Ladies and gentlemen, thank you for standing by and welcome to the Albany International fourth quarter earnings call. (Operator Instructions) I would now like to turn the conference over to the Executive Vice President and Chief Financial Officer, Mr. Michael Nahl. Please go ahead, sir.

Thank you very much, [Art]. Good morning. [break in audio] reminder that the comment about forward-looking references in the financial release also applies to the contents of this call. Before we begin, I'd like to point out a small error in the earnings release. In the table on the bottom of Page 3, PMC operating income for the third quarter of 2006 should read 23,799 rather than the 20,424 shown. Remember that these numbers are in thousands. That also results in a mistake on Page 6 in the middle paragraph, where the third line refers to a 21% increase in operating income Q4 to Q4. This should instead be 7%. Those are not restatements of 2006 results, but are corrections to this release since the numbers for 2006 were correctly stated in 2006. We will issue a formal correction during the day, but wanted you to be aware of it. There was no error in any of the 2007 results. Now for the operating commentary, we'll turn the call over to our President and Chief Executive Officer, Joe Morone.

Thank you, Michael. As always -- good morning, everyone -- as always, we'll open the call with my commentary, the text of which we publish with the release. Michael will follow with some amplifying comments this time about the strength of our balance sheet and cash flow potential, and then we'll turn to your questions. We began 2007 with two tightly connected objectives -- for the short-term, restore profits to the levels we experienced before the 2006 pricing disruption in the European PMC market, and for the long-term lay a sustainable foundation for our cash and grow strategy. By year's end, as reflected in our Q4 results, we had substantially achieved both objectives. We responded to the 2006 pricing disruption by initiating, in Q3 2006, a deliberate, intensive, three-year process of restructuring and performance-improvement initiatives. The announced shutdown of our forming plant in Montgomery, Alabama, was the latest step in this process. By late 2009, we will have streamlined our manufacturing footprint in Europe and North America, and expanded it dramatically in South America and Asia; reshaped and strengthened virtually every function in every business unit in every region of the world; and fully implemented a shared services center in Europe, a unified, comprehensive ERP system, and a global procurement organization. This transformation process is on schedule, contributed to the improvement in profitability in Q4, and is a major reason that we remain optimistic about the prospects for strong cash flow generation in 2009. It is not possible to understand our Q4 results (or those of any other quarter during this period of intense transformation) without considering the impact on net income of the costs of these initiatives, especially when comparing results to quarters preceding or following this period of transformation. For this reason, we have adopted the practice of…

Thank you, Joe. As always, our objective is to provide our investors with as much clarity as possible, as is evident from the extensive level of detail provided in our release. Today I'll add some comments regarding the balance sheet and cash flow. At the end of 2007 we had a total of $480 million of debt with an average remaining life of 5.2 years and cash plus cash value of company owned life insurance totalling $117 million. That's net debt, as defined in our principle credit agreement, of $363 million. The average interest rate applicable to our total debt at the end of December was 4.28%. We have no significant refinancing requirements until 2011. Included in our debt was $116 million drawn on our $460 million revolving credit facility. The rate of interest we pay on borrowings under the revolving credit is based on our leverage ratio, defined in the agreement as our net debt divided by adjusted EBITDA. Our leverage ratio at the end of the fourth quarter was 2.45 compared with 2.44 at the end of the third quarter. At that ratio, our interest rate is 100 basis points over LIBOR. This morning, three-month LIBOR is 3.07%. Shifting next to cash flow, our net debt increased $17.8 million in the fourth quarter of 2007 and $93.8 million for the year. For the full year 2007, after capital expenditures of $149.2 million, investments in SAP implementation and information technology of $16 million, and paying dividends of $12.3 million, our net debt increased $93.8 million for the year. For the full year 2008, we currently expect net cash use to be less than $25 million, assuming neither any acquisitions or serious economic recession. Interest expense and net debt are expected to peak in the fourth quarter of 2008 and…

Thank you. (Operator Instructions) Our first question comes from the line of John Emrich with Iron Works Capital. Please go ahead.

Thanks. Hi, Joe. Hi, Michael.

Hi, John.

Hey, John.

Starting with kind of the pro forma operating income margin, if you will, for the quarter, we've got in there would -- I took out the $10 million of the expenses that you called out, and we've also got a $3 million -- I'm trying to figure out the differences between this quarter and two Decembers ago and the difference between now and June '06 -- you got a $3 million pre-tax loss from the Composite business, correct?

