Albany International Corp. (NYSE:AIN) Q4 2023 Earnings Call Transcript
Albany International Corp. (NYSE:AIN) Q4 2023 Earnings Call Transcript February 27, 2024
Albany International Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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.
John Hobbs: 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?
Gunnar Kleveland: 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?
Rob Starr: 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?
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