Albany International Corp. (AIN) Earnings Call Transcript & Summary

We're rounding into the home stretch here with Albany International and CFO, Stephen Nolan. Stephen, thank you very much for joining us.

Thank you, Steve.

So you guys don't have any -- anything prepared, but I'd like to start out with kind of the state of the Union in the near term. There's -- it seems like there's a lot going on here globally. So maybe to put the Russia scenario in context for you guys, what -- how may this influence your business? What are you guys seeing on the ground? Any kind of impact for you guys that you've been seeing?

Sure. No, I appreciate the question. And look, from a direct business perspective, it's rather limited. We do have some machine clothing business in both Russia and Ukraine, total revenue, though per year in the $10 million range, let's say. So that's the direct impact. We also have a very small joint venture in Russia, actually, Neva-cloth, where the net income we get from that joint venture per year is in the $100,000 range. So it's really immaterial. And we're looking at the right way to extricate ourselves in that right now. We're just looking to see what our options are for that business. So from the direct impact perspective, quite limited. What we're more concerned about are the secondary effects. Obviously, inflation could impact us along with everyone else that's driven by increased energy prices. We're also concerned about raw materials that our customers use, less so than us. The raw materials we typically use are fairly widely available, carbon fibers or monofilament fibers in machine clothing side. The -- what we're concerned about is supply of materials such as titanium that are used broadly in the aerospace industry, could there be a shortage of those which might affect our customers' ability to hit their production target. So far, we have not seen anything concrete. Certainly, Boeing and Safran both have said, they have significant inventories of titanium on hand and don't expect disruption, but it's something to watch out for. So it's the secondary effect we're more concerned about than any primary effect.

Right. Safran has been kind of -- has kind of called out that they have a decent amount of buy from there. I know GE has said less than 1% of their titanium supply is from Russia and they have a bunch on hand. So maybe on the supply chain, everybody buys different components. How are things going for you guys as far as availability of purchase components, raw materials, things of that nature in both businesses?

Not a week goes by without some supply chain challenge somewhere in the company. And so certainly, our supply chain team has earned their pay the last 12 months as we've dealt with one issue after another. With that team's efforts, though, none of them has had any significant impact on us. Frequently, we might have a delivery of resin to a facility that might be 2 weeks late or something like this. We see that repeatedly but we've been able to rejigger our manufacturing plans to accommodate that. And so we haven't seen any actual disruption. Probably the biggest disruption has been more on the logistics side with our ability to ship product to our customers. Now we are fortunate in that, we've shipped very little of our product from certainly across any oceans, very little from Asia to North America or vice versa. We do some back and forth between China and Europe. And that has been challenging at times, unavailability of shipping, train lines, which run across Russia, largely now unavailable, where they would have been a route. So that's a bigger challenge. But again, nothing we have been able to overcome. Certainly, both raw materials and logistics, we've seen inflation as we have found what we need. But it's been a challenging year, but again, we've overcome all of the challenges we've seen so far. And we certainly were starting to see things like logistics improve. If you'd asked me 4 weeks ago, I would have said things are great. Getting back to normal, shipping is available, trains are available. Obviously, that's changed in the last 4 weeks with the invasion of Ukraine, the tragedy that's unfolding there and the knock-on effects. But it's -- so far, we haven't seen anything that is not manageable.

So it's interesting, you say, you were thinking things were actually getting better. It's not just stable. It was actually headed in the right direction?

From a logistics perspective they're certainly getting better.

Logistics, okay. Got it.

Inflation, I'm no economist. I'll trust someone else to tell us when inflation is going to end. We've certainly seen an easing of the logistics challenges we've seen. We are still seeing raw material inflation I just heard of one of our suppliers the other day, looking for a 14% increase in the price of the raw material, relatively small though but not material, but we are still seeing those inflation pressures even prior to the invasion crisis.

How does that play through to your customers, especially on the aerospace side? How does that -- first of all, are you on track for what you had planned when it comes to the margin dynamics around price cost, first of all, given what we've seen in the last couple of months? And then secondly, just talk about how those contracts work and how able you are to pass on whatever price increases you're taking from your suppliers?

