Q4 2020 Albany International Corp Earnings Call
Okay.
And ladies and gentlemen, thank you for standing by and welcome to the Albany International fourth quarter earnings 'twenty and 'twenty 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 you should require assistance during the call. Please press star and.
Zero.
As a reminder, today's conference is being recorded I would now like to turn the conference over to John hubs. The director of Investor Relations. Please go ahead Sir.
Thank you Brad and good morning, everyone welcome to Albany Internationals fourth quarter, 'twenty and 'twenty 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 and the text of the release about our forward looking statements that us and the use of certain non-GAAP financial measure.
And <unk> and their associated reconciliation to GAAP.
For the purposes of this conference call those same statements apply to our verbal remarks. This morning.
Where we will make statements that are forward looking containing a number of risks and uncertainties.
And 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 the call to their most comparable GAAP measures. Please refer to both our earnings release of February 10th.
'twenty 'twenty, one 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, who will provide some opening remarks bill.
Thanks, John and good morning, and welcome everyone and thank you for joining our fourth quarter earnings call let.
Let me provide highlights on our 'twenty and 'twenty performance share my expectations for 'twenty and 'twenty, one and comment on our strategy going forward and then Steven will cover our fourth quarter results and guidance for 'twenty and 'twenty, one and more depth.
We finished the year strong with fourth quarter results much better than expected, we delivered another solid quarter and a pandemic ear that was challenging and unpredictable.
Our operations demonstrated agility and a relentless focus to deliver great bottom line results. Despite pressure on the top line and downturns and some of the end markets that we serve and net.
This is our story throughout the year beginning in early 'twenty and 'twenty, we took swift action to ensure the safety and wellbeing of our employees. Our teams worked tirelessly to reset our manufacturing supply and supply chain and many times during the year to meet our customers' needs as they change.
We did a great job for customers and continue to drive efficiency and productivity improvements, we took early action and manage our costs well and.
And consequently, we were able to deliver outstanding margins for our shareholders and generate solid free cash flow and add to our strong balance sheet.
Also notable our customer performance metrics are at record levels for service on time delivery and quality. Our safety performance ended the year is the best and the history of the company are factory productivity and supply chain initiatives contributed to our bottom line success.
And we managed to launch a number of employee training and development initiatives.
I'm most proud of how our employees found ways to work safely and how they are innovative said not only do our work but to improve how we do it.
It's not an accident that we completed well over 100, and lean kaizen improvement projects in 'twenty and 'twenty. Despite the restraints of social distancing working remote and.
Following precautions for COVID-19.
In December we recognize these accomplish accomplishments by our employees and we're pleased to reward all of our employees around the world. Excluding the executive team with a $1000 bonus of gratitude as I've said I'm proud of how our employees pulled together to support one another and work safely during this pandemic and continuing to do a great job for customers.
Now, let me make a few comments about the outlook for this share and beyond.
Our machine clothing segments and markets appear to be gaining strength, we exited last year with a solid order book, which bodes well for this year and beyond as the global economy improves as.
As a leader in machine clothing, we're well positioned to grow with our customers, especially and the higher growth areas and tissue and packaging.
Our long standing strategy of continuous investment and technology and product development, along with our operating discipline has served us well during the worst market downturn and more than a decade.
Consider this and the middle of a global pandemic recession, our Mcs segment expanded its adjusted EBITDA margin by 170 basis points in 'twenty and 'twenty.
And more impressive since 2015, our M. C segment has expanded its adjusted EBITDA margin by more than 500 basis points.
We're also optimistic about our engineered composite segment's future, although its longer term since 'twenty 'twenty, one still pretends to face headwinds from the pandemic and the downturn and commercial aerospace and airline and travel.
Through 'twenty and 'twenty, one we're planning for slower production on some lines and AUC because of and excess inventory and our facilities and inventory and the supply chain of our customers, particularly for components for the Boeing 737, Max the 787 and to a lesser degree day F 35.
To continue and managing our costs and because of the recent downward revision and by Boeing for seven and eight seven demand.
Just yesterday implemented a reduction and our Salt Lake City workforce, where we produced 787 frames.
