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#Thank you, operator, and good morning everyone.
As a reminder for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results with particular reference to the Safe Harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP.
For purposes of this conference call, those same statements also apply to our verbal remarks this morning.
And for a full discussion please, refer to that earnings release as well as our SEC filings, including our 10-K.
Now I will turn the call over to <UNK> <UNK>, our Chief Executive Officer, who will provide some opening remarks.
<UNK>.
Thanks <UNK>.
Good morning everyone.
Welcome to our Q1 2016 earnings call.
My comments this morning will be a bit more extensive than they usually are.
As always, I'll summarize the highlights of the quarter.
<UNK> will follow with more detail.
I'll then turn to our outlook and we'll close with Q&A.
But since this is my first opportunity to talk with all of you since we completed our Composites acquisition on April 8, and since the acquisition effectively doubles the size and growth potential of AEC, we thought today's call would be the right time to give you a more detailed view of our outlook, both near and long-term, for the new combined AEC.
But first let's start, as usual, with a review of the quarter, which was another good quarter for the Company.
Against an unusually strong Q1 2015 and despite a sharp drop in year-over-year Machine Clothing sales, Q1 adjusted EBITDA was essentially flat compared to a year ago.
Both businesses again performed well as Machine Clothing continued to generate strong profitability and AEC's strong growth.
For Machine Clothing, even though sales, excluding currency, declined 7% compared to Q1 2015, there were no top-line surprises.
Essentially, the trends of the previous three quarters continued through Q1.
That 7% year-over-year sales decline was due primarily to the significant and permanent drop in publication sales that we experienced in the first half of last year, and that we talked about in last year's earnings calls.
When we exclude that drop in the publication market, or alternatively, if we look at the top line on a sequential basis, what we see is the following: sales in the Americas, Europe and China were stable; sales in the growth grades were stable; sales in the growth grades accounted for 75% of total sales; we continue to perform well on new machines; and we were particularly encouraged by the performance of our new technology platform in development trials and in actual product sales in the tissue market.
Machine Clothing profitability was again strong, as it has been for the last several quarters, for the reasons that we have discussed before ---+ last year's restructuring, continuing productivity improvements, and lower material costs.
The combined effect of these three sources of cost reduction was to essentially offset the impact on adjusted EBITDA of that large permanent drop in publication sales.
AEC also had a good first quarter, driven by growth in LEAP.
Sales improved by 19% and adjusted EBITDA swung from a loss of $0.9 million to a positive $1.5 million.
From an operational perspective, performance was strong across the board.
Preparation for the LEAP ramp, deliveries and quality for JSF, the plan to restructure our portfolio of legacy programs and new business development all continued on track.
And as I mentioned, shortly after the end of the quarter, we completed the Composites acquisition.
Our integration efforts are well underway and are also right on track.
We will include the acquisition in our consolidated AEC results starting with next quarter's earnings release.
So in sum, this was a good quarter with flat adjusted EBITDA against a strong year-over-year comp and with both businesses performing well and as expected.
Now let's turn to <UNK> for more detail.
Thank you <UNK>.
I'd like to refer you to our Q1 financial performance slides.
Starting with Slide 3, net sales by segment, excluding currency effects, total Company net sales in Q1 decreased 3.9%.
Also excluding currency effects, MC net sales were down 7.2% in the quarter against that strong Q1 2015 that <UNK> just referred to.
AEC net sales increased 18.8% due to growth in the LEAP program.
Turning to Slide 4, total Company gross margin was 42.1% in Q1 compared to 42.3% in Q1 of last year.
MC gross profit margin improved to 47.9% of sales in Q1 compared to 47.5% Q1 2015 despite the drop in sales.
This step up in MC gross margin over the past five quarters is partially due to a stronger US dollar against most major currencies since early 2015, particularly the Brazilian real and Mexican peso.
MC gross profit in absolute dollars declined to $69.6 million in Q1 compared to $75.3 million last year as a result of the lower sales.
