Q3 2020 Albany International Corp Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Albany International third quarter earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time if.

If he shouldn't require assistance during the call. Please press star followed by the zero.

As a reminder, today's conference is being recorded I would now let's turn the conference over to the director of Investor Relations. John Hobbs. Please go ahead Sir.

Oh, Thank you Brad and good morning, everyone welcome to <unk> third quarter Conference call.

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 their associated reconciliation to GAAP.

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

We will make statements that are forward looking that contain a number of risks and uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations the markets, we serve and our financial results 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 our earnings release as well as our SEC filings, including our 10-K.

Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer will provide opening remarks bill.

Thanks, John Good morning, and welcome everyone. Thank you for joining our third quarter earnings Conference call.

We delivered another solid quarter for our Q3 revenues were as expected and our profitability was better he was better than expected expenses.

A little bit echo their echo there.

All right I'll continue to all countries.

We're especially pleased with our operational performance doing a great job for our customers and our ability to drive profit to the bottom line before.

Before going into more detail, let me say a few words about the cobot pandemic environment, our employees health safety and wellbeing remains our top priority. We continue to adopt adapt our operations and offices to ensure our employees are safe as possible I commend our leadership teams and our employees, who have remained disciplined and created safe environments inside our facilities.

We have also provided support advice and supplies to our employees that their homes to encourage sales behaviors in their communities.

In spite of these challenges our management team has done a remarkable job delivering commendable Q3 results.

In Q3, we delivered adjusted EPS of 96 cents better than expected with both segments contributing to the solid performance.

Our customer performance is outstanding in both segments, we offer a range of value, adding products strong customer technical support and best in class on time delivery performance.

In the quarter, we continue to adjust our operations to rightsize production levels to new levels of expected demand.

We work closely with our customers to be prepared for demand shifts. This intense focus on the customer complemented by our strong operational excellence programs technology development and productivity have resulted in our ability to continue to execute well and to deliver historically attractive margins. Despite the effects of the pandemic on our top line.

Now, let me talk about the segments.

Our machine clothing segment continues to deliver exceptional.

Operational performance with gross margins over 50% and adjusted EBITDA margin of nearly 38% while revenue declined about 10% year over year due to the global economic slowdown machine.

Machine clothing continues to execute well in all of our plants around the world navigating the ups and downs in various end market segments as expected demand for writing and printing grades of paper has declined worldwide. According to some estimates by over 20% driven by the acceleration of digital technologies with many people working in school and from home.

Consequently, a number of publication grade machines around the world have been idled some permanently.

Issue and packaging are mixed markets at home tissue demand for residential consumption is very strong with tissue machines running at full capacity in new machines coming online.

Okay.

Or Albany engineered composite segment also performed well this quarter and delivered a healthy adjusted EBITDA margin of 26.6% in the quarter.

As planned or Albany, Sapphirine composites business work closely with our partner suffering to successfully reopener elite production facilities and gradually restart production in the quarter.

[noise] manufacturing, focusing hey, I see it will be mostly on the leap one a engine blade in San case production since demand for the Airbus a 320 D. O N is expected to increase more quickly as.

His production of the Airbus a 320 new aircraft recovers.

Lead one V production will take longer to recover while the Boeing 737, Max get certified an existing aircraft are brought into service.

In addition to great safety and customer on time delivery performance I was favorably impressed with a number of lean chi's into the a C.

Business executed during the quarter using video and other creative tools to conduct kaizen safely. This lean mindset and leadership persistent is critical for us to continue to drive process improvements that are quality and productivity.

All of which lead to improve profitability and enhanced growth opportunities as we pursue new content on existing platforms or a new production programs.

A C continues to work with a number of customers on new growth opportunities in both commercial and military applications. We continue to invest in R&D to advance the next generation composite materials and develop efficient manufacturing process to bring these materials market Wheeler.

We look at the downturn and commercial aerospace's, a time to develop a broader portfolio technology and product applications for advanced composites. So we're well positioned with key customers when the market comes back.

The good news is that our elite production supplies narrow body aircraft, which are expected to recover first there's domestic travel resumes before international travel.

It's been reported in fact that Airbus a 320 aircraft are being flown at a rate approaching levels similar to a year ago.

In general we're very pleased with both segments, how they performed in Q3 and expect to end the year with solid results. Despite the challenges of the pandemic globally.

