Q4 2019 Earnings Call

Your conference will begin momentarily please continue to hold.

[noise].

Ladies and gentlemen, thank you for standing by welcome to the Albany International fourth quarter 2019 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.

If you wish to ask a question during the call. Please press one and then zero on your telephone keypad email address your question at any time therapy in the one zero command, if you're using a speakerphone. Please pick up the handset before pressing the numbers.

If you should require assistance during the call. Please press Star then zero.

As a reminder, this conference is being recorded.

Now I turn the conference over to our host John Hobbs Director of Investor Relations. Please go ahead.

Well, thank you great and good morning, everyone. As a reminder for those listening on the call. Please refer to our detailed press release issued last night regarding our quarterly financial results with particular reference to the notice contained in the text of the release about our forward looking statements and the.

Use of certain non-GAAP financial measures and associated reconciliation to GAAP.

For purposes of this conference call. Those same statements also apply to our verbal remarks. This morning.

For a full discussion, including a reconciliation of non-GAAP measures. We may use on this call to their most comparable GAAP measures. Please refer to both the earnings release as well as RCC filings, including our 10-K now I turn the call over to Bill here.

Vince Chief Executive Officer.

Who will provide opening remarks bill. Thank you John Good morning, welcome everyone and thank you for joining our fourth quarter earnings call I'm happy to be here on my first earnings call as CEO of Albany as I'm sure you saw in last Night's press release, we delivered another strong quarter capping a great year, while let Steven go through the details let me point.

Got a few highlights from the quarter and then give my perspective on our strategy and my priorities.

The company delivered strong results in the fourth quarter and met or exceeded all the revenue and profitability guidance, we had issues on a third quarter earnings announcement.

I'm, particularly pleased with the adjusted EBITDA margins in both segments and the fourth quarter, we delivered margins of 35.1% in machine clothing, and 22.6% and engineered composites.

I'm also proud of the company's cash performance. This year the company generated over $130 million in free cash flow and for the first time since beginning on our growth trajectory several years ago engineered composites segment delivered positive free cash flow for the year.

I'd like to thank our employees across the globe for their contribution to the growth and success of the company now while on the board I've had the opportunity to visit our operations around the world and I've been impressed with the talent and dedication I've seen I'd also like to thank my predecessor, Olivia is our old for his pursuit of operational excellence and contributions.

As you May know I've been on the Albany Board since 2016 and was appointed chairman last year.

I appreciate the trust. The board is now placed in May and I'm honored to be responsible for the success of this great company.

In parallel with my transition into ensure continuity and consistency at the board level My predecessor, Herky Cal born is stepping back into the role of chairman.

I've known Albany for a long time in fact, when it completed engineering school, what is now way too many years ago I had a job interview with Albany in upstate New York, preferring aerospace at the time and went to work as a jet engine engineer at Pratt Whitney aircraft in their advanced Technology group.

Since then I held a variety of technical manufacturing business roles within Allied Siglin Honeywell and after Honeywell I was privilege to serve as CEO and chairman of CIRCOR International a public company that has similar sized all being unlike all than it has global manufacturing businesses that serve both aerospace and industrial end markets.

So I bring to this role not only prior experience as a public company CEO and as a director on multiple public company boards, but also considerable experience with our markets technology and operational excellence.

With the full support of the board I intend to continue executing on the two prong strategy that was first established by the company. Several years ago first we'll continue to focus on growing our engineered composites business.

While there are obviously near term challenges driven by the ongoing grounding of the Boeing 737, Max fleet, our longer term vision objectives has not changed.

Most important we need to continue to perform on our lead contract with Safran to support both the continued ramp on the leap one a engine for the Airbus Athree hundred Twentyneo family and the return to future ramp that will be required for the leap one be engine once the Boeing 737, Max returns to production.

So front as a critical customer of ours, with whom we've added almost 20 year history, we deeply value the relationship with SAP front and look forward to strengthen it further over time.

We'll also continue to grow the balance of our engineered composites business by ramping with our existing platforms by winning new competitions and by finding new applications for our industry, leading composite technologies across addressable market segments, including the next generation of commercial aircraft.

The recent announcement of Albany's participation in the Airbus wing of Tomorrow collaborative development effort is testament to the value that our technologies offer additional customers in the future.

This proven strategy remains sound and we believe it will deliver strong long term returns to our shareholders.

Second we will continue to solidify and build upon our leader leadership position in the machine clothing segment.

For the clear leader based on our technology and the strength of our offerings to our customers and paper machine clothing market.

That said, we're not resting on our laurels in order to maintain our PMC leadership position, we're constantly investing in this business leading to new product solutions to meet our customers changing needs to new manufacturing processes into improved support for our customers. We expect to continue investing in machine clothing, consistent with past investment levels to maintain.

Our leadership position and profitability.

This two prong strategy has served our shareholders well today, we have two strong profitable businesses.

In 2019, our machine clothing segment performed extraordinarily well delivering even higher level of EBITDA than we had expected after a very strong 2018.

The engineered composites business, even with the challenges caused by the 737 Max situation in the back half of the year delivered over $100 million of EBITDA and for the first time ever delivered positive free cash flow.

We continue to believe that at this time, given the technology overlap and resource sharing of people ideas and funding between the two businesses were stronger as one Albany.