While 'twenty and 'twenty, one is expected to be slower because of inventory destocking, we expect growth and engineered composites to resume longer term, we're well positioned and both military and commercial markets with solid programs such as the CH 53, K, the jazz and missile and the F 35, and leap and our position on leap engines with Safra I should see early growth and the recovery.
And since narrow body aircraft, which the leap engine powers are expected to lead commercial aerospace out of the recession as domestic air travel is expected to recover first.
Next let me say a few words about our strategy.
Albany International is a 125 year history of innovation and developing new materials that add value for our customers or.
And we're committed to continuing this legacy with a focus on developing the next generation of engineered materials and advanced composites to help our customers and prove their products and production processes.
Our machine clothing segment is the leader and PMC because it offers a full range and the most advanced material belts used on paper machines, which operate at high speeds and a severe environment.
We've earned a reputation for constantly improving our belts technology durability and performance and.
Cause of our advancements our customers are able to produce higher quality paper products reliably at lower overall costs and production under demanding conditions.
This is a technology intensive collaborative partnership that our customers value.
And our engineered composites segment, we continue to advance the state of the art and advanced composites, including our proprietary treaty woven composite material used and the leap engine fan blades and fan cases.
And 2020, despite the pandemic, we worked closely with safran to continue improving our three D wells and composite materials and to reduce our cost of manufacturing them. So as commercial aerospace and rebounds, we'll be even more competitive.
We also expanded our collaboration with new customers and for new applications to diversify our customer base and develop future growth areas.
Our technology development on the wing of Tomorrow program with Airbus has continued through the pandemic.
And this program is longer term it is imperative that we get and early seat at the table.
And bring our technologies to design the next generation of aircraft.
And the medium and near term, we have other ongoing R&D and development efforts, what I call incubator projects and both military and commercial areas. For example, our R&D team is supporting a major prime OEM and the development of next generation hypersonic materials and structures using our proprietary three D woven composites and Jerry.
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We also have projects and unmanned vehicles higher temperature materials and thermoplastics.
We believe the current downturn and commercial aerospace is transitory and that market forces and the long term will drive energy efficiency and ongoing replacement of metallic components with lighter composites.
This trend will gain and importance as the industry seeks to reduce its environmental impact with the next generation of more efficient aircraft.
Our treaty woven composite technology is commercially proven can meet the need for lighter weight and high strength and.
And we intend to grow our participation and the most demanding structural applications and aerospace.
As a company we remain committed to investing in technology and product development of advanced materials for organic growth and.
We're increasing our R&D budgets in both segments and 'twenty 'twenty one.
And this is a critical part of our capital allocation strategy organic growth has been driven by not only our investment and hard capital and such as new product tooling and production equipment, but also by our investment and intellectual capital expertise and time and effort that are necessary for successfully developing new products and process knowhow over.
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Our discipline and how we invest and the criteria we use to measure success, We guide our capital investment decisions based on expected returns to shareholders and we.
Direct capital to those programs and the best risk adjusted returns.
In summary, we're optimistic about the future we have a solid balance sheet and strong free cash flow generation, which enables continued investment to grow so with that I'll hand, it over to Steven.
Thank you Bill good morning Catherine.
And I'll talk first about the results for the quarter and then about our initial outlook for our business in the coming year.
For the fourth quarter total company net sales were $226 9 million.
Decrease of 12 per cent compared to the 257.7 million delivered in the same quarter last year.
Adjusting for currency translation effects net sales declined by 13, 6% year over year in the quarter.
And in machine clothing also adjusting for currency translation effects net sales were down six 6% year over year, driven by declines across most major grades of product, partially offset by growth and engineered fabrics.
Once again, the most significant decline of over 21% on a constant currency basis.
Was in publication grades, which represented about 17% of our MSP sales from the quarter.
However, we do see signs, but generally improving machine clothing market.
First while we did see year over year declines and packaging and tissue grades and the quarter driven by the same factors that we discussed on our third quarter call.
The year over year declines, we saw and those grades in the fourth quarter were considerably smaller than we had seen in the third quarter.
Second segments net sales from the fourth quarter were sequentially higher than the third quarter and modestly exceeded our expectations.
Engineered composites net sales again after adjusting for currency translation effects declined by 23.5 per cent compared to last year.
Primarily caused by significant reductions and leap and Boeing seven and eight seven program revenue, partially offset by growth on the F 35, and CH 53 K platforms.
