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

All right. This is the -- you guys are the closers. We have the guys from Albany International. I think you're going to start with a little bit of a intro, and then we'll go from there. But thanks for coming. Really appreciate it.

Yes. Our pleasure to be here, Steve. Thanks. And I have Stephen Nolan with me. I'm Bill Higgins, the CEO of Albany International. Just a couple of slides here to walk through who we are. I guess, the first disclaimer on our safe harbor, I'd refer you to more details on our SEC filings and 10-K. Albany is a 128-year-old company with a proud history of innovation and technology development. We have -- we're just a little over $1 billion in sales revenue. We have over 4,000 people around the world in 23 locations in 11 different countries. And if you take away anything from today, it's really about that innovation and long term -- reinventing ourselves over decades, and we have a Board of Directors that supports our investment, our development and new technology and new products for the future. So we've got a lot of good things going on, and I'll share some of that today. We report in 2 segments. We have a Machine Clothing segment I'll talk about in a minute. We also have an Engineered Composites segment. Our Machine Clothing segment is the global leader in the machine -- in the paper industry for Machine Clothing, which are the belts and felts that are used on paper machines to make paper. This is a very advanced product that is one we really like. It's a consumable product, so it's replaceable over time. As I said, we're the leader globally. We invest in technology development of a next generation of materials to make the machines run better, run faster, run smoother, use less energy, use less water to help the paper manufacturers in what's a very harsh environment. So it's a great business. It throws off a lot of cash. It's a solid business for the long haul. And with that we've, in parallel, developed a new business over the last dozen -- 20 years, I guess, now, the Engineered Composites business, which is focused on the aerospace industry, beginning with a partnership with Safran to produce fan blades and fan cases out of a woven carbon fiber. So at the core of our technology, we've taken the, sort of the textile weaving technology from the Machine Clothing business and created a new product with carbon fiber, where we weave what's called a 3D woven composite material. That material flies on the 737 MAX and the Airbus A320neo aircraft on the engines, the LEAP engines. We're the sole supplier in a partnership with Safran, and it's a great business. And that's kind of the core of the technology and the technology development of producing the next generation of composites used on aircraft. We've added to that capability by diversifying our composite applications across aircraft. We're looking at new areas of application for the 3D woven composite as well as other types of advanced carbon technology, as we develop the next generation of carbon composite materials. So we're really excited about the long term. This is a business, as we talked about in our investor conference last year. We have the growth plans in place to double the revenues in that business over the next 5 years, as well as you can go beyond that. And that's an organic growth plan. So we're excited about the opportunities we have in the aerospace sector as well. So if you look at how that all comes together as a corporation, we've got 1 business that produces -- creates a great cash flow, leader in its industry. It's very dependable. That's been helping us fund the aerospace development with Engineered Composites, and together, we have a growth trajectory in front of us. We can grow the company overall over 5% over the next number of years, and we've set a target of getting over $1.3 billion in revenue. We're working with Safran on the next generation of engines, the next RISE engine, which would be in the 2030s, but we're -- we just renewed our partnership with them for another long period to work on new technology, and bring what they call the RISE engine to market in the 2030s. And then with the Machine Clothing business, we're really excited about that long term as the publication end of Machine Clothing is they're sort of the main pieces of that business, the end markets of publication, packaging and tissue. The publication markets have been declining in the industry over many years, have kind of reached a level where we believe they're getting close to sort of flat, and then the rest of the markets globally growing with GDP growth around the world. So we're excited long term that this also becomes a growth business for us. So we have 2 growth businesses in the long run and just have a lot to work with, with a solid balance sheet, great cash flow generation and leadership -- developing leadership in the carbon fiber world and aerospace and a strong leadership position in the Machine Clothing business in the paper industry and a great balance sheet to work with. So we've got -- we've got a lot of things we can do going forward. So with that, I'll stop. I know that was quick, but...

