Q4 2021 Albany International Corp Earnings Call
Go ahead please.
Thank you Alan and good morning, everyone welcome to Albany Internationals fourth quarter 2021 conference call.
As a reminder for those listening today. Please refer to our press release issued last night detailing our quarterly financial results contain.
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. The 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, our February 15th 2022, as well as our SEC filings, including our upcoming 10-K.
Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks bill.
Good morning, and welcome everyone. Thank you for joining our fourth quarter earnings call. We're pleased to report another strong quarter capping a great year in 2021, our employees performed remarkably well throughout the year. We continue to do a great job for customers, one new business brought new products to market and navigated successfully.
Through supply chain and Covid challenges we generated.
Record free cash flow of more than $160 million in 2021, our highest cash flow in the history of the company on sales of $929 million with over 40% gross margins, 27% adjusted EBITDA margins and world class operational performance and delivery quality and safety.
At the segment level machine clothing, the operational performance and financial results continued to be exceptional with better than expected customer demand at year end machine clothing was able to deliver fourth quarter sales growth of nearly 10% over prior year fourth quarter.
And do it with great flow through to the bottom line at 52% gross margins and 38% EBITDA margins.
Engineered composites also performed well in the quarter with solid program execution across the board commercial aviation recovery is underway and it's in initial stages in 2022, they recover will be seen as a mix shift as our lead production volumes ramp back up to support narrow body aircraft demand beyond 2022 as the rig.
Covering progresses, we're excited as growth is expected to continue for our elite and CH 53, K programs and the anticipated wide body demand recovery begins.
We also expect new business wins will layer on top of that to provide a solid foundation for our longer term growth beyond 2023.
As we ended last year demand in our end markets with healthy yet still recovering in a few areas machine clothing demand was better than expected and appears robust entering 2022 packaging pulp and engineered fabrics have all been strong, especially packaging in the Americas and Europe .
Publication enjoyed slight growth in 2021, perhaps a short term rebound as we expect publication will revert to the longer term downward trend as digital media continues to replace printing and writing paper.
Machine clothing demand is expected to remain healthy in 2022 were somewhat cautious as some customers may have built up on hand inventory of machine clothing belts to mitigate the risk of supply chain and logistics disruptions.
The outlook for engineered composites demand is improving as commercial aerospace gradually recovers from the pandemic domestic airline travel is leading the way while international travel is still slow to come back.
Consequently, narrow body demand has already picked up and we're ramping our leap production to meet the needs for the Airbus <unk> hundred 20, Neo and Boeing 737 Max aircraft.
We do not expect to recover in wide body production and specifically for our Boeing 787 composite frames manufacturing in 2022, and it will take longer on the defense side, we have great programs joint strike fighter CH 53, K Jasmine missile that have longevity and the short term, we do see some temporary headwinds on the joint strike fighter.
As inventories have been overbuilt.
Longer term, however, as production plateaus and more aircraft enter service. We expect this to remain a healthy and attractive program for us.
Now, let me make a few comments about our strategy.
Our first strategic priority is to invest in R&D and product development for organic growth.
As planned we increased R&D investment by 10% in 2021.
We added talent to our design engineering and customer pursuit teams, we continue to collaborate with key customers to design. The next generation of advanced materials and bring new products to market.
Our strategy is to position Albany is the technology leader and partner of choice in our segments and markets.
This means we must be good at both advanced materials development and operational performance to win new business and to expand our market share with existing customers.
Our machine clothing business has successfully used this strategy to establish a leadership position second to none and it's industry. We've earned a long standing reputation for producing products of exceptional quality and durability for our customers we spend more on R&D than our nearest competitors.
And we work intimately with customers to design solutions that address their biggest technical challenges.
This results in a pipeline of new product introductions that our customers value.
Furthermore, we support our customers with a technical sales team assuring customers they get the best paper quality and production efficiencies at our products can deliver.
About a decade ago to machine clothing management recognize the secular shifts in the paper industry and redirected investments to emphasize serving customers in the growth areas of the business that strategy continues to pay off today sales tissue and packaging producers account for the majority of our revenue while sales to producers of printing and writing grades.
The paper the grades in secular decline contributed only 17% of our sales down significantly from over 30% 10 years ago.
Machine clothing is focused on improving its global footprint product technology operations and continuous improvement has paid off as I previously mentioned machine clothing delivered record adjusted EBITDA margins of more than 38% in 2021, that's nearly a 10 percentage point expansion over the past decade.
Reinforcing our strategy of providing the most advanced materials solutions with great operational execution.
In engineered composites were earlier in the journey or executing a consistent strategy to bring the next generation of advanced materials to market and we're earning a reputation for operational excellence and great customer service it.