So for the bulk of our aerospace programs, the core raw materials that go into the finished products, which is typically a carbon fiber and a resin, sometimes a prepreg, which combines the 2 together. Those are selected by our customer. The customer negotiates a contract with the supplier of that raw material. And it's an enabled contract where we're buying under the prices that our customers negotiated. And so we're typically insulated from increases in those materials to the extent it does increase, we can usually pass those along. We are not insulated from increasing prices on a lot of what we'd call non-end item raw materials. So these are everything from vacuum bags to gloves, to release agents that go into making a product, but they aren't in the finished product. Those -- we have to find some way to cover those increases through continuous improvement or through some pricing change if there is an opportunity to reopen it at some point? And also, on most of our contracts, labor escalation is something that we have to cover. Now our contract with Safran for the LEAP engine is a little different since it's a cost-type contract, where Safran covers all of our costs, plus a fee. And so there perversely, labor inflation actually increases our revenue from Safran since they're going to cover all of that. But that's a minority of our aerospace revenue at this stage.

Right. How do they manage that then? Because, I mean, I don't -- is that -- I'm not quite sure that's necessarily the way it works with the airlines. How do they manage that? If that's the case?

Yes. Look, we sit down with Safran every year. They are a 10% owner of the joint venture. So we do have -- they have obviously got access to all our books. And we sit down at the start of every year and work out an operating plan that we can both agree on as to -- to see what types of costs we're going to incur. So it's not as if we just start spending willy-nilly just to drive up our cost base and therefore, our revenue base, and not only would Safran object in the short term, in the long term, that's no way to build an aerospace business because your customers have to believe you're going to do what's in their best interest, not take advantage of them every chance you get.

Yes, of course, of course. I mean, at some stage of the game, you're dealing with in a tough competitive environment, somebody at the end of the chain, probably not the airline, maybe the airline, I don't know, it's going to -- or certainly not Boeing and Airbus.

So, over the last 2 years, I'm sure it has been challenging for Safran in that the price they were paying for our -- the fan case and the blades we make for the LEAP engine, they paid a certain price per ship set of components in 2019. In 2020 and 2021, they paid a far higher price, because they were buying fewer units and each unit had to absorb more of the fixed cost of operating those plants since they cover all of the cost of operating that enterprise irrespective of how many they procure. So I'm sure it was challenging for them. And fortunately, for us, this was Safran's challenge, but we did what we could from a cost reduction perspective. And we've been very aggressive working with Safran to get their approval on the initiatives we could undertake to reduce the variable cost of making parts, even if we can -- components, even if we can't adjust the fixed cost in the short term.

Right. So on the -- sticking with AEC, the -- should we think about the revenue, for you guys, there in line with the unit growth? I mean obviously, the LEAP is going to be up 60% this year, a lot. How do we think about that in terms of your related revenue there, given the kind of purchase at value?

Yes. So the challenge for just looking at the units, if you look at 2 of our largest programs, LEAP and CH-53K. On LEAP, because of what I just said, where we absorb -- we recover the fixed cost, irrespective of volume, revenue does not grow linearly with units because the only additional revenue we get in those incremental units is the variable cost of making those units plus the fee on top of that variable cost. And so just like you saw when we went down, the amount of engines LEAP was producing and or the GE Safran joint venture was producing in 2020 was down considerably, probably by 2/3 or more in 2020 compared to 2019 and yet our revenue only went down by half. The same -- so while we're insulated in the downside, we also get a muted recovery in the upside as -- for a 60% increase in units, if that's what holds. We clearly see revenue growth, but be appreciably lower than 60%. The other program I mentioned, CH-53K, is in low rate initial production where we're making only a handful of units a year, and those are quite expensive units because we're all getting down the learning curve together on that program. And so as we're negotiating each follow-on contract for the next buy, the next LRIP buy of that -- of those products. It's at a lower price than the prior LRIP as we're moving down the learning curve. So it doesn't quite scale linearly. On a mature program like F-35, 787, it absolutely just scales with volume. But those 2, CH-53K and LEAP, given they're are a significant chunk of our revenue, they distort that model where you can just easily take the growth in units and interpret what the revenue growth is.

