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Edited Transcript of AIN earnings conference call or presentation 6-Feb-18 2:00pm GMT

Q4 2017 Albany International Corp Earnings Call

ROCHESTER Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Albany International Corp earnings conference call or presentation Tuesday, February 6, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John B. Cozzolino

Albany International Corp. - Former CFO & Treasurer

* Joseph G. Morone

Albany International Corp. - Former President, CEO & Executive Director

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Conference Call Participants

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* Benjamin David Klieve

NOBLE Capital Markets, Inc., Research Division - Former Senior Government Services and Defense Technology Analyst

* Christopher Edmund Hillary

Roubaix Capital, LLC - CEO and Portfolio Manager

* John Edward Franzreb

Sidoti & Company, LLC - Senior Equity Analyst

* Peter John Skibitski

Drexel Hamilton, LLC, Research Division - Former Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter earnings call for Albany International. (Operator Instructions) At the request of Albany International, this conference on Tuesday, February 06, 2018, will be webcast and recorded.

Now I'll turn the conference over to Chief Financial Officer and Treasurer, John Cozzolino, for introductory comments. Please go ahead.

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John B. Cozzolino, Albany International Corp. - Former CFO & Treasurer [2]

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Thank you, operator, and good morning, everyone. As a reminder for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results, with particular reference to the safe harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP. And for purposes of this conference call, those same statements also apply to our verbal remarks this morning. And for a full discussion, please refer to that earnings release as well as our SEC filings, including our 10-K. (Operator Instructions)

Now I'll turn the call over to Joe Morone, our Chief Executive Officer, who will provide some opening remarks.

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [3]

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Thanks, John. Good morning, everyone. Welcome to our Q4 2017 earnings call. We've got a lot of ground to cover this morning, there's Q4, full year 2017, our short and long-term outlook for each business, the new tax law, the new rev rec standards and the announcement we made yesterday evening about my successor, our new CEO as of March 2, Olivier Jarrault.

As usual, I'll start the call with an overview, John will go into more details and also touch upon the new tax law and revenue recognition standards and then I'll follow with our outlook and some thoughts about Olivier. And then, as John said, we'll go to Q&A, including both live questions from those of you on this conference call, and if time permits, e-mail questions from those of you on the webcast.

Q4 2017 was another good quarter for Albany. Although charges associated with the new tax law contributed to a sharp drop in net income, both businesses performed well, resulting in solid growth in total company sales and adjusted EBITDA and strong cash flow.

As a result, Machine Clothing and AEC both reached the high end of their projected outlook for full year 2017, and we expect continued strong performance for both businesses in 2018.

In Machine Clothing, sales were once again stable in Q4, as the market trends of the previous 8 quarters persisted. A roughly 10% decline in publication grade sales was once again offset by a combination of steady, or incrementally growing, sales in the other grades.

Publication grades sales declined to approximately 23% of total revenue compared to 25% a year ago. Prices were again stable, although pricing pressure remained intense, particularly in Asia. New product performance was again strong across the board, and we are greatly encouraged by advances in the new technology platform in multiple segments and product lines. The only anomaly in the quarter was a drop in gross margin due to higher-than-normal end-of-year underutilization of capacity. We do expect gross margin to bounce right back in Q1 and for full year 2018 we expect gross margin to be right in line with the full year average of the past 2 years. And speaking of full year performance, full year 2017 sales, excluding currency, gross margin, operating income and adjusted EBITDA were all virtually identical to full year 2016.

For both years, full year gross margin was 47.5% and full year adjusted EBITDA was at the very high end of our normal range of $180 million to $195 million. After a decade of year-over-year declines in sales due to the collapse of the publication grades, we view this top line stability in Machine Clothing as an indicator of an important structural change in this business.

Although publication grade sales are likely to continue to erode at that same 5% to 10% annual rate and to cause a periodic volatility when large numbers of publication machines are shut down in short periods of time, the publication grades have now become a small enough part of our sales mix that under normal economic conditions, incremental growth in the other grades should usually be sufficient to offset those publication grade declines.

What these last 2 years suggest is that it may now be time to think of Machine Clothing for the long term as a stable business with some potential for incremental sales volume increases during strong economic conditions, rather than as a gradually deteriorating business fighting a market in structural decline.

