Q2 2023 Albany International Corp Earnings Call
Good day and thank you for standing by welcome to the Albany International Corporate earnings Conference call at this.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand the conference over.
To your speaker today, John Hobbs Director of Investor Relations. Please go ahead.
Thank you Cindy and good morning, everyone welcome to Albany Internationals second 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 forward looking statements and the use of certain non-GAAP financial measures and associated reconciliation to GAAP.
For the purposes of this conference call those same statements apply to our verbal remarks. This morning.
Today, we will make statements that are forward looking the contained a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied.
For a full discussion of these risks and uncertainties, including a reconciliation of non-GAAP measures. We may use on this call to their most comparable GAAP measures. Please refer to our earnings release of July 26th 2023, as well as our SEC filings.
Our 10-Q and 10-K.
Now I'll turn the call over to Bill against President and Chief Executive Officer, who will provide opening remarks built thanks, John Good morning, and welcome everyone. Thank you for joining our second quarter earnings call. We're pleased to report another strong quarter of results with revenues up $274 million up nearly 5% compared to the same period last year.
And solid execution across our operations GAAP.
GAAP EPS of <unk> 86 cents was down from last year's $1 25 impacted by non operational items that Rob will cover adjusted.
Adjusted EPS was <unk> 90, <unk> and.
And adjusted EBITDA was nearly $65 million in the quarter.
As a result, we finished the first half of the year in good shape and we're raising our guidance for the full year.
The machine clothing segment continues to deliver healthy results with revenue growth of five 6% on a constant currency basis.
Gross margins in excess of 50%.
And adjusted EBITDA margins exceeding 37%.
Our machine clothing team has done an outstanding job navigating the challenges posed by macroeconomic headwinds in Europe , and China inflation and the effects of the war in Ukraine.
Since the end of 2022 trends in machine clothing revenues operating profit and adjusted EBITDA have all been positive and now exceed our pre pandemic performance.
These impressive results are a testament to the effectiveness of machine clothing is disciplined operating model the consumable nature of our products and our well earned reputation as a supplier of mission critical paper machine clothing products with exceptional reliability and value to our customers.
Last month, we announced our agreement to acquire the Heimbach group a manufacturer of machine clothing based in Germany.
<unk> is a great fit and creates opportunities to provide our customers with even more value.
Geographically Heinbach is strong in central Europe , which complements our northern European presence.
The addition of high end box Asian operations will augment our presence in faster growing Asia as well.
Hi, I'm back in Albany, each have long proud legacies in machine clothing, and we look forward to working with the Heinbach team and leveraging the best of both companies to add value for our customers and shareholders.
We expect the transaction to be accretive in both earnings and cash flow in our second year of ownership.
And we have good news. This morning, we just heard from the regulatory authorities that we've been approved to proceed with the closure of the deal.
And we're going to move towards closing and so we as we've said before we expect closing to be in the second half of the year, but pretty excited on the news we received this morning.
The engineered composites segment achieved top line growth of approximately $5 million in the second quarter up nearly 5% compared to Q2 of 2022 growth in the quarter was driven by higher revenues from commercial programs and from some smaller programs that we've brought on over the past 12 months.
Our aerospace our aerospace team continues to ramp up the CH 53, K production line is doing a great job managing supply chain delays and supporting our customers adjusted EBITDA. In this segment was about $21 million relatively flat with the second quarter of last year.
AUC continues to do a great job for customers and on time delivery quality and customer satisfaction and his strong operational performances. It's notable in an industry that still hampered by supply chain delays and other challenges.
It gives our customers confidence in our ability to take on new business either through more content on existing platforms or new programs.
Our aerospace team did a great job at the Paris Air show and our business team our business development teams or engineering teams at a full slate of meetings to discuss new opportunities for growth in.
In many ways. It built on the momentum we achieved last year at Farnborough, We continued to build our reputation as the premier partner of choice in composites manufacturing.
Finally, I can report that our board of directors is working diligently on my succession at the CEO search process is well underway.
I'm committed to a smooth transition working with the board and the management team to continue executing our strategy and doing a great job for customers and shareholders.
I'll, let you know as soon as we have an announcement to make so with that I'll hand, the call over to Rob.
