Q1 2020 Earnings Call
Since President and Chief Executive Officer of Albany International will provide opening remarks bill.
Thank you John.
Good morning, welcome everyone. Thank you for joining our first quarter earnings call.
First I'd like to start by thanking our employees around the world to all of them I send my sincere gratitude for their individual and collective efforts.
I'm humbled by their commitment to making our facilities say, helping each other and despite all the stress around us doing a great job for customers.
These are unprecedented times and I couldn't be more proud of our employees.
Now, let me make a few comments on the pandemic in our approach to navigating these uncharted waters. After my remarks, Stephen will discuss the details of our Q1 performance.
There were a pit Indian breadth of the impact of the Corona viruses historic.
Less than a couple of months, we witnessed covance 19 spread globally and the most severe aviation slowdown in history. This time is different.
So we need to constantly assess our end markets and adjust our operations based on the best information we have.
We have experienced leadership and the operational capability needed to serve our customers as things change and I'm happy with our demonstrated ability to do just that over the past couple of months.
So how are we navigated these unchartered waters first we're working tirelessly to ensure the safety health and wellbeing of our employees.
Right from the start in January the leadership of our machine clothing business.
Alerted us to what was happening in and around our plants in China.
It took immediate action to put safeguards in place for our employees, there and communicated how we should prepare for other facilities around the world for the approaching pandemic.
As a company we open lines of communication across both segments and put an organized process in place to manage communications into accelerate decision making.
Okay.
We formed a task force at the corporate level and as a cross functional and cross business.
The Cobot 19 task force is charged with the responsibility for finding and recommending best practices that we deploy companywide to safeguard our employees.
The task force communicates with managers and employees on the front lines as well as experts outside.
Prepares communication and training materials.
Senior leadership meets with the task force on a regular basis every few days in the beginning to review what is happening on the ground plant by plant around the world.
Expedite decision, making so we can quickly adapt our facilities and modify worked procedures.
Keep people say well.
We also update our board of directors on a regular basis with information flow and from our covert 19 task Force brief.
The changes we've made collectively in such a short time, a profound and we continue to take these improvements to a new level.
Any employee that can work remotely is working from home, which is work well.
With great support from our Ita teams.
Our plans have adopted a host of new operating procedures that we can run them as quickly as possible.
In addition to social distancing extra cleaning wearing bass, taking employees temperatures indicates we've adjusted work shifts changed how we run meetings and cafeterias and how locker rooms or use.
These segment and plants into zones, what I called Zone defense.
Each zone has dedicated entry and exit points restrooms cleaning stations in hand wash stations.
Employees work within a specific zone until safer knowing that people aren't crossing zones.
And that we've added another layer of protection by limited and tracking travel within facilities.
In one case, where you had an employee who tested positive but didn't work we managed to get according to our plan.
Work with the appropriate health authorities sent all the employees from that zone home the recommended period of cell isolation.
Deep clean that facilities in all we're back to work after the cell isolation period, but didnt disrupt the rest of the facility and our employees know exactly how it would work because of the communication and planning beforehand.
Now, let me make a few comments about our approach to managing in such a fast changing marketplace.
We don't have clear visibility beyond the near term. So we are preparing to respond to business conditions as they evolve.
We anticipate that our end markets may be affected differently and a different times over coming months in quarters.
Therefore, our intention is to adjust our operations to meet new levels of demand.
Builds on our strengths with a long term and to manage risks looking forward.
In engineered composites for example, when the Boeing seven to seven Max was the late last year, we work closely with our customer and partner Safran to adjust our workforce in operations Accordingly.
We had already planned for low levels of manufacturing of leap one be products in 2020 and had reduced our workforce in early January.
With the accelerated spread of the Corona buyers and hit the commercial aviation in Q1.
We continue to rework our lead production plan and close coordination Assaf oron taken into account lower production levels relieved one area as well.
We jointly agreed to temporarily closed our three Albany Safran composite manufacturing sites in New Hampshire, Mexico in France, and furlough most employees.
We currently expect these plants to reopen at different times, depending on the latest production plan, which will likely continue to evolve.
The takeaway here is that we continue to work in close coordination with sovereign and all of our customers.
To modify our production plans and operations accordingly.
In general we believe narrow body production of will resume overtime and as a great place to be with our partner Safran leap engines.
Our threed woven advanced composite material is a next generation technology poised for growth in the long run.
In a larger AC business about a third of this segment serves the military defense industry.
And we're on solid platforms, including the joint strike fighter Sikorsky CH 50, Threek, a helicopter and Lockheed Martin's jazz and missile program.
In the machine clothing segment, we have a seasoned leadership team has demonstrated can be successful at managing with a tough marketplace.
For the last 15 years, we've adjusted our capacity and global footprint.
