Q2 2021 Albany International Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Albany International second quarter earnings call.
At this time.
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Later, we will conduct a question and answer session.
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I would now like to.
Turning the conference over to our host.
Mr. John Hobbs director of Investor Relations. Please.
Please go ahead Sir.
Thank you Tani and good morning, everyone.
Welcome to Albany International second quarter 2021 conference call.
As a reminder for those listening on the call. Please.
Refer to our press release issued last night detailing our quarterly financial results.
Contained in the text of the release is a notice.
Regarding our forward looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP.
For the purposes of this conference call those same statements apply to our verbal remarks. This morning.
Today, we will make statements that are forward looking that contain a number of risks and uncertainties on the mountain, which are the potential effects of the COVID-19 pandemic on our operations.
We serve and our financial results.
For a full discussion <unk>.
<unk> on 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 of July 26, 2021, as well as our SEC filing.
Filings, including our 10-K.
Now.
I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks bill.
Thanks, John Good morning, and welcome everyone. Thank you for joining our second quarter earnings call.
I'm pleased to report that we delivered.
The strong quarter with excellent performance in both segments. Our operations continued to do a great job for our customers with best in class delivery quality and service and I'm really proud of our employees on how they stayed focused on safety productivity cost savings and lean kaizen process improvements.
As a company we delivered 235.
Levered another revenue in the second quarter growing revenues, both year over year and sequentially and we achieved near record levels of profitability.
Gross margins of 43% and operating margins of 21%, our second highest quarterly margin performance.
We achieved GAAP EPS of <unk> 97 for adjusted EPS of $1.1.
$5 million on free cash flow quarter on our company's history Gen.
Generally over $50 million and free cash flow in the second quarter.
We did face supply chain challenges and materials cost inflation and logistics that our teams were able to manage through and successfully offset some of their impact on the bottom line and we'll keep an eye on these going forward.
We continue to pay down debt and have a healthy balance sheet, which enables investment in future growth.
As we've mentioned before we're increasing our investment in research and technology across the company.
In general we are encouraged by the economic recovery in key markets coming out of the pandemic slowdown we're cautiously watching how the delta variant might affect this recovery.
And on particularly international Air travel and the less vaccinated regions of the World that said long term secular trends are favorable and Albany is market position global footprint and product development take advantage of these trends.
In our engineered composites segment as domestic airline travel recovers, we expect to benefit.
<unk> from our position on narrow body aircraft with leap engines, and our partnership with Safran as.
As we mentioned last quarter, we're working closely with safran to coordinate ramping production as leap demand picks up on recovering narrow body OEM production.
Our plans include hiring additional workers and preparing for increased production in our 3 leased facilities.
As we exit 2021 grow in the future.
We're very excited about <unk> recent announcement with GE to partner and development in the next generation rise engine, we've used <unk> as an important long term customer and partner.
As we've previously mentioned, we're investing more this year in R&D projects, particularly with new customers and new products.
Using advanced materials, such as our <unk> woven composites with a goal to diversify and grow our customer base broaden our material science capabilities.
This ranges from our proprietary 3 D. Woven composites currently use on leap engine fan blades and fan cases, 2 automated fiber placement composite wing skins for Lockheed Martin's F.
535 joint strike fighter to complex components on the Sikorsky CH 50 <unk> helicopter.
We continue to develop applications for the wing of Tomorrow program with Airbus Industries. Along these lines. We are pleased to announce earlier this month, our technology collaboration with spirit Aero systems to develop advanced 3 D woven composites.
Composite applications for hypersonic vehicles.
This collaboration capitalizes on the unique capabilities of both companies to achieve superior hypersonic design solutions and efficient manufacturer ability using Albany is proprietary 3 D woven composite technologies and it builds on our demonstrated ability to manufacture.
While on composites at commercial scale.
This is an exciting example of the types of new business and advanced technology programs, we're investing in today to help secure our future long term growth.
In the machine clothing segment, we're optimistic about recovering global growth, we expect to benefit from long term secular trends, which should.
Should underpin the demand for paper products.
Our machine clothing business has benefited as a leading supplier in the industry since we're well positioned globally.
Particularly in the growing end markets for packaging and tissue products or.
Our product development strategies operational improvements and technical service continued to target these higher growth end markets.
Our operating teams have been firing on all cylinders and we expect to continue our strong execution on the second half of the year let.
Let me say a few words about machine clothing to end markets.
<unk> tissue corrugated products pulp and building products end markets have remained the strongest sub segments with packaging benefiting from increasing on.
Online shopping as retail goes through a fundamental shift worldwide.
In tissue, we may be on a transition phase whereby at home demand settles down and people return to school restaurants offices vacations et cetera.
You have to see a pickup however in the away from home paper markets for our belt, which should eventually improve.
Surprisingly publication grades continue their decline and only represented 16% of <unk> revenues in the second quarter.
Markets in North America, and China are robust, while emerging economies are still grappling with COVID-19 and low vaccination rates likely requiring more time to rebound.
In summary, our machine clothing segment continues to.
Performed well our operations are strong taken advantage of the higher growth sub segments, and serving customers well around the world as a recognized global leader in the industry. The success is the result of disciplined execution of our long term strategy.
As I mentioned, we have a strong balance sheet and good free cash flow generation, which allows us to continue investing.
<unk> and the technologies and customer programs that expand and broaden our competitive positioning in both segments.
Our first priority for capital allocation is to invest in organic growth programs across both business segments, and then to seek acquisitions that fill our long term strategy.
Our reputation for reliability service and technical excellence.
<unk> is well established in machine clothing, and our brand is growing in aerospace as a reliable supplier in engineered materials partner.
We're optimistic about the long term opportunities on both segments.
So with that I'll turn it over to Stephen for more detail on the financials, Steven Thank you Bill and good morning to everyone.
I'll talk first about the results for.
And then comment on the outlook for our business for the balance of the year.
For the second quarter total company net sales were $234.5 million, an increase of 3.8% compared to $226 million delivered in the same quarter last year.
Adjusting for currency translation effects net sales rose by 1% year over year in the quarter.
In machine clothing also adjusting for currency translation effects.
Net sales were up 0.8% year over year, driven by increases in packaging grades and engineered fabrics.
The court harshly offset by declines in all other grades.
Publication revenue declined by over 7% in the quarter and as Bill mentioned represented only 16% of Mcs revenue this quarter.
Tissue grades also declined over year over year due to a more normal level.
Demand for grades to support customer production for at home use resulting in the decline from the highs for those grades that we saw last year without significant recovery to date in the away from home product grades.
Engineered composites net sales again after adjusting for currency translation.
<unk> effects grew by 1.3%, primarily driven by growth on leap and CH 53, K, partially offset by a decline on the 787 platform.
During the quarter, the ASC leap program generated a little over $25 million in revenue.
<unk> comparable to the first quarter of this year, but up over $10 million from the second quarter of last year.
At the same time, we reduced our inventory of leap 1 be finished goods by over 20 engine chipsets in the quarter, leaving us with about 170 leap 1 b.
<unk> engine chipsets on the balance sheet at the end of the second quarter.
As you will recall, we previously recognized revenue on these engine chipsets and their value was reported under contract assets on our balance sheet.