Financially we're in great shape, we continue to generate free cash flow have a strong balance sheet with low leverage an excellent liquidity.

All of which allow us to continue to invest in organic growth opportunities such as the next generation of machine clothing belts for our tissue and packing customers and longer term applications for next generation of three composite structures.

And now it's Steven will provide more detail on a quarter financials and I'll look Steven.

Thank you Bill good morning, everyone.

I will talk first about the results for the quarter and then about our revised outlook for our business for the balance of the year.

For the third quarter total company net sales were 212 million.

A decrease of 21.8% compared to the 271.1 million deliberate in the same quarter last year.

Adjusting for currency translation effect net sales declined by 22.6% year over year in the quarter.

And machine clothing also adjusting for currency translation effects net sales were down 9.5% year over year, driven by declines across all major grades of product.

Sales of publication grades, which declined over 14% compared to last year represented only 18% of R. M C sales in the quarter.

However, we also saw declines in packaging caused partly by declines an overall economic activity earlier in the year in tissue grades as bill referenced earlier the shift in consumer demand from away from home too at home products has caused demand to exceed supply in at home products limiting the upside in our sales.

Products for the at home market.

While our customers were forced to idle or run that lower capacity Ah number if they're lying surfing be away from home market, resulting in an aggregate aggregates decline in sales of our tissue great products.

[noise] engineered composites net sales again after adjusting for currency translation effects declined by 39.2% primarily caused by significant reductions in leap and Boeing 787 program revenue, partially offset by growth on the F 35 N C. H 53 K platforms.

During the quarter the leap program generated a little under $17 million compared to 54 million in the same quarter last year.

This quarter's leap revenue was up only marginally from the 15 million generated in the second quarter of this year due to the fact that the reopening of our three leap facilities took place very late in the quarter with very little increase in production in queue to compare to cute and two three compared to Q too.

Third quarter gross profit for the company was 87.3 million Ah.

A reduction of 16.1% from the comparable period last year.

The overall gross margin increased by 280 basis points from 38.4% to 41.2% of net sales.

Within the M. C segment gross margin declined from 52.4% to 51.5% of net sales principally due to lower absorption of fixed costs due to lower net sales, partially offset by favorable foreign exchange rates.

Within a H E C. The gross margin improved from 20.8% to 21.2% of net sales driven primarily by a favorable mix and program revenues.

The net paying for all change in the estimated profitability of long term contracts. This quarter of about $3.5 million is almost the same as that recorded in the third quarter of 2019.

[noise] third quarter, selling technical General and research expenses declined from 48.7 billion in the prior year quarter.

247.8 million in the current quarter, but increased as a percentage of net sales from 18.0% to 22.6%.

The reduction in the total expense was primarily due to lower travel expense, partially offset by higher impact from foreign currency revaluation higher incentive compensation expense and the addition of sarcoma.

Foreign currency revaluation resulted in additional expense of 1.3 million in the current quarter compared to an expense reduction of 1 million in the third quarter of 2019.

Total operating income for the company was 38.8 million down from 55.7 million in the prior year quarter.

Machine clothing operating income decreased by 6.2 million caused by lower gross profit, partially offset by low or S. T. G in our expense.

And H E C. Operating income fell by 10.5 million caused by lower gross profit and higher S. T. G N R expense.

Other income expense in the quarter netted two income of 2.7 million compared to income of 1.6 million in the same period last year.

The higher income in the current quarter was primarily driven by a successful claim for a rebate a foreign sales tax paid in previous years.

The resolution if this claim resulted in other income of 2.6 million in Q3 of 2020, and Additionally, a reduction to interest expense net of 0.9 million.

The income tax rate for Q3 in both this year and last year was 24.7%.

Well this year, a higher share of our global profit square generated in jurisdictions with higher tax rates. This was offset by a higher level of favorable income tax adjustments, which reduced income tax expense by 3 million in this quarter compared to reduction of 1.5 million in the same quarters.

Last year.

Net income attributable to the company for the quarter was 29.6 million a reduction of 26% from 40 million last year.

The reduction was primarily driven by the lower operating income.

Earnings per share was 92 cents in this quarter compared to one dollar and 24 cents last year.

After adjusting for the <unk> impact of foreign currency revaluation gains and losses restructuring expenses and expenses associated with the <unk> acquisition that needs Gration.

Adjusted earnings per share was 96 cents in this quarter compared to one dollar and 17 cents last year.

