Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Earnings Call of Albany International. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. At the request of Albany International, this conference call on Thursday, November 1, 2012, will be webcast and recorded. I would now like to turn the conference over to Chief Financial Officer and Treasurer, John Cozzolino for introductory comments. Please go ahead.

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 the 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. And for purposes of this conference call, the 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 Joe Morone, our Chief Executive Officer who'll provide some opening remarks before we go to Q&A. Joe?

Thanks, John. Good morning, everyone. And let me add my welcome to John's, and to those of you who live in metropolitan New York and on the shoreline of New Jersey, all of us at Albany hope you and your family and friends are doing okay. As always I'll open with a few comments intended to amplify yesterday's release and then we'll turn to your questions. Q3 2012 was an excellent quarter, and compares favorably both to the very strong results we had last quarter as well as to an equally strong Q3 2011. The highlights this quarter were strong gross margin, strong EBITDA and cash flow continued competitive strength in Machine Clothing and continued growth and progress towards the LEAP ramp in Engineered Composites. Turning first to Machine Clothing, it performed for the most part as we expected it would. Sales in the Americas and Asia held steady, excluding that bump in sales in North America from the transition to new contract terms. Gross margins remained at Q2 levels and did not regress to their historical averages as we have been anticipating, this now marks 2 straight quarters in which gross margins in Machine Clothing were more than 2 percentage points higher than they had been for the comparable period last year. And our competitive positions remained strong across all our key customers and grades. The only bad news for Machine Clothing in Q3, was once again the deteriorating market in Europe. We do not think European Machine Clothing has hit bottom yet, and as we said in the release, given the structural over capacity there, we think it is a near certainty that prices will decline in Europe next year. The only mitigating factors are that sales from Europe now represent less than 20% of our global Machine…

[Operator Instructions] And our first question comes from the line of Jason Ursaner with CJS Securities. Please go ahead.

You've talked a lot about margin and it did stay up, I was just wondering given the outlook for Q4, where -- and Q1 with the slow starts next year, where do you see margin trending given -- I know last year you had to take a shut down for 2 weeks, how does that stuff impact margin given how high it has been trending?

Well, I think the important point which you are -- the 2 important points, both of which you're alluding to is -- first is, you have to take into account the seasonal quarterly fluctuations in this business. So looking at margins sequentially, is a little bit dangerous. You've got to go year-over-year, and so if we know there is a slowdown at the end of this year, and it will particularly show up at the beginning of next year, as it did a year ago, then you'd expect as our plants slow down, that unutilized capacity goes up so margin inevitably goes down. But if you go year-over-year comparisons, which controls those seasonal fluctuations then -- the experience over the past 2 quarters suggest our margins will be higher, year-over-year comparisons, given roughly comparable sales levels, everything else, in other words, everything else equal our margins should be a little higher than they were last year.

Okay. And given the contract change, does it change your internal safety stock, so to speak, where it might have a benefit to your utilization, if you have to build that back, in terms of -- I'm just trying to think about gross margin.

No. It's basically shifting ownership of the inventories from us to our customer, so it's shifting from consignment to essentially, what our industry calls make and ship, were just in time. So it might actually increase volatility a little bit, because now the customers controlling levels of inventory and if they are feeling squeezed, they may -- financially they might be willing to take the risk of running with lower inventories. But then once they start seeing an upturn in productions they'll have some more to replenish the inventory. So that kind of a shift can lead to an increase in volatility both, on the down side and the up, doesn't really change anything about the underlying demand.

But the whole $8 million had already been consigned to them or it was coming out of your safety stock where you would replenish it?

It had already been consigned.

And then your commentary on Europe in terms of the over capacity, is it that some of the shutdowns you saw earlier in the year, did they not become permanent shutdowns, and you're still sort of over serving demand or they were permanent shutdowns in its additional demand deterioration where you're still having over capacity situation on the production side.

