Q1 2022 Albany International Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Albany International first quarter earnings call.
At this time your telephone lines are in a listen only mode. Later, there will be an opportunity for questions and answers with instructions given at that time.
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A reminder, your conference call today is being recorded.
I'll now turn the conference call over to your host director of Investor Relations. John Hobbs go ahead. Please.
Thank you Alan and good morning, everyone.
Welcome to Albany Internationals first quarter 2022 conference call.
As a reminder for those listening on the call. Please refer to our press release issued last night detailing our quarterly financial results contained.
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.
For the purposes. 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 uncertainties, among which are the potential effects of the COVID-19 pandemic and the.
Potential effects of the Russian invasion of Ukraine on our operations.
Markets we serve.
Our financial results.
For a full discussion, including including a reconciliation of non-GAAP measures. We may use on the call to their most comparable GAAP measures. Please refer to both our earnings release of April 25th 2022, 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 and good morning, and welcome everyone and thank you for joining our first earnings call of 2022 today I'll comment on our first quarter results, our strategic progress in corporate governance, and Stephen will then cover our financial results in more detail.
First let me express our concern for the people of Ukraine. Following the Russian invasion, the will of the Ukrainian people on their resistance is inspiring and we hope. This census war comes to an end soon like many companies Albany has ceased doing business in Russia, specifically, we have stopped shipping machine clothing belts to paper companies in Russia and were withdrawn.
And from a very small joint venture in Russia that produced belts for local paper manufacturers.
Our business exposure in Ukraine is small we have no employees, there and we typically export a modest amount of machine clothing to paper, making customers there and we look forward to continuing to support those customers in the future.
The combined effects had a minor impact on our first quarter results, which Stephen will outline.
Our 2022 outlook assumes no rush in sales moving forward.
Suffice it to say 2022 has already started out as another year with unpredictable events the effects of which may not be entirely visibly at <unk>.
Despite the unpredictable environment I'm pleased to report strong revenue growth in the first quarter in both our business segments. In fact, our aerospace composite segment grew net sales by more than 20% in our machine clothing segment posted mid single digit growth compared to the first quarter last year.
In the first quarter, we achieved GAAP EPS of <unk> 87 per share up <unk> <unk> per share from last year's 85, and adjusted EPS of <unk> 91 per share versus <unk> 87 cents per share adjusted EPS last year.
Most impressive is our team's ability to be adaptive to work together to overcome difficult supply chain challenges logistics barriers material shortages, while replanting operations to deliver to our customers on time and.
In machine clothing. For example, we continue to see delays of raw material deliveries from our suppliers, but we're still able to hit record levels of output improve absorption and productivity delivered our customers on time and produce excellent financial results. This took a lot of extra effort or can o'clock across the globe to share materials in our rebalanced fact.
<unk> capacity and output we have great teams that are performing exceptionally well.
On the cost front, we're closely monitoring and actively managing inflationary pressures in materials wages logistics and energy.
Passing through cost increases where we can.
Inflationary cost increases continued into Q2 and are expected to impact our profitability for the year overall.
For example rail transport from China to Europe across Russia is no longer viable and has been replaced by boat transport, adding cost and doubling the shipping time.
Truck transportation within China has stymied by pandemic, Lockdowns and driver Quarantines and truck availability in Europe is impacted by the loss of Ukrainian truck drivers.
Who returned home contributing to an estimated 10% reduction of truck transport capacity in Western Europe on a positive note I'm confident we will continue to be nimble and flexible our supply chain and operations teams have demonstrated their agility by navigating the challenges of the last two years and the first quarter remarkably well.
Despite this unpredictable global environment, we're optimistic about our growth opportunities.
Our strategy is to invest in R&D and product development to drive organic growth to collaborate with key customers to design. The next generation of advanced materials for long term growth.
And to position Albany is the technology leader and partner of choice in both of our segments.
This means we must be good at both developing advanced materials solutions and operational performance.
In machine clothing, we have a strong operating culture, we've earned a reputation for producing products of exceptional quality and durability for our customers.
We're the global technology and market share leader in paper machine clothing, a market, whose underlying long term demand trends are expected to grow with economic activity ecommerce trends and a secular shift toward renewable and recycled materials as paper replaces plastic.
In our engineered composites segment, our strategy is consistent to bring the next generation of advanced materials to market and to earn a reputation for operational excellence and great customer service it.