AEC also had a good quarter and full year. Sales grew by 12% compared to a strong Q4 2016 and 38% compared to full year 2016. The year-over-year Q4 increase was driven primarily by growth in the 787 fuselage frames, F-35 airframes and CH-53K programs in Salt Lake City, along with the new program for engine parts in Boerne.

LEAP, which accounted for 44% of sales in Q4, was flat compared to an especially strong Q4 2016, but sequentially, compared to Q3 2017, LEAP grew by 31%. And compared to full year 2016, LEAP grew by 39%.

All of AECs ramping programs made good progress on quality and deliveries in Q4, and the 2 new plans in Queretaro, Mexico are right on schedule. The first of these two plants produced and shipped its first LEAP fan blades late in Q4. We continue to see upward pressure on demand for the LEAP program, while demand for all of AEC's other ramping programs is either stable or facing incremental upward pressure.

AEC operating income improved to slightly above breakeven in Q4. As expected, Q4 gross profit was hurt by ramp-up inefficiencies, but the negative impact was offset by a favorable net adjustment to estimated profitability of long-term contracts. As a result, adjusted EBITDA, as a percent of sales, improved to 14% compared to 11% in Q3 2017 and 8% in Q4 2016. In new business development, we continue to make progress on 3 fronts: opportunities with our current customers on existing platforms, opportunities on new platforms, and longer-term opportunities still in development. We've made enough progress on each of these fronts to revise upward our estimate of revenue potential for 2020. In 2016, you'll recall, following the acquisition of our Salt Lake City operation, we stated that AEC had the potential to grow to $450 million in revenue by 2020. In midyear 2017, we revised that potential upward to $450 million to $500 million. We now think $475 million to $550 million is a reasonable estimate. This assumes both existing contracts and contracts that we believe are more likely than not to win -- that we are more likely not to win.

In sum, this was another good quarter and year for Albany with stable year-over-year performance on both top and bottom lines in Machine Clothing and continued strong growth and incremental improvement in profitability in AEC.

And with that, let's turn to John for more detail.

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John B. Cozzolino, Albany International Corp. - Former CFO & Treasurer [4]

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Thank you, Joe. I would like to refer you to our Q3 financial performance slides. Starting with Slide 3, net sales by segment. Total company net sales in Q4 increased 6.4% compared to Q4 2016, bringing the full year sales increase to 10.8%. MC net sales, excluding currency effects, were up 0.8% in Q4 and 0.9% for the year, as declines in publication grades were more than offset by growth in other grades.

AEC net sales in Q4 increased 12%, due to the growth in the 787 fuselage frames, F-35 airframe and CH-53K programs, bringing the full year sales increase to 38.3%.

Turning to Slide 4. Total company gross profit, as a percentage of net sales, was 34.1% in Q4 compared to 36.3% in Q4 2016, reflecting the continued business mix shift to higher AEC sales.

Our MC gross profit margin is typically lower in Q4 than the rest of the year. It decreased to 45% in Q4 2017 compared to 46.8% in Q4 2016 due to stronger-than-normal year-end effects on capacity utilization. Full year MC gross profit margin was steady at 47.5%.

Slides 5 and 6 show net income and adjusted EBITDA by segment for the quarter and full year. Adjusted EBITDA, for the total company in Q4 2017, was $43.4 million compared to $38.3 million in Q4 2016.

On a full year basis, adjusted EBITDA for the total company was $169.4 million in 2017, including the Q2 charge of $15.8 million for AEC contract revisions, compared to $168.9 million in 2016. MC adjusted EBITDA was $44.9 million in Q4 2017 compared to $46.6 million in Q4 2016, bringing full year adjusted EBITDA to almost $195 million in both years.

AEC adjusted EBITDA was $10.8 million in Q4 2017 compared to $5.5 million in Q4 2016 while improving the 14.1% of net sales in the current quarter.

Moving to Slide 7, earnings per share. We reported net income attributable to the company in Q4 of $0.12 per share compared to $0.49 per share in Q4 of last year. Q4 2017 earnings per share were reduced by $0.21 per share for tax adjustments, mostly related to the impact of new U.S. tax laws, while Q4 2016 earnings per share included a favorable impact of $0.08 per share from tax adjustments. Other adjustments, principally, for restructuring expenses and foreign currency revaluation are noted on the slide. Excluding the adjustments, net income attributable to the company was $0.43 per share in Q4 2017 compared to $0.36 per share in Q4 2016.

