Albany International - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $288.8M, down 7.8% YoY as Machine Clothing (-5.7%) and AEC (-11.0%) softened; adjusted diluted EPS was $0.73, and adjusted EBITDA was $55.7M with a 19.3% margin.
• Versus Wall Street, Albany delivered an EPS beat and revenue miss: adjusted EPS $0.73 vs $0.622* consensus; revenue $288.8M vs $294.9M* consensus (3 estimates) — driven by lower LEAP volumes and $7M EAC adjustments partly offset by CH-53K strength.
• Guidance reaffirmed across the board: FY25 revenue $1.165–$1.265B, adjusted EBITDA $240–$260M, adjusted EPS $3.00–$3.40, tax rate ~31%, capex $85–$95M; segment targets maintained (MC revenue $705–$755M; AEC $460–$510M).
• Capital returns remained active: $69.2M in Q1 share repurchases and a $0.27 quarterly dividend (payable July 8, 2025), with $193M remaining under the $250M authorization.

What Went Well and What Went Wrong

• What Went Well

  • “Machine Clothing continues to deliver consistent strong results,” with MC adjusted EBITDA margin up slightly YoY (28.4%) and gross margin steady at 45.7%.
  • AEC operational progress: “lower EAC adjustments in the quarter” and process improvements on CH-53K and Gulfstream; total EAC adjustments were $7M (vs $15M in Q4).
  • New business momentum: seven-year Bell 525 composite components contract; AEC backlog stood at ~$1.3B excluding LEAP beyond the calendar year-end.

• What Went Wrong

  • Revenue contraction and margin pressure: consolidated gross margin fell 130 bps YoY to 33.4% due to changes in estimated profitability of long-term AEC contracts.
  • AEC profitability was constrained by program-level EAC charges (CH-53K $2M; Gulfstream $1.7M) and lower LEAP sell-in amid destocking, compressing AEC gross margin YoY.
  • Net leverage rose to 1.34x with net debt at $297.1M due to increased borrowing for buybacks and working capital, up from 0.88x and $203.2M in Q4.

Transcript

Operator (participant)

Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Albany International First Quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to JC Chetnani, VP Investor Relations and Treasurer. You may begin.

JC Chetnani (VP of Investor Relations and Treasurer)

Thank you, Pam, and good morning, everyone. Welcome to Albany International's First Quarter 2025 earnings 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 reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking and contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to both our earnings release of April 30th, 2025, as well as our SEC filings, including our first quarter form 10-Q and our 2024 form 10-K.

Now, I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar.

Gunnar Kleveland (President and CEO)

Thank you, JC. Thank you for joining us as we review our first quarter 2025 results. Overall, I'm pleased to report that our businesses are executing to the plan that we laid out at the start of this transition year. Our new business segment leaders are performing well, as they restructure and strengthen their respective operations. While we see uncertainty in the markets, we were not affected by tariffs or other disruptions in the first quarter. Due to our mostly regional setup for both suppliers and customers, the overall direct impact of tariffs, as they currently stand, is not expected to materially impact our financial or operational performance. Machine Clothing continues to deliver consistent, strong results, and the integration of Heimbach is proceeding to plan.

We expect to see the benefits of the Heimbach integration efforts accelerate into the second half of this year as our actions take effect. AEC is executing well on its current portfolio programs, and the segment continues to win new business. The team is making progress on process improvements on our CH-53K and Gulfstream programs, and we had lower EAC adjustments in the quarter, which we will discuss in more detail later. For the quarter, we reported revenues of $289 million and overall adjusted EBITDA margin of 19.3% and an adjusted diluted EPS of $0.73. Free cash flow was ahead of plan, and we expect 2025 to be another strong free cash flow year. We returned capital to our shareholders with both a regular quarterly dividend and our re-initiated share repurchase program. In the first quarter, we repurchased $69 million worth of shares.

