Albany International - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $311.4M, down 6.2% YoY but above S&P Global consensus ($305.1M), while GAAP diluted EPS of $0.31 and adjusted EPS of $0.57 missed consensus ($0.734), driven by AEC EAC adjustments and FX losses [GetEstimates:Q2 2025]*.
• Machine Clothing (MC) margin improved to 46.3% despite volume and Asia demand headwinds; AEC gross margin fell to 10.5% on $7.2M cumulative EAC charges (primarily CH‑53K).
• Free cash flow improved sequentially to $17.8M (from -$13.5M in Q1), net debt rose to $338.0M (share repurchases $120.4M YTD), and net leverage ratio ended at 1.60x.
• Management reaffirmed full‑year 2025 guidance (revenue $1.165–$1.265B; adj. EBITDA $240–$260M; adj. EPS $3.00–$3.40), citing stronger H2 from AEC ramp and MC shipment recovery; CFO transition announced (Willard Station appointed, effective Sep 1).
• Narrative catalysts: reaffirmed guide despite margin pressure, sequential AEC revenue growth, CH‑53K ramp toward ~2/month by year‑end, S/4HANA upgrade, and 3D woven titanium‑replacement opportunities highlighted at Paris Air Show.

What Went Well and What Went Wrong

• What Went Well
  • MC margin resilience and sequential growth: MC gross margin rose to 46.3% (+40 bps YoY) despite lower volume; CEO: “MC…delivered expected returns… and showed growth from the first quarter”.
  • AEC sequential revenue growth (+14% QoQ) on key programs; planning and supply chain “aligned with the rapid growth” of CH‑53K.
  • Cash generation improved QoQ: Q2 free cash flow $17.8M versus Q1 -$13.5M; TTM net leverage manageable at 1.60x.
• What Went Wrong
  • EPS miss and margin compression: Adjusted EPS $0.57 vs $0.734 consensus; consolidated gross margin fell 260 bps YoY to 31.3% on AEC EAC charges [GetEstimates:Q2 2025]*.
  • AEC profitability below expectations: Q2 gross margin 10.5% (17.0% LY) with $7.2M negative EAC, mainly CH‑53K; management acknowledged underestimated overhead rates.
  • Operational disruptions at MC and Asia softness: unplanned equipment downtime delayed shipments; reduced Asia demand pressured MC revenue (-6.5% YoY).

Transcript

Speaker 3

Good morning and welcome to the Albany International Corp. Second Quarter 2025 earnings call. I am Franz, and I'll be the operator assisting you today. 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 *1 on your telephone keypad. If you would like to withdraw your question, press *1 again. Thank you. I would now like to turn the call over to JC Chetnani, Interim CFO and Vice President of Investor Relations and Treasurer. Please go ahead.

Speaker 2

Thank you, Franz, and good morning, everyone. Welcome to Albany International Corp.'s Second 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 methods 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 the 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 July 30, 2025, as well as our SEC filings, including our Second 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?

Speaker 5

Good morning, and thank you for joining us as we review our Second Quarter 2025 results. Overall, I'm encouraged with our progress this year, a year that we have said would be a transition year. Our business segment leaders are performing well as they restructure, invest, and strengthen their operations, all while remaining agile in addressing near-term challenges. Our second quarter financial results lagged our expectations, but as I'll cover, the performance was largely impacted by certain timing and operational issues, and we're confident in our recovery. We continue to monitor the tariff situation and secondary effects that could impact regional market dynamics or customer behaviors. To date, we've not realized any direct material headwinds. Our mostly regional setup for both suppliers and customers largely insulates our operations from direct impacts of tariffs.

Also, while we were cautious about the tariff impact in our outlook, we now expect global growth to continue as the tariff environments get more predictable. Increasing activity in the defense sector, particularly hypersonics and new programs, is expected to result in accelerated growth at AEC, in addition to our growth in commercial aerospace over the next several years. In Machine Clothing, despite some second quarter timing and market headwinds, the business delivered expected returns on the lower volume and showed growth from the first quarter. We've commenced two additional facility closures in the quarter as we remain focused on optimizing our global production footprint to best serve our customers. AEC delivers strong sequential quarter growth and continues to accelerate its disciplined long-term operational strategy. We're investing in operational excellence to transform how we execute our current portfolio programs, allowing us to grow profitably with our continuing new business wins.