So with that continuation of our existing strategies my backdrop my priorities for the business are threefold first I'll continue to focus on operational improvement across both segments that has helped drive the improvement in our financial results over the last few years.

Fortunate to have two strong operational leaders who themselves are supported by strong teams.

Daniel Halftermeyer has a long history of driving continuous improvement across the machine clothing segment. The strong margins at the segment has delivered demonstrate our commitment to delivering shareholder value.

Leading the engineered composites segment. We're now we're fortunate to have Greg Harwell, who joined US late last year, Greg brings extensive experience managing and operating global aerospace businesses.

Second we will continue to focus on growth within a renewed focus on winning new business in the engineered composites segment.

Not too long ago, we were in a position where we had one so much business on leap on the F 35 on the 787 on the CH 50, Threek K that we had to demonstrate to our customers our ability to ramp and execute on those programs.

Youre expecting them to trust us with additional work we've accomplished a lot are tracking well on existing programs and are actively pursuing and winning new opportunities in aerospace.

Third I firmly believe in our long term vision to advance the state of the art in composite technologies and find new applications in aerospace and beyond as well as to maintain our leadership position in machine clothing.

I believe that successfully executing on our vision represents a tremendous opportunity for our shareholders will continue to deploy return seeking capital to maintain our leadership positions and to drive organic growth.

We've achieved strong strong returns for our shareholders port from the investments we've made in working capital and capital expenditures across both of our segments.

At the same time, we've got the balance sheet and wherewithal to come fleet acquisitions that extend our capabilities and support our strategy. In fact, we've recently completed a small high tech acquisition in Germany, Circon, which brings us new technologies and capabilities. However, our strategy doesn't depend on completing acquisitions and we're not prepared chase some of the pricing and we're seeing.

The M&A market, we do not believe that it would be a prudent use of our shareholders' capital to overpay for assets.

Looking forward to 2020, our strategy is continuing to bear fruit, we expect another strong year with continued high margins for our machine clothing business and but for the current production halt in the 737, Max we would be expecting to provide guidance for the segment that meets in the case of revenue or even exceeds in the case of margin the long term 2020 of.

Actives, we established and published for that segment several years ago.

However, the continued grinding and the recent suspension in production of the Boeing 737, Max will obviously have an impact on our 2020 financial results 737, Max through the work, we perform and leap one be engine components is a very important program for Albany, while we're heartened by the public reports of Boeing's progress toward safely returning to 737 Max.

Platform into service there continues to be a significant lack of clarity into the returned to service timeline and the subsequent production ramp for the aircraft.

While I do not have any additional insight into the status of the program beyond public reports, we believe that our guidance for 2020 reflects a realistic approach with respect to demand for the leap one be components in 2020.

In 2019 were able to overcome the impact of a 737 Max grounding through a combination of Overperformance elsewhere and AC build ahead of leap finished goods inventory and the structure of the lead contract with Safran.

However in 2020, the magnitude of the impact of the 737, Max will be too large for us to overcome resulting in a material reduction of APC revenues in 2020 compared to the long term 2020 objectives, we established several years ago.

It's important to note that notwithstanding this impact the balance of AC is continuing on its growth trajectory and also the guidance for 2020 reflects adjusted EBITDA margins for the segment higher than those that had been refresh reflected in our long term 2020 objectives. These are both strong indicators that our strategy for AC remains sound that the revenue.

The reduction in our 2020 guidance is only because of the 737, Max grounding and that the long term outlook for the business remains strong.

On a separate note we're of course monitoring that Corona virus situation in China. As you may be aware, we have two large machine clothing manufacturing locations in China. Our first priority is the safety and well being of our employees that those facilities and we've taken actions that we felt were appropriate to help mitigate the risk to our employees.

Of our facilities have been significantly impacted by the ongoing situation. So we're seeing a real time impact of the situation on our machine clothing segment's performance if the travel and work restrictions were to continue for a meaningful period, not only without significantly exacerbate the impact on machine clothing and forces to execute contingency plans.

We would also likely see an impact on the aerospace industry demand and global supply chain, which could start to impact engineered composites segment.

At this time, it's too early in there too many unanswered questions pressed to size the full potential impact on the company's 2020 results.

However, we have incorporated into the guidance Stephen will provide the direct impact we're seeing of the current disruption.

With that I'd like to turn the call over to Steven who will provide more details on a quarter and our initial guidance for 2020 Steven.

Thank you Bill.

I will talk first about the results for the quarter and then about our initial outlook for outperformance in 2020.

For the fourth quarter total company net sales were 257.7 million.

An increase of 2.4% compared to the 251.6 million delivered in the same quarter last year.

Adjusting for currency translation effects net sales grew by 3% year over year in the quarter.

In machine clothing also adjusting for currency translation effects net sales grew by 0.7% driven by strong growth in tissue and packaging grades, partially offset by declines and publication and pulp grades and in engineered fabrics.

Engineered composites net sales again after adjusting for currency translation effects grew by 6.4% primarily driven by growth in the CH 50, Threek K program.

The acquisition of Sarcom, which was completed in the back half of the fourth quarter contribute to an immaterial portion of fourth quarter 80 sales.

Fourth quarter gross profit for the company was 96.6 million an increase of 9.9% over the comparable period last year.

The overall gross margin increased by 260 basis points from 34.92, 37.5% of net sales.

Within the M.C. segment gross margin improved from 48.6% to 15.2% as net sales principally due to reduced depreciation expense.