We currently have $193 million of capacity remaining under our latest share repurchase authorization of $250 million. Turning to our individual businesses, for the quarter, Machine Clothing reported revenues of $175 million and an adjusted EBITDA margin of 28.4%. In terms of grades, secular trends in packaging remain strong. Tissue, pulp, and engineered fabrics remain stable. North America had a slight decline in deliveries in the first quarter, but strong order flow shows strength in the market. Europe is showing signs of recovery, with good deliveries and strong orders making us cautiously optimistic for the region. Finally, Asia is mixed with some weakness in China. Our global MC order backlog is strong, with order-to-sales ratio above one, giving us confidence in our outlook for the year. At Heimbach, we continue to make good progress on our integration plans, which is focused on footprint rationalization and operational efficiency.

As a reminder, since the acquisition, we have closed two Albany facilities, sold one Heimbach business, and closed two Heimbach facilities. We have also restructured operations at the remaining Heimbach facilities in Durham, Manchester, Burgos, and Zhongzhou. These consolidation activities are strengthening our operational and production efficiencies and enhancing the regionalization of our business. The synergy benefits of these actions accrue over time. We expect the run rate on our synergies to be particularly strong as we exit 2025, and we remain confident of hitting our original synergy targets with a three and a half to four times effective purchase multiple. Turning to tariffs, we're monitoring and assessing the fluctuation in the tariff landscape as they occur. Our current view is based on tariffs as they currently stand.

The situation is dynamic, and our teams are vigilantly addressing both challenges and opportunities, and we continue to adapt as the situation develops. As it relates specifically to our MC business, it should be noted that most of our sales and sourcing is regional and therefore generally insulated from tariffs. For example, in North America, the transaction among our facilities in Mexico, U.S., and Canada are covered by the USMCA. With the acquisition, excuse me, with the acquisition of Heimbach, our EMEA sales and supply chain is strengthened regionally by local trade treaties. Finally, in Asia, we're also supplying our customers from within the region. However, we have some potential exposure to sole-source supplied materials and certain highly engineered products manufactured by us only in the U.S. or the UK, To mitigate any impact, we're assessing and using trade mechanisms, looking at cost controls as well as considering other actions.

Turning to our engineered composite segment, revenues for the quarter were $114 million with an adjusted EBITDA margin of 13.5%. We keep making progress in our AEC operations, and we recorded a total EAC adjustments of $7 million for the quarter. Half of this is driven by CH-53K and Gulfstream, with a balance across a mix of programs. The frontline leader coaching, operator training, and progress in planning and supply chain are driving the expected improvements as well as setting the sights up for future growth. On LEAP, as you may recall, last quarter, we took a conservative approach as we projected lower volumes both at LEAP as well as our other Boeing programs. The drop in revenue in the first quarter is in line with our forecast.

We stand ready to meet Safran's production schedule as the demand at Boeing and Airbus recovers and have ample capacity to meet any upside to the demand. With respect to our other programs, we're seeing growth in advanced air mobility with expected ramp to build through the course of 2025. On new program wins, we recently announced a long-term agreement with Bell on the 525 program. For JASSM, we added to our current backlog and are working on a new multi-year contract. As these awards translate into purchase orders, they will be added to our existing AEC backlog, which at quarter end was $1.3 billion. As a reminder, this is backlog that does not include LEAP volumes beyond the current calendar year and only relates to our other AEC platforms. This backlog provides us with visibility and confidence into our business performance in 2025 and beyond.

Finally, as it relates to tariffs for AEC, our sourcing and production in Mexico, Canada, and the USA is again currently protected under the USMCA. The direct impact of our earnings from tariffs at AEC is currently expected to be negligible. We're tracking how second-order tariff impacts play out, particularly from suppliers as they may be impacted in their own value chain. Similarly, we are monitoring the impact of demand at our end customers. At this point, we are not aware of any changes from our customers or suppliers. If we begin to see impacts, we have assessed and prepared mitigating actions, and we will address these challenges as needed. In the current macro and geopolitical environment, we believe the ongoing titanium shortages and extended lead times will continue.

This creates even more opportunity for our engineered materials, especially in 3D woven composite parts, which can be a superior alternative to titanium in terms of strength, weight, and cost. As our product offering gains more acceptance among our customers, our competitive advantage will be a catalyst for additional long-term growth. We have proven our industrialization of this technology with the LEAP fan blade and case, 777-9X fan case, as well as parts for landing gears. Our solution can be delivered at a fraction of the lead time with readily available materials and a production capacity proven to deliver 100% on time, which is in stark contrast to the current and historical titanium supply issues. Finally, we continue to streamline our operations and are upgrading our SAP system with S/4HANA across the entire company with a go-live schedule for next week.