Correct.

And you also have -- how much in the way of expensed SAP implementation was there in the quarter ballpark?

SAP is part of the performance improvement initiatives listed on Page 4, on the Table 3 of Page 4, John.

So part of the $10 that I've already called out?

No.

No?

Yes, it is.

Yes, it is. Okay, so just in general, when I was thinking of returning to the Q2 '06 profit levels by the end of this quarter, I was looking at a gross margin of 40%, an operating margin of over 11% back then. And what you're saying is we're there excepting for the two things, the seasonality of PMC and the operating loss in Composite. Am I missing anything else that I should be --

That's it.

That's it, right?

That's right.

So come June of '06 --

That comes up to be about $0.63 per share.

Right. So coming to June of '08 -- excuse me --we should be looking at a margin structure like that, like we had back in June of '06?

Well, at --

Excepting the Composite business and the SAP expense.

Yeah, at the operating income level, John.

Yeah. I noticed that. It looks like the gross margin is much lower, but you've actually taken out more, it appears, SG&A expense over the last four quarters, which is not what I would have guessed. But is that really what's --

Well, I think over time, as we complete this three-year march we're on we're should see improvements in gross margin, we should see reductions in SG&A, and we should see improvements [break in audio] on the bottom line. But you have to also remember that there's a big difference in our business mix between late '05, early '06 and where we'll be next year, and that's been a very explicit part of the story is that the growth in the emerging businesses is certainly a piece of what leads to the steady improvement.

And on that, Joe - I mean, Michael - I remember even two years ago you thinking that long term the return on capital of those nascent businesses and now specifically Composites would actually - it would have a higher return on capital profile than the PMC business.

Right.

Yeah. You still believe that?

Right. And the way we break it down, we use PMC as a benchmark. So when we look at Doors, the start of one end, we see significantly higher growth, lower profitability, positive cash flow generation barring a recession, but lower than PMC. But on the other hand, much lower capital intensity, so pretty highly -

Right. Higher return on capital.

Right. Exactly. And then lastly, given your $25 million or less net cash use in '08 and given your Capex forecast and I'm guessing maybe even the dividend, you're looking at cash from operations of $115 to $125 million in '08 to get to that net cash usage number?

We'll let you do your own math.

Yeah. Okay. Thank you.

Thanks, John.

Our next question comes from the line of Mark Connelly with Credit Suisse. Please go ahead.

Thank you. Joe, a couple of things on PMC. If we look at demand in Europe right now, not for Albany's business but overall, would you characterize that market as stable or slipping? And the second half of the question is: If we do see the European market start to slide, what would you expect would happen next? You've strengthened your European position quite a lot, but, you know, do you have a sense that customers in Europe would shut capacity quickly, and who's going to be more exposed to that? Is it going to be you or is it going to be the other players?

Morning, Mark. You know, that's a question we spend a lot of time on, and I think you're seeing the same trends we're seeing. The combination of exchange rates on the one hand hurting Euro exports and the growth of the Chinese paper - Asian paper industry - on the other, wiping out that export market for West European paper makers puts a real squeeze on them. We think the most likely outcome is reductions in capacity in Europe. And the reason we've been on a three-year transformation process rather than a year and a half is because that pricing disruption in '06 in PMC in West Europe was, for us, a wake-up call to much larger structural issues in Europe and also in North America. That's what I tried to say in the call. These are mature markets; we're going to continue to see top line pressure. We're expecting to continue to see top line pressure in PMC in both North America and Western Europe. We'll continue to see reductions in paper machine capacity. What we've seen in North America we're expecting to see in West Europe, and our whole three-year transformation process is based on that presumption. So we're anticipating more of the same, which means the way we compete globally is we have to gain share based on performance in West Europe and North America. We have to grow with the growing markets - South America and Asia - and then we have to race to get lower costs. And we're on all three paths. We've pretty much blown by the short-term target of restoring profitability from those '06 price disruptions, but we're not stopping there and we're far from the finish line of our internal transformation precisely because we expect more pressure to come in West Europe.

Is your European market share higher or lower than it was before the disruptions?

We don't typically disclose it, but if you look at this in terms of volume, it's higher.

He also asked a question about what you're expecting with regard to the paper companies' capacity.

I'm sorry if I didn't make that clear, Mark. What I was referring to was our expectation that we will see more consolidation in West Europe among some of the leading paper companies.

