Albany International Corp . (NYSE:AIN), a global advanced textiles and materials processing company, has announced robust financial results for the second quarter of 2024. The company's Machine Clothing segment saw an increase in revenues, largely attributed to the recent acquisition of Heimbach, while the Engineered Composites segment received a significant influx of new orders, contributing to a substantial year-over-year top-line growth. Despite facing challenges with the LEAP program due to Boeing (NYSE:BA)'s situation, Albany International remains confident in its overall profitability and ability to manage risks in its expanding aerospace and defense portfolio.
Key Takeaways
- Machine Clothing revenues rose due to Heimbach acquisition; slight decrease in organic demand in Europe and North America.
- Engineered Composites segment secured over $200 million in new orders, marking a 20% increase in revenue.
- Stable global order backlog with progress in Heimbach integration.
- LEAP program revenue slightly down, with minimal impact on profitability.
- Footprint consolidation efforts to continue through 2025.
- $900 million in new orders this year, contributing to a $1.2 billion backlog.
- Confidence in managing ramp-up and hiring challenges, particularly in Salt Lake City.
- Production aligned with Boeing's 787 ramp-up; focus on operational efficiency and cost reductions.
Company Outlook
- Margins expected to improve in the second half of the year due to operational improvements and program mix.
- Continued production for Safran (EPA:SAF) contract and inventory reduction.
- Anticipation of a 21% run rate in the second half of the year, driven by shift in program mix and cost reductions.
- Confidence in managing growth in Aerospace, particularly in 3D-woven parts.
Bearish Highlights
- Organic demand for Machine Clothing slightly lower in Europe and North America.
- LEAP program revenue expected to be slightly down due to Boeing's situation.
- Potential impact of a Boeing strike on LEAP production considered in downside forecast.
Bullish Highlights
- Strong performance in Machine Clothing with improving margins.
- Substantial new business wins in Engineered Composites segment.
- New orders for space and engine components to contribute to long-term backlog.
- Positive outlook on Aerospace business growth and 3D-woven parts production.
Misses
- No specific financial misses were discussed in the earnings call summary provided.
Q&A Highlights
- Discussion of the impact of Boeing's situation on LEAP engine supply chain and production rates.
- Confidence expressed in the machine clothing business and opportunities for growth in aerospace.
- The company's approach to managing risks associated with defense and space work, including a robust bid review process and contractual protections.
Albany International Corp.'s second quarter of 2024 financial results reflect a company successfully navigating industry challenges while capitalizing on strategic acquisitions and new order inflows. With a strong order backlog and proactive management of operational efficiencies, the company is well-positioned to maintain its growth trajectory in the advanced textiles and materials processing industry.
InvestingPro Insights
Albany International Corp.'s recent financial performance and strategic moves have caught the attention of investors and analysts alike. The company's successful integration of the Heimbach acquisition and its robust order backlog are reflected in the real-time data and insights provided by InvestingPro. Here are some key metrics and tips that could provide additional context to Albany International's financial health and future prospects:
InvestingPro Data:
- Market Cap (Adjusted): $2.73 billion
- P/E Ratio (Adjusted) last twelve months as of Q2 2024: 22.12
- Revenue Growth last twelve months as of Q2 2024: 16.54%
InvestingPro Tips:
- Albany International has maintained dividend payments for 24 consecutive years, showcasing a reliable return to shareholders. This could be particularly appealing to income-focused investors.
- The company is trading at a low P/E ratio relative to near-term earnings growth, indicating that it may be undervalued compared to its growth potential. This could suggest an attractive entry point for value investors.
For readers looking to delve deeper into Albany International's financials and for more InvestingPro Tips, additional insights are available at https://www.investing.com/pro/AIN. Currently, there are six more tips listed in InvestingPro that could further inform investment decisions.
Full transcript - Albany International Corp (AIN) Q2 2024:
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Albany International Corp. Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to JC Chetnani, VP IR and Treasurer. Please go ahead.
