Q1 2023 Albany International Corp. Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Albany International first quarter 'twenty to 'twenty three earnings conference call.
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I'll now turn the conference call over to your host John Hobbs Director of Investor Relations go ahead Sir.
Okay.
Thank you Alan and good morning, everyone welcome to Albany Internationals first quarter 2023 conference call.
As a reminder for those listening on the call. Please refer to our press release issued last night detailing our quarterly financial results contained in the text of the release is a notice regarding our forward looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP.
For the purposes of this conference call those things 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, which could cause actual results to differ from those expected or implied for a full discussion of these risks and uncertainties, including a reconciliation to non-GAAP measures. We may use on this call to their most comparable GAAP measures. Please refer.
For both the earnings release of April 25th 2023, as well as our SEC filings, including our 10-K.
Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks bill. Thank you John Good morning, and welcome everyone. Thank you for joining our first quarter earnings call. We're pleased to report another strong quarter and are off to a good start this year, both business segments executed well in line with our plan.
Total company sales grew more than 10% relative to our first quarter of last year, driven by strong organic growth from engineered composites.
Gross margins were nearly 37% and adjusted EBIDTA margins were 22%.
At the segment level machine clothing is first quarter sales were effectively unchanged year over year machine.
Machine clothing segment delivered excellent profitability again with gross margins over 50% and adjusted EBITDA margins exceeding 36% to put this in historical context as margins are in line with our five year averages our machine clothing operating teams continue to execute well and deliver these attractive levels of profitability. Despite.
<unk> and lingering supply chain challenges.
The engineered composites segment.
Achieved top line growth of approximately $26 million in the first quarter up nearly 30% compared to Q1 of 2022.
The growth is primarily driven by the Sikorsky CH 53, K helicopter program. Our lead program. In addition to contributions from smaller programs.
Adjusted EBITDA in this segment was $21 million up about $7 million from 2022's first quarter result.
In the past I've discussed our strategic goal is to become the partner of choice for our customers in both of our business segments.
In machine clothing, we're the leader in the paper machine clothing space and it's our job to remain firmly position as the partner of choice.
Our strategy is to invest in the next generation of products, our production processes and our technical sales and service teams. This is foundational to our well earned reputation for superior product performance reliability quality and customer service.
In AUC, we're continuing to build our brand our on time delivery and our product quality are becoming recognized as world class.
This customer recognition of Albany is a high performance supplier coupled with our composite material expertise has been key to securing more business with existing customers such as the CH 53, K F transition program, Sikorsky and new business with certain new customers.
Building on our growing reputation our commercialization team has significantly increased our bid and proposal pipeline our engineering and operations teams are working hard to convert the most attractive these opportunities organic growth for our business.
This pipeline of opportunities enhances our confidence that our organic growth strategy for the next few years is on track.
As we discussed on our last call our 2023 Capex program consists of investments driven by our organic growth in AUC. In addition, as part of our continued operational excellence, we're making a significant investment and production capabilities to drive productivity gains within AC NMC as well.
Turning to business development.
We recently announced the contract award from the U S Army in support of hypersonic development activities.
This award is a visible indication of the potential of our proprietary three D composite technology and what it could play in the demanding hypersonic environment.
AUC will be utilizing its near net shape <unk> technology to develop a carbon carbon structural solution, our thermal protection systems that have significant benefit in high temperature hypersonic applications.
When compared to competing technology technologies AUC <unk> solution provides unique thermal and structural performance advantages with superior affordability and scalability.
So we're off to a good start to the year, our operations are performing well and we're executing on our long term strategy.
Before moving onto the financial review I wanted to take a moment to thank Stephen Nolan for his contributions to the success of Albany International extend our best wishes for continued success in his new company now.
Now I'd like to formally welcome Rob Starr.
Who recently joined Albany is our Chief Financial Officer, Bob comes to Albany is a seasoned CFO with both public and private company experience. He knows the industries, we serve and his depth of experience will be instrumental in leading our finance organization and we're grateful to have him on board.
While many of you likely know Rob from his prior roles, we look forward to introducing him to the investment community in coming weeks.
Now with that I'll hand, the call over to Rob and I'll be back to wrap up.