It builds on the application of <unk> woven composites, we developed by collaborating with Safran on leap fan blades and cases.
The durability and performance of <unk> woven composites exceeds those of any other fan blade materials titanium or to date <unk> composite blades and the production rates. We achieved have demonstrated the commercial feasibility of high volume production of <unk> woven composite components.
We're using the leaf experience as a springboard to build a complement of composite design engineering and manufacturing capability and propagate the use of <unk> woven structures across the aircraft.
This strategy takes advantage of long term secular trends driven by climate change and energy efficiency that demand lighter and stronger materials that raise the bar for fuel efficiency and contribute to a more sustainable future. Our strategy is to be at the center of this shift to lighter composite aircraft. We believe it will include a range of composite material.
<unk> in applications, the right material and manufacturing process for the job.
Over the last 18 months or so we've announced new business wins partnerships and technology collaborations that advance this strategy to become the leader the leading supplier of advanced composite technologies and solutions.
We have been awarded more content on existing aircraft, including Boeing 787 composite frames Lockheed Martin joint strike fighter composite components now over 200 part numbers.
On Sikorsky CH 50, <unk> helicopter.
Winning this additional share reflects the strength of our operational performance on time delivery quality and service and how important it is to our customers.
In 2021, we extended our technical collaboration with Safran for 25 years with the goal of developing the next generation of <unk> woven composite products for the revolutionary rise engine to power. The next generation narrow body aircraft.
We're also working with on the GE <unk> with Safran to develop a composite fan case for wide body aircraft.
In addition to engines, we're working on three D woven composite application for wings as a partner with Airbus on the wing of Tomorrow program.
And then 2021, we also formed a technology collaboration with spirit Aero systems to develop <unk> woven carbon carbon composite materials for high temperature use on hypersonic vehicles another.
Another application we are excited about the unparalleled benefits of <unk> woven composites.
And today, we're pleased to announce that Sikorsky has awarded Albany, The CH 53, K App transition manufacturing program.
This program award reflects trust and confidence in our ability.
<unk>, our strategic relationship with Sikorsky on a durable program critical defense capabilities with a value over $300 million.
It also positions Albany is a major player in composite rotorcraft structures.
We already manufacture the CH CH 53 case sponsors and vertical tail in with the App transitions section, we essentially will manufacture the back half of the helicopter.
This win adds to the foundation, we're building for long term organic growth.
Effective capital allocation remains a top priority and continues to be focused on driving long term organic growth. It starts with research and development.
And while these expenditures live on our income statement, we consider them an essential investment in our future success.
Our capital expenditure program focuses not on not only on maintaining our current capabilities, but advancing our production efficiency and growing our capacity and capabilities as our business base grows.
Share repurchases supplement our regular dividend as a flexible method of capital return finally targeted disciplined acquisitions will continue to be a key element of our long term growth strategy at the right price of course historically.
Acquisitions have played an important role day, enabling us to build on our technology leadership and global market positions in line with our strategic priorities.
Yes.
As a company we ended the year 2021 in great shape with strong free cash flow generation, a robust balance sheet, a relentless focus on operational excellence and leading technologies in both of our segments.
We continue to invest in R&D to position Albany for long term organic growth, we believe long term secular trends are favorable.
Machine clothing continues to advance its technology leadership position globally in an industry that is becoming more attractive as a sustainable resource as paper replaces plastic.
Engineered composites continues to win new business as the emerging emerging partner of choice for the next generation of advanced lightweight composite material applications on aircraft that will deliver on the promise of more sustainable aviation.
So with that I'll hand, it over to Steven.
Thank you Bill.
And good morning to everyone I will talk first about the results for the quarter and then about our initial outlook for our business in the coming year.
For the fourth quarter total company net sales were $239 9 million an increase of five 7%.
<unk> to the $226 9 million delivered in the same quarter last year.
Adjusting for currency translation effects, principally to decline in the euro relative to the U S. Dollar net sales increased by six 4% year over year in the quarter.
In machine clothing also adjusting for currency translation effects net sales were up nine 4% year over year driven by growth in all grades of product.
Engineered composites net sales again after adjusting for currency translation effects grew by one 3% with growth on the leap and other commercial programs offset by declines on the F 35, and 787 platforms.
During the quarter. The leap program generated revenue of just under $27 million compared to a little under $25 million in the same quarter last year.
Leap revenue was also up modestly sequentially.
As we hit deliberate revenue of around $25 million in each of the first three quarters of 2021.
We finished the fourth quarter with about 115 leap <unk> engine chipsets in contract assets largely completing the destocking of leap one be finished goods onto our balance sheet.
We now expect our production of leap <unk> units to be more or less in line with our deliveries.