It started with our development of three D woven composites in collaboration with Safran on Leap engine fan blades and fan cases, the durability and performance of three D. Woven composites exceed the performance of any other fan blade materials titanium or two D.
Composite blade. Moreover, we achieved high rates of commercial production and demonstrated the commercial feasibility of three D woven composite components.
Our success with leap as a springboard to propagate the use of three D woven structures across the aircraft. We're excited about our long term opportunities for advanced really well in composites on the next generation airframe and engines.
Variety of OEM and tier one customers and partners.
In the near term, we're ramping up production on the leap program and preparing our factory for our most recent win the App transition for the Sikorsky CH 50 <unk> helicopter.
Which positions Albany is a major player and rotary aircrafts.
Layer into the future of these programs and opportunities lay the foundation for sustainable long term organic growth.
This strategy takes advantage of long term secular trends driven by climate change and energy efficiency. Our aim is to be at the center of this shift to lighter composite aircraft that are fuel efficient.
Now let me make a couple of comments about recent changes in our corporate governance first we're pleased to welcome two new members to our board of Directors, Christine Albert and Russell, Tony as part of our board refreshment process. We're excited to have Christine Russell joined Albany, They bring strategic operational technical leadership experience to the board.
With their collective experience and materials aerospace technology, and diversified global manufacturing, our governance strategic planning and growth capability is enhanced.
And second we've effectively transitioned Albany to a single class share structure, 100% of class B shares have now been converted to class a shares and all outstanding common stock is now class a therefore, all shareholders now have equal voting rights.
Our next step will be the formulary retirement of the dual class structure, and our bylaws, which we intend to bring to a shareholder vote in 2023, so with that I'll hand, the call over to Steven Steven.
Thank you Bill good morning to everyone.
I will talk first about the results for the quarter and then provide an update on our outlook for our business for the balance of the year.
For the first quarter total company net sales were $244 2 million and.
An increase of nine 8% compared to the $222 4 million delivered in the same quarter last year.
Adjusting for currency translation effects, principally the decline in the euro relative to the U S. Dollar net sales increased by 11, 5% year over year in the quarter.
In machine clothing also adjusting for currency translation effects net sales were up five 7% year over year driven by growth in all grades of product.
Engineered composites net sales again after adjusting for currency translation effects grew by 23, 1% with growth on leap and CH 53, K, partially offset by a decline on the F 35 platform.
During the quarter the leap program generated revenue of almost 38 million <unk>.
Compared to a little under $27 million in the same quarter last year.
Leap revenue was also up significantly sequentially as we have now completed the planned destocking of our finished goods.
We finished Q1 with less than 100 leap <unk> engine chipsets in stock in line with the safety stock levels required under our contract.
First quarter gross profit for the company was $91 6 million an increase of three 5% from the comparable period last year.
The overall gross margin declined by 130 basis points from 39, 8% to 37 eight.
5% of net sales caused mainly by the mix shift due to Aes <unk> topline growth outpacing that of the <unk> segment and a lower gross margin in AUC.
Within the <unk> segment gross margin was flat at 51, 5% of net sales as the drop through benefit of the increased revenue was fully offset by higher input costs and fully reserving about $600000 of width and finished goods that had been destined for Russian customers.
Within AUC gross margin declined from 16, 4% to 13, 6% of net sales caused primarily by a raw material and width, whereas RF mixed effects and a slightly larger net unfavorable change to long term contract profitability.
During the quarter raw material held at a third party storage facility was determined to have been stored in appropriately with temperature fluctuations that effectively consumed its useful life.
While we will pursue options for recovery of some or all of our loss. We made the determination to reserve $2 4 million in Q1 for the raw material and the whip into which.
Suspect material had been incorporated.
To the extent that our recovery initiatives are successful in the future quarter, we would at that time reduce the reserved appropriately.
First quarter, selling technical general and research expenses increased from $46 7 million in the prior year quarter to $52 $6 million in the current quarter and increased as a percentage of net sales from 21.0% to 21, 5% caused primarily.
<unk> by the impact of our decision to exit the Russian market and higher R&D expenses.
During the quarter, we fully reserved about $1 2 million in receivables from our Russian customers.
Total operating income for the company was $38 8 million down from $41 8 million in the prior year quarter.
