Albany International Corp. (AIN) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Albany International Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. I would now like to turn the conference over to our host, Mr. John Hobbs, Director of Investor Relations. Please go ahead, sir.
John Hobbs: Thank you Tony, and good morning, everyone. Welcome to Albany International's Second Quarter 2021 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 in the use of certain non-GAAP financial measures and their associated reconciliation to GAAP.
Andrew Higgins: Thanks, John. Good morning, and welcome to everyone. Thank you for joining our Second Quarter Earnings Call. Earnings. I'm pleased to report that we delivered another strong quarter with excellent performance in both segments. Our operations continue to do a great job for our customers with best-in-class delivery, quality and service. I'm really proud of our employees and how they stayed focused on safety, productivity, cost savings in Lean Kaizen process improvements. As a company, we delivered $235 million in revenue in the second quarter, growing revenues both year-over-year and sequentially and we achieved near record levels of profitability. Gross margins of 43% and operating margins of 21%, our second highest quarterly margin performance. We achieved GAAP EPS of $0.97 for adjusted EPS of $1.1 and our best free cash flow quarter in the company's history, generating over $50 million in free cash flow in the second quarter. We did face supply chain challenges in materials, cost inflation and logistics that our teams were able to manage through and successfully offset some of their impact on the bottom line and we'll keep an eye on these going forward. We continue to pay down debt and have a healthy balance sheet, which enables investment in future growth. As we've mentioned before, we're increasing our investment in research and technology across the company. In general, we're encouraged by the economic recovery in key markets coming out of the pandemic slowdown. We're cautiously watching how the delta variant might affect this recovery, particularly international air travel in the less-vaccinated regions of the world. That said, long-term secular trends are favorable and Albany's market positions global footprint and product development take advantage of these trends.
Stephen Nolan: Thank you, Bill, and good morning to everyone. I'll talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year. For the second quarter, total company net sales were $234.5 million, an increase of 3.8% compared to $226 million delivered in the same quarter last year. Adjusting for currency translation effects, net sales rose by 1% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were up 0.8% year-over-year, driven by increases in packaging grades and engineered fabrics, partially offset by declines in all other grades. Publication revenue declined by over 7% in the quarter and as Bill mentioned, represented only 16% of MC's revenue this quarter.
Operator: Thank you. Our first question comes from the line of Peter Arment with Baird. Please, go ahead.
Eric Ruden: Hi, good morning. You actually have Eric Ruden on the line for Peter today. I guess if I could start off, Stephen, maybe at MC. I'm just wondering how the mix that you saw for sales in this quarter compares to what you're seeing in the current order environment there, looking to the back half of the year with geography being the bigger driver of margin pressures there. Is there any shift and a particular reason in causing any headwinds or are the once more surrounding, just the rising input costs and the other items you called out there?
Stephen Nolan: Good morning, Eric. There was a little bit of pressure from that. Certainly right now at the recent order strength we've seen, has been back to strengthen the Asian market -- China in particular -- which as we've discussed before is on the margins of somewhat lower overall margin business. That's certainly part of the pressure we see in the back half.
Eric Ruden: Okay. And then in terms of rising input costs, how does what you're kind of looking at for the second half of the year compared to what you've already seen have been managing through in the second quarter?
Stephen Nolan: It certainly is still increasing in the first instance; and secondly, we certainly didn't see even the current level of elevated costs for the full first half of the year. So, we're in an environment where we see increased pressures. We also -- as we've discussed previously, it takes a while for some of these rising input cost to reflect themselves in our cost of goods sold as we make product and that goes in the inventory and then gets sold. There is typically a lag of about six months from some of those rising costs and raw materials, before the impact of our actual cost of goods sales. It's a different environment than you've seen in the first half of the year for sure.
Eric Ruden: Okay, that's helpful. And maybe just one quick one on AEC. Appreciate the details on the moving pieces around the destock there. But is the $60 million to $65 million we kind of talked about as a full year headwind for 2021 on the inventory destock still the right number. It sounds like 787 is going to be a headwind for longer, but F-35, maybe offsets a bit of that. Maybe if you could just talk through the moving pieces there?