Although we should point out that there is still considerable uncertainty related to boeing's demand on our planned production rate is still subject to revisions.
Also from time to time, we do expect to see some periods of finished goods inventory stocking and destocking.
Our customer supply chains for both leap <unk> and leap <unk> components.
It will not always be full alignment between aircraft production levels and our production of the respective engine components.
Fourth quarter gross profit for the company was $96 1 million an increase of five 2% from the comparable period last year.
The overall gross margin declined by 30 basis points from 43% to 40.0% of net sales.
Within the <unk> segment gross margin improved from 59% to 52, 3% of net sales.
Driven by a onetime benefit from government refunds in certain international jurisdictions, where we operate.
<unk> improved absorption due to higher production volumes, partially offset by higher raw material and logistics costs.
Within <unk> the gross margin declined from 21, 7% to 16, 9% of net sales caused primarily by mixed effects due to a decline in revenues on our fixed price programs.
They're lower margin programs grew and the absence of reserve changes that improved the prior year gross margin.
Partially offset by a slightly more favorable net change in the profitability of long term contracts.
Fourth quarter, selling technical General and research expenses declined from $54 8 million in the prior year quarter to $53 2 million in the current quarter and declined as a percentage of net sales from 24, 1% to 22, 2%.
You may recall that in Q4 2020. These expenses were higher than normal as the company made a special bonus payment to all nonexecutive employees.
Total operating income for the company was $41 7 million up from 35 zero or $1 million in the prior year quarter.
<unk> clothing operating income increased by $12 5 million driven by higher gross profit and lower <unk> expense, while <unk> operating income fell by $5 6 million caused by lower gross profit and higher <unk> expense.
Other income and expense in the quarter netted to income of $1 2 million compared to income of about 500000 in the same period last year. The improvement this quarter was primarily driven by a more beneficial foreign currency revaluation effect in this quarter.
Income tax rate for this quarter was 27, 3% compared to 13, 5% in the prior year quarter.
The rate this quarter is a little lower than our normal expectations driven by discrete items, while the abnormally low rate in the fourth quarter of 2020 was due to a significant true up of earlier quarters provisions recognized in that quarter.
Net income attributable to the company for the quarter was $28 6 million slight.
Slightly higher than $27 5 million last year.
As the significantly higher operating and operating income was largely offset by the significantly higher tax rate.
Earnings per share was <unk> 89 in both this quarter and the same period 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 with 86, this quarter compared to <unk> 89 last year.
Adjusted EBITDA increased five 7% to $60 6 million for the most recent quarter compared to the same period last year.
Machine clothing, adjusted EBITDA was $59 7 million or 38, 1% of net sales this year up from $50 9 million or 35, 3% of net sales in the prior year quarter.
<unk> adjusted EBITDA was $16 1 million or 19, 3% of net sales down from last year's $21 3 million or 25, 7% of net sales.
During the quarter the company generated free cash flow defined as net cash provided by operating activities less capital expenditures.
Over 47 million and for the year generated free cash flow of almost $164 million.
The very strong free cash flow. This year was driven by both strong operating performance in both segments and by the drawdown of our finished goods inventory on the leap program.
As we've previously discussed we recognized revenues and profit on the Leap program has components are manufactured at which point they are recorded in contract assets.
We subsequently ship those components.
We then invoice and collect cash with no associated revenue or profit.
This year on the leap program overall cash collections were considerably higher than revenue reversing the pattern, we had seen in 2019 and 2020.
During the fourth quarter, we returned about $30 million of our free cash flow to investors.
Price of roughly $6 5 million in regular dividends and over $24 million in share repurchases.
We repurchased about 285000 shares during the fourth quarter at an average price of $85 42.
Repurchases are continuing in Q1, so far we have repurchased a little over 200000 additional shares.
We will provide a full update on Q1 repurchase activity during our next earnings call.
For the full year 2021, we returned almost $50 million to shareholders $24 million in share repurchases and almost $26 million in dividends.
Thanks to our strong free cash flow our net leverage ratio is now about zero point to fight.
This leverage ratio provides a significant headroom.
To both continue to return cash to shareholders and as bill referenced explore acquisition opportunities.
As we execute our capital deployment strategy, we would be comfortable with leverage ratios on a sustained basis in the two five range, although as we've done in the past we could from time to time consider assuming a higher leverage ratio provided we see a path to returning to our normal comfort range.
I would now like to turn towards the coming year and provide our initial financial guidance for 2022, which.
Which is expected to be another strong year for both segments.
We expect expect to deliver another year of excellent performance in the machine clothing segment.
The mental demand for paper products is strong our order books are healthy and the segments culture of continuous improvement continues to deliver results year in and year out.
We are in a solid position as we enter 2022.