Machine clothing operating income decreased by about $700000 caused by the higher gross profit being more than offset by higher STG NR and restructuring expenses.
Meanwhile, AUC operating income decreased by about $1 7 million caused by lower gross profit and higher <unk> expense.
Other income and expense in the quarter netted to income of $3 9 million compared to expense of about $600000 in the same period last year.
The improvement was primarily driven by a more beneficial foreign currency revaluation effect in this quarter, partially offset by the write down of the $800000 net book value of our equity stake in our small Russian paper machine clothing joint venture.
With respect to the ladder, we have provided notice to our joint venture partner of our intention to fully exit that relationship.
The income tax rate for this quarter was 28, 1% compared to 26, 7% in the prior year quarter.
The higher rate this quarter is primarily due to the absence of the beneficial true up of estimated tax payments recognized in the first quarter last year.
Net income attributable to the company for the quarter was $27 7 million essentially flat compared to last year as the lower operating income and higher tax rate were only partially offset by the favorable change in other income and expense.
Earnings per share was <unk> 87, this quarter compared to 85 cents in the same period last year.
After adjusting for the impact of foreign currency revaluation gains and losses restructuring expenses, the discrete impact of exiting the Russian market.
Expenses associated with the <unk> acquisition and integration adjust.
Adjusted earnings per share was <unk> 91, this quarter compared to <unk> 87 last year.
Adjusted EBITDA increased slightly to 61 million for the most recent quarter compared to the same period last year.
Machine clothing, adjusted EBITDA was $57 7 million or 37, 4% of net sales this year up from $54 9 million or 37, 1% of net sales in the prior year quarter.
AUC adjusted EBITDA was $13 7 million or 15, 2% of net sales.
From last years, $16 7 million or 22, 6% of net sales.
During the quarter the company had negative free cash flow defined as net cash used in operating activities less capital expenditures of about $21 1 million. This was not at all unexpected as it is typical for the company to have negative cash flow in the first quarter due to seasonality and receipts.
And incentive compensation payments for performance in the past year.
This quarter's cash flow performance does not change our outlook for free cash flow for the full year.
During the first quarter, we returned over $50 million of cash to our investors comprised of over $6 million in regular dividends and almost $44 million in share repurchases.
We repurchased almost 515000 shares during the first quarter at an average price of $85 35.
Share repurchases have continued in Q2.
Our net leverage ratio is now about 0.5 to.
Which still provides a significant flexibility to return cash to shareholders without impairing our ability to make street strategic investments should an opportunity arise.
I would now like to provide an update on our financial guidance for 2022.
Machine clothing had a very good quarter with strong top line more than making up for some of the headwinds we talked about on the prior call, including input cost increases and the weak euro.
However, we continue to see risks in the balance of the year.
First it is unlikely that the high sales performance. We saw this year will continue at the same level.
We believe that the revenue growth we saw this quarter in both the North American and European markets exceeded underlying demand and was driven by timing of certain customer requirements.
In future quarters, we do not expect to be.
They build to fully offset the impact of input cost inflation through higher revenue driving increased drop through.
This challenge is exacerbated by the fact that inflation is still rising.
In fact in the 10 weeks since we issued our initial financial guidance for 2022, our assessment of the impact of inflation on the segment's bottom line for the full year has risen by about $4 million.
Second the risk of the Destocking cycle, we discussed on our last call remains.
Many of our customers have continued to operate with a higher than normal safety stock of our finished goods at our facilities driven by fear of future supply chain disruptions.
Kevin given global events, including the invasion of Ukraine, and resulting sanctions the inflationary environment and the lingering impact of the pandemic those fears did not abate in the first quarter.
We do not know when or to what extent that risk will manifest itself in terms of impacts to our revenue, but it is still possible we will see some impact in 2022.
Third we have new challenges, resulting from Russia's invasion of Ukraine, and the tragedy that is unfolding there.
Direct impacts of our exit from the Russian market include both the write offs and reserves that we recognized in the first quarter.
And the loss of approximately $10 million in sales per year.
As Bill noted there also have been significant disruptions the cost and availability of shipping options between Asia and Europe .
Potential indirect impacts such as effects on our supply chain or to global demand for our customers' end products are unknown at this time, but could be significant.
