Albany International - Q1 2023
April 26, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to the Albany International first quarter 2023 earnings conference call. At this time, your telephone lines are in a listen-only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. If you should require assistance during the conference call, please press star then zero, and an AT&T specialist will assist you offline. As a reminder, your call today is being recorded. I'll now turn the conference call over to your host, John Hobbs, Director, Investor Relations. Go ahead, sir.
John Hobbs (Director of Investor Relations)
Thank you, Alan, and good morning, everyone. Welcome to Albany International's first quarter 2023 conference call. As a reminder for those listening on the call, please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we'll make statements that are forward-looking that contain a number of risks and uncertainties which could cause actual results to differ from those expected or implied.
For a full discussion of these risks and uncertainties, including a reconciliation to non-GAAP measures we may use in this call to their most comparable GAAP measures, please refer to both the earnings release of April 25th, 2023, as well as our SEC filings, including our 10-K. I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill?
Bill Higgins (President and CEO)
Thank you, John. Good morning, and welcome, everyone. Thank you for joining our first quarter earnings call. We're pleased to report another strong quarter, and we're off to a good start this year. Both business segments executed well in line with our plan. Total company sales grew more than 10% relative to our first quarter of last year, driven by strong organic growth from Engineered Composites. Gross margins were nearly 37%, and adjusted EBITDA margins were 22%. At the segment level, Machine Clothing's first quarter sales were effectively unchanged year-over-year. Machine Clothing segment delivered excellent profitability again, with gross margins over 50% and adjusted EBITDA margins exceeding 36%. To put this in historical context, those margins are in line with our five-year averages. Our Machine Clothing operating teams continue to execute well and deliver these attractive levels of profitability despite inflation and lingering supply chain challenges.
The Engineered Composites segment achieved top-line growth of approximately $26 million in the first quarter, up nearly 30% compared to Q1 of 2022. The growth is primarily driven by the Sikorsky CH-53K Helicopter program, the LEAP program, in addition to contributions from smaller programs. Adjusted EBITDA in this segment was $21 million, up about $7 million from 2022's first quarter result. In the past, I've discussed our strategic goal is to become the partner of choice for our customers in both of our business segments. In Machine Clothing, we're the leader in the paper machine clothing space, and it's our job to remain firmly positioned as the partner of choice.
Our strategy is to invest in the next generation of products, our production processes, and our technical sales and service teams. This is foundational to our well earned reputation for superior product performance, reliability, quality, and customer service.
In AEC, we're continuing to build our brand. Our on-time delivery and our product quality are becoming recognized as world-class. This customer recognition of Albany as a high-performance supplier, coupled with our composite material expertise, has been key to securing more business with existing customers, such as the CH-53K Aft Transition program, Sikorsky, and new business with certain new customers. Building on our growing reputation, our commercialization team has significantly increased our bid and proposal pipeline. Our engineering and operations teams are working hard to convert the most attractive of these opportunities to organic growth for our business. This pipeline of opportunities enhances our confidence that our organic growth strategy for the next few years is on track. As we discussed on our last call, our 2023 CapEx program consists of investments driven by organic growth in AEC.
In addition, as part of our continued operational excellence, we're making a significant investment in production capabilities to drive productivity gains within AEC and MC as well. Turning to business development, we recently announced a contract award from the U.S. Army in support of hypersonic development activities. This award is a visible indication of the potential of our proprietary 3D composites technology and what it could play in the demanding hypersonic environment. AEC will be utilizing its near-net shape 3D technology to develop a carbon-carbon structural solution for thermal protection systems that have significant benefit in high temperature hypersonic applications. When compared to competing technologies, AEC's 3D solution provides unique thermal and structural performance advantages with superior affordability and scalability. We're off to a good start to the year. Our operations are performing well, and we're executing on our long-term strategy.
