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

Good day. Thank you for standing by. Welcome to Albany International Business Update Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your host, JC Chetnani, VP of Investor Relations and Treasurer. Please go ahead.

Thank you, Olivia, and good morning, everyone. Welcome to Albany International's guidance update conference call. As a reminder, for those listening on the call, please refer to our press release issued early this morning detailing our updated full-year guidance. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking and contain a number of risks and uncertainties which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to our SEC filings, including the Form 8-K SEC filing on October 3, 2024, and our previously filed Form 10-K. Now I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar?

Thank you, JC. Good morning, and welcome, everyone. Thank you for joining our call to review and discuss our earnings preannouncement, which was detailed in our press release, filing earlier this morning. I'll provide an overview of our business performance and the key drivers that have resulted in us revising our full-year guidance. Rob will then provide details on our revised financial guidance. As highlighted in our press release, we have decided it is appropriate to provide an update to our full-year earnings guide largely due to changes in our 2024 outlook for our Albany Engineered Composites segment. That said, I want to assure you that we're focused on improving the operations so that we can deliver on the full promise of the business and that we now have the right team in place to do that. The changes in our outlook are driven by changes in assumption on a few key aerospace programs, combined with the decision to defer a portion of the planned material receipts at our Salt Lake City facility. As part of our normal quarterly EAC review process, we have adjusted a number of our program assumptions to reflect the performance challenges we are encountering on a few of our large complex aerospace programs. The revised estimates reflect our current view on how the programs will perform over the life of the contract. Given the size and long-term duration of these contracts, a modest change in assumptions, resulted in a meaningful current period charge. Before Rob reviews the details regarding the items impacting our aerospace outlook, I want to comment on the condition of the overall business. Albany's business segments are each leaders in their respective industries with excellent capabilities and the same underlying material science technologies. We are highly focused on serving our customers and have a strong reputation for delivering high-quality products on time. Albany will continue to invest in R&D to drive continued innovation, building future profitable growth. I'm confident we have the right leadership in place to execute our strategy. At AEC, specifically, in spite of these forecast adjustments, the business remains very well positioned with strong backlog and improving cash flow versus prior periods. Our bid pipeline remains robust, and AEC will continue to deliver value to its current and prospective customer base. With Chris Stone leading the business, we're confident that we will successfully execute on the opportunities in our growing aerospace business. Our Machine Clothing business continues to perform well in spite of challenging markets, most notably in Europe. However, they are on track to meet their previous EBITDA guide. The Heimbach integration has been proceeding well, and we're confident in delivering the long-term synergies we have previously discussed. The leadership transition from Daniel Halftermeyer to Merle Stein is also going well. On a consolidated basis, we are delivering strong free cash flow, and our balance sheet is in terrific shape. We have significant balance sheet capacity to strategically invest in the business for the long term. We will provide more color on our Q3 business results and full-year outlook in our Q3 earnings call. At this point, I would like to call -- to turn the call over to Rob, who will review our revised full year guide and discuss in detail the items impacting our results. Rob?

Thank you, Gunnar. Before discussing the changes to our outlook for our Albany Engineered Composites segment, I want to highlight that while we have lowered our Machine Clothing revenue guide, our midpoint estimate for Machine Clothing adjusted EBITDA remains unchanged. For AEC, we are reducing the midpoint revenue guide from $520 million to $490 million, and the midpoint of adjusted EBITDA from $102 million to $70 million. A large majority of the reduction is due to net unfavorable changes in estimated contract profitability on our long-term contracts, most notably on our CH-53K program as well as on our Gulfstream contract. Additionally, we are reducing the pace of planned material receipts at our Salt Lake facility in order to improve manufacturing flow. The components of the change to our Albany Engineer Composites adjusted EBITDA outlook are as follows: an unfavorable change in estimated labor costs, combined with higher-than-expected material costs, totaling approximately $15 million on our CH-53K program. An approximate $7 million negative impact related to elevated scrap and labor costs on our Gulfstream contract. An approximate $6 million negative impact relating to the timing of material received at our Salt Lake facility. We anticipate receiving these materials in fiscal '25. An approximate $2 million impact arising from reduced Boeing demand on the LEAP and 787 programs. And approximately $2 million relating to changes in other forecast assumptions across other programs. Now turning to our revised 2024 full-year guide. We expect total company revenue to be between $1.22 billion to $1.26 billion, an effective income tax rate of approximately 27%. Capital expenditures are projected to be in the range of $90 million to $95 million. Adjusted diluted earnings per share will be estimated between $2.90 and $3.40 with our second half earnings per share weighted towards the fourth quarter. Total company adjusted EBITDA between $230 million and $250 million. Machine Clothing revenue between $740 million to $7460 million. Machine closing adjusted EBITDA between $235 million and $245 million. Albany Engineered Composites revenue is forecast to be between $480 million and $500 million. And AEC's adjusted EBITDA is forecasted to be between $65 million to $75 million. Now I'd like to go ahead and open the call for questions. Operator?