This will improve our systems and operational efficiencies and deliver enhanced analytics to improve our business agility. With that, I will now hand it over to Rob to provide more details on the quarter. Rob.

Robert Starr (CFO)

Good morning, everyone. I will review our first quarter results and then provide our outlook for 2025. As a reminder, please note that starting last year, we allocated our GIS costs to our operating segments to better reflect their true underlying performance. Consolidated net sales were in line with our plan at $289 million, down 7.8% from $313 million in the first quarter of last year. Machine Clothing net sales of $175 million decreased 5.7% versus the first quarter of the prior year due to targeted product line divestitures and lower sales to a large Heimbach customer. AEC net sales of $114 million were lower by 11% versus the first quarter of 2024, primarily due to a $7 million negative top-line impact from the EAC adjustments during the quarter. This was coupled with lower LEAP sales as was expected.

We were able to partially offset the sales decline with growth in our advanced air mobility and CH-53K platforms. Consolidated gross profit was $96 million, or 33.4% of sales, down from $109 million in the prior year, or 34.7% of sales. Machine Clothing gross profit of $80 million decreased from $85 million in the prior year, while gross margin percentages remained constant at 45.7%. This performance reflects improved operating efficiencies as we continue with our integration efforts. AEC gross profit of $17 million decreased from $24 million, largely reflecting the impact of the cumulative EAC adjustment for the quarter. Of the $7 million of EAC charges for the quarter, $2 million related to the CH-53K program, $1.7 million related to Gulfstream, with the balance spread across multiple other programs. Net R&D expense at 4% of revenue remained relatively flat in the first quarter versus the prior year.

Our consistent investment in R&D underscores our strategy of using material science as a competitive advantage. Consolidated SG&A expenses were $54 million for the quarter, down slightly versus the $55 million in the prior year. The effective tax rate for the quarter was 26.6% versus 29.2% in the prior year. The lower rate is mainly due to favorable discrete tax adjustments, primarily related to a decrease in our valuation allowance on foreign tax credits. GAAP net income attributable to the company for the quarter was $17 million compared to $27 million last year. GAAP diluted EPS was $0.56 per share in the quarter versus $0.87 in the same period last year. After adjustments primarily relating to FX revaluation and restructuring costs, as detailed in our non-GAAP reconciliation, the adjusted diluted EPS was $0.73 versus $0.90 in the same period last year.

Consolidated adjusted EBITDA was $56 million for the first quarter versus $65 million in the prior year period. Machine Clothing adjusted EBITDA was $50 million versus $52 million in the prior year. Adjusted EBITDA margin was up slightly to 28.4% versus 28.2% prior year, reflecting improved operational efficiencies. AEC adjusted EBITDA was $15 million as compared to $21 million in the prior year period, largely reflecting the effect of the EAC adjustments. Adjusted EBITDA margin at AEC was 13.5% of sales versus 16.6% in the prior year, once again reflecting the current period EAC cumulative catch-up adjustments, as well as the effect of EAC charges, which were recorded in the second half of last year. During the quarter, free cash flow was negative $13 million versus negative $17 million in the prior year. We remain on track to deliver another strong cash flow performance this year.

Our balance sheet remains strong with a cash balance of over $119 million and $384 million of borrowing capacity under our committed credit facility. Based on our analysis of tariff impacts and given our first quarter's performance, which was in line with our plan, we are reaffirming our full-year guide. In terms of earnings cadence, we still expect the second half to be stronger than the first half due to the ramp at AEC combined with the acceleration of Heimbach synergies. Now I'd like to open the call for questions. Operator.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad. Raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Peter Arment with Bird. Please go ahead.

Peter Arment (Managing Director)

Yeah, good morning, Gunnar, Rob, JC. Hey, Gunnar, you talked about kind of the ability to kind of step up to meet Safran's schedule if rates increase. Could you just kind of remind us? I know that there was probably some inventory that they were burning through, but where things stand regarding LEAP and kind of how things are progressing there?