JC Chetnani: Thank you, Debbie, and good morning, everyone. Welcome to Albany International's Second 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 is the 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 both our earnings release of August 6, 2024, and as well as our SEC filings, including our 10-K. Now I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar?
Gunnar Kleveland: Thank you, JC. Good morning, and welcome, everyone. Thank you for joining our second quarter earnings call. I will provide an overview of our business performance. Rob will later discuss our financial results in detail. Overall, we had another good quarter as our businesses delivered strong results and are responding well to their industry challenges. We continue to deliver strong profitability and have further strengthened our balance sheet. Free cash flow was strong with $64 million generated in the second quarter. Machine Clothing revenues at $194 million grew year-over-year driven by our Heimbach acquisition, slightly offset by lower organic demand, primarily in Europe and North America. Our global order backlog remains stable. We continue to make progress with the integration of Heimbach. Our performance has improved sequentially quarter-over-quarter with a 220 basis point expansion in Machine Clothing. Adjusted EBITDA margins and we took further action on our global footprint with the consolidation of 2 U.K. facilities. We successfully implemented SAP at Heimbach in the second quarter, which will enable us to further execute on our integration plans for the second half of this year. We commend the team for executing the implementation with no operational disruption, and I thank them for all their hard work. Moving to our Engineered Composites segment. We are pleased to report that during the quarter, we received over $200 million in new orders, bringing our year-to-date orders to over $900 million. This will further drive revenue growth in 2025 and beyond. For the quarter, we delivered 20% year-over-year top line growth as our current programs ramp up. We see growth in our commercial markets, especially in Space and other emerging platforms. Our Defense business is also growing, primarily the CH-53K and JASSM platforms, partially offset by the Joint Strike Fighter program. However, our profitability for the quarter is lower with adjusted EBITDA margins at 16.9%, lower by 130 basis points versus the prior year, driven by inefficiencies related to program ramp-up. We expect margins to improve in the second half due to operational improvements and program mix. Turning to the LEAP program. We've been working closely with Safran to adjust our 2024 production plan in light of the continued situation at Boeing. We now anticipate LEAP revenue to be slightly down this year versus the prior year, with minimal impact to overall profitability. Despite changes to lead production, we're maintaining our full year AEC guide as all the programs will serve to offset this reduction. Overall, our business is performing well. Our margins in Machine Clothing are improving as we execute our Heimbach integration plans and substantial new business wins at AEC have improved our backlog. I would also like to welcome Chris Stone as President of AEC. Chris brings strategic capability combined with experience in leading complex operations and supply chain. These skills will be critical to AEC as they continue to execute our growth strategy. And with that, I'll hand it over to Rob to provide more details on the quarter. Rob?
Rob Starr: Thank you, Gunnar, and good morning, everyone. I will review our second quarter results of 2024 and then provide our outlook for the balance of the year. Consolidated net sales came in at $332 million, up 21.1% from the second quarter of last year. The growth was driven by a combination of Heimbach revenues and organic growth at Engineered Composites. Machine Clothing net sales of $194 million increased 21.6% versus the second quarter of the prior year, driven by Heimbach, partially offset by a $4 million decline in organic sales on a currency-adjusted basis. North America comps were lower year-over-year, primarily due to a strong performance in the second quarter of last year. However, for the first half of the year, North America is stable and it simply reflects quarter-to-quarter variability. AEC net sales of $138 million increased 20.5% from the second quarter of 2023. Our growth was driven by CH-53K, 787 and other commercial and Space programs. We continue to see a ramp up of our various commercial and Defense programs. Consolidated gross profit was $112 million, up $10 million or 9.4% from the same period last year. Machine Clothing gross margin decreased from 50.8% in the second quarter of 2023 to 45.9% in 2024. The reduction was driven by the inclusion of Heimbach. When you exclude Heimbach, Machine Clothing gross margins increased 90 basis points to 51.7% versus the prior year, reflecting continued excellent