Albany International Corp. (NYSE:AIN) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Good day and thank you for standing by. Welcome to Albany International Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 hand the conference over to your speaker today, Mr. John Hobbs, Director of Investor Relations. Please go ahead, sir.
John Hobbs: Well, thank you, Norma, and good morning, everyone. Welcome to Albany International's third quarter 2023 conference call. As a reminder, for those of you listening on the call, please refer to our press release issued yesterday afternoon detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking that 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 November 6, 2023, as well as our SEC filings including our 10-Q. Now I'll turn the call over to Gunnar Kleveland, our 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 third quarter earnings call. I'm pleased to be here today on my first call as President and CEO of Albany International. The Company has again produced very good results in the third quarter with excellent operational execution and positive free cash flow for both the quarter and on a year-to-date basis. Before we get into the details, I'd like to take a moment to acknowledge Bill Higgins' steadfast leadership of Albany as President and CEO through the past several years. While he has retired from his role, he continues to provide guidance and counsel as a member of the Company's Board of Directors. My transition has proceeded smoothly, and Bill leaves a legacy of a great company with innovative proprietary technologies, businesses that are performing well and a healthy balance sheet.
The business segments each have impressive product quality and exceptional customer service. I know from experience, these elements are the foundation of excellent customer relationships, continued business opportunities and a sustainable competitive advantage. These factors weighed on my decision to join Albany. I spent my first few weeks getting more familiar with operations, traveling to numerous sites across the business, meeting with our team and having meaningful conversations at all levels of the Company from the shop floor to the C-suite, really spending my time focusing on the technology, operations and getting more familiar introducing myself as well as gathering impressions from our customers and the investment community. The Company's technologies and track record of innovation really strike me as strategic assets.
The same underlying weaving technology is fundamental to the Company's businesses and driver of ongoing technical collaboration and [indiscernible]. Within Aerospace, to push towards lighter weight, more environmentally friendly designs is the number one challenge to be solved for the next generation of commercial aircraft. Albany's proprietary composite technologies, such as our 3D woven composites are well positioned to play a role there. In Machine Clothing, it's clear from my conversations with -- that customers value Albany's industry-leading, product technology and technical expertise. In an industry that places a high value on operational reliability and operating efficiency, machine clothings, custom tailor and consumable belts are a well-earned reputation, helping our customer make the most efficient use of their raw materials, energy and labor.
I believe our company's culture and people are the key to success. Albany's operational metrics in safety, quality and customer service indicate to me a well-developed operational discipline. I think of continuous improvement as a lifestyle, which I also see across Albany's operations. From my operations leadership experience, I know how important on-time delivery and quality are to manufacturing operations. Finding a supplier with the performance of Albany International is very hard. And well, as a customer, that just makes you want to give them more business. That kind of execution is a great foundation for our long-term and profitable business relationship and profitable growth. When you add the technology and innovation that we have to offer to all our customers, I think Albany International is an easy pick.
Our challenge is to deliberately and strategically manage our growth while not losing sight of operational execution and capital discipline that is foundational to the business long-term success. Now let's look at third quarter results we announced last night. The Company completed the acquisition of the Heimbach Group on August 31 of this year. So the GAAP results include one month of Heimbach operations and, of course, expenses associated with the transaction. The details are included in our press release. Rob will review these in more detail in his remarks. Heimbach operations added nearly $16 million of revenue in the MC segment and reduced the segment's operating income by $500,000. We are reporting GAAP revenue of $281 million, up 7.9% year-over-year, driven by sales growth at AEC and one month of Heimbach results in MC.
GAAP net income was $27 million or $0.87 per share, up from the GAAP results of third quarter last year of $11 million or $0.34 per share, which incorporated $49 million of pension settlement charges. As expected, Heimbach was slightly dilutive to GAAP EPS for the quarter, about $0.01 per share. Excluding the impact of the Heimbach acquisition, revenue of $266 million was about $5 million or 2% higher than the third quarter of last year, driven by higher revenue at AEC. Adjusted EPS was $1.02 per share compared to $1.15 per share reported in the third quarter of last year. Adjusted EBITDA, excluding Heimbach impact, was $63 million or about 24% of sales right on the Company's stated long-term target. The Machine Clothing business continues to perform very well, particularly in light of challenging macroeconomic conditions in Europe and China.