During the quarter the ASC leap program generated revenue of a little under $25 million.
Compared to 48 million in the same quarter last year.
However, this quarters ASC leap revenue was up significantly on a sequential basis, 48% higher than the third quarter driven by the fact that all three of our a S. C. Leap facilities were operational for the full fourth quarter.
Fourth quarter gross profit of the company was $91 3 million a reduction of 5.5 per cent from the comparable period last year.
The overall gross margin increased by 280 basis points.
From 37, 5% to 43% of net sales.
Within the M. C segment gross margin improved from 52% to 59% of net sales driven by favorable foreign currency exchange rates increased efficiencies and product mix.
H E C. Gross margin improved from 19, 6% to 21 seven per cent of net sales.
And primarily by a favorable mix and program revenues, partially offset by a lower net favorable change in the profitability of long term contracts.
While we did recognize the net favorable change in the estimated profitability of long term contracts. This quarter of about 500000. This compares to a 3.3 million dollar improvement recognized in the fourth quarter of 2019.
Fourth quarter, selling technical general and research expenses increased from $51 3 million in the prior year quarter to $54 8 million in the current quarter and increased as a percentage of net sales from 19, 9% to $24 one per cent.
The increase in the amount at the expense was driven primarily by higher incentive compensation expense and an increase in foreign currency revaluation losses from $1 4 million in Q4 of 2019, two 3 million this quarter.
These items were partially offset by lower travel expenses and the fourth quarter of 'twenty and 'twenty compared to the same period in 2019.
I would like to note that the higher incentive compensation expense that we recorded in both the third and fourth quarters of 'twenty and 'twenty included accruals at corporate too.
<unk> 3.9 billion across both quarters combined for the special 1000 dollar employee bonus that bill referenced.
Total operating income for the company was $35 million.
Down from $43 6 million in the prior year quarter.
Machine clothing operating income decreased by $4 9 billion caused by lower gross profit.
Higher S T G and our expense and higher restructuring expense, while <unk> operating income fell by $2 1 million.
Caused by lower gross profit and higher S. D G and our expense, partially offset by lower restructuring expense.
Other income and expense and the quarter net debt to about the income of 490000 compared to an expense of about 350000 and the same period last year. The improvement was driven primarily by a more beneficial foreign currency revaluation effect and the quarter.
The income tax rate for this quarter was $13 five per cent compared to 24, 8% in the prior year quarter.
As a result of a foreign currency revaluation gains and entities, where no tax provision as required.
The tax rate associated with our adjusted EPS is somewhat higher.
17, 8%.
That's 17.8 per cent tax rate is significantly lower than the tax rate for the full year.
In 2020, as a whole our tax rate excluding discrete items was 28, 4%, which compares to 28% excluding discrete items for 2019 as a whole.
The lower rate this quarter due mainly to a true up of earlier quarters provisions increased adjusted EPS by 12 cents this quarter.
How do we know the final full year rate earlier in the year that 12 sense would it be and recognized as additional adjusted EPS and those earlier quarters.
Net income attributable to the company for the quarter was 27 five per cent a reduction of five 5% from $29 1 million last year.
The reduction was primarily driven by the lower operating income, partially offset by the lower tax rate and improved other income and expense.
Earnings per share was <unk> 85 cents and this quarter compared to 90 cents last year.
After adjusting for the impact of foreign currency revaluation gains and losses restructuring expenses pension curtailment curtailment charges and expenses associated with the <unk> acquisition and integration.
Adjusted earnings per share was 89 cents this quarter compared to 97 cents last year.
Adjusted EBITDA fell $10 four per cent to $57 3 million for the most recent quarter compared to the same period last year.
Machine clothing, adjusted EBITDA was $50 9 million or 35, 3% of net sales.
This year down from $52 8 million or 35, 1% of net sales in the prior year quarter.
Eight and you see adjusted EBITDA.
With $21 3 million or 25, 7% of net sales down from last year's $24 2 million or 22, 6% of net sales.
Turning to our balance sheet.
Net debt declined by about 46 million during the fourth quarter.
As a result, our absolute leverage ratio declined from 0.89 at the end of Q3 to 0.7 and four at the end of Q4.