Slide 8 summarizes the impact of the new U.S. tax legislation. In Q4 2017, a discrete multi-noncash charge of approximately $7 million was recorded. About $6 million of that charge was related to liability for the mandatory deemed repatriation, while the remainder was due to revaluing U.S. net deferred tax assets to the new lower rate.

Looking ahead to 2018, we currently estimate that our tax rate from continuing operations will decline from 35% in 2017 to a range of 27% to 31% in 2018, with no significant impact on cash taxes. We also expect to continue our foreign cash repatriation program and that the new tax law should benefit that program over the long term.

Lastly, Slide 9 shows our total debt and net debt. Total debt increased about $11 million to a balance of $516 million at the end of Q4. Cash balances, however, increased approximately $30 million, resulting in a decrease in net debt of about $20 million in the quarter to a balance of $332 million.

Payments for all capital expenditures in Q4 were about $23 million, and we continue to expect the total company capital expenditures in 2018 would be in the range of $20 million to $25 million per quarter as the key AEC programs continue to ramp.

As discussed in the release during Q4, the company amended and extended its revolving credit facility. The facility was increased to $685 million and the maturity date was extended to November 2022. At the end of the year, borrowings under the new facility were $501 million, which includes the effect of paying down in Q4 the remaining $50 million due on the Prudential notes.

Now I'd like to turn it back to Joe for some additional comments before we go to Q&A.

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [5]

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Thank you, John. Turning to our outlook, the -- as John just described, the new revenue recognition standards will probably complicate year-over-year comparisons in 2018, especially in Q1 since the actual income statement for 2018 will be on the new standard while the 2017 comps will be based on the old standard.

Throughout 2018 we will be required to disclose what our quarterly results would have been under the old standard, which should help to clarify the year-over-year comparisons. For the purposes of this release, we have presented our 2018 outlook under the old standard, thus in effect holding revenue recognition standards constant. So for Machine Clothing, holding rev rec standards constant, we expect full year 2018 performance to be comparable to full year 2017 and for Machine Clothing to again perform in the upper half of our expected range for a full year adjusted EBITDA. While growing inflationary pressures and a weakening U.S. dollar could well lead to some aggression away from the high end of our normal range, a strong order backlog, healthy economic conditions around the world and continued strong product performance should lead to another good year for Machine Clothing in 2018.

As for AEC, we expect 20% to 30% growth in full year sales, driven primarily by the ramp ups in LEAP, 787 fuselage frames and the 50 -- and the F-35 programs. And again, holding revenue recognition standards constant, we expect the trend of incrementally improving AEC profit margins to continue through 2018 and 2019 as the rate of hiring, training and new equipment installation begins to slow and operating efficiencies advance.

In sum, this was another good year and another good quarter for Albany, with stable year-over-year performance in both top and bottom lines in Machine Clothing, continued strong growth and incremental improvement in profitability in AEC and in outlook in both businesses for continued strong performance next year or this year in 2018.

Finally, before we go to Q&A, a word about my successor, Olivier Jarrault.

Judging from everything the board and I have learned about Olivier, from extensive interviews, references, his records of accomplishments and a daylong visit to our operations in New Hampshire, Olivier is one impressive individual. He has brought in deep aerospace experience and has worked with and negotiated billions of dollars of contracts with all of the major aerospace OEMs, from Safran, GE and UTC to Lockheed Martin, Boeing and Airbus.

He has brought industrial experience beyond aerospace, from the transportation industry to industrial gas turbines. He has managed global operations significantly larger and more complex than Albany's. He has a long record of driving profitable growth, both organically and through M&A. And he has plenty of experience working directly with boards of directors and investors.

From everything I know about Albany and everything I've learned about Olivier, he is superbly qualified to lead this company. I'll be proud to hand over the reins to him on March 2, and I'm excited to see where he takes Albany from here. You'll get a chance to meet Olivier in the months ahead at investor conferences and at an Investor Day here in New Hampshire. And of course, you'll hear from him directly on our next earnings call.