Adjusted EBITDA felt 13.5% to 61.8 million for the most recent quarter compared to the same period last year.

She and clothing, adjusted EBITDA was 52.6 million or 37.9% of net sales this year down.

Down from 55.8 million.

Or 36.9% of net sales in the prior year quarter.

H E C. Adjusted EBITDA with 19.5 million or 26.6% of net sales.

<unk> from last year's 28.6 million.

Or 23.9% of net sales.

Turning to our deposition, we continue to use our solid free cash flow to pay down debt during the quarter total debt, which consists of amounts reported on our balance sheet as long term debt or current maturity as a long-term that declined from 435 million at the end of Q2 2022 400.

And 18 million at the end of cute 320, 20, and cash increased by about $11 million during the quarter, resulting in a reduction in net debt of about 28 million.

Under the definition of leverage ratio used in our credit agreement, which limits us to 65 million of cash netting against gross that we finish the quarter with a leverage ratio of 1.5 up slightly from 1.48 at the end of queue to both well under the cap of 3.5 allowed for them to the credit agreement.

Disregarding the limitation on cash netting results in an absolute leverage ratio up 0.89 down from 0.95 at the end of Q too.

The reduction in total debt during the quarter was principally caused by continue pay down of a revolving credit facility enabled by strong operating cash flow.

The reduction in net that was principally caused by the strong operating cashflow generation in both segments.

I would like to note that in engineering composites, there were no cash collections during the quarter related to the roughly $17 million of leap revenue during the quarter. The cash associated with that revenue will be collected during the fourth quarter of this year in the first quarter of 2021.

As we collect on both invoices for shipments during the fourth quarter and the true up in voice that we will be submitting under our cost plus contract to our customer at the end of the year.

I should note that the interest expense was unusually low this quarter, which result of the interest received on the rebate a prior period sales tax expenses I referenced earlier that particular benefit will not be repeated in future quarters.

While occurring after the end of the quarter I would like to note that are strong balance sheet and operational performance have allowed us to extend the term of a revolving credit facility by two years to October 2024.

Capital expenditures in Q2, and Q3, 2020, where a little over 9 million down from almost 14 million in the same period last year do principally to reduction of capital expenditures on the leap program.

Looking forward to the balance of 2020, we have revised our financial guidance.

And the machine clothing segment, we have seen a continuation of the order weakness, we called out last quarter drew.

During Q3 orders went down almost 8% compared to Q3 of 2019 I'm on a year to date basis orders of down almost 4% compared to the same period in 2019.

While our orders for publication grades continue to show the greatest declines declining by about 15% this quarter compared to last year.

We also saw year over year declines in all other grades other than engineered fabrics during the quarter.

These declines are broadly in line with the expectations for the back half of the year that we shared on our second quarter earnings call.

This trend in lower orders manifested itself in lower machine clothing revenues this quarter.

However, certain risks to revenue in the quarter failed to materialize, resulting in us delivering somewhat higher revenues than they had been envisaged in our prior guidance.

We do expect the impact of lower orders on revenue to be greater in Q4, and as a result, we expect for the fourth quarter revenues to be down sequentially from the third quarter.

While there are some signs of certain markets set this such as the North American packaging market are showing signs additional signs of recovery.

Ah lag between end product production and machine clothing sales means that any rebound should it be sustained would not be seen on our current orders.

For the full year 2020, due to the stronger than expected performance in Q3, we arrange creasing segment wrapping use to arrange a 555 to 565 million up slightly from prior guidance, a 545 to 555 million.

From a margin perspective and machine clothing, while we did continue to enjoy during the quarter. The benefits of very favorable exchange rates. We did start to see minor signs of March and erosion due to the change in the previously April mix of business.

Or wherever that impact was not as great as we had expected when we lost provided guidance.

Instead, the biggest headwind two margins during the quarter was the lower fixed cost absorption associated with lower revenue, which led to a 300 basis point compression and segment gross margin compared to the second quarter, which is less overall than had been expected.

However, this impact will be exacerbated by the further erosion in revenue projected in queue for.

We also expect that the impact of absorbing fixed S. G and a expenses over a lower revenue base in conjunction with some expected growth and S. G and a and R. R&D expenses well cause additional compression of EBITDA margins in the fourth quarter.

For the full year again due to the strong Q3 performance, where now guiding segment adjusted EBITDA of 200 to 210 million up from prior guidance of 190 to 200 million.