execution. We continue to progress on our Heimbach integration plans, and we expect further margin expansion as a result in the coming quarters. AEC gross margin decreased 200 basis points from 19.0% in the second quarter of 2023 to 17%. This includes a $5 million unfavorable change in the estimated profitability of long-term contracts. This is due to inefficiencies related to program ramp-up. For comparison purposes, in the prior year, we recognized an unfavorable $2 million charge. Net R&D expenses increased $2 million in the second quarter versus the prior year, remaining at approximately 4% of revenues. We continue to make strides as we focus on material science capabilities to further differentiate ourselves from our competition. SG&A expenses for the quarter increased by 18.7% nominally, but this was due to Heimbach. As a percentage of revenue, SG&A has decreased from 17.1% to 16.7%, as we continue to further streamline our operations and focus on efficiencies. Corporate expenses increased $7 million, this is primarily due to the Heimbach IT-related costs, acquisition and integration-related expenses and employee-related compensation. Additionally, we recorded foreign exchange hedging losses of $4 million as part of our global foreign exchange hedging program. These transactions do not qualify for hedge accounting treatment, and as such, we will experience quarterly fluctuations in the normal course of business. The effective tax rate for the quarter was 27.9% versus 42.8% in the prior year and generally in line with our long-term guidance of 30%. The rate for the second quarter of 2024 was lower than the prior year, mainly due to the unfavorable discrete adjustments we took in the prior year period. GAAP net income attributable to the company for the quarter was $25 million compared to $27 million last year. GAAP diluted EPS was $0.79 per share in this quarter versus $0.85 in the same period last year. After adjustments primarily related to the Heimbach acquisition and other restructuring activities, as detailed in our non-GAAP reconciliation, the adjusted diluted EPS was $0.89, unchanged from the same period last year. As a reminder, we also had a $0.10 headwind from foreign exchange hedging this quarter that is not reflected in our adjustments. Consolidated adjusted EBITDA was $63 million for the second quarter versus $65 million in the prior year period. Machine Clothing adjusted EBITDA, including Heimbach, was $62 million, an increase of 5% versus the prior year. Adjusted EBITDA margins were 32.2% versus 37.3% in the prior year, with the decrease driven by the inclusion of Heimbach. AEC adjusted EBITDA was $23 million, a nearly 12% improvement over the prior year. Adjusted EBITDA margins at AEC were 16.9% of sales versus 18.2% in the prior year. During the second quarter, free cash flow was $64 million with positive operating cash flow of $83 million, offset by capital expenditures of approximately $19 million. Our balance sheet remains strong with a cash balance of over $116 million and $430 million of borrowing capacity under our committed credit facility. Net leverage is below 1x. This provides us with significant financial flexibility. Turning to our outlook for the balance of 2024. We are reaffirming our full guidance for the year. I want to provide some context around the segment level guide given the dynamic environment we are in. For Machine Clothing, the low end of the range reflects greater-than-expected softness in our European and Asian markets and delays in the realization of our targeted Heimbach synergies. The high end of the machine closing guide reflects improving market conditions, in particular, Europe, combined with constructive markets in the Americas and Asia, with Heimbach synergies realized ahead of plan. For AEC, the low end of the range reflects further reductions in LEAP production, lower 787 rates as well as continued challenges as we ramp up our key programs. The higher end of the range reflects better-than-expected performance on our program ramps, including on our new programs. Now I would like to open the call for questions.
Operator: [Operator Instructions] Your first question comes from the line of Peter Arment with Baird.
Peter Arment: Maybe just to start on MC. Could you talk a little bit about just kind of the -- what you saw from the organic side of things, I guess you -- North America was up in Q1 and down in Q2. It just -- is that more timing related? And I guess, have you seen any kind of -- or is that pacing kind of continued as we are halfway through Q3?
Gunnar Kleveland: Peter, the comp for year-over-year was difficult this year. But if you look at the overall North America for the first half, we are up. So we believe that it's a continued strong market in the U.S.
Peter Arment: Got it. And then you've continued to do footprint consolidation. Where are you, I guess, in that journey? Is that -- are you completed for the year? Or is there more to go?