And with that, let's go to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of John Franzreb from Sidoti & Company.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [2]

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An unusually large amount of items, this quarter to deal with?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [3]

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Yes.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [4]

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Let me start with Machine Clothing and the gross margin profile in Q4. You said it was underutilization, but revenue was up year-over-year. Just talk a little bit about what's going on in the gross margin profile in Machine Clothing?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [5]

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Yes, we always try to remind people, you need to -- you can't look -- take too literally any one quarter in this business, you need to look over the full year. So full year, 47.5% gross margin in '17, 47.5% in '16, 47.1% in '15 and so -- and we expect it to bounce right back to normal levels in '18. But if you go back to Q2, and especially Q3, we were running very hot, and you can see that in the gross margins. I think in Q3 it was up to 48.5%. And so we're building inventory in those quarters and plant utilization is really strong and then some of that reverses itself in Q4 where we're shipping inventory and driving down inventory and we've got the end-of-the-year effects and so it evens out. There -- but there are number of moving parts there, but fundamentally, year-over-year, it's all stable and all as expected.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [6]

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And in Q3, you teased us with the update on the long-term outlook. I'm most surprised by your change in discourse regarding Machine Clothing that reset in size of the publication -- sorry, the business can now be fully offset by growth in additional impact and all that. And that you're confident in saying that the business can essentially flat line. Could you just spoke a little bit about the growth side of the business? And how well you're doing there? And what's driving, everybody getting share, just a little bit more color on the shift in that dynamic that we've kind of gotten used to -- used to be near the line?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [7]

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You can't -- I don't think you can overstate the importance of this shift. And so if you look at the business, I think we've talked about this before, if you look at the business since 2007 and you just track year-over-year, quarter-over-quarter declines, it's a 30% top line decline. And you try to track where that decline is from, it's all publication rates. So we're -- we were living through one of the great structural dislocations of our lifetimes. And this business is -- just a great management team has weathered that storm and we're out on the other side now where 77% and growing of our sales are now in grades that for the long haul are GNP-driven grades, they're not grades that are being displaced by some fundamental structural phenomenon. In this case, digital media. In fact, if anything, the movement toward digital media, as expressed through online shopping, is actually helping grow over the long haul the packaging grades.

So yes, this is a structural change. And if you look at the grades that are now the predominant -- make up the predominant portion of our sales and that will make up a growing portion of our sales over time, publication -- I mean, packaging will continue to be GNP driven. Tissue will continue to be GNP and GNP per capita-driven in markets outside of the U.S. Pulp will be -- continue to be GNP driven and our small segment engineered fabrics, which represents 13%, 14% of our sales right now and is in markets adjacent to paper or with similar characteristics as paper, like fiber cement and nonwoven, they're all GNP driven as well. So we're seeing a business now that's primarily oriented toward markets that are growing not as fast as GNP, but growing directionally with GNP. And then the added variable on top of that is, if you look at where we are best able to differentiate our products with new technology, it's clearly #1 in tissue and #2 in the engineered fabrics grades, and #3 in pulp, so -- and then even in some segments of publication -- of packaging. So we're moving into grades that where we actually have quite a bit of leverage from technology. So yes, I know for many years, with John and I have talked to investors who have viewed Machine Clothing as a melting iceberg. I think it's time to bury that analogy, this thing is a rock.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [8]

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And one last question on your upward revision on the EC side of the business, it sounds like there's no change in your LEAP assumptions, more so that you're either gaining new platforms on -- the new customers or existing platforms. Is that the proper LEAP full year?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [9]

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I think it's all of the above. It's -- there's some incremental pressure on our existing platforms. There's -- we're increasingly confident of landing new business with existing customers on some platforms that they've already introduced. We haven't yet -- this upgrade does not take into account wins on entirely new platforms with new customers. So it's more incremental upward pressure with existing customers on either new business for us or existing business.

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Operator [10]

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Our next question will come from the line of Ben Klieve from NOBLE Capital Markets.

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Benjamin David Klieve, NOBLE Capital Markets, Inc., Research Division - Former Senior Government Services and Defense Technology Analyst [11]

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Have a handful of things here, I'll try to make this as brief as possible. Quick follow-up -- two quick follow-ups to the earlier questions here. You talked about the incremental pressure on existing platforms, I'm curious if you continue to see CFM, kind of, standing firm on the production schedule? Or if those incremental pressures you think are coming from the LEAP engine, you had nice couple of years. Do you think their current outlook is going to be -- has been increased? Or is going to be increased here in the near term?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [12]

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They haven't announced anything new, but they've -- but even if you just listen to the latest comments from CFM at the Singapore Air Show, it's clear that both Airbus and Boeing are expressing some desire to increase their production rates beyond the announced increases that they've already put forth, growing to 60 planes per month on the Airbus side and 57 MAXs per month on the Boeing side. So there's -- there are market signals that both Boeing and Airbus would like to produce more, the limiting factor is the engine. And I think where CFM is, is they want to be absolutely sure their supply chain is ready to meet existing commitments before increasing. But I'd say, all of the pressure right now is upward.