Yes, there are 3 variables simultaneously at work, the first is just a weak and weakening macroeconomic environment in Europe, so that alone would lead, as you'd expect, demand down. That is super imposed on structural overcapacity in the paper industry in Europe and we've said anywhere from 10% to 15% to 20%, it's still, while some has come out not nearly enough has come out. And so there's still significant overcapacity in the European paper industry. And then on top of that, there's over capacity in the European PMC industry, and while we've been pretty aggressive about taking out capacity particularly in the last recession, our competitors have not been as aggressive in part because they don't have as many plants in part, because they didn't have the cash or the cash required to make those moves. So you take all 3 and they're are all at work and they all reinforce each other. And while some capacity in the European paper industry came out not nearly enough yet. We think the right way to think about this is the way we were thinking about the paper industry in North America in 2009, think L, an L-shaped recovery, because that capacity has to come out at some point. So, and then the L is dampened pushed down, the flat part of the L, the recovery part of the L is pushed down because of price erosion as well. That said, all of our modeling and planning when we say our outlook is for a flat year-over-year it takes that into consideration.

Our next question comes from the line of Mark Connelly with CLSA.

Just a couple of things you talked about the AEC portfolio development expanding fast. How quickly will we know the implications of that for your reinvestment need in that business? Now is this going to affect your need to invest in CapEx and people. Is there -- well really just how are you balancing those two?

So the 2 -- they're, let me try and answer this in 2 pieces. First there is the investment in the LEAP program that's first wave of composite parts for the front of a LEAP engine. And that our expected investment, total investment has not changed on that. However there is some indication that it's going to get accelerated, that both the production and therefore the required investment, the amount of equipment we put in the plants is going to move forward. So it's not, within the next 5 years the average CapEx at or slightly below amortization, depreciation that still looks good, but we thought the earlier might be lower than 70 and we may see a shift into distribution, CapEx of which the first wave of LEAP is included. Now then we get to your question which is the portfolio of opportunities is expanding and as that expands the revenue opportunity expands, but so does the capital requirement. And for the most part the investment required for the opportunities we're seeing would probably hit in the 2017-2018 timeframe. The one exception would be if we wind up with more content than those initial parts on the LEAP engine, we'd have to invest in a third plant and that would be good news and that could happen before 2018. So if we're going to build a third plant that means there's more content on the initial wave of the LEAP engine, with the second wave of the LEAP engine and that would be reflected in new CapEx requirement hitting around '15 or '16.

Okay, that's very helpful. Switching gears, when I look at what's happening in China right now in the paper industry, it doesn't feel like the small players are taking a bigger hit than the big players and I look at [indiscernible] and Nine Dragons and they have felt this very, very fast. Have you seen any meaningful shift in your own position in that market versus the market as a whole. I am just trying to get a sense whether being aligned with the big players is helping you there?

It's been -- our production in Asia and China sequentially has been flat. And we were getting a little concerned at the end of Q3 and the beginning of Q4 that we were seeing signs of softness, but lately that feels like its bouncing back. So we're not seeing any surprises there. No -- let's stop at that.

Okay, that's fine. And just one last question, you've talked about new product introductions in PMC. How big a deal is that going to be in 2013?

Oh, it's always a big deal for us. And I guess the simplest way to answer that -- or the the easiest indicator of -- it's hard to answer this question without it sounding like arm waving. So let me try to be as concrete as [indiscernible]. Our measure of -- we think the most telling measure of our performance is our share with the top papermakers around the world this gets back to your earlier question. The only way we have such strong share, we have very strong share with top papermakers is because we demonstrate quantitatively that we are able to reduce their total cost of ownership through a combination of new products, service and production and deliveries. Our share even under all of the pressure, all of the economic pressure, our share across the world with key papermakers is holding or strengthening, and we're committed to maintaining that. The only way you maintain that is by delivering better and better value and better and better enabling them to reduce total cost ownership. And you can't do that with better products. You can't do that unless you have better products along with better service.