Also during the most recent quarter we generated.
About $3 million on revenue on the 787 program.
Up from less than 1 million in the first quarter, but down from almost $14 million in the second quarter of last year.
Second quarter gross profit for the company was $101.7 million from.
A reduction of 1% from the.
<unk> period last year.
The overall gross margin decreased by 220 basis points from 45, 6% to 43, 4% of net sales.
Within the <unk> segment gross margin declined from 54, 5% to 52.9.
9% of net sales principally due to foreign currency effects higher input costs and higher fixed costs, partially offset by improved absorptions.
For the <unk> segment, the gross margin declined from 26, 7% to 23% of net net.
Sales driven primarily by a smaller impact from changes in the estimated profitability of long term contracts.
During this quarter, we recognized net favorable change in the estimated profitability of long term contracts of just over $4 million.
But this compares to a net favorable change of over $7 million in.
In the same quarter last year.
The favorable adjustment this quarter was principally due to a reduction.
As a result of changes in volume expectations to previously established loss reserves.
Couple of specific programs and is therefore, not necessarily reflective of ongoing enhancements to profitability.
In fact, as we previously discussed the expected revenue decline this year in some of our fixed price programs are leading to headwinds to long term.
Term program profitability this year.
Second quarter, selling technical General and research expenses increased from $47.4 million in the prior year quarter to $51.8 million in the current quarter and also increased as a percentage of net sales.
On the from 21% to 22, 1%.
The increase in the amount of expense reflects higher incentive compensation expense.
Higher R&D spending.
Travel expenses and higher foreign currency revaluation losses.
Total operating income for the company was $50 million down from $52.7 million in the prior year quarter.
Machine clothing operating income.
By 600000.
Caused by higher FTE, Gnr expense, partially offset by higher gross profit.
<unk> and lower restructuring expense.
And <unk> operating income fell by $1.1 million.
Caused by lower gross profit and higher <unk> expense.
Partially offset by lower restructuring expense.
The income tax rate for this.
<unk> was 30%.
<unk> to 32, 1% in the same quarter last year.
The lower rate. This year was caused by the generation of a lower share of our global profit in jurisdictions with higher tax rates partially.
We offset by a higher level.
<unk> of unfavorable discrete income tax adjustments.
Net income attributable to the company for the quarter was $31.4 million a reduction of $1 million from $32.4 million last year.
The reduction was caused primarily by the lower operating.
<unk> profit, partially offset by the lower tax rate.
Earnings per share was <unk> 97 in this quarter compared to $1 last year.
After adjusting for the impact of foreign currency revaluation gains and losses restructuring expenses.
And expenses associated with the <unk>.
Acquisition and integration.
Adjusted earnings per share was $1 <unk> this quarter.
Compared to $1 and <unk> last year.
Adjusted EBITDA declined by 5.8% to $69.4 million for the most recent quarter.
Compared to the same period last year.
Machine clothing, adjusted EBITDA was $63 million essentially flat compared to prior year quarter and represented 39, 4% of net sales.
<unk> adjusted EBITDA was $19.3 million.
<unk> <unk> 25, 9% of net sales down from last year's $22.8 million or 31, 4% of net sales.
Turning to our debt position total debt, which consists of amounts reported on our balance sheet as long term debt or current maturities.
Charities of long term debt declined.
<unk> declined from $384 million at the end of Q1, $2000.21 million to $350 million at the end of Q2.
And cash increased by just over $15 million during the quarter.
Resulting in a reduction in net debt of about 50 million.
Capital expenditures in the quarter were approximately $11 million compared to $9 million in the same quarter last year.
The increase was caused primarily by higher capital expenditures in machine clothing.
As we look forward to the balance of 2021 the outlook for the machine clothing.
<unk> segment remains strong.
Compared to the same period last year <unk> orders were up 10% in the second quarter and up over 3% year to date.
We are also seeing some foreign currency tailwind to our MSC revenue, primarily driven by the strong euro.
The recent strength in the dollar versus the euro means that we are unlikely to see the same foreign currency tailwind in the back half of the year.
Overall, we are raising our previously issued guidance of revenue for this segment to between 585 and $600 million up.
Up from the prior.
Prior range of $570 million to $590 million.
From a margin perspective in machine clothing, we delivered another strong quarter.
With adjusted EBITDA margins of almost 40%.
We saw some increase in the level of travel during the quarter, but we.
We are still not back to a normal level of travel on the segments travel expense in the quarter was still almost $2 million below the level in the same quarter in 2019.
So we may see some additional pressure from that in the balance of the year as we continue with the return to normal.
We have also seen some pressure from the increased input expenses, both raw materials and logistics and expect these pressures to continue through the balance of the year.
We continue to work to offset the impact of these cost increases to the greatest extent possible.
By driving down our production costs through.
Needless improvement initiatives.
However, we do expect to see overall margin pressures in the back half of the year driven by both increasing travel expenses and rising input costs.
At the start of the year, we had anticipated seeing foreign currency exchange rate pressures on <unk>.
Continued stability.
Particularly caused by the recovery in the Mexican peso and Brazilian real as the devaluation of both of those currencies in the middle of 2020 had provided us a bottom line benefit since we have more expenses than revenues in those currencies.
Year to date, we have not seen.
As much headwind from those currencies as we had expected and we have also benefited from the strong euro currency, where we have more revenues on expenses.
As a result overall year to date foreign exchange rates have actually provided us with a modest adjusted EBITDA benefit compared to the same period.
Last year.
However, based on current exchange rates, we will not see the same comp growth comparables.
Foreign currency benefit in the back half of the year.
We are also cautious about the effects of a potential resurgence in COVID-19 cases on segment results in the back half of the year.
As a result of all of these factors and the increase in revenue guidance, we are increasing our adjusted EBITDA guidance for the <unk> segment to a range of $210 million to $220 million up from the prior range of $195 million to $205 million.
Turning to engineered composites.
Posits, we delivered a strong quarter aided by the net favorable adjustments to long term contract profitability.
Absent that pickup our Q2 results were consistent with what we had indicated last quarter.
Down from Q1, representing what we had expected to be the trough for the year.
However, given the impact of the net favorable adjustment on the second quarter results. We now expect that Q2 will be the quarter with the highest segment profitability. This year as we expect Q3 and Q4 profitability to be more in line with what we deliberate in Q1.
For.
Here, we still expect 787 program revenue to be down over $40 million from the roughly $50 million generated on that program last year.
With Boeing's recent announcement of a reduction in 787 build rate all but eliminating the possibility for any upside on that program.
Later in the year.
We also still expect leap revenue to be in line with prior expectations and roughly flat to last year.
However on a more positive note.
While F 35 revenue was down slightly in the second quarter compared to the same period last year.
Recent order volume has given us confidence that we will not see the full year decline in F..35 revenue that we had previously expected.
Overall due to the increased confidence in F 35 revenue the.
The adjustments to long term contract profitability this quarter.
Improvements in several other areas, we are raising our guidance for segment revenues to be between 290 and $310 million up from the previous range of $275 million to $295 million.
From a profitability perspective, driven by the same factors.
We are raising our <unk> adjusted EBIT or EBITDA guidance to be between 65 and $75 million up from the prior range of $55.65 million.
