Q3 2021 Albany International Corp Earnings Call
This conference is being recorded.
Ladies and gentlemen, and thank you for standing by and welcome to the Albany International third quarter earnings call. At this time parties aren't election to only mode. We will conduct a question and answer session. Later instructions will be given at that time. If you should require assistance. During the call. You can press Star then zero and as a reminder, this conference is being recorded I would now like to turn the call.
All over to host director of Investor Relations Mr. John <unk>. Please go ahead Sir.
Thank you Brad and good morning, everyone welcome to Albany Internationals third quarter 2021 conference call.
As a reminder for those listening on the call. Please refer to our press release issued yesterday afternoon detailing our quarterly financial results.
Entailed in that tax.
A notice regarding our forward looking statements and the use of certain non-GAAP financial measures and there are 70 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 and uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations the markets, we serve and our financial results for a full discussion, including a reconciliation of non-GAAP measures we may use.
On this call to their most comparable GAAP measures. Please refer to both our earnings release of October 25, 2021, as well as our SEC filings, including our 10-K.
Now I'll turn the call over to Bill Higgins, our President and Chief Executive Officer, who will provide opening remarks bill. Thank you John Good morning, and welcome everyone. Thank you for joining our third quarter earnings call. We're pleased to report another good quarter of results, we executed well and we've continued to do a great job for our customers on many fronts and quality delivery service.
And our technology partnerships.
Our supply chain teams work 24, seven to overcome unprecedented logistics challenges and material shortages to keep our factories supplied and I'm. Most pleased that we achieved a record level of performance and safety something our teams have been working hard at and all of our plants around the world.
As a company we delivered GAAP EPS of <unk> 90, 583 on an adjusted basis on $232 million in revenue an increase of nearly 10% from Q3 last year. Our machine clothing segment continues to fire on all cylinders and grew sales by 11% compared to Q3 last year with excellent profitability and free cash.
Cash flow generation engineered composites delivered topline growth nearly 7% and performed well as we work toward the upturn in commercial aerospace.
Our profitability was solid with gross margins up 40% operating margins of 19% and adjusted EBITDA margins of 26% and we continued our strong free cash flow generation over $40 million in the quarter.
We have low debt and a healthy balance sheet and we look forward to continuing solid performance from our machine clothing segment and gradual recovery in commercial aerospace as we mentioned last quarter long term secular trends are favorable and albany's market positions global footprint and product development take advantage of these trends.
In our engineered composites segment, we expect commercial aerospace to gradually improve with narrow body aircraft demand improving before wide body demand. Consequently, we're hiring employees and planning for a ramp up and lead production driven by Airbus <unk> hundred 20, Neo and Boeing 737, Max growth, we're coordinating with safran to expand production in our three.
Leap facilities in the U S, France and Mexico.
We see positive signs in international travel bookings as borders reopen and people have begun to travel internationally. Although we don't expect any near term pickup in widebody production demand such as for a Boeing 787 composite frame line is there still inventory in the system and international travel has been slow to recover.
Our AUC businesses continue to perform well on our military platforms Sikorsky CH 50, <unk> helicopter Lockheed Martin's F 35, joint strike fighter and Jasmine missile programs, we're fortunate to be an excellent programs and our teams are executing well.
We also continued our pursuit of new customers and new applications for advanced composites during the quarter, we announced our technology collaboration with spirit Aero systems to apply our advanced three D woven composite technology to a hypersonic vehicles and take advantage of our proprietary treaty woven composites and a high temperature environment, providing both.
Structural robustness in thermal protection and building on our proven ability to industrialized three D woven composites at high volumes.
This is an example of the intense collaboration our teams are good at working closely with our technology partners in the design development and commercialization of the most advanced composite applications.
In addition to working on engine component applications with our partner Safran. We continued development of wing applications with Airbus Wing of Tomorrow program and other composite programs in commercial and defense applications.
Our machine clothing segment continued to perform exceptionally well, our engineers and sales and service teams and <unk> work closely with key customers to develop the next generation of belt materials for improved operational efficiency performance and durability and customers value our service technical expertise and innovation, we saw good demand in the quarter for new products.
All product lines.
Demand in Mcs and markets has been resilient and particularly strong in packaging in the Americas tissue markets have held up although demand is mixed and flat overall as tissue machine utilization is below long term averages and tissue producers are working through distortions caused by the pandemic effect on away from home paper markets.
This should improve as workers go back to offices and students are back in school.
In other end markets demand was strong in the quarter for corrugator nonwovens and building products.
Even publication was better this quarter likely a pause in the longer term secular decline of printing and writing grades of paper.
We're seeing significant logistics challenges and price inflation on various raw materials and wages, so far our supply chain management and operations teams have done an excellent job they've been able to secure the materials, we need to run our operations at only moderate increases in cost.