Stephen Nolan: Yes, certainly, but the number is lower right now because we certainly don't face the F-35 decline as I indicated. So the destocking them for the year is somewhere and around about $50 million at this stage.
Eric Ruden: Okay, thanks. I'll hop back in the queue.
Stephen Nolan: Thank you, Eric.
Operator: Thank you. Our next question comes from the line of got Gautam Khanna with Cowen. Please, go ahead.
Gautam Khanna: Hey guys, good morning.
Stephen Nolan: Good morning, Gau.
Andrew Higgins: Hi, Gautam.
Gautam Khanna: I had a couple of questions. Machine Clothing continues to kind of do better than we thought it would when we're looking at a longer-term framework. What do you think is the right annual EBITDA is, adjusted EBITDA for the Machine Clothing business? Are we in a new paradigm where we're just going to be up $200 million plus? Or do you think it will ultimately mean revert down?
Stephen Nolan: Yes, it's pretty hard. We have that discussion internally quite a bit. It's pretty hard to look out with a crystal ball and say what it's going to be, but it does feel like it's gotten to a better level and operations have been holding up really well. So, we're going to try to keep it at that level.
Gautam Khanna: Okay, got it. Secondly, just on the F-35, so, what actually changed? I'm just curious, is that the full $50 million variance on the destocking that you -- $65 million goes to $50 million, is that all F-35? And sort of what changed in the last quarter?
Andrew Higgins: Maybe just a little color and then Stephen can add the financials. We did work with our customer, Lockheed and we got improved order flow in the quarter that helped with the F-35 production rates to keep that more level-load on the factory, so that we weren't actually reducing as we have expected when we spoke in the last quarter.
Stephen Nolan: And some of that includes continuation of some of the additional work, we had talked about previously picking up some of the fixed-wing skins we're making the automated fiber placement machine. We got a contract extension on that, which allowed us to continue to work on that, which was certainly not a sure thing earlier in the year. But overall, yes, the decline from the $65 million range to the $50 million range, Gautam that you referenced is really driven by F-35. The other programs that we look at out there, most notably 787, there has been no material change from what we expected six months ago.
Gautam Khanna: Okay. And with the F-35 change, does that effectively prevent or mute the growth we might otherwise see in 2022, in 2023? Because when we look at their planned production -- said differently, their planned deliveries, I think it's 139 this year 169 next year and then stabilizes in the 170 range two years out. So, are we seeing that that pick up this year, if you will and so it's going to be flattish in 2002 and beyond just based on your discussions with Lockheed? Or how should we think about the growth problems ?
Stephen Nolan: I wouldn't jump to that conclusion just yet. I think we got to get a little further along here to figure out what 2022 looks like. But yes, our production goes through a mix of new aircraft as well as sustainment use. So, I don't think it eats into the future aircraft program.
Andrew Higgins: Yes, Gautam. We clearly don't do numbers, we aren't giving any guidance yet. We would clearly still expect to see some growth in F-35 in 2022 and in 2023.
Gautam Khanna: Okay, got it. Last one before I turn it over. Just on the LEAP program. So, you talked about the 1B. Any updates there on sort of when do you expect to have inventories and balance with no excess inventory, if you will? And you also mentioned that all three facilities are ramping up on the LEAP. If you could just explain what you're gearing up to do this year or next year in terms of production on the program?
Andrew Higgins: We are gearing up the production in the facilities and obviously the A320neo program is going fast. That comes out of sort of the destocking phase into more alignment with production of new aircraft long before them. 737 program does. So, we are ramping up all three facilities as we look into next year. It's relatively flat through the rest part of this year, but growth into next year.
