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

With us in Albany International Corporation, we've got Gunnar, forgive me if I don't say it right, Kleveland.

That's very good.

All right. Cool. President and CEO; and Robert Starr, EVP and CFO. So thank you guys for coming.

Thank you for having us.

Great. Thank you. Thank you, Ron.

And maybe a place to start. I think it's always useful for investors who aren't as familiar with the company, what does the company do?

Yes. So Albany International is -- has a history of textiles. It's a lot of looms and weaving and up through the years, I found a niche in the market of Paper Machine Clothing and other engineered fabrics, so belts that are used in paper machines. And so in a large paper machine, there are several types of belts. And that type of belts come from among others would come from us. So this weaving technology, which is really something that I have discovered to be very much more technology than I had expected. When I came to the company, I've been with the company now for 8 months. It is really a material science, and there are different types of belts that are used in different parts of the machine and for different purposes. So it's been really exciting to see. But then to keep it short, just the history, the -- they took this weaving technology that they were so good at and they were able to do 3D weaving and transfer that over to aerospace. And what they started making were parts that go into engines and what we are probably best known from is the LEAP blades. So what we do is we weave a 3D shape, put it in a form and then insert resin into that to make a composite blade -- that is near net shape. We do that together with Safran. It goes on the LEAP engine, it goes on the 737MAX and the A320Neo. And so that was the connection to aerospace since then the company has done several acquisitions on the composite side of business. And we are in both in Europe, Mexico and the U.S. with the aerospace part. For the paper machine and engineered fabrics, we are pretty much all over the world. We got a lot of sites.

And then when you think about the, say, just the split by sales the biggest piece of the business by far is the paper machine -- correct?

So yes, the Paper Machine Clothing is the bigger. The aerospace side was catching up catching up until we last year made an acquisition on Paper Machine Clothing with Heimbach, which added growth to that part of the business. But we're about 60-40, 60% on paper machine, 40% aerospace.

Got you. And what's the proper balance for the company, do you think going forward?

Well, I think you will see that the aerospace part of the business is going to grow, outpace the -- what we have in Paper Machine Clothing. It's growing in the double digits. There is more investment there. And we see a slower growth on the machine clothing other than from our acquisition. But I think that the aerospace will outpace machine clothing.

Yes. And probably sort of unrelated, but do you guys have an idea why they call it machine clothing instead of just belt, right? Because I think that just throws people?

It's an industry term that's been around for a long time back when I was and associated in the Paper and Packaging group, we talked about machine closing I think it's just a way it's an analogy to dressing up the machine. I mean... It's -- so it's like... There are better -- belts is, I think, a better term for it, but the parlance industry is machine clothing.

And then maybe could you give a feel for folks that haven't seen it, what is 3D weaving as opposed to just waving or grading or something, right?

I think from the [ sample or ] going into aerospace, you have to think about 2D and the way that traditional composite is made, where you take layer upon layer of broad goods and create a greater part. You can insert that with resin or you can cook it in autoclave and get the composite part. What is unique about this 3D weaving is that we've, in every direction, which allows us to have a strength that is that is phenomenal compared to the traditional approach. And there is no delayering in 3D parts. So we become -- and we're able to stay lighter. So we're stronger and lighter and what's not like to like about that in the future of aviation.

So when you think about that maybe broadly in -- are there parts on aircraft today that could be replaced by weaved parts. And I mean, obviously, there's going to be future platforms that will be this [indiscernible]. In the market today, are there things that could come off that could be replaced?

Yes, there is. And we are looking at opportunities there. I think our biggest opportunity is the future platform, whether that's air mobility or military aircraft and then eventually the next single [ while ], but anywhere you have titanium today, we should be able to replace place that we can make very intricate forms, woven without having to have the add-on of fasteners and other parts. We can make one integrated part using this 3D evolving. It is a really remarkable technology that Albany has developed over the last several years. And any type of joints that you traditionally see a large titanium [ Hagar ] from a forging, we can be there.

Got you. You mentioned you've been at the company or maybe 8 months or so.

Yes.

Since you took over the helm and I wondered if some of the biggest surprises, good bed, lessons like coming into this because this was significantly different than what you can do to [indiscernible].

Yes. Yes, it is different. And the aerospace part, obviously, having been in aerospace for many, many years. It was a known entity for me. I know the people. I know the suppliers and the OEMs. And -- but I want to start by saying the reason why I came was because I've been with a company that makes composite parts, the traditional way. And I see what we do at Albany with this 3D-woven as the absolute future of composite manufacturing. So I came in to learn that, and I have learned that we can do more with it than I initially thought. But I needed to understand our machine clothing or belt business much better. So I've spent a significant amount of time with that team going out to the sites. I've been to several of the [indiscernible] sites, I've been to 5 of the countries in Europe that we do that and also here in the U.S. and my discovery is this that I like to refer to, and I talked to earlier, material science. These aren't just belts that they put into a paper machine which you may be -- might feel like there is a lot of technology that goes into making a belt that can make a paper machine worked away the manufacturers need to. And if anything goes wrong with our belts -- it is not a good day for the superintendent or for the papermaker. So they want the absolute best quality. And I've been to every R&D center that we have, and we have a tremendous capability in the material sciences to make these belts perform at a level that our customer expects. And that is both in the chemical composition of how the belts are made and also in the way we make them and the form whether that is some sort of a 3D-weave, but we also do nonwoven and have other types of belts. And I think we spent 4% on both sides of the business on R&D every year. And that's been well used. You can see it in our product. You can see it on the renewal of our product, and you can see it in our customers picking us and paying for it. Very recently, we promoted a person of [ Hansen ] to take over all of R&D and innovation for the company at the leadership level because I see the opportunity to harvest some of these technologies and use them across company and also for other invention and other opportunities that we have.