[Operator Instructions] Now first question, coming from the line of Michael Ciarmoli with Truist Securities.

Rob, I guess just elaborated on some of the programs there. You had the charge last quarter as well. Were there any new programs or was this kind of just an extension of more challenges across all those programs you took the charges on last quarter?

Yes. I mean, Michael, it's a good question. In the prior quarter, the programs that I mentioned also did have some negative impact. There was definitely some Boeing impact last quarter as well. So this quarter, it's really looking at -- as we went another quarter, have the labor rates and the bill of material was shaping out on CH-53K that drove the majority of this change. We're also seeing challenges on the Gulfstream contract that we mentioned. Those are really the 2 programs where you see the vast majority of these adjustments on the EACs and as you can appreciate, we have a lot of eyes on this. I mean this is part of our normally quarterly review. And as Gunnar mentioned in his prepared commentary, in particular, the CH-53K is a very large program. And this cumulative adjustment on that program represents a very small percentage of the overall contract value.

Okay. Okay. And just you called out the LEAP and the 787. What actually drove a charge on the LEAP considering that's cost plus. And is there any real impact here from the Boeing strike? I mean, it would seem like 787 not impacted by the strike. What kind of -- what are the knock-on effects from the strike, if any?

The strike is reducing some of the demand that we're seeing and on the LEAP, while it's cost plus, there -- not every cost is necessarily capture -- recoverable under that contract. So there's -- and a lot of this is really overhead impacts that we're seeing in the business across even some other programs, but it's being driven by reduced Boeing demand in the near-term base.

So you're already seeing where is that reduced demand coming from? I mean we're only a couple of weeks into the strike. I think you guys might be the first ones to be publicly talking about it. I mean are you seeing a slowing of demand from your engine OEMs? Is it more on the structure side? Or what's driving that slowing?

We are in -- Michael, we're in continuous dialogue with Safran. And as we've gone into this quarter, there's been the factors -- on the slowdown this just added to it. So we took some action to respond to that.

Okay. But proactively, they haven't given a new production schedule yet to you or just trying to -- I mean, obviously, Boeing, right -- match with them.

Right. We're in continuous dialogue with them. This wasn't something that came up because of the strike. This was -- this happened prior to the strike. And with this strike, we've made a decision together.

Okay. Last one that I had. You now have, I guess, within the past couple of months, you've made key personnel changes in both segments. I mean, did the AEC challenges sort of drive that change? And I mean I think it was earlier in maybe August, you made a swap at the machine clothing, but were these changes in response to kind of what's going on from a programmatic standpoint.

Michael, I'm really excited to have Chris Stone join the team. He brings a capability that this company needs to do the growth that we have had and will have going forward. He has great experience both from an operational standpoint, he and I have worked together for many years in much more much more complex systems than what we have and his supply chain experience and knowledge of the whole aerospace business between the 2 of us. I see a better sophistication on where we're going as a company. So very excited to have Chris here.

And our next question coming from the line Pete Skibitski with Alembic Global.

Could you talk about the Gulfstream issue because you guys don't talk about Bizjet exposure too frequently. So maybe just kind of -- I don't know if you're on the engine on some of the Gulfstreams, but could you talk about that more? And is it an issue of changes in end market demand in Bizjets?

This is a program on the structure for Gulfstream. We're not going to get into the detail, but it's a very, very difficult part for us to make, and we took that realization in this quarter. And we're working with our engineering team and our manufacturing team to overcome some of those challenges as well as with Gulfstream.

Okay. So it's sort of a new -- it's an engineering project. It's a new program, not something that's been in production?

We are very early in production. So this is a very long program, and we are only a few shipsets into the build. So we're going through the learning curve. We're realizing that we're not meeting that learning curve, and we're taking action to recover that. But we decided to take a not as steep curve as we had initially.

Okay. Got it. And then for a couple of these different charges that you took, you guys mentioned supply chain is -- can you talk about -- is it raw material issues or something else? And just you guys are kind of seeing supply chain go the wrong way this quarter instead of, I think, across the industry in the last year or so, we've seen modest improvements in the supply chain. But are you guys now seeing things go kind of in the opposite direction?

No, not really. We have, like everybody else with a large program like the CH-53K, there are a lot of parts. So there are always some issues. That's not necessarily the cause here, we've had material go through our factory. We're basically streamlining our factory to the rate that we're building. So we're slowing down some of the input. That's really what it is about. And I think I mentioned in an earlier call that the company has taken actions on difficult parts to make sure that we had inventory. So we've had some exaggerated inventory in Salt Lake City. And so we're streamlining that now with a better supply chain visibility. Does that make sense?

Yes. Pete, the $6 million negative impact that I referred to on material receipt, that's really timing. And I think what we're seeing as part of the material cost on the CH-53K is the realization that some of the same material savings, right, just based on some of the contracts we've entered into, we're not going to get to where we earlier had estimated. So we're taking that into account right now just based on where we are contractually with our supply chain.