So when you look at the '23 revenue that you said can maybe be back to the 2019 peak. I mean how much is that kind of aviation like-for-like unit recovery and the LEAP, for example. And then these kind of other -- maybe other new business that you may be getting. I mean it's pretty much baked, I would assume, from your visibility perspective?

Well, nothing's ever baked when it's 18 months out, but it's -- we clearly have good line of sight. I wouldn't have said it on the earnings call. There's always risk to anything when we go out and start projecting 2023 revenue when you haven't even barely started 2022. Certainly, if I look at programs, 787 was more than $50 million of revenue in 2019 when we were at our prior peak. We said that last year and this year, it's in a sub-$10 million range. There might be some growth next year, but it's certainly not going to be anywhere close to $50 million next year. Similarly, while LEAP will have improved from this low level next year, they're not going to be producing the, whatever it was, 2,200 engines they produced in 2019. It's going to be appreciably lower. So we're tens of millions of revenue short on those programs relative to 2019. The reason we're going to get back to the same level we're at in 2019 is because of new wins, such as on CH-53K, where we announced winning the Aft Transition program in conjunction with our most recent earnings call, where we were doing a lot of work on CH-53K already but one of our competitors was doing the Aft Transition portion of the fuselage, and that's the portion that narrows from the main body of the fuselage to the tail. We were successful in taking that away from our competitor, that's a program over $300 million in size over the next 10 years. And programs like that what are allowing us to get back to that $450-ish million level next year, even though the commercial programs will be appreciably smaller.

What are some of the new ones that are -- first of all, how do you win on that front? What were some of the key attributes that they preferred over your competitor? And then are there other opportunities in the pipeline in the near term that are visible to you that can add to a win like that?

Yes. So a program like that. And we've seen this now on 3 areas, on Boeing 787 going back a couple of years ago, on F-35 and now CH-53K. On all of those programs, we were awarded a certain amount of content, and we performed very well on that content with on-time deliveries, with high-quality finished product and making composite parts, it's not like just machining a piece of metal where you machine a piece of metal, you know what's left behind, it's very predictable. There's a real art and science to making composite parts. And there's been at certain points in time, spotty performance by certain players in terms of meeting delivery requirements and meeting certain quality requirements for parts. We have demonstrated to our customers on F-35 to Lockheed, on 787 to Boeing, on the CH-53K to Sikorsky. A very high level of performance. And in all 3 cases, they have given us opportunities then to win additional content in the same platform. They said you're doing a great job, for example, on 787, we're doing the frames for certain sections of the aircraft. They said, your competitor who's doing this section we'd rather you do it than them. And we had the opportunity to take that similarly in F-35 where we've stepped up our content and now most recently on CH-53K. So it's really performance on the existing work that has allowed us to do it with our customers. We have...

It's kind of like land and expand, if you will.

Absolutely. Yes. We have a pipeline of new business. that we're working on. Nothing we can obviously discuss. But in the near term, it's a mix of some defense programs and some smaller takeaways of additional content on certain other aircraft from certain of our competitors. And that's the bulk of our near-term pipeline, obviously, long term, there are some huge opportunities when we get to the next generation of single-aisle airliners, but that's probably at the end of this decade. Certainly, somewhere in the back half of this decade when you'd start maybe being selected for those sort of programs and it will be sometime early in the next decade when you start getting any revenue from it.

How do you play into that? So for example, the RISE concept? Is that a net positive content thing for you, do you think or too early to tell? What is the -- how do you look at these new architectures and what you can do for them?