The reduction in net debt was principally caused by strong operating cash flow generation and the machine clothing segment.
And lower capital expenditures during the quarter.
Due principally to a reduction of capital expenditures on the leap program.
I would now like to turn towards the coming year by comparing it to 2020 and by providing our resulting initial financial guidance for 'twenty and 'twenty one.
We expect to deliver another strong year.
And another year of strong performance and the machine clothing segment for.
And for the full year, 'twenty and 'twenty, we delivered net sales of about $573 million.
Down 5% from about $601 million in 2019.
Orders in the fourth quarter of 'twenty, and 'twenty were up about 6%.
Compared to the fourth quarter of 2019.
This was a marked change from the first three quarters of the year when cumulative orders and this segment had been down compared to the same period and 2019.
This gives us some comfort as we head into 2021.
And in particular, we do expect that sales in Q1 of 2021 will be up compared to the relatively low level of sales delivered in Q1 of 'twenty and 'twenty.
We are providing initial net sales guidance for the segment of $570 million to $590 million.
From a profitability perspective.
Machine clothing had a very strong year in 2020.
Delivering $216 million of adjusted EBITDA.
However, there are three effects that will make it hard to replicate those results and 2021.
First as we have previously disclosed we benefited from very favorable foreign exchange rates and 2020 Petite.
Particularly with respect to the weakness of the Brazilian real and Mexican peso, both of which are currencies in which we are short and that we have more expenses than revenues and built.
Overall net favorable foreign exchange rates contributed over $6 million of adjusted EBITDA in 2020.
Compared to the prevailing foreign exchange rates in 2019.
However, some of those favorable effects had dissipated by the end of the year.
For example, the Mexican peso had weakened from under 20 pesos per U S. Dollar in Q1 F 'twenty and 'twenty to almost 25 pesos per dollar in Q2.
But by the end of the year the rate was back under 20.
Second in 'twenty and 'twenty due to the COVID-19, pandemic, we incurred significantly lower level of travel expense in the segment than in prior years.
While this helped the bottom line to the tune of about $6 million. This was not ideal from a business perspective as.
As we depend on strong customer relationships to develop insight into customer needs and to drive product development and support.
We are expecting to resume our prior level of travel during 2021.
Although in Q1 travel will likely continue to suffer from some COVID-19 effects.
Third we continue to see pressure on input costs, particularly right now with respect to logistics.
We're see rail and air freight costs are all considerably higher than they were 12 months ago.
In a typical year, we see over $4 million of input cost pressure and there is reason to believe that in 'twenty and 'twenty, one and this could be higher.
While as is typical we believe that we will be unlikely to be able to recover all of that increased cost through pricing increases.
And we will of course work to implement cost improvement initiatives to offset as much of the remainder as possible.
Notwithstanding these three pressures on profitability, we expect the machine clothing segment to deliver another strong year profit performance and are providing initial adjusted EBITDA guidance for the segment of $195 million to $205 million.
Turning to engineered composites, 'twenty and 'twenty was a challenging year for the segment from a revenue perspective.
Overall revenue and the segment declined by about $125 million in 'twenty and 'twenty compared to 2019 driven.
Driven principally by lower sales on leap, seven and eight or seven and other commercial programs.
Offset by growth and military programs.
Unfortunately, and 'twenty 'twenty, one we're going to see a continuation of some of the same trends with 'twenty 'twenty, one shaping up to be a year of finished goods inventory destocking across our customer supply chains.
On the a S. T leap program, we expect to continue to purchase components for the leap one be variant, which powers the seven and three seven Max and <unk>.
Very low levels.
While the seven and three seven Max is narrower re entering service. There was considered both finished goods inventory and the channel at Boeing at Safran and and our own facilities, one of which we have already recognized revenue as we recognize revenue at the time of production not delivery.
In 'twenty and 'twenty, one we currently expect to make components for fewer than 150 leap <unk> engines.
Far below the 1000 plus engine chipsets, we would expect to deliver annually in the long term.
On leap one a there was a much lower level of finished goods inventory and the channel and.
And we expect to produce components for well over 500 engine chipsets in 'twenty and 'twenty one.
Overall, while the total number of a S. C leap engine chipsets produced in 'twenty and 'twenty one.