Excluding the effect of the Heimbach acquisition, Machine Clothing revenue of $151 million was about 2% lower on a currency-neutral basis, while adjusted EBITDA, again excluding the effect of the acquisition of this measure was $56 million. This translates to 37% margin. North American markets continue to report sales growth year-over-year, while sales declined in other regions of the globe. The Heimbach integration is underway and proceeding as planned. Our segment President, Daniel Halftermeyer, and his expanded team have been focusing on workforce engagement, ensuring operational stability and financial integration in these first few weeks. We have a clear line of sight into the cost savings and efficiency opportunities that the Company previously announced and expect acquisition will become accretive to earnings and cash flow in 2025.
The Aerospace Composites business had a very good third quarter. Revenues of $115 million were up 6% year-over-year on a constant currency basis. Adjusted EBITDA of $22 million was up about 3%. The business is well positioned and continues to win new programs, both commercial and defense from existing and new customers. This will collectively contribute to AEC's long-term growth over the coming years. The Company is executing well. It is in great financial health, and it is well positioned with unique technologies and know-how across the businesses. We are in an enviable position. We will continue pursuing continuous improvement across all of our operations. We expect to deliver the benefits of the Heimbach integration as planned. We're investing wisely today in technology development that will position the Company to profitably grow well into the next decade.
I'm excited about the opportunities. And with that, I will hand the call over to Rob to review the results in more detail and provide our updated guidance for the year. Rob?
Rob Starr: Thank you, Gunnar, and good morning, everyone. I will now turn to our third quarter results and then provide our updated outlook for the year. As Gunnar mentioned earlier, we are reporting GAAP net sales of $281 million, up 7.9% from the third quarter of last year. Excluding currency translation effects and the one month of Heimbach sales, revenue growth for Albany was 2% versus the prior year period. Machine Clothing net sales, excluding Heimbach, declined 1.5%. Higher sales in packaging and tissue product lines were offset by contraction across our other product lines, most notably in pulp and engineered fabrics. Compared to a year ago, European markets are clearly softer, while Asian markets have been mixed. The North American market continues to perform well with modest growth over the prior year period.
Engineered Composites net sales of $115 million grew 5.7% on a constant currency basis compared to the third quarter of 2022, driven principally by year-over-year growth on the LEAP, 787 and various space programs. This was partially offset by lower CH-53K revenues. Our CH-53K results from the prior year provided a difficult comparison for us as the last year benefited from significant amounts of nonrecurring revenue for the helicopters as transition program. The CH-53K nonrecurring items largely concluded in second quarter of this year. So we will continue to see tough comparisons through the first half of next year. Our CH-53K program sales will grow as the program moves toward full rate production. The AEC LEAP program generated $45 million of revenue in the third quarter, nearly $5 million higher than the same period last year.
We now expect full year ASC LEAP revenues to be up approximately $15 million compared to the full year 2022. 2023 LEAP revenues are higher than we had previously guided as we manage production efficiencies on the program. Our long-term LEAP revenue target of $200 million for 2026 remains intact. Third quarter gross profit for the Company was $102 million, up $1.4 million or 1.3% from the same period last year. Within MC, higher input costs and lower overhead absorption were offset by the incremental gross margin from Heimbach. Excluding Heimbach, Machine Clothing gross margin was 50.7%, very similar to the 50.8% we reported in the first two quarters of this year and down about 100 basis points on a year-over-year basis. At AEC, gross profit expanded $1.3 million or 6.2%.
During the quarter, we recognized a net favorable change in the estimated profitability on long-term contracts of $900,000 compared to a favorable change of $2.6 million in the third quarter of last year. AEC's gross margin was 19.7%, similar to the same period last year. Third quarter R&D spend of approximately $10 million was largely unchanged from the prior year. And excluding the Heimbach revenues, represented about 3.5% of sales. Third quarter SG&A expenses were $52 million, up $15 million from the third quarter last year. A number of factors drove the year-over-year increase. Machine Clothing SG&A increased $6.5 million, principally driven by Heimbach SG&A expenses and $2.3 million from currency translation effects. AEC SG&A was $1.9 million higher on increased incentive comp and personnel-related costs.