Gunnar Kleveland: No, Peter, we're continuing. We are on plan, and we're continuing the efforts through, frankly, through 2025, but there's more actions coming.
Peter Arment: Got it. And then just quickly on AEC. You mentioned that LEAP revenues are going to be slightly down. Can you call out maybe some of the programs that are going to be offsetting or providing you the ability to grow? Is that CH-53K, is it JASSM, anything in particular?
Gunnar Kleveland: On the military programs, it is definitely a CH-53K and JASSM. But for our guide, some of our new programs that we reported, the $200 million in new orders includes Space, engine components and that will start later this year and continue through the long term. That's -- we are signing some good long-term contracts, and that's helping our backlog in the future. But there is some additions this year as well. So that's how we're holding our guide.
Peter Arment: Okay. And just lastly, on the 737 rate, when do you expect to be back in sync with ultimately Boeing gets -- if Boeing gets to 38 a month at the end of the year?
Gunnar Kleveland: Yes. That's difficult to answer, Peter. I think Boeing -- we have no challenge with meeting any ramp-up. We know we have the capacity. Our work is with Safran to make sure that we do not build inventory in this period. And so we have adjusted our rates. Our ability to ramp up following that will be -- is not the challenge for us as -- and we'll monitor Boeing through this as well as what's happening with the actual LEAP engine and some of the supply chain issues that are having that. But we're tied with Safran and adjusting as necessary.
Operator: Next question comes from the line of Pete Skibitski with Alembic Global.
Pete Skibitski: Gunnar, the year -- I want to make sure I understood you right. Did you say the year-to-date orders is more than $900 million that AEC, or is that backlog?
Gunnar Kleveland: Yes, that's -- new orders we have taken this year is $900 million. And that transfers to backlog some this year, but 2025 -- primarily 2025 and beyond.
Pete Skibitski: Okay. So that was the order flow, what's the backlog?
Rob Starr: It's about $1.2 billion, Pete.
Pete Skibitski: Okay. Okay. And that's just for AEC, you guys are talking about?
Rob Starr: Yes, that is correct. Yes.
Pete Skibitski: Okay. Okay. That's great. That's pretty sizable. It seems like at this point. And then you guys talked in the release about the strength in Space and other emerging markets. I guess that was part of that order flow. Any more details, I know you've been kind of reluctant to talk too much to the new stuff, but, are we any closer to being able to talk more about what exactly you're doing in Space and what other new programs you're involved with there? So we can get a sense of kind of the long-term upside.
Gunnar Kleveland: I think the good part here is that we keep getting orders and they're not spot buys. They're long-term agreements based on our ability to deliver both in -- on the Space as well as in other programs. We're not yet able to share who our customers are. I think as these programs expand, my goal is to be able to share that, but we're not at that point yet, Pete.
Pete Skibitski: Okay. Okay. Fair enough. Last one for me. The $5 million negative EAC adjustment -- I think at AEC, do you guys feel like you've got a good handle on that program now? It sounds like it was a newer program, and you guys have not had a history of EAC changes of any meaningful size and I think Aerospace analysts are in shell shock because there's other firms out there that are kind of take serial EAC charges quarter after quarter on the same programs. And so I just would like to get a sense that you guys feel like you've really got this particular program well aligned to what the future accounting looks like.
Rob Starr: Yes. Pete, this is Rob. I mean, if you look historically, our EAC adjustments have been less than 1% of top line. So to your point, this year to date, we're about $7.5 million, which is -- it's a bit higher than clearly than we would like. But we've been working very closely on a number of these programs and feel good about the adjustments that we've made to reflect the state of the programs. And we're certainly very closely monitoring the operations to make sure that they're performing. So at this stage, we feel confident with the adjustments. And these are really good long-term programs that are complicated in their ramp-up. So we're working that very closely.
Gunnar Kleveland: And I would just add, this is the area where we added the additional content, and we're going to full rate at the same time. So is a major effort by the team but we are ramping and we're supporting our customers.