As the end market for publication, writing grades of paper have declined.
We've established a global footprint with a strong regional presence that serves our customers locally and focuses on higher value added opportunities.
We've continued to be at the leading edge technology in the industry.
Support our cafe steamers.
New and improved products and services.
And she is excellent financial results in Q1, particularly the strong gross margins of 53%. Despite the Corona virus disruptions reinforce this point.
Currently demand for toilet paper tissue paper towels packaging and Paul has outstripped supply creating immediate.
The demand for our customers.
Paper companies, who serve these product markets.
Orders for PMC belts are stronger than we expected and all RMC plans to open and operating around the world Sports is demand.
We're watching these markets carefully though as we expect the demand may fluctuate supply catches up.
We expect the decline of publication grades to continue with everyone working from home in schools and offices are closed and because it accelerated shift to digital communications.
As we've noted in the past this portion of our business has already shrunk to under 20% of our MC segments revenues.
In short I have confidence in the leadership, we have across the company. We've demonstrated that we can work together to communicate to plan to execute well into a just as our market shift.
This is not to say managing will be easier predictable far from it.
We have great experienced in place that is.
Demonstrate our ability to tackle tough challenges and deliver great results.
As the enough to call to Steven Let me point out that our first quarter.
Results were solid.
As expanding gross margins, both year over year sequentially quarter over quarter.
The strong balance sheet.
Good liquidity and exited Q1 with record gross margin MC.
A 53% when adjusted EBITDA margins of 22% and agency.
Steven.
Thank you Bill.
Good morning, everyone.
I will talk first about the results for the.
Quarter, and then about our current outlook for our business and 20.
20.
For the first quarter total company net sales were 235.8 million a decrease of 6.2% compare to the 251.4.
4 billion deliberate in the same quarter last year.
Adjusting for currency translation effects.
Net sales shrank by 5.4% year over year in the quarter.
In machine clothing.
Also adjusting for currency translation effects that sale shrank by 4.3% caused by declines in pulp publication and tissue grades, partially offset by growth in packaging grades and in engineered fabrics.
Engineered composites net sales like Ghana after adjusting for currency translation.
And effects shrank by 6.8% primarily caused by significant declines elite program revenue.
Partially offset by growth on the F 35, and CH 50, Threek platforms and the acquisition of Sarcom.
First quarter gross profit for the company was 89.5 million.
A reduction of 2.5% over the comparable period last year.
The overall gross margin increased by 140 basis points from 36.5%.
2% to 17% of net sales.
Driven primarily by mix benefits and a little under $1 million in net favorable change can be estimated profitability of long term contracts.
First quarter, selling technical General and research expenses declined from 51.2 billion in the prior year quarter to 49.1 billion in the current.
The quarter, but increased slightly as a percentage of net sales from 20.4% to 20.9%.
The reduction in the amount of expense was driven primarily.
By the revaluation of nonfunctional currency assets and liabilities.
Which resulted in reduced expense of 3.7 million in Q1, twentytwenty compared to a negligible effect in the same period last year.
And by just under $1 million in lower R&D expenses in the most recent quarter.
These reductions were partially offset by $2.7 billion.
In CEO severance costs.
And by 1.5 million in additional reserves recognized under ASV Threeqtwenty six or Cecil.
The new accounting standard for credit reserves that the company adopted on January Onest Twentytwenty.
Total operating income for the company was 39.6 million.
Down from 40.1 million in the prior year quarter.
Machine clothing operating income.
Increased by 2.9 billion, driven by lower SPG and our expense.
Partially offset by lower gross profit.
While you see operating income fell by 1.9 million caused by lower gross profit and higher SPG and our expense.
Q1, Twentytwenty other income and expense was an expense a 15.6 million compared to income of 1.2 million in the same period last year.
The increase in the expense was primarily due to the revaluation of nonfunctional currency balances.
Which has resulted in a gain of 2 million in Q1 of last year, but the net loss of 14.8 million in Q1 Twentytwenty.
This loss principally resulted from the effects of a much weaker peso on an intercompany loan payable in us dollars Bice Mexican subsidiary.
The income tax rate for the quarter was 62.1% compared to 20.3% in the same period last year.
The higher rate in Twentytwenty was primarily caused by a 24.8% impact.
From the non deductibility of foreign currency rates revaluation loss I just described.
Which occurred in a tax jurisdiction, where we are not recording the potential benefit of loss carry forwards.
And a year over year change in other discrete tax items.
Other discrete tax items increased income tax expense by 1.5 million in Q1, twentytwenty compared to a reduction in expense of 3.4 million in Q1 2019.
Absent the impact of the foreign currency revaluation and the other discrete items the tax rate and the most recent quarter was roughly 30%.