Within AG see the gross margin improved from 14.5% to 19.6% of net sales driven by a $3.3 million favorable net change in the estimated profitability of long term contracts.

By higher net sales driving increased fixed cost leverage and by improved labor productivity.

Fourth quarter, selling technical general and research expenses.

Increased from 48.7 million in the prior year quarter to 51.3 million in the current quarter and also increased as a percentage of net sales from 19.3% to 19.9%.

The increase the amount of expense was driven primarily by the revaluation of non functional currency assets and liabilities, which resulted in a loss of 1.4 million in Q4 2019 pilot had only a negligible impact in the same period last year.

And by $600000 in expenses related to the acquisition of stock comp, including just over $100000 of the deferred purchase price, which is being treated as an expense for GAAP purposes. Due to the fact that its payment is dependent on certain future obligations being met.

These increases were partially offset by a decline in R&D expense for the quarter.

Total operating income for the company was 43.6 million an increase of 16.5% from 37.4 million in the prior year quarter.

Machine clothing operating income increased by 3.4 million driven by higher gross profit and lower restructuring expense, partially offset by higher STG and our expense while he see operating income grew by 63.8% to $10.9 million driven by higher gross profit.

Partially offset by higher restructuring and STG in our expense.

Income rate for the quarter was 24.8% compared to 37.9% in the same period last year.

Discrete tax items and the change in the estimated annual income tax rate reduced income tax expense by 1.3 million in Q4 2019 pile. The same factors had increased the expense by 1.8 million in Q4 2018.

Net income attributable to the company for the quarter was 29.1 billion, an increase of 65.7% from 17.6 million last year.

The increase was driven by the improved operating income and the lower tax rate.

Earnings per share was 90 cents in this quarter compared to 55 cents last year.

After adjusting for restructuring expenses.

The impact of foreign currency revaluation gains and losses pension charges related to de risking initiatives and expenses associated with the circuit by acquisition adjusted earnings per share was 97 cents this quarter compared to 69 cents in the comparable period last year.

Adjusted EBITDA grew 10.8% from last year to 63.9 million for the most recent quarter.

Machine clothing, adjusted EBITDA was 52.8 million or 35.1% of net sales this year.

Up from 51.2 million or 34% of net sales in the prior year quarter.

APC adjusted EBITDA grew from 18.1 million or 17.9% of net sales last year to 24.2 million or 22.6% of net sales this quarter.

Turning to our debt position total debt, which consists of amount supported in our balance sheet as long term debt or current maturities of long term debt remained steady at 424 billion at the end of Q4 and cash increased by about 22 million during the quarter.

Resulting in a reduction in net debt of about 22 million.

On the definition of leverage ratio used in our credit agreement, which limits us to 65 million if cash netting against gross debt. We finished the quarter with leverage ratio of 1.35.

While disregarding the limitation on cash netting results in an absolute leverage ratio of 0.89.

Our reduction in net debt. This year has been a part driven by our working capital initiatives, partially offset by a significant working capital investment in the leap program primarily to support the buildup of finished goods inventory in the back half of the year.

For the full year net cash provided by operating activities increased from 132 million in 2018 to 200 million in 2019.

Also for the full year free cash flow, which we defined as net cash provided by operating activities less capital expenditures.

Increased from 50 million in 2018 to 132 million this year.

I would like to point out that as bill alluded to in his remarks. This cash performance included AC delivering positive free cash flow for the year Inspite of the leap working capital investment.

Capital expenditures in Q4, 2019 were about 19 million, reflecting continued investments in equipment to support multiple ramp ups in the AC.

We mentioned last quarter that capital expenditures for the full year would be lower than initially expected driven by the timing of some projects some of which will now be completed in 2020.

But the lower level of spending does not represent any material change in our investment plans or priorities.

Overall across both segments on all metrics, we were very pleased with the performance at the business last year.

Looking for it to Twentytwenty.

As previously discussed on prior calls machine clothing faces ongoing weakness in its end use markets with the latest risi data suggest that in the third and fourth quarters of 2019 global production of paper and board products declined by between two and 2.5%.

On a year over year basis with declines in North America over these most important market of over 5%.

As Bill indicated earlier.

While we cannot yet anticipate full impact to the segment of the Corona virus situation that China. We've also incorporated into our expectations a modest impact from the current disruption to those operations assuming that those operations pay some degree of disruption for about four weeks.

To put this impact to our Chinese operations in perspective, we disclosed in our 2018 10-K that our sales directly to customers from operations in China were around $50 million.

And while we have yet to disclose them our proven sales in 2019 were roughly similar.

Our overall expectations for the machine clothing segment take into account the anticipated impact a machine clothing demand of the lower level of paper production globally over the last few quarters.

The current impact of the CRO the virus situation I, just referenced and the impact of ongoing currency weakness in several markets, where we generate machine clothing revenues in local currencies.

As a result, we are guiding twentytwenty revenues for the segment of between 570 and $590 million.

However, notwithstanding the slightly weaker revenue compared to 29 team, we still expect the margins to remain very robust on our guiding twentytwenty adjusted EBITDA for the segment of 190 to 200 million.

Before I provide twentytwenty guidance for eight you see it may be helpful to highlight a few items from agencies 2019 results.

First in 2019.

Including the impact recognized in the fourth quarter, we recorded a cumulative total of over $12 million in net favorable changes in estimated long term contract profitability.