Thank you Bill and good morning, everyone.
My first full quarter with all of that he has been tremendous.
I visited a number of our locations in both the U S and Europe and I am impressed with the very visible operational excellence across both businesses.
The culture and our people are very inspiring.
Grateful for the opportunity to be on the team.
We had another great quarter and continued to execute on our growth strategies, including the recently announced <unk> acquisition.
As Bill mentioned earlier <unk> is an excellent fit for us and creates real opportunities for significant value creation for our shareholders over time.
Pro forma for the Heimbach transaction, our financial leverage will remain very modest, but net leverage slightly above one times EBITDA as we plan to fund the transaction with available overseas cash we.
We'll continue to have considerable room under the financial covenants in our revolving credit facility to invest in organic and inorganic opportunities.
I will now turn to our second quarter results and then provide our updated outlook for the year.
For the second quarter total company net sales were $274 million, an increase of four 9% compared to the prior year period on.
On a constant currency basis net sales increased four 8% year over year.
In machine clothing also adjusting for currency translation effects.
Net sales grew five 6% compared to the same period in 2022 with higher sales across all paper machine clothing product lines somewhat offset by contraction in engineered fabrics as nonwoven demand has returned to its lower pre pandemic levels.
Engineered composites net sales after adjusting for currency translation effects grew by three 8% compared to the second quarter of 2022, driven by growth over a number of programs, including some recent wins.
This growth more than offset the temporary decline in CH 53, K as we transition from nonrecurring development efforts last year to recurring production in 2023.
The <unk> program generated revenue during the second quarter of about $45 million, approximately 5 million higher than the same period last year.
While our first half revenues were above the prior year that is mostly timing and we expect our full year revenues to be generally flat when compared to 2022.
Second quarter gross profit for the company was $103 million, an increase of about 2% from the comparable period last year. The overall gross margin declined 100 basis points to 37, 5% of net sales. This was caused primarily by higher input costs and lower absorption in machine clothing, combined with program mix impacts.
And at $1 9 million unfavorable change in the estimated profitability of long term contracts within AC.
Second quarter, selling technical general and research expenses increased from $50 million in the prior year quarter.
$57 million in the current quarter.
There were a number of factors driving the year over year increase.
We saw a negative FX impact of approximately $2 $5 million in machine clothing, we also incurred higher corporate expenses related to executive transitions professional services related to business development activities as well as expenses related to the Heinbach acquisition.
We also had increased it spend to support our growth and to enhance security.
Other income and expense in the quarter netted to income of $4 5 million compared to $7 million of income in the same period last year due to lower foreign exchange revaluation gains.
The effective income tax rate of 42, 8%. This quarter. It was unusually high due to discrete tax items, driven by withholding taxes, resulting from international tax planning as well as a provision for international tax audits.
As we look at the back half of the year, we expect the tax rate to normalize to historical levels between 28% and 30%.
For long range forecasting purposes, we believe that these same effective tax rates apply for our current operations absent unusual tax items.
Net income attributable to the company for the quarter was $27 million compared to $39 million last year.
GAAP earnings per share was <unk> 86 in this quarter compared to $1 25 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> 90, this quarter down from the $1 six reported in the second quarter of 2022.
Adjusted EBITDA of 65 million declined approximately $1 million from the 66 million reported in the second quarter of 2022 machine clothing, adjusted EBITDA was $59 million or 37, 3% of net sales up from $58 million or 38, 2% of net sales in the prior year quarter.
AUC adjusted EBITDA was $21 million or 18, 2% of net sales approximately flat with last year.
During the quarter the company generated $12 4 million of free cash flow defined as net cash provided by operating activities less capital expenditures, which for the quarter totaled $18 7 million.
During the quarter, we experienced some working capital investment that we expect to unwind in the second half leading to improved cash flow performance in the second half of the year.
I would like now to turn to the outlook for the full year.
Overall, we are pleased with our first half performance and our raising our guidance for the full year.
Machine clothing delivered another exceptional quarter overall business conditions were similar to those we experienced in the first quarter on a constant currency basis, we experienced demand growth in all paper machine clothing product lines and as we noted last quarter, our return to lower pre pandemic levels in our engineered fabrics business.