We're making good progress driving process improvements across all of our sites and with emphasis on our CH53K program. At our last visit to Salt Lake City, it was encouraging to see planning and supply chain aligned with the rapid growth of this program. The EAC adjustment in the quarter reflects our investment in program ramp readiness that we will cover in more detail later. For the quarter, we reported revenues of $311 million, an overall adjusted EBITDA margin of 16.7%, and an adjusted diluted EPS of $0.57. We returned capital to our shareholders through both a regular quarterly dividend and share repurchase program. In the first half of the year, we repurchased $119 million worth of shares, including $50 million in the second quarter. We currently have $143 million of capacity remaining under our latest share repurchase authorization.

Turning to our individual businesses, for the quarter, Machine Clothing reported revenues of $181 million and an adjusted EBITDA margin of 28.8%. As a reminder, comparisons to prior year are impacted by certain intentional and strategic business exits of approximately $5 million per quarter. In terms of grades, while longer-term secular trends in packaging remain strong, the effect of customer consolidations in North America created a delivery headwind in the second quarter compared to the prior year. Tissue remains a bright spot globally with expected new machine investments, while Pulp and Engineered Fabrics remain stable. North America had a slight decline in deliveries in the second quarter, mainly due to packaging machine production curtailments. We're working closely with our customers to solidify our positions where consolidations have impacted their capacity. Overall, Europe continues to show solid signs of recovery with good deliveries and orders, offsetting weakening conditions in Asia.

In particular, in China, we're seeing softer demand and continue to await machine restarts from the legacy Heimbach customer that we discussed in the prior quarter. Overall, we continue to follow a disciplined sales approach to mitigate these market dynamics. Our global MC order backlog remains healthy and gives us confidence for a stronger second half of the year. Operationally, we initiated the process to shut two additional facilities in the quarter: St. Union, France, and Manchester, UK. While we are executing to plan the transfer of production and equipment across facilities, this challenges how quickly we can ramp up at the new location. In the second quarter, the performance at our Durham facility lagged as it took on new production, resulting in some temporary sales and profit shortfalls. During the second quarter, we also experienced temporary operational disruption in one of our U.S.

facilities due to unplanned equipment downtime, which led to delayed shipments in the quarter. Turning to the Engineered Composites segment, revenues for the quarter were $130 million, with an adjusted EBITDA margin of 8.5%. Revenue grew sequentially by 14% from the first quarter, reflecting continued ramping on our key programs. Profitability remains lower than our expectation as we continued our investment in disciplined operational improvements. We recorded a total EAC adjustment of $7.2 million for the quarter. The EAC is mainly driven by continued investment in our labor force, which led to higher than projected overhead rates. We're seeing the progress from our investment in frontline leader coaching and operator training through improved output and reduced scrap and rework. Our planning and supply chain improvements are evident in material being available for assembly needs on the CH53K program.

On LEAP, we're at the contractual inventory levels and well aligned to meet Safran's production schedule as Boeing and Airbus single aisle delivery rates continue to recover. We have ample capacity to meet any upside to the demand and now expect growth in the second half. The emerging advanced air mobility market remains attractive for our business. With continued sequential quarter growth and expected strong demand through the course of 2025, with our key customer BETA, advanced air mobility will be a significant source of growth for AEC. As previously highlighted, our new long-term agreement on the Bell 525 program is an attractive new win where we are already delivering to customer expectations. We have invested in additional equipment in preparation for the JASSM program growth, where we also deliver at 100% on time.

Having achieved critical milestones at our dedicated facility, we're seeing momentum with customers in hypersonic parts development. We continue to invest in our capabilities and remain very positive in the medium and long-term attractiveness of this segment. Also, as I highlighted in our last quarter earnings release, our application development team continues to evaluate where AEC differentiated 3D woven technology in composite parts can be a superior alternative to titanium, with stronger relative strength-to-weight benefits. This was highlighted at the Paris Air Show, where our displays showed examples of parts that we are currently supplying or in the process of developing for various customers. The response at the show was positive, with customers and others seeing our keen focus on the technology that grew out of our weaving expertise and this technology's growing strategic uses and value.