Okay.

And that we've built over the past year and a half our strategy with that expectation in mind, so we think we're prepared for it.

Very good. Just one question on the Door business. Obviously, you did an acquisition; you've reshuffled management fairly substantially. How much of the strength that we're seeing now do you think relates to the reorganization versus just, you know, latent economic strength?

You know, most of the strength in Q4 - a lot of that strength was Europe. We haven't yet seen the full effects of the combination in North America, and that's one of the reasons we're optimistic about '08.

Okay. Okay, so you may have a little bit of a tailwind even as the economic side slows down?

We have the tailwind in all three sectors of the world, but again this, we've seen you've seen what's happened before to this business in a recession and that's, you know, we have to keep that target out in front of investors.

Okay. Okay. And just two more questions, Joe. First, on Applied Technologies, you talk about the second half of '08 getting to profitable, how should we be thinking about Applied Technologies' margins across, say, the next two years? Should we be thinking about a gradual recovery or should we be thinking about a recovery but a continued, lumpy, you know, upanddown margin quarter to quarter?

Yeah. You're talking about the Composites business?

Primarily, yeah.

Because we do intend to break out as a separate segment beginning with Q1 '08 which should help you and our investors track this a little more clearly I think lumpy is a good word just because of the - I think that's a great characterization because of the nature of this business. We will have quarters where, year-to-year, sales will be up 10% and then the next quarter it might be up 50%. And when you get that kind of fluctuation at the top line, you clearly get, as you characterize it, lumpiness on the bottom line. And it's a function of how shipments get released to customers. If a major customer like an Eclipse slows down its deliveries, then our deliveries get slowed down and our sales get slowed down and vice versa. If we get a sudden surge of requirements for shipping landing gear braces for Boeing - from Messier-Dowty and then to Boeing, then we'll see that kind of lumpiness. I think you've got it right.

Now related to that, you know, if we look at the delays we've been seeing across, you know, several aerospace platforms, at the end of the day you guys weren't really, you know, a meaningful factor in some of these big ones that are in the headlines right now. But when you look at the delays in aggregate, is this good for you or bad for you that these projects are getting delayed?

It really helps. I mean, our - if you look at what's dragging down income in this business today, there are two factors. The first is production inefficiencies in a small business - it's basically the plant down in Boerne, Texas - where they've had a huge surge in shipment requests and just trying to get up a learning curve overnight is just a fundamentally inefficient process. So anything that buys us time, it's not loss of sales. It's just rescheduling of sales a little bit farther out. That gives us more time to get up the learning curve and get through the inefficiencies. So that's one variable that's clearly affected in a good way by the sort of delays that we've read about with Boeing, for example. The other big factor that's affecting profitability is we're ramping up as rapidly as we can our engineering and R&D capability in this business in order to take advantage of all of the second wave development opportunities that are coming our way. That's not going to change. We're going to continue to invest heavily, spend heavily in R&D and engineering. And that isn't as directly affected by the delays. In fact, it's not affected at all.

Okay. Just one financial question for you, Michael. Originally - or prior to your comments - I had moderately frontloaded my Capex assumptions for 2008 just a little bit. I'm just wondering with this shift of Capex from 2007 into '08 whether there's more frontloading now or what -

There clearly is more frontloading now. You're absolutely spot on.

Okay. Thanks very much.

Thanks, Mark.

Our next question comes from the line of Arnie Ursaner - please go ahead - with CJS Securities.

Hey, Arnie.

Hi, good morning.

Hi, Arnie.

A couple of starting questions. Geographic trends in PMC for Q4, please, by region?

In terms of sales, Arnie, flat to down in North America.

Can you quantify that a little more than just flat to down, because you have in the past.

We have?

I think so.

It's down 2% to 3%.

Okay.

In [inaudible] America. It's up in West Europe pretty sharply, and in our emerging markets, nice growth - a combination of South America and Asia.

But again, no quantification on any of those?

We'd rather not.

Okay. On Albany Door, you clearly already indicated that the majority of the growth was from Europe. I know you would prefer probably not to separate out organic growth versus acquisition growth, but to the extent most of it was international, would it be fair to say that nearly all of the growth was organic?

Yes.

Okay. Can you break out EFC growth specifically, or the EFT performance specifically? [It's half] of Applied Tech. What did it do in the quarter?

Yeah, EF - is it Engineered Fabrics?