No, that's great. I'm going to kick it over to my associate Sam Yellen in a second, but I just wanted to address the recent announcement, Bill, that there's going to be some succession here. What's the -- maybe just some background on that, some more color, what's the time line? And how should we kind of think about the direction the company is...

Yes. So we made an announcement for everyone, we made an announcement this week that I've told the Board of my desire to retire as the CEO of Albany, and this is my third year in the role. So this is a well-planned succession process right now, and we're making it transparent to everyone. There is no change in the strategy. The goal is to keep working it, and we'll run the process. We'll look for candidates for the -- for my replacement, both inside and outside the company and work on that over the coming months, and we'll communicate that as it goes.

So there's no set kind of time line of end of the year or anything like that? I mean what's the...

There isn't a set date or anything like that, but the process has started. So as long as it takes, and I'll work side-by-side with whoever comes into this role to help them -- that person succeed in the future.

Yes, I mean, like you made it through COVID, and now you've got the trajectory. So stick around, now it's time to have fun.

No, the company is great shape. And you may remember, I was on the Board of Directors before I stepped into this role. So I have a great relationship with the Board of Directors. I'll continue working with them. And so yes, we've got a lot of good things going on and I want to make sure they keep going.

Okay. Sam?

Yes. So I'll just kick it off with a high-level one. But on the Aero segment, can you just give us a brief update on how the quarter is tracking versus your expectations?

How the first quarter is tracking?

Yes.

I would say, in general, for the company, things are tracking kind of the way we talked about it when we did our earnings release not too long ago, in both businesses. We're happy when we see that Boeing gets more 787 orders. We'd like to see more 737s and 787s shipped. So as that picks up, we'll get a little more excited. But so far, we're doing fine as we go through the quarter.

Okay. Great. And then I know you guys talked a bit about flat LEAP revenue this year. So how should we really think about the potential upside case on that?

Yes. So this year, LEAP is an engine and Airbus A320, the 737 MAX, obviously, those production numbers will go up this year. But where we are in our relationship with Safran, we planned kind of a level year from last year to this year. But we think as we get out into 2024 and 2025, we should see that pick back up. I mean I think 1 of the benefits of our really strong operations is, we never fell behind like other companies in the supply chain. So we were never at risk of being a supplier that would slow down the production of the engine or the aircraft. And because of that, I think Safran has a lot of confidence in us that we can ramp things up very quickly as things go.

Yes. And I think this is a question from the call, that you guys were effectively -- you were on track. The other guys weren't. So you were overshipping to a degree, relative to their line rates. Their ability to [ keep up the engines ]

It's hard for us to see exactly at what levels -- we can see what we have in our inventories. And we don't have a lot of excess inventory. We have some extra inventory, which we would normally carry -- just for perturbations in the flow. But as you go through the supply chain all the way to Airbus or Boeing, there's probably a little bit more inventory in the supply chain and they need at this point, at least for our products. So we'll keep working with them. And we like to set the plan for the year so that we get the most efficient production. And then we come back -- and so we level load it. So it's not a plan where we generally step up every month or change every month or every quarter. But if it changes, we will pick it back up.

And obviously, they give you -- I mean, like they tell you what you need, and then you're like, okay.

Yes, if you go back to December of 2021, Safran at their Capital Markets Day said they expected to build about 1,450 engines in 2022. And we're always delivering a little more than our build rate typically, because they're buying a little bit ahead for 2023 as well for when they expect a ramp- up. But if we just stick with the 1,450 number for a moment, they actually delivered something like 1,150 engines. And so 300 fewer than they thought. And this year, they're talking about delivering something like 1,750 engines. So 600 higher than last year, which is huge growth for them. But for us, we delivered kind of half that already last year. So if you think 1,150 and 2,750 (sic) [ 1,750 ] is kind of 2,900 collectively, that's kind of 1,450 each year, which means we're kind of flat. Those aren't our exact numbers because as I say we're building a slightly different rate. But nominally, that's why we're flat year-over-year.

But then you're kind of recoupled to whatever they're going to do next.