Turning to engineered composites.

In the fourth quarter, we expect to see modest recovery in revenues from R. A S. E. <unk> program as a result of all three of our facilities now being back in operation.

However, even with that recovery program revenue in the fourth quarter is expected to be less than 25 million compared to almost 50 million that was generated in the fourth quarter of last year.

There will be some marginal improvement in 2021.

We expect to have continuous production through all four quarters to support leap one eight deliveries for the Airbus a 320 Neo family. However.

However, with respect to the leap when B variant the powers. The Boeing 737, Max we expect that given the number of finished engines already uncompleted aircraft. The amount of our finished goods in San friends inventory and the volume of finished goods inventory of which we have already recognised revenue in our facility.

[noise] that boeing's planned returned to surface of the 737, Max will provide very limited upside to our 2021 revenue as compared to 2020.

We also expect to see further sequential declines in our 787 frames program, where revenue in the fourth quarter, maybe close to half of that generate in the fourth quarter of last year caused by Boeing slow down and production of that aircraft.

We expect that low level of revenue to continue throughout 2021.

From a positive perspective are defendants programs continue to perform well in Q3 unrepresented almost 49% of the segments Q3 revenues up from just over 45% in queue too.

For the full year, we are now guiding segment revenues of trance between 315, and 325 million down slightly from prior guidance of 325 to 335 million.

From a profitability perspective for the full year. We are now guiding engineered composites segment adjusted EBITDA of 75 to 85 million consistent with prior guidance.

Turning back to the company level, we have slightly lowered our tax rate guidance for the year driven by the income tax adjustments, including a true up to prior year taxes recorded in Q3.

Turning to cashflow, notwithstanding the leap programs consumption of cash during the quarter due to the lack of with invoices on shipments we delivered another good quarter, what about 30 million of positive free cash flow roughly in line with our net income for the quarter, we expect to finish the year overall with strong free cash flow.

At the company level.

We are updating 2020 guidance as follows.

Revenue between 870, and 890 million unchanged from prior guidance.

Effective income tax rate of 34% to 36% down from prior guidance, 36% to 38%.

Depreciation and amortization of between 70, and 75 million unchanged from prior guidance.

Capital expenditures in the range of 45 to 55 million unchanged from prior guidance.

GAAP earnings per share of between $2 and 72 and $2.82 up from prior guidance of 226 and 251.

Adjusted earnings per share of between $3, and 35 and $3.45 compared to prior guidance of $2 and 85 and $3.10.

And adjusted EBITDA between 240, and 250 million up from prior guidance of 220 to 235 million.

Returning to the present.

It was once more given the ongoing pandemic and the resulting impact on the red markets are very strong quarter, the credit for which is due to the hard work put in by all of our employees across the globe.

With that I would like to open up the call up for questions. After you Brad.

Of course, and ladies and gentlemen, if you wish to ask a question at this time, please press one and.

Zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.

Once again, if you have a question. Please press one zero at this time.

Our first question today comes from the line of Peter Ahmet was bird. Please go ahead.

It's a good morning Bill of mind Steven.

Steven Thanks for all the details on on kind of the leap dynamics and and and congrats on obviously a strong corner just given what's going on but can you help us understand a little bit I understand on the leap a kind of a fast recovery leap one be taking a long time you know do you expect you know I guess qualitatively.

Speaking should leap revenue be higher in 2021 versus 20.

I would expect it it very marginally higher if you recall, we we had a good first quarter of this year for producing both significant one a components and a and a modest amount of one b in the first quarter and obviously Q2, two three no production, but revenue recognized on the fixed costs in that business. So.

I would expect that might be marginally up next year at but we we really expect very little one be revenue if you'll recall Peter we we said you know three quarters ago. We said we finished 2019 with about 200 engine chipsets of leap won't be on hand at today, we have a little more than that on hand, and leap one b.

Beanie, we've produced a few more this year than we actually at shipped at marginally higher than the 200, but that's still has a lot of chipsets at on which we've already recognized revenue at that will you know power of the forest you know Boeing aircraft completed for which started not already engines, either you know on the aircraft today or in the.

Sapphirine supply chain leap when a is obviously a much different situation. We we we have lower inventory today and we had at the end of 2019, when we had about 100 ship engine chipsets on hand at but but still just looking at through <unk> trajectory I would expect next year to be at only marginally higher than this year.