Before moving on to the financial review, I wanted to take a moment to thank Stephen Nolan for his contributions to the success of Albany International and extend our best wishes for his continued success at his new company. Now I'd like to formally welcome Rob Starr, who recently joined Albany as our Chief Financial Officer. Rob comes to Albany as a seasoned CFO with both public and private company experience. He knows the industries we serve, and his depth of experience will be instrumental in leading our finance organization, and we're grateful to have him on board. While many of you likely know Rob from his prior roles, we look forward to introducing him to the investment community in coming weeks. Now with that, I'll hand the call over to Rob, and I'll be back to wrap up.
Rob Starr (CFO)
Great. Thank you, Bill. Good morning, everyone. I'm excited to be at Albany and working closely with the team as we continue to execute our strategy of value creation for all of our stakeholders. I have known Albany for some time and was attracted to the company for its financial strength, operational discipline, and leading-edge technologies. I found these attributes evident in both segments which I view as a clear differentiator in the market. Across the organization, there is a demonstrated foundation for success, which I am excited to help build upon. The team has a collaborative culture, and I've been impressed with their expertise and passion. Over the coming weeks, I will be visiting a number of sites and getting to know our team throughout the organization.
Turning to the quarter, I will talk first about the results for the quarter and then provide our outlook for the rest of the year. For the first quarter, total company net sales were $269.1 million, an increase of 10.2% compared to the $244.2 million delivered in the same quarter last year. Adjusting for currency translation effects, principally the decline in the euro and the Chinese yuan relative to the U.S. dollar, net sales increased by 12.2% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales are slightly higher compared to the same period in 2022, with higher sales across all paper machine clothing grades offset by contraction in engineered fabrics as nonwoven demand has waned in the post-pandemic environment.
Engineered Composites net sales, again, after adjusting for currency translation effects, grew by 30.3%, driven primarily by growth in the CH-53K and LEAP programs. During the quarter, CH-53K generated revenues over $27 million, up from $16 million in the same quarter last year, while the AEC LEAP program generated revenue of about $43 million compared to $40 million last year. First quarter gross profit for the company was $99.3 million, an increase of 8.4% from the comparable period last year. The overall gross margin declined modestly from 37.5% to 36.9% of net sales, caused primarily by the higher contribution from the AEC segment. Within the MC segment, gross margin declined from 51.5% to 50.8% of net sales, caused by higher input costs.
Within AEC, the gross margin increased from 13.6% to 18.5% of net sales, primarily due to improved absorption in the absence of raw material write-offs recorded in Q1 2022, partially offset by losses on a new program. During the quarter, we recognized an unfavorable net change of $600,000 on estimated profitability on contracts, similar in magnitude to that in the prior year-quarter. First quarter selling, technical, general, and research expenses increased from $52.6 million in the prior year-quarter to $58.8 million in the current quarter and was essentially flat at about 22% of net sales. Please note, from a run rate basis, Q1 corporate expenses included approximately $2.5 million of discrete items that are one-time in nature.
Total operating income for the company was $40.5 million, up from $38.8 million in the prior year-quarter. Higher operating income from AEC was offset somewhat by higher corporate expenses due to higher professional fees and personnel related costs and modestly lower MC operating income. Other income expense in the quarter netted to an income of less than half a million dollars, compared to $3.9 million of income in the same period last year. The decline this quarter was primarily driven by revaluation losses due to the euro strengthening relative to the U.S. dollar during the current year-quarter. The effective income tax rate of 28.2% this quarter was largely unchanged from the rate experienced during the first quarter of 2022.
Net income attributable to the company for the quarter was $26.9 million, compared to $27.7 million last year, caused by a $3.4 million reduction in other income, partially offset by higher operating income. GAAP earnings per share was $0.86 in this quarter, compared to $0.87 in the same period last year. After adjusting for the impact of foreign currency revaluation gain and losses, restructuring expenses, acquisition and integration expenses, adjusted earnings per share was $0.91 this quarter, unchanged from the first quarter of last year. Adjusted EBITDA declined slightly from $61 million in Q1 2022 to $60.4 million in the most recent quarter.