Looking at Slide 5, earnings per share, we reported net income attributable to the Company in Q1 of $0.42 per share compared to $0.38 per share in Q1 of last year.
Q1 2016 EPS was reduced by $0.03 per share for acquisition expenses.
We expect an additional $5 million to $6 million of direct acquisition expenses in Q2.
While restructuring expenses only had a $0.01 effect in Q1, Q1 2015 EPS was reduced by $0.18 per share for restructuring.
The restructuring charges in both periods were principally related to MC plant closure costs in Germany.
Other EPS effects in one or both periods related to discrete tax items and foreign currency revaluation are noted on the slide.
Excluding all the adjustments, adjusted EPS in Q1 2016 was $0.46 per share compared to $0.45 in Q1 2015.
Slide 6 shows adjusted EBITDA for the quarter.
Adjusted EBITDA in Q1 2016 was $41.3 million compared to $41.5 million in Q1 last year.
MC adjusted EBITDA was solid in Q1 at $49 million compared to a very strong Q1 last year of $52 million.
AEC adjusted EBITDA improved to $1.5 million in the quarter compared to a loss of $0.9 million in Q1 last year due to the growth in LEAP.
Lastly, Slide 7 shows our total debt and net debt before the effect of the acquisition that was completed in April.
Total debt in Q1 declined $10 million as repatriated cash was used to pay down debt.
Net debt, total debt less cash, increased about $5 million compared to the end of the year to $86 million.
The increase was mostly due to incentive compensation payments that typically occur in Q1.
Along with the successful completion of the acquisition in April, we also amended our revolving credit facility to increase it to $550 million and extend it to April 2021.
The terms of the facility were essentially the same as the previous agreement.
In addition to assuming a $23 million capital lease, total debt increased $205 million to fund the acquisition and related costs as well as financing fees and initial cash requirements of the new business.
The interest rate on the initial borrowings under the new facility was 1.5% plus one month LIBOR, or 1.95%.
Including the impact of the increase in total debt, our leverage ratio increased to 2.57 at the date of the acquisition.
Now I'd like to turn it back to <UNK> for some additional comments before we go to Q&A.
Thanks <UNK>.
Turning to our outlook, in Machine Clothing, we do not see any significant deviation from our expectation, but given the current exchange environment, full-year 2016 adjusted EBITDA should be in the upper end of that normal $180 million to $195 million range.
The typical seasonal pattern in this business is for sales to increase from Q1 to Q2, and for margins to decline as annual salary increases are implemented.
Last year's unusually strong performance in Q1 notwithstanding, we expect a return to the normal pattern this year.
Q2 sales should improve somewhat over Q1.
Profit margins should decline.
The net effect is that we expect Q2 2016 adjusted EBITDA to improve compared to Q2 2016 and first-half 2016 adjusted EBITDA to be comparable to first-half 2015.
The primary risk to this outlook continues to be global macroeconomic conditions, particularly in commodity driven economies like Brazil.
Turning to AEC, our short-term outlook remains unchanged from what we described in our Q4 earnings call and then in our February 29 investor call about the acquisition.
We expect the acquisition to contribute roughly $65 million of sales and $10 million of adjusted EBITDA to our results in 2016.
That's since the date of acquisition, April 8 through the end of the year, $65 million of sales, roughly $10 million of adjusted EBITDA.
On a pro forma full-year basis, the acquisition would add $80 million to $90 million in sales and $13 million to $15 million in adjusted EBITDA.
If we look at AEC as a whole, including the acquisition, our pro forma full-year 2016 outlook is for sales to grow to $190 million to $200 million compared to pre-acquisition full-year 2015 revenue of $100 million.
Pro forma full-year adjusted EBITDA for the combined AEC would be $15 million to $17 million, including $10 million of R&D spending, compared to a pre-acquisition loss in 2015 of $16 million which included that $14 million BR725 charge.