This resulted in both recognized revenue and gross profit of $12 million in 2019.

While we review the estimate to profitability of long term contracts every quarter.

Any change is recognized as a result of that process, maybe either favorable or unfavorable and.

And we've seen changes in both directions over the last several years.

These adjustments to profitability are usually difficult to forecast. However, these types of benefits are unlikely to be recorded in the same magnitude in twentytwenty as we recognized in 2019.

Second in 2019 to full impact of the grounding of the Max fleet and Boeing subsequent decision to suspend production at the aircraft had yet to be felt in our results.

In 2019, we recognize leap revenues in our Albany, Safran joint venture of just over $210 million.

Of this just over 60% or almost $130 million was recognized on leap one components destined for the 737, Max with the balance related to the leap one day engine.

The outlook for components for the leap one at variant that powers. The Athree 20 Neo family remains strong.

However, as Bill mentioned earlier, there is a continuing lack of clarity into the return to site service timeline and subsequent production ramp for the 737 Max.

We believe that our assumption with respect to demand from our customer for leap one decompose this year, which is at a level much lower than in 2019 is realistic but it remains uncertain.

This reduced demand expectation will drive significant significantly lower levels of production of leap one be components.

A secondary but less important driver of our leap fan blade fan case blade and space of production levels in Twentytwenty.

Relates to the finished goods inventory, we had on hand at the end of 29 team.

As we have previously disclosed in the second half of 2019, we made a decision with the full support of our customer Safran and based on our mutual expectation that the return to surface at the 77 Max was only months away.

That in order to minimize any workforce disruption how to our eight SC facilities.

We would maintain a production rate of components for both leap, one a and leap one D variance at a rate higher than would mean soft brands immediate demand.

And would allow for a modest increase in finished goods inventories.

Due to the current GAAP revenue recognition requirements for contracts like our lead contract with SAP rent, we were required to recognize revenue on those components at the time of production rather than at the future point to delivery.

Resulting in the recognition of those revenues in 2019.

And the reporting of the finished goods inventory on the balance sheet as a contract assets.

As a result of this action and inline with our expectations from the time, we made the decision.

We finished 2019 with sufficient finished goods inventory on hand to support 50 aircraft from the Airbus Athree hundred Twentys family.

And 100 737 Max aircraft.

However, as you all know our expectation for near term or turn to surface for the 737 Max was not met.

And in fact, Boeing announced a pause in production of the aircraft in December.

Following boeing's announcement in early Twentytwenty, we reluctantly began to implement reductions in force our assay facilities.

We are now assuming that during twentytwenty, we'll start to burn down the excess finished goods inventory for both leap one a and leap one the in place at the end of 2019, which will flip the impact we saw in the back half of 2019.

This is finished goods inventory burn down will result in recognized revenues in twentytwenty, although lower than actual shipments to our customer in the same period.

I would like to point out that the structure of our contract with Safran, where we recover actual costs means our revenues will not go down directly proportionally to any reduction in the quantity of produced leap one be components since a portion of the revenue recognized on those components in 20.

The 19 was related to fixed costs and associated fee.

If as expected we deliver fewer leap one de components in twentytwenty those fixed costs will be absorbed by and recovered on the remaining leap one day and leap one be components that are produced in twentytwenty.

However, we will experience a reduction in ASV revenue caused by the absence of variable costs and associated fees that we had incurred in producing the higher quantity of leap one be components in 2019.

Third outside of the AMC joint venture, we do also support the leap program with traditional laminated composites under another small fixed price contract.

Why we would have previously expected revenues from this program to grow and Twentytwenty in line with the expected ramp for both leap one a and leap one the engines. We now expect Twentytwenty revenues from this program to decline by $5 million to $10 million compared to 29 team.

I would like to point out that much of AC is performing in line with or ahead of expectations. In fact, as Bill mentioned earlier worth not for the 737 grounding in production pools are 80, you see guidance for Twentytwenty will be at or above the prior long term objectives, we had set for the segment.

For nominally programs overall, we are experiencing experiencing significant improvements in twentytwenty.

Additionally, we expect that the segment overall, even after the impacted the 77 Mac slowdown will for the second here in a row generate positive free cash flow in twentytwenty.

However, the impact of the three factors I just discussed.

The absence of net favorable changes in estimated long term contract profitability and are expected to Twentytwenty performance.

The lower revenues for the ASV joint venture and the lower revenues from the smaller fixed price lease program. Our two great for those other improvements to offset.

As a result for Twentytwenty, we're guiding APC revenue of $400 million to $420 million and E. C. Adjusted EBITDA at 80 to 90 million.

At the total company level, we're also providing initial twentytwenty guidance as follows.

Revenue up between 970 and $1.01 billion.

Adjusted EBITDA of between 210 and 235 million.

The effective income tax rate, including tax adjustments up 26% to 28%.

Depreciation and amortization of between 750 or sorry between 75 and 80 million.

Capital expenditures in the range of 75 to 85 million.

GAAP earnings per share of between $2, the 69 and $3 an eight cents.

And adjusted earnings per share of between $2 to 75 and $3.15.

The difference between our GAAP and adjusted EPS guidance ranges represents a known charge, which will be recorded in Q1 of $3 million related to severance payments for our outgoing CEO.

While we do not formally guide R&D spending I would like to note that we do expect to increase R&D expenditures and Twentytwenty.

