Q1 2024 Albany International Corp Earnings Call

Participants

Jc Chetnani; Vice President - Investor Relations and Treasurer; Albany International Corp

Gunnar Kleveland; President, Chief Executive Officer, Director; Albany International Corp

Robert Starr; Chief Financial Officer; Albany International Corp

Peter Ament; Analyst; Baird

Michael Ciarmoli; Analyst; Truist Securities

Jordan Lyonnais; Analyst; Bank of America

Gautam Khanna; Analyst; TD Cowen

Chigusa Katoku; Analyst; JPM

Pete Skibitski; Analyst; Alembic Global

Presentation

Operator

Good day and thank you for standing by, and welcome to the Albany International First Quarter 2024 earnings call. (Operator Instructions)Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, JC Chetnani, VP of Investor Relations and Treasurer.

Jc Chetnani

Thank you, operator, and good morning, everyone. Welcome to Albany International's First Quarter 2024 earnings conference call. As a reminder, for those listening on the call, please refer to our press release issued last night detailing our quarterly financial results contained in the text of the release, I 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 global 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 both our earnings release of April 29th, 2024, as well as our SEC filings, including our 10 K.
Now I will turn the call over to Bernard Cleveland, our President and CEO, who will provide opening remarks.
Gunnar?

Gunnar Kleveland

Thank you, J.C. Good morning, and welcome, everyone. Thank you for joining our first quarter earnings call. I'll provide an overview of our business performance, and Rob will later discuss our financial results in detail.
We had another good quarter as our businesses delivered solid results and are executing to their plans. Machine Clothing grew year over year, primarily driven by our high-end box acquisition, offset by lower organic demand, primarily in Europe. And North America remained strong and our global order backlog has improved from the beginning of the year, which provides us confidence in our full year guide.
Integration at Hornbach is making excellent progress. We implemented a two-brand strategy, which has been well received by the market. Procurement and supply chain continued to see savings, and we have been integrating functions across both our organizations.
We continuously assess our global manufacturing capacity and footprint. And recently, we announced that we are closing our South Korea facility and transferring capacity to other sites. We also sold a nonmanufacturing location in Sweden, further optimizing our footprint. We'll continue to evaluate other opportunities as the year progresses, with integration actions occurring in late 2024 and into 2025 we expect meaningful margin expansion as the integration progresses.
Moving to our Engineered Composites segment, we're pleased to see continued ramp-up on our programs, especially on the commercial side, including space and other emerging platforms.
On the defense side, for the year, we see growth on our CH. 53 K. and Jetson platforms, offset by relative weakness on our Joint Strike Fighter program.
Overall, we're reporting growth of over 10% in revenue versus the prior year on a constant currency basis. Additionally, our profitability continues to improve with adjusted EBITDA margins of 19.4%, up 120 basis points versus the prior year. This reflects our long-term strategy of winning newer programs with higher profit margins.
Turning to the LEAP program, we've been working closely with Safran to set the 2024 production plan. In light of the situation at Boeing, we anticipate LEAP revenue to be relatively flat with the prior year. As a reminder, the LEAP engine is used on both Boeing and Airbus aircraft, both of whom have multi-year backlog.
Finally, for AEC., we continued to develop a healthy business development pipeline with continued wins across various platforms. In the quarter, Sikorsky awarded Albany, a long-term agreement for future CH. 53 K., lots on all our legacy content, similar in duration to the previously announced after transition LTA. This represents the largest contract award in a C history next to our lead program. Given that our expertise in research and technology is critical to the success of Albany. We have created a new role of Senior Vice President and Chief Technology Officer of Albany International reporting directly to me, we have promoted Rob Hansen from his prior role as Senior VP of Research and Development at machine coating. To this role. By aligning closely with the leadership team, we have the opportunity to leverage our unique competitive technological capabilities to accelerate impactful innovation across our businesses.
And with that, I'll hand it over to Rob to provide more details on the quarter from.