As we began the fourth quarter of 2021, we saw some risks to topline performance in this segment.
At that time, we had been seeing growing inventory at several of our customers of both our products and our customers finished goods, which raised the risk of an inventory destocking cycle, which would obviously impact our revenue.
This risk did not materialize in the fourth quarter, resulting in strong orders and revenues for the segment above our expectations.
However, these inventory levels have not reversed course and in some cases have grown as we enter 2022.
Therefore, the risk of Destocking cycle remains.
We do not know when that risk will manifest itself in terms of impacts to our revenue.
However, we have accounted for some impact from it in our 2022 outlook.
Our revenue guidance for this segment also takes into account the significant weakening of the euro that has taken place over the past several months.
We generated over $100 million.
Of our 2021 segment sales in euros.
We now expect an exchange rate that is 7% to 8% lower on average in 2022 compared to 2021.
This creates roughly $10 million of headwind to 2022 revenues in our outlook.
Finally, as Bill indicated we do expect that the rebound we've seen in publication grades will be short lift and we expect that portion of the market to return to secular decline over the next 12 to 24 months.
Combining all of these factors with the typical variability in overall demand for machine clothing, and other engineered fabric products results in initial net sales guidance for the segment of 590 $610 million.
From a profitability perspective machine clothing had an exceptional year in 2021, delivering almost $237 million of adjusted EBITDA equivalent.
Equivalent to a record 38, 2% of net sales.
During the fourth quarter, we began to see the impact on the segment of higher input costs, including raw material labor and logistics hitting the P&L.
However, these were more than offset by some nonrecurring benefits by higher fixed cost absorption and by a continued low level of travel due to the global prevalence of the <unk> variant.
In 2022, we expect to be able to offset a modest amount of input cost inflation through pricing to our customers.
And to be able to offset a more significant portion of it through continuous improvement.
Overall inflation is continuing globally and therefore, we do not know the final impact on our profitability, but our current outlook assumes about $6 million.
Net impact to the bottom line in 2022 compared to 2021.
I discussed earlier that over $100 million of the segment's 2021 sales were denominated in euros. We do of course also of significant expenses in euros on a net basis, we expect a weaker euro relative to the U S. Dollar will impact our bottom line by about $5 million.
We will also see a profit hit from the modestly lower revenues in 2022 compared to 2021.
On a currency neutral basis, the mid point of our guidance range for 2022 is about $10 million lower than we generated in 2021.
You are no doubt aware, while our gross margins are typically slightly north of 50%. We do have significant fixed costs in our cost of goods sold resulting in decremental margins well north of 50%.
Therefore, this $10 million reduction in volume is expected to result in high single digit million dollars reduction in profitability.
Finally, this year, we're likely to see the long expected return to our normal level of travel.
While we have expected the return to normalcy to occur before now it has been repeatedly delayed at the incidence of Covid variance has continued.
Constrained our ability to travel.
We now hope that those travel restrictions are largely behind us and we expect machine clothing travel and R&D will rise by close to $5 million in 2022 compared to 2021.
Notwithstanding those concerns we expect the machine clothing segment to deliver another excellent year performance and are providing initial adjusted EBITDA guidance for the segment of $205 million to $225 million consistent with or slightly above the EBITA margins delivered in 2018 in 2019.
Turning to engineered composites, the long term future is very bright.
With the successful pursuit of the CH 53, K App transition program and the ongoing recovery in the global Aerospace market <unk> is now on track to deliver revenue in 2023 on par with that delivered in 2019 before the impact of the 737, Max grounding and the Covid pandemic.
Nick which would be a terrific milestone for this segment.
That will put AUC revenue in the ballpark of $450 million for 2023, which would be up over 40% from the $310 million delivered in 2021.
The App transition program is expected to be a very significant program for ADC for many years to come.
However, the revenue impact in 2022 is expected to be insignificant.
In general on those fits programs AUC recognized this revenue as it incurs costs.
While this will also be true for the <unk> transition program. Once AUC begins recurring production, we do not expect it to be the case for the nonrecurring phase in 2022.
Instead, we anticipate that the work performed on the nonrecurring phase of the program in 2020 to.
Expect it to represent the equivalent of over $30 million of revenue will.
It will be recorded as inventory.
We will be recognized as amortized revenue over the subsequent years of recurring production.
On the ASC Leap program, we do expect to see a significant rebound in volumes on the leap one b portion of the program as we get the inventory Destocking phase behind us and begin to produce components for that engine variant.
More and more in line with Boeing's demand.
We also expect <unk> volume to remain robust as Airbus continues its meaningful ramp up in production volumes.
I will note that revenue does not scale linearly on the leap program with volume due to the recovery of our fixed costs from our customer irrespective of the actual volume.