In general, we strive to offset inflationary costs through productivity savings of this time may be different is we don't see inflationary pressures abating anytime soon.
Anything conditions grew more challenging during the third quarter.
Let me make a few comments on corporate governance and capital allocation before turning the call over to Steven in early August the company move closer to a single class share structure. Following the secondary offering of nearly all of the standards family's ownership in the company with a few remaining shares converted to class a common stock.
As a result today there are more than $32 3 million shares of class a common stock outstanding and less than 200 shares of class B stock outstanding which are held by two former employees.
The transaction effectively created a conventional single class governance structure for our shareholders.
Regarding capital allocation as we mentioned in the past our priority is to use our balance sheet first for organic growth investments, where we can add value for our customers.
And then acquisitions that fit our strategy enable us to build on our technology leadership and market positions in both segments.
Adding to these options Albany's board of directors has authorized $200 million share repurchase program expanding the set of capital allocation alternatives, we have at our disposal we.
We continue to look for acquisitions that advance our technology and market position at a fair price and we're focused on value creation from both an organic and inorganic investment perspective.
In summary, we had another good quarter, our businesses are executing well we continue to push the envelope in our technology development with new products in both segments and.
And secular trends in our end markets are favorable so with that I'll hand, the call over to Steven for more detail on our financials, Steven Thank you Bill and good morning to everyone.
I will talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year.
For the third quarter total company net sales were $232 4 million and.
An increase of nine 6% compared to the $212 million delivered in the same quarter last year.
Adjusting for currency translation effects net sales rose by eight 8% year over year in the quarter.
In machine clothing also adjusting for currency translation effects net sales were up nine 9% year over year, all major grades of product led by engineered fabrics and packaging grades.
Debuted to the year over year increase in net sales.
Engineered composites net sales again after adjusting for currency translation effects grew by six 7%, primarily driven by growth on the leap and CH 53, K, partially off set by expected declines on the 787 and F 35 platforms.
During the quarter the ASC leap program generated about $25 million in revenue comparable to the first two quarters of this year, but up about $9 million from the third quarter of last year.
We are pleased with the reduction in our inventory of leap one be finished goods.
During the most recent quarter, we reduced that inventory by over 30 engine chipsets down to about 140 engine chipsets on hand.
Given the current rates of inventory consumption on that program, we would not plan to have that inventory level drop below about 100 engine chipsets. So we can see the light at the end of the tunnel in terms of inventory Destocking.
Looking forward to an earnings call, but I no longer have to discuss leap <unk> inventory at all.
We hope to return to a more normal level of production on leap one be on par with the current production rates for leap <unk> early in 2022.
However, we do have some concern with the rate at which Boeing is destocking. Its inventory of finished 737 Max aircraft. So there is still some lack of clarity around 2022 build rates.
We will hopefully have better insight for you on our fourth quarter call.
Also during the quarter, we generated under $3 million of revenue on the 787 program down slightly from the second quarter, but down from almost $9 million in the same quarter last year.
Third quarter gross profit for the company was $92 million, an increase of over 5% from the comparable period last year.
The overall gross margin decreased by 160 basis points from 41, 2% to 39, 5% of net sales.
Within the <unk> segment gross margin was flat at 51, 5% of net sales as the benefit from improved absorption was offset by the impact of year over year foreign currency changes and rising input costs.
For the <unk> segment, the gross margin declined from 21, 6% to 16, 1% of net sales.
Caused by a smaller impact from changes in the estimated profitability of long term contracts.
A change in program mix and lower fixed cost absorption due to the lower 787, an F 35 revenues and the impact of sharing with our customer base a portion of the aviation manufacturing jobs protection Grant.
We received during the quarter.
The $5 $8 million benefit of this grant appears in the corporate portion of the results while the reduced profitability caused by sharing a portion of the grant with our customer base is reported in the segment results.
During the quarter, we recognized a net favorable change in the estimated profitability of <unk> long term contracts of about $2 million.
This compares to a net favorable change of about $3 5 million in the same quarter last year.
Third quarter, selling technical General and research expenses were $47 4 million in the current quarter.
Down slightly from $47 8 million in the prior year quarter.
And were down as a percentage of net sales from 22, 6% to 24%.
While R&D was up over for over $1 million this quarter.
And while we also incurred higher travel expenses these were more than offset by a foreign currency revaluation gain this quarter compared to a foreign currency revaluation loss in the same quarter last year.
Total operating income for the company was $44 5 million up from $38 8 million in the prior year quarter.
Machine clothing operating income rose by $9 8 million driven by higher gross profit and lower <unk> expense.
And <unk> operating income fell by $3 9 million caused by lower gross profit and higher <unk> expense, partially offset by lower restructuring expense.