Given typical vacation and winter holiday impacts in the second half of the year combined with softer markets. This year in Europe and Asia, We expect revenue in the second half of 2023 to be modestly lower than the first half.
Taking into account our strong first half we are increasingly seeing closings revenue guide by $20 million on the low end and $10 million on the high end to a range of $610 million to $620 million for the year.
As we've mentioned for the past couple of quarters inflationary pressures are easing and for some raw materials, where we are even seeing price reductions. However in general raw material prices remain above pre pandemic levels.
Despite the ease and price pressure it will take a few quarters to see this flow through our results as we work through the raw materials acquired in prior periods. We continue our efforts.
To offset the inflation inflationary impact to ongoing continuous improvement efforts and input cost management.
Logistics have largely normalized with both better pricing and better availability.
We expect machine clothing, adjusted EBITDA margins to be in line with our long term expectations of mid 30% for the full year.
As a result for 2023, we are narrowing our guidance for machine clothing pulling up the bottom end of the EBITDA guide by <unk> 5 billion.
Now expect machine clothing, adjusted EBITDA to be between $210 million to $225 million.
Turning to engineered composites, our outlook for the year improved with some recent new business wins.
We are still expecting full year revenues for our two largest programs leap and CH 50, <unk> to be relatively stable this year compared to 2022.
For <unk>, we are largely complete with our tooling and <unk> on the App transition. So revenues on that program will grow as the production ramps towards full rate over the next few years.
Taking into account the performance so far this year, we are raising our revenue guidance by $10 million. We now expect AUC of revenue to be between $430 and $450 million.
Our AUC full year, adjusted EBITDA guidance of $82 million to $92 million up $2 million and implies margin expansion in the second half of the year as we see improved program mix and continued strong operational excellence in the second half.
At the total company level, we are updating our 2023 full guidance as follows.
Revenue between 1.04, and 1.07 billion up $30 million on the low end and $20 million on the high end from prior guidance.
Adjusted EBITDA between 232, and $257 million up $7 million on the low end of the range of $2 million on the high end.
An effective income tax rate of 32% to 33%, implying effective tax rate of approximately 28% to 30% in the second half of the year.
Depreciation and amortization between 72% and $74 million.
Capital expenditures in the range of $85 million to $95 million. This is $5 million lower than our previous guidance as we expect some investment to move into next year.
GAAP earnings per share between $3, seven and $3 67.
Adjusted earnings per share between $3 15, and $3 75.
<unk> on the low end and <unk> 15 per share on the high end.
With that let's open the call for questions operator.
Thank you we will now conduct a question and answer session. As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question is from what Tom cannot of TD Cowen. Please go ahead.
Hey, it's got them here. Thank you.
Hey, guys, Hey, Gautam.
Hey, guys I was curious if you could update us on your expectations for.
The leap program this year.
And perhaps if you have any early view into next year and also on the CH 53, K I know both were relatively flat this year, but.
Whats your visibility on a reacceleration.
Next year if any.
<unk>.
Yes, let me start.
We're we're pretty excited about there is some good news out there on the <unk>.
<unk> hundred seven production rates going forward longer term <unk> hundred 20, narrow bodies the place to be as we all know.
How that manifests itself will have to wait and see into next year as we reported we we over we over achieved a little bit in the first half of the year versus our leap plan for the year, which kind of is testament to our ability to ramp up real quick operations are running really well.
Inventories are moving through so we're encouraged as we look at next year, but we don't really have any updates at this point to anything different for this year, we're still maintaining that kind of a flattish level. This year, although we're on a better run rate than that right. Now and then we expect to see growth next year, but don't have any numbers on it yet.
The lead program on the CH 53 K.
So I think Rob mentioned, we've gone from the tooling and development stage into the production stages, where we've got one line up and running and very successful we've shipped product.
Two Sikorsky CH 50, <unk> and continue to and we're bringing the second production line.
Online, which is an automated production line this.
The next couple of months. So we expect to begin production production and shipping off that second line in the second half of this year, so things are going really well there.
Again, good news on the CH 53, K demand longer term as well so we're excited about that.
Okay and then just if you could also update us on your view on 787 and.