As volumes declined in 2020 and 2021 this effect mitigated the impact of the reduced volumes on our revenue.
Now as we returned to growth it will somewhat mute the impact of that volume gain on our revenue line.
We do not expect any recovery on the 787 program in 2022 in fact volumes are likely to be down from the already low levels. We saw in 2021, although the impact on the results of any further reduction in the program will be modest given we finished 2021 with <unk>.
Yes, and $10 million in total program revenue for the year.
On the F 35 program. This time last year, we told you that finished goods inventory destocking at our customers.
And reduced depot consumption of spare parts will drive lower revenues on that program.
Due to the timing of customer orders and deliveries those impacts were stretched out.
And only partially impacted our 2021 F 35 program revenues, which finished down only modestly from 2020.
However that previously expected dip in demand has not gone away and has instead shifted into 2022 when do we expect F 35 revenues to be down close to $15 million from 2021.
Overall for the engineered composites segment, we are providing initial guidance for net sales of $330 million to $350 million.
Turning to the engineered composites segment profitability. We finished 2021 largely in line with expectations with full year, adjusted EBITDA of $68 4 million or 22% of net sales.
As we look forward to 2022, we will continue to see negative mix effect on our gross margins the.
The growth on the leap program is expected to exceed the total growth of the segment, implying a net reduction of revenue on the higher margin fixed price programs that make up the remainder of our segment revenue.
This will lead to a meaningful decline in our full year average gross margin.
Beyond the mix effects, we are seeing some impact from cost growth.
First similar to the <unk> segment, we are seeing inflation impacting all of our input costs.
While we are contractually insulated from cost increases on many of our raw materials that is not true of all the materials, we consume nor is it typically true of labor and logistics.
As a result, we will see inflation driven increases in both cost of goods sold and SG&A.
Second we expect to return to normal travel.
And third we continue to invest in both R&D and sales and marketing.
Dominantly to support near term identified pursuits.
While these investments will depressed near term profitability, we believe that the long term benefits more than justify the expense.
Overall, we are providing initial 2022 guidance for engineered composites, adjusted EBITDA of $65 million to $75 million.
At the total company level, we are providing initial 2022 guidance as follows.
Revenue of between 920 and $960 million.
Effective income tax rate of 29% to 31%.
Depreciation and amortization roughly flat with this year at $75 million.
Capital expenditures in the range of 75% to $85 million.
GAAP and adjusted earnings per share of between $2 80 and $3.
<unk>.
And adjusted EBITDA of between 215 $245 million.
I would like to add a few clarifying explanations for some of the company level guidance items.
First our tax rate guidance is a little higher than where we finished last year move.
Most of this increase is driven by expected higher withholding taxes as we return cash from certain overseas jurisdictions and the <unk>.
Fact that we cannot forecast discrete items, which ended up being positive in 2021.
Second.
A significant portion of the increase in capital expenditures is in support of the CH 53, K after transition program.
Third given the uncertainties around when and how many additional shares we might repurchase and the balance of the year, we have not assumed any such activity in our EPS guidance. So our EPS guidance is based on the latest share count of about $31 9 million shares which includes the impact of only <unk> <unk>.
<unk> activity already completed in the first quarter.
And fourth the companywide adjusted EBITDA implies a higher level of corporate spending compared to guidance in prior years.
While some of that expected expense growth as wage inflation due to current labor market conditions significant portion of the increase was driven by higher cyber security investments.
While we do not provide explicit cash flow guidance, we expect free cash flow to be no more than $100 million in 2022 due to the rise in capital expenditures and the significant investment in new programs, most notably the CH 53, K App transition program.
Returning to the present, we are very pleased with how the company performed in 2021. Overall. We are also excited about the long term positioning of both segments and look forward to delivering another strong year of performance in 2022.
With that I would like to open the call for questions Alan.
Thank you ladies and gentlemen, if you do have any questions. Please press one then zero on your Touchtone phone.
Youll hearing indications you've been placed into queue and you may remove yourself from the queue by repeating the <unk> zero command.
If youre using a speakerphone, we ask you to please pickup your handset and to make certain that your phone is on muted before pressing antibodies.
Again for questions Press, one then zero at this time.
Our first question will come from the line of Steve Tusa with Jpmorgan go ahead. Please.
Yes, hi, good morning.
Good morning, Thank you.
Can you.
Just talk about.
And what you expect from a.
Kind of a volume basis for for the.
The 708 seven related business and the leaves just from a unit perspective.
Yes, maybe just a little bit Steve right upfront.
From where we said we're running at very low levels, and we're going to continue to run at a low level.
Our customers work with us to keep the line running at a rate where we can actually run it. So we're running at about as low as we can.