Most notably in the engineered composites segment, we will continue to demonstrate the applicability of our advanced and unique composite solutions to the production of a variety of aircraft components to support our customers' needs.

As Bill mentioned earlier.

Our long term vision for success in that market has been unaffected by the current 737, Max situation and we are continuing to invest in supports that division.

We continue to believe that the strategic outlook for both of our segments remained strong and will lead to significant long term value creation.

With that I would like to open the call for questions Grace.

Thank you once again, ladies and gentlemen, if you wish to ask your question. Please press Hawaiian and then zero on your telephone keypad.

And our first questions from John Franzreb lists.

Side Daddy and company. Please go ahead.

Good morning, Don Steven welcome back though.

Thanks, John.

My first question is embedded in your guidance.

How long you soon.

Production Hall will continue for the Max.

So it is so John that thanks for the question.

In terms of said the Seventhree thousand Max and our guidance.

And John I know if you look your phone on mute because we're getting some background noise.

Our guidance is based not on necessarily any expectation of what Boeing does with the Seventhree thousand Max program either in terms of its return to service and the subsequent production ramp our guidance is based more on an expectation of demand we anticipate seeing from.

Our direct customers the fraud. So it is some walk removed our various levels removal from from that.

What Boeing dust with Safran does in terms of as we say not only boeing's returned to service and believe clearing up the backlog of existing aircraft out as the fleet and will also aircraft. It is yet to deliver but also at clearing through of the backlog at the end finished goods inventory that lies not only on our books that.

I discussed, but also within the supply chain and within the.

Soft front end and CFM joint venture.

Well.

Thank you and next I'll go to the line of Christine the lag with Bank of America. Please go ahead.

Hi, good morning, guys.

Good morning.

For the 77 Max.

What production rates levy producing through 2020 and at what point do you restart production and electric rate are you producing.

Yes, so Doug as we've discussed before at the request of our customer we do not talk about our specific build rates. After this happened three seven Max.

And so I can't answer that question directly at we are still in production for leap one Andy component.

Sitting here today, we are still producing but obviously at a much lower rates than we had previously been producing at which is that.

Not only as a result have the demand from our customers, but also exacerbated as I mentioned by the the finished goods inventory we already have on hand.

On which we have already recognized revenue I think Stephen it's probably important to emphasize to just sold as we noted in our comments the lack of clarity. It really is difficult as we look at the year to trying to on exactly what will be so we've we've taken an approach. We think is a realistic approach and it's probably someone just an update everyone on as we go through the year.

Thanks, and in the non AC portion of engineered composite can you discuss your cost cutting initiatives, there and how we should expect.

You to balance going F 35 rate, but declining 77, right how does that net out.

Yes, as we mentioned we have a number of programs that we're ramping up on right now so we're watching each of those were watching the 787.

And how that will play out, but we also have growth program, so where we will be shifting.

Probably a workforce as needed as the gross shifts.

I will point out that outside of.

Leap one be.

And the impact of fat of that program on our APC results the balance of a C. As we anticipate double digit revenue growth in twentytwenty and that is embedded in our guidance.

Thank you and then switching gears to machine clothing, Bill you mentioned that to how you have two facilities in China that kind of unaffected by kind of Iris can you quantify the magnitude of the possible effect of that and.

When should we see some resolution on when activities normalized.

There are dollar amount that you can stay tuned in terms of per quarter or and then also once things normalize do you expect to recover all of that so thats a full year is intact.

It's really hard to make a call right now because this situation is so fluid we do have two facilities there.

One is basically shut down the other is running a very small rate and then there's the logistics problem of ships and.

Shipping that's just not running yet so we're going to watch it as we go.

I don't know we will yeah in terms of so Christine to answer your dollar question as I've mentioned in my remarks last year, we disclose we generated roughly a million dollars a week of sales brought from Chinese operations directly to customers at we're seeing AG kind of two types of impacts right now we.

One we're seeing reduced sales obviously, yet so not only are we shutdown, but our Chinese customers shutdown. So sales in sales to Chinese paper mills or or any other our choice of our other Chinese customers, obviously on hold and thats, causing a direct revenue impact the secondary impact were.

Genius bar, some products, which go from outside of China from those Chinese facilities as some elsewhere in Asia and some even to youre at those customers still need those products. We are having to come up with contingency plans reduction that those product, which is causing that product to be produced at a higher cost than it would have been produced in.

China, which is causing additional EBITDA impact beyond the revenue hit we're seeing from just the overall slowdown in China.

Thank you very much.

Thank you Christine.

Thank you and excellence in the line of Pete.

Steve.

Alembic Global please go ahead.

Hi, Good morning don't Steven.

So understanding you know.

Potentiality with the customer and stuff.

But to that end to go further on the leap one be guys should we expect first half revenue just talking about timing should first half revenue ACB.

Fairly.

Meaningfully below second half revenue.

That.

It depends on give too many unknowns quite frankly at page because we really don't know.

As bill alluded to add when when we're going to.

The able to step up production rate. So I don't think cap I think it's too early to say that given the uncertainty around rapidly Wendy.

Okay. Okay, and then I was just curious about free cash flow conversion, Steve and just given it sounds like you did have the big working capital build that it sounds like it will reverse I'm not exactly sure or the timing but.

Are you expecting free cash conversion to me, maybe greater than one this year given given the working capital build from last year.