Jc Chetnani

Thank you, Gina, and good morning, everyone. I will review our first quarter results of 2024 and then provide our outlook for the balance of the year. During the quarter, our businesses executed to their plans.
Consolidated net sales came in at $313 million, up 16.4% from the first quarter of last year. So growth was driven by a combination of the contribution from Ironbark and organic growth at Engineered Composites, Machine Clothing net sales increased 20.9% versus the first quarter of the prior year, driven by handbags excuse me, partially offset by a 3.8% decline in organic sales, which was largely concentrated in publication grades.
Market conditions remain largely unchanged with North American markets remaining strong European markets continuing to be soft and Asian market showing signs of slow recovery. Ac sales of $128 million increased 10.6% from the first quarter of 2023.
Our growth was driven by our commercial programs, especially on our seven eight seven space and emerging platforms. This growth was slightly offset by our defense programs, much of the first quarter drop in defense related to the rolling off of onetime revenue related to standing up the CH. 53 KF. transition production line in 2023.
However, we could see continued ramp up of recurring CH. 53 K. production for the balance of 2020 for consolidated gross profit was $109 million up $9 million or 9.4% from the same period last year. Machine Clothing gross margin decreased from 50.8% in the first quarter of 2023 to 45.7% in 2024, with the reduction primarily driven by the inclusion of Hambach.
Excluding Hambach Machine Clothing, gross margins increased to 52.1%, reflecting favorable mix and cost controls. Ac gross margin also grew with margins at 18.8%, up 30 basis points versus the same period last year. This reflects our strategy of pursuing higher margin programs and the resulting improvement in product mix.
Note that for the quarter, we recognized a net unfavorable change in the estimated profitability on our long-term contracts of $1.9 million in line with a net unfavorable change of $0.7 million in the first quarter last year. Net R&D expenses were generally in line with the prior year and represent approximately 4% of our revenues. This represents our continued investment in research and development to further differentiate our products.
Sg&a expenses for the quarter increased by 13.1%, but this was due to the Hornbach acquisition. As a percentage of revenue, SG&A decreased from 18% to 17.5% as we benefit from increased scale. Corporate expenses increase of $0.5 million, primarily due to acquisition and integration related expenses.
However, adjusted corporate expenses decreased by $1.5 million versus the prior year our effective tax rate for the quarter was 29.2% versus 28.2% in the prior year and generally in line with our long-term guide of 30%. And GAAP net income attributable to the Company for the quarter was $27.3 million compared to $26.9 million last year.
GAAP diluted EPS was $0.87 per share in this quarter versus $0.86 in the same period last year after adjustments, primarily related to the high-impact acquisition. As detailed in our non-GAAP reconciliation, the adjusted EPS on a diluted basis was $0.9 compared to $0.91 in the same period last year. Consolidated adjusted EBITDA of $65 million for the first quarter increased 8% from the prior year period. Machine Clothing adjusted EBITDA, including Hambach, was at $55.5 million and was generally in line with the prior year at $55.7 million.
Adjusted EBITDA margins were 30% versus 36.4% of the prior year, with a decrease driven by the inclusion of Hambach you see, adjusted EBITDA was $24.8 million, a 17.9% improvement over the prior year. Adjusted margins at AEC. were 19.4% of sales, a 120 basis point improvement over the prior year period.
During the first quarter, free cash flow was a use of $17 million with positive operating cash flow of $10 million, offset by capital expenditures of $27 million. We further strengthened our balance sheet and pay down over $17 million of debt and are focused on repatriating our non US cash to help minimize our outstanding debt.
Our balance sheet remains strong with a cash balance of over $125 million and over $370 million of borrowing capacity under our committed credit facility. Our net leverage at the end of the quarter was 1.2 times.
Turning to our outlook for the balance of 2024. We are reaffirming our guide for the year. Our Q1 performance was in line with our plan, and we are confident that we will meet our full year guide.
Now I'd like to turn the call over for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Peter Arment, Baird.