Great. Thank you Bill and good morning, everyone I'm excited to be at Albany, and working closely with the team as we continue to execute our strategy of value creation for all of our stakeholders.
I have known Albany for some time and was attracted to the company for its financial strength operational discipline in leading edge technologies found these attributes evident in both segments, which I view as a clear differentiator in the market.
Across the organization there is a demonstrated foundation for success, which I am excited to help build upon.
The team has a collaborative culture and I've been impressed with their expertise and passion over the coming weeks I'll be visiting a number of sites and getting to know our team throughout the organization.
Turning to the quarter I will talk first about the results for the quarter and then provide our outlook for the rest of the year.
For the first quarter total company net sales were $269 1 million, an increase of 10, 2% compared to the $244 2 million delivered in the same quarter last year.
Adjusting for currency translation effects, principally the decline in the euro and the Chinese Yuan relative to the U S. Dollar net sales increased by 12, 2% year over year in the quarter.
In machine clothing also adjusting for currency translation effects net sales were slightly higher compared to the same period in 2022 with higher sales across all paper machine clothing grades offset by contraction in engineered fabrics as nonwoven demand has waned in the post pandemic environment.
Engineered composites net sales again after adjusting for currency translation effects grew by 33% driven primarily by growth in the CH 53, K an elite programs.
During the quarter CH 53, K generated generated revenues over 27 million up from $16 million in the same quarter last year.
While the ASC elite program generated revenue of about $43 million compared to $40 million last year.
First quarter gross profit for the company was $99 3 million.
Kris of eight 4% from the comparable period last year.
Overall gross margin declined modestly from 37, 5% to 36, 9% of net sales.
Caused primarily by the higher contribution from the AUC segment.
Within the M. C segment gross margin declined from 51, 5% to 58% of net sales.
Cause by higher input costs.
Within <unk>, the gross margin increase from 13.6% to 18.5% of net sales.
Primarily due to improved absorption in the absence of raw material write offs recorded in Q1, 2022 partially offset by losses on the new program.
During the quarter, we recognized an unfavorable net change of 600000 on estimated profitability on contracts similar in magnitude to that in the prior year quarter.
First quarter, selling technical general and research expenses increased from $52.6 million in the prior year quarter to $58 8 million in the current quarter and was essentially flat at about 22% of net sales. Please.
Please note from a run rate basis Q1, corporate expenses included approximately two and a half million of discrete items that are onetime in nature.
Total operating income for the company was $40 5 million up from $38 8 million in the prior year quarter higher operating income from AUC was offset somewhat by higher corporate expenses due to higher professional fees and personnel related costs and modestly lower M. C operating income.
Other income and expense in the quarter netted to an income of less than half a million dollars compared to $3 $9 million of income in the same period last year. The decline. This quarter was primarily driven by revaluation losses due to the euro strengthen relative to the U S. Dollar during the current year quarter.
The effective income tax rate of 28, 2% this quarter. It was largely unchanged from the rate experienced during the first quarter of 2022.
Net income attributable to the company for the quarter was $26 9 million compared to $27 7 million last year caused by $3 4 million reduction in other income partially offset by higher operating income.
GAAP earnings per share was <unk> 86 cents in this quarter compared to 87 cents in the same period last year.
After adjusting for the impact of foreign currency revaluation gains and losses restructuring expenses acquisition and integration expenses.
Adjusted earnings per share was <unk>, 91% this quarter unchanged from the first quarter of last year.
Adjusted EBITDA declined slightly from 61 million in Q1, 'twenty two to $16 4 million in the most recent quarter.
Machine clothing, adjusted EBITDA was $55 7 million or 36, 4% of net sales this year down from $57 7 million or 37.4% of net sales in the prior year quarter.
AUC adjusted EBIDTA was 21 million or 18, 1% of net sales up from last year's $13 7 million or 15, 2% 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 33 million. 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.
I would like now to turn towards the balance of the year and confirm our prior financial guidance remains in place for 2023.
In short the first quarter developed largely as we had anticipated and our expectations for the balance of the year hasn't fundamentally changed.
Machine clothing delivered another exceptional quarter in aggregate, we experienced market growth on a constant currency basis, and all paper machine clothing grades. This was offset somewhat by declining demand in our engineered fabrics business driven by the lower demand for the belts, we supply to nonwoven manufacturers.
