AIN - NYSE

Good day and thank you for standing by. Welcome to Albany International’s Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today, John Hobbs, Director of Investor Relations. Please go ahead.

Thank you, Lisa, and good morning, everyone. Welcome to Albany International’s fourth quarter earnings 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 reconciliation to GAAP. For the purposes of the conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking and contain 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, please refer to both our earnings release of February 26th, as well as our SEC filings, including our 10-K. Now, I turn the call over to Gunnar Kleveland, President and Chief Executive Officer, who will provide opening remarks. Gunnar?

Thank you, John. Good morning and welcome, everyone. Thank you for joining our fourth quarter earnings call. Before we begin this call, I want to take a moment and acknowledge John Hobbs, who’s been leading our Investor Relations functions for the past five years. John has been instrumental in communicating our story to the investment community and has taken the IR function at Albany to the next level. After a long career with nearly three decades in Investor Relations, John is retiring and he will transition his responsibilities to JC Chetnani. We wish John and his wife the best in his retirement and we welcome JC to his new role. Moving to our 2023 performance, I continue to be impressed with our operations and remain confident about the strengths of our company and our long-term growth potential. Technological innovation, material science knowhow, operational execution, customer satisfaction and capital discipline are all key to the long-term success of Albany. I’ll provide an overview of 2023’s financial performance. Rob will later discuss our fourth quarter results in detail and provide our outlook for 2024. In 2023, our businesses remain focused on operational execution and delivered outstanding financial performance. This is a testament to the strong management team at Albany, who have stayed a step ahead of global macroeconomic issues and allowed us to deliver our high-quality products on time with excellent financial results. We close the year with consolidated revenue of $1.15 billion, up 11%, primarily driven by 12% topline growth in our Engineered Composites business, along with 10% topline revenue growth in Machine Clothing, largely resulting from our recent Heimbach acquisition. Importantly, we grew adjusted EBITDA to $265 million, up 5% over the prior year. Adjusted EBITDA margins came in just over 23% versus the prior year of 24.5%. The margin compression was primarily driven by growth in sales at Engineered Composites and the acquisition of Heimbach. GAAP net income for 2023 was $111 million or $3.55 per share, up from $96 million last year or $3.04 per share. Diluted adjusted EPS for 2023, after adjustments primarily driven by expenses related to the Heimbach acquisition was $4.06 versus $3.87 in the prior year. Free cash flow for the year increased to $64 million from $32 million. Turning our focus to the segments, our Machine Clothing business excluding Heimbach, continues to be a strong consistent performer. This year was no different. Our Machine Clothing business excluding Heimbach reported $620 million in revenue, up 2% versus prior year, on a currency-neutral basis. Adjusted EBITDA was $229 million, up 3%, again, on a currency-neutral basis. The adjusted EBITDA margin was 37%. The segment finished 2023 very strong, completing backlog orders and posting better results than we anticipated, especially in North America and Asia. The Heimbach acquisition added $51 million to Machine Clothing’s topline for the final four months of 2023 and was modestly diluted to GAAP earnings. We continue to be pleased with the addition of Heimbach and the expanded presence in both European and Asian markets. Integration remains on track and we expect that it will be accreted on a GAAP basis in 2025. Our Machine Clothing business is well-positioned globally, with an increased share of our customers serving the secularly growing packaging and tissue markets, both of which continued to grow for us on a global basis. This was offset somewhat by weaker engineered fabrics demand, particularly in Europe. Overall, we saw a positive impact on our bottomline results from both product and geographic mix. Machine Clothing continues to demonstrate world-class execution across its global markets. Our Engineered Composite segment is executing on this long-term growth strategy. The segment reported revenue of $477 million, up 12% versus the prior year, while adjusted EBITDA margins expanded 60 basis points to 19% compared to 2022. Growth was driven by commercial programs, including Boeing 787 and new programs that kicked off in late 2022. ASC LEAP revenues was $175 million, up approximately $15 million year-over-year, in line with our most recent guidance. Turning to U.S. Government programs, we made first article delivery of the CH-53K Aft Transition in the second quarter of the year, ahead of schedule. The execution of the AEC operations team was exemplary and their ability to timely deliver on this program was noted by the industry. Recurring production revenues on defense programs were up in aggregate year-over-year. This growth was masked by lower 2023 non-recurring revenues associated with the standoff of the CH-53K Aft Transition production line. These non-recurring efforts were largely completed in the first half of 2023. We have a robust business development pipeline and have one significant new business in 2023, which will result in revenues in the short-term. Notably, in 2023, we have significant growth in space programs and other emerging platforms. AEC’s consistent ability to deliver a quality product on time to our customers is a significant competitive advantage when competing for new business. Turning to our business strategy, Machine Clothing is a consumable aftermarket business that performs consistently year-in and year-out. Albany International Machine Clothing benefits from a longstanding reputation for reliability, technological leadership that our customers value. The business generates strong cash flows and provides an excellent return on capital. Successful integration of Heimbach will generate system-wide efficiency and enhance customer service. The integration is designed to drive earnings and cash flow growth in the years to come. Engineered Composites will continue to be an important source of growth as we focus on building out our business by disciplined selection of strategic partners and programs with a focus on capital efficiency. From an operations perspective, we will continue to deliver world-class execution and to meet our customers’ quality and delivery requirements. Our reputation in the marketplace continues to grow and our business development pipeline will provide us with growth opportunities over the medium-term. Our continued investment in proprietary and differentiated technologies will translate into meaningful growth over the long-term. Our balance sheet remains very strong, allowing us to pursue those investments that provide the highest risk-adjusted returns to our shareholders. During 2023, the company executed on the acquisition of Heimbach, invested in organic growth at AEC, continued to invest significantly in R&D and increased our dividends to shareholders. This disciplined approach to capital management will continue to inform our business decisions. With that, I will hand it over to Rob to provide more details on the quarter and our outlook for 2024. Rob?