Gunnar Kleveland (President and CEO)

Hi, good morning, Peter. Right now, there is some use of inventory. We expect to be, and as I've mentioned before, we have a requirement to sit on certain inventory for Safran. As we get through this first half of the year, we expect to be at that level. We are monitoring how they're pulling. We're continuing to meet with them regularly. I would say there is upside to the back half of the year the way it is looking right now. As of now, we're staying with the plan.

Peter Arment (Managing Director)

Got it. You mentioned the other programs, the $1.3 billion backlog that talks to the rest of the programs and mix. Just wondering, you're seeing about new opportunities in terms of, I know there's probably a lot you can't talk about in terms of the classified world, whether it's hypersonics or other things, but there is a lot of funding dollars coming through the supplemental and other areas. Are you seeing new opportunities to grow that backlog?

Gunnar Kleveland (President and CEO)

I definitely am seeing opportunities. We have the benefit actually now picking and choosing a little bit what we want to go after. Our focus is on our technology, whether it's 3D woven braiding or other capacities that we have and where we have a competitive advantage. There is definitely opportunity out there. I would say the opportunity is in space and in some of the missile programs, as well as as we ramp up now across both Boeing and Airbus engines is a priority.

Peter Arment (Managing Director)

Yeah, that's helpful. Just lastly, maybe on lower EACs this quarter, maybe just CH-53K, such a huge program for you guys, maybe just give a little more color on how that program's going. Thanks.

Gunnar Kleveland (President and CEO)

Yeah, our plan is working, Peter. The team is progressing. We have the right people in place. We still have to hire more people, which always introduces some risk. I would say we are better at onboarding. We're better at training, and we have better frontline leadership people. I am optimistic about continued improvement on the CH-53K. We also closed out several programs in the first quarter, which was part of the EAC adjustments. As new programs are coming on, we are well situated, well prepared. Very positive.

Peter Arment (Managing Director)

Appreciate the color. I'll jump back into queue. Thanks, guys.

Gunnar Kleveland (President and CEO)

Thanks.

Operator (participant)

Your next question comes from Michael Charmolly with Truist Securities. Please go ahead.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Hey, morning, guys. Thanks for taking the question.

Robert Starr (CFO)

Hey, Michael.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Hey, maybe Gunnar or Rob, just to stay with Peter's last or the last line of questioning there on new programs. Can you give us more color on this seven-year contract with Bell? I mean, I guess just thinking of it specifically from a risk or margin profile, we've kind of all been conditioned, I think, to think that structures are challenging business. How do we get comfortable with what you're potentially going to be working on and delivering there?

Gunnar Kleveland (President and CEO)

Yeah, so I'm very excited that we do have a contract with Bell now. We've been working with them. It's a situation where one of their suppliers failed, which we've seen before. We took on some rather complex parts from on the 525 tail boom specific. I would say it's an opportunity for us to show our capability. Those parts are in our Bernie facility right now, and we're delivering and supporting Bell as they're ramping up on the 525. I believe in the 525 program. I think it's a good program going forward. It's really a catalyst to get us in with Bell and show our capabilities and see what else we can do for them.

As far as returns, since we do have a choice of the work that is coming towards us, we are being picky about the work that we're taking and we're getting the returns that we have projected in the high teens for AEC.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Okay. Okay. Just, yeah, I guess the last time we saw you, you just said you took over from a challenged supplier. I guess that was the Gulfstream, and that proved to be a little bit risky. Okay. I guess just sticking with AEC and kind of trying to dig a little deeper, what were LEAP revenues or what was the growth year-over-year? I mean, you've got GE and Safran talking about a 15%-20% increase this year, but it sounds like there will be continued destock as they manage that inventory. I mean, have you changed your view at all from being down slightly for the year, or how should we think about LEAP?

Gunnar Kleveland (President and CEO)

Let me address the supplier first with Bell. They chose to get out of the business, so that's why Bell was in trouble. These are much simpler composite parts than what we have with Gulfstream. We've already made delivery of all the parts, so I'm not worried there. They're complex parts because we are good at complex parts. As far as LEAP is concerned, right now, we're keeping the plan for the year. As I mentioned to Peter earlier, I think there's upside for the year. It's very positive to see where Boeing is at their ramp-up on 737 and with Airbus. As the year progresses, we will incrementally grow our output with the demand.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Okay. Do you have the LEAP revenue number for the quarter?