Yes. So the RISE concept is -- so Safran and GE their joint venture, CFM makes most of the engines that power the current generation of single-aisle aircraft. Every 737 MAX as a LEAP-1B engine on it from that joint venture and roughly 60% of all A320neos have a LEAP-1A on it from that joint venture. And RISE is their concept for the engine, which will power the next generation of airlines. And it's a very different architecture. If you've ever seen just an engine, what you see is the fan case around the blades. And that fan case, one of its jobs is to contain the blades if there's any catastrophic failure of blades so that they doesn't damage other parts of the aircraft. And the RISE engine is actually what's called an open rotor design where there is no fan case. There's a set of blades and behind it another set of blades and enormously long blades. First thing you notice is right now in the current LEAP engine, we make the fan case and the blades, but we make the fan case. There is no fan case, so it's a reasonable question, is that a net positive? For us, assuming all goes as planned and we extended our agreement with Safran to 2046 and are certainly in volatile discussions around RISE and how it will work. The blades, those 2 sets of blades, given their size and given there are 2 sets are certainly more valuable than a fan case and blades in the current LEAP engine. So that architecture will be a net positive. But more broadly, as we go to the next generation of single-aisle airliners, we're not restricted to talking about engines. Right now, we're on the engine. The reason we're on the engine is because there hasn't been an aircraft designed in the last 10 or 15 years. The last aircraft design was A350, which is kind of 15 years ago. At that stage, we really didn't have 3D weaving mature to the level it is today. And the 737 and neo and A320 platforms that are flying, it's effectively the same fuselage that was flying 30 years ago just with new engines hanging off the wings. So we've gone where the opportunity was. As we look at the next generation of aircraft, we would expect to compete more broadly on the platform. Right now, we're working with Airbus on a program called Wing of Tomorrow, where we're demonstrating the applicability of 3D weaving to wing components in that -- in their new aircraft architecture. And we could also compete in other parts of the aircraft using traditional laminated composites, not 3D weaving where that is appropriate. So for us, given how small and recently developed our aerospace business is, new platforms are just an enormous opportunity for us. So we look forward to those new airliners. There's always a talk about whether Boeing will introduce something else in the meantime, there 797 concept, this new midsized aircraft which will kind of replace the old 757, anything like that is only an opportunity for us because we're not on the current platforms other than on the LEAP engines.

And have you proven that content out on maybe smaller platforms or I mean, is it really like you can't really go in a business jet with this stuff because the smaller guys typically follow the leading edge of the commercial guys when it comes to technology like that. If you're going to do something as aggressive as putting it on a wing, Boeing and Airbus probably have to prove that out for those guys? Like is there a way to prove out the technology first on something that's less episodic?

Yes. So if you're talking...

Because that sounds like a tremendous, obviously, opportunity for you guys.

Yes, if you're talking 3D weaving. This is not unlike the situation we were in 20 years ago with Safran. We had developed this 3D weaving technology, which has actually grown out of our knowledge of weaving from our machine clothing business, which is why we have this weird combination of pulp and paper products business associated with an aerospace business. We've come up with this concept. But neither we nor Safran knew how it would actually perform in an aerospace application. And so what we went through a process of, for several years is, Safran would ask us to build a part, looking like this. We would make the part. They would take into the lab and they would stress it and ultimately break it. They would see -- test its limits, then they come back and build this other part. And we go through this iterative cycle where they could understand the operating limits of the technology. We're going through that right now with Airbus. They're building a demonstration wing, which they're then going to load up and test. And it's got a combination of components in it, some of them being ours, some of them being other -- some of our competitors using other technologies, obviously, not 3D weaving, since we're the only company that does 3D weaving. And they look at all of those components and find out which performs better, and then it will be down to a performance price trade-off when they come around actually designing the wing.

But getting the validation from those guys, obviously. Why wouldn't you kind of proliferate this into smaller parts of the -- or do these guys look at it as such a proprietary part of how differentiated they are? So they don't really want to -- they don't allow you to go in and play with...