So, $190 million to $200 million in combined full-year pro forma sales in 2016 and $15 million to $17 million in combined full-year pro forma adjusted EBITDA.
As for our longer-term outlook, the new AEC has the potential to reach approximately $450 million of annual revenue by 2020.
The latest progress in new business development adds to our confidence in this growth potential.
And driven by growth related operational efficiencies and STG&R leverage, we expect steadily improving EBITDA margins through the rest of the decade growing to 18% to 20% by 2020, again for the combined entity.
This growth potential is based on six key sets of programs.
First of course is fan blades and cases for the LEAP engine.
Total orders for LEAP now exceed 10,500 engines and CFM's latest forecast is for annual engine sales to grow from 100 in 2016 to 500 in 2017, 1,200 in 2018, 1,800 in 2019, and 2,000 by 2020.
The annual rate of AEC sales of ship sets will be somewhat higher than the annual rate of CFM sales of engines.
This program has the potential to account for as much as $200 million in annual AEC sales by 2020.
The second key program is airframe components for the Joint Strike Fighter.
AEC is producing a variety of parts for the airframes of each of the three versions of this aircraft.
Total sales, which should account for roughly $30 million of pro forma annual revenue in 2016, are expected to begin to ramp in 2017 and have the potential to reach annual revenue potential of $75 million to $100 million by 2020.
The third key program is airframe components for the Boeing 787.
AEC is producing the forward fuselage frames for both the 787-9 and the 787-10.
Production began to ramp this year and has the potential to contribute $50 million to $60 million in annual revenue by 2020.
The fourth key program is Sikorsky's CH-53K, the Marine Corps' next-generation heavy lift helicopter.
AEC is producing the tail rotor pylon, horizontal stabilizer and sponsons.
The first versions of the CH-53K are currently undergoing flight tests.
Low rate initial production is scheduled to begin in 2017 and the ramp is expected to begin in 2019.
This program has the potential to generate more than $20 million of annual revenue by 2020 and at full rate production early next decade, it has the potential to generate more than $100 million in annual revenue.
Fifth is a cluster of parts for other engine programs, including components for the LiftFan of the Joint Strike Fighter, which we are producing for Rolls-Royce, and the fan case for GE's 9X engine.
The ramps for these parts will be spread through the rest of the decade and into early next decade.
Depending on the outcome of current negotiations on parts for other engines, this fifth set of programs has the potential to generate $25 million to $50 million of annual revenue by 2020.
And finally, the new AEC produces parts for numerous legacy programs, most notably bodies for a family of Lockheed Martin standoff air to surface missiles, and vacuum moist tanks for most Boeing aircraft.
In aggregate, these legacy programs have the potential to generate $50 million to $70 million in annual sales by 2020.
AEC's ability to actually realize the revenue potential of these six sets of programs will hinge primarily on two variables ---+ how well we execute against demanding requirements and schedules, and whether the schedules for each program hold firm.
There's always the risk that demand will slip to the right, but given the strategic importance to our customers of each of the underlying program platforms, we continue to view our ability to successfully execute as the primary risk factor here.
Our ability to realize the new AEC's revenue and profit potential is going to be mostly, if not entirely, about operational execution.
So, to conclude, Q1 2016 was another good quarter for Albany highlighted by strong profitability in Machine Clothing, LEAP driven growth in AEC, and shortly after the quarter, the acquisition of our Composite Aerostructures division.
Our outlook for Machine Clothing continues unchanged.
We expect to end the first half of 2016 on track toward full-year adjusted EBITDA in the upper end of the normal $180 million to $195 million range.
And for AEC, including the acquisition, we expect pro forma full-year 2016 sales to grow to $190 million to $200 million, pro forma full-year adjusted EBITDA to grow to $15 million to $17 million, and assuming good execution and an absence of significant market based delays across the six key sets of programs, rapid growth through the decade accompanied by steadily improving profitability.
And with that let's go to your questions.
Daniel.
Yes, I think the best way to think about this is, again, how we think about the full year year-over-year.