The income tax rate for this quarter was 29, 4% compared to 24, 7% in the same quarter last year.
The higher rate. This year was caused by the generation of a higher share of our global profits in jurisdictions with higher tax rates.
And by a less favorable discrete income tax adjustments.
We reported over $2 million in expense under other income and expense this quarter, primarily due to a true up of indirect taxes in a foreign jurisdiction.
Net income attributable to the company for the quarter was $30 9 million an increase of over 1 million from $29 6 million last year.
The increase was caused primarily by the higher operating profit, partially offset by higher interest expense and the higher tax rate.
Earnings per share were <unk> 95 in this quarter compared to 92 last year.
In addition to the normal non-GAAP adjustments, we typically make to cover the impact of foreign currency revaluation gains and losses restructuring expenses and expenses associated with the <unk> acquisition and integration.
This quarter. We are also adjusting out the impact of the aviation manufacturing jobs protection Grant as we do not believe it is reflective of ongoing profitability.
After making these non-GAAP adjustments.
Adjusted earnings per share was <unk> 83, this quarter compared to 96 last year.
Adjusted EBITDA declined by two 6% to $60 2 million for the most recent quarter compared to the same period last year.
Machine clothing, adjusted EBITDA was $59 2 million or 38, 4% of net sales up.
Up from $52 6 million or 37, 9% of net sales in the prior year quarter.
<unk> adjusted EBITDA was $16 3 million or 28% of net sales down from last year's $19 5 million or 26, 6% 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 remained steady at $350 million.
We have a floating to fixed interest rate swap replace at that level for the life of the current credit agreement and currently we do not intend to pay down total debt below that level.
Cash increased by about $33 million during the quarter, resulting in a reduction in net debt by the same $33 million.
Capital expenditures in the quarter of about $9 million were roughly the same as incurred in the same quarter last year.
From a capital deployment perspective, as Bill mentioned, our priorities are unchanged. Our first priority is organic investments.
Followed by disciplined and targeted acquisitions, followed by returning capital to shareholders.
Our fundamental strategy has not changed how's.
However, given our modest leverage and strong free cash flow outlook. The board of directors has authorized a $200 million share repurchase program.
We believe that such a program will be the most efficient effective and value added approach to returning additional capital to our shareholders.
While theres no guarantee that we will execute all or even any of this authorization. It is the company's intention to make use of this authorization subject to prevailing market conditions and while recognizing the inherent limitations on how quickly we can execute such a significant program.
Fully executed the share repurchase program would increase our net leverage a little under one turn of EBITDA, leaving us with sufficient dry powder for additional strategic actions.
As we look forward to the balance of 2021 the outlook for the machine clothing segment remains strong.
Q3 revenues were up over 11% compared to last year, partially aided by some currency tailwind to revenue primarily due to strong euro.
Packaging and tissue grades remain the primary drivers of long term growth.
While we also saw a nice recovery in publication revenue in the third quarter, driven by a return to offices and schools a continuation of this recovery is in jeopardy. As a result of the Delta Varian surge, which is <unk> is paused some return to office efforts.
Also after we get through the pandemic effects, we do not expect any change in the long term secular decline in the publication market.
I would also like to note that the growth rate for the <unk> segment. This quarter was unusually high driven by timing of customer needs.
Segment orders year to date are up about 6% compared to last year.
And backlog entering Q4 is only modestly higher than at the same time last year.
We typically generate about 23% to 25% of the segment's revenue in the fourth quarter and we expect this year to be broadly similar to that.
As a result, we are raising our previously issued guidance of revenue for the segment to between to be between 600 and $610 million up from the prior range of $585 million to $600 million.
From a margin perspective in machine clothing, we delivered another strong quarter.
Adjusted EBITDA margins of almost 39%.
We are seeing increased pressure from input expenses of all types, particularly logistics and expect these pressures to continue to increase through the balance of the year.
However, as previously discussed many of these cost increases which began in Q2 and accelerated from Q3 have yet to materially impact our results.
Due to both the terms of our supply agreements.
The roughly six month lag between procuring raw materials of the higher cost and those costs being reflected in the segment's cost of goods sold.
We will see more impact from these cost pressures in Q4, but will not see the full impact until 2022.
In addition, late in the third quarter and early in the fourth quarter, we have seen some relaxation of travel restrictions in certain regions and are beginning to see our level of visits to customers increase which will result in somewhat higher STG in our sorry, SG&A in the fourth quarter.
Driven primarily by the strong revenue performance, we are increasing our adjusted EBITDA guidance for the segment to a range of $215 million to $225 million up from the prior range of $210 million to $220 million.
Turning to engineered composites, we delivered a strong quarter very much in line with expectations.