Thank you, Gunnar, and good morning, everyone. I will review our fourth quarter results of 2023 and then provide our outlook for 2024. During the quarter, a number of factors resulted in us delivering a result well ahead of our earlier expectations. At Machine Clothing, we successfully executed on a number of consumer orders, resulting in drawing down our backlog to more normalized levels. We also saw accelerated procurement savings as a result of the team’s efforts to optimize our supply chain, a nice early win from our Heimbach integration. Additionally, Heimbach’s standalone results were better than expected for the quarter. Corporate expenses came in lower than expected as we were managing controllable expenses. Our favorable effective tax rate for the quarter is due to the impact of a few discrete items. For the fourth quarter, we reported net sales of $324 million, up 20.4% from the fourth quarter last year and 19.6% versus the prior year period on a currency neutral basis. The growth was primarily driven by Heimbach. Fourth quarter Machine Clothing net sales, excluding Heimbach, increased 2.8% on a currency neutral basis versus the fourth quarter of the prior year. Higher sales to the packaging and tissue industries were partially offset by contraction in our other end markets, most notably engineered fabrics. In terms of geography, markets in the Americas are stronger year-over-year, Asian markets are slightly positive, while European markets remain soft. Engineered Composites net sales of $132 million increased 10.6% on a currency neutral basis compared to the fourth quarter of 2022. Our growth was driven by strength across our commercial and space programs, partially offset by our defense programs. I would like to highlight that our recurring production revenues on the defense programs increased year-over-year, driven by both CH-53K and JASSM. During the fourth quarter of last year, there was significant one-time revenue generated by the stand-up of the CH-53K Aft Transition production line. Fourth quarter gross profit for the company was $120 million, up $23 million or 22.5% from the same period last year. Within Machine Clothing, excluding Heimbach, favorable product mix and lower procurement costs drove an increase in gross margins to 51.9% of 270 basis points versus the same period last year. While at AEC, gross margins finished with a strong 20%, up 120 basis points versus the same period last year. Note that for the quarter, we recognize a net unfavorable change in the estimated profitability on our long-term contracts of $1.5 million, compared to a net unfavorable change of $1.7 million in the fourth quarter of last year. Net R&D expenses were in line with the prior year and represent approximately 3% of our revenues. SG&A expenses for the fourth quarter were largely unchanged on the base business from the prior year. The year-over-year growth in total SG&A is due to the addition of Heimbach. GAAP net income attributable to the company for the quarter was $30.5 million, compared to $18.1 million last year. Heimbach results reduced GAAP net income by approximately $5 million, largely the result of inventory step-up and initial integration expenses. GAAP diluted EPS was $0.97 per share in this quarter versus $0.58 in the same period last year. After adjustments primarily related to the Heimbach acquisition as detailed in our non-GAAP reconciliation, the adjusted EPS on a diluted basis was $1.22, compared to $0.75 in the same period last year. Please note that from this call going forward, EPS results will be reported on a diluted basis. Adjusted EBITDA of $75 million for the fourth quarter increased 28% from the prior year period. Machine Clothing adjusted EBITDA excluding Heimbach increased 12% to $58.6 million. Segment adjusted EBITDA margins were 37.5%, an 80-basis-point improvement from the prior year. Heimbach operations added $3 million of adjusted EBITDA. AEC adjusted EBITDA was $27.1 million, a 21% improvement over the prior year. Margins at AEC were 20.5% of sales, a 170-basis-point improvement over the prior year period. During the fourth quarter, the company generated $39 million of free cash flow with cash flow from operation -- operating activities at $74 million and capital expenditures at $35 million. Over the fourth quarter, we paid down debt of over $30 million. Our balance sheet remained strong with a cash balance of $173 million and over $350 million of borrowing capacity under our committed credit facility. Our net leverage at the end of the year came in at approximately 1 time, giving us financial flexibility to execute our plans. Finally, I want to touch upon Heimbach. Heimbach added $36 million to our topline for the quarter and was modestly diluted to our GAAP earnings. I am impressed with their people and technology. Our integration efforts are on track and I have confidence in our ability to meet the financial targets outlined at the time of the acquisition announcement. Turning to our outlook for 2024, we are forecasting another strong year with double-digit topline growth and continued attractive EBITDA margins. Moving to a Machine Clothing outlook, we expect the business to perform well in the coming year. We anticipate markets in Europe will remain soft by historic standards. However, Asian markets are showing early indications of improvement from the soft patch they saw in the first half of 2023. Markets in the Americas remain healthy. For 2024, the Heimbach acquisition, as expected, will meaningfully add to our revenue outlook and will be diluted to our GAAP results. The low end of our Machine Clothing guide assumes weaker-than-expected global market conditions and corresponding lower absorption. The top end of our range assumes robust markets in the Americas, continued recovery in Asia and improvement in Europe. We expect revenues of $760 million to $790 million and adjusted EBITDA of $230 million to $250 million. Turning to AEC, we are on high-demand programs and most are continuing to ramp to sustained production levels. Going forward, we expect our long-term growth to continue to be driven by increasing production across commercial, defense and space programs. We have a strong backlog and we continue to see positive results from our ongoing business development efforts. We have one new business that we expect will add revenues to the second half of the year and set us up for continued growth into 2025. As we think about our guide, the low end of our guide, beyond normal variability, takes into account the potential for lower-than-planned LAEP component demand from our customer or delays in the reward of new programs reflected in our plan. The high end of the range takes into account the potential for earlier-than-anticipated start on new wins and a higher-than-expected LEAP production. Overall for the segment, we are providing an initial revenue guide of $500 million to $540 million. From a profitability perspective, we expect to see a positive shift in product mix and a modest improvement in margins. Accordingly, we are guiding our adjusted EBITDA at $97 million to $107 million. I would like to bring your attention to some Hudson headwinds [ph] impacting our 2024 adjusted EPS. We will see higher pension expense in our base business due to the expiration of prior accounting treatment relating to the amortization of prior service costs. This will result in a non-cash expense of approximately $4 million or $0.09 per share. Purchase accounting adjustments from the Heimbach transaction will increase depreciation and amortization by $3.7 million or approximately $0.08 per share. And finally, our previously placed interest rate swap arrangement will mature at the end of October 2024. We are exploring various alternatives to minimize the impact. For guidance purposes, we have estimated the full impact to our net interest costs at approximately $2.6 million or $0.06 per share, assuming current interest rate levels. Together, these items represent a $0.23 headwind to our EPS by 2024. These impacts excluding interest are non-cash. At a consolidated level, our 2024 guidance is as follows; revenue of $1.26 billion to $1.33 billion; adjusted EBITDA between $260 million and $290 million; adjusted EPS between $3.55 per share and $4.05 per share; depreciation and amortization between $85 million to $95 million; an effective income tax rate of 29% to 31%; capital expenditures in the range of $90 million to $95 million. Our goal with this guidance is to provide investors with a forecast which equally balances the risks and opportunities we see in the coming year. Now, I would like to open the call for questions. Operator?