Stephen Nolan: Yes, Gautam, look, in terms of the inventory level, I mentioned we have 170 roughly engine shipsets on hand at the end of the quarter. That's down from close to 250 at the start of the year. So, it's been a nice decline for the client, 70 ships at year-to-date. I have no intention nor desire to get to zero on that. The exact level, we need to get to, really depends on the volume, the rate at which Boeing is producing therefore we're shipping, because we have a contractual requirement of a certain number of weeks of inventory on hand. So, it's not exactly clear. It's kind of a complicated calculation. If you're looking at that's declining and then potentially going up at what point we cross, but when we get to somewhere, let's say, it certainly wouldn't go below 100 shipsets on hand to give you an idea of how many we have to burn through. So, the most recent quarter we burned through 20. So, if you think we're getting down to 100 and take it several quarters, it will take one or two quarters, but it's several quarters likely ahead of us. But that all depends on Boeing ramping up productions so they're all ready to kind of meet us when we get to that point. Obviously, Boeing is doing a great job getting back up to production, but there are still a lot of uncertainty as to what rate they'll hit at what point in time.
Gautam Khanna: Thank you very much, guys.
Stephen Nolan: Thank you, Gautam.
Andrew Higgins: Thanks.
Operator: Thank you. Our next question comes from the line of Michael Ciarmoli with Truist Securities. Please, go ahead.
Michael Ciarmoli: Hey guys, good morning. Thanks for taking the call here. Maybe just one on Machine Clothing. I guess with some of the orders you're seeing and thinking about the rising input costs. Are you able to potentially pass through some of those costs? I think you alluded to most of the plan of attack was going to be on the productivity side, but maybe just what you're seeing or what the flexibility is there?
Stephen Nolan: Yes, it's a good question. We are working to see if we can pass through cost. It's a mixed picture because we have some contracts that are longer than others. So, price negotiations come up over a period of time with different customers at different time. We are looking at that as we go into next year. So, we will work to do that. Our primary approach has been to drive continuous improvement to offset inflation cost. Just in general, we've done that for years.
Michael Ciarmoli: Got it, got it. And then just maybe one other one on the engineered side. When you think about the LEAP program, obviously Airbus has put out some specific color on where they want to take production. Assuming a path to 75 and assuming the MAX program, are you guys set on potential capacity and the ability to meet that potential demand? How are you guys looking at the program potentially re-accelerating and everything from labor to machining and tooling ?
Stephen Nolan: I'd love to have that challenge. We've done a good job of working on the facility as well. Things have been slower here over the last year. So, improving productivity, improving our throughput as production ramps back up, we believe we're in much better shape than we were even in 2019. So, yes, we are hiring people. That will be the thing we're keeping our eyes on as how easy it is to get operators and folks in the facilities. So far so good. Yes, we think we have the capacity in place, we put a lot of equipment in place back in 2019 to grow, so that would be a great problem to have.
Michael Ciarmoli: Got it. And then last one, you obviously lift the guidance, but the second half clearly looks to be weaker kind of across the board, revenue, EPS, EBITDA. I know you're not going to talk 2023, but we've got weakness in the second half, but presumably as the world begins to recover, travel recovers, we should see a step-up as you may be exit 2021 here?
Andrew Higgins: Yes, I think on the MC side, our third quarter, typically we look at as a little bit of a softer quarter with the summer slowdowns and favor companies are getting equipment to do downtime maintenance. They would have already ordered that in the first and second quarter of this year. So, we look at the third quarter as a little bit slower there. And then I think on the AEC side, we've tried our best particularly on the commercial side where there's destocking going on to kind of level-low the factory as we go back into the second half of the year and kind of run at a rate that's predictable and well-planned so we can execute well in the plans. And then some of our growth programs they kick in next year. Not so much in the second half of this year.