Last quarter, we indicated that we expected Q3 profitability to be similar to that delivered in Q1 and it was within a few hundred thousand dollars of that level.
We are very pleased to be awarded and aviation manufacturing jobs protection grant during the quarter of $5 8 million, which recognizes the challenges that we along with the rest of the industry have experienced due to the COVID-19 pandemic.
However, as I already noted we have adjusted the effects out of both Q3.
Adjusted results and segment guidance for the year as it is not reflective of continuing operations performance.
While unlikely to have any material impact on the balance of 2021, we are concerned about the slow recovery of the Boeing 787 program, where Boeing has indicated that they will continue to produce at a low rate for the foreseeable future.
As of the end of the third quarter, we had the equivalent of about five ship sets of 787 product in either finished goods with which is not unusually high.
However, significant quantities of our finished goods exist in boeing's overall supply chain, which combined with boeing's low level of production.
Will likely lead to very low levels of production for us for the foreseeable future and may even lead to significant production gaps.
Any impact on 2021 would be modest as we are not anticipating any significant recovery on the program. This year, but it will likely delay any meaningful recovery on the program until beyond 2022.
As you know our production levels on the F. 35 has been uncertain. This year as our customer has dealt with issues elsewhere in the supply chain over the last 18 months and with lower depot consumption of aftermarket parts.
We are confident in our outlook for the balance of the year, but I will note that Lockheed Martin and its government customer have established a new outlook for program production that plateaus at 156 aircrafts in 2023.
A lower rate and an earlier date than the previously planned plateau.
The F 35 remains a very good and profitable program for us.
This programmatic change has no impact on this year, but it will likely temper the revenue upside in the program for us in future years.
Overall for the EC segment, the year is progressing largely as we expected when we last issued guidance. Although we are now less concerned about downside risk.
Therefore, we are raising the lower end of our guidance range for segment revenues, resulting in a range of between 300 $310 million up from the previous range of $290 million to $310 million.
From a profitability perspective, given the year is progressing largely as expected we are maintaining the previously issued guidance range for <unk> adjusted EBITDA of between 65 and $70 million.
We are also updating our previously issued guidance ranges for company level performance, including revenue of between 909 hundred 20 million increased from prior guidance of $880 million to $910 million.
Effective income tax rate of 28% to 30% unchanged from prior guidance.
Depreciation and amortization of about 75 million unchanged from prior guidance.
Capital expenditures in the range of 40 to 50 million also unchanged from prior guidance.
GAAP earnings per share of between $3 23.
And $3 38.
Increased from prior guidance of $2 84 to $3 14.
Adjusted earnings per share of between $3 15 and 330.
Increased from prior guidance of $2 90 to $3 20.
And adjusted EBITDA of between 230, and $240 million increased from prior guidance of $225 million to $240 million.
Overall, while the pandemic has not yet behind us and risks still remain across our business. We are very pleased to be able to raise guidance, yet again, reflecting the hard work and dedication of our teams across the globe.
The coming years will continue to be a challenge as we and the rest of the industry slowly recover from the severe downturn in commercial aviation and as the machine clothing market searches for its new post pandemic normal.
We also recognize that there are risks ahead in terms of supply chain constraints and inflationary pressures should the recent and current increases due more than transitory.
However, our track record of operational excellence and continuous improvement positions us well to address these challenges.
With that I would like to open the call for questions Brad.
Thank you and ladies and gentlemen, if you do wish to ask a question. Please press one and then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command and if youre using a speakerphone. Please pick up the handset before pressing the numbers.
And well first go to line of Peter Arment with Baird. Please go ahead.
Hi, Good morning, you actually have Eric Ruden on the line for Peter today.
If I could start maybe just.
In terms of the Max destock their alright.
Just thinking through this it actually looks like you grew contract assets by about $3 million, which compares to the $16 million and $10 million burn downs in the first half of the year here, how does that actually tie.
Feedstock I know you mentioned the 30 ships Thats decrease I would've expected the cash piece to be a bit higher there can you just help us think through the puts and takes on revenue and cash recognition there.
Sure.
Your general premise is correct that with burning through those at that inventory of finished goods. Those are in contract assets on which we have already recognized revenue and profit and we just collect cash as we ship them. So in general that does lead to better cash flow conversion.
I think it's important to understand that within contract assets is far more than just leap one b.
In particular the <unk>.
<unk> 35, and the CH 53 key programs are also in their 787 is in there and those programs.
They're lumpy CH 53, K in particular is a lumpy program where in certain quarters. We go grow contract assets significantly in other quarters, we collect cash based on.
Deliveries of our products so.
Those parts.
The very large parts and CH 50, <unk> the sponsors and the vertical at rotor pylon.
They're very large parts take a long time from juice. So we build a lot of contract assets as we go through those production process, which we then liquidate when we ship shipped and Invoiced.