When you think about growth in the Paper Machine Clothing business. My impression is just could be wrong, not a paper [indiscernible], but kind of like a GDP sort of growing. Can you get better than that? What can you do in the Paper Machine Clothing business to accelerate growth beyond the sort of how things grow.

Things -- and I think the answer in that lies in the type of paper that is being made. As you can imagine, what is called publications or newspapers and traditional paper is a declining business. Albany had very wisely 15 to 10 years ago moved away from publication and put a lot of effort on what is referred to as packaging and tissue, which are growing. So -- when you're in, and that's where also the paper machine makers and the paper makers are putting their R&D. So they need the more sophisticated belts that we are able to make and support them with. So you can grow there. And I think tissue is an interesting one, right, because it's strong and I take the opportunity. Any time you see a pattern in tissue, cancer it's coming from one of our belts. 's the belts that make it. And in North America, obviously, there's a great market for that. It has expanded tremendously in Europe as well. Asia, it's picking up as well. And I think the rest of the world, that is a growth area that we have a competitive advantage. So it is possible that you have to overcome the traditional paper that at some point, we need paper. So at some point, that is going to flatten out.

And then in that business, when we think about the structure of the industry, who is your biggest competitor competitors?

Yes. So there is one privately owned company in the U.S. as Johnson that makes parts there are kind of America centric. They do have some others as well. But then each of the paper machine makers, the companies that make paper machine also, some of them have the capability to take -- to make the machine clothing. So it's a small industry, and our positioning in that industry is to be the technology leader. So that's why we're putting so much effort into the technology.

Okay. Then now back to the aerospace maybe aerospace and defense side. What avenues for growth do you have there beyond just the LEAP business?

I mean it seems like it's a good start. Yes. The LEAP was a phenomenal start. I think it's incredible to think about the company that came from a traditional industrial business to take on aerospace with the fan blade on the new engine. That is an incredible leap. No, pun intended. But we -- that technology has kind of 4 areas that I think we can grow in. So the 3D-woven, I mentioned Air Mobility vertical lift, where you're going to use electricity as the power need significant weight reductions. We're able to do that. So that is an area that we can have that the strength and the lightness of our material has a place in new military products such as helicopters and fixed wing. So that's the second one. The third one is a little bit further out, which is on the single aisle, the next single aisle is coming. We're working with -- we're currently working on the [ rights ] with Safran and GE. It's a great project. We're also on the wing of tomorrow. So our technology is being accepted, and we see that. But that's a few years forward. We're also investing quite significantly now on hypersonics. So 3D weaving -- this is really an area where we can make a near net shape part. And carbon just keep it simpler carbon infused to where it becomes the front of some of these hypersonic missiles and have the absorption -- heat absorption effect that is needed there. I think we have a significant competitive advantage in making a near net shape form there from a cost standpoint. And I think that's a growth area going forward. On the more traditional 2D and structures, the 2 area -- that we have expanded into space -- that's a growth area. It's a good place for us to be. We have recently announced our long-term contract with Sikorsky on the CH-53K. We do structures. I think we have a unique position in the structured market composite structure market in aerospace. I have been the OEM. I've been the ones asking for composite structures and the performance of the suppliers in that arena is pretty poor -- we are performing exceptionally well. It's one of the things that really attracted me to the business. We deliver at 100%. We deliver a quality product. And I think we can demand the price that is needed to expand there because in the end, you see what -- I mean, Boeing and Airbus are in-sourcing again, that capability. If there needs to be a position to be in as long as we get the right price. I think we can expand that area as well. So everywhere within what we do at -- in the aerospace business, I would say we are -- we have growth opportunity. We do grading as well. And I should have said that, that is -- so the [indiscernible] bodies made with our grading technology. And as -- with where, I believe, missiles and weapons are going in the next 10 years. So it's another area that our technology is a growth area.

So when we think about the composition of the composite business could it be a 50-50 commercial defense kind of thing. I mean, how we think about the defense portfolio over time?

Over time, I think that would be my goal. I'd like to see it 50-50. I think in the near term, it will be a growth on the defense side that outpaces the commercial side until the 2D. But if you look 10 years from now, I think it will be about 50-50.

Yes. And that makes sense. When investors think about that side of the business, what kind of growth should it have?

It should have mid-double digits.