[Operator Instructions] Our next question comes from the line of John Franzreb from Sidoti & Company. Please go ahead.

Regarding the anticipated drop off in volume -- in PMC in Q4 and Q1. Do you expect it to be of the same magnitude you saw a year ago on a percentage drop basis or just give me a sense of how much of step down we're thinking about there?

Yes, it's a little tough to be precise but if you look at the pattern a year ago that Q4 might have been a little higher last year than what we've anticipated this year in Q1 might have been of '12 might be a little weaker than we'd anticipate in Q1 of '13, but basically the underlying phenomenon is the same. As we get toward the end of the year papermakers slow down production and that affects us at the very end of the year and especially into the beginning of next year. So the more pronounced slowdown at the end of the year by the papermakers the more pronounced our weakness in Q1. Primarily a Q1 effect with a little bit at the end of Q4. So if you were to listen to -- let's take the example of International Paper, if you were to listen to their earnings call, they said it's a matter of routine, as we'll after Thanksgiving we start slowing down we always start slowing down after Thanksgiving. So that will lead to softer sales for us in December but especially softer shipments in beginning of next year. So the seasonal pattern is pretty much locked in as it was last year. The magnitude of the seasonal pattern really depends mostly on macroeconomics more than anything else.

So are you saying Joe that Europe is going to be weaker this year than it was a year ago?

Yes

And that would probably put the revenue number below last year's level?

And it has been all through this year, if you do the year-over-year comparisons, while our EBITDA has held, our revenue has been consistently lower even in quarters that we thought were good quarters, Q3 for example, our revenue was lower than last year in Machine Clothing by 5% to 7%.

Okay. And regarding the restructuring actions, can you talk a little bit about them and how much you expect to incur in Q4?

We -- earlier this year, you'll remember we announced that we had started a process of consultation with our works councils in France, and that process continues to evolve really I don't think it's -- I don't think we can say more than that at this point when we have an update or change in that process will make it a disclosure.

Okay what were the Q3 then restructuring actions [indiscernible]?

In reaction to response to weakness in Europe, we did some restructuring in our plant in Sweden and so that was part of the process of matching our capacity to underlying demand position, we have a large and outstanding plant in Sweden, and we did do some downsizing there in the summer in anticipation of this European weakness.

Got it. And John you said I think the blended full year tax rate would be about 30% what's -- do you happen to know the individual Q4 tax rate?

Yes. And we actually -- we think that we our blended full year rate it will be mid-30% range. So and we were at, our 35% through Q3, our anticipation is that we will stay in that mid 30% range for the full-year.

And our next question comes from the line of Rick D'Auteuil with Columbia Management.

I missed the first 10 minutes or so, so I'm not sure if this was covered but it was a reference to new product introduction in Q&A on PMC, is that maybe you can expand on that. Is that new products to address your existing customers or is that to expand the potential customer base?

All of the above.

Okay, would you expect it to change the margin profile at all?

No I think it's more likely to contribute to preserving the margin profile. When you say customer base, Rick, I think the right way to think about it is, look at the growth grades and, so lot of our efforts at new product development are aimed at growth grades. Whether that's an existing customer or a new customer and for the most part it's existing customers.

Thanks, but you have pretty terrific share among the largest paper manufactures?

Right.

I guess what I was trying to address was -- does this potentially get you into the Tier 2s that you don't have as big a presence with.

You know I'd rather not get into that, Rick, it's getting into...

Yes, that's fine.

...insider information and we know all our competitors, are on this call.

And we have no more questions in queue at this time.

Okay thank you everyone for participating on the call and we'll look forward to catching up with you between now and our next earnings release and until then have a good holiday season, thank you.

Thank you. Ladies and Gentlemen, a replay of this conference call will be available at the Albany International website beginning at approximately noon Eastern Time today. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.