F 35.
730, 787 look Boeing says they're at four a month on the way to five on the way to 10.
If you guys are finally, starting to see.
You have to pick up with the Boeing subcontract manufacturers that you shipped to and likewise on the F. 35, if you have an update thanks.
Yes on the 787, we're pretty much synced with the Boeing demand we are running the production line as you know last year, we had stopped align and prior to that we had run at a really low level. So the line is up and running we were we were how would I say cautious in how we started up the alignment make sure that demand was coming and it looks like it's.
It was pretty good so far so we're in sync with that forward going to five rate level. As we go from this year into next year and will continue to ramp up from there. So.
It looks pretty good so far so we haven't heard any any changes to the production demand there.
On.
The F 35.
Also good news out there about longer term demand. So we're waiting to see we don't have I don't have anything to report today on the demand for it but we're excited as we look at next year and beyond.
Thanks, guys.
Okay, well thank you.
Okay.
Please hold for our next question.
Okay.
Okay.
Our next question comes from Michael CMO Lee of.
<unk> Securities.
Hey, good morning, guys. Thanks for taking the questions here.
Maybe just to stick with.
<unk> line of questioning on some of the platforms, obviously still early with the.
Whitney disclosure and I know, there's been some chatter out there.
Airlines or.
Deliveries from Airbus get held up could there be a shift to more to more leap platform. So I mean, how are you guys too early or how are you guys thinking about that in the trajectory of lead production here.
Yes, I think we're watching it with interest in full disclosure and my first job was at Pratt Whitney and the turbine engine group, so I'm watching it with a lot of interest.
The.
Longer term is this.
It's a great program to beyond the leap program.
We look forward to.
Increasing our share and being real competitive so I'd say, we're just going to watch it and see how it goes.
Got it got it and then I don't want to be kind of flipping here with this question, but the high back deal looks like a solid acquisition, but from a from a strategic standpoint.
How did that come about the decision to acquire that Rob.
Assuming you were to new to be intimately involved bill you are on the way out.
Maybe Daniel let the machine clothing side was the board I mean I'm just.
Trying to figure out strategically who really pulled the trigger on this thing.
Yes. It was it was a real strong team effort board Daniela his team myself.
Very highly engaged and it worked it for a long period of time I will say so.
We're very excited about it.
As I said Heinbach has a long tradition of it's got a great brand in the industry and we're excited about working together with them. So it was a collaborative approach a lot of work, but we're really excited to get moving forward here.
And Mike I'll, just add yes, I'll just add.
Came in obviously late into the picture.
Giving an independent view of the coming in it's a phenomenal deployment of capital for the company. When you look at the opportunities to create value and to really build out the machine clothing business, which as we all know generates a ton of cash and has given us the strategic flexibility to pursue a lot of growth across the company.
Yeah, no I totally agree I mean, it sounds like a great path to earnings and EBITDA accretion for sure.
Just the last one for me and I'll get out of the way here I guess, just looking at the guidance.
What has to happen for for second half earnings to be down 26% versus first half to get to the low end of the range.
I mean, I know you talked about machine clothing, and normal European seasonality and other pressures, but I mean, it just seems like it would be.
A real struggle to get down there and I mean, you even had a pretty big tax headwind here in this current quarter. So can you can you maybe give us some of the mechanics on the on the range is out there for the for the guidance.
Yes, let me start and I'll hand, it over to Rob.
A fair question.
<unk>.
We look at we do a bottoms up we look at all of our programs are on we go through platform by platform and AUC, we look at the marketplace in machine clothing, and as you know the machine clothing business. We have we have bookings that go out of period of time, but they don't go out of long distance. So we look at the market we look at what the.
The paper companies are doing the machine and Theres a lot of machine downtime right now, where they're doing maintenance and quite often we sell when they do maintenance, even if they take extended downtime because perhaps the demand is slower right now so publication is down in Europe particular.
Quite a bit down theres more closures coming there. So we're just watching it. So yes. It is it would take a lot to get down to the lower end of that range, but we look at the the perturbations of what could happen and without having bookings that go all the way through the end of the year at least not significant quantities.
Just trying to put bookends around it so it's not likely we're going to go to that end of the range, but that's kind of OE.