We are also updating our previously issued guidance ranges for company level performance.
<unk>.
<unk> revenue of between 880, and $910 million increase from prior guidance of $850 million to $890 million.
Effective income tax rate of 28% to 30% unchanged from prior guidance.
Depreciation and amortization of approximately 75.
$5 million the top end of prior guidance.
Capital expenditures in the range of $40 million to $50 million down from prior guidance of $50 million to $60 million.
GAAP earnings per share of between $2.84.
On $3.14.
Increased.
From prior guidance of $2.38 to $2.78.
Adjusted earnings per share of between $2.90, and $3.20.
Increased from prior guidance of $2.40 to $2.80, and adjusted EBITDA of between 225 and 2.
<unk> 40 million increased from prior guidance.
$195 million to $220 million.
Overall, we continue to be very pleased with the performance of both segments. Both faced challenges primarily rising input costs for machine clothing, and the recovering commercial aerospace market for.
Engineered the engineered composites segment.
But both segments are overcoming the challenges and delivering strong results.
Which is a testament to the hard work by all of our employees across the globe.
With that I would like to open the call for questions Tony.
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Our first question comes from the line of Peter Arment with Baird. Please go ahead.
Hi, Good morning, you actually have Eric Ruden on the line for Peter today are Joseph.
Start off Stephen maybe at M. C. I was just wondering how the mix that you saw for sales in this quarter compares to what you're seeing in the current order environment, they're looking to the back half of the year, our geography being the bigger driver of margin pressures. There is there any shift in a particular reason, causing any headwinds or are the headwinds more.
If I could just the rising input costs.
The other items you called out there.
Good morning, Eric said, there was a little bit of pressure from that certainly right now the recent order strength we've seen.
Has been back to strengthen the Asian market, China in particular, which as we've discussed before is on the margin.
Margins are somewhat.
Lower at lower overall margin business.
That's certainly part of the pressure, we see in the back half.
Okay, and then in terms of rising input cost how does what youre kind of looking out for the second half of the year compared to what you've already seen on been managing through.
Rounding in the second quarter.
It's certainly still increasing is the first and the first day.
And secondly, we certainly didn't see.
Even the current level of elevated costs for the first half of the year. So we're in an environment, where we see increased pressures we also.
As we've discussed previously.
It takes a while for some of these rising input cost to reflect themselves in our cost of goods sold as we make product and that goes into inventory and then get sold.
There is typically a lag of about 6 months from some of those rising costs and raw materials before.
The impact of our actual cost of good sales so.
It's a different environment than you've seen from the first half of the year for sure.
Okay.
And maybe just 1 quick 1 on <unk>.
I appreciate the details on the moving pieces around the destock there but.
<unk> of $65 million, we kind of talked about it as a full year headwind.
1 for 2021 on the inventory destock still the right number it sounds like 770 is going to be a headwind for longer but 35 may be offset a bit on that maybe you could just talk to the moving pieces there.
Yes, it certainly is but the number is lower right now because we certainly don't face the F 35.
The decline as I indicated so the destocking them for the year somewhere in around about $50 million at this stage.
Okay. Thanks, I'll hop back in the queue.
Thank you Eric.
Thank you. Our next question comes from the line of Tom Khanna with Cowen.
Please go ahead.
Hey, guys good morning.
Good morning, guys.
I had a couple of questions.
Machine clothing continues to kind of do better than.
We thought it would when we were looking at a longer term framework.
What do you think.
Right annual EBIT as adjusted EBITDA for the machine clothing business are we in a new paradigm, where we're just going to be up.
$200 million plus or do you think it will ultimately mean revert down.
Yes, it's pretty hard we have that discussion internally quite a bit.
It's hard to look out.
With a crystal ball and say, what it's going to be but it does feel like it's gotten to a better level and operations have been holding up really well. So we're going on we're going to try to keep it at that level.
Okay got it.
Secondly, just on the F 35, so what what actually.
Change.
I'm just curious.
Is that the full $15 million variance on the Destocking.
Debt $65 to 50 is that all.
F 35.
And sort of what changed and.
On the last quarter, maybe just a little color on then Stephen can add the financials, we did work.
Ed it's put on our customer Lockheed and we got improved order flow in the quarter that helped with the F 35 production rates to keep data more level.
Load on the factories, so that we werent actually reducing as we had expected.
When we spoke on last quarter and some of that includes continuation of that.
With some of the additional work we had talked about previously picking up some of the fixed wing skins were making the automated 5 replacement machine.
We got a contract extension on that which allowed us to continue work on that.
Which was certainly not a sure thing early in the year, but overall.
The decline from the 60 to 65 range to the 50 range to offer them that you referenced is really driven by F 35. The other programs that we look at out there most notably 787% has been no material change from what we expected.
6 months ago.
Okay and with the F.
Vive change.
Does that.
Effectively prevent or mute the growth we might otherwise see in 2022 and 2023 because when.
When we look at their planned production.
Said differently their planned deliveries I think it's.
139, this year 169 next year and then <unk>.
<unk> on the $1.70 range 2 years out so are we seeing that.
That pickup this year, if you will and so it's going to be flattish.
'twenty 2 and beyond just based on.
Your discussions with Lockheed or.
30 to rethink about the gross profit.
Yeah.
I would I wouldn't I wouldn't jump to that conclusion, just yet I think we got to get a little further along here.
Figure out what 2022 looks like but.
Yes, so our production goes to a mix of.
New aircraft as well as Sustainment use.
So I don't.
Eats into the future aircraft program golf and while we clearly don't do numbers not giving any guidance yet we would clearly still expect to see some growth in F..35% in 2002 and in 2003.
Okay got it.
Last 1 before I turn it over.
Just on the leap program so.
You talked.
Talked about the 1 b any.
Any updates there on sort of when do you expect to have.
Inventories in balance with.
No excess inventory if you will.
You also mentioned I think all 3 facilities are ramping up.
Maybe just explain sort of what youre gearing up to do.
This year and next year in terms of production on the.
Yes.
Our.
We are gearing up the production on the facilities and obviously.
<unk> hundred 20 neo programs going fast.
And that comes out of sort of a destocking phase.
2 more alignment with the production of.
Kraft.
Long before the 787 program does.
So we are ramping up all 3 facilities as we look into next year, it's relatively flat through the rest of the part of this year, but growth into next year.
Got it.
Terms of the inventory level I mentioned, we have 170 roughly engine chipset.
New are on hand.
At the end of the quarter.
That's down from close to 250 at the start of the year. So it's been a nice decline.
Declining 70 ships thats year to date and what we never have.
No intention nor desire to get to zero on that day.
On the level, we need to get to really depends on the volume the rate at which Boeing has produced and therefore were shipping because we have a contractual requirement to have a certain number of weeks of inventory on hand, so it's not exactly clear what.
Yes.
It's kind of a conflict.
The executive.
Calculation as you are looking at us declining and then potentially going up but at what point do we cross, but when we get to somewhere let's say.
Certainly we wouldn't go below 100 chipsets on hand to give you an idea of how many we have to burn through.
So.
The most recent quarter, we burned through 'twenty.
So if you think.
Getting down to a 100 and take care.