Net income attributable to the company for the quarter was 9.1 million.
A reduction of 68.8% from 29.2 million last year.
The reduction was driven by the higher other expense.
And the higher tax rate.
Earnings per share was 28 cents in this quarter compared to 90 cents last quarter.
Last year.
After adjusting for the impact of foreign currency revaluation gains and losses.
The former CEO severance costs.
Restructuring expenses and expenses associated with the store comp integration.
Adjusted earnings per share was 78 cents this quarter.
Compared to 87 cents in the comparable period last year.
Adjusted EBITDA grew 2.6% from last year to 59.1 million for the most recent quarter.
Machine clothing, adjusted EBITDA was 49.2 million worth 36% of net sales this year down from 50.5 million or 35% of net sales in the prior year quarter.
Eight you see adjusted EBITDA grew from 20.5 million or 19.1% net sales last year.
22.1 billion or 22.3% of net sales this quarter.
Turning to our debt position total debt, which consists of amounts reported on our balance sheet as long term debt or current maturities of long term debt.
Grew from 424 million at the end of Q4 2019 to 491 million at the end of Q1 20.
And cash increased by about 27 million during the quarter.
Resulting in an increase in net debt of about 40 million.
On the definition of leverage ratio used in our credit agreement, which limits us to 65 million of cash netting against gross debt.
We finished the quarter with leverage ratio of 1.69.
While disregarding the limitation on cash nothing results than the absolute leverage ratio of 1.09.
The increase in total debt during the quarter was principally caused by the previously disclosed 50 million dollar drawdown on our credit facility.
The increase in net debt was principally caused by normal seasonal variation in cash generation for Q1 has traditionally been a low point in the year.
The impact of foreign exchange rates on the value of our cash and cash equivalents.
And the completion of the facility purchase associated with the Sarcom acquisition.
Capital expenditures in Q1 Twentytwenty.
We're about 13 million.
Down from almost 21 million in the same period last year.
Due principally to a reduction of capital expenditures on the leap program.
Overall as Bill indicated given the ongoing impact on the global economy, and our markets in particular of the Corona virus pandemic. We were pleased with the performance of the business last quarter.
Looking forward to the balance of Twentytwenty.
As previously disclosed in our April six press release, we have withdrawn our previously issued financial guidance.
We will not be replacing that withdrawn guidance at this time.
There is simply too much uncertainty in our end markets to provide reliable guidance for the full year. However, we do want to provide as much insight and color as we can.
In the machine clothing segment notwithstanding the decline in revenue from Q1, 2019 orders were strong and were up over 3% from the same period last year with particular strength in packaging and tissue grades and in engineered fabrics.
We do continue to see declines in publication grades, which represented about 19% of our and see revenues in the most recent quarter.
Our order book over the trailing four quarters for publication grades at the end of Q1, Twentytwenty was down close to 15% compared to the equivalent period last year.
It would not be surprising to see that trend in publication grades continue or even accelerate throughout the balance of this year.
While the overall strong M.C. order book bodes well for the second quarter.
We expect the up sequentially from the first quarter in the segment, but down year over year.
We are cautious about the balance of the year.
As we've discussed previously the volume of our PMC sales is tied to the volume of sales of pulp and paper products.
Which is entering generally correlated with overall economic activity.
The current compression in global GDP is likely to modest manifest itself in the P.M.C. market later this year and into 2021.
All of our machine clothing facilities are currently operational.
As we discussed on our last earnings call. Our two Chinese facilities did see a few weeks of disruption, which impacted our Q1 results modestly but those plants are now back online.
We have not seen any other material disruptions to M.C. operations.
Turning to engineered composites, where the second quarter unlikely the third quarter will be challenging.
We recently announced the temporary closure of all three of our lead production facilities in New Hampshire, Mexico, and France, resulting from the press demand due to the ongoing 737, Max situation and a decrease in production of the Airbus Athree hundred Twentyneo family.
The reason resumption of operations at the facilities will be undertaken in coordination with San Fran.
And in compliance with all local stay provincial and national guidelines of directives.
However, we do expect that these closures will constrain 10, you through much of Q2 and in some cases well into Q3.
As a result, the year over year comparisons for leap revenue in Q2, and likely Q3 will be very unfavorable.
While we do expect to see some recovery in the later part of the year, our overall expectations for leap for the full year are that it will generate under half of the 210 billion in revenue we generated from that program in 2019.
However, as I pointed out before the cost plus nature of our leap contract will partially mitigate some of the profit impact of such a sizable drop in revenues.
While there have been some other non leap challenges in the engineered composite segment such as the declined in the bond for our relatively small wastewater tanks program that supports most Boeing commercial aircraft.