He is expected to be somewhat higher than that produced in 'twenty and 'twenty.
This is offset by the absence of certain recoverable nonrecurring expenses.
They were recognized as revenue in 'twenty and 'twenty.
Resulting in roughly flat revenues for a S D from 'twenty and 'twenty to 'twenty 'twenty one.
Our next largest commercial program to produce but frames for the Boeing seven and eight seven and all.
And so has finished goods inventory destocking challenges.
In 2020, we had already seen some effect from boeing's decision to reduce the seven and eight seven build rate.
And our revenues from the program in 'twenty and 'twenty, we're down over 20% from 2019.
However.
As Boeing reduced the seven and eight seven build rate further there's been and increased buildup of our finished goods in Boeing supply chain risk.
<unk> and drastic reductions in order quantities for delivery in 2021.
In addition, we expect our startup of production of the seven to eight seven and she's the last range.
I'll now shift from late 'twenty, and 'twenty, one and to be into 'twenty and 'twenty two.
As it will take longer to consume the parts already.
And the supply chain that were produced by the previous supplier.
Overall in 2021.
We expect our revenues on the seven eight and seven frames program to be $30 million to $35 million lower than we recognized in 'twenty and 'twenty.
On the military side, we support the Lockheed Martin F 35 through several contracts for different parts, including wing skins edge seals and engine components and.
Both our Salt Lake City and Bernie locations.
F 35 has been and remains a very important platform force in 'twenty and 'twenty, we recognized over $85 million of revenue and the platform overall.
More than 25 per cent from what was recognized in 2019.
However, during 'twenty and 'twenty Lockheed Martin and produced finished F 30, fives at a rate lower than they had originally predicted.
Due to supply chain issues caused by the pandemic and consume fewer sustainment parts.
As a result during 2020.
The buildup of our finished goods and the F 35 supply chain and.
Situation that we expect will reverse itself in 2021.
This year to rebalance the supply chain, we expect that our build rate will be lower than the rate at which Lockheed Martin is completing aircraft.
We now expect our F 35 revenues in 'twenty 'twenty, one to be more than $15 million lower than we recognized in 'twenty and 'twenty.
We see similar patterns and several smaller commercial programs across the segment.
Where the revenue on those programs in 'twenty and 'twenty, one will be close to $15 million lower than recognized in 2020.
All of these reductions will be offset by growth and other programs, most notably on the CH 53 K.
Overall for the engineered composites segment, we're providing initial guidance for net sales of $275 million to $295 million.
Turning to the engineered composites segment profitability.
'twenty and 'twenty was a strong year with adjusted EBITDA margins of over 26%.
Largely enabled by three factors, one strong operating performance and the period as evidenced by about $10 million and net favorable adjustment to long term contract profitability to a sales mix benefit as the majority of the revenue decline from 2019 to 2020 was on the a S E.
<unk> program, which has a lower than average profit margin and three despite the decline in revenue was limited loss of fixed cost absorption as.
Has the cost plus nature of the a S elite program allowed us to still recover all of the fixed cost of operating our three a S C facilities.
Unfortunately, those factors will not help us again in 'twenty and 'twenty one.
First.
The lower revenue in 2021 at our non a S. C facilities, most notably our Salt Lake City operations, where all of our seven and eight seven work and the bulk of our F. 35 work is performed will create upward pressure on plant overhead rates.
While as Bill mentioned, we have announced a work force reduction out of our Salt Lake City facility and so that alone will not all states these rate pressures and.
And such an environment it will be difficult for us to achieve the lower unit production costs required to deliver significant improvements to long term contract profitability.
This is a change from the past few years, when a growing revenue base and our non a S. C facilities created the tailwind to long term contract profitability.
Second in 'twenty and 'twenty, one you'll see a product mix. It has a roughly $40 million to $50 million revenue declined. We expect this year is on fixed price programs, which have a higher than average profit margin.
And third unlike 'twenty and 'twenty, we will suffer from a loss of fixed cost absorption due to the fixed price nature of the programs with declining revenues.
As a result, the decremental margins will be much larger than the average margins from those programs.
In fact, it is not a typical per hour fixed price programs to have EBITDA contribution margins in the 30% to 40% range.
As a result of the impact of those three factors in 'twenty and 'twenty one.