Peter Ament

Thanks. Good morning, IB&R and Robert. JC. Thanks oriented, and I just I wanted to ask a question on maybe you can level set us on, you know, kind of the LEAP program. I know you've got a 2026 target out there for revenue is just how do we think about kind of where you are today and how you see that transition?

Gunnar Kleveland

I think it's a good question, but I also think that we're as we're looking through 24 will as a flat year going into 25 and 26, Boeing Boeing will recapture and continue to grow. And if you look at the whole portfolio. And Peter, I see still no challenges with meeting our 26 goal, Brian, very helpful.

Peter Ament

And then just on MC, I guess sounds like integration home back selling very, very well. But you've talked a little bit about footprint consolidation, South Korea and Sweden. Is there a is there a number in mind? I mean, you have I think prior to that, maybe this upstream downstream had 23 plants in R & D center. So what's what's optimal for the MC business?

Gunnar Kleveland

And I think as we look at the whole coal business ended. And the South Korea business was a was a Albany business model Ironbark business, sorry, when we look at our total footprint and where our customers are we will make decisions based on that. And I'm not going to go into details for what we're going to do, but we will continue to evaluate the situation through through throughout the year and continue to take actions that optimizes our footprint and our ability to support our customers.

Peter Ament

Okay. And just one last one. Rob, you mentioned that publication grades was was weak. And if I remember correctly, that was still kind of as overall mix was like kind of in the 10s as a percentage. Is that is that still correct?

Robert Starr

I guess it is.

Operator

Michael Ciarmoli, Truist Securities.

Michael Ciarmoli

Hey, good morning, guys. Thanks for taking the questions here, Gunnar, Rob, maybe maybe just to go back to Peter's first line of questioning. Can you kind of just dissect the on the agency growth this year at the midpoint, and I think you already had the best being flat. So I guess that program is flat I guess the CH. 53 K. on the other, some kind of onetime down F 35 under pressure. Can you can you give us maybe some of the buckets that are driving growth. Maybe talk to the Gen-X, talk to it if there's any progress with the nine x or what's really kind of anchoring that, that's right at the midpoint of the guidance this year.

Gunnar Kleveland

And we really see most of the growth this year coming from from new new wins and new programs from space. This is a significant growth area for us and them. But when you look at the CH. 53 K., there is there is growth there throughout the year, even though we don't have NRE, I think JSF will also be flattish together with the LEAP. So but I still have no full confidence that the other programs that we are growing on the military side, Jason, is a strong growth for us, but our new wins and additional wins will gives us confidence on the growth rate.

Michael Ciarmoli

Okay, got it. And then just I guess shifting to Machine Clothing, I guess on organically down 4% in the quarter, Europe weak. But I think if I heard you correct, you said the backlog was up and you've got confidence there. Can you maybe just give us what you're seeing kind of geographically and what's sort of driving some of that, I guess, positive book-to-bill and order activity?

Gunnar Kleveland

The macro we had we had a very strong fourth quarter on Machine Clothing and coming into Q1, we kind of expected it to be a little lighter. We saw that. But but as we come to the end of the quarter. Our backlog is growing in line with our expectations. North America is very strong and we see some recovery in Asia and Europe. Europe remains very soft for some of the macro indications. Some of our end customers are seeing signs of a recovery around the globe. I think Europe will probably have soft through the year, but but of offset by the US in particular and validation.

Michael Ciarmoli

Got it. And last one for me. I think you talked about the time that the hive off the two-brand strategy. Can you can you maybe just elaborate what exactly you're doing there and maybe give us give us some details, whether it's by product offerings by pricing or and how that how you expect that to play out.