After part delivery, so it's really driving that contract asset growth is other programs other than leap one.
Okay. Thank you that's very helpful. And then just in terms of thinking through the rest of this year can you just provide some commentary around how we could end up actually seeing the bottom end of EBITDA guidance range coming into play or is it safe to say you should be trending much closer above or to the top of the <unk>, especially I think if I run the <unk>.
For the fourth quarter implied margin would be below 30% on the bottom line, which would be a pretty dramatic falloff from the levels we've been seeing.
Memory here.
Okay.
Certainly true that we're trending based on recent experience we're trending towards the upper end of our guidance range and we certainly hope to deliver.
In the in the upper half of our guidance range, but.
It's already in the quarter. There is still a lot that has to get done to deliver on that so.
Not prepared to tighten the range at this stage, but certainly your basic premise is correct, but based on recent experience we should be trending towards the upper half of that range, yes, I might add just some color.
<unk>.
Business, we had customers that took delivery of material.
Which helped with our sales growth in Q3, and I think there is a lot of concern out there in the supply chain and logistics and people not able to acquire materials. They need theres, probably some behavior out there bringing material in early we did that a little bit we add a little bit to our inventory so that we're protecting our ability to produce.
So that could slow down if things get better. So we're just kind of look.
The cyclicality and the Lumpiness of the businesses.
Okay. That's helpful and then just looking into 2022.
I know obviously no guidance here, but just is there anything you can give us in terms of sizing the actual margin impacts youre thinking about in terms of the supply chain headwinds given that there is about six month lag for the rising input costs actually flow through just anything you can give us there would be helpful.
It's a little early to tell for the full 2022, given we don't know when these increases are going to end.
So the increases we've seen to date.
<unk> has certainly been in the.
A few hundred basis points, let's say, but those increases are continuing and it's premature of US right now to talk about what the impact might be for the full year of 2022, when you get around to issuing guidance in February and hopefully by then we'll have more clarity into wind whether this inflationary spike was transitory or sustained and if.
Sustained will be better able to project what the impact will be in the full 2022.
It's a little early to project that.
At this stage.
Okay. Thank you I appreciate the color I'll hop back in queue.
Thank you.
And next we'll go to line of Michael <unk> Sirona Ali with twists Securities. Please go ahead.
Hey, good morning, guys.
Thanks for taking the questions nice results here I kind of wanted to stay on on both of those lines of questioning but maybe just.
Thinking about the mechanisms you guys have in place to pass through some of these costs can maybe maybe we start with the engineered components.
I know you have a cost plus agreement with Safran does that cover some of the raw material increases or just naturally under master contracting agreement, assuming <unk> is raising prices or other chemical components are.
Seeing significant inflation are you able to pass all of this through or what can you kind of stay on the on the aerospace.
EC side first with the pricing environment.
Yes, so look Greg with two types of contracts under a cost plus contract with safran and all of those cost increases get passed through further increases in raw materials or increases in labor costs or increases in logistics all of that gets passed through.
So we are protected from price increase.
On the bulk of the rest of our business, which is primarily.
Fixed price contract some of that government business some of its commercial business.
On the commercial business, we will typically have entered into some.
Multiyear contracts at the firm fixed price. So it will be some protection on the raw materials, and particularly with the fiber and the RASM, which are typically specified by our customers.
We are we purchasing that underwrite and enables material supply contract from from our customer and typically we will get to pass along some of those if not all of those price increases in the core raw materials are a lot of raw materials that don't end up in the finished product if you like non <unk> items as stuff thats used within our.
Factoring whether its vacuum bags, Oregon, flubs or anything else on those sorts of contracts those sorts of increases we will not have protection for nor will we have protection for increases in labor costs and those sorts of contracts.
On government contracts.
It's kind of a hybrid in the middle and it depends on the specific contract.
The way a lot of our government contract work in Florida negotiate a fixed price contract where each time, we get the New awards. We disclosed are all all of our prior cost and pricing data and establish a new baseline with will allow for a profit margin.
As far as those price increases that occur in the system.
We do get to pass those along in the next.
In the next go round of that.
MC negotiation of the next phase of that contract how long Netherlands before we get to negotiate that next phase really depends on the individual contract in some cases, where were pricing a new avenues and.
A new buy every year or 18 months and others that could be three or four years in between negotiations. So thats why its a hybrid somewhere in the middle there is some protection, but certainly not as much as on.
The safran contract so overall on an on AUC.
We have certainly some exposure, particularly to labor cost.
But on the core raw materials, we're largely protected.
Okay got it and then presumably machine clothing, it's really just a grind you've got to use productivity to offset any of those increases because I think the contracts are more lengthy or in nature and they don't often come up for renewal is that correct.