And a pandemic related government mandated shutdown of our other small non leap composites manufacturing facility in Mexico, we have been very pleased with performance up much at the segment.
Looking forward, we will also likely see an impact from Boeing's recently announced reduction in the build rate for the 787 program.
We do not yet know the full impact of that change on our build rate.
Particularly since our content is focused primarily on only two of the three variants that the aircraft. However, any impact is likely to be seen in Q3 in Q4 and into 2021.
Overall, if we'd be a challenging year for topline performance from the APC segment.
As Bill indicated we are taking actions such as a reduction in capital expenditures and certain cost reduction measures to help drive the continued profitability and cash flow generation potential if the segment.
Turning to the company level.
Our current capital allocation priorities are largely focused on cash accumulation.
To ensure that we have a significant buffer relative to any expected requirements.
We previously guided capital expenditures for the year of 75 to 85 million.
We now expect to spend 55 to 65 million this year.
We are also carefully monitoring working capital needs and usage.
Notwithstanding the challenge that certain of our business is space.
We do as a result at the ongoing strong performance in several areas and the continued focus on cash still expect to generate significant free cash flow this year.
The recent draw down on our credit facility was not due to any expected near term need for those funds.
Rather we drew down that cash out from the abundance of caution and help ensure that should we have an unexpected need for the cash we had it available immediately.
Additionally, we do not in any current plans for deploying cash for any M&A activities.
I would like to highlight that with significant cash in hand, almost 225 million at the end of Q1, and an undrawn balance of almost 200 million on our credit facility.
We have sufficient liquidity on our balance sheet remains strong.
With that I would like to open the call for questions Lois.
Thank you and ladies and gentlemen, if you wish to ask a question. Please pass the why not then zero on your telephone keypad you may want to your question at any time by repeating a one zero command. If he is going to speakerphone. Please pick up your handset before I pass and then I'm back once again, if you have a question.
Please pass one zero at this time and one moment that first question.
And then if you did have a question. Please pass one zero at this time.
We do have a couple coming through at a peak at the moment.
[noise].
Thank you I know first question is from the line.
Peter I might have Baird. Please go ahead.
Yes. Thanks, Good morning Jones, Steven Thanks for all the details on on the quarter and nice results.
Next year.
I guess just to start where they see because the not the topline was better than we anticipated when when did you actually officially closed down the three facilities and how that kind of impacted or did not impact the first quarter topline results.
I've spent a couple of weeks now since we closed the.
Three facilities. So we had worked prior to that beginning in January to reduce a the workloads. We had so it's kind of an ongoing discussion and then the close down.
Okay that sounds as far as the first I was just Peter hit it at the tail end of March, though it's still losing a slight impact in Q1, but at the full closures were solidified here in the months April but there was a slight impact at the tail end of Q1.
Okay. So that that's that's what I was looking for because obviously you kind of alluded to that even that Q2, and probably Q3 is when we're going to feel the brunt of the shutdown on the topline.
Yeah, we would expect to see a significant sequential decline in APC revenue from Q1 to Q2.
Okay, and then if I could just ask quickly on on the M.C. So.
That's helpful. You've always talked about volume growth of paper being a good correlation to M.C. belt. So a pickup in Q2 from a a sequential basis.
You know any any aspect of why you think the second half is is gonna be you know weaker or is it just you know you're you don't have the visibility and you're just cautious based on the kind of economic activity that we're currently seeing in the lock down.
I think it's a it's a it's a it's a lot of caution but there is a there is a general I think.
Question out there if the demand right now.
Plants are running full out there there's probably less.
Stoppage right now for full scale large maintenance programs, there's ongoing maintenance and sometimes when there's a.
Those regulatory plan large maintenance downtimes we.
We might see more consumption of belts, but I think in general it's driven by the economic demands and the different end markets and now we see a supply catching up with demand as the channels gets filled.
As I think a we've discussed before Peter we don't carry a huge backlog in a in machine clothing typically at right. Now we started you have some backlog, but the bulk of the backlog is for delivery in Q2 and sweet good insight into Q2, but yet you know to a first order proxy.
Nation at but right now not a lot of insight into Q3, and almost nanning into Q4 in terms of what the order flow will look like so so part of it is to your point, we just don't know yet, but we are certainly.
Concerns given the level of economic activity that we could see not only the big declines were seeing right now and publication, but that yeah. There was that the burst of fat tissue activity could cool down in the back half of the year and publication, our sorry packaging grades at could you know.
Decline in lot inline with the economic activity broadly.
Understood and just lastly, I.
We will have you guys had any supply chain disruptions I know that there's you know it's early on in this kind of locked down but I have you seen that across any of your businesses. It's a impacted you so far.
We really haven't we've seen a couple of minor things that we worked around our supply team early on did a great job of bringing extra supply and so we have.