Not only do we expect the top line reduction that I discussed earlier.
But we also expect the EBITDA margins for the segment to fall from the 26.1 per cent level deliberate and 'twenty and 'twenty into the low twenty's.
Therefore, we are providing initial 2021 guidance for engineered composites adjusted EBITDA of.
A $55 million to $65 million.
At the total company level, we are providing initial 'twenty 'twenty one guidance as follows.
Revenue of between 850 and $819 million.
Effective income tax rate of 28% to 30%.
Depreciation and amortization of between 70 and 75 million.
Capital expenditures and the range of $50 million to $60 million GAAP.
GAAP and adjusted earnings per share of between $2.40 and $2.80.
And adjusted EBITDA of between 195 and $220 million.
While we are not providing explicit cash flow guidance for 'twenty and 'twenty. One we do expect that the free cash flow, we generate in 'twenty and 'twenty, one will be well above the roughly $100 million generated in 2020.
I would also like to note that in 'twenty and 'twenty, one we expect R&D expenses to be bored and 25% higher than they were in 'twenty and 'twenty.
Reflecting the ongoing investments in both segments that bill referenced earlier.
Returning to the present, we are very pleased with how the company performed in 2020 overall.
Despite the challenging operating environments, both segments met our customers' needs and delivered outstanding performance, all while maintaining a safe working environment.
While it does appear that we have one more year of channel Destocking ahead of US before we return to growth in the engineered composites segment, we remain very excited about the future prospects for both segments.
With that I would like to open the call for questions 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 and you may withdraw your question at any time by repeating the one that zero command.
It's using a speakerphone please pick up your handset before pressing the numbers and once again if you have a question at this time, please press, one and and zero.
And our first question today comes from the line of Peter Arment with Baird. Please go ahead Sir.
Yes, good morning, Bill and Steve and congrats on the.
Strong results given the challenging year.
I guess I wanted to just first touch base says Stephen on on the a C revenue guidance kind of implies I guess, if I look at the midpoint of revenues around 71 million, a quarter, which I and I know, that's probably not how it's going to play out but maybe if you could just walk us through how you think the revenue cadence that maybe a high level given all of them.
Moving pieces around Destocking.
So yeah look I'm not going to get into quarterly guidance, we don't provide quarterly guidance and although I don't expect it to be terribly lumpy as we go through the year and so it's not.
Not giving the quarterly guidance you suggested just dividing the midpoint by four but you're probably not that far off and so is that.
Your your your you know general approaches.
Donnelley correct look that's the challenge we face is a while and.
You know ASC revenues will certainly be at fairly flat and.
And they were more lumpy and in in 2019, and so that those will be spread more evenly throughout the quarters, and which should mean that either for a S. C and no quarter is as bad as the worst quarter, we saw and in 2019. However, we have to layer on top of that at seven and eight seven and F 35 declines and the other <unk>.
And our commercial programs.
And the effect of which will be spread throughout the year and there is they are and in seven and eight seven and F 35, and boat there was considerable inventory in the channel and that needs to be cleared out before we can start to.
Produce and recognize revenue and and it's not as if that that means we'll take a holiday from production and in Q1 that that that's you know decline and production will be spread throughout the year and so we'll be producing a little ahead of the need and in some ways, if you'd like to think and the first half of the year and and be catching up is.
And they'll be catching up with us as we get to the back half of the year. So we have somewhat level loaded those production quantities threat throughout the year as well until I know a few about their thoughts on that.
I would just stay out and I think the programs that are where we're destocking through the year, we were projecting and planning for a low level of production.
We'll probably see some pick up and the back half of the year and we have other growth programs like the CH 53 day as the volume longer term growth and maybe a little bit more and the back half of the year as we go into 'twenty and 'twenty, two and expect you know.
And to get beyond Destocking, and and grow from there so it'll be probably a little bit more and the back half of the year, but as Stephen said I don't think it'll be real lumpy.
Okay and that's that's really helpful. And then just around just the sensitivity of the EPS range and adjusted EPS that you provided just I think we struggled a little bit of of what are the some of the factors that maybe we're not thinking about that you know implied you're getting to the lower end of your range I mean could you maybe walk us through may.
And maybe some assumptions there that you were thinking about.
