Ladies and gentlemen, thank you for standing by. Welcome to the first quarter earnings call of Albany International. [Operator Instructions] At the request of Albany International, this conference call on Tuesday, May 6, 2014, 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 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, those same statements also apply to our verbal remarks this morning. And for a full discussion, please refer to that earnings release, as well as our SEC filings, including our 10-K. Now I will turn the call over to Joe Morone, our Chief Executive Officer, who'll provide some opening remarks. Joe?

Thanks, John. Good morning, everyone. Welcome to Albany's Q1 2014 call. Before we begin, I wanted to let everyone know we've decided to modify our format a bit for these earnings calls. I'll begin, as usual, with some general introductory comments, but then I'll turn the call back over to John, who will review the results of the quarter in a bit more detail. During his comments, John will be referring to the slides that are attached to our webcast page. And for those of you on our distribution list, the slides were attached to the email containing the earnings release that was sent to you yesterday evening. So let me begin with an overview, and then we'll go to John. Q1 2014 can be easily summarized. Machine Clothing rebounded as expected and AEC continued to make progress on all fronts. The overall result was a 12% improvement in EBITDA, 12% both on a year-over-year basis and on a sequential basis. The only complication in the quarter was a delay in LEAP sales due to a shift in invoicing terms. John will talk a bit more about this, but the important point is we are on track in LEAP, and we expect a strong full year performance for AEC. So in Q1 2014, both businesses performed well and in line with our expectations. If we go one step deeper, in Machine Clothing, sales and orders in Europe and Asia were once again stable. That's 5 quarters in a row of essentially steady sales and orders. And the Americas, as expected, rebounded from the soft Q4 right along with the containerboard market. Gross margins for Machine Clothing also rebounded sharply, as John will describe in more detail. And more generally, the highlight of the quarter for Machine Clothing was excellent performance, with all of our key customers in each of our key product segments and in every region of the world. Likewise, AEC made good progress on all fronts. On the LEAP program, our parts are performing well in engine tests, and both plants are advancing toward the ramp up on schedule. Commercially, the LEAP engine has now won over 6,000 orders, and we're still more than 2 years away from entry into service. In R&D, we're making good headway across the board: on engine applications, both for LEAP and beyond LEAP and both for the fan module and for higher temperature parts; on airframe applications; and also in our preliminary exploration of the possibilities in the automotive industry. So overall, for Q1 2014, good performance in both businesses resulting in strong EBITDA. Now let me turn the call over to John, who will review these results in a bit more detail. John?

Starting with Slide 3, Net Sales by Segment. Total net sales in Q1 decreased 3.8% compared to last year. AEC net sales were down about $3 million or 15.7% due to a temporary lag in sales of LEAP test parts. Our shift to larger-scale production of these parts, along with the related change in customer invoicing terms that took effect at the beginning of the year, resulted in a buildup of inventory and an estimated lag of approximately $5 million in sales. Onto Slide 4. Total company gross margin percent increased to 41.5% in Q1, while MC gross margin increased to 45%. The higher gross margin in MC was primarily due to seasonally strong production rates, along with lower costs from the European restructuring. This is consistent with our normal seasonal pattern. As you can see on the chart, gross margin was strong during the first half of 2013 and somewhat declined during the second half. Looking at earnings per share on Slide 5. We reported net income attributable to the company in Q1 of $0.33 per share compared to $0.37 per share in the first quarter last year. First quarter EPS in 2013 included a $0.06 per share gain from the sale of foreign manufacturing facility. Other EPS effects in both periods related to restructuring, tax adjustments and currency evaluation are noted on the slide. Excluding the effect of the building gain and those items, EPS this quarter would be $0.37 per share compared to $0.32 per share last year. Slide 6 provides adjusted EBITDA details for Q1 2014 in the same quarter last year. As noted in the earnings release, starting this quarter, we have included all research and incentive compensation expenses directly attributable to the MC and AEC business segments. Prior year information has been recast to conform to this change. MC adjusted EBITDA is essentially flat compared to last year, while AEC and corporate expenses showed improvement. Lastly, Slide 7 shows our change in net debt. During Q1, net debt increased $12.2 million due to incentive compensation payments that typically occur in the first quarter, along with cash outflows for restructuring payments. Compared to the balance at the end of Q1, we expect net debt to decline throughout the year. Now I'd like to turn it back to Joe for some additional comments before we go to Q&A.