Corporate expenses increased $6.4 million, principally due to acquisition-related expenses, CEO transition expenses, incentive compensation as well as IT investments in support of our CMMC requirements. GAAP net income attributable to the Company for the quarter was $27 million compared to nearly $11 million last year. As indicated earlier, Heimbach reduced net income by approximately $500,000. GAAP earnings per share was $0.87 in this quarter compared to $0.34 in the same period last year after adjusting for the impact of CEO transition costs, acquisition and integration costs, purchase accounting adjustments on this quarter's results and other adjustments detailed in our non-GAAP reconciliations, adjusted EPS was $1.02 this quarter compared to $1.15 last year.
Adjusted EBITDA of $64.7 million declined $3.4 million from the third quarter of '22. Machine Clothing adjusted EBITDA was $57.5 million or 34.5% of net sales. That is down about $1.5 million from $59 million in the prior year quarter. AEC adjusted EBITDA was $22.1 million or 19.3% of net sales, up about $600,000 from last year's result. During the quarter, the Company generated $45 million of free cash flow, cash flow from operating activities was $59 million and capital expenditures totaled $14 million. Net cash consideration from [indiscernible] was $133 million. We remain in a strong financial position with a cash balance of $172 million and well over $300 million of additional liquidity under our committed credit facility. We closed the quarter having refinanced our credit facility for another five years with a maturity into 2028 and we upsized the facility to $800 million.
Our net leverage at the end of the quarter was a modest 1.3x, providing us the flexibility to continue pursuing our long-term growth strategy. I would like to now turn to our outlook for the full year. Please note that our full year guidance for the Machine Clothing segment includes four months of Heimbach operations. Please also note for [indiscernible] purpose, we will incur $5.5 million of inventory step-up for the full year 2023 relating to the transaction. The inventory step-up will be complete by year-end. Heimbach's estimated annual G&A, including the impact of purchase accounting will be approximately $12 million to $13 million going forward. Machine Clothing business conditions softened somewhat during the third quarter. On a constant currency basis, we experienced demand growth in packaging and tissue product lines, while the other product lines were lower.
Business conditions in Europe are clearly soft relative to the past few years, while Asian markets are mixed with the Americas growing modestly. Orders at the end of the quarter were lower than they were at the same time last year. We will have a full quarter of Heimbach operations in the fourth quarter, and as a result, expect revenues to increase sequentially and year-over-year. We are raising Machine Clothings revenue guide to a range of $660 million to $670 million, increasing approximately $50 million, including the estimated contribution from Heimbach. We continue our efforts to offset inflationary impacts through ongoing continuous improvement efforts and input cost management. As a result of the Heimbach acquisition, we are revising our adjusted EBITDA guidance range for Machine Clothing to $215 million to $225 million.
As is typically the case, Machine Clothing fourth quarter revenues and EBITDA results will be modestly lower than the prior quarters. Turning to Engineered Composites. As mentioned earlier, we expect the ASC LEAP program to generate approximately $10 million to $15 million more revenue in 2023 than we had originally guided. During the third quarter, we stepped up 787 production. Based on this, along with growth in smaller programs, we are raising our revenue guidance and now expect AEC revenue to be between $440 million and $460 million. We are narrowing our AEC full year adjusted EBITDA guidance to $85 million to $90 million. At the total company level, we are updating our 2023 full year guidance as follows; revenue between $1.10 billion and $1.13 billion, up $60 million.
Our guidance includes approximately $15 million top line contribution from Heimbach, adjusted EBITDA between $238 million and $254 million, an effective income tax rate of 32% to 33%, implying an effective tax rate of approximately 28% to 30% in the fourth quarter of the year. Depreciation and amortization, including Heimbach of approximately $75 million; capital expenditures in the range of $85 million to $95 million. GAAP earnings per share of between $3.02 and $3.37, taking into account approximately $0.16 of dilution from the Heimbach acquisition, largely the result of purchase accounting. Adjusted earnings per share between $3.35 and $3.70. The impact of Heimbach is anticipated to be negative $0.04 to $0.06 in the balance of the year. With that, let's open the call for questions.
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