We obviously had very strong free cash flow conversion in 2019, we expect another strong year in 2020, we don't guide free cash flow. So I'm not going to as you note tell you, whether it's above or below one but it should be a strong year. We certainly we'll see some unwinding of the working capital position, we've taken in that Italy and.

And obviously the balance of AC add delivered very meaningful cash in in that in 2019, given the segment overall was positive free cash flow.

And.

Obviously as always add machine clothing was a very strong cash generator, we expect that to continue in twentytwenty.

Okay.

Okay, Great and maybe one for bill.

Build in your opening remarks, you kind of were alluding to.

As the M&A market being a little pricey, but it sounds like you were really looking at kind of new beds on projects on kind of current aerospace platforms.

And I'm not sure that's more commercial and military or not but the how you know kind of active is the new bid opportunities said, how our you know in terms of the size how big is in the opportunities that Im just curious given a lot of these programs are very long lived.

So.

Just a lot of.

New opportunities that at the high level, but maybe a year level there they're more active some just curious as to what you're seeing there.

Well and as we announced Pete the.

The wing of Tomorrow is it's a long term program. So it really speaks to the long term technology and bassman, our belief in the technology our customers.

Expected benefits from the composite technology. So we'll keep working though is as we're working on other long term opportunities will do well disclose them when our customers are ready to do that.

But in nature, I would say there longer term, they're not something it's going to happen within the year, but there is a fairly full pipeline, though and we were successful in some opportunities in 2019.

To put these in context these tend to be ones, which are either.

Military in nature, which means that our pipe somewhat definition smaller because the build rate is lower or 30 takeaways and from an from another supplier and the these programs tend to be smaller. These are certainly not leap type programs that were pursuing and winning right now in terms.

Its revenue impact, but they are they are meaningful some of them are certainly in that tend to even $30 million of revenue per year, we could potentially get out of these programs that were chasing today and given the size. They see we only need to win a handful of those every year to have that I mean meaningful impact on our growth rate.

Okay. Okay that makes sense. Thanks, a lot of color guys.

Thank you Pete.

Thank you in next similar to the line of Peter Arment with Baird. Please go ahead.

Yes, Thanks morning, Bill Steven.

[music].

Steve and just a quick on human on the forecast for machine clothing. The global production, you said down 2% to 2.5%.

5% down North America have you already started to see weakening order rates from North American customers.

It's tough to tell right now here in Q1 I do today. The early hard on there is always ferreting and order flow.

It is it's in the quarter for at the I haven't lived through this before typically add in the corporate staff.

And I guess, the lack of order flow and it all comes it back half you want.

So it's.

Early al right now it is a little weaker app.

On that we would ordinarily expect.

Path that if not.

Yes.

And.

Obviously.

It's not like aerospace will get orders very long lead.

I think.

These are fairly quick turn to orders and so it's not that we typically carry at large backlog.

Okay. No. That's helpful. And then just quickly on 80 I know we've talked a lot about lead.

Are you getting more pull that will lead to fill in on the leap one a.

From your customer I know there was expectations that they were going to accelerate some production on there.

So leap one is certainly up from 2019, absolutely and we're seeing some some modest increases in leap when a demand I think are there are couple of factors going on one as we've discussed before if you look at some of the more recent orders for the Athree 20 Neo family the proportion of those aircraft, which are leap powered.

As opposed to being powered by the alternative engine easy has increased over time and therefore, we would expect to see even for the same athree hundred twentyneo build rate a larger number of leap one eight.

Engines being produced and secondarily at Airbus has talked about increasing the actual build rate if the athree hundred Twentyneo now Thats that takes time I don't think it's it's reasons expect to see the impact of a higher build rates of Athree hundred twentyneo in our current numbers the global supply chain for aerospace takes time to move and I'm sure our airbar.

Yes, well.

Trickle is up over time, but we're not seeing that impact today I wasn't as Dave and I don't.

Answer the question I don't think we're seeing an impact to them Max order rates slowdown or the or the production rates slowdown is our competitive reaction on the on a athree hundred 20, I, we're not seeing that yes. There is an increase in a lead business Bleep one day.

Okay. That's helpful.

Maybe just a quick one for you given that you were onboard you'd better kind of front row seat of media improvements you mentioned operational improvements to you're expecting for both segments to continue.

Maybe just give some perspective on.

Kind of the runway that still in front of the front.

From your seat now.

Yes, we're going to continue to focus on operational improvements. We've got strong teams in place a number of leaders put in place last year, there's still plenty of opportunity too.

Continue improving quality performance cost productivity service to our customer.

We've got that I'll say that the foundation there there's still a lot more work to do on top of that.

Appreciate it thanks, well call it.

Thank you and next we'll go to the line of Patrick Paul Mendlik JP Morgan. Please go ahead.

Hi, good morning, gentlemen.

Just maybe starting with them.

The the mid term 2020 targets that you guys had provided some time guide I think you'd mentioned that you'd be at or above those numbers.

Fax machines in the only reason to believe that when that gets back to where it was supposed to be that we'll be able to achieve those levels I guess I'm asking the supply chain impaired and in line from the issue. Since then make it difficult to normalize back to what you thought impediment beacon that business and talking about the 500 fracking fee revenue and 100.

EBITDA that you had said you know.

Put out there I guess couple of years ago.

Certainly has just taken them reverse order certainly the EBITDA guidance.