There will be fluctuations quarter to quarter, but everything we see says we should be in the upper end of that normal range.
And going into the second half, we will be right there.
The blended EBITDA margin is what I described to you, 18% to 20%.
So that would be for everything.
If you take those six key programs ---+ let's leave LEAP aside because LEAP is an extraordinary relationship that we have where it's unique technology, exclusive relationship, life of program, unique kind of contractual arrangement.
So the other programs mostly are sole source.
The primary exception is that some of the parts on one of the variants of the JSF is dual source.
But I think the more significant point is, for many of these programs which are DOD programs, you wind up as the sole-source supplier, and then contracts proceed in blocks.
So the next block of purchases for JSF, it will be a three-year block, and so you get a three-year contract.
You're mostly the sole-source through that.
And then toward the end of that block, you negotiate the next block.
And as long as ---+ this is pretty standard life in DOD.
As long as you don't screw up, you continue to renew those contracts because, as the program ramps, it's a high risk for the customer to switch out suppliers unless they really are forced to do it because of systemic performance failures.
So there certainly ---+ there isn't the guarantee and the certainty that you would expect on the LEAP side, but I think you should take literally what we say.
As long as we perform, as long as we execute on the requirements and the schedule, we should be able to realize that revenue potential and profit potential.
Let's take CapEx and then Cozz can give you a swag on the D&A.
But what we had said before the acquisition was that we expected total CapEx for the Company, including AEC and reinvestment in Machine Clothing, to be on average $70 million a year, for between 2015 and 2020, on average $70 million a year.
2015 was light, but we expected 2016 and 2017 to be heavier, and above that average because those are the LEAP ---+ those are the peak spending for LEAP because that's when we need to invest all the equipment for the steepest part of the ramp for the LEAP program.
And then we thought, unless there were major new programs hitting, that CapEx spending would drop off.
But over the periods, $70 million a year on average.
With the acquisition, it's a similar story.
Add about $10 million on average per year through the period, but that will be frontloaded.
At the same time that we are investing heavily with LEAP, our colleagues in Salt Lake will be investing heavily for the ramp on the Boeing forward fuselage frames, and then JSF.
So while it will average 10 ---+ while it's likely to average $10 million a year over the five years, the first two years will be closer to $15 million to $17 million average.
So add all that together, we should be in the $85 million-ish to $95 million range of capital spending in 2016 and 2017, and then probably dropping off from that below the $80 million average for the period.
Now, all of this is subject to caveats.
The first is timing can vary.
This is basically we are giving you a picture into the projects, the volume of projects we are approving, the precise timing of them may get delayed or may come forward a bit.
So Q1 looked a little bit light but we expect a surge in capital spending over the next several quarters.
And then on D&A ---+ <UNK>.
The AEC segment in Q1 had D&A of $3.4 million.
And so that's our current run rate.
We expect, with this acquisition, probably not quite get to $5 million per quarter for the rest of this year, so it will add ---+ going in, it looks like it's about $5 million of annualized depreciation and amortization for the acquisition.
So if you add that to our current run rate, it brings us a little under $5 million per quarter going forward for the rest of this year.
And of course, that number will increase as we put the CapEx in over time.
But if you just look at the rest of this year, $1.3 million to $1.5 million more of depreciation and amortization for the acquisition is probably a good estimate.
The three plants, including the one we're building now in Mexico, are based on the assumption that ---+ are based on the expectation that CFM and Safran have going out well into the next decade.
So we do not anticipate the need for more than three, but they are going to be three very full plants.
We are not ---+ we are right on track.
We are not ---+ we are meeting delivery schedules right on track.
The challenge for us now is we are ramping up each plant and we are about to start a third plant.
But at this stage, we are right on track.
And from everything we see, we should be right there as it ramps.
It's a really interesting phenomenon that goes well beyond Boeing.
In our minds, the right way to think about this is there is a sea change taking place in the aerospace industry.