Well you know, it's it's derived from the lower end of our EBITDA range for the two segments.
There's obviously that the table and the in the earnings release that shows how we get from our adjusted EBITDA range to two our EPS range. So assuming the question is is really at the adjusted EBITDA range and look out from from an E C perspective.
And we mentioned the headwinds we face now on and on our long term and cause.
Contract profitability with the declining volumes, placing upward pressure and rates and that's something we're gonna have to manage very carefully through the year. It. It's certainly you know generates the risk that you could actually have and adjustments and long term contract, which would be unfavorable and we obviously are not planning and that but there's certainly a risk there.
And so so that's one of the biggest risks on the AUC side on the machine clothing side, either certainly FX risk, which could push us towards the bottom and there's the inflation on input costs I talked about which we always try to offset with a.
Cost reduction initiatives, given we are and on the Abel and given the competitive environment and to raise prices to completely offset those rising input costs. We we try to identify cost savings initiatives to offset those increases, but but there's no guarantee as we entered the year that will be successful and and offsetting all of those and that's all.
And so a bit of a mix issue of just exactly where the yeah. You know spread is going to come as we go through the year for machine clothing, and as we've discussed previously either certainly and regional differences in March and and even some margin differences between grades of out of product and so there is certainly a product mix risk, which.
Could drive us towards the lower and if the range as well.
Okay and just lastly, thank you for that Steven and then just lastly, our and Bill maybe and just your thoughts on you guys are generating a lot of cash and you've got a really strong balance sheet. You know just thoughts on how youre thinking about M&A and and in this environment just given the pandemic.
Yeah sure Peter did the and we are generating a great free cash flow and paying down debt and where are you know our primary objective as I said, it's gonna be the organic growth investment, we make and the programs. We're working on but we will consider M&A were particularly interested and things that would help us advance our technology our processes and.
And and the product development round, and you're gonna materials and advanced composite. So it is something that we would consider if the right property came along where we've been.
Early conservative in nature, and you know price.
Prices have been high over the past year. So we'll keep looking but if something if the right property came along we'd consider it.
Thanks very much.
And we do have a question from the line of Gautam Khanna with Cowen and company. Please go ahead.
Yeah, Hey, guys. Good morning, this is Dan on for Gautam.
And so listen I wanted to ask a little bit more detail on the F 35 destock.
And.
And just kind of the puts and takes behind that and how long that could last and I guess kind of.
Like what rates, where are you producing at versus what.
What they delivered this year and I mean, there's still a pretty substantial.
Ramp and deliveries through 'twenty, two I'm still kind of just how you expect that to play out.
Thanks.
Hey, Dan This is bill I think that maybe the first part of the question and Steven could add some.
One or two it is a you know we're expecting this will work. This through this year in 'twenty and 'twenty. One are the program for us the F 35 programs and a great program. It's been growing quickly and we've been now we added production capability and grow with it and.
You know just came to find out and somewhat of a surprise at the end of the year that you know and then there was there was inventory and the channel that we're.
We're getting ahead of the overall rate that Lockheed Martin was working out so it's a it's a short term.
The revision to the to the growth rates longer term, so I think in 'twenty and 'twenty until we back it up.
The growth rate on the program.
Right.
Okay got it.
And I guess.
As a follow up to that is it kind of like that that's a pretty big snapback and if say Lockheed goes to deliver and one seven day in and 22.
And that's that's a pretty big step up right for you guys or is it already that that all of that inventories and the channel.
I think it is a step back I don't know that I would describe it as a snapback well well well manage it you know over time, so that it's.
Well managed operational increase but.
But yeah, we do expect it to come back beyond 'twenty 'twenty, one and it's as I said, it's a good program.
Okay Cool and then just on the you guys have the safran cash true up right and that occurs is it partially in Q4 and partially in Q1, what was the amount of that.
Yeah.
Yeah, what we were expecting and Q are a true up in Q1 and Stephen I know if you have the numbers on that or we've something we did and.
We we we we haven't disclosed that number and you know, it's typically we sat and prior years being in the high single digits of millions of dollars and I at this stage, we're not giving any further guidance than that.
Okay sounds good.
And then just lastly, how's the.
Progress at reopening and let the leap facilities have you run into any snags or is it going pretty smoothly.