Range at the 18% to 20%.

Our guidance that we are providing for twentytwenty certainly implies the rates above that 18% to 20% range as so so we don't see a challenge with that in terms of 500 550 as million of revenue, we do not see anything which has permanently impaired the business.

In any way we do see this is a short term effect, obviously, we're not guiding beyond twentytwenty, so I'm not going to.

Predict the future, but theres nothing in what we're seeing right now which should be lasting in nature. It is that directly driven by reduced demand for leap one be engines at caused by the 77 AG grounding in production pause and and that should reverse itself.

Once the ones that 77 comes back online.

Okay, and any update on progress for the gene and actually the triple seven.

So we are obviously in low rate production aircraft, we're very pleased to see the first flight of the Triple Sevenx here in a month ago. So from that and so we expect to be producing that this year, the but was that delay in that program.

It slipped about 12 months to the right, which.

Obviously impacted our production ramp at but we are expecting to increase production. This year on that program inline with our customers demand and we are facilitized thing for for that ramp on that.

Our no particular challenges in that program today.

And then what about the 77.

What's the outlook for that within your business for 2020.

Yes, obviously they are being the two step downs 14 to 12 to up to 10 and that will not be and it had any material impact Kieran twentytwenty and there could be some impact in 2021, but it does depend on the mix of aircraft as he knows our three variance for the 77 we.

Provide frames for two of the three variance today and so it really depends on the production mix and the given year at how significant that impact would be at even more so too will all be felt in our variance. It is not as if it would have a material adverse impact on our overall APC revenues.

It's an important program add but it is much much smaller than leap, obviously and one of a handful of outdoor significant programs in that but but not significant enough that any reduction that program is going to materially drive revenues up or down.

Well, maybe if you could just and last one from me by order of importance. I think you mentioned that double digit revenue growth you expect for the segment.

The Arrow segment, excluding San Fran.

Business for 2021, so by order of importance what are the big drivers. Maybe you said this earlier than I just mentioned what are the big drivers of that double digit growth.

Program Wise.

Yes, so what we don't get into guiding specifically by program, but.

Outside of that leap the other big programs, we have an AC our 787, CH 50 Threek Kay.

The F 35 program jazz them, which is the drilling dare to surface standoff Miss for Lockheed Martin at our waste water tanks program for for Boeing aircraft at the end then a variety of smaller programs those our most significant program at programs and the and the bulk of the growth will be coming out with those programs.

Okay very good thanks, a lot.

Good luck.

Thank you.

Thank you only to have another question from and John Franzreb. Please go ahead.

Yes, I'll ask Brooklyn, New myself again could you just discuss it's been over year that during the second half how does that impacted the price environments.

Machine clothing.

And secondly.

Cycle.

Paul has come down and so in prices pricing is that impacted your customer spending and it will talk to those issues.

We'll file and.

In closing maintenance and then just wondering is already there.

So thanks, John So in terms of the Xerium acquisition, and obviously that would that just as you say completed some time ago at.

We have not yet seen at a significantly impact in the market. It obviously, a asked strengthens that competitor of ours. The area has a strong competitor and that and they remain as strong competitor to strong competitor in the market.

Third the the pricing environment in machine clothing has been fairly stable add but we are always very and mindful of that and watch it as a.

We have not seen significant impact of that yet in terms of your question about pulp and pricing is obviously down.

Our we've seen a bit of a shift.

The with some some of our pulp customers the market for Pat for our products that they acquired being down somewhat at various points in time during the year at but but not material at the top line level when we roll it all out it hasn't mental material shift for the year overall during the most recent.

Here at pulp.

It was was up for the year compared to 20 818 slightly low single digit growth in in pulp for the year on a constant currency basis, the bulk of the growth as we typically see in in in the machine clothing business was driven by primarily growth in packaging and tissue with.

Again for the full year as you would expect full year declines on a constant currency basis in in that publication grades of roughly 10% for the year, but we did see some growth in pulp for the year, so while door as specific customer impact of what you talk about overall it didnt affect our top level sales.

Thank you and next forgotten the liner bottom Hana with Cowen <unk> Company. Please go ahead.

Okay. Thanks, good morning, guys.

Good morning, Golf and Martin was.

Great. Thank you so.

A couple of questions just for clarification first.

In terms of you see adjustments.

Steven what are you expecting in the guidance for.

2020.

We typically take a neutral stance on the AC adjustments I really don't embed them either positive or negative the in in our in our planning as we've seen in the past we've had years, where we've had significant unfavorable adjustments. We were at very fortunate unfortunate is probably the wrong word because due to the hard work of our employees.

And leaders of the business, but we enjoyed some very favorable adjustments this year, but in a typical year, we would that we would assume a neutral position.

Okay. So then you gave some color on the leap one be revenue last year at $130 million.

You made a couple of comments something was down five to 10 million and I wasn't clear if that was the one be components.

That was not in the 130.

And maybe can you just frame, what you're anticipating what revenue expectations and embedded.

In the eat the C guidance for one be revenue.

In 2020.

Thanks, Scott them. So so to answer your two questions. The first part the reduction of five to 10 million. We we have a small program as that you know at customer request. We don't typically talk about externally in a don't divulge the exact nature of the program at which is a fixed price contract for traditional laminated.