Robert Starr (CFO)

Yeah, we haven't disclosed that specifically, but Michael, if you look in the queue, there is a reference to the percentage of revenue, so I'm not.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Okay.

Robert Starr (CFO)

I mean, I would expect in Q1 to be pretty much the low point for the year just based on the full-year projection.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Okay. Got it. Just last one for me, and I'll get out of the way, just shifting to MC. I guess Heimbach coming on a couple of years, and I think the original plan was to take EBITDA from kind of that $15 million-$60 million and maybe triple it. The margins down in MC this year. Is that still the trajectory for the overall integration you're working on? Should we be thinking about kind of those Heimbach EBITDA margins getting to that $45 million-plus rate?

Gunnar Kleveland (President and CEO)

I think what you should expect on Heimbach, or what you see right now, is an effect of all of the actions that we're taking. I did repeat that just to remind us and everybody that we're taking significant actions to densify our operations and make our efficiencies better. As we're doing that, there are some challenges with all the moving parts. You're not seeing it right now, but you'll see that accelerate through the year. Yes, we're confident that we will continue to see that growth.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Thanks, guys.

Operator (participant)

Your next question comes from Jordan Lyonens with Bank of America. Please go ahead.

Jordan Lyonens (Analyst)

Hey, good morning.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Good morning.

Robert Starr (CFO)

Morning, Jordan.

Jordan Lyonens (Analyst)

Could you talk about how you're looking at the ramp for 78 and then 777X going into the rest of the year?

Gunnar Kleveland (President and CEO)

787, we believe to be just growing very, very slowly through the year and then accelerating next year. We have a relatively, I would say, cautious outlook for 787 for this year, but better next year. 777, it's all about the certification, and we're building parts to support that certification.

Jordan Lyonens (Analyst)

Cool. On the tariff impacts, for the direct one there, you guys said you were mitigated. Where are you guys looking at the second derivative impacts?

Gunnar Kleveland (President and CEO)

Yeah, we're listening to International Paper. We're looking at listening to whether it's GE or Safran or Boeing. If we're going to have to monitor that and also see what happens with the tariff landscape as it seems to change every week. Right now, it is looking relatively flat for us.

Jordan Lyonens (Analyst)

Got it. Thank you so much.

Gunnar Kleveland (President and CEO)

Sure.

Robert Starr (CFO)

Thanks, Jordan.

Operator (participant)

Again, if you would like to ask a question, press star, then the number one on your cell phone keypad. Your next question comes from Steve Tusa with JPMorgan. Please go ahead.

Chigusa Katoku (VP and Equity Research)

Hi, this is Chigusa Kotoku on for Steve. Thanks for taking my question. I guess I'm going to ask on the MC side. I think the organic growth was maybe worse than expected, and you have the full-year guidance change, so it embeds an acceleration through the year on tougher comps and an uncertain macro, but what just gives you confidence on this and just any color on what you're seeing in the macro?

Gunnar Kleveland (President and CEO)

Yeah. Chigusa, I have to also remind you that it is down because of divestitures, both of a company, our car that we sold in Italy, as well as some lines that we stopped because of poor economics. Just simple as that. We're a little below organically in the first quarter, but our backlog and our orders are very strong. With the current outlook, second and third quarter is looking healthy.

Chigusa Katoku (VP and Equity Research)

Okay, great. Did you see any signs of pull-forward orders during the quarter, or is it hard to tell?

Gunnar Kleveland (President and CEO)

No, we have seen no pulled orders.

Chigusa Katoku (VP and Equity Research)

Okay, great. Thank you.

Gunnar Kleveland (President and CEO)

Pull forward or pulled? Either.

Chigusa Katoku (VP and Equity Research)

Oh, pulled.

Gunnar Kleveland (President and CEO)

We haven't seen any of that yet. I mentioned that we do make some MC product here in the U.S. that goes to the whole world. We are monitoring that. The volume is relatively low outside the U.S. and Europe.

Chigusa Katoku (VP and Equity Research)

Okay, great. Thanks.

Operator (participant)

There are no more questions. I will now turn the conference back over to Gunnar Kleveland for closing remarks.

Gunnar Kleveland (President and CEO)

Okay. Thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you, and have a good day.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.