To not lose the technical capability that we have in the manufacturing process.
Yes, we're running at very low single digit rate in terms of units per month at we do anticipate that there may be periods during the year, where we have to pause production completely although as bill has mentioned we are doing everything we can to level load the plant but.
So I'm not sure if the average is that meaningful.
If I try and forecast what's going to happen in the back half of the year, but I would just say very low single digit right now.
On leap.
Our customer doesn't like us talking about.
Revenue dollars.
And unit set so we typically don't disclose disclose the actual number of units were.
We are producing but look that generally what we're seeing from Boeing which is right in that let's say 31 per month and what we're seeing from Airbus, which is more in the 50 rate per month recognizing that <unk>.
60% to 65% of those are equipped with that with leaps in the balance with the geared turbofan. That's roughly the demand level. We are expecting that is driving the production volume we expect.
And then anything on the working capital side.
You know that on the on the engine business that you guys.
See out there for this year anything moving around on that front, you mentioned capital Capex, but maybe just talk about working capital.
Yes.
We mentioned, we're close to our normal inventory levels on both leap <unk> and leap <unk> and it goes up and down a little bit quarter to quarter, but theres not a lot of.
Additional.
Contract asset value to unwind in that program this year, where we're more or less where we expect to finish 2022, the big working capital change in 2022 quite frankly is going to be on the CH CH 53, K App transition program as I've mentioned, we will be putting in the inventory the equivalent of over 30.
<unk> million dollars of revenue based.
Based on the anticipated revenue recognition approach on that contract based on the contract structure.
So that will be the biggest growth of working capital this year on the AC side.
Okay, great. Thanks, a lot.
Thanks, David.
Our next question will come from Gautam Khanna with Cowen go ahead. Please.
Hey, guys. Thanks.
Was wondering although 737, Max assumptions, you mentioned or sort of aligned with.
With the customer but.
At what point do you have to put more inventory back into the system.
Get ahead of it I'm just curious how.
How do you guys think youre shipments will track with.
When you look at sovereigns forecast.
And you talked about 2000 total leap deliveries in 'twenty three 1500 ish this year.
Do we.
What point do you guys want ahead of that if at all just given the.
The need to get inventory back into the channel.
Yes, right now we are close to our desired level of inventory, we're within spitting distance of it in 2022, we do not anticipate a need to build significant additional inventory.
That could come in future years, if both Boeing and Airbus continue to ramp up but thats not in our current forecast for 2020.
I'd say its were sort of more of a normal level of.
Inventory in stock just as a buffer and what will always carry some inventory as a buffer in the channel.
Don't see anything changing dramatically this year.
Okay.
Clear on the guidance.
So you are not assuming any catch ups with that right.
Favorable profit adjustments.
Yes, yes.
I understood the referenced.
No no we're not anticipating any significant there is a normal level of cost savings and that would be bale to all of our planning assumptions, but in terms of the outsized.
Out of period.
Profit increases no.
There are no material ones assumed in 2022.
Okay.
The last one for me just on.
F 35 at one point you guys thought it would be a $20 million headwind for 2000.
20 ships that I believe I can't remember, but.
What is the impact this year and then what are you.
If you could quantify the dollar value and then what do you think.
What happens in two three years do we recover all of that.
So in 2021 were down slightly from 2020, I think we put out a number externally on F 35 is about $85 million.
In 2020 and down slightly in 2021 and now we see this $15 million reduction we believe the primary driver up to $15 million is inventory destocking.
Both.
At the OEM level and also at the at the depot give sustainment level.
And so we would expect that largely to be onetime as as that the stocks that we would then start to replenish and but we don't have clear a clear insight yet into our customers' order level for 2023, but we would certainly expect to rebound from 2022.
Assuming thanks, a lot this reduction does materialize in 2022 as we expect.
Sure Okay. Thank you.
Thanks Scott.
Next we will go to the line of Ron Epstein with Bank of America.
Hey, good morning, guys.
I wanted to follow up on your commentary on the frames for 787.
What are you seeing there.
Where do you expect those rates to go as we go through the year into next year.
It's a hard.
A question and answer on where kind of taken a periods first call. It six months at a time here. We're our outlook for this year is really just to run at a low rate.
Working with our customers.
And the channel and producing at a rate where we can keep the technology going but as Stephen pointed out running mid single digits is kind of how we expected a year ago. We're.
We're hoping it gets going after that in the next year, but it would be hard for us to opine on what that looks like.
Ron to give you an idea.
In fact, if you if you go back before the decline.
When Boeing is producing more in the 13 ships at some <unk>.
<unk> units a month.