At several quarters, we'll take 1 or 2 quarters, but.
Several quarters likely ahead of us, but that all depends on Boeing ramping up production. So that they are ready to kind of meet us when we get to that point.
Obviously Boeing.
<unk>, great job getting back up to production, but there's still a lot of uncertainty as to what rate they will hit at what point in time.
Thank you very much guys.
Thank you guys.
Thank you as a reminder, please first 1 zero like yourself on the question queue.
Our next.
Next question comes from the line of Michael Cera, Mali with <unk> Securities. Please go ahead.
Hey, guys. Good morning, Thanks for taking the call here, maybe just 1 on.
Machine clothing, I guess with some of the orders Youre seeing.
And thinking about the rising.
He is doing the costs are you able to potentially pass through some of those costs or I think you alluded to most of the plan of attack was going to be on the productivity side, but maybe just what youre seeing or what the flexibility is there.
Yes, it's a good question.
We.
We are working to see if we can pass through costs. It's a mixed picture because we have some contracts that are longer than others. So price negotiations come up.
Over a period of time and with different customers at different times. So we are looking at that as we go into next year. So we will work to do that our primary approach has been to drive.
Drive continuous improvement to offset inflation cost just in general and we've done that for years.
Got it got it and then just maybe 1 other 1 on the.
The engineered side I mean, when you think about the leap program, obviously Airbus says.
Putting out put out some specific.
Color on where they want to take production I mean.
Assuming a path to 75% and assuming the Max program. I mean are you guys set on on potential capacity and the ability to meet that potential demand I mean, how are you guys looking at the program potentially reoccur.
Re accelerating in everything from from Labor.
<unk> tooling.
Yes.
I'd love to have that challenge we've done it we've done it we've done a good job of working on the facilities, while things have been slower here over the last year or so.
Improving productivity improving.
Throughput.
As production ramps back up we believe we are in much better shape than we were even in 2019. So yes.
We are hiring people that will be the thing we're keeping our eyes on is how easy it is to get operators and folks on the facilities.
So far so good.
And.
So yes, we think we have the capacity in place we put a lot of equipment in place back in 2019 to growth so that'd be great problem to have.
Got it and then last 1 I mean, you, obviously lifted guidance, but the second half clearly looks to be weaker.
Kind of across the board revenue EPS EBITDA.
Moving on anything.
I know youre not going to talk 'twenty, 3 but we've got weakness in the second half, but presumably.
As the world begins to recover travel recovers.
We should see a step up as you maybe exit 'twenty 1 year.
Yes, I think I think.
On the EMC side, our third quarter's typically we look at as a little bit of a softer quarter with the summer summer slowdowns in the paper companies are getting equipment to do maintenance down downtime.
They would have already order that in the first and second quarter of this year. So we look at the third quarter is a little bit slower there and then I think on the AUC side we've.
We've tried our best particularly on the commercial side, where there's destocking going on to kind of level load. The factory as we go back into the second half of the year on kind of run it run at a rate that's predictable on well planned and so we can execute well on the plants.
And then some of our growth programs that kick in next year not so much in the middle or second half of this year.
Yes, if you look at our margins if you look for today.
By the way I believe I misspoke earlier, and said that EBITDA guidance for the segment of 65 to $75.65 to 70.
But if you look at the back half of the year, if you take out the unusual.
Pickup in long term contract performance that we have here in.
The second quarter to $4 million that was largely attributable to reduction in loss reserves.
Not a huge amount of margin compression in the back half of the year on AUC and the margin pressure is really in machine clothing, and it's driven by some of the factors. We described the rising input costs a significant factor.
And including logistics, which you can't lose sight of these on large pieces, it's very expensive to move them and why we try to limit the amount of transoceanic shipments with pieces of this size and debt we vary on them going back and forth for example between North America and Asia, We do get some.
Fair amount of back.
Factor between Asia, and Europe, and those costs have risen very significantly.
Certainly puts pressure at the ryzen travel puts pressure on it.
The assets that FX environment being less favorable now within the average we've seen year to date it puts pressure on the back half of the year some of the mix shifts that lead.
<unk>, Eric asked about upfront at place some pressure and just overall does that there is to be fair a little bit of concern also around COVID-19 and not necessarily just how it impacts our markets, but also our factories at various points in time, we've had to shut down some of our factories.
Because of that.
And forwarded outbreaks in the region and so there's a little uncertainty in the back half of the year as well there.
Got it thanks a lot.
Thank you.
Thank you. Our next question comes from the line of Ron Epstein with Bank of America. Please go ahead.
Hey, guys could you clarify.
On a little bit just a little confused on.
The impact of $7.7 on the business.
Meaning that there is it looks like there is a chance here that boring right not deliver an instrument determines for a while maybe.
Maybe not until the end of the year.
How does that flow through the business for you guys.
Covid as a start.
As we've communicated before we have been running the 787 line just warm enough to keep it going I mean, it's such a low level of production, we don't want to lose that.
The capability of the talent the people and keep operations running and doing that with our are our channel customers.
On a.
Very very low level the more recent announcement from Boeing while a little disappointing is it's not really going to affect us. This year is probably going to push things maybe further to the right as we look into next year and beyond.
Yes, so for the year, Ron we've said to expect somewhere in the range, let's say $10 million of revenue this year on 770 deliberate for.
I guess to date the 6 on the back half so whether it's.
6 or closer lower than that is not going to have material effect. It is important to understand that is a firm fixed price contract.
And so as we lose revenue the decremental margins are not just the end of the average margin on that program because its obviously.
<unk> typically overhead that loss of fixed cost absorption I believe on the fourth quarter earnings call.
When I provided guidance says 6 months ago I talked about the fact that some of the incremental.
Margins on some of our fixed price programs.
EBITDA margins.
Thirties, and so the drop through is certainly going to be in that sort of level as we lose that EBITDA margin EBITDA or sorry revenue.
So this year irrespective of what happens not a huge impact, but certainly next year, we had anticipated an increase from this years level.
If things change and we could certainly see a repeat of what we're seeing this year or even lower level.
Closer to zero revenue next year, but Thats, obviously, an open question.
Got it and then maybe just.
1 follow up.
If Airbus were to actually get to 70.
<unk> hundred 21 months.
Are you guys set up to handle that.
Yeah, Yeah look at Bill touched on this a few moments ago net we.
We certainly need to staff up with with operators in our facilities, we brought our head count down is as.
As our production volumes at <unk>.
Decrease, it's obviously very competitive labor environment right now.
And so that's clearly not just flipping a switch this challenge in it but we certainly have the physical plant that.
Debt, we can debt, we can meet those needs.
There may be some some capex required but.
Nothing on the achievable the Big Challenge is just getting the labor force, we would need and not that we have unmet needs today, but staffing up to that level. It would obviously require some significant hiring in those day. It's just it's a competitive market, yes, I think that as we think about the more.
Near term going from 45 to 50.50, plus we're ready for that we have to add people, but we have the capital in our facilities already.
Thank you.
Thank you and we have no remaining questions in the queue at this time.
Sure Okay well. Thank you. Thank you everyone for joining us on our call today. We appreciate your continued interest in Albany International.