As a result, we are maintaining our previously issued segment guidance for net sales of $590 million to $610 million and adjusted EBITDA of $205 million to $225 million.
Turning to engineered composites, we are seeing no meaningful direct impacts from Russia's invasion of Ukraine as the segment is almost no Russia sourced revenue.
However, there are secondary risks, most notably that our customers could see disruptions elsewhere in their supply chains.
Or that the potential economic impact of the conflict and the sanction regime could disrupt the recovery in the global aerospace market.
At this time, while it is not possible to assess the size or probability of the impact of these risks on the segment's top line performance.
We do not expect meaningful impact from those risks on our 2022 segment outlook.
The first quarter was challenging from an underlying profitability perspective for the segment as the lower revenue on some fixed price programs, most notably on the F. 35 program meant that we did not see any improvement in gross margin from the higher revenue this quarter compared to last year.
This effect combined with the raw material related reserve and the previously announced higher investments in new business pursuits, and R&D caused us to temporarily deliver an adjusted EBITDA margin under 20%.
For the full year, we still expect to deliver an adjusted EBITDA margin of over 20% for the segment.
Therefore, we are maintaining our segment guidance for revenue of $330 million to $350 million and adjusted EBITDA of $65 million to $75 million.
At the total company level, we are maintaining most of our previously issued full year guidance as follows.
Revenue of between 920, and 960 million unchanged.
Effective income tax rate of 29%, 31% unchanged.
Appreciate and an amortization of $75 million unchanged.
Capital expenditures in the range of 75 to 85 million unchanged.
GAAP earnings per share of between $2 76, and $3 26 updated from prior guidance of between $2 80, and $3 30.
Adjusted earnings per share between $2 80, and $3 30.
Also unchanged.
Adjusted EBITDA of between $215 million and 245 million also unchanged.
Returning to the present it does remain a challenging environment.
But the past three years, our employees have had to deal with the effects of the 737 Max grounding.
Pandemic, the inflationary environment and now the Ukrainian tried crisis.
Through it all our employees have performed admirably.
Particularly our production management supply chain and human resources personnel, who have had to manage through a constantly changing environment, where every week has brought new challenges.
The company owes all of our employees a debt of gratitude for their hard work.
Their diligence and persistence and at all times with our commitment to safety.
With that I would like to open the call for questions Alan.
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We will first go to the line of Pizza Kubicki with Alembic Global go ahead.
New IEC in particular, it seemed like the ramp on leap.
It was really strong.
Over 300 chipsets are so in the corner.
And so I'm wondering if you think the visibility for that ramp to continue is really good at that point there were some questions about <unk>.
China accepting deliveries or not but from year end anyway does it seem like kind of all systems go on leap.
Yeah, I'm sorry, we missed the first part of your question I don't know at least at our end and the first couple of things, but I think I got the gist of your question.
Look good leap as we said was up fairly significantly this this quarter.
Certainly compared to Q1 of last year.
I'm not sure it's quite that the 300 chipsets you referenced but.
Yeah.
A&P of talking about total number of shipments.
Our total number of units produced.
Probably in the right directional range at least.
We we certainly feel we have.
As much insight into demand as our direct customer Safran has and we get regular updates and safran.
Our outlook for it I am not sure that right now that the outlook is heavily dependent on the Chinese market reopening, although clearly at some point it will be that is a significant market as you know for single aisle aircraft and we would expect to you, though at some point in the future.
Again, a 730 sevens <unk> hundred <unk> to get out of the selling there and in quantities comparable to what they were that we saw before the crisis at right now I would say that we think our outlook into the balance of this year is good.
As we get into 2023, it's less hazy or more hazy I should say.
But I don't think star significant risks to our outlook for this year.
Okay got it one last one for me on machine clothing.
Also kind of related to China, and the global economy.
With regard to the Lockdowns in China.
How much of that how much of that negatively impact revenue wise in the quarter and then.
There are some concerns about the potential for a global recession, maybe early next year late this year and machine clothing, I think is at least partially viewed as sort of a <unk>.
Staple product if you will maybe modestly discretionary, but how are you guys thinking about that.
The potential for.
A meaningful slowdown in machine clothing late this year next year with the inventory in the channel with the potential for you know the economy slowing it's.
It's been sort of a mixed record I think historically, if I look back so what what are your thoughts as you see it today.
Yes, Pete let me start with that so far machine clothing has performed remarkably well and.