Thanks, John. Turning briefly to our outlook. It's basically unchanged. In Machine Clothing, we expect Q2 to be comparable to Q1. Beyond Q2, as John indicated, because of seasonal factors, the second half of the year in Machine Clothing tends to be weaker than the first half. Exactly how much weaker, depends on the severity of those seasonal effects, which in turn depends on the health of the macro economy. More generally, we continue to view the macro economy as the primary short-term risk factor, both upside and down for Machine Clothing. As for AEC, we expect the next 3 quarters to be substantially stronger than Q1, and we still expect full year revenue on AEC to be roughly 10% ahead of 2013. So overall, this was a good quarter with good performance in both businesses. And barring any macroeconomic disruptions, we are on track for a strong full year performance that's consistent with both our near- and long-term expectations for both businesses. With that, let's go to your questions. Operator?

[Operator Instructions] And first in line, we have Jason Ursaner with CJS Securities.

Just, first, for the AEC segment, what was the magnitude of the shift from development to production?

Well, the -- go ahead, Cozz.

Yes. And Jason, as we said -- I want to give you the net sales side. The impact of that shift in the terms was about $5 million in sales. So had we been on -- under the previous terms, we would have $5 million more in sales during the quarter.

Got it. Okay. And what do you think incremental, either margin or flow-through, is on that $5 million of sales? And then also, it had been a pretty predictable revenue stream at $20 million-ish a quarter. Is it likely to have more volatility quarter-to-quarter going forward between now and the inflection point, as you need to match production levels?

No. It shouldn't be. Particularly, if you look year-over-year, it should be pretty steady. I mean, they get -- we may get some fluctuations quarter-to-quarter for precisely the reason you just described. There'll be ebbs and flows. But if you go year-over-year, it'll be a pretty steady incremental increase until we hit the inflection.

Okay. And for the Machine Clothing segment. Yes, I understand that the commentary on the rebound in North America containerboard for Q4. But overall, sales were still a little bit lower than I had been expecting. Was containerboard and tissue in North America -- was it up year-to-year or just from Q4?

Sequentially. If you look at the actual production statistics for containerboard, I think it's -- Q1 might be 1% ahead of Q1 last year, but most of the major producers emphasized that they were hit hard by the bad winter. International Paper, for example, said their income would've been about $60 million higher were it not for the bad-weather effect. So rather than try to take any of that into account or -- all we were trying to say is it hit a seasonal low at the end of last year, which was magnified by general economic weakness. And it came back off those lows -- the low of the lows, November. And the overall market came back well off those lows into a more normal range in Q1. And with it, so did our overall sales. We didn't think that this was, at all, out of the ordinary sales quarter for a Q1 in Machine Clothing. And we tend to think in terms in terms of ranges. Mid-160s to mid-170s is a normal quarterly range for this business. Gross margins we've talked before, 42.5% to 44% will be the normal quarterly average. EBITDA, $44,000 to $48,000 to $49,000 to $50,000. That'll be the normal quarterly average. And if we do our jobs right, over time, that's roughly where the business will be. There'll be fluctuations because of macro factors, but until something structural changes, that's more or less what the business is. And what we saw this quarter was actually between normal and pretty good for Machine Clothing in a Q1.

Got it. And did you see a month-to-month build at all. I guess, I'm just trying balance what you just said with Q2 being comparable to Q1. Q2 has always seemed to be a stronger seasonal quarter. So I'm just wondering if it's revenue or EBITDA?

Yes. I think you're barking up the right trees. In Q2, we'll tend to have stronger sales than Q1, just because each month tends to be normal. In Q1, there are weak shipments coming in from December, so that tends to pull back sales a bit. And then February tends to be a short month, and as always, the Chinese New Year holiday. So all of that tends to dampen Q1 a little bit from a top line point of view. On the other hand, our plans are typically running hard through the month, and so you get good margin. Second quarter, there are no top line seasonal effects. So typically, from a top line is our best sales quarter -- not always, but typically. But the margin tends not to be quite as good as Q1. If for no other reason, then raises kick in on April 1. And so you get a -- across the world, we get a margin hit from labor inflation.