Okay, and just the dynamics around kind of the margin adjusted EBITDA margin guidance say, it's quite a range I guess in a C. For Q4, what are some of them puts and takes there and we should be thinking about.

Yeah, you know that as you know there's always a little uncertainty in in a business like a C, which is longterm program accounting about whether they may be adjustments one direction at the other and so even in a relatively short time period that can be quite a broad range of potential outcomes because those numbers could be part.

<unk> or negative in any given quarter and so some amount of it is is to leave allowance for that from an operational perspective, I know, we need think we need to as as wider range as as as we have suggested there cause there aren't there's not a huge amount of uncertainty in terms of production rates here in the fourth quarter all of our production rates and programs is pretty.

Much locked in it it it's large just on the on the profit wait right. We recognize on some of those long term programs.

I appreciate that and just if I could squeeze in one more quickly on just on M. C. R. U. Thanks for all the details there, but you see on the terms of different grades and what you're seeing on orders and how <unk>. How is the pricing environment have you seen any kind of material change I can sequentially and how should we be thinking about that thanks.

Yeah that'll be the look as we've said before it is a very competitive market to nose has been it has been competitive market for years, we face very strong competitors. There every day is a it was a knife fight out there for every single you know did that's available and and and we we always have to make tradeoffs in terms of price or or.

[noise] marketshare and that that is certainly true today. However, we have not seen a significant uptick in that you know driven by that the pandemic an overall economic conditions, it's more or less today in line with what we have seen you know over the last let's say 12 to 18 months.

I appreciate that thanks to.

Thanks Peter.

And we do have a question from the line of Caitlin Galanti with Bank of America. Please go ahead.

Good morning, Guy and they'll you mentioned that that commercial Arab downturn should be a good opportunity for Albany, two grand theft technology capabilities. So that you guys can be well positioned her recovery can you tell us a little bit more about your strategy for that in terms of what.

Allergy areas are you evaluating.

Do you see only incremental and that's been driving this or would you consider then maybe it's not in a and then kind of tangentially, how do you see elion spending I advanced materials development.

Sure Great question me. It is a crime, we're working sort of a broad spectrum of opportunities commercial military defense to see where we can develop materials and then the the processes behind materials manufacturing processes to bring.

You know next generation of composites to the marketplace. So we're working you know across the board, there's there's probably a little bit less work now on the on the large I'll say large OEM opportunity. There's there's more opportunity in the near term on defense military defense opportunities. So we're gonna continue working at you know where where we've we've positioned arse.

I was really well and I'll be program on the engine, but we're also looking at wing and fuselage. Another application. So it's it's challenging one of the things we've learned through the pandemic is it's challenging just to get into customers facilities and our customers get into ours, but we've committed to the R&D and develop them to do that we're doing a lot by video and.

At a meeting so there's a number you know programs that we're working on it currently and then as you as you say then we.

It was part of our strategy is we want to get through this downturn in and have a broader portfolio of applications. As we go forward and certainly from an inorganic standpoint, we would consider technology companies. The right type of M&A as we you know as we've noted before we bought a small company in Germany last year. So concept brings some other capabilities around thermoplastics.

Almost that technology to to Albany that perhaps we didn't have before and we can develop that further as well. So yes. We will continue we'll continue working at the OEM environment, we're watching it on and see how that how that pans out and we want to be there at the table and I think we've seen a demonstrated we have the capability and the operational backing behind it.

To make things happen. So we're gonna take every advantage weekend.

Oh, well, thank you very much.

And we do have a question from the line of John Friendship with Sidoti. Please go ahead.

Every morning, guys.

I'm curious about your thoughts on the reopening of of the office place in 2021.

Mix change hurt you a benefit you and and the machine clothing side of the business is there any reason to think that M. C wouldn't have a better 2021 and 20.

Well, certainly certainly the reopening of offices and and the other you know other avenues as I mentioned in my opening remarks that have been hurt at the away from home marketplace. We would certainly benefit isn't that longer term is that comes back the at home business. You know, it's been real strong, but that that'd be away from home Mark.

And that's from machine clothing, that's certainly suffered through this downturn them, though.

We we would enjoy that coming back.

So should we think about resetting maybe margin contributions and an EBITDA contributions from machine clothing. It just seems to me that over the past year and a half.

Every good quarter, we've kind of reset the ball lower only to see that.