Thank you. [Operator Instructions] Our first question today is coming from Steve Tusa of J.P. Morgan. Your line is open.

Hey. Good morning. How are you?

Hi. How are you, Steve?

Good morning.

John, nice working with you. Congrats on retirement.

Thank you very much.

Just maybe a little bit of color on the quarterly cadence for the year on sales and margins by segment for 2024?

Yeah. So, Steve, we haven’t provided a quarterly guidance. I think, if you look historically, we tend to be a little bit lighter in Q1, but I would just say that, when you look at the nature of our business, there really isn’t a seasonality that is really significant. So I wouldn’t overweight one quarter significantly over another at this point.

Okay. And then just maybe your latest color on what’s happening at Boeing and how you guys are kind of aligning with their production, which seems a little more volatile than expected maybe a few months ago.

Yeah. Obviously, we’re watching that with high interest, Steve. But our contract and relationship is with Safran, and they said it very succinctly in their earnings call that they are -- they have a plan for the year and will continue on that until there are changes coming from Boeing. And that’s kind of our position as well. We have a plan. We recognize there might be a reduction in that. That’ll have some revenue impact, but mostly revenue impact. So, we’ll wait and see. It will be -- the first quarter will probably be indicative to where the year goes with the LEAP going to Boeing.

And then just one more quick one, just cash conversion for 2024. Thanks a lot for the details.

Great. Thank you. I’m sorry, say that again, Steve?

Cash conversion.

Cash…

Oh! Cash conversion…

Cash conversation. Yeah.

So cash conversation will be an improvement over this year. That is what we’re expecting. We haven’t provided that level of detail, but we are -- if you look at our prior Investor Day materials, our long-term goal is to get net income conversion just like near net income. So, we’re not there yet. We’re still in growth mode. So we still are ramping up on a number of programs, Steve, but it should be higher than this year for sure.

Great. Thanks a lot, guys.

Thank you. One moment for the next question. Our next question will be coming from Jan-Frans Engelbrecht of Baird. Your line is open.

Thanks. Good morning, John, Rob and Gunnar. Congrats on a good quarter. I guess, I’ll start with, can you just give us a sense if there’s been any communication with Safran on the LEAP contract pricing structure? And could you see this transition from a cost-plus to a fixed price in the near-term? I would imagine that fixed price would be quite attractive for your margin profile?

Yeah. We -- the structure remains the same. It is a cost-plus program. And coming into this role, I can tell you that I’m surprised to see that that is the way the contract is constructed. And as we go forward, our goal -- our joint goal is to reduce the cost of 3D woven products so that it becomes more attractive in the market beyond LEAP and some of the other projects that we’re doing. So we’re looking at that structure and we will update when we’re ready.

Perfect. Thanks. That’s helpful. Just a quick follow-up. On the integration of Heimbach, are there any additional lessons that you’ve maybe learned in terms of pricing that you could incorporate in the existing business or vice versa that you could just share with us?

Yeah. You learn -- you always learn something when you get into the details of a new company. I’ve spent quite a bit of time there. I’ve been to four of the sites getting into the detail. I think the best way to describe this is, we have a very strong Machine Clothing business. They’re very good at what they do. What we’re doing with the Machine Clothing business is what you should expect to see from the Heimbach integration. The bonus here is that we’re getting new technology, we’re getting a stronger presence both in Asia and in Europe, and technology that is complementing. So we’re seeing that. We’re very confident with where we’re going with this integration. It’s a very good acquisition.

Perfect. Thank you. I’ll jump back in the queue. Thanks.

Thank you. One moment for the next question. And our next question will be coming from Pete Osterland of Truist Securities. Your line is open.

Hey. Good morning. I’m on for Mike Ciarmoli this morning. Thanks for taking our questions. First, on Machine Clothing…

Good morning.