We'll happily proliferate it anywhere we can. Certainly, right now, we announced last year now on the defense side of the house, an agreement with Spirit AeroSystems who has a significant and growing defense business in addition to their legacy commercial business with Boeing and now Airbus. We announced an agreement with them where we're collaboratively working on hypersonic's applications where we use our 3D weaving and some of the Spirit's technologies to offer special materials, which meet the high temperature or high -- high temperature, high pressure and obviously high-speed environment that hypersonics vehicles encounter. And the key thing with machine -- with 3D weaving is there are certain parts where you get more bang for the buck with 3D weaving than others. So for example, if you look at just an aircraft, the wing skin of an aircraft is laminated composites and will probably remain laminated composites forever because it doesn't encounter stresses and strains, which make it challenging to make it out in the amount that they cost. What 3D weaving offers is the fact that in the traditional composites, you get stacked layers of carbon fiber. And the only thing holding those layers together is the melted resin. In 3D weaving, you have those layers of carbon fiber, but you also have strands going up and down throughout the layers, knitting them all together, much more closely mimicking the mechanical properties of metallic structure. That's important in certain environments where it's subject to certain bending moments or shear forces, which can cause traditional composites to delaminate that actually separate, certain parts of the aircraft don't encounter those stresses and they'll stay traditional laminating composites probably forever because there's no reason to use 3D weaving there. 3D weaving plays in areas like the wing or the wing box or the nose or the empennage of the aircraft or the engine, where it encounters these stresses and strains and really offers a significant advantage. And look, our goal is proliferated everywhere, which is as we look forward, 10 years at 3D weaving, one of our primary competitors is less so other composite manufacturers. It's really, some of the metallics manufacturers are more likely our competitors for much of what we'd like. Things like ribs and spars and the wings, right now, they're not produced by our composite players. They're produced by the Howmets or Allegheny Technologies of the world, those sort of players. And we'll face a variety of different competition in every opportunity. But that's where 3D weaving is targeting. We obviously also have a traditional laminated composites business, and we will happily do that. We're doing the wing skins in the F-35. And there's no reason we can't do skins on other aircraft in the future as well.

Right. Can you talk about the margins on these wins? I mean, how do we think about the 450 in '23 margins on that given the -- the mix of revenue?

It's bad enough, I provided a preliminary revenue guidance for 2023 and another bad before I start giving EBITDA guidance for 2023 as well.

It's not guidance, it's just your thoughts -- it's your personal thoughts.

Look, Charles, there are a couple of effects going on right now. One, very oddly, you would expect there to be a relationship between the proprietary nature of the process and the profit margin and that the ones that are more proprietary would have a higher profit margin. And one would reasonably expect the same from 3D weaving. And I think it would generally be true, but for the fact that we're under effectively a cost plus contract with Safran. And when Safran is bearing a lot of not only the market risk, but our cost risk we accept the lower margin in return. So LEAP is lower than average margin for our aerospace business. So one of the challenges we face in the very near term, as LEAP grows faster than the rest of the aerospace business, that creates a mix shift towards a lower margin. Now we'll obviously work to offset that. What has been hurting our margin of late was less the decline in commercial aircraft, such as LEAP, and more because it's cost plus. The operating margin on LEAP is effective -- or certainly, the gross margin is the same whether we're making 100 engines or 1,000 engines, it's the same percentage margin on top of both, largely with minor discrepancies. What -- the challenge we face is when we see a decline in fixed price business, like 787 that I mentioned, went from over $50 million to under $10 million. So like F-35 for this year because of a variety of factors, largely COVID-driven where other parts of the supply chain could not keep up with Lockheed's demand and Lockheed now has excess of our product on hand. We're going to see a bit of a destocking. We see a bit of a different revenue. Those are -- that's what's really creating pressure right now on our margin. But as LEAP grows, that's also going to cause a bit of a mix shift. We will work to offset that with some of the other fixed price business we're winning. Programs like CH-53K Aft Transition is a fixed price business. Now it's government business, which is frequently slightly lower margin than commercial, but it's still good business from a gross margin perspective and certainly good relative to a program like LEAP.

So can you hold the margin flat? Or is it -- is that kind of a too far of a bridge to cross?

So look, we provided our guidance for this year, which is at the midpoint, down a little from last year. So because...

So kind of a similar dynamic -- so it's probably a similar dynamic.

Certainly, our goal is to grow the margin. We're lower than we were in 2019 and 2020. Our goal is to grow the margin from here, not continue declining it. But I don't want to give specifics of 2022.