Oh, probably a larger than normal inventories of raw materials and our supply as you know is.
Not so complicated and depends on a few raw materials that we've been able to deal with pretty well.
Appreciate that I'll jump back in queue. Thanks, a lot guys.
Thank you. Thank you and our next question is kinda landscape Atlantic <unk> from Bank of America. Please go ahead.
Good morning, guys.
As you mentioned one of the size is clearly a bright spot and as as customer demand is relatively insulated from macroeconomic pressures. There can you discuss any opportunity. If you guys are seeing potentially expand your position and huh.
That I think right a little too little too early to say right now under sense, we have or we have some good programs and we're working them. If we can do a great job with our customers, we can mix, possibly expand our work with them, but we're watching it offends right now and were relatively new to these programs that.
CH 50, Threek K for example, we've been ramping that up so.
We're happy with how that's gone and we'd love to do more work on but we'll just have to wait and see.
Okay fair enough.
Then just one quick question on gross margins at M.C., you guys mentioned that the expansion was mainly driven by like appreciation. So I'm. Just wondering how do you think we should think about gross margin there going forward and and just level sustainable maybe not much expansion labs that just trying to help us understand that propping profitable.
Okay profile there.
As Bill mentioned gross margins are really you know posted all time high in this business and we're very pleased at with the margins.
<unk>.
Underlying <unk>, while year over year as we discussed one of the significant changes was depreciation we still are benefiting from a good mix of business within a machine clothing. That's the first 0.2nd point is the the gross margin is sensitive to the voice.
Volume a factor of of sales, even though in that business. So.
No we are concerned.
If if sales were to decline.
Hey materially in the back half the year that that could certainly put pressure on gross margin at <unk>. We obviously, a as bill mentioned have a fantastic team in place who are used to managing add through ups and downs and have done so for the past 15 years as that market has gone through significant changes. So we have confidence in their ability to me.
Maintained good gross margins, but I certainly wouldn't you know if I was looking forward expect him to remain in the 53% on a go forward basis that that that certainly seems higher than is that is realistic on a go forward basis, but I believe we will maintain them at a historically at strong levels.
Okay. Thank you very much.
Yeah and again, if you do have a question. Please I'm wondering now you're welcome to Gautam Khanna from Cowen. Please go ahead.
Yeah. Thanks, good morning, guys.
Morning other warning.
I had a couple of questions first can you talk about the mechanism by which you will get reimbursed or.
Hello, or lead volume you know just.
The cost plus contracts because it just made up on volumes. Once you restart production that you'll get a higher unit cost or is there. Some relief you get in the intervening period when the.
Three facilities or are closed.
Just how does that work mechanically.
Yes, good question got them as <unk>, So two things we need to separate here revenue from cash collection.
Because they are quite different on this program a under AOCI six of six the revenue recognition standard at we are required to recognize revenue on a percent complete basis on this program.
So as we incur costs, we recognize revenue in those costs equal to the cost we incur plus the expected overall profit level for the year, we deal with each year as a separate accounting period for the purposes at the leap contract. So how do they so so revenue.
To the extent, we have costs, which at our ongoing during the shutdown period have whether they be fixed costs related to the plants themselves or as some of those that have employees, who are remaining at work as we mentioned we followed the bulk of our employees with are still some working in in Korea.
Nicole roles at while we are incurring costs than those folks during the shutdown period, we will still be recognizing revenue in those costs. We will obviously every quarter look at our expected revenue for the full year and our cost for the full year to make sure. We're applying the right profit rate on top of those costs.
Add that we incurred we are incurring for the purpose of revenue recognition. So that's how revenue works if it is spread with our costs over the year cash is a little different and in general are talking generally how this works at the start of the year.
We will work with our customer safran to identify the expected demand for the year from San Fran.
<unk> to <unk> and then we will look at bought our expected costs are for the year to produce demand that safran has identified we will then calculate the expected unit price based on that demand level and our expected costs.
We will at the appropriate profit on top of that has allowed for the contract and then as we shift each unit, we will build saf friend that amount and that that happens throughout the year.
At the end of the year, we will we go back and look at what was the actual volume we supplied during the year to San Fran walk for our actual costs.
Yeah and to the extent at our actual costs were above or below what we collected during the year based on the actual volume at Theres, a true up at the end the year, where either at we invoice safran for additional amount or we write a check to safran if we've collected more than our total costs.
Based it based on the you know expected price it start the year. So so cash is a little different from revenue and as you go through a period, where at volumes drop unexpectedly and if there is no adjustment in the the unit gas pricing that we are charging safran for each unit as we deliver at we will.
Building in effect, if you want to think about it and Unbilled receivable recognizing at that we were collected as part of the true up to a at the end the year. So on that portion of our business our cash flow conversion would not be great until you get to the end of the year and collect that true up payment.