Operator: Next question comes from the line of Jordan Lyonnais with Bank of America (NYSE:BAC).
Jordan Lyonnais: On the AEC guide, I appreciate the color that you gave earlier. Just in that downside risk, how much of -- how much is being considered if there were to be an extended strike at Boeing and what that would mean for follow-on production rates for the LEAP?
Rob Starr: Yes. Jordan, it's a really good question. I mean I think if there were a strike at Boeing, clearly. I mean, we've taken some of that into the downside. But really just -- it would depend on the length of that strike and really what that really looks like. And that comes down to length. I mean, clearly, that's hard to forecast. Yes. But we definitely -- the downside does reflect lower LEAP production, which certainly would result if there was a strike in.
Jordan Lyonnais: Got it. Okay. And then on the new orders, strong backlog, how do you feel about current head count to meet the ramp across these programs?
Gunnar Kleveland: I think hiring is -- has been challenging over time. I think Salt Lake is our biggest site, but where we're hiring the most. We are almost at the right that the head count that we need for the current ramp-up. And so now the trick is to keep everyone. So I'm -- the team is -- our HR team is performing well. We're bringing people in and they're becoming effective. But hiring is more challenging in Salt Lake than any of our other sites. And I will say that both for MC and AEC we do not have a challenge on hiring and any of the other sites.
Operator: Next question comes from the line of Jack Ayers with TD (TSX:TD) Cowen.
Jack Ayers: So just kind of on the drill down again on sort of the LEAP production forecast. I know you guys are just kind of calling it down year-over-year. I wonder if you can maybe refine that a little bit more? And then, I guess, going into next year, how we think about 2025, just given the assumptions already at CFM about the 40% sequential ramp in LEAP output in H2, if those guys don't hit those targets, kind of what that means for 2025, just any color there would be helpful.
Rob Starr: Yes, Jack. I mean, I think for '24, I mean, we're looking at approximately $5-or-so million reduction in LEAP revenues and approximately about $1-or-so million of EBITDA impact. The planning, of course, is underway for 2025. We're not in a position to necessarily provide any outlook towards 2025. But as Gunnar referenced, we're very much aligned with the friend who clearly has in close discussions with their customers regarding the LEAP engine. So we have the flexibility to adjust our output either up or down. And to your point, right, there's just a lot of volatility right now around the LEAP supply chain, nothing to do with us. But we're just going to have to navigate.
Jack Ayers: Okay. That makes sense. And then just a quick one on 787. I know you guys called it up this quarter. Can you size that like basically how big that program is today for you guys?
Rob Starr: Yes. we haven't -- I mean we -- I mean it is an important commercial program for us. We have not in the past discussed the relative program size. For us, year-over-year, if you recall, 787 to a pretty low production rate for a long time. And year-over-year, it's been a favorable comp for us, but we are clearly aligning our production with Boeing run rate as they ramp back up to 5 per month.
Jack Ayers: Okay. Great. And then I guess just one high-level question, I guess, for Gunnar here. Kind of coming into this relatively new, I think for the past few quarters, just would love to hear your sort of perspective on the portfolio. You've got a ramping Aero business here, in a kind of unique MC business. So would love to hear your impressions of the MC business and kind of moving forward, how you kind of see the portfolio evolving?
Gunnar Kleveland: Thank you, Jack. And we are going through our -- the strategy review and strategy planning for the next 5 years now. So I'm well versed. I do appreciate being called new still. I think I have another month. But it is -- I really -- I love the Machine Clothing business. I think the name is a misnomer in a way. It is a great business. I think the acquisition of Heimbach was a good opportunity as we integrate, that will continue to be a strong business for us with great returns and great cash flow. And what's not to like about that. So Machine Clothing, I like the foundation I want to repeat is material science, and we have this ability to use our technology, our material science to expand on what was started with Machine Clothing and expanded into Aerospace with a 3D-woven parts. And I think we have lots of opportunity there. The growth rate on Aerospace business is very good. We need to be able to manage the growth and I see continued growth, but maybe moving more towards our technology there. So 3D-woven is a focus in years to come.