Yes. So if they go to, let's say, 2,000 next year, while it may only seem like a 10% jump for them, that would end up being more than a 33% jump for us, because we're down in the 1,450 range. So -- it's just we pulled unintentionally, but -- because Safran didn't know what their supply chain was going to do. Some of our 2023 revenue was pulled into 2022, which flatlines us, but then we will jump again in '24.

Okay. And then just following up on that. You guys had talked about $200 million in revenue related to the LEAP engine in 2026. Is that still on track? And then we've also heard comments that some of the LEAP engines have seen earlier-than-expected shop visits. And I was just wondering if that has any impact on your revenue potentially?

I don't think there's a change to the longer-term outlook for the business in general. I think we're still on track to what we expect as we go out to '24; '25, '26, so for that question. As far as the engines coming in, I have seen some of that discussion. I don't think it's related to what we do. The performance of fan blades, the performance of the fan cases has been phenomenal. So we're -- it's not because of -- I think it's more of a hot section -- engine hot section repair situation. So I don't know if it would affect us. If -- I guess, if they were to do overhauls or something, maybe we would sell more, but I don't expect that at this point.

Okay. Great. And then in terms of opportunities, where do you see the potential for further growth within the Engineered Composites segment, whether it's expanding onto new platforms or different parts of the aircraft. Is there any low-hanging fruit in terms of where you could really gain share?

Yes. So we're working with a number of OEMs, I will say commercial, defense and space, on other applications for composites. So the answer is yes, we are developing growth opportunities. We have some things already in the works that we haven't been able to announce, and there's others we're working on. So we think there's a lot of opportunity in front of us.

Okay. And what's the time line typically from when you guys actually come to an agreement and when that starts to show up in the revenue?

It's a mix, right? So we think of it as a layered strategy. So we're working on some things that are more near term that would show up in the next 12 to 18 months, other things that maybe are 2 to 3 years out, and then -- and of course, longer term. So it's a mix. It just depends on the program.

Yes, look, certainly, if you look at CH-53K, where we were lucky enough, fortunate enough to win the AFT Transition component. This is the back half of that next-generation Marine Corps heavy lift helicopter, where a competitor of ours was doing that work for Sikorsky, and they asked us to step in. This is an aircraft which is already qualified. So we need to get to First Article Inspection to make sure we can make the part correctly. But that's kind of our milestone before we can start delivering. On the other hand, if we're awarded a part on a brand-new aircraft or brand-new platform, it could be 4 or 5 years before it starts to become meaningful revenue, because the aircraft has to go through the whole development cycle and be qualified. And so that's why there's a real difference based on the nature of the win, whether it's a takeaway or a new program. And we have things which are all over the map.

But maybe for the audience, describe what's the value proposition, right? I mean like what part of the aircraft are you replacing that would be like an example of the light -- essentially like a light-weighted -- what you can lightweight, what you can make [ to help there ]?

Yes. So longer term, aircraft are -- I don't want to say every component, but most parts on an airplane are going to move toward a lighter material, right? So metal is going to become composite. So you think about where titanium's used, where aluminum is used is going to be a composite. That's on the next generation of aircraft or if there's a major redesign of an existing airplane. In the shorter term, we'll work on composites where we can take a higher level of technology, maybe a more durable composite to a replacement part and get more share on an existing platform. So if you think about our big customers that we talk about a lot. So we do a lot of work on the Boeing 787. It just that Boeing is not making a lot of 787s today. But when that comes back, that will be really good business for us. We had 1 more business on the 787 right before the slowdown and the pandemic. And that had never gone through our P&L yet. That will come back. So we won more business with them. Why did we win more business? Because we do a great job, right? And that's good business for us. We won more business on the Joint Strike Fighter. We now do over 220, 230 parts on the Joint Strike Fighter. So it's not like it's different aircraft. It's just we're doing more components on the airplane. So different parts: blades, seals, all different parts of wing parts on the Joint Strike Fighter. And then with Sikorsky, by doing a great job with Sikorsky, working with them, where we did some of the components on the -- not the Chinook, the Stallion, the CH-53K, we now are now doing most of the back half of that aircraft. So we won more content. So we're working very closely with our partner, Safran, Boeing, Lockheed, Sikorsky on doing more with them on the platform. So that's one of the layers that we talk about for growing the business is winning more content on those existing airplanes.