Yes.

Was as opposed to the filtration and [primal op] businesses?

Correct.

Yeah, it was basically flat.

Okay. The rest of my questions I think are going to relate to aerospace. So for the first time you've actually disclosed a specific number, an operating loss, for AEC in the quarter so now, given that, it's going to lead to a whole series of questions. You also indicated you intend to separate it out anyways by Q1, so I'm going to ask a series of questions related to that. You mentioned for the year revenue was up 31%. You mentioned in Q3 that it had been up 46%. Can you give us an actual Q4 revenue this year and a Q4 revenue last year?

I think that AEC sales Q4 to Q4 was up 17%. We can get you a more precise number, but I think that that's - 16%.

Do we have an actual Q4 revenue for AEC?

Yeah. I think I mentioned it in the release. For the year it was 39.

Right. What was it for Q4?

Oh, 8 - 8.1.

Okay. And you mentioned it lost $3 million this year, operating loss of $3 million this year. What was its operating performance last year in Q4?

Let's see. You know, we - Arnie, you're asking us for information that we intend to start publishing in Q1 '08, for all the reasons that you're asking.

Okay. Joe, you're obviously - we've talked about and you've spoken about your general view, being conservative about the business. By shifting your view to a 35% per annum growth compounded rate, are you basing that on what you have in hand or are you basing that on future development programs you hope to win or hope to develop?

We base it on a very careful analysis of the projects that we have in hand.

Okay, maybe I'll ask it a slightly different way. In your prepared remarks you speak about being involved in next generation engines, so perhaps you could expand what it is you're doing there, but then you also speak to an opportunity in airframe applications. Are both embedded in this new revised guidance?

The whole point of the wave one, wave two timing, Arnie, is that 35% per annum for the next five years is pre-wave two. So there's two simultaneous waves of activity going on in our business. One is rapid short-term growth to meet selling into existing aerospace platforms and rapid expansion of development projects to position us for the next big wave of aerospace growth, which kicks in after the five-year period.

In that 35% growth rate, Arnie, we have included - over 80% of what is in that growth rate is absolutely totally in hand. And we've put a very, very, very conservative estimate in connection with the things that are in process but not contractual at this point. So I think we're feeling very, very comfortable with that number.

You also mentioned, again, you will be carving out the information on this subsidiary or providing the information on the subsidiary. Is part of that - Joe, I know you've been focused on shareholder value - is part of your reason for giving out lots of additional information the possibility that you may do a carve-out IPO or some other monetization transaction to enhance -

You're ahead of us, Arnie. At this point we're focused on execution. We do think this is, as I tried to make clear, we think this is a potentially very important part of our future which does, as we execute and fulfil some of these projections, create all kinds of options for us. But we're - and if you know the way Michael and I think and the Board, our Board, thinks - we consider these options all the time. But right now all the focus is on execution. It's way premature to think about anything else right now.

Final question, if I can, on Albany Doors. You indicated in your release you're going to be building a manufacturing facility in China. When will that be operational? What is the capacity of that plant? And also, as you're focusing on Albany Door, can you give us an update on your whole aftermarket strategy and where we stand there?

Yeah, the plant will be operational this year. We haven't really gotten into capacity disclosures and we really don't want to at this point, but suffice it to say that it's a substantial expansion of our production capability in the Pacific region. The aftermarket business is proving to be appealing and profitable in Europe where there appear to be real opportunities for forward integration. It does not appear to be a serious opportunity in North America where, for purely historical reasons, the channels of distribution are independently owned by in some cases some very large third-party distributors. So in North America, we really need to work with the channels, and it's one of the reasons why breadth of product line is so important and why that R-Bac acquisition was so important to us. In Europe, there's more of a tradition of the product supplier forward integrating into the distribution channel and owning the distribution channel, so there's much more opportunity there. And that's what we're seeing and that's how our strategy is progressing is to pursue the aftermarket with vigour in Europe; to not do so in North America. Unclear at this point on how it will play out in Asia - that market is still very young.

Just one clarification. Your potential cost savings for '08 is now higher than it's been. Does that reflect Montgomery, Alabama? Is that the difference between the two numbers?

No, Arnie. Montgomery, Alabama is not in those numbers.

So if we were to add that, since it's now announced, how much, you know, what do you think that incremental savings could move from?

We haven't released those numbers yet, and when we will, to be - you should be prudent and assume that those savings, because of inventory effects, will play out in '09.