We keep in fact, we're asking again last night are we seeing any effects in China with the Lockdowns now extending across Beijing. In addition to Shanghai and other places our facilities in China have been up and running we've been able to keep them operating so far so good so.
It feels pretty solid right now I think we're watching the customers that we think have built up extra inventory because of the supply chain sort of risk mitigation that will probably continue for a little bit longer while we're seeing these transit transport interruptions and bottlenecks and delays.
But I think for now machine clothing looks pretty solid as we go into the year packaging tissue has been strong, particularly in North America, what happens in China longer term is there a recession, there's a big questions I'd like to know the answers to because as we mentioned.
In the commentary.
Just been through.
The Max that <unk>.
Pandemic and now this.
<unk> effects. So we hope we don't go into a recession, but we don't see any evidence of it affecting us just yet.
<unk> probably be to your question about the excess inventory theres probably.
All of our product in the channel in the tens of millions of dollars in total.
Extra product out there.
That would be presumably consumed forest, where we did see some slowdown and just kind of size the risk the immediate risk level. As you say, we are a staple product, but as a consumable product we do see a much more muted cycle, then and many members of the pulp and paper.
Our supply chain, which will provide a more capital intensive products.
Our belts wear out.
And if you look at prior cycles, but the volume consumed even during prior economic cycles, while it clearly goes down it is a cyclical business. It's a much more muted cycle than many cyclical industries.
Yeah, Stephen I mean tens of millions so thats on the order of 10% of your own machine clothing revenue that's kind of.
I wouldn't say as high as 10%.
Okay. Okay. Okay, alright, thanks, so much guys.
Our next question will go to line of Peter Arment with Baird.
Go ahead, please hey, good morning mine, Belgium.
A question is really on just kind of circle, a little bit on what Pete was asking about on M. C. Just on kind of the top line cadence I guess historically your second quarter has always been a little bit stronger seasonality and I'm. Just wondering you know you mentioned so there was some timing on some shipments with North America and Europe is there how should we be thinking about just.
The cadence do we still think we're growing sequentially or you know it seems like it would be a tough year over year number when you look at the second quarter last year in M. C on the topline.
Yeah, I don't know that we're looking for big growth I mean, we're holding our guidance things feel pretty steady our bookings coming into the quarter are solid. So I think we feel like we're in pretty good shape, but I.
I don't think were expecting a big step up here, yes, Peter we try not to get involved in giving quarterly guidance.
But as Bill says what we are we are in a strong position heading into the second quarter certainly our order book is strong all involved.
You know probably on balance a little weaker and that might be at the same time last year and.
So were expecting it.
Another blowout quarter to date.
Yes.
We expect to see it continue to perform well, but as you mentioned Q2 was a tough comp.
Okay. Now that's helpful. I just wanted to and then just Steve just on kind of FX can you remind us a little bit kind of the dollar obviously continues to really strengthen a lot of against a lot of other currencies around the world.
What your exposures on that front.
Yeah, you know against the Euro we had sales of over $100 million in euros, and so clearly at the top line, we see a drag with the euro having come down last year, we had an average close to $1 20.
In terms of that date.
Oh dollar exchange rate and now we're down.
Hello.
A little north of priority quite frankly, bounces around but down in that dollars $6 seven range.
<unk> adds so top line over $100 million at the bottom line level in a world long the euro.
Probably no.
Round numbers in that let's say close to $50 million range.
And so.
As you look at that.
Over 10% decrease we've seen this year in the euro at the end of that that will drive north of $5 million of out of impact to the bottom line.
Great. Thanks, so much.
Our next question will come from the line of John <unk> with Sidoti <unk> Company go ahead.
Good morning, guys.
On the higher inflationary costs I'm curious about what your staffing level looks at looks like between the two segments. You are you fully staffed.
Or are you still having any trouble kind of bring people on board.
I would say in machine clothing, we are fully staffed John .
AAC, we're adding folks for both the leap production growth as quickly as we look to exit this year going into next year for the future and then.
We're building the CH 50, <unk> K production facility in Salt Lake City, where we're adding people as well. So we are staffing up folks there in very tight labor markets.
And when do you expect that to be done though.
Whether the lead production I think it will go into next year. The CH 50, <unk> K is probably probably most of it this year.
Okay.