So who loses it? I mean who loses that? I mean it's like highly unusual that they would go midstream of a platform and like switch out -- switch out a supplier. It was a deal that was pretty incredible for the [ competition ].

So it comes down to -- we want to have -- in a carbon fiber composite world, we want to have really good quality. We want to have good delivery. And I was looking at the numbers this morning. Our 3 largest facilities were 97%, 98%, 99% on time. If you go back to Farnborough when we were there last summer and all the aerospace companies were together, there were very few companies that could say they were 100% on time. We were 1 of them, right? Very rare. So in this world where supply chain shortages are occurring, and it's difficult to get what you need to finish the product, we're delivering very reliable. So that's kind of starting criteria, right? That gets us in the door. And then we have to say, we can take this carbon fiber part, or we can take this metal part, and we can design it so it's lighter or more durable, will last longer. And so it's kind of part-by-part. There is -- until new airplanes come to market, that's kind of the marketplace we're working in. And we talk about a few OEMs a lot, but there's a number that we don't talk about here today that we're working with, that we're working quietly with, that hopefully in the future we'll be able to talk [ about ].

And is that a push from you, or the government comes to you and says, we're trying to redesign this platform and we're putting out an RFP on how you can make this thing more efficient, and then you guys propose? Or is it you guys going to them and saying, listen, we have this opportunity for you to take the helicopter and like really change the economics of this thing, so kick these guys out and put us on the back of the helicopter?

It's both, right? It's both. So in some cases, the government might come out with something, in other cases -- one of the things that happened for us in the pandemic that, I think, helped us is we were totally focused on the LEAP program. In 2019, we had hit all of our numbers. We hit our stride. We had shown the world we can make 3D woven composite parts. And -- but the whole company was focused on that. That was like, we were living and breathing for that program. And then everything slowed down, right, after we had got all our capacity, throughput, everything working, slowdown. So we sort of stepped back and said, "What else can we do?" And that's when we started working with these other programs. We're doing a lot more in defense today. if you go look at the mix of our end markets. So yes, some of that's with the government, some of that is with the big defense contractors. We're doing more in other parts of commercial than we did before, and we've broadened the base of what we're doing. So we're going to keep doing that. But it gave us time to really kind of reflect on, we want to have a larger diversified customer base, and we want to bring the technology that we can to that customer base. So one thing we did, for instance, is we invested more in the front end. We invested more in salespeople, engineers that are at the customer, working with customer meetings. So we're out there actively working it much more than waiting for a phone call to ring.

Just going back to something that you had said where you have 100% on time. A lot of your peers have had supply chain issues and haven't been able to do that. So what do you think really helps you guys being so successful on that front?

We have really strong operations teams in both segments. And I think the other benefit we have is we basically start with materials that are carbon fiber or yarns, polymers and chemicals. And so we make a product. We're not relying on a lot of other people for components or chips or other things. So we do have a little bit of a [ backstop ]...

Or semiconductors...

We control a little bit more of our destiny. But it really comes down to, in the composite world, there have been a lot of companies that have struggled to make repeatable processes, and we're learning how to automate them. If you go into our 3D woven composite facilities, there's a lot of automation, and you typically don't see that. You see a lot of manual process in the carbon fiber world. So we're taking it to another level on the industrialization side, which helps.

Those looms are pretty incredible. Pretty incredible, that site visit was really informative for sure.

Yes. So you guys have a number of contracts that are cost plus. In a deflationary environment, how should we think about the impact from those on revenue and margins?

In a deflationary environment?

Well, partially. Or a [ flowing ] deflationary, yes.

Let me take a shot at that.

So what you're saying is we're not in a deflationary environment yet...