As we presented in last quarter's call, our solution can be delivered at a fraction of the titanium lead time, with domestic materials and a production capacity proven to deliver 100% on time, which is in stark contrast to the challenges in the titanium supply. We successfully completed our S/4HANA upgrade across the entire company in May. This investment improves our systems and operational efficiencies and will deliver enhanced analytics to improve our business agility. Finally, I'm excited to announce that Will Station has accepted the role of CFO at Albany International Corp. Will comes to us from McKesson Medical Surgical, where he was Senior Vice President of Primary Care Sales, leading a team of more than 1,200 account executives. Prior to that, he was the subsidiary's Chief Financial Officer and Senior Vice President of Finance.

Will's career also includes 16 years at The Boeing Company from 2005 until 2021, where he held a number of increasingly senior finance roles, notably Vice President and Chief Financial Officer for the commercial derivatives airplanes from 2014 to 2021 and Director of Financial Operations for Boeing Commercial Airplanes from 2011 to 2014. He's a great addition to the team and complements the leadership team with large OEM experience, as well as his commercial finance and business expertise. I also want to take this opportunity to thank JC for stepping up to take on the role as Interim CFO and making the transition seamless. JC will continue to support the transition as Will onboards. With that, I'll now hand it over to JC to provide more detail on the quarter. JC?

Speaker 2

Thank you, Gunnar. I will review our second quarter results and then discuss our outlook for the balance of 2025. Consolidated net sales were $311 million, down 6.2% from $332 million in the second quarter of last year. Machine Clothing net sales were $181 million, a decrease of 6.5% versus the second quarter of last year. After adjusting for the effects of planned strategic business exits, the decrease is approximately 4%. This is mainly driven by lower volumes in the quarter from unplanned equipment downtime in a U.S. facility, a lag in ramping transfer production as part of a footprint rationalization, and softness in Asia, especially China. The majority of the current quarter's production shortfall is expected to recover in the second half.

AEC net sales of $130 million were lower by 5.7% versus the second quarter of 2024, primarily due to the unfavorable cumulative catch-up impacts from the EAC adjustments offset by growth in our new programs. Consolidated gross profit was $98 million, or 31.3% of sales, down from $112 million in the prior year, or 33.9% of sales. Machine Clothing gross profit of $84 million decreased from $89 million in the prior year, while gross margin improved by 40 basis points to 46.3%. Overall, this performance reflects improved operating efficiencies. AEC gross profit of $14 million decreased from $24 million, largely reflecting the impact of the cumulative EAC adjustment for the quarter. Of the $7.2 million of EAC charges for the quarter, $8.1 million was related to the CH53K program, partially offset by a positive $1.6 million Gulfstream reserve adjustment, with a balanced spread across other programs.

Net R&D expenses at 4% in the second quarter is higher versus the prior year, reflecting our emphasis on material science and new business ventures. Consolidated SG&A expenses were $59 million for the quarter, up versus $56 million in the prior year due to weakening of the U.S. dollar and higher professional fees, partially offset by lower personnel-related costs. The effective tax rate for the quarter was 31.3% versus 27.9% in the prior year. The higher rate is mainly due to favorable discrete tax adjustments in the prior year, resulting from the release of uncertain tax provisions. GAAP net income attributable to the company for the quarter was $9.2 million compared to $24.6 million last year, while GAAP delivered an EPS of $0.31 per share in this quarter was $0.39 in the same period last year.

After adjustments primarily related to foreign currency reevaluation and net restructuring costs, as detailed in our non-GAAP reconciliation, the adjusted diluted EPS was $0.57 versus $0.89 in the same period last year. Consolidated adjusted EBITDA was $52 million for the quarter versus $63 million in the prior year period, while for Machine Clothing, adjusted EBITDA was $52 million versus $59 million in the prior year. Adjusted EBITDA margin decreased to 28.9% versus 30.4% in the prior year, driven primarily by the margin impact from lower shipments due to slower than expected ramp or transfer production, unplanned equipment downtime, and softness in Asia. AEC adjusted EBITDA was $11 million as compared to $20 million in the prior year period. Margin at AEC was 8.5% of sales versus 14.3% in the prior year, primarily reflecting the current period AEC cumulative catch-up adjustments.