Operator: [Operator Instructions] And we have our last question comes from the line of Michael Ciarmoli with Truist Securities.
Michael Ciarmoli: Just to maybe keep beating this LEAP issue. Can you just maybe give us a better sense of, do you have an idea of what kind of inventory is in the channel? And I know you said a couple of times you're aligned with Safran. I mean they were originally planning 20% to 25% growth in LEAP for the beginning of the year, which I guess would have been nearly 2,000 engines, they scale that back to 10% to 15% and now flat. So I mean, are you guys actually producing units now? Or are they -- or is it an inventory burn down situation? Can you give us any more color of maybe what's in the channel there?
Gunnar Kleveland: Yes, we are continuing to produce. It is important that we continue to produce and keep our people both engaged and the technology fresh there. We were flat from last year, which means we had started the inventory burn down. As we're coming into the second half, we are further reducing our rates, which will have an impact on inventory going forward. But we're trying to maintain an inventory for the contract with Safran. Where the inventory on beyond that? I don't know.
Michael Ciarmoli: Okay. And then just thinking about knowing that contract and not as accretive to margins. The second half AEC, and obviously, you had the negative EAC this quarter, but it looks like you got a 21% or so run rate in the second half. What are the big sort of drivers that kind of give you the confidence in that margin level in the second half?
Rob Starr: Yes, Michael, this is Rob. There are a few things that give us that confidence. The first is there is going to be a bit of a shift in program mix. A lot of our Space and other programs that we expect to see improved sales in the back half of the year, carry higher margin. The operational challenges that led to some of the EACs, we're working to overcome those, and we feel confident that we'll be able to produce more efficiently in the second half. So you have that. And then thirdly, A number of these restructuring activities that you see at AEC are really about getting the cost structure to a much better place at AEC. And that is also going to be a significant contributor in the second half of the year, based on the SG&A reductions that we've made there. So it's really those 3 items that give us the confidence in the back half of the year margin.
Michael Ciarmoli: Got it. And then just one more, more broadly on that, not to hone in directly on that negative EAC. But clearly, your winning more Defense and Space work. And presumably, those programs come with a lot more risk. I mean, as you look at your bidding process, contracting terms, design, analysis, program management, do you feel that everything is robust enough to to sort of contemplate and capture any potential overruns or challenges so you kind of don't get into this sort of persistent negative EACs?
Rob Starr: Yes, I'll start and I'll let Gunnar weigh in. But Michael, I mean, we have a very robust bid review process. We have -- over the last handful of years, we've built out a very strong business development team that works very closely with program management and supply chain to really understand the program and what's required. I mean we've walked away from a number of potential opportunities, just given the economics don't pan out and the risk is too high. So what we're experiencing this quarter is a very significant ramp-up on very large programs in a very difficult labor market. So that's really the largest contributor to the EACs that you're seeing. If you take out just a couple of programs, the rest of the programs, net-net have been fairly neutral. So we feel, overall, very, very good about our review process and that type of work that we'll take. As Gunnar mentioned, we're going to continue to focus on our 3D-woven technology, in particular, and focus on opportunities. But you're right. I mean in any firm fixed-price contract, the risk and opportunity is related to supply chain, labor, you name it, right? You have to be taken into account when you price. And contractually, we feel that we've done a good job of protecting ourselves as much as we can. And we have a good team executing.
Gunnar Kleveland: We have the opportunity to be selective. And so we'll select the programs that makes the most sense for us. And I have to emphasize the ability of this team to execute is great. So we're going through a significant ramp, and we're seeing some effects of that. That ramp was the beginning of this year. We're continuing to ramp up through the end of the year. We're adding new programs. Some of the new programs are added at our various facilities, which help us disperse the risk. So in support of Rob fully in that answer.
Operator: There are no further questions at this time. Mr. Gunnar Kleveland, I turn the call back over to you.
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: This concludes today's conference call. You may now disconnect.
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