Okay.
That's actually very helpful explanation. So is there when you when about.
Shutting the three facilities down for a period of time.
Is there a.
Timeframe by which if you do not bring it back up online you end up losing you know effectively the learning curve you've already developed.
With that styles.
I'm working on that equipment. So you know is it like you can't go longer than six weeks or or else you know the revamped becomes much more challenging <unk>.
How do you how did you can think about.
The the maximum duration of instability closure.
Oh, Yeah I got on that.
That's a really good question and that is part of our discussions and and as we bring that facilities back up. It also varies by individual product and we're looking at each production process the technology behind it.
We've done a great job developing those processes and the technology and we don't want to lose it so.
One of the strategy looking forward is insight into what.
What's an optimum, but a pop a minimum production rate that we can.
The format and still continue not only to keep the technology, but to improve the production process and the technology and cost and efficiency in the process. So were.
We're fully cognizant of that as we work through discussion with SAP Ron.
Jointly we want to continue to improve the technology as a you know the end of last year, we were on a great Ron improving the a throughput the yield the quality and reducing costs or the material and we believe it's important to the future in growing the threed woven composites spreading across other products. So.
It's important to us that we maintain that technical capability.
But I guess, you haven't yet defined what that timeframe as.
Like I think that Oh, we have we have defined.
When we expect you to that facilities to come back up in each of the product lines over a certain periods of time in some of them may we made bringing them back up earlier, and then have a period, where there's kind of a low period. So that we continue to run the line. So.
We don't have a particularly a drop dead date, but we do we knew we are planning.
So we maintain a technology and process capability and also as we go Florida is a future the ability to ramp back up.
Okay and then.
He others. Please if you wouldn't mind.
When it comes down to <unk> you know Airbus is given this is a Nike 20 right.
You know we can that we can discern a one a production right.
And Boeing they'd comments yesterday, so on the Max ramp.
What point do you guys actually expect to be back.
Two.
Looks like he's in the I'm just curious when will you actually see year over year lows in production I mean, this year, obviously, others shutdown for some period of time.
But when you get back to some level of production will it be a fairly low level that stays swaps.
For a year to also a low rates and then if that's the case.
Do you then ratchet back up that.
The price per unit.
In a way above what we were what we were experiencing last year, because the units with a much higher.
And then separately at the Salt Lake facility can you remind us of your 787 content because.
Obviously that rate looks like it's.
How does it dropped by 50% and.
If you could just help us line.
What the revenue content on page eight seven those thank you.
Sure. So let me let me start with the Leap program and then what kind of the Salt Lake and 787.
Frames program in Stephen can chime in here with detail the.
Obviously, I wish I knew exactly what the demand is going to look like going out through next year and into the future.
When we'll get to a a production rate that is.
Where we where we left off at and where we get.
Grow from there.
We're watching what Boeing and Airbus and Safran are saying in their releases numbers and we're going to work all that into our plans as we go forward. So we expect this year as we've communicated is a relatively low year fill the program.
Some growth into next year and will address the plans as we as we go forward or not and re communicate with those ours and when we know you know more clearly what they are so yes and as we go to these lower volumes are obviously, our price per unit cost goes up significantly we were running at a good pace as I said at the end of last.
Jerry and high speed Internet come down.
I never going out as we achieved our goals in operations and <unk>.
Improving the processing efficiencies. So yes, so there will be higher price per unit as we're at these lower volumes.
It's less absorption of overhead and more often general so.
We'll work through that and it's a great program longer terms. So we were glad we're on the narrow body aircraft and what's out for another partner and we will see that growth again, but I can't tell you exactly will be Stephen I don't know if you want to add any comment on that.
The program.
No I I think you said you know correctly Oh, we do we do not yet to the insight and that the challenge to answer your question Gotham, We do not have insight into what the what boeing's slope will look like when it gets back into production. They have obviously put a rate out there that they would.
I like to build that.
They they pick you know there's still uncertainty over when it's obviously a plane re enter service, but also the rate at which they slow pop that that that that ramp at once they start so it's a little difficult to answer your question right now I'm, hoping that a quarter from now I will look more insight into where both.
Thing isn't a wheel will be better able to answer your question, but we can't answer is that the leap portion today and I didn't know Bill. If you wanted to go back to the 787 that question.
If you'd like me to take it.
Yeah, I was just going to add commentary that Steven pointed out in my opening remarks the.
We're on two of the three variants with watch the news from Boeing on the 77 numbers and well work to understand what they mean for us as a as we adjust production. There there are actually a little better than we expect somebody saying, but no. Stephen if you want to add to that 77 <unk> yeah. The only thing I'll add Gotham I have no.