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Benjamin David Klieve, NOBLE Capital Markets, Inc., Research Division - Former Senior Government Services and Defense Technology Analyst [13]

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Yes, absolutely. Okay. And on the -- curious, if you're able to kind of break down the -- either the increase to the 2020 guidance or just the 2020 guidance overall between 3D and other application?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [14]

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Most of the incremental growth we're talking about is not 3D. So it's a combination of some upward pressure in Salt Lake and some upward pressure in Boerne, Texas. It's just going to be a significant increase in LEAP over the next few years and that would be something incremental to that.

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Benjamin David Klieve, NOBLE Capital Markets, Inc., Research Division - Former Senior Government Services and Defense Technology Analyst [15]

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Okay, perfect. Couple of questions on the MC segment. The technology advancements that you're referring that are encouraging you herewith. From a number of factors, it sounds like -- I'm curious, with these technological advancements, to what degree do you think they can improve operations in, say, 2019 and beyond or versus just, kind of, keeping the business in its current state? Are these advancements going to be improving operations down the road? Or are they going to be basically keeping that segment where it is?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [16]

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Yes, I think the best way to think about this business long term is stable. With -- when the economy around the world is really hot, maybe there is some incremental upside to volume. But over the years, there have been 3 downward forces on this business. One was the demise of the publication grades. And as I was just describing, we think that has washed through -- that has been an incredibly powerful force. But there've been two others. One is pricing and pricing pressure around the world, it's there every day like a really bad toothache, it's especially bad in Asia. Our strongest weapon against pricing pressure is the new technology. So the way we think about this is, the investment in technology is intended primarily to offset the corrosive effects of pricing pressure. And thus it's another weapon for holding this business stable. We think that's a much safer way of thinking about this than thinking about it as upside, particularly since things were moving really slow in this industry and so if you -- the place where this new technology has the biggest impact tends to be on new machines and, for example, tissue. But new machines come in and displace the existing base very slowly in this industry. And the third downward pressure is just inflation. And we have been fighting inflation through incremental productivity gains. I think the team has done a great job with that and continues to do a great job with productivity improvements. So I think of the technology as a major arrow in the quiver to fight against price pressure and the overall effect is stability.

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Benjamin David Klieve, NOBLE Capital Markets, Inc., Research Division - Former Senior Government Services and Defense Technology Analyst [17]

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John, one quick question for you regarding the impacts of the tax legislation here. Is there to be any comment at all on the -- on your current cash position and the outlook for repatriation? Where does your cash position onshore stands today versus 3 months ago or whatever? And then at -- where do you think that will be maybe at the end of this year?

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John B. Cozzolino, Albany International Corp. - Former CFO & Treasurer [18]

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Yes, so Ben, we have had our repatriation program for several years, dealing with not really just the tax cost in the U.S. but also overseas, and the limitations on getting money out of certain countries. Of the cash that we have on hand at the end of the year, most of that is held outside of the U.S. That position really hasn't changed over the last few months. But it's in countries such as China, Brazil, various countries in Europe, so we expect to continue to repatriate money this year. We'll look for places where we can accelerate it.

Remember, we are also using some of that offshore cash to fund the growth in AEC in other countries. So I am not anticipating a dramatic increase to what we're able to repatriate this year, as we work through -- what we need to on other countries. So we'll use the cash for AEC, we'll do some more reparations this year, we'll look for ways to accelerate where we can. And as I noted in the release, I think over the long term, we'll be able to do this more efficiently, but it does take some time.

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Benjamin David Klieve, NOBLE Capital Markets, Inc., Research Division - Former Senior Government Services and Defense Technology Analyst [19]

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Perfect. Joe, I think that was it for me. Congrats on a good quarter, again. And Joe, congrats on being able to take a much-deserved retirement, help in the transition over there, and I hope you have a lot of fun things planned when that transition is complete here.