Moving to free cash flow, free cash flow was improved sequentially and was positive $18 million in the second quarter versus a negative $14 million in the first quarter. For the first half of 2025, total free cash flow of $4 million is down versus the prior year of $46 million. This was partially driven by investment in working capital as we ramp up new programs in 2025. Our balance sheet remains strong with a cash balance of $107 million and $355 million of borrowing capacity under our current committed credit facility. In terms of full-year guidance, we expect the second half to be stronger than the first half. We project continued ramping programs at AEC, recovery in shipments at MC, as well as bottom-line improvement from continued operational efficiencies across both businesses. Accordingly, we are reaffirming our full-year guide. Now, I'd like to open the call for questions. Franz?

Speaker 3

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press *1 on your telephone keypad to join the queue. If you would like to withdraw your question as well, simply press *1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your headset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Peter Arment from Baird. Please go ahead.

Good morning, Gunnar and JC. Welcome, Will. Hey, Gunnar, can you talk about where you are in terms of overall build rates in aerospace? Maybe not calling out specifically, but just in general, where you are matching up with the OE rates and the planned production?

Speaker 5

I think we're getting, as The Boeing Company is ramping up and destocking, as they have been bringing material in, we're seeing our ramp up slowly occurring, both on The Boeing Company and then, as I mentioned, on the LEAP program. We have seen, we have reached our contractual level of inventory, and we're building to match how Safran is pulling from that inventory. I would say overall there is a momentum towards the prior level of production.

Is there anything we should, Gunnar, be thinking about for the second half that could either put you at the low end or the high end of the revenue range?

Yeah, I think what you need to look at, if you see Machine Clothing, the Heimbach synergies are driving a lot of this, together with recapturing the lost revenue from the machine down, as well as the transition. At AEC, the increase in commercial programs is a major factor to the growth and profitability, as well as the higher return programs coming back at AEC. Now, the improved performance is part of our guide. We expect our performance in the second half to be better.

Can you just maybe touch on kind of the latest adjustments that you've made? It seems like obviously some of this was all strategically planned to support your move into low-rate production, but maybe just give us your latest thoughts on that program.

Peter, I missed the program.

The CH53K, sorry.

Okay, CH53. Yeah, so the ramp up there, we're taking a very controlled approach to how we're ramping that up. Like I said, the investment in that program, both in how we lead our team and how we train our team, I wouldn't say that it's taking longer, but we're putting a lot of effort into it as the program grows. We are continuing to grow each of the monuments, if you want. The biggest one being the AFT, which is the latest transition that we had. I can tell you that I was there. I saw all of our jigs at the facility, and we have parts in all of the jigs, which gives me the confidence that we're building and working towards that two per month rate that we're going to be at towards the end of this year.

I appreciate the call. I'll jump back in the queue. Thanks.

Speaker 3

Before we proceed to the next question, we ask that you please limit your question to one question and one follow-up only. After that, you can simply join the queue again. Thank you. Your next question comes from Steve Tusa from JP Morgan. Please go ahead.

Hi, this is Chigusa Kotoku on for Steve. Thanks for taking my question. Firstly, just digging in a little bit more into the AEC margins. I think in your most recent updates, it sounded like things were turning a corner here. Things are improving on Boeing 2 versus a couple of quarters ago. I was wondering if you could provide some additional color on what happened here that you kind of need to make additional investments in the labor.

Speaker 5

Yes, good morning, Chigusa. AEC is performing very well across all of the programs. Our challenge has remained at the CH53K program, primarily because it's a very different program from all of the other parts that we provide at AEC. The focus has been there. It has taken us longer to do the ramp, and it has taken more resources. As we looked at the performance in the second half, we realized that we had underestimated our overhead charges there. I think also what is important to remember is that this is a 10-year program. When you do a small adjustment in the overhead rate, it has a very large impact to the EACs. We are investing in this program. We're seeing the result of the investment in the program.

More importantly, the investment in both our planning and supply chain now has us filling up our tool jigs with parts, giving our teams the ability to perform, which has been an issue, right? If you don't have the parts, it's hard to show your performance. With all the parts available, you have a chance to show how you can perform. That is the turning the corner, as you say, we're seeing coming into the third quarter.

Okay, great, thanks. As a follow-up, you reaffirmed your full-year guidance, which implies that it's maybe like a 30% over half ramp in EBITDA. If you can just dig in a little bit deeper into what you expect will ramp in the second half to give you confidence to reiterate the guidance.