Two d. composites. So this is outside of the Albany Safran joint venture, we would have expected that program to grow from calendar 19 to calendar 20 inline with just the ramp of lead in fact that programs declining by about five to 10 million from 19 to 20. So this so thats first question. So this was not in 100.

R&D, because 130 with only leap one any revenues within the Albany Safran joint venture.

At to answer your second question in terms of leap one be revenue support for calendar 2000, we're not going to break those out.

They are clearly down appreciably vary significantly from one targeting we recognized in in Twentytwenty, but we don't want to get into issuing guidance down at that the product line or business unit level at the segment level is as low as we're comfortable going.

Okay.

Can you give us some framework on how much EBIT dollars associated with the one be reduction compares to that of the the revenue decline obviously, it won't be as big but any order of magnitude.

So look as you as you see so if we look at.

2019, and if you strip out 12 million of profit revenue associated with the App with the E. C adjustments, we just talked about you're going to come out with that pending exactly how you do the calculation and EBITDA margins for the year somewhere north of 20% in that 20.3 to 20.5.

What percentage.

The midpoint of our guidance.

On a seat for 2020.

Hey implies a got an EBITDA margin for Twentytwenty, 20.7%. So north of 2019, so basically what that tells you since we said we weren't assuming AC pickups in 2019, we're assuming that the margin overall expense embedded in that.

Isn't assumption that while the revenue will go down within at Sea as a result of leap Wendy productions, our EBITDA margin certainly our gross margin that that business will generate will not decline appreciably as we've talked before at given.

The cost plus nature of that business. Our gross margin percentage is relatively at immune to shift in volume and I think relatively new net the it.

Can be slight changes, but relative to the moon. It's it's fairly stayed stable so our.

Dollars of profit gross profit dollar is that the assay business generates will go down but effectively pro rata with the revenue line. So we will see a percentage reduction in gross profit consistent with the percentage reduction in revenue, we're seeing and thats, because we will still absorb our fixed cost over the road.

Main business, so will not see any margin compression within that business.

Okay and my last one sorry is just on we ramping now that you've had some workforce reductions.

What is your level of concern about.

Albani's ability to lead ramp.

Obviously these decisions are made with some production ramp in mind, what that profile looks like but in terms of your ability to kind of higher those folks back.

Preserve learning curves Im just wondering how this impacts kind of your longer term thinking on.

The margin profile of this.

Of this contract I mean does it.

Does it severely impair the.

The ability to get.

So point, we're in a position to negotiate a fixed price contract down the road or I'm just curious how do you think about.

Yeah, Let me, let me wrap let me try to actual given this yes, let me try try that little bit the.

I think the whereas we used for our reluctance to reduce the workforce.

Was precisely because of some of the reasons you state we.

It's it.

A growing.

Businesses in the developing technology, we have a lot of promise with so.

We wanted to keep the expertise that weve developed and continues to develop.

We as Stephen went through in detail the production of the inventory at the end of 29 team provides us with some time as we burn off that in our assumption what we're producing today leap one be but we'll also have the inventory.

That we can burn off as we go through 2020.

We believe gives us enough time to look ahead and see as the ramp comes to shift people around it and bring people back on as needed. So we feel we've given that a lot of spot.

It was a more normal businesses, we probably would have taken deeper cuts, but we're we're trying to protect the production capability in the technology as we go forward.

Thank you.

Thank you bye.

Thank you, but we'll go back to the line for Patrick Baumann. Please go ahead.

Hi, Thanks for sneaking me here just one quick follow up when you said.

The year business was free cash flow positive for 19, and you expect to be for 28 want to be clear on on the definition, how do you build to that.

Is it EBITDA minus capex and if it's more than that how do you treat like all the other components like cooperated and how do you allocate all the other stuff working capital in taxes and all that stuff. Okay. Very good question now very good question at so so our free cash flow for this purpose is just the pre.

Cash flow from operations for that business.

Less capex for that business. So that does not include the corporate element and so it's.

Leaving aside from that free cash flow is not a GAAP measure. This is even neogen has less of the GAAP measure, which is why we're not giving you actual hard numbers because it is somewhat artificial at that business level, but it just says at the entity that business sent corporate at check for cash at the end the year, which was very positive in prior years it has consumed.

You know as much as the in to add $50 million of cash into given year. So it has been a remarkable turnaround for that business.

Okay. So, but so the statement is basically EBITDA minus capex number no no no no nothing but that free cash flow from operations less capex. So not EBITDA. So it's much more of a true cash flow measured in EBITDA minus capex. So it. So it is the operating profit less all of the changes in working capital for that business less capex.

Okay got it okay, okay, but its excluding you know the incorporates what do you got it okay exactly yes understood understood.

And then as you look at 2021 like as you ramp backup.

Hopefully with a safran with the Max.

Would you expect to be able to say that again at that point or is this a function of kind of.

A little bit of a pause in the growth trajectory more than more than kind of the statement on.

The business itself.

So obviously, we're not guiding 2021 and beyond but I would say that the positive cash flow. We expect in Twentytwenty is not really a result at the pause it's more results that the underlying strength of the business.

Okay. Thanks much.

Thanks Pat.

Thank you and I have no further questions in queue at this time.

Alright. Thank you Grace this is Phil Higgins if I.

Can I'd like to thank you all for joining the call. We appreciate your time today and your continued interest in all the international I'd like to conclude today's call by recognizing the entire Albany team for another very strong quarter performance. Thank you everyone.

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