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Operator [20]

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We have a question from the line of Pete Skibitski from Drexel Hamilton.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Former Senior Equity Research Analyst [21]

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Morning, guys. And best of luck to you, Joe, I'll echo the prior comments. And also congrats to getting Machine Clothing to a stability here. I guess, I'll start, guys, by asking about the reduction in the effective tax rate going forward that so many companies are seeing. A lot of companies are talking about sort of incremental capital deployment options. And it looks like, if I read your CapEx comment, it looks like you're talking about CapEx this year of $80 million to $100 million. Should we anticipate that being kind of a stable number going forward? Or increasing? Or -- also maybe you can talk about internal R&D, but maybe capital deployment in general, in this new tax -- posttax-reform world?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [22]

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Coz, why don't you answer the question specifically about tax and I'll talk about capital deployment more generally.

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John B. Cozzolino, Albany International Corp. - Former CFO & Treasurer [23]

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Right. So Peter, I think as we talked about on tax, we will be looking to try to, obviously, get as much cash back to the U.S. as we can to pay down the debt With -- ultimately, with the interest limitations, we're going to be keeping that in mind, as we move forward. While the U.S. tax rules somewhat simplify the process, it's still fairly complicated in the countries where we're holding some of our largest balances. So we do need to work through that. But we will try to take everything into account. One of the things that over time we'll certainly be trying to do is either shift debt or pay down debt, as we move the money around. So that's all kind of part of the longer-term strategy, as far as actual use of the cash.

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [24]

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So Peter, I think the way we think about this as follows is, over the next 3 years, if you look at what happens to Machine Clothing EBITDA, if we do our jobs right, it remains steady. So no material change in cash flow from that business. On the other hand, AEC sees a rapid growth to 2020, both in sales and EBITDA margin. So out in 2020, if we hit our targets, it's over $500 million in sales with 18% to 20% EBITDA margin, that's a significant increase in cash. And then at the same time, what we've said is CapEx should come down off its current rate by next year as peak investment in AEC declines, since we're through the bulk of the ramp. So increase -- significantly increasing cash from composites, significantly lower cash expenditure from CapEx, roughly the same cash generation from Machine Clothing, roughly the same expenditure of cash for interest and taxes and dividends. We bundle all of that together, significant increase in cash flow by 2020, starting in 2019. We think, initially, we use that to drive down debt, as Coz suggested, and then same priorities as we've had before, use the stronger balance sheet to drive growth.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Former Senior Equity Research Analyst [25]

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Helpful. That's helpful. And then I guess you will be in position to -- at that point to either invest more internally or look at M&A. Maybe you can update us on what you're seeing in the M&A environment today, especially on the aerospace side? And we've heard from a lot of suppliers and a lot of the bigger, kind of, tier 1 suppliers are doing portfolio reviews that maybe there'll be some piece parts available coming out in the next year or so. Would you agree with that assessment?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [26]

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Well, it's -- there certainly are -- there certainly is clearly a move to consolidation, as you're seeing, and alignment of the supply chains almost into opposing camps. There's the Boeing supply chain and the Airbus supply chain and the battle among OEMs is becoming as much a battle about the supply chains as anything else. So we do think that has two effects and both are potentially beneficial. One is the M&A has led to fewer and fewer independent composite suppliers just at the time when everybody is ramping, and so there is -- we are sensing, as I think we've talked about on previous calls, the OEMs looking for reliable suppliers in the composite space. And at the same time, as companies are doing M&A and rationalizing and -- their structures, there is a growing possibility that you get these orphan composite operations that get -- that could get spun out. That's really how we got the opportunity to acquire our Salt Lake City operation. It was an orphan inside of Exelis, which was acquired by Harris, and made it even more of an orphan. And we hope that, that phenomenon continues and does create opportunities for M&A. We doubt, given our debt level and how full our hands are with ramp ups right now, we -- we're not really focused on M&A and won't be until we get through this wave of ramps. By the time we're generating strong free cash in second half of '19 and '20, that's a different story.

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Operator [27]

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We have a question from the line of Christopher Hillary from Roubaix Capital.

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Christopher Edmund Hillary, Roubaix Capital, LLC - CEO and Portfolio Manager [28]

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I just wanted to ask if you could revisit for us your margin targets in the composite business. If I recall correctly, there were some differences between what you could potentially achieve in your, kind of, core business with Safran and what the other businesses could achieve as you added incremental wins?