Of course, if you have any questions. Please feel free to reach out to John Hobbs, Our director of Investor Relations is number 63033058.97, Thank you and have a good day.
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Ladies and gentlemen, thank you for standing by and welcome to the Albany International second quarter earnings call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Instructions will be given at that time.
If you should require assistance during the call.
Please press Star then zero.
And as a reminder, this conference is being recorded.
I would now like to turn the conference over to our host Mr.
Mr. John Hobbs director of Investor Relations. Please.
Please go ahead Sir.
Thank you Tony and good morning, everyone.
Welcome to Albany International second quarter 2021 conference call.
As a reminder for those listening on the call. Please refer to our press release issued last night detailing our quarterly financial results.
And in the text of the release.
Notice.
Regarding our forward.
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.
Today, we will make statements that are forward looking that contained a number of risks.
Looking on the uncertainties on mountain, 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.
Risks measures. Please refer to both our earnings release of July 26th 2021, 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 opening remarks bill.
Thanks, John Good morning, and welcome everyone. Thank you for joining our second quarter earnings call.
I'm pleased to report that we delivered another strong quarter with excellent performance in both segments. Our operations continued to do a great job for our customers with best in class delivery quality and service I'm really proud of our employees and how they stayed focused.
On safety productivity cost savings and lean kaizen process improvements.
As a company, we delivered $235 million in revenue in the second quarter growing revenues, both year over year and sequentially and we achieved near record levels of profitability.
Gross margins of 43% and operating margins of 21% our.
Our second highest quarterly margin performance.
We achieved GAAP EPS of <unk> 97.
Our adjusted EPS of $1, 1 and our best free cash flow quarter on our company's history Gen.
Generate over $50 million and free cash flow in the second quarter.
We did face supply chain challenges and materials cost inflation and logistics that.
As we're able to manage through and successfully offset.
Some of their impact on the bottom line and we'll keep an eye on these going forward.
We continue to pay down debt and have a healthy balance sheet, which enables investment in future growth.
As we've mentioned before we're increasing our investment in research and technology across the company.
In general we're.
Our team by the economic recovery in key markets coming out of the pandemic slowdown we're cautiously watching how the delta variant might affect this recovery, particularly international air travel and the less vaccinated regions of the world that said long term secular trends are favorable and Albany market position global footprint and product development take.
Advantage of these trends.
In our engineered composites segment as domestic airline travel recovers, we expect to benefit from our position on narrow body aircraft with leap engines and our partnership with Safran.
As we mentioned last quarter, we're working closely with safran to coordinate ramping production as leap demand picks up on recovering narrow.
Encourage OEM production.
Our plans include hiring additional workers and preparing for increased production in our 3 leased facilities as we exit 2021 grow in the future.
We're very excited about <unk> recent announcement with GE to partner on development in the next generation rise engine, we view <unk> as an important long term customer and partner.
As we've previously mentioned, we're investing more this year in R&D projects, particularly with new customers and new products.
Using advanced materials, such as our <unk> woven composites with a goal to diversify and grow our customer base broaden our material science capabilities.
This ranges from our proprietary 3 D woven composites currently is.
On leap engine fan blades and fan cases, 2 automated fiber placement composite wing skins for Lockheed Martin's F 35 joint strike fighter to complex components on the Sikorsky CH 50 <unk> helicopter.
We continue to develop applications for the wing of Tomorrow program with Airbus Industries and along these lines we are pleased.
To announce earlier this month, our technology collaboration with Spirit Aero systems to develop advanced 3 D woven composite applications for hypersonic vehicles.
This collaboration capitalizes on the unique capabilities of both companies to achieve superior hypersonic design solutions and efficient manufacture ability.
<unk> using Albany is proprietary <unk> woven composite technologies and it builds on our demonstrated ability to manufacture 3 D well on composites at commercial scale.
This is an exciting example of the types of new business and advanced technology programs, we're investing in today to help secure our future long term growth.
In the machine clothing.
Segment, we're optimistic about recovering global growth, we expect to benefit from long term secular trends, which should underpin the demand for paper products.
Our machine clothing business has benefited as a leading supplier in the industry since we're well positioned globally, particularly in the growing end markets for packaging and tissue products.
Clothing product development strategies operational improvements and technical service continued to target these higher growth end markets.
Our operating teams have been firing on all cylinders and we expect to continue our strong execution on the second half of the year.
Let me say a few words about machine clothing as end markets.
<unk> tissue corrugated products.
<unk> pulp and building products end markets have remained the strongest sub segments with packaging benefiting from increasing online shopping as retail goes through a fundamental shift worldwide.
In tissue, we may be on a transition phase whereby at home demand settles down and people return to school restaurants' officers vacation.
Our print et cetera, and we've yet to see a pickup however in the away from home paper markets for our belts, which should eventually improve.
Not surprisingly publication grades continue their decline and only represented 16% of <unk> revenues in the second quarter.
Markets in North America, and China are robust while emerging economies are still.
Grappling with Covid and low vaccination rates likely requiring more time to rebound in.
Summary on machine clothing segment continues to perform well our operations are strong taken advantage of the higher growth sub segments, and serving customers well around the world as a recognized global leader in the industry. The success is the result of disciplined execution.
Vacation on term strategy.
As I mentioned, we have a strong balance sheet and good free cash flow generation, which allows us to continue investing in the technologies and customer programs that expand and broaden our competitive position in both segments.
Our first priority for capital allocation is to invest in organic growth programs across both business segments.
And then to seek acquisitions that fill our long term strategy.
Our reputation for reliability service and technical excellence is well established in machine clothing, and our brand is growing in aerospace as a reliable supplier in engineered materials partner.
We're optimistic about the long term opportunities on both segments.
With that I'll turn.
On it over to Stephen for more detail on the financials, Steven Thank you Bill and good morning to everyone.
First about the results for the quarter and then comment on the outlook for our business for the balance of the year.
For the second quarter total company net sales were $234.5 million an increase of 3.
2.8% compared to $226 million delivered in the same quarter last year.
Adjusting for currency translation effects net sales rose by 1% year over year in the quarter.
In machine clothing also adjusting for currency translation effects.
Net sales.
<unk> were up 0.8 percentage year over year, driven by increases in packaging grades and engineered fabrics, partially offset by declines in all other grades.
Publication revenue declined by over 7% in the quarter on as Bill mentioned represented only 16% of Mcs.
<unk> revenue this quarter.
Tissue grades also declined over year over year due to a more normal level of demand for grades to support customer production for at home use resulting in the decline from the highs for those grades that we saw last year without significant recovery to date in.
In the away from home product grades.
Engineered composites net sales again after adjusting for currency translation effects grew by 1.3% primarily driven by growth on leap and CH 53, K, partially offset by a decline on the 787 platform.
During the quarter the ASC leap program generated a little over $25 million in revenue comparable to the first quarter of this year, but up over $10 million from the second quarter of last year.
At the same time, we reduced our inventory of leap 1 be finished goods.
By over 20 engine chipsets in the quarter, leaving us with about 170, <unk> leap <unk> engine chipsets on the balance sheet at the end of the second quarter.
As you will recall, we previously recognized revenue on these engine chipsets and their value was reported.
Under contract assets on our balance sheet.