That was specific enough. That was specific enough. All good. On the machine side, you gave a little bit of a cautious guidance based on inventory. What are you seeing so far? Any update to that guide? And maybe a little bit of color around that business?

Look, I think our guidance was appropriate. I'm not sure I would describe it as conservative. There is risk there of some destocking in the channel. Our customers there are concerned about future availability of product, given logistics challenges, given supply chain challenges across the globe and have more of our product on hand than they would ordinarily have. Where ordinarily, they may have one row of a product sitting to the side of the machine. They might have 2 rows right now. And at some point, we expect them to destock that to feel like the risk is gone. I've got to say right now, this will be used anyone -- I don't think anyone is feeling like the risk is gone right now. So I certainly don't think that destocking cycle is underway as we're sitting here today. That does not mean that it won't happen during 2022 overall. So I don't think the fact that it is not started right now would certainly doesn't affect my view of our guidance at all. Our conservative guidance, you described it, is really driven by 3 factors, [ vast ], plus secondarily, the inflation we're seeing around the globe and its impact on our profit margins because we cannot increase price on a lot of our products in real term -- real time. As our -- many of our products where we're under a long-term contract, it could be 3 years or 4 years with customers with limited room for us to change pricing within the term of that contract. And the third factor is FX. We've had 2 very beneficial years from an FX perspective in 2020. The Brazilian real and Mexican peso, both of which our currencies were short, weakened significantly, which provided a nice bump in 2020. And in 2021, the euro currency in which we're long, appreciated significantly, which is very beneficial for us. Right now, we're not seeing either of those benefits this year. In fact, the euro has slipped even from what it was on our earnings call, given what's been going on in Ukraine and the peso and real are staying relatively stable. So we're not seeing the same benefit we saw from FX over the last 2 years. So those 3 factors were what led us to the guidance range we provided on Machine Clothing.

Right. And -- so first of all, you've been very -- just very upfront about how customers have inventory. I mean were these guys -- or how far in advance were they ordering? It doesn't sound like it's necessarily a double order that gets canceled, if you will. It's more like they ordered it, they took it, they have it. So how far in advance do you think -- if the same customer ordered 2 of these things over -- today, when would he have ordered? Would it have been a couple of quarters out? Would it have been ...

Yes. No, look, that's reasonably. And another way of thinking about this is kind of what percentage of our revenue is at risk if all of that got consumed.

Yes, yes.

And certainly, what I'll say is that's been factored into our revenue guide. So it's not as if we think there's another $100 million of revenue at risk there if all of this is consumed, because we factored it a little bit, but that's largely reflected in our revenue guide today. It's certainly not that there is double inventory out there. You saw our revenue last year, while it was up a little over the prior year, partially driven by this, the amount by which it was up on a currency-neutral basis was kind of mid- to high-single digits. It was not up 50% or something like that for now that needs to get destocked. So there's some excess out there, but it's not -- it's a meaningful amount but it's not enough to take us down significantly in revenue where it all to be consumed.

Any questions from you guys? I've kind of dominated here? Don't be shy. No.

Keep dominating.

All right. All right. All right. I do a good job of that. So it was -- it's my nickname around here, the dominator. But the EBITDA margins very strong last year. You mentioned kind of a reason -- a bunch of reasons why that was a good result. How should we think about the margins here long term?

Yes. Look, we try to deliver EBITDA margins there kind of north of 35%. We've been more towards the 40% range of late, which we've been very pleased with. I think this pressure we're seeing on margins this year from inflation is probably a short-term effect. I mean short term in the maybe couple of years. As we lap these contracts with our large customers, the pricing pressures we see in input costs are the same -- our competitors are seeing the same pressures. And so one would expect that over time, that will kind of be absorbed by the market and that we will lap these increases. So long term, we still see very healthy margins in this business. I think one thing that's a little underappreciated by many investors is the stability of that business that for a start, it's a consumable product. And so when we do see cycles and every business sees some sort of cycle, it's a much more muted cycle than certainly, let's say, the paper machine manufacturers who are providing capital goods. So it's a muted cycle. And it's been very stable, the cash -- the profit and cash flows in that business has been quite stable now for well over a decade, very solid results. And as we model out even impacts of downturns, clearly, they have an impact on our profit. We still stay very profitable in almost every scenario we can come up with.