Got it. Okay. And in Asia, you mentioned stability for a little over a year there. Some of the long-term pieces have been predicated on growth in China, offsetting a lot of other smaller headwinds. Just longer term, how are you looking at the fundamentals in that region? And is the overbuild and capacity -- is it specific to printing and writing there? Or are you seeing stability, or maybe a lack of growth across all of the different paper grades?

We still think that long term, this is a critical market and a growth market, and you have to be there in a strong way to grow that market. But we're not seeing anything in the short term to make us excited. Everything you read in the business press about general lack of energy, let's put it that way, in China, is consistent with what we're seeing. We're not seeing any short-term catalysts. As far as overcapacity, there looks like there's a small amount of overcapacity in all of the grades in China right now. So short term, there are no reason to expect any kind of a strong rebound. Long term, this is still -- everyway you look at it, this is still an important growth market.

Next we'll go to John Franzreb with Sidoti & Company.

Joe, could you just talk a little bit about the gross margin improvement in PMC? How much do you attribute to the rebound in volumes versus how much you attribute to the European restructuring actions you took a year ago?

Well, almost -- well, if we look at the slide that John went through, Slide 4, and just take a look at the trends last year in the first half, and you can see that's hovering around 44% in Q1 and Q2 and then drops down. It drops down -- I think, John mentioned this, it drops down because in Q3 and Q4 you have these seasonal effects that tend to reduce plant utilization. Whereas, the plants tend to be running pretty full in the first half of the year, barring some economic abnormality. So we'll always see -- we'd always expect to see, and we were indicating that we were expecting to see a rebound in margins in the first half of the year. The fact that it bounced that high has -- certainly has, above our normal range of 42.5% to 44% is an indication of the impact of the French restructuring -- or the European restructuring.

Okay, and just sticking to PMC...

Just one.

Sure.

Long term, you shouldn't deviate from that average over the full year in average gross margin of between 42.5% and 43.5% in that range. That's typically where the full year average will turn out.

Okay. And in PMC, can you talk a little bit about the pricing environment? Are there any major contracts that are coming up? How's -- what's the competitive landscape now?

The -- structurally, if we go back to the root causes here -- structurally, the overcapacity in our industry and in the paper industry that we serve is most acute in Europe, still, and so the greatest risk of price instability remains in Europe. None of the underlying structural factors have changed, so we continue to emphasize with investors, that's really the primary risk factor for the investment in Albany. On the other hand, while there are a couple of important contract negotiations coming up later in the year, we're not in Europe. We're not really -- we're not raising the pricing stability flag right now. We're feeling -- we try to emphasize, we think the primary risk factor in the short term, short term equals 2014, is macroeconomic. We think that has a bigger effect on how strong or weak the seasonal effect in the second half of the year is, than anything that's going to go on with pricing [indiscernible].

Okay. And switching over to AEC. Could you talk about traction you're making in non-LEAP-related programs, potential awards timeline, an update on that R&D spend?

The -- first of all, remember that beyond the initial wave of parts for LEAP, the fan blades and fan cases, the -- because -- I think we've talked about this on other calls. The volume of LEAP, the LEAP program, is so large relative to other programs in aerospace that any additional parts that we get on LEAP as LEAP evolves and as the -- and their every engine program has an evolution, that's the single biggest impact on future revenue that you could have as additional parts on a super high-volume program. So I assume, when you say beyond LEAP, you mean beyond the initial wave of LEAP parts.

Correct.

Okay. We're -- we continue to be encouraged by the progress we're making on the following fronts: Additional LEAP parts, both in the fan module, the front of the SAP engine and in the back of the engine on possible longer-term, high-temperature applications. We continue to feel bullish about working on the next wave of engine beyond LEAP: the replacement of engine, whether that is the open-rotor or an ultrahigh-bypass contained engine. Either way, it's going to need blades, and it's going to need containments or protective -- or fuselage that has real strength if it's open-rotor. We continue to be optimistic about the progress we're making on airframe applications. We continue to work hard near daily in -- or monthly, with expensive interactions with customers, exploring those applications. And we're still moving ahead with our probe. And I think that's the right way to think about it, a probe, into the automotive industry to see if there might be an early application or 2 at the very high end of that market. So we're pushing ahead on all those frontiers: On LEAP, both low temperature and high; next generations after LEAP; airframe, across multiple OEMs; automotive, a probe into the very high end of that industry.