Also during the most recent quarter, we generated about $3 million on revenue on the 787 program.
Up from less than $1 million in the first quarter, but down from almost $14 million in the second quarter of last year.
Second quarter gross profit for the company was $101.7 million a reduction of 1% from the comparable period last year.
Overall gross margin decreased by 220 basis points from 45, 6% to 43, 4% of net sales.
Within.
Within the <unk> segment gross margin declined from 54, 5% to 52, 9% of net sales principally due to foreign currency effects higher input costs and higher fixed costs, partially offset by improved absorption.
For the AEP.
<unk> segment gross margin declined from 26, 7% to 23% of net net sales driven primarily by a smaller impact from changes in the estimated profitability of long term contracts.
During this quarter, we recognized net favorable.
<unk> change in the estimated profitability of long term contracts of just over $4 million.
But this compares to a net favorable change of over $7 million in the same quarter last year.
The favorable adjustment this quarter was principally due to a reduction.
As a result of changes in volume expectations to previously established loss reserves on a couple of specific programs and is therefore, not necessarily reflective of ongoing enhancements to profitability.
In fact, as we previously discussed the expected.
<unk> revenue declined this year in some of our fixed price programs are leading to headwinds to long term program profitability. This year.
Second quarter, selling technical General and research expenses increased from $47.4 million in the prior year quarter.
The $51.8 million in the current quarter and also increased as a percentage of net sales from 21% to 22, 1%.
The increase in the amount of expense reflects higher incentive compensation expense.
Higher R&D spending.
Higher travel expenses and higher foreign currency revaluation losses.
Total operating income for the company was $50 million down from $52.7 million in the prior year quarter.
Machine clothing operating income fell.
<unk> by 600.
Thousands.
Caused by higher STG in our expense.
Partially offset by higher gross profit and lower restructuring expense.
And <unk> operating income fell by $1.1 million.
Caused by lower gross profit and higher <unk> expense.
Italy offset by lower restructuring expense.
The income tax rate for this quarter was 30% compared to 32, 1% in the same quarter last year.
The lower rate. This year was caused by the generation of a lower share of.
Our global profit in jurisdictions with higher tax rates.
Partially offset by a higher level of unfavorable discrete income tax adjustments.
Net income attributable to the company for the quarter was $31.4 million.
Reduction of 1 million from 30.
$32.4 million last year.
The reduction was caused primarily by the lower operating profit, partially offset by the lower tax rate.
Earnings per share was <unk> 97 from this quarter compared to $1 last year.
After adjusting for the impact of foreign.
Foreign currency revaluation gains and losses restructuring expenses on.
On expenses associated with the <unk> acquisition and integration.
Adjusted earnings per share was $1 <unk> this quarter.
Compared to $1 and <unk> last year.
Adjusted.
EBITDAR declined by 5.8% to $69.4 million for the most recent quarter compared to the same period last year.
Machine clothing, adjusted EBITDA was $63 million essentially flat compared to the prior year quarter.
And represented 39.
4% of net sales.
<unk> adjusted EBITDA was $19.3 million or 25, 9% of net sales down from last year's $22.8 million or 31, 4% of net sales.
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.
Declined from $384 million at the end of Q1, $2000.21 million to $350 million at the end of Q2 and.
And cash.
By just over $15 million during the quarter, resulting in a reduction in net debt of about $50 million.
Capital expenditures in the quarter were approximately $11 million compared to $9 million in the same quarter last year.
The increase was caused primarily by higher.
Capital expenditures in machine clothing.
As we look forward to the balance of 2021 the outlook for the machine clothing segment remained strong compared.
Compared to the same period last year MSC orders were up 10% in the second quarter and up over 3% year to date.
We are also seeing some foreign currency tailwind to our MSC revenue, primarily driven by the strong euro.
Although the recent strength in the dollar versus the euro means that we are unlikely to see the same foreign currency tailwind in the back half of the year.
Overall, we are raising.
Our previously issued guidance of revenue for this segment to between 585 and $600 million.
From the prior range of $570 million to $590 million.
From a margin perspective in machine clothing, we delivered another strong quarter.
With adjusted <unk>.
<unk> margins of almost 40%.
We saw some increase in the level of travel during the quarter, but we are still not back to a normal level of travel and the segment's travel expense in the quarter was still almost $2 million below the level in the same quarter in 2019.
EBITDA. So we may see some additional pressure from that in the balance of the year as we continue the return to normal.
We have also seen some pressure from increased input expenses, both raw materials and logistics and expect these pressures to continue through the balance of the year.
We continue to work.
Offset the impact of these cost increases to the greatest extent possible.
By driving down our production costs through continuous improvement initiatives.
However, we do expect to see overall margin pressures in the back half of the year driven by both increasing travel expenses and rising input.
Work towards.
At the start of the year, we had anticipated seeing foreign currency exchange rate pressures on MCC profitability.
Particularly caused by the recovery of the Mexican peso and Brazilian real as the devaluation of both of those currencies in the middle of 2020 had provided.
<unk> autumn line benefit since we have more expenses than revenues in those currencies.
Year to date, we have not seen as much headwind from those currencies as we had expected.
We have also benefited from the strong euro currency, where we have more revenues on expenses.
As a result overall.
<unk> year to date foreign exchange rates have actually provided us with a modest adjusted EBITDA benefit compared to the same period last year.
However, based on current exchange rates, we will not see the same comp comparables.
Foreign currency benefit in the back half of the year.
We are also cautious about the effects of a potential resurgence in COVID-19 cases on segment results in the back half of the year.
As a result of all of these factors and the increase in revenue guidance, we are increasing our adjusted EBITDA guidance for the <unk> segment to a range of 210 to 200.
Third $20 million up from the prior range of $195 million to $205 million.
Turning to engineered composites, we delivered a strong quarter aided by the net favorable adjustments to long term contract profitability.
Absent that pickup our Q2 results.
Our results were consistent with what we had indicated last quarter down from Q1, representing what we had expected to be the trough for the year.
However, given the impact of the net favorable adjustment on the second quarter results. We now expect that Q2 will be the quarter with the highest segment.
Stability this year as we expect Q3 and Q4 profitability to be more in line with what we deliberate in Q1.
For the full year, we still expect 787 program revenue to be down over $40 million from the roughly 50 million generated on that program last.
<unk> product with.
With Boeing's recent announcement of a reduction in 787 build rate all but eliminating the possibility for any upside on that program later in the year.
We also still expect leap revenue to be in line with prior expectations and roughly flat to last year.
However on a more positive note.
While F 35 revenue was down slightly in the second quarter compared to the same period last year.
<unk> order volume has given us confidence that we will not see the full year decline in F..35 revenue that we had previously expected.
Overall due to the increased confidence in F 35 revenue.
The adjustments to long term contract profitability this quarter and improvements in several other areas. We are raising our guidance for segment revenues to be between 290 mm $310 million up from the previous.
<unk> range of $275 million to $295 million.
From a profitability perspective, driven by the same factors, we are raising our AUC adjusted EBIT EBITDA guidance to be between 65 and $75 million up from the prior range of 55.
Of the $5 million.
We are also updating our previously issued guidance ranges for company level performance.