Well, it still feels little inflationary.

So we really have one cost-plus program of any significance. We've got the LEAP contract with Safran. Which is highly unusual that it's a cost-plus contract. Basically, how that works, we operate 3 factories to make LEAP components: 1 in New Hampshire, 1 in Mexico, 1 in France. And every year, Safran effectively pays us the cost of running those 3 facilities, irrespective of what volume they buy from us. So they are bearing all of the market risks. They're, quite frankly, bearing all of our cost risk. In return, we accept lower margin on that work than we do in the rest of our work, but -- so it's a risk trade-off. The major components of making those -- if I look at the cost structure, there are 3 big parts in the cost structure. There's a fixed cost, which is largely DNA of our plant and equipment. That ain't going down in a deflationary environment. And there's the labor cost of all of our employees. It's likely that's going down in a deflationary environment. The labor tends to only go one direction. It may stagnate for a while, but it's been a while since we've actually seen declines in labor cost. And the third is the raw materials themselves. Those are procured under these long-term contracts that Safran has signed with suppliers, Hexcel for the carbon fiber; in particular, we're using Hexcel IM7 fiber. I think it's unlikely that you will see that contract ratchet down. Quite frankly, I think there's probably built up pressure where the price is not as high as Hexcel would like to be charging Safran right now, but there are various points in that contract where they can change the price. So I really don't see a risk of any deflation in any of our material input costs on our -- really, our only cost plus contracts.

How much is labor as a percentage?

We've never revealed that. And I know I could reveal it today, but I would rather not.

And are you hiring more people? Or is it...

Absolutely. We're ramping up. And look, to Bill's point, very strong about on-time delivery. The other fact is, we've been able to hire the people we need. Now that's been challenging. On our 3D woven plants, I mentioned, are in New Hampshire, Mexico and France. We also have a large non-3D woven, more traditional composites in Salt Lake City, where there's very low unemployment. So it's certainly been a challenge finding the people we need, but we've been able to find the people we need. Salt Lake City has been on a hiring spree now for 18 months. And our plants on the LEAP side, while they took a dip down, obviously, during the pandemic, there are plans to ratchet those heads up. We've already ratcheted them up significantly from what they would have been 12 or 18 months ago, and there's growth plans for headcount over the next 18 months.

Okay. And as you become more confident in the LEAP manufacturing process, would you consider switching over to fixed price from cost plus?

We would switch to fixed price with a mutual agreement between Safran and us. I mean that's what it would have to take. As a cost-plus contract, it has worked very well for both of us, kind of driving us to work together to improve the manufacturing, improve the cost of the material, of the final product and all that. So that would take quite -- I think it would be quite a big change. It's an interesting question. We get it every now and then. I -- we'll just have to see. But it would really require -- of course, we would want a higher price and they would want a lower price, and we'd have to go through all that negotiation.

I think what we've seen over the last few years, we now know how much it cost us to make parts. The biggest variable in the actual cost of any part is the volume that is produced in any given year. And we saw that -- as Bill said, we've both benefited various times from the cost-plus nature. Certainly during the pandemic, we benefited big time because we were absorbing all of our fixed costs even on much lower volumes. I think the challenge for us right now, we're each trying to go to fixed cost today. I am not saying we have to listen. If we sat down in the room with Safran, I think there are expectations for future volumes on which we should base the prices. Would be a little different than our expectations for future volumes. And I think that's really where the disconnect comes in. We would want to risk-adjust those volumes. Safran would want to use 75 A320s a month, or whatever Airbus might have said. And we probably want to ratchet that back a little. And that's really where I think the disconnect will take place, is what volumes we would [ base ].

