Joseph G. Morone - President, CEO

On the other hand, you'd expect that they would continue to need to repair and service the doors, and so that's one of the beauties of having a higher percentage of - a higher volume of sales in the aftermarket.

Andy Singer - Flat Rock

Okay. And the PMC earnings, were China's start-up costs included in those restructuring numbers or where they not included?

Michael C. Nahl - EVP, CFO

In the performance improvement.

Andy Singer - Flat Rock

Okay. Okay.

Michael C. Nahl - EVP, CFO

Not restructuring.

Andy Singer - Flat Rock

Okay. Okay. Great. So the margin softness, a lot of it was due to seasonality?

Joseph G. Morone - President, CEO

There was an effect that we saw for the second time in a row in North America in the second half of December where mills didn't shut down. They just - paper mills  they just ran through the year.

And since they didn't shut down, they didn't put on new PMC. They ran the PMC longer. And that's the second time we've seen that holiday season effect, second half of December, and it was a clear season effect.

We're not yet certain whether this is going to happen every year, but it's happened the last two, and we're assuming - we're building into our models that it'll be a continuing effect.

And for people who've been following PMC for years and years, Q4 used to be a strong quarter. Because of this effect, now that seems to have slipped a bit.

Andy Singer - Flat Rock

Okay. Thanks.

Joseph G. Morone - President, CEO

Well, if there are no more questions, thank you all for participating on the call once more.

Operator

We do have one in queue - I'm sorry, Speakers. Ned Borland, Next Generation, he's the last question in the queue. Please go ahead.

Ned Borland - Next Generation

Hi, guys.

Joseph G. Morone - President, CEO

Hi, Ned.

Ned Borland - Next Generation

Just following up on the savings rate question. If it's not Alabama that gets you to 120 in savings EPS, you know, what is it? And also the press release sort of reads that you're going to be recognizing that faster than by 4Q '08, which I think was the last timeline when you were going to get to the, you know, a $1 a share run rate. I'm just wondering if I'm on track there?

Michael C. Nahl - EVP, CFO

Yeah, you're on track. It's just that as we go through this process of intense change, there are more opportunities we'll have for performance improvement. And as you know, we try as best we can to be conservative in the numbers we give you.

So yes, the 120 is from previously announced activities. There's not anything new in there. And effectively, that 120 - $0.50 or $0.125 per quarter - was being felt by the end of 2007, which leaves $0.70 and a quarterly effect of an incremental $0.17, and that incremental $0.17 should be apparent in Q1.

Ned Borland - Next Generation

Okay. That's all I had. Thanks.

Michael C. Nahl - EVP, CFO

That's $0.17 per quarter effect.

Ned Borland - Next Generation

Okay.

Operator

There are no further questions, Speakers.

Michael C. Nahl - EVP, CFO

Remember, Ned, that doesn't mean you just add $0.17 to your projection for earnings. There's offsetting effects - inflation [inaudible].

Ned Borland - Next Generation

Right. Thank you.

Operator

Once again, there is no one else in queue at this time.

Joseph G. Morone - President, CEO

Thanks, again. I know Michael and I will be seeing many of you in the various [break in audio].

Operator

Ladies and gentlemen, this conference will be available for replay on the Albany International web site. That does conclude your conference for today. Thank you for your participation, and thank you for using AT&T Executive Teleconference service. You may now disconnect.

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