Including revenue of between 880, and $910 million increase from prior guidance of $850 million to $890 million.
Effective.
And tax rate of 28% to 30% unchanged from prior guidance.
Depreciation and amortization of approximately $75 million the top end of prior guidance.
Capital expenditures in the range of $40 million to $50 million down from prior guidance of 50 to 60 million.
<unk> income.
GAAP earnings per share of between $2.84, and $3.14.
Increased from prior guidance of $2.38 to $2.78.
Adjusted earnings per share of between $2.90, and $3.20.
<unk> increased from prior guidance of $2.40 to $2.80.
And adjusted EBITDA of between 225 from $240 million increased from prior guidance.
$195 million to $220 million.
Overall, we continue to be very pleased with performance.
<unk> on both segments, both faced challenges, primarily rising input costs for machine clothing, and the recovering commercial aerospace market for engineered the engineered composites segment.
But both segments are overcoming the challenges and delivering strong results.
As a testament to the hard work.
By all of our employees across the globe.
With that I would like to open the call for questions Tony.
Okay.
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Please press 1 zero at this time.
Our first question comes from the line of.
Peter Arment with Baird. Please go ahead.
Hi, Good morning, you actually have Eric Ruden on the line for Peter Today, Joseph I could start off Stephen maybe.
I was just wondering how the mix that you saw for sales in this quarter compares to what you are seeing in the current order environment there.
Looking to the back half of the year, our geography being a bigger driver of margin pressures. There is there any shift in a particular reason, causing any headwinds or are the head once more surrounding just the rising input costs.
The other items you called out there.
Good morning, Eric said, there was a little bit of pressure from that certainty right now.
The recent order strength we've seen.
It has been back to strength in the Asian market, China in particular, which as we've discussed before is on the margins are somewhat.
Lower at lower overall margin business.
That's certainly part of the pressure, we see in the back half.
Okay, and then in terms of rising input costs, how does what youre kind of looking out for the second half of the year compared to what you've already seen on been managing through in the second quarter.
It certainly is still increasing is the FERC in the first instance, and secondly, we certainly didn't see.
See.
Even the current level of elevated costs for the full first half of the year. So we're in an environment, where we see increased pressures. We also as we've discussed previously.
It takes a while for some of these rising input costs reflect themselves in our cost of goods sold as we make product and that goes into it.
And then get sold.
There is typically a lag of about 6 months from some of those rising costs and raw materials before the impact of our actual cost of good sales. So it's a different environment than you've seen from the first half of the year of the year for sure.
Okay.
And then maybe just 1 quick 1.
Inventory.
I appreciate the details on the moving pieces around the destock, there, but is the 60% to $65 million on kind of talked about it as a full year headwind for 2021 on the inventory destock still the right number it sounds like 700, Simon is going to be a headwind for longer but F..35, maybe that's a bit of that maybe you could just.
1 on moving pieces there.
Yes, certainly, but the numbers lower right now because we certainly don't face the F 35 decline as I indicated so the destocking them for the year somewhere in around about $50 million at this stage.
Okay. Thanks, I'll hop back on the queue.
Thank you Eric.
Thank you. Our next question comes from the line of Tom Khanna with Cowen. Please go ahead.
Hey, guys good morning.
Good morning, guys.
I had a couple of questions.
Green clothing continues to kind of do better than.
We thought it would when we were looking at a longer term framework.
What do you think so right.
Annual EBIT as adjusted EBITDA for the machine clothing business are we in a new paradigm, where we're just going to be up.
$200 million plus or.
MS. Do you think it will ultimately mean revert down.
Yes.
Yes, it's pretty hard we have that discussion internally quite a bit its pretty hard to look out on.
With a crystal ball and say, what it's going to be but it does feel like it's gotten to a better level and operations have been holding up really well. So we're going on we're going.
Try to keep it at that level.
Okay got it.
Secondly, just on the F 35, so what what actually changed.
I'm just curious.
Is that the full $15 million variance on the Destocking.
65 goes to <unk> if at all.
F 35.
And sort of what changed.
And the last quarter, maybe just a little color on then Stephen going on the financials, we did work with our customer Lockheed and we got improved order flow in the quarter that helped with the F 35 production rates to keep better more level.
Load on the factories.
So that we werent actually reducing as we had expected.
When we spoke on last quarter and some of that includes continuation of that some of the additional work we had talked about previously picking up some of the fixed wing skins were making the automated 5 replacement machine.
We are weak.
Got a contract extension on that which allowed us to continue work on that.
<unk> was certainly not a sure thing early in the year, but overall, yes debt declined from the 60 to 65 range to 50 range to offer them that you referenced is really driven by F 35. The other programs that we look at out there most notably 700.
87% it would be no material change from what we expected.
6 months ago.
Okay and with the F 35 change.
Does that.
Effectively prevent or mute the growth we might otherwise see in 2020.
2 in 2023 because.
When we look at their planned production.
Said differently their planned deliveries I think it's.
139. This year of 169 next year and then stabilize in the $1.70 range 2 years out so are we seeing that.
Net pickup.
Pick up this year, if you will and so it's going to be flattish.
In 'twenty, 2 and beyond just based on your.
Your discussions with Lockheed or how should we think about the growth.
Sure.
I would I wouldn't I wouldn't jump to that conclusion, just yet I think we got to get a little further along here.
Figure out what 2022 looks like.
But.
Yes, so our production goes to a mix of.
New aircraft as well as Sustainment use.
So I don't think it eats into the future aircraft program, Yes, golf and while we clearly don't do numbers not giving any guidance yet we would clearly still expect to see some growth on F..35% in 2002 and <unk>.
<unk> III.
Okay got it.
Last 1 before I turn it over.
On the leap program so.
Talked about the <unk>.
Any updates there on sort of when do you expect to have inventories.
Inventories in balance with.
No excess inventory if you will.
And.
You also mentioned I think all 3 facilities are ramping up from a leap.
Maybe just explain sort of what youre gearing up to do.
Yeah.
This year and next year in terms of production on the program.
Yes, we are we.
We are gearing up the production on the facilities and obviously.
<unk> hundred 20.
Programs going fast.
And that comes out of sort of a destocking phase.
Into more alignment with production of new aircraft long before the 787 program does.
So we are ramping up all 3 facilities as we look into next year, it's relatively flat through the rest of the part of this year, but.
Growth into next year.
Yeah, Gautam look in terms of the inventory level I mentioned, we have 170 roughly engine ships net on hand.
At the end of the quarter.
That's down from close to 250 at the start of the year. So it's been a nice decline.
Declining.
70 ships at the year to date.
We never do.
I have no intention nor desire to get to zero on that the exact level, we need to get to really depends on the bad.
The volume the rate at which Boeing has produced and therefore were shipping because we have a contractual requirement if a certain.
Certain number of weeks of inventory on hand, so it's not exactly clear what.
No.
It's kind of a complicated.
Our calculation as you are looking at us declining and then potentially going up but at what point do we cross, but when we get to somewhere it let's say.
Certainly.
You wouldn't go below 100 chipsets on hand to give you an idea of how many we have to burn through and so the.
Most recent quarter, we burned through 'twenty. So if you think.
Getting down to 100 and take care.