Across the board, up-and-down the supply chain, every OEM is making the swing from 10 years of more, 10 years plus of massive investment in new platforms.
And now it's making the turn to return on investment and recovering, basically recovering from the massive investment in developments.
So literally every OEM is doing everything possible to squeeze costs out of themselves and out of their supply chain.
And so success in this environment, the premium goes from unique technology to operational excellence.
And operational excellence means, in the end, high quality, low cost.
That then, as you become more and more productive, reduce your costs, you then have to share those gains with your customers.
And in so doing you not only preserve your position on existing contracts but you have an opportunity to get more contracts.
And that's how we view it, but we do feel that's playing into our strength.
We are spending heavily on R&D.
Our view is if we have an opportunity that's coming our way because of a next-generation CFM engine, we ---+ as long as the ROI is there, we are delighted to invest more in capital and more in development and R&T to go there.
One of the beauties of, in our minds, of this model of the combination of these two businesses is we are very well positioned to take advantage of ---+ to make the investments required to take advantage of significant opportunities as they come along in the aerospace industry, and there are not that many independent Tier 2 suppliers capable of saying that.
So, to us, let's say Boeing pulled the trigger on some sort of middle of market aircraft in CFI and won the business, and that would require us to ramp up investments, both capital and R&D, we would be thrilled, and we're prepared to do that.
That's just ROI for us and for our investors.
But you are really getting a piece of ---+ one of the cores of our whole model as a company is position ourselves to aggressively invest in appealing, new opportunities as they come along.
And the only way ---+ as you know, the only way you can grow in aerospace, you cannot do so in a cash starved mode.
The ROI has to be there, but if it is, then we will continue to move aggressively.
No, and it's not slow.
The ramp up of LEAP is taking place in an incredibly compressed period of time.
We are talking basically three years, going from start to 2,000 engines a year, that's never happened in commercial aviation history.
And the ramp down of CFM is happening at the same time with the same velocity.
So while what you describe may be happening on some platforms, it's certainly not happening on the platform that's right in front of us.
And if you listen to the Safran earnings call or the GE or what GE Aviation talks about, they spend an enormous time and energy focused on making sure their supply chain can deliver.
But in the case of CFM, GE and Safran, most of the suppliers are the same.
The parts are not radically different.
We are the ---+ we are one of the major points of change as they go from a CFM engine to the LEAP engine.
That's why we try to give a range, give an estimate of full-year 2016 and a range for 2020.
That's as much as we are prepared to disclose now.
And a ship set number isn't all that meaningful since they're multiple parts on three different variants.
So we are really not ready to go there beyond the disclosure we just gave you.
I think, rather than give you a precise number for next year, if you think in terms of broad trends, that 25%, which is publication grade, that's part of a sectoral structure decline driven by digital displacement.
That's heading down 5%, 4% to 6% per year no matter what.
And sometimes it's lumpy, as we saw last year.
The interesting question about that decline is does it level off at some point.
Is there some tail in the publication grade industry where there is kind of a steady-state capacity to supply limited amounts of publication papers.
And it's hard to gauge where that is.
But what we can say with mathematical certainty is, with every step down in the market, our exposure to that market declines.
And when you're down to 20%, 15% of sales, even a big drop in that 15% has a small effect on our revenue and on our income.
So, we are slowly but inexorably moving to the zone where big drops in the publication markets will have diminishing effect on us.
There's an asymptotic effect there.
Now, if you look on the other side, the 75%, which are growth grades, those ---+ that growth is almost completely a function of GNP.
So whereas the 25% is going to head down no matter what, the 75% is only going to grow when there's healthy GNP around the world.
So, one of the challenges over the past couple of years is we've seen these step downs in publication, and we haven't had the economic juice to drive the growth grades.
And that's why we've been relying more on cost reduction of various sorts to offset the publication declines.
At some point, that's got to switch over.
We need, in the long-term, we need the growth grades to pick up to 1%, to 2%, to 2.5% GNP driven growth while that 25% shrinks to 15%.