Machine Clothing adjusted EBITDA was $55.7 million or 36.4% of net sales this year, down from $57.7 million or 37.4% of net sales in the prior year-quarter. AEC adjusted EBITDA was $21 million or 18.1% of net sales, up from last year's $13.7 million or 15.2% of net sales. During the quarter, the company had negative free cash flow, defined as net cash used in operating activities, less capital expenditures of about $33 million. It is typical for the company to have negative cash flow in the first quarter due to seasonality in receipts and incentive compensation payments for performance in the past year. I would like now to turn towards the balance of the year and confirm our prior financial guidance remains in place for 2023.
In short, the first quarter developed largely as we had anticipated, and our expectations for the balance of the year haven't fundamentally changed. Machine Clothing delivered another exceptional quarter. In aggregate, we experienced market growth on a constant currency basis in all paper machine clothing grades. This was offset somewhat by declining demand in our engineered fabrics business, driven by the lower demand for the belts we supply to nonwoven manufacturers. Looking at geographic markets, the market conditions we noted as we entered 2023 remain largely in place, with growth in the Americas, stable markets in Asia, and markets that have weakened somewhat in Europe when compared to Q1 last year. Overall, our order books are similar to this time last year, with strength in tissue grades offsetting softer packaging markets. As a result, we're cautiously optimistic about 2023.
Unlike in 2022, we do not currently expect to see a continuation of foreign exchange headwinds for the full-year. We finished 2022 with an average euro to U.S. dollar exchange rate of 1.05 for the full-year, and the current exchange rate is above that level. Overall for this segment, we are maintaining our revenue guide of $590 million-$610 million. As mentioned last quarter, inflationary pressures are easing with improved availability and cost of logistics and more moderate energy pricing. However, some raw material supply chains remain a challenge. We continue our efforts to offset some of the inflationary impact through ongoing continuous improvement efforts and input cost management. We still expect to deliver margins in line with our long-term expectations for adjusted EBITDA margins in the mid-30s for the full-year.
Accordingly, we are maintaining our 2023 guidance for Machine Clothing adjusted EBITDA of $205 million-$225 million. Turning to Engineered Composites, our outlook for the year has not changed. As I mentioned, the AEC LEAP program generated close to $43 million in the first quarter. We continue to expect 2023 LEAP revenue will be roughly stable with 2022 levels before growing again in 2024. We also expect revenue from the CH53 program to be overly overall flat compared to 2022, with an increase in recurring production fully offset by a decline in non-recurring revenue. In 2023, we also expect to see growth on a few smaller programs. As a result, we are reiterating our revenue guidance of $420 million-$440 million and adjusted EBITDA of $80 million-$90 million.
At the total company level, we are reiterating our 2023 guidance as follows: revenue of between $1.0 billion and $1.05 billion, effective income tax rate of 28%-30%, depreciation and amortization between $70 million-$75 million, capital expenditures in the range of $90 million-$100 million, GAAP earnings per share of between $3.05 and $3.55, adjusted earnings per share of between $3.10 and $3.60, adjusted EBITDA between $225 million and $255 million. With that, I'll turn the call back to Bill for his final prepared comments.
Bill Higgins (President and CEO)
As you've heard, the company's in great shape. Our differentiated technology, innovation expertise, and solid customer relationships gives us a real competitive edge in the marketplace. We have experienced business leaders who have clearly defined long-term goals and outstanding operational track records. It's the expertise and depth of our teams across the company that helps assure the continuity of our strategy and continued success. Our balance sheet is strong. We're on sound financial footing. Rob is obviously already deep into our financial strategy and is going to be an outstanding CFO. As you know, I've informed the board of my intention to retire. We have a search underway for my successor. I know the board is pursuing it, the effort with thoroughness. I'm fully committed to ensuring a smooth transition. The board knows I'll remain in place for as long as that takes.
Our team has confidence in the future, and we look forward, as always, to sharing our progress with you. Well, now we'll be happy to take your questions. Alan?