It's gone remarkably well, we brought all of the three facilities all back online after they are closed.
Really close and in second and third quarters and.
Productions picked right back up we are still working on improving the product as I said in my remarks, and it's gone it's gone very well we've made some strides and.
The ability of the product well, while things were slow and and we're happy with how it's going right now we're just waiting for the rest of the market to pick up.
Okay. It sounds good thanks, guys.
And we do have a question from the line of Steve Tusa with J P. Morgan. Please go ahead.
Hey, guys good morning.
Alright.
So I I think we counted roughly and the way of kind of 60 to 65 million of revenue headwinds at AC from your comments. Your guide is down 40 to 45 at the midpoint I guess.
And what what is or are we kind of calculating that correctly correctly and kind of.
What what what would be growing and I guess.
Is the 60 to 65 are you know.
How much of the $60 million to $65 million is destock.
Yeah, So and let me take that first and so your math is generally correct. It's about 60 to 65. The growth is coming we mentioned and CH 53, K and some other new programs. We have on board that are that are growing net.
And have not talked about and and I'm not talking about at this stage and they're smaller in nature right now and delivering some of the growth and that that you you you see there and.
And the 66 60 to 65 million it depends how you count destock and the vast majority of it is destock quite frankly, and if if you look at the the primary drivers being a leap one b seven and eight seven and F. 35, all of those are destock and I think if you add those three together and you know you.
You get into that and a $50 million to $55 million range of your of your 60 to 65 and so we certainly you know and while it's difficult to predict the future and F. 35 appears to certainly be a transitory destocking event and and we should get back on track after at Lockheed manages two.
And I'd get back to their plan to build rates at the post and again with the pandemic supply chain challenges on 737, and eight seven and eight seven and the beat the Big question. There is just a well you know what.
As Boeing do with build rates as we go forward and obviously, we're not relying on a lot of that you know revenue. This year, so our 'twenty 'twenty revenue.
Our 'twenty 'twenty, one revenue, sorry, and is unlikely to be significantly affected by boeing's decision to build rates, but the question as to how quickly that recovery as we go into 'twenty and 'twenty, two really depends on the rate at which they build and therefore consume that that that channel inventory. So it's a little difficult to predict the exact quarter right now and where are we.
We returned to growth on those programs and but as you know and even in some but the vast majority of it is destocking.
And if if you look at the kind of are they the the three seven.
The I would assume that that flips a bit in 'twenty two.
As as these guys kind of start to think about a bit of a of and increase in 'twenty. Two would you would you expect that to kind of go back to.
And then the stocking more regularly kind of ahead of those.
Those are potential.
And part of production rate increases if they if they start to ramp a little bit there.
On leap yet yeah, it does but the one caveat being the back end of your sentence. There if they start to ramp a little yet and if they meet our publicly stated you know build rates and then sure we would expect it to flip in 2022, and it's are they they face a lot of challenges as well and in and getting back.
Back up to rate. So it's that's why I get you. The we're not we're not guiding 2022 at this stage and I don't want to pretend to know and exactly when in 2022, that's going to flip on us.
But if but when.
And when but the headwind goes away like you'll be normalized you know on that front from what you know today by the end of 'twenty one.
It's it's a it's a hit to you guys today, it's a cash benefit to your customers, but then that goes away and in 'twenty two because it would be more aligned.
Is that right on 37, and we would expect that's what we would expect yes, okay great.
And leave one B I was going to say the other thing is on leap one as we'll watch Airbus too as we exit 'twenty, one with the production rates with <unk> hundred 20, neo and they've talked about raising the rate build rates. So that would help us to as we go beyond 'twenty one right. So it's really a one O one be kind of dynamic.
The that you're almost talking about okay, great. Thanks for all the detail I appreciate it thanks.
And if there are any additional questions at this time, please press one and zero on your telephone keypad.
And it does appear at this time there are no further questions in queue.
And I'll turn it back to Mr. Higgins for.
Remarks.
Thank you Brad and thank you everyone for joining us on the call today. We appreciate your continued interest and Albany International and I would like to reiterate my thanks to albany's employees across the globe for delivering a safe and successful in 'twenty and 'twenty. Thank you everybody.
Good day.
Yeah.
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