Yes.
It's exactly what I just described.
Particularly if you take key markets like China, Indonesia, Brazil, Vietnam, Southeast Asia, it's all of South America, as those economies' GNP revive, then sales in the growth grades are going to accelerate.
But if they remain in the doldrums, and again, if you think of this as a link to oil prices, so many of those economies are commodity-driven, and oil prices get depressed, their economies get depressed, you just don't have the economic juice to drive the top line on that 75%.
As that returns, then we should come back to the point where a 2% to 3% growth in that 75% more than offsets ---+ 75% going to 80% going to 85% more than offsets a 5% to 7% decline in the publication grades.
But where is that economic activity.
Look at Brazil, look at China.
On the automotive side, we're continuing our probe.
We've been working with two OEMs at the very high end of the automotive market, and we have now ---+ those opportunities have now matured to a point where we have to make a bet and start spending real money.
And so we've decided to go with one of those two, which is a much bigger opportunity, a bigger array of opportunities, with a substantially larger OEM.
And so we are taking a hard run at that this year, and it will be development of genuinely crash-worthy structures, like at the front of the car.
And so that probe is continuing.
Now, that is not ---+ that is, in our minds, a next generation family of growth opportunities, so that is not ---+ we haven't factored anything into ---+ anything in the way of revenue from that probe into our estimate of a potential for $450 million in revenue in 2020.
There's a second probe that we haven't really talked about that is part of ---+ came with part of the acquisition that our Salt Lake City colleagues have been working on, which is they make parts, they make frac plugs for the oil and gas industry.
And this isn't the best time in the world to talk about the oil and gas industry, but those are interesting parts.
They are basically consumable parts, have to be replaced, and so they've been exploring that market and have learned a lot in that process.
The parts are good.
The challenge is how you distribute parts into the field in a highly fragmented industry like that.
When we ---+ a few years ago, when we did the diversification study analysis of possible applications outside aerospace, that led us to the automotive market.
We concluded that the second most compelling application was down-well drilling.
So, we will continue to probe both.
But it really is important to think of them as probes.
I mean this was like you get in there, explore and then learn, and what you learn may lead you to conclude, yes, keep going, or it may lead you to conclude wrong model, that's back off.
So neither of those is in any material way in the $450 million.
The new platform that we've been investing in in the Machine Clothing side, it really is ---+ I guess the simplest way to describe it is it really is a composite structure.
We're applying and exploring the application of composite structures to the production of these belts that we make for the paper and related industries.
And what we've so far found, we really went into it looking to see if we could come up with an inherently lower cost way of making these belts.
But our first, most encouraging set of applications so far is that we are finding that when we make ---+ instead of traditional woven structures, we make these composite structures for the tissue industry, that it is allowing our customers to make differentiated tissue.
So tissue and towel, for example, is softer or bulkier.
And so it wasn't the outcome that we were expecting going into this, but the first wave of applications are very encouraging ---+ is really to apply these belts to customers in the tissue and towel market that creates performance advantages for the customer.
Yes, as you know, we've been doing that over the past few years, and we'll continue to do that.
The Machine Clothing business generates a lot of cash, generates it in various countries, so I don't think there's really any major change to the plan.
We'll keep looking at those pockets where the cash gets generated, and try to ---+ we try to average $20 million to $30 million a year of repatriated cash.
Again, the key objective there is to minimize the cash tax cost of doing that.
So that's an ongoing plan that we are continuing into this year and forward.
The actual cash that we used to pay down debt was money that was part of a $20 million repatriation that came back at the end of ---+ in December, at the end of 2015.
So, we didn't do any actual repatriations in the first quarter.
We used cash that had come back right at the end of the year.
Thank you, everyone, for participating and for the questions.
And we'll be out there in a variety of conferences and visiting as many of you as possible over the next couple of months.
And if we don't talk to you then, we'll talk to you on our next earnings call.
Thanks a lot for participating.