Thank you very much.

Thank you.

We have a follow up from the line of John Emrich with Iron Works Capital. Please go ahead.

Yeah, three quick ones, please. The tax rate used in the $1.20 calculation. Is it closer to the 31% for '08 or the 24% for '07?

It's in between the two tax rates. It's closer to the 24%.

And is not the, I guess, why would you not use the expected tax rate for '08 in that - since that's where we're going to see it - in that estimate that you provided us? I thought the '08 tax rate was going to be closer to the low 30s.

We did use 25% in that rate - in that estimate.

Is the expected tax rate, then, for '08 now in the mid-20s and not the low 30s?

It is expected at 25%, John.

For '08?

Correct.

Wow, okay. And with China, what's the progression of serving Asia out of Asia and then eventually someday serving Europe out of Asia or other parts of the world as well?

Well, what we've talked about publicly is that our first priority is to have significantly reduced shipments from outside of Asia - from Europe, for example into Asia, and at the same time to position ourselves to grow with Asia. Those are the top priorities.

Okay. So we're not yet talking about the potential of serving Europe out of Asia someday down the road.

We haven't publicly, John.

Okay. And lastly, what's the run rate now of the percentage of total revenue that is international, outside North America, for the company?

63%.

63%? Thank you very much.

(Operator Instructions) And we have a question from the line of [Andy Singer] with [Flat Rock]. Please go ahead.

Hi, guys. The Doors business operating margin looked like it was around 11.5%, which is the best we've seen in a long time. Is that [inaudible] continue into '08?

Barring recession, there's a lot of momentum in that business, so yes. But, you know, but just so you understand the potential that a recession can have, these new door sales are, for the customer, a capital expenditure. And, you know, if we hit a hard recession, then they'll cut back on Capex.

Sure. And the PMC - sorry, go ahead.

On the other hand, you'd expect that they would continue to need to repair and service the doors, and so that's one of the beauties of having a higher percentage of - a higher volume of sales in the aftermarket.

Okay. And the PMC earnings, were China's start-up costs included in those restructuring numbers or where they not included?

In the performance improvement.

Okay. Okay.

Not restructuring.

Okay. Okay. Great. So the margin softness, a lot of it was due to seasonality?

There was an effect that we saw for the second time in a row in North America in the second half of December where mills didn't shut down. They just - paper mills they just ran through the year. And since they didn't shut down, they didn't put on new PMC. They ran the PMC longer. And that's the second time we've seen that holiday season effect, second half of December, and it was a clear season effect. We're not yet certain whether this is going to happen every year, but it's happened the last two, and we're assuming - we're building into our models that it'll be a continuing effect. And for people who've been following PMC for years and years, Q4 used to be a strong quarter. Because of this effect, now that seems to have slipped a bit.

Okay. Thanks.

Well, if there are no more questions, thank you all for participating on the call once more.

We do have one in queue - I'm sorry, Speakers. Ned Borland, Next Generation, he's the last question in the queue. Please go ahead.

Hi, guys.

Hi, Ned.

Just following up on the savings rate question. If it's not Alabama that gets you to 120 in savings EPS, you know, what is it? And also the press release sort of reads that you're going to be recognizing that faster than by 4Q '08, which I think was the last timeline when you were going to get to the, you know, a $1 a share run rate. I'm just wondering if I'm on track there?

Yeah, you're on track. It's just that as we go through this process of intense change, there are more opportunities we'll have for performance improvement. And as you know, we try as best we can to be conservative in the numbers we give you. So yes, the 120 is from previously announced activities. There's not anything new in there. And effectively, that 120 - $0.50 or $0.125 per quarter - was being felt by the end of 2007, which leaves $0.70 and a quarterly effect of an incremental $0.17, and that incremental $0.17 should be apparent in Q1.

Okay. That's all I had. Thanks.

That's $0.17 per quarter effect.

Okay.

There are no further questions, Speakers.

Remember, Ned, that doesn't mean you just add $0.17 to your projection for earnings. There's offsetting effects - inflation [inaudible].

Right. Thank you.

Once again, there is no one else in queue at this time.

Thanks, again. I know Michael and I will be seeing many of you in the various [break in audio].

Ladies and gentlemen, this conference will be available for replay on the Albany International web site. That does conclude your conference for today. Thank you for your participation, and thank you for using AT&T Executive Teleconference service. You may now disconnect.