It up.
And Michael I mean, I think it's really just a a real caution that we have around the macros in Europe , and some parts of Asia, including China. So we wanted to just ensure that the range as bill said kind of captured that possibility. We don't think it's a high probability that we're going to wind up at the low end of course.
Just wanted to bookend it and I think you raise a fair point that allow would have to happen negatively for us to get there yeah. Okay. Okay fair I'll jump back into queue guys. Thanks.
Thank you.
Hugh.
All told for next question.
Okay.
Our next question comes from Jan France, Ingo Bank.
Baird.
Good morning, Robin John I'm on for Peter This morning.
Good morning.
<unk>, probably close a little earlier than expectation.
So if you look at the first year first half of the year to 35, 8% EBITDA margins in machine clothing, and the guide at the midpoint implies about 35, 4%. So is that I assume that excludes obviously the high box acquisition, but can you just talk about how we should think about second half of the year for AMC.
Margin, but yes.
Yes, Jeff I mean, just I mean, there is nothing in our guide that has anything with Heinbach Ambac has not inhibited in any aspect in our.
And I think what we're looking at is to your point.
The second half of the year tends to be a little bit softer right and we have slightly lower sales, which does also impact absorption machine clothing. So that also.
Has a bit of an impact on what we would expect in the second half of the year and if you were to look Barry I mean, there is a slight level of seasonality that we typically experience in machine clothing first half to second half.
Got it that is really what's impacting the margin. There is also some costs that we incurred higher pardon me inflation, we've experience, where we had material costs. We brought in that we've got to work through the system I will take that take a few more months to work through that into the into the fourth quarter, probably before those higher cost materials flow through the P&L.
Okay perfect. Thank you. Thanks for the detail and then if I could just a quick follow up and I understand 2026 is far out, but if I just looked at the Investor day target for.
For leap.
77, and <unk> 53.
Are you sort of still comfortable with.
Those targets. If you just look at 707, I think were doing let's say about $5 million this year.
The previous target was at $40 million.
For 2026.
Okay.
Yes.
If you can just.
Yeah.
I think certainly kind of looking at 787, we are at a low point right now clearly with the production.
And if boeing's forecast is correct and they ramp up to those production levels.
I think we feel pretty comfortable with our longer term outlook for 787.
In terms of yes, CH 53, K I mean, we definitely feel comfortable with that and certainly.
If you were to look at our backlog numbers.
In the Q.
Lot of growth related to <unk>.
<unk> done very well in getting contracts there.
And then in that 35.
Leap.
We feel we feel comfortable with where those productions are based on everything we're seeing.
Okay. Okay, great. Thank you I appreciate it I'll jump back in the queue.
Thank you.
Our next question.
Right.
Our next question comes from Ron Epstein of Bank of America.
Hey, Good morning, this is Jordan on for Ron.
Hey, good morning Andre.
Hey.
Actually on the 2026 targets too with.
Defense spending in all the restocking and also the European spending.
Are you guys thinking about those targets, especially for missiles.
Proving long term.
And then also too.
Anything else that you guys are seeing down the pipe.
Do you think would be really interesting for hypersonic.
Yes, we didn't talk about technology on this call, we usually do I get pretty excited when they get into the hypersonic discussions, but yes. We are excited about that longer term and we are we are.
We're making some investments there.
But again, it's a little bit longer term.
Regarding the 2026 targets that we've talked about in the past if you go back to last year, our Investor Conference where we.
We said, we're going to double the AUC business over that timeframe.
We're still on track to doing that the mix has changed a little bit we won some some business that cover for some of the areas that maybe have been a little bit shorter than we thought for instance, the 787 didn't ramp back up quite as quickly as we thought but we've been the team has done a great job, winning new business and multiple of applications. So.
That adds up to it so we're pretty confident we can get to those 2026 levels if not beyond.
Got it thank you.
Yes.
Thank you I'm showing no further questions at this time I would now like to turn the conference back to Bill Higgins for closing remarks.
Great. Thank you. Thank you everyone 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 <unk>, Our director of Investor Relations. So thank you and have a great day.
This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Great.
Yes.
Okay.
Okay.