And just go back to the China question, maybe I missed it how much revenue was deferred out of the first quarter into the second or third.
Or was there any because as you can see we are fully operational.
So in China.
We are fully operational in the first quarter and nor did we see any material impact to our customers either our operations or the demand in the first quarter so far.
First quarter was relatively unimpeded by.
What's going on with Covid in China at the current time.
Not to say that I could not be impact to Q2, and Theres clearly theres some news about it spreading to other cities.
And seeing that kind of stringent lockdown, we saw on Shanghai. Most recently at but certainly there was no impact to our Q1 results no deferred revenue.
Alright, Thanks, guys I appreciate it.
Okay.
Our next question will come from the line of Gautam Khanna with Cowen go ahead. Please.
Hi, How's it going guys I may have missed this.
Pardon me, if I ask a repeat question.
On the.
One the leap one the visibility that you guys have how firm is that schedule just SKU.
I was just wondering how much it's changed around over the last six months and.
How far of a forecast for or do you get from Safran almost.
Bill kind of comfortable with the 2000.
Deliveries of total lead product that they've talked about for 2023.
That's my first question.
Yes, so I think maybe the context of is that our production isn't directly linked to what Boeing is doing or even engine shipments we work it out with safran the production we're going to.
Planned for the year, we set that in motion and January kick it off and in some years like when the pandemic it got changed quite a bit but the share it's pretty steady. So we're working to a production plan that we've agreed to a safran that might be a little different than what youre seeing with Boeing.
Okay.
Okay and then.
One of the things we hear from a number of industrial companies is.
Inflation in resins, and inflation and availability of resins has come down.
Has that impacted any of the carbon fiber prepaid product.
You guys are sourcing or is that all.
Well sourced and you don't see the inflation in those inputs.
We are seeing inflation as I mentioned.
Generally, we're seeing inflation cost of materials, and resins and yarns and Chemistries.
And in both AUC NMC, both segments are managing it on a day. It's a 24 seven job. So if you were to sit in our our business reviews with our supply chain teams. I mean, you could write a book on it it's amazing the effort that goes into keeping.
Production going.
In the machine clothing segment, we actually manufacture some of our own polymers.
And because machine clothing products are all custom made we buy a lot of different size and types of polymers. So we're ramping up our internal production to.
To shore up the needs that we have there and then in the AE side AUC side, we work with very large Oems that are helping us safran Sikorsky and whatnot when we buy materials, yes.
For most of the end item raw materials resins carbon fiber, whether it's prepaid or district, where all carbon fiber that we use in in AUC.
There are long term contracts entered with those suppliers by our customers and we are buying under those agreements.
And so we're a little bit insulated from the impact of inflation in AUC not completely certainly a lot of the non end item materials, whether it be gloves release agents vacuum bags everything else that goes into making parts. We are procuring on the open market and are subject to inflation just like any company.
But on the a lot of the end item raw materials that are in the finished product as say the board under contracts our customers negotiate.
And we along with our.
The supplier to those customers are buying under that master contract.
That's very helpful.
And then just on 77 could you talk a little bit about what your expectations are for the year, where we are in that destock and have you seen any uptick.
Yes.
Production were accused of you guys yes.
Yeah, we don't have it in the commentary because we're just kind of running the line to keep it warm and that's sort of the plan for this year. So we have very little in the plan for our revenue in the quarter on <unk> was under $2 million got them. So it's <unk>.
And we finished last year close to 10, so view that as essentially flat because it's a little noisy quarter to quarter. We are seeing no uptake right now it is keep the line warm and operate at the lowest level possible.
Great and one last one we've talked about Russia, Ukraine.
Risk is there any forthcoming opportunities that are created by it.
It was.
I don't know if any of your customers sourcing.
Russia, and Ukraine that may want to create their own infrastructure outside of the region machine clothing side or is it just a potential negative.
I don't see any opportunity at this point.
It's probably slowed down Europe , a little bit more North America has been very strong I was happy to see that the strike in Finland ended, but I don't see any upside from the Russian invasion.
Thanks, guys.
Thank you Catherine.
Our next question will come from the line of Michael <unk> with Truest Securities go ahead.
Hey, good morning, guys. Thanks for taking the questions here, just I dunno bullish Steven.
All the commentary around machine clothing.
Risks seemingly.