Yes, it depends on the customer and the specific contract.
There are three types of contracts. Some are repriced regularly some are firm fixed price for many years with no reopener. Some have an escalator in there whether it would be tied to some industrial and consumer price index.
But overall, it's certainly true that.
We do not get to pass along the full impact of the cost increases to our customers and as you say, we do have to rely on continuous improvement efforts to offset a significant portion of that increase as I noted in my commentary we've done a really really good job over the years of offsetting inflation wage inflation.
At lower levels now that we're seeing higher increases in wage pressure around the world in both segments, but in machine clothing, it's more work to try and offset that through productivity and cost savings, but we'll do that we'll be able to get part of it but it just depends on how high wage inflation closer.
Got it helpful. And then just shifting to the F 35.
You guys articulated a new plan from Lockheed I mean are you guys going to be dealing with any sort of inventory destock I mean, those those original plans I think called for maybe.
Close to 170 units this year moving to 180 are.
Are you going to have to deal with any excess capacity.
Zuma believe theres going to be a headwind on revenue as that program flattens out, but anything else on the destock or maybe excess capacity weighing on margins that we should be aware of.
I don't see any Destocking challenge anything of that severity, it's more of the the revenue pressure.
And managing the.
Production.
The next couple of years and trying to keep it at a at a level right. So that we can be most effective most cost effective in the factory with our suppliers as well as we said before Mike. We did go through some degree of inventory Destocking This year.
Unrelated to the plateau from 56.
And so that's the word.
Sure.
Absorbing that impact this year as I think you know we have been on their trajectory for we're growing our average revenue per ship set.
So at the same time as this is leveling out theres been some growth in that so so.
It's a little.
Noisy in terms of.
Showing our exact as.
Profile it doesn't it our exact revenue profile won't match Lockheed build profiles exactly.
But there's a little uncertainty in the Ikea is exactly how those two effects are going to feather together and what sort of.
Growth or lack thereof, we might see in 'twenty, two 'twenty three 'twenty, four but well have more color. When we issue guidance, yes, I would say too the other thing Thats, a little hard for us to predict what the demand is going to be for sustainment for the aftermarket repairs and overhauls and whatnot, sometimes that's hard for us to see going forward.
Got it got it yeah, and I think they actually put out Lockheed called Sustainment, maybe growing 6% CAGR through 2006, and there are slides today.
Last one I had I know youre not going to obviously provide 'twenty two guidance, but.
Matching this altogether F $35, 787% drag it sounds like the Max production rate is still an unknown.
Youre going to exit fourth quarter with a machine clothing clothing, EBITDA margin, 30%, maybe maybe it's a little bit better.
Sounds like that get more challenging as we go into next year I mean.
Just trying to calibrate us for 'twenty, two I mean, it seems like it could be a challenge to grow earnings year over year, if there is pressure.
All those kind of unknown and pressures.
Yeah.
Is that the right way to kind of be thinking about the operations as you move into 'twenty two.
Now again as you pointed out upfront that we're not going to give guidance for 2022 I will note in your in your list of things.
<unk>.
You noted in machine clothing margins close to 30% in Q4.
I'd be careful about using that to some sort of jumping off point for predicting at 2022 margins in that business. Typically Q4 has is one of our lower absorption quarters as are a lot of holidays in the quarter and therefore lost production days and therefore lower absorption and.
Therefore fixed cost is more of a drag on our on our production cost in the fourth quarter.
So that that's not a normal number I'd characterize rolling that forward.
Into 2022, the other pressures you talked about certainly existed in 2022, and and we have to deal with them.
We.
I would say, though it is premature for us to start giving you any specifics bill idose, you've other color to give on that.
No not at this point I think we'll come back to it.
Okay fair enough, thanks, guys I'll jump back in the queue.
And next we'll go to line of Peter's Kubicki with Alan Beck Global. Please go ahead.
Hey, good morning, Bill, Stephen and John Nice quarter.
Peter.
I guess I'll start with <unk>.
Machine clothing, even at the low end of your revenue guidance here the updated guidance it looks like youre expecting to be pretty much back to your pre COVID-19 volume levels.
Up 6% year to date order wise I'm, just trying to get a better feel from you if.
The mid term outlook for machine clothing is the same where youre thinking flat to maybe up low single digits or has that changed at all for you guys. After COVID-19 with this kind of packaging surge or you're kind of thinking about that.
Yes.
It's not easy to see through how it plays out again, we're kind of talking about next year as we go forward.
Obviously, we really like packaging and tissue markets, and that's where we've moved our strategic approach to and we've had a good run there. So far the tissue has been sort of a mixed market as we noted in our comments with at home and away from home have behaved differently in the distribution channels production.
But overall packaging has been really strong in the Americas, we've seen a little bit of a slowdown in Asia.