And if you were going to set a reasonable timeline when you can probably announce some sort of award on any of those fronts, where would you put that?

Well, it's -- we're constrained by what we can and can't say by our -- constrained by our customers to what we can and can't say. I think that over the next 2 years, given the competitive pressures in the engine business that CFM, the Saffron-GE partnership, is going to have to start talking about what their plan is to evolve LEAP. Just as Pratt will have to do so on the gear turbo fan. And as they -- as those competitive pressures lead them to announce plans to improve their engines, that will be the context in which we'll be able to talk about what and which, if any, new parts we'll be having on that evolution program. I think it's -- next 2 years is a pretty reasonable bet.

Next, we'll go to Steve Levenson with Stifel.

You've been talking a little bit about high-temperature applications. Could you give us an update please on the CMC nozzle and the test program. Will that be flying soon?

I think the short answer is it'll be flying in a test program under the CLEEN program of the FAA. But we're not seeing any indications from Boeing that that's going to be -- that those nozzles are going to be included in any commercial platform this decade. It's not...

Not this decade?

Yes. We're not hearing anything about 77X. We're not hearing anything about 787-10. So it's -- the vibe we're getting is that this is more of next, next. This a promising technology for next wave of platforms, which is out next decade. Now, more generally, we do think this whole domain of high-temperature applications for composites is really important to us, and we are actively working on it. We have seen, for example, small but a derivative application of that nozzle work on hypersonic applications for defense. And as you saw -- I think you saw at the airshow, the Paris Air Show, Steve, Saffron has talked about a composite low-pressure turbine blade, which we're working with them on. So this is an important area. The nozzle is feeling more like it's still going to be in development through the decade. I think the more significant early application is going to be driven by the LEAP evolution.

Got it. And in terms of LEAP, I know there's no ramp expected until sometime next year, when they start getting ready to produce engines in quantity. But can you give us an idea how many units it takes to have sort of a basic operating margin you look for. And is there, just for forward-modeling purposes, have you figured what incremental operating margins are per, I don't know, if you want to say, 10 or 20, or 50 engines worth of parts?

Yes. We have a pretty good sense of incremental margin contribution with -- as volume grows, it's pretty much one-to-one that there's a margin contribution -- a steady margin contribution with each engine, basically. So we will...

That much of a measurable impact. That's good to know. Can you quantify it at all? Or do you want to keep that confidential for now?

Well, if you take the average EBIT margin in the engine business. If GE is at 18% EBIT margin and Rolls is at 12%, thereabouts, so you take the average and assume that for every incremental dollar of revenue as we grow LEAP, that average EBIT drops down. That's probably a reasonable way to think about it. EBITDA -- EBIT and EBITDA out will grow with revenue for that first application pretty steadily.

Our next question is from J.B. Groh with D.A. Davidson.

I'm pretty much almost covered here, but a lot of these paper guys had this weather impact. Is it your contention that none of that really trickled down to you in Q1?

It trickled down in a very big way, but on the other hand, we had some other stuff going on our favor. So it hurt us, other stuff helped us, so it -- [indiscernible] is, the quarter was what the quarter was, which is a pretty normal -- pretty good first quarter for Machine Clothing.

So maybe a little higher volatility, but at the end of the day, within the realm of expectations.

Yes.

Was there any way to kind of quantify weather?

Well, International Paper did. They said that their earnings were hit -- were $60 million lower than they otherwise would have been. So you have to go into their numbers and see in percentage terms what that means. But that's a pretty big effect for them, just about 10% effect.

Right, okay. Okay, so maybe similar for you guys?

Well, no, but we had some other stuff going in our favor, I mean. So I don't think you should -- we didn't mention it in any significant way, and I think you should just assume this was a pretty normal -- this was a good Q1.

Okay. And then John, can you remind me of the CapEx plan for the balance of the year?