Looking at geographic markets the market conditions. We noted as we entered 2023 remain largely in place with growth in the Americas stable markets in Asia and markets that have weakened somewhat in Europe , when compared to Q1 last year.
Overall, our order books are similar to this time last year with strength and tissue grades offsetting softer packaging markets. As a result, we're cautiously optimistic about 2023.
Unlike in 2022, we do not currently expect to see a continuation of foreign exchange headwinds for the full year. We finished 2022 with an average euro to U S. Dollar exchange rate of 1.15 for the full year and the current exchange rate is above that level. Overall for this segment, we are maintaining our revenue guide of 590.
$610 million.
As mentioned last quarter inflationary pressures are easing with improved availability and cost of logistics and more moderate energy pricing. However, some raw material supply chains remain a challenge we continue our efforts to offset some of the inflationary impact on golf and continuous improvement efforts and input cost management.
We still expect to deliver margins in line with our long term expectations for adjusted EBITDA margins in the mid thirties for the full year.
Finally, we are maintaining our 2023 guidance for machine clothing, adjusted EBITDA of $205 million to $225 million.
Turning to engineered composites, our outlook for the year has not changed as I mentioned, the AC elite program generated close to $43 million in the first quarter. We continued to expect 2023 leaved revenue will be roughly stable with 2022 levels before growing again in 2024.
We also expect revenue from the CH 53 program to be overly overall flat compared to 2022 with an increase in recurring production fully offset by a decline in nonrecurring revenue.
In 2023, we also expect to see growth on a few smaller programs.
As a result, we are reiterating our revenue guidance of $420 million to $440 million and adjusted EBITDA of 80 to 99.
At the total company level, we are reiterating our 'twenty three 2023 guidance as follows.
Revenue of between 1.0 and 1.05 billion.
Effective income tax rate of 28% to 30%.
Depreciation and amortization between $70 million to $75 million.
Capital expenditures in the range of $90 million to $100 million.
GAAP earnings per share of between 3.05.
$3 55.
Adjusted earnings per share of between $3 10, and $3 60, and adjusted EBITDA between 225 and $255 million.
With that I'll turn the call back to Bill for his final prepared comments.
Yeah.
As you've heard the company is in great shape, our differentiated technology innovation expertise and solid customer relationships gives us a real competitive edge in the marketplace.
We have experienced business leaders, who are clearly define long term goals and outstanding operational track Records and it has the expertise and depth of our teams across the company. It helps assure the continuity of our strategy and continued success.
Our balance sheet is strong and we're on sound financial footing Carrabba's, obviously already deep into our financial strategy is going to be an outstanding CFO .
As you know I've informed the board of my intention to retire.
We have a search underway for my successor, and I know the board is pursuing it the effort with thoroughness I'm fully committed to ensuring a smooth transition and the board knows all remain in place for as long as that takes.
Our team has confidence in the future and we look forward as always to sharing our progress with you.
Now, we'll be happy to take your questions.
Alan.
Thank you ladies and gentlemen, if you do have questions. Please press one then zero on your telephone keypad.
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Our first question will come from the line of Gautam Khanna with Cowen go ahead.
Yeah good morning.
Good morning Gautam.
Wondering where there any positive EAC is in the quarter.
Positive or negative.
At AAC.
Yeah, there was actually a mix of positive and negative EAC season, and that was then it was $600000 et cetera, which is about the same time last year Thats correct and last year I think it was 700000.
Got it.
Can you update us on where you guys are on the 787.
Hey, guys actually producing for it now.
Good good good question. The 787 as we would describe as we went through the year last year, we idled the production line prior to that we had been keeping it running warm at a level at a very low rate of production. So we maintain that.
Our ability to produce and when we idled. The line, we moved employees to other parts of the business to keep the talent that we need to run the production of <unk>. This year. We have started the line back up we're running it at a slow pace, but running it enough so that.
We're sure that it could run effectively and so we have started it backup which is would be news compared to.
I think the last time, we talk so we're getting ready we're expecting that in the back half of the year, we'll see a little bit more production.
Yeah.