More watching China for instance, with the energy shortages there in some material shortages.
We're seeing a little bit of softness in China.
And then Europe, it seems like it's a little bit behind on the recovery, so its coming coming up a little bit. So it's a real mixed picture around the world. So that kind of gets hard to look through into next year at this point.
So hopefully we'll have a better view on it when we get to the fourth quarter report.
Okay, Yes.
Seeing some of the energy issues in China, So I hear you there.
And then I just wanted to switch gears Lockheed is talking about pretty meaningful supply chain issues on the military side, so not necessarily inflation.
Inflation in logistics per se it seems like maybe maybe more so shortages I guess, we will learn more later, but are you guys seeing any of that on your side real genuine we can't get in the parks.
Supply chain issues on the military side and do you have any visibility into any inventory building up on the military side for you guys because of that.
Yes, we don't really see it or I should say, we don't really experienced that we start with raw materials with fiber and resin and we make a lot of our components, we're not buying a lot of manufactured components that we assemble that into a sub systems.
So the products that we make we're earlier in the supply chain and we seem to be doing okay. I will say the behavior, we see out there in <unk>.
Includes Albany, as well, where we've added a little extra inventory for cushion.
It's probably driving capacity constraints.
Suppliers in general so I imagine that's what Lockheed is referring to it in addition to logistics and shipping challenges from all over the world. So we're not we're not having that same experience though.
Okay. Okay.
And just so.
Again, maybe you can talk to this generically or directionally.
It looks like CH 53, K is kind of all systems go I think lock you just talked about.
Another production award or accelerated production, there and it seems like Youre F 35 comp would be easy going into 2022. So just directionally should we feel good about those two programs.
Yes, we feel really good about CH 53, K and longer term.
35, as well, we just got to work through.
The next year or so and F 35.
Okay, great. Thanks for the color guys.
Okay.
And next we can go to line of blocking <unk> with Cowen. Please go ahead.
Hey, good morning, guys.
Good morning.
So a couple of questions maybe Steven could you talk about.
Could you quantify the Destocking again for.
787.
<unk> 35, and any other programs.
In 2021, just update us on what you expect those to shake out.
Yes.
Kind of as we talked before that.
20 back in 2000, 1970 eights happened was north of $50 million was in the $40 million range last year in 2020, and this year will be in the $10 million range. When all is said and done.
In that two $2 million to $3 million per quarter range.
And they each quarter, so far so to be in that range. So you can see there its been an impact.
Of that $30 million Thats it makes it destocking and.
Reduced production rates overall.
But just to give you an idea thats the impact here in 2021 77 F 35 with smaller we'd originally theory that could be a significant reduction there will be some reduction this year, but it will be lower than we originally feared.
You'll see exactly where we come out with reduction somewhere in that.
Yes.
$10 million range is probably fair five to 10.
For the full year is probably not unreasonable to assume.
And that's in that case, that's largely driven by.
Some destocking, where they produced fewer aircraft last year than they expected and consumed lesson in depots that came into the year with more of our finished goods on hand than they had originally expected.
Okay.
And those are the only programs you'd call out.
A destocking this year.
<unk>.
No.
Yes, yes look look on leap overall, and obviously, we talk a lot about the destocking, we're going through but as we mentioned in terms of revenue last year, we produced close to $100 million of revenue on that program. This year, it's going to be similar number trending a little higher than that but a few million dollars higher than that this year, but.
Really rough.
Roughly similar level as the growth in <unk>.
Has.
It has picked up nicely and even though we're not generating a lot of revenue on <unk>.
Overall, it's about the same level of production of last year.
Okay and I may have missed this in your opening remarks, but.
I think you mentioned $2 million of favorable EAC.
Engineered composites this quarter.
If that was the number then what explains the.
The sequential EBIT margin decline ex.
If we take out <unk> was there anything about the mix underlying that was what was different or any other costs that you want to call out specific.
Specific yes, it's primarily for what I call that mix is a big driver of it.
Yes.
While year over year, we have revenue growth. If you look where we grew year over year leap grew.
Whereas programs like 787, and the F 35 declined F 35, and 780 770 707 as it was last year much higher margin than leap last year and so as we as we just grow one shrink the other you get it mixed impact where the margin comes down.
This quarter was a little unusually low for F 35, compared to them throughout the quarters that didn't help us and leap was unusually high.
A relative basis.
And then the lack of fixed cost absorption because of both 780, <unk> and F 35 being down at both our fixed price programs produced in our Salt Lake City facility, we have to worry about the overall fixed cost absorption there that was a challenge this quarter.
Youre right with the $2 million that fat EAC pickups. It was three five.
A year ago, so that million and a half alone.
That represents a couple of hundred basis points of <unk>.