At several quarters, we'll take 1 or 2 quarters, but.
Several quarters.
Can you help us, but that all depends on Boeing ramping up production. So that they are ready to kind of meet us when we get to that point too.
Obviously Boeing is doing a great job getting back up to production.
There's still a lot of uncertainty as to what rate they will hit at what point in time.
Thank you very much guys.
Thank you guidance.
Thank you as a reminder, please first 1 zero with yourself on the question queue.
Our next question comes from the line of Michael ceremony with Truest Securities. Please go ahead.
Hey, guys. Good morning, Thanks for taking the call here maybe.
Quarters lawn on.
Machine clothing, I guess with some of the orders Youre seeing.
And thinking about the rising input costs are you able to potentially pass through some of those costs are I think you alluded to most of the plan of attack was going to be on the productivity.
Just.
Maybe just what youre seeing or what the flexibility is there.
Yes, it's a good question.
We are we are working to see if we can pass through cost. It's a mixed picture because we have some contracts that are longer than others. So price negotiations come up.
Over a period of time.
And with different customers at different times. So we're looking at that as we go into next year. So we will work to do that our primary approach has been to drive continuous improvement to offset inflation cost just in general and we've done that for years.
Got it got it and then just maybe 1 other 1 on the.
Scott engineered side I mean, when you think about the leap program, obviously Airbus.
Putting out put out some specific color on where they want to take production.
Assuming a path to 75% and assuming the Max program I mean are you guys.
Debt on on potential capacity.
To meet that potential demand I mean, how are you guys looking at the program potentially re accelerating everything from from labor.
Machining tooling.
Yes.
To have that challenge we've done it we've done it.
We've done a good job of working on the facilities, while things have been slower here over the last year or so.
Improving productivity improving our throughput.
So as as production ramps back up we believe we are in much better shape than we were even in 2019. So yes.
We are hiring people that will be the thing.
Our eyes on is how easy it is to get on.
Operators and focusing on facilities.
So far so good.
So yes, we think we have the capacity in place we put a lot of equipment in place back in 2019 to grow so that'd be great problem to have.
Got it and then last 1 I mean, you obviously lift.
The guidance, but the second half clearly looks to be weaker.
On a across the board revenue EPS EBITDA, yeah anything.
No you are not going to talk 'twenty, 3 but we've got weakness in the second half, but presumably.
As the world begins to recover travel.
Keeping our coverage.
You'd see a step up as you maybe exit.
1 year.
Yes, I think I think on the MCC side, our third quarter's typically we look at as a little bit of a softer quarter with the summer summer slowdowns in the paper companies are getting equipment to do maintenance down downtime maintenance.
Maintenance day there.
It would have already order that in the first and second quarter of this year. So we look at the third quarter is a little bit slower there and then I think on the AUC side. We've we've tried our best particularly on the commercial side, where there's destocking going on to kind of level load. The factory as we go back into the second half of the year on kind of run it run at a rate thats predictable on well planned.
Travel, where we can execute well on the plants.
And then some of our growth programs. They kick in next year not so much in the middle or second half of this year, Yes. If you look at our margins if you look for today.
By the way I believe I misspoke earlier, and said that EBITDA guidance for the segment of 65 to $75.65 to 70.
So if you look at the back half of the year, if you take out the unusual pickup.
Pickup in long term contract performance that we have here in the second quarter to $4 million.
It was largely attributable to a reduction in loss reserves.
There's not a huge amount of margin compression in the back half of the year on AUC and the margin pressure.
Is really in machine clothing, and it's driven by some of the factors. We described the rising input costs, a significant factor, including logistics, which you can't lose sight of these are large pieces, it's very expensive to move them and why we.
We try to limit the amount of trans oceanic shipment at with pieces.
But the size and that we vary on them going back and forth for example between North America and Asia, We do get some a fair amount of back and forth between Asia and Europe.
Costs have risen very significantly and that certainly put pressure at the ryzen travel puts pressure on it.
The assets that FX environment.
Environment being less favorable now than the average we've seen year to date it puts pressure on the back half of the year. Some of the mix shift to that lead Eric asked about upfront at place. Some pressure on just overall does that there is the fare a little bit of concern also around COVID-19 and not necessarily.
Really just how it impacts our markets, but also our factories at various points in time, we've had to shut down some of our factories.
Because of the Covid outbreaks in the region and so there's a little uncertainty in the back half of the year as well there.
Got it thanks, a lot guys.
Thank you.
Thank you our next.
It comes from the line of Ron Epstein with Bank of America. Please go ahead.
Hey, guys could you clarify a little bit just a little confused on the impact of 77 on the business.
Meaning that there's it looks like there's a chance here that boring right not deliver range from any covenants.
Next question, a while maybe not until the end of the year.
How does that flow through the business for you guys.
I guess as a start.
As we've communicated before we've been running the 787 line just warm enough to keep it going I mean, it's such a low level of production, we don't want to lose that.
This capability the talent of the people and keep operations running and doing that with our are our channel customers. So it has had a very very low level. The more recent announcement from Boeing while a little disappointing is it's not really going to affect us. This year is probably going to push things maybe further to the right as we look into next year and beyond.
Yes, so for the year, Ron We've said expect somewhere in the range, let's say $10 million of revenue. This year on 770 deliberate for year to date 6 on the back half so whether it's.
Fix or closer lower than that it's not going to have material attack. It is important to understand that is a firm fixed price contract.
And so as we lose revenue the decremental margins are not just the end of the average margin on that program because its obviously absorbing overhead lease debt loss of fixed cost absorption.
I believe on the fourth quarter earnings call.
When I provided guidance says 6 months ago I talked.
About the fact that some of the incremental.
Margins on some of our fixed price programs.
EBITDA margins in the thirties, and so the drop through is certainly going to be in that sort of level as we lose that EBITDA margin EBITDA sorry revenue.
So this year.
Talked about irrespective of what happens not a huge impact, but certainly next year, we had anticipated an increase from this years level.
If things change, we could certainly see a repeat of what we're seeing this year or even lower level.
Closer to zero revenue next year, but Thats, obviously, an open question.
Question.
Okay.
Got it and then maybe just 1 follow up.
Airbus were to actually get to 70.
<unk> hundred 20 a month.
But you guys set up to handle that.
Yes, yes.
Bill touched on this a few moments ago net.
We certainly need to staff up with with operators in our facilities. We brought our head count down is as our production volumes decreased it's obviously very competitive labor environment right now and so that's clearly not just flipping a switch this challenge.
But we certainly have the physical plant that we can debt we can meet those needs.
There may be some some capex required but.
Nothing on the achievable the big challenges with getting the Labor force, we would need.
But we have unmet needs today.
But staffing up to that level.
It would obviously require some significant hiring MSA. It's just it's a competitive market, yes, I think that as we think about the more near term going from 45% to 50.50, plus we're ready for that we have to add people, but we have the capital in our facilities already.
Net.
Thank you.
Thank you and we have no remaining questions in the queue at this time.
Okay well. Thank you. Thank you everyone for joining us on the call today. We appreciate your continued interest in Albany International.
So if you have any questions. Please feel free to reach out to John Hobbs, Our director of Investor Relations. His number 63033058.97, Thank you and have a good day.
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