Not sure we've ever publicly disclose the shipset value for it for 787, but it's in a few hundred thousand dollars per shipset.
Thank you.
[laughter].
Our next question is from Pete Skibitski from.
Well I make Gabelli. Please go ahead.
Hey, Good morning, guys, just a couple of quick questions.
Can you remind us I I know your exposure to business aviation is fairly small, but could you remind us what that isn't kind of what you're seeing there are we you know we've seen pretty uneven results from the Oems.
Yeah, it's yeah, so I don't even.
Yeah, sorry, our primary exposure would be a really on some rolls Royce programs or that we perform in our Bernie Texas facility, where we support a variety of engines add that that that supports <unk> Gulf stream and other business jets, but small <unk> in terms of for France, our impact on our overall revenue very small.
You know even within a c. I think it would be a you know that is low single digit percentages of our overall revenue.
Okay, Great and then on Triple seven acts are you seeing any real kind of changes to your work flow there and it seems like that's largely on track to up to maybe deliver late next year I'm I'm, just wondering that seems kind of.
Business as usual on that program.
Yeah, we're we're still working through that we.
We haven't.
I guess put in any big changes, yet, but I don't know Stephens you want to have any color that were just still working through it so it's hard to tell.
Yes, there were certainly significant slips in that program to date, which has pushed you know our revenue out I think if you had gone back a couple of years ago. We were just expected twentytwenty add to the a year of reasonable production rates, where you've been making you know dozens of that of fan cases. This year at we're obviously not in that.
They should where the program is as you said you know backend if next year certainly looks likely at its not a material driver of our revenue this year.
And you know out I eat it may be in 2021, but that we'll see where we stand again nine months now as we enter 2021, just to see where where their program is obviously Boeing has established build rates that have four at the combined triple seven the triple Sevenx.
Deliveries that they announced a I guess yesterday that we're you know much lower in their previous numbers. So I think the ramp up in that program, even when it starts will be more gradual than we'd originally anticipated.
Okay. Okay.
Last question for me I guess.
I'm trying to figure out if it's <unk>.
Thank you my second quarter marginal AC it sounds like the lead facilities will be close current for quite a bit of the quarter isn't a reasonable is it reasonable and the things that we'll see margin compression. The AC in the second quarter and you know maybe that's the trough and we start to come out of an event in the second half of the is that a reasonable line.
I'm thinking or you know because you've got the defense strength and because leap is core plus is that the wrong way to think about it.
So we will have to competing factors at play in the second quarter at first off as you say leap will certainly be smaller.
Where leap is operating right now at the gross margin we are recognizing on Lee.
At is is a little lower.
Then the average gross margin for this segment.
And so in some ways, there's a slight mix benefit not materially at its not you know a you know hundreds of hundreds of basis points lower but it is lower than the average and that's certainly results in ER I say it makes benefit for that segment. However.
The lower volume overall that we expect in Q2 is going is going to significantly at compressed our margins. There was a result, if the fixed cost we have in that segment.
You know at SGN, a is going to become more of a challenging in Q2 on on the compressed revenue will see so so those competing factors will be at play at it is going to be difficult I think challenging to maintain the at the EBITDA margins at we we've seen here year to date in Q1.
Where we delivered over 22% really fantastic results I think at the low volumes that it's it's going to the challenge to replicate that sort of performance.
Okay I appreciate the color thanks, guys.
Thank you. Our next question that's impacting Holmen timetable again. Please go ahead.
Hi, guys. Good morning, Oh, I hope you're well.
Good morning learning.
Hi, Thanks for taking my questions I'm, sorry, I missed some of the beginning of the call I'm not sure if he's going into detail on on on the stuff, but I just want to kind of rehashing.
So the gross margins by segment in the quarter. Just wondering if you could talk to the drivers and if there was anything unusual impacting results yeah in the past he's talked about mix for the M.C. segment or.
You know the cost adjustments in Aero segment.
Just wanted to.
Touch on that and.
Also just how we should think about.
Gross margin performance in the near term you just mentioned competing factors are there I guess and that it seemed like more EBITDA margin comment I'm. Just curious you could folks on the gross margin and also within M.C. the gross margin.
Sure absolutely absolutely. So I'm looking segment by segment machine clothing, you're completely correct. We have in the past talked a lot about mix benefits in in that and and those benefits that we saw in 2019 from the mix perspective continued so it's not as they affect a you.
If you missed the start to call I didn't call at mixed benefits. It's one of the drivers of outperformance, but that's more because the Washington to change year over year, we're seeing a continuation of the good mix at benefits, we saw last year and the primary change we called out year over year was at a reduced at depreciation charge in this quarter can.
Fair to Q1 at 29 team.
But <unk> as I mentioned few moments ago at we.