And on the Leap program are you still expecting it to be relatively flat year over year in terms of units produced in revenue.
We are we do plan.
Our lead program for the year, when we play on the manufacturer and we plan to.
Do we level load the plant as we did as we described in our last meeting we did plan it to be flat. This year, we're still running at that pace. We had look we had a good first quarter.
You know what.
We're excited about the news coming out of Boeing and we're looking to see if the 787 Max production picks up in the latter part of the year, but right now we're sort of holding to the plan that that is flat.
Thanks, guys.
Thank you. Thank you.
We'll next go to the line of Michael try Molly with Truth Securities Go ahead. Please.
Hey, good morning, guys. Thanks for taking the questions here.
Just to stay on got them.
Question with the leap <unk>.
We see the news out of Boeing which I think you know come out a couple of weeks ago to they want to be at $38 42, and I guess you know.
Just the flat run here as you know the disconnect with with Safran I guess planned production and deliveries, but what when would you start to ramp up to meet that that 38 later this year or even you know are fixed 42 into next year I mean do you have pretty good.
Good line of sight into that inventory burn down or safran or can you give us a little bit more color there.
Sure Michael we have we have ongoing regular discussion with safran, we were very close with them. As you know were cold Lake co located in the same facilities in our three plants around the world.
So we're talking to them constantly.
We we would need a few months to start ramping up we would you know we have the we have the capacity to ramp up we have the machinery in place and I think if you look at the last couple of years, our production probably got a little bit ahead of the engine delivery rate.
Which is a testament to our ability to produce and produce on time. So we're ready to go we're having discussions and if we do ramp up.
We need a few months ahead, but as I described earlier, we typically plan for the full year to get to optimize that.
The production and the efficiency of it so in the second half of the year, we would be we would be adding people. If we were going to ramp up.
Got it and from an inventory perspective.
Do you have enough raw material in fiber.
How should we think about you know I think the inventory.
It was up significantly on a sequential basis, but you know what when would you start sort of pulling on inventory to get ready is that that's sort of it all in a few months kind of contemplated with labor and raw materials as well.
Yeah, I think around a material side, we're fine we're working those plans and if there aren't any shortages.
Okay.
Got it and then Rob I know you obviously just got on board, but you obviously had a really nice Q1 here reaffirm the guidance.
I know, it's obviously earlier in the year early in the year here Theres a lot of broad based economic unknowns, but.
The $3 10 since the low end of that range implies a major step down in earnings trajectory. I mean, what are the puts and takes you know from the high end to low end I mean, I think it's pretty easy for us to get to the high end you know on Florida, just a flat run rate basis here, but what what sort of comp.
Completed to maybe take that earnings trajectory down significantly on the low end.
Yeah, Michael that's a very fair question I mean, I think what you would have to see as you know.
A real degradation in some of the machine clothing markets relative to our expectations given what the drop through would look like there.
And then.
Any any change in overall production rates.
As it relates I mean, we have.
A handful of very large programs at AUC that could really move the needle.
Any change in assumption there from what's expected broadly in the market. So.
There may be a little level of conservatism, there, but we want to make sure that our low end of the range captures kind of any unforeseen changes in the macro environment.
Yes.
We've taken out the risky areas 787, I mean, they're basically not theres not much in the forecast there is upside more than downside I think there.
Got it.
Just the last one on that topic of machine clothing, I'm on that degradation should we be or how are you looking at.
Maybe the erosion of cargo and we saw UBS and thinking about that packaging side of the business.
Is there a lot of revenue tied to more on the packaging I know it sounded like you know tissue.
It was pretty stable, but what specifically would degrade and should we be watching the overall sort of e-commerce shipping retail trends for some clues there.
Yeah.
No I, it's there's not a direct correlation that the markets right now there's we have an interesting mix where tissue is done well, it's covered a little bit of softness in packaging.
Publication has slowed down a little bit, but the Americas have been stronger than Europe , Europe's been a little bit slower Asia has been pretty good.
So it's a real mix around the world, but in aggregate in nonwovens, where coming out of the pandemic. So it's more like a kind of a reversion to the mean in nonwovens.
And then there's a little bit very small business in the buildings industry.
That has slowed down a little bit but overall.