One of the things I want people to understand about this relationship we have. It's a very -- it's a unique relationship, right? There's not many partnerships like this that brought 2 companies together where Safran took most of the risk. They took the market risk. They have a new engine. They brought in a company from the paper industry to be the sole supplier on the fan blades. I mean this is the -- so what we developed this very closely over time. But the incentives of the venture are to drive improvements in the manufacturing and the industrialization and the performance of the product. And because of that, over the last 10 years particularly, we drove it to now we've industrialized and we've proven to the world we can do this. And so what does that say about Albany? It says Albany is a really good partner. We're a material expert. We can be a partner to an engine maker, and we can help them improve that engine that is now the best engine out there, right? With a fan blade on it that is life of the engine, it doesn't ever have to be replaced. We can do that with other companies. So when we start getting business with a company like Sikorsky on the helicopter, our intention is long term to say we can take these materials, and you can redesign the helicopter to get more efficiency out of it by altering the design. So it has to get into the design process. So this is what we've done with Safran. So we can get the benefit of the material if we change the end product design: aircraft, wings, landing gear, engines, whatever they are, but that's where the real value comes long term. And that's what Safran's figured out with us. So it's a great partnership in that sense. I mean, of course, we'd like to make more money at it. But they did take the lion's share of risk. Now it's our responsibility as a corporation to say, where do we take this great technology and where do we go with it to benefit shareholders?

Yes, it's like R&D with a very nice margin.

Well, a margin that was paid for -- R&D that was paid for on the best program in aerospace, right? LEAP engine.

I think, though, it is highly likely, I would say highly likely that when we get to the follow-on program, whether it's RISE or whether the name changes between now and then, that, that would likely be a fixed price program, the next program with Safran. Cost-plus was important at the time when we signed it, because we -- it was a new technology, no one really knew how -- what it was going to cost to make 3D woven blades. We were a relatively small company, but we couldn't kind of bet the company on this. And so Safran said well, look, we'll take the risk on this. It's likely at this stage that the process is mature enough, well understood enough and more financially stable enough that we agree that it makes sense to go fixed price for the next contract. But that could be 10 years...

Because I don't want to get into a public negotiation on the next one.

You're not going to have to, don't worry about it.

Just switching over to military. Can you just help us understand the size of the military business right now, and if you're seeing any growth from what's going on in Russia and Ukraine?

So right now, our military business, if you look at the platforms we're on, it's CH-53K right now is the largest platform, followed by F-35, followed by the JASSM Missile, the Joint Air-to-Surface Standoff Missile with Lockheed, missile fire and control. Those platforms are not the type platforms which are being used in Ukraine today. So we don't see any direct impact. However, the general appreciation for the need to have a more coordinated defense strategy across NATO, and the need for higher defense budgets, naturally leads to a long-term lift in the spending on some of those programs, in fact, all 3 of them. We see more international allies looking at 53K. We see probably more international demand for F-35 than previously seen. And JASSM, as a consumable missile, there's probably an appreciation for the need to have larger stockpiles at that long term. Not that it's the sort of missile which is being used right now in Ukraine, but there's just a general appreciation. So I think there will be long-term lift in some of those, but we don't make any -- support any of the weapons systems which are being depleted (sic) [ deployed ] in Ukraine today.

Okay. Great. And then just switching over a bit to the Machine Clothing segment. How should we think about pricing versus volumes in that segment last year and then looking at 2023? And really how we should think about volumes for publications versus tissues and any other end markets you have within there?

Yes, pricing versus -- so pricing, we -- with the inflationary pressures in the market, we pursued price increases across the board in Machine Clothing. And that happens over time, our contracts, some of them are 1 year, 2 year or 3 years. So there's kind of a rolling effect there on pricing. We're still pursuing price increases. From a volume standpoint, in general, the markets held up pretty well last year, and as we came into this year. There's a little bit of a mix going on, some specific markets may be slower than others, but the Americas have been stronger. Europe slowed down a little bit. China, China went into a pause in the second half of last year, at least the 3 quarters ending last year, with the COVID slowdown. And now we're watching that kind of reopen and get better. So -- but -- and also in China, there was a lot more machines installed, and there still is more of a push to improve the installed base in China, particularly to replace machines that are polluting or energy inefficient, older machines and/or to produce higher grades of tissue and things in a place like China that's growing, so with growing middle class. So it's -- I think, on balance, the end markets have held up pretty well coming into this year, we had a good book of business coming into the quarter. It looks, so, so far through the quarter, it looks pretty solid in aggregate.