Range, our revenue is north of $50 million as we mentioned our revenue was less than $10 million in 2021, and we expect it to be flat to down in 2022 to give you an idea.
We're less than a fifth of the revenue so you could.
It's a fixed price program you could.
Just do the math and get a rough indications that we're somewhere in that two to three ship sets on average per month.
Gotcha Gotcha Gotcha.
Then on the changing gears here on the.
The machine clothing side.
As economy continues to recover and people get out and start.
Living their lives again, maybe in a more normal fashion do you have any sense of.
What that's going to do to that business.
You're expecting I mean.
Downward pressure upward pressure.
Just at a very high level, how are you thinking about that.
Yes interesting question Theres, a mix thats going to.
It's going to take place.
Way from home business that was has suffered over the last couple of years will probably come back some more.
And then.
We've already seen and if you look at the industry tissue for instance had kind of a flat to down year in 'twenty, one because it was such a high growth year in 'twenty with everybody running after the grocery store to buy extra tissue. So that that will come back in line. So I think it will come off the sort of the slowness of 'twenty, one so going.
Forward things things look pretty good one area. We're cautious ownership is has there been some inventory built up but I think globally, the demand looks pretty solid going forward.
Got it got it got it and then maybe just one last one if I can.
Your input costs on the aerospace side does that pass through to your customers or how does that work on your raw materials.
Yes look it really varies Ron or certain programs, obviously in a program like leap since it's more of a cost type program.
Pass through for other contracts, where we're buying the raw materials.
And enabled contracts negotiated by our customer and therefore that pricing is a pass through but to be clear on those sorts of contracts. There are still a lot of raw materials non end item raw materials that don't that aren't the radisson or five that are in the finished product but that are used in the production of the prop.
Whether that be vacuum bags or or gloves or release agents like we typically do not have coverage for those.
And we do not have coverage even for.
Fiber and resin on 100% of our use of such materials, what we do on a lot and obviously labor at all.
Other non the leap contract, where it's cost tight labor inflation is not typically a path through either so it's a mixed bag.
The resin and fiber largely protected.
Lower input costs at not protected other non leap.
Got it great. Thank you guys.
Thanks, Rob.
And if there are any additional questions. Please take this opportunity now to press. One then zero on your Touchtone phone.
We will go to the line of Peter Kubicki with Alembic capital Pardon Me Alembic Global go ahead. Please.
Hey, good morning, everyone.
Good morning.
Stephen I'm trying to just think through kind of where I guess EBITDA margin could go AUC you guys just talk that a little bit, but you know from.
From the standpoint of leap likely to be your kind of most meaningful growth program through the mid term.
Cost plus program I know there are some.
Yeah.
Nietzsche type of contract terms on that how do we think about where margins could go at AUC given given the positive outlook for leap.
Yes look we're seeing great growth in leap over let's say the next 12 to 24 months as the narrow body recovers.
And during that timeframe it will put some downward pressure on those margins. However.
During the back half of that 12 to 24 months and certainly beyond that 24 months, we expect to see a lot of growth on fixed price programs as CH 53, K, particularly now with the addition of the App transition content.
F 35, we do.
While it is not within this calendar year.
Depending on how Boeing does maybe not even within next calendar year, we do expect to see a rebound in the seven to eight seven program. We still think Thats a fantastic aircraft, we're still very happy to be on that platform.
So as those rebound at those will offset some of the dilutive impact we're seeing of the growth in leap over the next 12 to 24 months. So I think you're seeing it at data.
A dip in margins, particularly this year, but I do expect to see those margins.
<unk> to increase again.
Beyond this year and maybe.
Into the middle half of next year is as leap continues to outgrow itself. So I think we will start to get back. Our goal has always been north of 20% margins in that business clearly, we peaked well north of that in 2019 and 2020.
Our goal is to get to.
Gradually get back to those again or more.
Sustained levels, well above that 20%, but in the very short term that the lead growth is just too much of a challenge.
Okay, Okay, and then just given.
The relationship you have with Lockheed Sikorsky right now with the CH 50 <unk>.
Do you have a similar relationship with them on the army.
Programs flora in pharma.
And do you guys view those as big opportunities.
And any color you could provide there would be great.
Yes, certainly we're interested in peat and their relationship with Sikorsky is so important to us. So we're going to keep working that we're very interested in those programs going forward.
As we talked about with advanced composites, one of the great benefits, we can bring three D woven composites into the actual design upfront.
We can really maximize the benefits we get from the material advantages. So that we're pretty excited about our relationship with of course the longer term.
Great. Thanks, guys.
Thanks Pete.
One moment for our next question.
That will come from the line of Michael <unk> with <unk> Securities Go ahead. Please.
Hey, good morning, guys. Thanks for taking my questions here and thanks for all the detail here on 22.