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John B. Cozzolino, Albany International Corp. - Former CFO & Treasurer [29]

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What we've guided to and told investors is, 18% to 20% EBITDA margin by 2020 is our internal objective and what we think -- when we factor in the differences among our different contracts, we think that's a very realizable target. So -- and we have been making -- and so our measure -- aggregate measure of profitability in this business is EBITDA as a percentage of sales. And if you track that, the average for 2016 was 8% and by full year 2017, if you control for the couple of the one-time charges we took, in full year, it was about 11.5%. By Q4, it was 14%. We think full year '18 is going to continue that journey. So 8% in '16, 11% in '17. We should see 3% to 4%, 3 points, 4 points improvement in '18 and then incremental improvement in '19 getting to our target. And what's driving that is a combination of variables. One is just fixed-cost leverage. There's so much growth and some fraction of our costs are fixed -- well, relatively fixed. And then it's learning curve efficiencies. In the classic sense, the more you make, the better you get at it. Plus, something that we've referred to in the release, and I referred to in my commentary, is that as you come out of these ramps, your efficiency improves, and not just because of the learning curve but because the act of ramping is inherently inefficient. So you're -- if you're to ramp, you've got to hire people. To hire people, you need to spend money training people. Once they're finished training and they're actually in production, there's still a learning period for them. And that means their more experienced colleagues on the factory floor are spending time overseeing the new people. So you have lower productivity from the new people and lower productivity from the more experienced people who are spending time training.

Typically, when you're adding new people, less experienced people, new equipment, you have an increase in scrap, you have an increase in amount of engineering time spent qualifying the equipment. So a significant part of the reason that we expect this incremental profitability trend to -- continue, is those ramp-up inefficiencies, which hit a peak in Q3 and Q4 of this year, begin to decline. People get more productive, there's less scrap, there's less time spent on qualifying equipment. Now we're never completely out of the woods, because as we get through the LEAP ramp and get through the 787 ramp, we're going to the F-35 ramp and then the CH-53K ramp. But right now they're all piling up together and by the time we get out toward the end of the decade, the only program that's really still ramping is CH-53K. So there just won't be the same kind of ramp-up inefficiencies.

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Christopher Edmund Hillary, Roubaix Capital, LLC - CEO and Portfolio Manager [30]

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And then do think, in the medium run, there's potential or -- what would cause there to be potential upside to your margins in that division, given we see some other companies that produce high-value add components, including composites deliver higher margins?

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [31]

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Just exactly what you'd expect. Classic, lean Six Sigma, continuous improvement. And it's very much a part of the culture that we've built into this business. And there's -- we have clear economic incentives to keep driving productivity improvements in this business beyond 2020. 2020 is the magic number of us, because that's really when several of these ramps start to plateau. New programs will always bring with them inefficiency, but by the time we get out to '20, this business is big enough that we hope the bulk is at a -- the bulk of the business is at a productive and increasingly productive space, so the incremental effect of new business on margins won't be as severe as it would be when you're talking about $200 million business with everything ramping through the roof.

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Joseph G. Morone, Albany International Corp. - Former President, CEO & Executive Director [32]

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So I think that's it for our calls. So let me just -- before we -- so thank you for those questions and everyone for participating. Before we close the call, let me just finish on a personal note. This has been my 50th Albany International earnings call, and as I think by now everyone realizes, this will be my last one, as I will be retiring at the end of business on March 1. As I look back on those calls, we've had a lot of good earnings calls over these past 12 years, but we also had our share of bad ones. But through them all, even during the worst days of 2009, it has been the privilege of my life to represent this company on behalf of the thousands of my wonderful Albany colleagues. And so to every one of them, everywhere in the world and to my fellow board members and to Coz and Dave and Heather and everyone who helped make these calls work over the years, and to all of our investors and analysts, thank you for taking this journey with me. And I can't help but say this for one last time, from where I sit, from my vantage as a shareholder, as a board member of 22 years and CEO for the past 12, this company will be in very good hands under Olivier's leadership. Thank you, everyone. Operator?

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Operator [33]

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And ladies and gentlemen, a replay of this conference will be available at the Albany International website beginning at approximately noon, Eastern Time today. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.