Are concerned about our ability to maintain that strong.
Mix benefit on a go forward basis. We're also concerned at just about overall volumes the add machine clothing, and obviously with the 10 significant facilities. They have around the world much fewer than they used to have a and so a significant the leaner operations, we used to have but there's still a lot.
Got a fixed cost associated with running at our machine clothing enterprise and so we are sensitive to the two volumes in terms of the gross margins, we can deliver because of that fixed costs. So we are.
<unk> concerned is a strong word but cautious about at the back half the year. If as we discussed earlier our revenues were two dropped significantly in machine clothing on a sequential basis, our ability to maintain gross margins at certainly the 53%. We have right now does feel a little like over earned.
And in that market. It it's a historic Okay. All time high at I think we can maintain numbers, which on the historical basis are still very good at but at the 53% range feels like a bit of a native a reach on a go forward basis, but heat.
Large independent of what overall topline volume's do and as we mentioned earlier in the call at while we have good insight into Q2 Q3 in Q4 are much less certain so we all kinds of have to see what develops there on a C. It's it's largely but I just talked about with at <unk> gross margin.
There is a significant fixed cost also on on the seaside a we do have significant amount of equipment or a <unk>, leaving aside at the leap production facilities for a moment because of the fact that their cost plus.
We are less sensitive to volumes and a and ER and absorption of the fixed cost from a gross margin perspective, I mentioned few moments ago. They beat the challenge with absorbing a you know SGN a at that lives lower volumes, but focusing on on the gross margin outside the fleet, we are very capital intensive.
Still in that business. If you look at our Salt Lake City Operation. For example, we we have significant investments in in at five replacement for machines in in the Autoclaves and in other automated production equipment everything from a lay up to curing to add to a inspection.
And if volumes were to drop we talked about potentially the risk for example in 787 it would push put pressure on our gross margins at so we expect gross margins to still be strong in that business at but they're certainly under some pressure on a go forward basis, a if that if volumes outside of.
<unk> for it to drop significantly.
Are there any contract adjustments in the first quarter in that segment.
We had less than $1 billion. This quarter. So there were some there that was positive from a so if there were some positive adjustments was less than the million dollar so at much lower than the the numbers. We saw in the let's say that the the last three quarters, where I think we averaged close there are too you know $3 million a quarter or so still very.
Positive and we're very pleased with the fact that are positive adjustments because they still indicate we're heading in the right directionally programs, becoming more profitable overtime at but they were not as significant driver of the at the margin level, we delivered in the quarter.
And that was the depreciation benefit how big was that is the one timers and sustainable and then see.
And in M.C.. So as you know we <unk>, we saw a depreciation benefit in a couple of waves last year at <unk> a lot of this is related to the investments we made in our Chinese facilities that you tend to 12 years ago, where where that the those are now being fully depreciate and rolling off the books.
I think was a couple of million dollars that year over year.
Okay and then on last one for me is on cash just if you could talk too I don't know if you already did the drivers of the working capital drag in the first quarter and how we should think that.
Look look at that play out for the rest of the year from working capital perspective.
Yes, part part if this is normal first quarter.
Are you know just seasonal variation, how we had a fantastic first quarter last year at but that was really an operation. If you look historically at we typically at consume cash in the first quarter, including building some working capital. So there's nothing terribly unusual in this quarter the were a handful of programs.
Uh Huh, let's particularly on our defense side, which have some milestone payments at where a lot of expense was incurred in the quarter, but those milestone payments were beyond the ended the quarter and so we built a larger contract assets during the quarter in those programs at but but nothing terribly unusual.
That I believe is in different indicative of any sort of long term trend as I mentioned in my remarks, we still expect at the company level at to generate significant free cash flow this year and and nothing I saw in the first quarter changes my opinion if that.
Okay. Thanks, Thanks, a lot for the color appreciate it good luck.
And next Patrick.
Thanks.
And again, if you could have a question Placemats one zero.
We didn't have the follow up question from that Huh. Please go ahead.
Hi, guys, sorry to keep asking questions, but one of the asked.
How many at the end of last year, if I recall you guys were building.
Inventory on the leap program.
Presumably get built in Q1 as well how many.
Units unit equivalence do you have shipset equivalents of inventory.
This point on.
Hello, everyone and giving them a woman 81 as well just an island.
Yeah.
Yeah, I'm golf and this is bill what we did build up inventory last year, we talked about at the end of the year and a anyway, we sort of plan for it internally as a number of Shipsets shipsets on a weekly basis.
We that all changes for as the demand plans changed going you know, what's what's one week worse.
And so we're looking at the inventory as we look at our production plan going forward, but we haven't.
You haven't really specifically what those numbers are and we.
As we go through this year we.