We're we're pretty positive things look pretty stable with a little bit of growth.
Got it perfect. Thanks, guys I'll jump back in the queue.
Thank you Michael.
We'll go next to the line of Jordan <unk> with Bank of America go ahead. Please.
Hey, good morning.
Good morning.
So it just had a quick question.
Just do you feel you guys gave around machine clothing is there anything else happening in the broader economy, that's impacting the business right now.
I'm, sorry, I didn't understand the question is there something in the broader economy.
So I don't think so.
We are.
Machine clothing demand has held up its about the same as last year.
As I said, it's a little bit stronger in the Americas and in Europe . So there's.
Slow down in Europe , because of energy and the.
The general economic weakness there, it's the overall driver, but overall as I said, it's pretty solid.
Okay.
Great. Thank you.
We have a follow up question from the line of Michael Mueller with true Securities go ahead.
Hey, Thanks again guys.
Just thinking about I guess some of the longer term opportunities you called out in press release.
The Army hypersonic anything you can talk about in terms of flora and potential potential opportunities there.
Is that now we have a production decision and that contract has been awarded.
Well, Michael there is theres nothing we can talk about specifically I will say I get pretty excited because the team has a as I mentioned has a number of programs and.
And I've mentioned in prior calls where we've actually won programs our customers don't let us disclose and we've been adding to that list, which is wonderful for the longer term. So.
We don't have anything specific to disclose but we're pretty excited about the long term opportunity.
And that comes out of doing a great job with the customers, having a having a technology that can play in the future that the most advanced composites. So what we I think we have a lot of opportunity we're working on working on.
Okay.
Last question.
Rob again, not to put you on the spot, but I think it was.
Maybe maybe a year ago, you guys had the Investor day put out the 2026 longer term operating model and some targets.
I know you've been on board a short time here, but maybe drinking from a fire hose, but then any thoughts on kind of the trajectory of the business over the longer term and how you kind of looked at those targets coming on board here.
Sure Yeah, no I mean, when you think about the guide right, 5% organic growth.
Really looking to see very meaningful expansion in particular in Aac's topline.
And then the overall earnings growth.
I think we have we have a super strong balance sheet.
You know everything that I'm seeing in my first couple of weeks in the role is that the programs are in place.
We have we have a terrific BD team across both sets of businesses.
And then when you think about just the large macro right.
Look at machine clothing, and we just kind of look at the trend towards tissue and packaging, which is where we've centered our production and our sales.
Especially compared to a few years ago I feel that we're very much on track to deliver on that and especially with the and that's the organic side and of course.
We are evaluating in a very disciplined way other inorganic opportunities to further accelerate that growth.
Got it helpful. Alright, Thanks, guys welcome aboard Rob.
Alright, Thank you very much Michael.
If there are any additional questions. Please take this opportunity now to press one then zero on your telephone keypad.
Yeah.
Gentlemen, we have no further questions in queue.
Pardon me, we always have we do have a line of Tony Bancroft with Gabelli funds go ahead.
Okay.
Good morning, Gents. Thanks for taking my call I just had one maybe last question sort of longer term big picture.
Sort of as the the engineered composites business matures and sort of gets to a run rate maybe just longer term plans strategy of the business what would it ever make sense for a separation could you maybe just sort of review that I know, we've talked about in the past, but maybe update us with.
Sort of the outlook that you see now thank you.
Yeah. Thanks, Toni for the question.
The teams are working really well to grow the business grow the AUC business and our.
Our research development and technology teams actually are working together across the businesses to develop the next generation of materials.
And we've got a lot of opportunity to create value organically, we're going to keep working on that.
Great. Thanks, Thanks for all your hard work Bill and Rob welcome aboard could too good to see your name there in the thinking.
Good to hear from you Tony it's been a little while yet.
Thank you thanks.
We have no further questions in queue at this time.
Alright, Thank you everybody for joining us on the call today. We appreciate your continued interest in Albany International and of course, if you have any questions.
Feel free to reach out to John Hobbs, our director of Investor Relations. Thank you and have a good day.
Ladies and gentlemen that will conclude your conference call for today. Thank you for your participation and for using AT&T event Teleconferencing you may now disconnect.