Stephen Nolan: Yes, if you look at our margins, if you look for us at AEC -- and by the way, I believe I misspoke earlier, I said EBITDA guidance for the segment of $65 million to $75 million, which is $65 million to $70 million -- but if you look at the back half of the year, if you take out the unusual pickup and long-term contract performance that we have here in the second quarter, the $4 million that was largely attributable to reduction in loss reserves, there is not a huge amount of margin compression in the back half of the year in AEC. The margin pressure is really in Machine Clothing and it's driven by some of the factors we described -- the rising input costs, a significant factor, including logistics which we can't lose sight of. These are large pieces. It's very expensive to move them while we try to limit the amount of transoceanic shipment with pieces of this size and that we're very limited going back and forth, for example, between North America and Asia. We do get a fair amount of back and forth between Asia and Europe and those costs have risen very significantly. That's certainly puts pressure at the RISE and travel puts pressure on it, the FX environment being less favorable now than the average we've seen year-to-date, puts pressure in the back half of the year. Some of the mix shift -- I believe Eric asked about upfront -- place some pressure, and just overall there is to be fair, a little bit of concern also around COVID and not necessarily just how it impacts our markets, but also our factories at various points in time. We've had to shut down some of our factories because of COVID outbreaks in the region. So, there is a little uncertainty in the back half of the year as well there.
Michael Ciarmoli: Got it. Thanks a lot, guys.
Stephen Nolan: Thank you.
Operator: Thank you. Our next question comes from the line of Ron Epstein with Bank of America. Please, go ahead.
Ronald Epstein: Hey, guys. Could you clarify a little bit? Just a little confused on the impact of 787 on the business. Meaning that it looks like there is a chance here that Boeing might not deliver any 787s for a while, maybe not till the end of the year. How does that flow through the business for you guys?
Andrew Higgins: I guess as a start as we've communicated before, we've been running the 787 line just warm enough to keep it going. It's such a low level of production. We don't want to lose the capability, the talent, the people and keep operations running and doing that with our channel customers. So, it's in a very, very low level. The more recent announcement from Boeing while a little disappointing is not really going to affect us this year. It's probably going to push things may be further to the right as we look into next year and beyond.
Stephen Nolan: Yes. So for the year, Ron, we've said to expect somewhere in the range of let's say $10 million of revenue this year. On 787, we delivered four year-to-date, so six in the back half. So, whether it's six or closer, lower than that, it's not going to have a material effect. It is important to understand that it is a firm fixed price contract. And so as we lose revenue, the decremental margins are not just the average margin that program because it's obviously absorbing overhead with that loss of fixed cost absorption. I believe on our fourth quarter earnings call when I provided guidance six months ago, I talked about the fact that some of the incremental margins on some of our fixed price programs had EBITDA margins in the 30s . The drop-through is certainly going to be in that sort of level as we lose that revenue. And so this year, in respect for what happens, not a huge impact, but certainly next year, we had anticipated an increase from this year's level. If things change, we could certainly see a repeat that what we're seeing this year or even lower level closer to zero revenue next year, but that's obviously an open question.
Ronald Epstein: Got it. And then maybe just one follow up. If Airbus were to actually get to 70 A320s a month, are you guys set up to handle that?
Stephen Nolan: Yes. Look, Bill touched on this a few moments to go and that we certainly need to staff up with operators in our facilities. We brought our headcount down as our production volumes decreased. It's obviously very competitive labor environment right now. It's not just flipping a switch, there's challenge in it. But we certainly have the physical plant that we can meet those needs. There may be some CapEx required, but nothing on the achievable. The big challenge is just getting the labor force we would need. Not that we have unmet needs today, but staffing up to that level would obviously require some significant hiring in those state. It's a competitive market.
Andrew Higgins: Yes and I think as we think about the more near-term going from 45 to 50, 50 plus, we're ready for that. We have to add people, but we have the capital in our facilities already.
Ronald Epstein: Super. Thank you.
Operator: Thank you. And we have no remaining questions in the queue at this time.
Andrew Higgins: Okay. Well, thank you. Thank you, everyone, for joining us on the call today and we appreciate your continued interest in Albany International. Of course, if you have any questions, please feel free to reach out to John Hobbs, our Director of Investor Relations. His number 630 330 5897. Thank you and have a good day.
Operator: Thank you. Ladies and gentlemen, this conference will be available for playback later today at the Albany International website at www.albint.com; that's www.albint.com. That does concludes our conference for today. We thank you for your participation and for using AT&T conferencing service. You may now disconnect.