No margin degradation you add a few of those factors together you get there.
Okay.
I know you don't want to guide 22, but I am curious machine clothing and in.
Output revision story for a while now.
For years actually.
So I'm curious.
One point, we thought that.
The $200 million of EBITDA was the right base.
<unk> I think a quarter or two ago, you mentioned, it might be $200 million ish or slightly better as the run rate.
Even with publication grade declines and what have you.
You guys have an updated view I mean.
I mean, obviously this year you took up the numbers again.
But how.
How much of over earning are we actually seeing order of magnitude is there any way to kind of frame. It I'm not asking about 'twenty two I'm asking about long term.
What is sort of a.
The right mean reversion level, we're going to move.
It was back to.
Yes, we don't see we don't see a reversion back to where we were before below the 200 level.
We can't predict the future and we haven't given guidance for next year, but we're going through our annual planning our strategic look for the next number of years and profitably is very very good and the emcee. The work that we've done the strategic were to shift the business towards.
The higher growth markets packaging and tissue and where the technology development is today, particularly in tissue.
And then the global footprint, we've had we've done a really good job. The team has done a great job over the years and you mentioned it has been a upward revision for years because of that strategic footprint that we've worked towards by consolidated sites and moving towards where the customers are in.
And having our operations running at the best utilization rates, we can around the world and then shifting the mix and once in a while if we need to optimize.
So the team has done a really good job.
We expect to we're still going to run above that $200 million can't say exactly how high above it but we'll come back around on that when we talk about next year, but it is it is that a new level of performance and we're really pleased with the teams and have it done.
Sure. So 200, plus is sort of the low end.
We're at $2 25 this year.
Last one Steven.
Also thought you mentioned that Q3 had.
So more just.
The deliveries that benefited machine clothing in the quarter.
Are there any I imagine your salespeople are pretty close to when these things are going.
We're going to need replacements are.
Are there anything you'd point out at least in 2022 about hey, this quarter is going to have more activity in that quarter.
Even directionally just based on how these things are being utilized and thank you.
Yeah, No look nothing unusual.
It's really in 'twenty to 'twenty two as we look at third quarter of 2021.
Certainly two things are true one third quarter of 2020 was a little low.
Third quarter 2020 had been down.
I think it was 8% year over year from the third quarter of 2019, and almost <unk> I think it was 9% sequentially from second quarter of 'twenty. So the third quarter of 'twenty with a fairly low quarter. So it was a relatively easy comp.
Part of what explains the high growth in the third quarter of 2021, but also as as bill alluded to.
Theres, a little bit of our customer as being a little risk of ours and may be taking delivery of some of the product a little earlier they made otherwise do so to make sure. They can get it in the door since the worried about logistics and <unk>.
Apply chain constraints.
But.
That partly Mike.
It might explain a little bit of a weaker Q4, I'm not sure yet it's a little premature to talk about some particularly weak or strong quarters in 2022 at this stage, we don't see anything terribly unusual in 2022, but it's early yet.
Things have a habit of changing quickly over the last couple of years. So.
That's why it's a little early for us to start giving any specific guidance.
Thanks, guys.
Hey, Thank you Kevin.
Thanks.
Next we will go back to Michael China, Li with <unk> Securities. Please go ahead.
Hey, guys. Thanks for taking the follow up just on the on the leap B and the.
The Max in general.
Can we assume that your current production are in line with Boeing's stated 16, a months and just remind us what.
Boeing is going to take that to 31, a month and realizing you've got a little bit of Destocking left to get to that 100, but I think what did you say 30 units. This quarter. So 15 planes and maybe 20th left to go I mean.
Should we see or whats the normal lead time, if they are going to go up to 31 per month.
Yes, so right now they are consuming.
Not only as you mentioned Ken correctly during the quarter.
Shipped 30 more engine chipsets, and we produce equivalent to about five aircraft demand. So you take that off the top there was also a product finished goods of our.
Product within elsewhere within the Boeing supply chain that is being consumed whether its at safran or elsewhere in the engine supply chain.
Right now, we're producing well below.
Boeing target sales rates right now and.
And we don't expect that to materially change starting here in Q4 as I mentioned, we hope to see it pick up early in 2022, assuming.
Everything goes smoothly and Boeing hits smart, but.
Theres another.
A couple of quarters to go before we settle down fully yes, I would say the short answer is no. We're not totally lineup with boeing's production, but we are with Airbus <unk> hundred 20.
Got it perfect. Thanks, guys.
And currently we have no further questions in queue.
Alright, Thanks, Brad.
Thank you everyone for joining us on our call today.
We appreciate your continued interest interest in Albany International and of course, if you have any questions. Please feel free to reach out to John Hobbs, Our director of Investor Relations. This number 63033058 97, Thank you and have a good day.
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