Operator (participant)
Thank you. Ladies and gentlemen, if you do have questions, please press one then zero on your telephone keypad. You'll hear an indication you've been placed into queue, and you may remove yourself from the queue by repeating the one then zero command. If you're using a speakerphone, we ask that you please pick up your handset and make certain that your phone is unmuted before pressing any buttons. Again, for questions, press one then zero at this time. Our first question will come from the line of Gautam Khanna with Cowen. Go ahead.
Gautam Khanna (Managing Director and Senior Analyst)
Yeah, good morning.
Bill Higgins (President and CEO)
Morning, Gautam.
Rob Starr (CFO)
Morning, Gautam.
Gautam Khanna (Managing Director and Senior Analyst)
Wondering, was there any positive EACs in the quarter, positive or negative at AEC?
Bill Higgins (President and CEO)
Yeah, there was actually a mix of positive and negative EACs, and the net was.
Rob Starr (CFO)
The net was $600,000.
Bill Higgins (President and CEO)
$600,000, which is about the same as last year.
Rob Starr (CFO)
Correct. Yeah, last year I think it was $700,000.
Gautam Khanna (Managing Director and Senior Analyst)
Got it. Can you update us on where you guys are on the 787? Are you guys actually producing for it now?
Bill Higgins (President and CEO)
Yeah. Good question. The 787, as we described as we went through the year last year, we idled the production line. Prior to that, we had been keeping it running warm at a level, at a very low rate of production, so that we maintain the ability to produce. When we idled the line, we moved employees to other parts of the business to keep the talent that we need to run the production line. This year, we have started the line back up. We're running it at a slow pace, but running it enough so that, you know, we're assured that it could run effectively. We have started back up, which is, would be news compared to, I think, the last time we talked. We're getting ready.
We're expecting that in the back half of the year we'll see a little bit more production.
Gautam Khanna (Managing Director and Senior Analyst)
On the LEAP program, are you still expecting it to be relatively flat year-over-year in terms of units produced and revenue?
Bill Higgins (President and CEO)
We are. We do plan the LEAP program for the year. When we plan the manufacturing plan, we planned it. We level load the plan as we did, as we described in the last meeting. We did plan it to be flat this year. We're still running at that pace. You know, we had a good first quarter. You know, we're excited about the news coming out of Boeing, and we're looking to see if the 737 MAX production picks up in the latter part of the year. For right now, we're sort of holding to the plan that is flat.
Gautam Khanna (Managing Director and Senior Analyst)
Thanks, guys.
Bill Higgins (President and CEO)
Thank you.
Rob Starr (CFO)
Thank you.
Operator (participant)
We'll next go to the line of Michael Ciarmoli with Truist Securities. Go ahead, please.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Hey, good morning, guys. Thanks for taking the questions here. Just to stay on Gautam's question with the LEAP, you know, obviously, the news out of Boeing, which I think it's, you know, come out a couple weeks ago, too. They wanna be at 38 and 42, and I guess, you know, just the flat run here is, you know, the disconnect with Safran, I guess, planned production and deliveries. When would you start to ramp up to meet that 38 later this year or even, you know, if it's 42 into next year? I mean, do you have pretty good line of sight into that inventory burn down or that Safran, or can you give us a little bit more color there?
Bill Higgins (President and CEO)
Sure, Michael. We have ongoing regular discussion with Safran. We are very close with them. As you know, we're co-located in the same facilities in our three plants around the world. We're talking to them constantly. We would need a few months to start ramping up. We would, you know, we have the capacity to ramp up. We have the machinery in place, and I think due to the last couple years, our production probably got a little bit ahead of the engine delivery rate, which is a testament to our ability to produce and produce on time. We're ready to go. We're having discussions, and if we do ramp up, we need a few months ahead.
As I described earlier, we typically plan for the full-year to get to optimize the production and the efficiency of it. In the second half of the year, we would be adding people if we were gonna ramp up.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Got it. From an inventory perspective, you know, would you have enough raw material and fiber or, you know, how should we think about, you know, I think the inventory, you know, was up significantly on a sequential basis. You know, when would you start sort of pulling on inventory to get ready? Is that sort of all in the few months kind of contemplated with labor and raw materials as well?