But not to not to blow right past 'twenty two.
AEG revenues can you get back to $450 million.
'twenty three.
<unk>.
Very healthy 32% growth rate.
At the midpoint of this year's guidance.
I'm just wondering.
With unknowns around the 787 wide bodies in general.
Just even where narrow body production's going to.
Go from here.
What gives you that confidence to get back to that to that.
Presumably the 19.
You guys were overbuilding to catch up to the engine manufacturers to support the rate. So I'm just trying to figure out what kind of line of sight you have into that growth rate into 'twenty three.
Look there's always some uncertainty Mike.
It's.
We're not to stage for providing full.
Formal guidance for 2023, yet and we'll see where we sit 12 months now, but certainly on a risk adjusted basis.
We see good line of sight to the $4 50.
You have to realize.
If you reference back to 2019, clearly we were building at very high rates on the engine side in 2019.
As we look at 'twenty two 'twenty three we see a lot of new business that we did not have in 'twenty.
2019, not only the app transition, but other programs.
Which we have been successful or expect to be successful.
In the coming months and.
So.
I think that we have I.
I would say we have.
Better than average line of sight, but theres, obviously, no certainty and looking out 12 to 24 months and in this sort of market and we are making projections of what we think will happen on 737 on 787.
On the other programs.
I'd say, we have built in some amount of risk in those programs, but there could always be downside to that outlook at this stage.
Are there are there certain.
Program.
Milestones, we should track I mean, clearly youre, assuming narrow body rates get to some monthly level I don't know if we need to see.
<unk>.
Really start to ramp up and you mentioned that the new programs.
Anything else I mean.
If.
If we see more.
Max rates get to 42 and hold 42 into next year. For example is that enough to get to $450 million.
Yes, we're certainly not expecting rates on any program above what the primes published rates have and in some cases.
We have factored that somewhat certainly on the program like GE Nymex, while we expect that to be a great program in the future that's not a near term revenue drivers. So that's not a material portion of our of our 'twenty, even 2023 outlook at this stage.
So.
We're not making any heroic assumptions on rate to get to that 400, no. It's a pretty conservative buildup program by program number of aircraft by number of aircrafts looking at things like the growth and the CH 53, K even for the existing work that we already do today.
Got it got it that's helpful. And then just I think I'm pretty clear on this.
The margin pressure in 'twenty, two youre getting some good topline growth youre getting that EBITDA margin compression.
Sounds really liked its just overall mix with more of your cost plus.
Work ramping up and then.
Is there significant.
Called out the CH 50 <unk> program.
$30 million of nonrecurring, but I'm, assuming that's going to be.
Sort of dilutive in even more of a margin headwind as you ramp that up in the beginning of the year here in 'twenty two.
Yes, no we wont be recognizing any revenue or profit on that here in 2022, I think the real way to think about.
The mix is it take F 35, we said it's down $15 million.
And that's a fixed price programs, we have said before that typically fixed price programs have a higher average gross margins than leap.
Which is growing but that's at the average level the way to think about the decremental margins on fixed price programs, obviously, not only delivering the average margin, but it's absorbing some fixed costs, which is no longer does.
So the decremental gross margins.
We've talked before that it is not unusual on fixed price programs for there to be decremental or incremental.
Gross margins in 30%, 40% range. After you factor in the fixed cost absorption of the programs so losing that $15 million of of revenue does the significant loss of EBITDA that goes with it on the flip side as leap grows because of the fact that leap where covers all of its fixed.
Irrespective of volume the incremental gross margin on leap is effectively equal to the average gross margin on leap, we don't get those economies. So those benefits from the app from additional volume.
And so you're adding revenue.
Somewhat lower average gross margin, but losing revenue at a far higher decremental gross margin on the fixed price programs and Thats whats driving that the lack of EBITDA growth.
The increased revenue.
Yes, perfect makes sense guys.
Appreciate the color thanks, a lot.
Thanks, Mike.
And with no further questions in queue I'll turn the conference back to Bill Higgins.
Well. Thank you everyone for joining us on our call today. We appreciate your continued 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. His phone number is 6303 $305 97, Thank you and have a good day.
Ladies and gentlemen, this conference is available for replay beginning today February 16th 2022 at five P M and running until April 16th 2022 at midnight during that time, you may access the AT&T replay service by dialing toll free 866 20710.
One if you're unable to dial the toll free number you could use area code four zero to 90 700 847, the access code for the call is 90 413320.
I'll repeat those numbers the toll free number is 806 2071041.
Also area code four zero to 90, 700 847 with the access code 90 413320.
We will conclude your conference call for today. Thank you for your participation and for using AT&T event Teleconferencing you may now disconnect.