Yeah, it's fair because we see not only better returns, but we also see higher sales in the third and fourth quarter, which is what's giving us the confidence to say that we'll keep the guide. Heimbach synergies again is a big part. They're becoming cumulative, as well as some of the timing at MC. For AEC, it's really the growth that we're seeing both on the commercial side and the defense with CH53K and performance there. That gives us the confidence to say we're holding the guide.

Okay, thank you.

Speaker 3

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

Hey, thanks. Morning, guys. Just to stay on that topic of the guidance, the couple of challenges here, what were the drivers in or the decision-making in not lowering the guidance? Even the bridge for AEC, that second half range implies that revenues could be down 11% for its first half or up 9%. What are the swing factors that are going to take you to the high end and the low end of those guidance ranges? It just seems like a pretty wide range, especially in the context of the recent performance.

Speaker 5

Yeah, and good morning, Michael. I'm not addressing the range itself, but it's really about getting the performance on the program to the level that we believe that the program has, which is the EACs that is driving the low performance, right? If we can perform at the level that we believe we have the ability to do now with parts at hand and with the team trained and continued ramp is where we see the high end of the range. The low end of the range, obviously, is we're not able to achieve that. For AEC, it is really around the CH53K program. The reason why we held it is because we have confidence that the team has come to a point where we will see the results of all of this impact. We see it gradually, right? We see it with less quality issues.

We see it with less hours being spent on each operation, and so the progress is there in the short term.

Okay. If anything else is ramping up, your pipeline, maybe other programs that you've secured, do you have to relook at other contracts and other assumptions across other defense programs? How do we get comfortable with the AEC profile on a go-forward basis? What's potentially in that pipeline that we don't really know yet?

We have, there's both existing and new programs that are ramping up in the second half. We've not talked that much about it. Bell, obviously, is a part of that. The LEAP program is growing, and we had kept that flat for the year. At this point, we're saying that it's growing as we are matching what Safran is building. The JASSM/LRASM program continues to grow. When I was in Salt Lake recently, we've invested quite significantly in that program and continue to deliver on time. That is a growth for the back half as well. I would say Joint Strike Fighter, I would keep flat for now. We're watching where Lockheed Martin is going on that. The engine programs at our Bernie facility and our Querétaro facility, as both Airbus and The Boeing Company are ramping up, there is an increase in orders to us.

The second half does have growth in it across both commercial and military programs.

Okay. Thanks, guys. I'll jump back in the queue.

Okay.

Speaker 3

Before we proceed to the next question, if you would like to join the queue, simply press *1. Your next question comes from Alex Preston from Bank of America. Please go ahead.

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

Speaker 5

Morning.

I wanted to touch on the 3D woven composite parts and the replacing titanium. You mentioned you got a good reception in Paris. Maybe if you could just go a little deeper and sort of where that program stands, maybe how long do you expect until certification might be in play, a go-to-market strategy, maybe just a little more detail on that would be really helpful. Thank you.

Yeah. You will see more information about this for each quarter as we expand our target opportunity there. I think a good example here is at the Paris Air Show, if you went to the Safran display, they had the landing gear of an A350 there, and they had a brake brace. It takes four per landing gear, and they had two of ours and two in titanium on that display. Clearly, it's a perfect example of how we are replacing a part that is titanium today that can be replaced with a 3D woven part at a lower weight. That is a great example, and we were excited that both Airbus and Safran were aligned there with us. We're developing that. Certification is in the next 18 months or so, I would say.

Some of these commercial programs or military programs, when we are actually replacing current titanium, will take some time. Our focus has been around the new programs. BETA is a great example. We use 3D woven technology to help them design their lift plate. We had that in Paris as well. We were meeting with the developer of the new aircraft, military aircraft, to show where we can replace titanium on new development programs. Of course, we're using the 3D woven technology in our hypersonic development, which would replace not titanium, but use our technology to get a near net shape rather than the current box type that has to be machined. 3D woven is our focus. We're going to put a lot of effort on it over the next several years.

I think we'll have an opportunity to replace titanium on current programs, but we'll have a big place in new programs.

Got it. Thank you very much.

Sure.

Speaker 3

There are no further questions at this time. I would like to turn the call back over to Gunnar Kleveland for closing remarks. Please go ahead.

Speaker 5

Thank you, and 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.