Gunnar Kleveland

And it's exactly that, Michael. We're going in with the two brands that that our customers are used to. We have differentiated technology between the two businesses and in some and in some paper machines, for example, we have some we can we can come in with the with forming pressing drying and other other belts supporting belts from the two companies and really complement the entire entire machine. So this is working. I know that the company many years ago had done some integrations before and not use the two-brand strategy and it wasn't very successful. So so far, I would say that we're very positive on this approach and our customers are staying with us.

Operator

Jordan Lyonnais, Bank of America.

Jordan Lyonnais

Hey, good morning. Thanks for taking the call this morning.
Would you guys be able to quantify how many blades are in excess inventory for Safran, GE CFM overall and what visibility you guys have into are those excess inventory levels and we do not have insight into what our customer have in inventory.

Gunnar Kleveland

And we have a plan like like I stated earlier with Safran on what we're building to and we're building building that being being that the and the growth of the engines are 10% to 15% this year and we will stay at a flat level. I'm venture to guess that the inventories are going to be smaller, but I don't know. I don't know what it is. I expect us to continue to grow next year, but flat this year.

Jordan Lyonnais

Okay. And then just follow-up to so on defense for the F-35 and the Jazan missiles, the cuts that came in with the presidential budget request.

Gunnar Kleveland

Is there any concern from your end if Jazan was cut almost 45%, but that's going to be one of your growth pieces sort of hands. And so what we're seeing right now is significant growth from where we were last year and the year before the we did see the reductions that has not been in the presidential budget that has not been it translated to orders to us, but the growth the growth in this year and into next year is quite significant.

Operator

Gautam Khanna, TD Cowen.

Gautam Khanna

Hey, guys, good morning. This is Jack on for Gotham.
Nice. Nice results here.
Hey, Rob.
On quick quick question, just on AC. And I totally understand the dynamics with LEAP kind of flat this year on GEN. Saffron are both talking about leap up 10% to 15% and really the rationale. And my question is, no, it's for you guys at the cost plus contract and I know you guys don't have great visibility into sort of channel inventories, but how should we think about that moving forward taking into account?
It is cost plus. So no quarter after quarter year after year, as you guys get up the learning curve costs come down, how should we think about unit volumes versus absolute sales dollars for the LEAP program?

Gunnar Kleveland

What we have what we have and it's a good question, and we are looking to improve the cost on this program, but there's also some improvement in margins as the cost comes down. So what we have forecasted for 2026 at the $200 million level for this program remains accurate, it will add.

Robert Starr

Yes, I would just add, Jack. I mean, what you'll see is there's not a linear relationship between revenue and unit volume to your point as we do take cost out. So we feel really good about the strength of the LEAP program and we are going to be able to grow revenue there, just not as quickly as the underlying volume increases would indicate, but it's also on the LEAP program it's super critical for the commercialization of our 3D technology, which allows us to produce at a lower cost, which then opens up a lot of other avenues for that technology.

Gautam Khanna

Yes, look, I totally now I get it. And then I'm just kind of switching to NC. here here, Rob, on for high mark, are you guys still thinking that is going to come in relatively flat year over year. Any incremental updates for on Highmark in 24 sales?
Sure.

Gunnar Kleveland

Yes.

Gautam Khanna

I mean, I think the general perspective is we're going to be somewhere around flat for the year for Ironbark. And the focus there, of course, is now that it's on integration is really combining the teams. I mean that's going to be a huge focus for us as we go throughout 24 and into 25.

Robert Starr

Okay. And then just one last one off of that. Obviously the integration is going well. It seems like are you guys still kind of sticking to that that year three target of that 3.54 times sort of net synergy post-synergy purchase multiple? Is that still hold today for HomeBanc.

Gautam Khanna

It does. It does and we are we're executing on the integration plan. And at this stage, we are definitely confident and our ability to achieve those synergies over that timeframe.

Robert Starr

Okay, great. Thanks, guys. I'll jump back in the queue.

Gautam Khanna

Thank you, Jack.