Bill Higgins (President and CEO)
Yeah. I think from a material side, we're fine.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Okay
Bill Higgins (President and CEO)
Working those plans and there aren't any shortages.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Okay. Got it. Rob, I know you obviously just got on board, but you obviously had a really nice Q1 here, reaffirmed the guidance. I know it's obviously earlier in the year here. There's a lot of broad-based economic unknowns, but the $3.10, the low end of that range, you know, implies a major step down in an earnings trajectory. I mean, what are the puts and takes, you know, from the high end to the low end? I mean, I think it's pretty easy for us to get to the high end, you know, on sort of just a flat run rate basis here. What's sort of contemplated to maybe take that earnings trajectory down significantly on the low end?
Rob Starr (CFO)
Yeah, Michael, it's a very fair question. I mean, I think what you would have to see is, you know, a real degradation in, you know, some of the Machine Clothing markets, you know, relative to our expectations, given, you know, what the drop-through would look like there. You know, any change in overall production rates, as it relates. I mean, you know, we have, you know, a handful of very large programs at AEC that could really move the needle. You know, any change in assumption there from what's expected broadly in the market. You know, there may be a little level of conservatism there, but, you know, we wanna make sure that, you know, our low end of the range captures, you know, kind of any unforeseen changes in the macro environment.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Got it.
Bill Higgins (President and CEO)
I would add we've taken out the risky areas, 787. I mean, they're basically not much in the forecast. There is upside more than downside, I think there.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Got it. Just the last one on that topic of Machine Clothing. On that degradation, should we be or how are you looking at, you know, maybe the erosion of cargo, and we saw UPS and thinking about that packaging side of the business. You know, is there a lot of revenue tied to more on the packaging? I know it sounded like, you know, tissue, you know, was pretty stable, but, you know, what specifically would degrade? Should we be watching the overall sort of e-commerce, shipping, retail trends for some clues there?
Bill Higgins (President and CEO)
No, I. It's, there's not a direct correlation. The markets right now, we have an interesting mix where tissue has done well. It's covered a little bit of softness in packaging. Publication has, you know, slowed down a little bit. The Americas have been stronger than Europe. Europe's been a little bit slower. Asia's been pretty good. It's a real mix around the world. In aggregate, in nonwovens, you know, we're coming out of a pandemic, it's more like a kind of a reversion to the mean in nonwovens. There's a little, very small business in the buildings industry that, you know, has slowed down a little bit. Overall, we're pretty positive. Things look pretty stable with a little bit of growth.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Got it. Perfect. Thanks, guys. I'll jump back in the queue.
Rob Starr (CFO)
Thank you, Michael.
Operator (participant)
We'll go next to the line of Jordan Lyonnais with Bank of America. Go ahead, please.
Jordan Lyonnais (Equity Research Associate)
Hey, good morning.
Rob Starr (CFO)
Morning.
Bill Higgins (President and CEO)
Morning.
Jordan Lyonnais (Equity Research Associate)
I just had a quick question. For just on the detail you guys gave around Machine Clothing, is there anything else happening in the broader economy that's impacting the business right now?
Bill Higgins (President and CEO)
I'm sorry, I didn't understand the question. Is there something, in the broader economy? I don't think so. I mean, we're. Machine Clothing demand has held up. It's about the same as last year. As I said, it's a little bit stronger in the Americas than in Europe. The, the slowdown in Europe, you know, because of energy and just the general economic weakness there is the overall driver. Overall, as I said, it's pretty solid.
Jordan Lyonnais (Equity Research Associate)
Great. Thank you.
Operator (participant)
We have a follow-up question from the line of Michael Ciarmoli with Truist Securities. Go ahead.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Hey, thanks again, guys. Just thinking about, I guess, some of the longer term opportunities. You called out in press release the Army Hypersonic. Anything you can talk about in terms of FLRAA and, you know, potential opportunities there, you know, as that now we have a production decision and that contract's been awarded?