So I think that kind of brings us to the next topic, which is the portfolio. These seem like 2 very different businesses, but you just mentioned one that is stable and generates a lot of cash. The other can be a bit volatile and depending on what kind of programs you have coming up. What other synergies, is that kind of the key synergy to these businesses being together? What are the other synergies? I know you mentioned some R&D related.

Look, there's certainly been a financial benefit for us as a company over the last 5 or 10 years, as we have grown the aerospace business, and that's required a lot of investment. As you know, aerospace business require both capital expenditures, but also working capital investment as you go through the early phases of a program. We've been able to fund those internally without having to go to the capital markets to raise money, which has certainly been a benefit. But that's not the primary reason why we keep them together because it's just financial, there are other ways of overcoming that. As I mentioned, they came out of a similar technology background, one really grew out of the other, our knowledge of weaving. And we still rely on the technological expertise of our legacy Machine Clothing people in our aerospace business. Now the technologies are growing further apart every year. These days, if I didn't tell you they were both looms, you would probably look at one of the things in one of our LEAP factories and then in our Machine Clothing factories and not see a lot in common between them, other than there's a bunch of spools growing into it, but the actual loom itself looks very different. So they are growing further apart. What we still rely on that understanding. And we also rely on the personnel from Machine Clothing. There aren't too many people who know how to weave at an industrial scale these heavier fibers. This isn't the cotton fiber weaving, it's either a monofilament fiber, fairly heavy-duty one in machine clothing or these stranded carbon fibers. So hefty, hefty fibers. For example, our Rochester LEAP facility, the plant manager there was previously the plant manager at our Townsville, Quebec Machine Clothing operation. We draw on Machine Clothing for expertise that isn't available anywhere else, quite frankly, in the broader economy. And so we still see benefits of keeping them together. I say they are growing further apart, but we still see those synergies where we think our current structure makes sense.

And then just on cash flow, you got a bit of a step-up in CapEx in '22. What's the key driver there?

Yes, look, the biggest single driver is that our transition win on CH-53K, I mentioned, where we have to facilitize in Salt Lake City an automated line that we're taking a very automated approach to making those as we're going to be making a lot of ship sets. So it's a significant upfront investment, but we think it will more than pay for itself over the 10 years of plus of production. Ten years that we can see with other international customers' interest in CH-53K, my guess is that contract will -- or that program will end up going far longer than the current contract.

And then how do you think about prioritizing M&A repurchases, the dividend?

Look, we have a standard dividend. We've been a regular dividend payer for over a decade, and I can't see the Board of Directors changing that policy. We'd love to do some M&A, there's limited opportunities available to us, particularly on the commercial aerospace side, a lot of owners are loath to sell right now because they think they're selling at the bottom. And so it's fairly thin, the market there. And we're also unwilling to chase very high multiples, unless it's a small technology play where you're really buying the future, not the current business, such as the business we bought a couple of years ago in Germany, CirComp, where we were buying it for the future application of technology they had. So we have a lot of dry powder. Our net leverage at the end of the quarter was only 0.25. So we still would like to do M&A. But in the interim, we're doing some share repurchases. We mentioned a $200 million authorization from the board near the end of last year. And we've been buying under that through Q4 and now into Q1 and that is by no means consuming much of our liquidity, but it's putting us in a bit of a holding pattern until we find the right acquisition.

Right. A question over here?

[indiscernible] patent-protected. And two, have you looked at applications outside of aerospace.

So it's mainly protected with know-how rather than patents. We don't want to give people a guide to how to do it. It took us a long time to perfect it. So we've decided to keep it as a trade secret rather than put it out there. We have absolutely looked at applications outside aerospace, few applications require the high performance that it offers in the low wage, but we're looking still.

Okay. I think that's it. Stephen, thank you very much.

Appreciate it.