Yes. Look, as we look at it, if you think about the 3 large end markets we support, which is packaging, which is every grade of packaging from cereal boxes through to multi-walled corrugated cardboard that you put a car engine in, and everything in between. And then publication, which is everything that gets written on or printed on, if you think, from newsprint to copy paper, then tissue, which is everything from toilet tissue through to McDonald's napkins. As we look at those markets in the current environment where there's certainly the risk of some recessionary effects, tissue is, quite frankly, largely immune to most of those recessionary effects. We saw wild impacts of COVID, but that was not because of some reduction in economic activity. It was because of the huge shift from out-of-home into at-home consumption of all sorts of tissue product. And publication is already fairly low with -- so it's 15% to 17% of our revenue depending on the quarter. So we -- could it go down a little more? Maybe, but I'm not sure it makes -- we love the revenue, by the way. It's a nice profit revenue, but I'm not sure it's big enough that it's going to have a material effect. And within packaging, a portion of packaging is relatively immune to recessionary effects as well, because it's for food and agriculture, which doesn't get significantly impacted. But now a portion is clearly quite cyclical for consumer products and the like. But you roll all that together, we're certainly not -- you combine that with the fact that we're selling a consumable product when it's a rapid turn consumable product. Some of these belts are replaced every 4 weeks and some a little longer on average, somewhere between 1 and 2 quarters is probably the average replacement cycle for a belt. Because of that, we -- it's not that we're in any way cavalier about it. But we don't see an enormous impact from a potential recession. And so we're not seeing -- what we see is more impacts, as Bill suggested, COVID impacts in China where factories are down because they don't have the employees to work. And so it's more those rather than macroeconomic effects that we're really seeing swinging our revenue right now.

All right. But in terms of price, I mean how much are you thinking you can take this year? Or just can you help us kind of think about the magnitude of that?

Sure. So we're trying to pass on, to the greatest extent possible, the increase we're seeing in input costs. But our challenge is, input costs continue to rise. And we can't increase all of our pricing in any given year. We typically operate in multiyear contracts with all of our large customers, and might be an average of somewhere between 3 and 4 years, each contract. So somewhere between 1/4 and 1/3 of contracts come up for renewal in any year. And the challenge is, if we increase pricing on those once come up for renewal and inflation is continuing, we start falling behind almost immediately, on even the ones we just renewed and we have yet to catch up on the other 2. So I don't want you to think this is something that, look, this year, we're going to increase pricing and make it all better. We saw, as we went through last year, input costs rising. Our inability to pass off it along. But then we got to the fourth quarter, we talked about maybe a 250-basis-point compression in our margins from Q4 '21 to Q4 '22 because of these rising input costs. We will endeavor to pass some of that along this year on those contracts which come up for renewal. But it's not as if you'll see all of that disappear in one fell swoop.

Yes. And some of the other costs that went up are coming back down now, transportation costs, fuel costs, so that should pass through as well. And when inflation was normal, if there ever was a time now, we did a very good job of driving productivity in the plants and making up for that with productivity. So we're going to do that as well.

Okay. And your margins within that segment, they've been very strong. How should we think about -- it sounds like publications rolling off a bit, but tissue and packaging is a bit more -- it has more cushion in a recessionary environment. How should we think about the mix impact from that on the margins?