Significantly increasing you've got the Russia headwind.
Why not lower the guidance it seems like your commentary is much more biased to the downside there.
Well, we certainly had a very strong first quarter.
Which which puts us in a good position.
Cover as you know.
Some of that risk and allows the stay within the same guidance range. It's also quite frankly, Mike It's Q1.
We're one quarter through the year.
Aye.
There are many uncertainties in the balance of the year.
Unless we're quite.
Sure of how some of them are going to unfold. It feels a little early to be thinking about a change in guidance in either direction for either segment unless something is very short at this stage.
Okay, No Thats fair.
Can you kind of talked about inflation still rising just calling out those risks triggered.
Basket.
What about the.
Has anything changed with your confidence level of getting back to the $450 million.
In revenue and <unk> by 23 again.
Just given what's going on in the World and you know things what kind of bit more hazy here and any kind.
Kind of sentiment change there.
Sorry no.
Sentiment change.
Is there more just global uncertainty than when we last spoke two five months ago sure add Theres clearly more global uncertainty with the invasion in the sanctions regime, that's in place at but right now we.
Certainly.
Not kicking ourselves, we're grabbing and making that statement two five months ago, Mike. So I think we still feel generally good about that.
And we will see how this year unfolds and you obviously give you better guidance for 2023, when we when we get together in nine months.
And I think taking the longer view as I said in my commentary.
We're optimistic because we're working on programs we have.
<unk> talked about a number that CH 53, K being the most recent win hypersonic, we've talked about our collaboration on spirit last year getting that off the ground. There's some other ones that we haven't talked about so we're just optimistic longer term that we've got some growth in front of us.
Got it makes sense and then just one more if I can just on the.
The AEG margins, obviously weaker in the quarter, you talked about the 20% sounded like.
Some just under absorption on the on the joint strike fighter and <unk>.
Presumably.
The write down of some of the assets may have been in there, but whats it going to take you know specifically I guess in terms of programs and volume to drive those margins is it.
Continued leap it certainly doesn't sound like you know 787 is going to be a contributor or is it joint strike fighter ramping whats going to drive that EBITDA margin as we as we move through the year here.
Yes, if you look Mike if you look at the shortfall, let's say to that 20% level during the quarter.
Roughly half of it close enough to little over half of it was driven by this reserve we had to take on raw material.
And our with related to the.
To the to that issue that that should not be a repeating issue. So.
So that gets us back halfway there just just from the absence of that the rest as you say it was really from F 35, being particularly low this quarter at all.
Our certainly our plan is not dependent on.
There are enormous.
Recovery programs beyond what we're seeing today.
So I do not think that getting back to a 20% EBITDA are require some you know.
It's very easy for me to say herculean effort I'm sure for the guys in the operating segment everyday as herculean effort. These days, but it doesn't require enormous leaps. We think we're on a solid path to get to that is what I am saying, Mike. It's not like if you had a falling off a log and but there is certainly a solid path.
To delivering that without some heroic assumptions around demand beyond what the trends were already seeing in the market.
Got it got it makes sense, thanks, guys I'll jump back in queue.
It's Mike.
As a reminder, ladies and gentlemen, if you do have questions press. One then zero on your Touchtone phone at this time, we will go next to the line of Pizza Kubicki with Alembic Global for a follow up question.
Yes, just one follow up guys.
Since we have a defense budget now and it looks like a little bit better outlook I just wanted to get kind of your updated thoughts on.
Bill I think you touched on missiles in general on hypersonic missiles in particular.
I know, there's been testing going on across the industry, but but how soon should we think that.
Jazz Oh, my Gosh, how shall we think the hypersonic missile category.
It could be a pause.
Part of the growth story for you.
Okay.
We've got a ways to go still on that.
Probably could give more color on that towards the end of the year into next year.
It's a development program right now so.
Without saying anything we can say that.
Publicly out there various companies talking about testing plans over the next 24 months lets say 18 to 24 months.
I would not expect material revenue for us before that time period.
Hopefully some programs will go into production where it certainly.
Toward toward the middle of the decade.
We could see some meaningful revenue.
Okay, Yeah, no I know.
Barry I just wanted to get it.
I was just curious if visibility had improved since we had a.
Better budget outlook. So thanks for the color.
Yep. Thanks.
And speakers, we have no one else in queue at this time.
Okay.
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