Operator

Chigusa Katoku, JPM.

Chigusa Katoku

Hi, this is ticket-in ticket-out on for Steve. Theresa, thanks for taking my question. And my first question is on the AC margins. I think it looks like historically Q1 is a low point for margins seasonally for AC. I was just wondering if we should expect margins to be higher than these levels for the balance of the year?

Robert Starr

Yes, it's a good question. So I mean, if you look at our kind of implied margin guide for the balance of the year, on average, it would it will be higher than than the 19 four we posted in Q1. The implied range for the balance of the year is 19.4% to 20%. So we are certainly working hard to do on the margins. And we feel really confident with our backlog and the position we have on the contracts to have a very solid year at AEC.

Chigusa Katoku

Okay.
Great, thanks. And then on MC and so core revenues decline this quarter after growing last quarter, and I was just wondering if the environment deteriorated this quarter and also if you expect core revenues declined for the balance of the year?

Robert Starr

Yes, I think what you saw we came off a very strong fourth quarter and it's really as we look at the backlog building. That's what gives us confidence in the full year top line forecast for machine clothing. So we are we are expecting to see in the back half of the year higher core average quarterly sales levels in Machine Clothing relative to what we saw in Q1.

Operator

(Operator Instructions) Pete Skibitski, Alembic Global.

Pete Skibitski

Hey, good morning, guys. A big thing. So one thing I wanted to clarify, we've been talking about Jazan. A lot of I want to understand. Do you guys also have content on the LRASM., which my understanding is sort of a cousin variant of Jazan. So I wasn't sure if you also have content there, but just don't talk about it a lot. I guess I'll start with that one.

Gunnar Kleveland

We have several new programs in missiles that we have not announced yet that we are in the early phases of providing parts and potentially getting contracts.

Pete Skibitski

Okay. That was actually my next question. Good artists. When do you when would you guys be comfortable, do you think talking about some of these new programs and potential sizes, I guess, not just in missiles but base as well.

Gunnar Kleveland

And I we will and we announced our contract with Sikorsky today. We'll continue to update you all on new contracts as as we win them. But in some cases, our customers that takes a while before day before they let us share in all the content of the contracts. But that is our intention and we'll continue to do that. Big programs like that is definitely something we want to share and continue to follow.

Pete Skibitski

Understood. I appreciate it. And then as I just want to ask, we haven't talked about 77 yet. I don't think and not necessarily your biggest program, but still, I think kind of a chunky program for you. And of course, Boeing is talking about taking down production rates this year because of some supply chain issues, I think unrelated to you guys, but Tom has your expectation for revenue on that program change this year as it is, it may be looking flat to down this year with a 25 recovery expected.

Gunnar Kleveland

So we had it. We had a good first quarter on seven eight seven. And you're right that the supply chain issues is not us. It is I think we expect that to grow to seven through the through the end of the year. It might in the forecast right now says five. So it will be a little lower than we expected, but not material for our AC business.
Yes.

Pete Skibitski

Okay. Got it. And then last one for me, Rob, you talked about, I think, repatriating non-US cash. I'm just wondering kind of what percentage you guys hold overseas and if you expect to take any kind of a tax hit on that or not?

Robert Starr

Yes.
No, good question. And yes, the majority of our cash, but the large majority of our cash is overseas and we have the ability to come through. We're working through the different Scott government contracts or if we can bring back the cash pretty much tax-free at NAB not always it will depend. I mean, we did have an exit tax that we paid. We brought some cash back from Asia. But by and large, it's pretty nominal debt. The friction that we see and the opportunity cost, right. Our debt right now on the floating side is about 7%. So it really is an important initiative on our part to really optimize our cash balances globally and JC and the team or I've been working very hard on that.

Operator

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to garner Cleveland, President and CEO, for closing remarks.

Gunnar Kleveland

Thank you, and thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you and have a good day.

Operator

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.