See those lower bars I'm just wanted maybe if the where the mix changes been going on for the past five years.

A starting point, maybe it should be a little bit higher now and M C.

I I, just I would cost me a little bit on it's early you know this is incredible.

Marketplace in an economic environment to try and predict things you know just look at what happened has happened through this year. So we we have a mix. The fact that didn't didn't occur like we expected or a mix actually turned out to be a little better than I expected in this quarter uhm, but we're still kind of watching a longterm effects of the lag between when machine.

Things are are idled, and and and start back up and when you know belcher consumed.

Getting into customers facilities, right now and the M suicide as difficult as well trying to run trials of new products is very difficult right now or what we're trying to commit to that next generation of the belt technology and.

And it's a challenge in this environment. So I would just be cautious I wish I had a crystal ball. It says I knew exactly what this guy looked like going to the next year, but I don't think any of US do in in with a lag effect and the different mix and in different impact globally.

It's a little hard to call right now so I think I'd be patient quarter to let's see what mixture looks like.

Uncertainty John <unk>, you know irrespective of you know what the top line looks like next year and machine club starting with the first half of this year. The margins. We delivered then that business, where where you know outstanding even get a by his dark norm send and certainly you've seen they've been somewhat lower here it in.

In the back half of the year at repeating the March in performance, we delivered in the first half of the year, maybe maybe a challenge just as you would think about next year you know even even if it's another strong topline ear and we we had particular, particularly good mix in the first half of the year, we benefited from exchange rates as you know.

It was overall just a a very good first half of the year those margins, where we got the end of the the the the mid fifties on on gross margin than you know high thirties to 40 per cent range on the on adjusted EBITDA margin. They may be tough to replicate so I'd be careful about just kind of rolling that sort of margin performance for it.

Yeah, but I guess Ah well that was the beginning of the question was that you know next year, we're gonna see the schools, we open when C offices coming back online I I would assume that would be a margin beneficiary, but maybe I I I'm not understanding that properly.

You you, it's hard to get some increase fixed cost absorption absolutely if revenue rebounds, you certainly get that benefit and it's just there are other factors such as mix and F X that F F X impact, which which benefited us in the first half of the year, which may not have the same outsized impact on this next year if some of these other.

At markets such as the publication Great for office in school recovers. So I I again, I <unk>, we do not yet you know I remember not guiding for 2021, so I'm not suggesting any specific numbers you use certainly we have said before that M. C. A has stepped up from its traditional his star.

Oracle a level of of EBITDA. If you go back to what we might just all three or four years ago that it certainly jump to a higher plane, but but I I wouldn't say jump to automatically considering that we can replicate the first stop at this year again in subsequent years.

Yeah, I think it's a little bit it's a little bit longer term, but we also have to think about I don't know if there's gonna be any pricing there was gonna be it I got pricing as we go into this environment next year and then there's is always inflation. So I think that would have to think about as we go and it will like Martin.

Okay. This switching over to a C for a second.

Talk to us about what's going on as far as labor retention a lot of downtime I'm wondering if that's been a problem or not and how you see yourself ramping up in the coming year listening to start to come back online, maybe it's either quicker pace.

Yeah. The I can comment on that we we we've been very methodical and how we restarted the.

Albany, Sapphirine composites venture business, which was shut down to 223 as we started goes back up very careful one hour, bringing people back on in training. We've had we've had excellent progress so far and how that's occurred so I think we feel like we're in good shape with our employees and bringing them back online with.

Extensive training and support as they come on so I don't I don't feel like that's an issue of your question is longer term is capacity comes back up one of the things we are still continuing to do even though we're running very low rates of production on that on the lead program or still working on improving the processes and clothing the efficiencies in the quality of the throughput so that.

As things do come back up we've got plenty of capacity that we've already installed to work with.

Great great. Thanks for taking my questions, though.

It's fun.

And if there are any additional questions at this time. Please press one then zero on your telephone keypad.

And we do have a question from the line of Patrick Baumann with J P. Morgan. Please go ahead.

Hi, sorry, I was on mute [laughter]. Good morning, Okay. Thank you for taking my question.

Uhm quick.

Quickly I'm, sorry, I missed the beginning of the call what what was why where the margins in a sea. So strong in the in the quarter. It was there was there a reason that you discussed as to why that was the case in N y.

You know the fourth corner is <unk> to be a little bit software is it maybe like the leap coming back and that's mix.