Yes. So typically -- look, there are exceptions. There are multiple positions in every machine, different types of belts are more technically complex. But in general, the more technically complex a belt, the higher the price and higher the margin we enjoy. Traditionally, that was publication because that required the smoothest finish on various types, whether it's everything from photographic paper to copier paper, you wanted a nice smooth finish. And that was that -- if you go back 20 years ago, that was the high-margin segment. Over the last decade, tissue has become increasingly technically complex. What we need to do to reduce the energy consumption of our customers to produce tissue. And now that is at least as technically complex as paper. In fact, if you look at our R&D spending -- you can't, but if you could, it is definitely skewed toward tissue because that's where we see a lot of opportunities. So I think the way you should view it is, tissue and publication, somewhat higher margin; public -- or packaging, lower margin. So to the extent we see most of the impact of a recessionary environment in packaging. Certainly, we see a loss of fixed cost absorption, which just is generally true irrespective of what volume we're seeing going away. But in general, you're not going to see an outsized mix impact, because it's not our higher-margin product.

Okay. That makes sense. And then on your free cash flow profile for this year, can you just help us think about, last year was a bit lower because of the Aft Transition. So what any carryforward investments could be and just how we should bridge cash flow from last year to this year?

Yes. So look, compared to last year, we had a significant investment on the CH-53K program in 2 respects. One, we performed a lot of work on that Aft Transition portion of 53K last year. We talked about somewhere north of $50 million worth of revenue we recognized in that. We did not bill our customer for that last year. That was revenue we were required to recognize because of our contract structure under the relevant accounting standards, and that appears as contract assets in our balance sheet. Which again, contract assets, you might like to think of it almost as an unbilled receivable. We've recognized revenue on it, but we have not yet billed the customer for the work. We will -- so that created close to $50 million of contract asset last year. On top of that, we invested a significant amount in CapEx last year on that program. So overall, it was a very significant investment year for that program. This year, on the 53K program, we'll actually start billing our customer because we're actually starting delivering parts. And so you will see a much better cash situation on that -- on the working capital side of that program. The bigger impact for us this year is not investment in working capital. It's a large CapEx year for us this year, for a couple of factors. One, we still have some new equipment to go for a variety of new programs that we're installing. And secondly, there was a lot of kind of pent-up CapEx investment. Back in 2020, 2021, even 2022, we deferred whatever CapEx we could, because, particularly during 2020 and 2021 when revenue in AEC was lower, we were loath to spend more CapEx, we absolutely had to. And so we deferred some spending. We're now at the point where we need to really catch up with some of that. So you have a few years of pent-up demand of spending in CapEx that will be done this year, that really should have been spent back in 2020 and '21.

Okay. And then in terms of cash collection on the Aft program, is that entirely dependent on when the products are delivered? Or are there other variables?

Primarily when the products are delivered.

Okay. Okay. Great. Do we have any audience questions? I can keep going. On M&A, just what do you guys -- how are you thinking about M&A right now, with valuations where they are? What could you potentially be looking at in terms of size and segments?

It really would be what fits with our strategy, the strategy to advance our material, our customer reach, our geographic locations and all. We're kind of hoping this -- I don't know, what's going on in the economy and the markets might free up some properties that maybe we wouldn't have seen over the last couple of years. So we're hoping that works in our favor. So it's certainly an arsenal in our toolbox to grow the company. Our plans for growth that we've talked about are all based on organic plans, things that we have line of sight to. So we don't need acquisitions to achieve our goals. But certainly would help.

Is there a rationale to keep the company together with these 2 segments? Or as you -- as the aerospace business starts to really take off, is there an opportunity to...

I think for now, there's not a lot of synergies, but there are some critical ones where the weaving technology, the technology that we've used to develop the 3D woven composite came out of the Machine Clothing business. Obviously, it came out a while ago, but we -- our teams still work together. What seems to be happening now is we're looking at what other materials we can make, and that involves more both R&T groups in each business and then the chemistry and the chemicals that we use benefit from one another. So there's a core development there. It's not a huge part of the company. But while aerospace is still in that $400 million or $500 million range, it's still a pretty small aerospace company. It doesn't take much to move the needle, right? We can grow that business by winning a couple of programs pretty significantly, but it's still a pretty small business from a scale standpoint.

Also a great CFO looking over the 2 businesses as well. I mean that's it. Thanks, guys. Really appreciate it. Thank you.

Thanks. Thanks for having us.