Good morning. On Machine Clothing segment, what is your outlook for growth for the Heimbach business in 2024? Is there any meaningful difference between the growth you’re expecting for the year there relative to your legacy Machine Clothing business?

No. I think we look at the whole business as a GDP growth business. We expect Heimbach to be relatively flat based on the concentration of European businesses, but they also have a business in Asia. So, with that, we think the first year will be flat.

Great. Thanks. And then just as a follow-up, with the step-up for capital expenditures in your guidance this year, if you could just provide some more detail there, how much of the year-over-year increase is related to the acquisition and are there any areas within AEC you could talk about where you’re targeting increased capital spending this year to drive future growth? Thank you.

Sure. This is Rob. We are going to see a higher level just with the addition of Heimbach. They are investing in their capacity as well and capabilities. So, that’s definitely an impact. As it relates to AEC, we continue to be in ramp mode in a number of programs, plus we’ve got some other wins that we’re going to need to make some investment in this year to support the growth. With 10% growth, I mean, that’s really just fundamental as we’re going to see some level of elevated CapEx for a little bit of time here. However, I would just say that, the other piece where we’re investing and it shows up with purchase software is, we do have some CMMC and other requirements. But overall, the investment level that we’re reflecting for this year really just reflects the topline growth -- double-digit topline.

Great. Thanks for the color.

Thank you. [Operator Instructions] One moment for the next question. And our next question will be coming from Jordan Lane of Bank of America. Your line is open.

Hey. Good morning. Thank you for taking the question. I know you guys said that you’re aligning with Safran and CFM’s guide. Are you seeing any changes from their ability to take on excess inventory, and then also, too, for your production schedule this year? Are you doing anything different to avoid the excess inventory that they held through 2023?

Our plan with Safran has been set for the year. We’ve not seen any changes. There was some buildup of inventory last year because we kept it flat through the end of the year, but with a higher consumption expected this year, that inventory, both with us, Safran, will slowly be reduced. So our plan is -- on the program is relatively flat for the year, which will impact with a lower inventory.

Okay. Got it. And then just one follow-up, too. On M&A, could you guys talk a little bit about the pipeline right now? Is there any specific area you guys are looking to increase exposure?

Yeah. We -- there’s a lot of activity. I think it’s picked up. We get new opportunities in front of us on a weekly basis. So we are assessing everything that makes sense for us. The -- we just want to make sure that it’s a good fit for us and also that the multiple makes sense. We’ve seen some of the multiples be pretty high and with the cost of capital right now, we want to make sure that we make the right acquisition. We’re also looking at internal where do we spend, as the last caller said, we have relatively high capital expenditure and that’s because we see the opportunities there with the returns being very accretive. But we’ll continue to look and the market is active.

Thank you guys so much.

Thank you.

Thank you. One moment for the next question. The next question is coming from Gautam Khanna of TD Cowen. Your line is open.

Thanks for taking the question. This is Spencer Breitzke on for Gautam Khanna. Could you talk about your assumptions for CH-53K and F-35 for 2024? Thank you.

So CH-53K continues to grow in line with the plan from Sikorsky and the Marines. Good program, good growth, lots of work. We’re actually here in Salt Lake City today doing the call and we’ll be spending time later this week with Sikorsky. On the Joint Strike Fighter, I think, we should expect to see some growth to relatively flat. We know what Lockheed Martin is saying that they will build and will support the build. We’re ready to support that build, but last year it remained below 100. We’re hoping to see that it goes above 100, but we have planned for a rate right around the 100 in our numbers.

Thank you. Could you also talk about Europe demand for Machine Clothing and what you’re saying regarding destocking? Thank you.

Yeah. We’ve seen Europe being soft. We don’t see it becoming softer, but we’re keeping our eyes on Europe and the latest expectations of GDP growth there. Are you still on?

Spencer, are you there.

Yeah. Thank you. That’s all for me.

Okay.

Thank you. That concludes today’s Q&A session. I will now turn the call back over to Gunnar Kleveland for closing remarks. Please go ahead.

All right. Thank you and thank you everyone for joining us on the call today. We appreciate your continued interest in Albany International. Thank you and have a good day.