Hurts makes a little bit I'm, just curious what you've said on that and I'm, sorry, you're repeating yourself.

Yes, it's two two factors I would 0.2 and <unk>, we didn't really give a an explanation fourth Patrick. So you you you you didn't miss much on the in that respect at at first off you know for your for your perspective at we we had a roughly comparable level of at night faithful adjustment to longterm Khan.

Cracked profitability of about three and a half million dollars during the quarter. So that certainly contributes to the level of margin and also I need 30, if you're looking and again it it depends what your comparison point is if you look on a year over year basis, we certainly get a mix benefit on a year over your benefit Ah basis from a margin perspective.

Due to leap being a smaller share of our revenue. This quarter mentioned leap was only 17 million. This quarter work with you know can get.

Almost three times that a year ago. So it was a much greater share of our revenue. If you go back a year ago and it was close to a half of a sees revenue and as we discussed you know it it is a somewhat lower lower margin, whereas this quarter. It was only about you.

24% of our revenue so <unk> much much lower sure. So that those were the two primary things if you're looking on a year over year comparison basis.

Okay. So if I do the marathon the contracted fever more contract adjustments, which he seemed to be continually getting so I'm not even sure if that sound or carrying any more it just seems like it's you're executing while I suppose on contracts.

But if it if I if I just that out in the third quarter. It's it's the EBITDA margins like closer to like 23%.

That's in the ballpark.

Yeah look at you know B as you know, we we've been targeting [laughter]. If you go back to your few years ago. We we had said when you were looking for I, just EBITDA margins not business with 18 to 20 per cent and we and we we've beaten those kind of right now I think it would be safe to say I absent.

You know those longterm favorite justice longterm contracts that the EBITDA marches typically or somewhere in the low twenties, let's say 21, 22% range. So your your calculations not far off the kind of normalized EBITDA margin.

Yeah, no that's what I'm looking for yeah. So so basically when we think about next year, we shouldn't be I mean, this year was it looks like ending up being more mid twenties, but if we were normalized things you. You would you would kind of talk you would think about more low 20th is.

Is the right level, you know going forward to model.

Yeah and look in future years as leap certainly grows if if that as we've discussed that's a lower March business that that will put some downward pressure on those numbers, but as we mentioned next year leap should be you know oh only marginally higher in terms of revenues. This year. So at that that will not be a significant.

Factor next year.

Got it and then and then the cash flow this year I think is.

Being reasonably solid given the environment.

What's how should we think about free cash flow and Capex, you know more wise any changing kind of your view on.

You know conversion or capex to sales ratios, how should we think about those you know going forward.

So a couple of things there you know one clearly capex has taken a significant step down and consistent with the with the with the slower kids.

Ramp we expected in a sea, we're really in their recovery mode, rather than just a ramp up mode. It, particularly on a program like <unk> like leap and so capex certainty step sandwich, which 30 helps conversion I will say Capex is is a little lumpy right now at because of the leap program and as I mentioned in my remarks.

At the the revenue a lot of the revenue regenerated in Q2 and Q3 from leap was cashless revenue because we will not collect that cash at at some of <unk> in the fourth quarter as we invoice in shipments, but the majority of it quite frankly will not be collected in fourth quarter, but will be collected as part of the truth.

Invoice, we submit the soft round at the end of the year and will collect early and expect to collect early in Q1 of 2021. So the 30th shift of cash out of this year into next year, given and and that's an artifact of the significant reduction in volumes add that we saw on leap, but as we went through the year because the rate at which were in.

<unk> Ah sacra on shipments.

Is is based on the <unk> production value far higher than the actual production volume and and that means that that that cash collection shifts out of the year or early next year. So so it can't get a cue for it'll be a little <unk> you know Ah unusual given that shift of fat cash out of it and it into Q1.

But but overall, we we certainly don't see any if you if you normalize for that we don't see any thing which is significantly impacting the cash conversion of the underlying business and we expect to you know maintain are strong free cashflow conversion for the foreseeable future.

Last year, you did about $50 million, a free cash flow I mean, how much of an impact is this shift the payments.

You know until next year.

Yeah, you know looked at the exact number is yet to be determined but it certainly a double digit number in terms of millions of dollars that will that will shift out if this year into into 2021.

Got it okay. That's helpful.

And yeah, I'll I'll jump off the line I'll, let someone else next question I appreciate that.

Hey, Thank you Patrick.

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