Bill Higgins (President and CEO)
Michael, there's nothing we can talk about specifically. I will say I get pretty excited 'cause the team, as I mentioned, has a number of programs, and I've mentioned in prior calls where we've actually won programs our customers don't let us disclose, and we've been adding to that list, which is wonderful for the longer term. We don't have any specific to disclose, but we're pretty excited about the long-term opportunity. You know, that comes out of doing a great job with the customers, having a technology that can play in the future that the most advanced composites. I think we have a lot of opportunity we're working on.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Okay. Fair. Last question. Rob, again, not to put you on the spot, but I think it was maybe a year ago, you guys had the Investor Day, put out the 2026 longer term operating model and some targets.
Bill Higgins (President and CEO)
Mm-hmm.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
I know you've been on board a short time here, maybe drinking from the fire hose. Any thoughts on kind of the trajectory of the business over the longer term and how you've kind of looked at those targets, you know, coming on board here?
Rob Starr (CFO)
Sure. Yeah, no, I mean, when you think about the guide, right, 5% organic growth, you know, really looking to see very meaningful expansion, in particular in AEC's top line, and then the overall earnings growth. You know, I think we have a super strong balance sheet. You know, everything that I'm seeing in my first couple weeks in the role is that, you know, the programs are in place. The BD environment, you know, we have a terrific BD team, you know, across both sets of businesses. And then when you think about just the large macro, right?
You know, if you look at Machine Clothing, and we just kinda look at the trend towards tissue and packaging, which is where we've centered our production and our sales, you know, especially compared to a few years ago, I feel that we're very much on track to deliver on that. Especially with the. That's the organic side and of course, you know, we are evaluating in a very disciplined way other inorganic opportunities to further accelerate that growth.
Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)
Got it. Helpful. All right. Thanks, guys. Welcome aboard, Rob.
Rob Starr (CFO)
All right. Thank you very much, Michael.
Bill Higgins (President and CEO)
Thank you.
Operator (participant)
If there are any additional questions, please take this opportunity now to press one then zero on your telephone keypad. Gentlemen, we have no further questions in queue. Pardon me.
Bill Higgins (President and CEO)
Thanks. Thank you, Alan.
Operator (participant)
We do have a line of Tony Bancroft with Gabelli Funds. Go ahead.
Bill Higgins (President and CEO)
Okay.
Tony Bancroft (Research Analyst)
Hey, good morning. Good morning, gents. Thanks for taking my call. I just had one maybe, last question, sort of longer term, big picture. You know, sort of as the Engineered Composites business matures and, you know, sort of gets to a run rate, maybe just longer term plans, strategy of the business, would it ever make sense for separation? Could you maybe just sort of review that? I know we've talked about in the past, but maybe update us with, you know, sort of your, the outlook that you see now. Thank you.
Bill Higgins (President and CEO)
Yeah, thanks, Tony, for the question. We, you know, the teams are working really well to grow the business, the AEC business. Our Research Development Technology teams actually are working together across the businesses to develop the next generation of materials. We've got a lot of opportunity to create value organically. We're gonna keep working on that.
Tony Bancroft (Research Analyst)
Great. Thanks for all your hard work, Bill and Rob. Welcome aboard. It's good to see your name there and, thanks, gentlemen.
Rob Starr (CFO)
Yeah. Good to hear from you, Tony. It's been a little while.
Tony Bancroft (Research Analyst)
Yep. Yeah.
Bill Higgins (President and CEO)
Thank you.
Tony Bancroft (Research Analyst)
Thanks.
Operator (participant)
We have no further questions in queue at this time.
Bill Higgins (President and CEO)
All right. Thank you everybody for joining us on the call today. We appreciate your continued interest in Albany International. Of course, if you have any questions, feel free to reach out to John Hobbs, our Director of Investor Relations. Thank you. Have a good day.
Operator (participant)
Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.