Yes. Our forecast for the spend for the year is $65 million to $75 million. So I think we were about $14 million through the first quarter.

Okay. And so that assumes this ramp in LEAP goes forward as planned, not -- no variance from that. Okay.

Yes, J.B.

Okay, J.B.

[Operator Instructions] And we'll go back to Jason Ursaner.

Just the overcapacity in China. Do you think producers are viewing that capacity as needing to be absorbed by domestic consumption? Or was it built assuming a stronger export market, just because you also mentioned some of the structural problems in Europe?

Well, rather than try to get into what their intent was, I think in -- the reality is whatever their intent was, the effect is that once Europe slowed down significantly, the export market dried up. And once the export market for Chinese paper makers started to weaken, that's when the overcapacity was exposed. And so Europe is -- all indications are Europe is doing a little bit better. But a little bit better is 1% GNP without -- the underlying structural problems in Europe, particularly, in the paper industry, are still there. So I think the way you posed the question is the right way to think about this. The overcapacity, which is not a big overcapacity in Asia -- we're talking 2%, 3%, if that, that sort, not European style overcapacity, which is 15% -- 12% to 15%. I think the right way to think about it is domestic growth should catch up to that overcapacity, more than return to boom export days.

Okay. And you mentioned just the macro environment as really being the primary risk factor for the short term, how much -- how more limited is your visibility now than it has been historically because of the trend towards make-the-ship instead of consignment?

It's much less visible. We -- a large chunk of our orders in a quarter actually turn into sales of that quarter, so orders, become far less useful a predictor than they did in the past. Moreover, when parts were sitting in consignment, they had a, what we call, a sunset date that after a certain period of time, if they hadn't been installed, they would be recognized as revenue. And so there was always a predictable element that way too, that you're always able to estimate when the pieces in consignment would eventually be turned into recognized revenue. Whereas now, sales are often triggered -- sales in the quarter are often triggered by orders in that quarter. There are often -- if there's anything unexpected happening on the customer side, they have a problem with the machine or they have a surge in demand, we'll get orders dropping in, in the quarter on an emergency basis, so it is far less visibility. On the other hand -- that's on the one hand. On the other hand, there's no mystery about what drives this industry, just look at GNP trends. And if GNP is strengthening, you have a pretty good bet that containerboard consumption and tissue consumption is going to grow with GNP or slightly less than GNP, and so paper mills will be running at higher capacity and therefore, they'll be consuming more of our clothing. So even though our visibility is shorter because of shorter lead times on orders, the economic using GNP trends as an indicator of what our outlook is, is a pretty reliable way to go. That's why we say, if you tell us what the GNP is going to be for U.S. and Europe and China in the second half of the year, we'll tell you whether we're going to have a very limited, muted seasonal effect or a very strong seasonal effect. By the end of Q2 last year, we were feeling that the economy was slowing down, and so we were concerned about the second half of the year, particularly the end of the year. And sure enough, they were weak for paper consumption. And they were weak in our key market, containerboard. If we see -- the growing economy consensus is right, and we're seeing 3.5% growth or 4% GNP growth, then we're going to have a stronger second half than a weaker second half.

Okay. And on the positive side of that GNP growth. Where do you think your market position is in terms of capability to be a trusted supplier on short notice. Because a lot of times, you talk about being the strategic partner. Do you think that your business is aligned with those strategic customers stronger than ever because of kind of the trend towards make-the-ship at limited visibility?

Well, they're all connected. You can't -- the short answer is yes, and I try to allude to that in my summary comments about the highlight of the quarter was really the very strong performance with our key customers in each region of the world. But you can't get away with shortening your supply chain and your order chain, typically, unless you narrow your supplier base and develop type relations with that supplier base. So yes, I think it does work hand in glove.

Okay. And just last question for me. On the nozzle program, you mentioned no indications about inclusion on aircraft programs, but there used to be some optimism on a retrofit opportunity. Is there any structural impediment that would preclude a retrofit on the nozzle?

No. But I think the right way -- if and when that market hits, you think from a -- from 30,000 feet, it feels like there would be a retrofit market. But the first step is the way these things evolve is the technology needs to mature enough that -- and the OEM, say, Boeing, needs to feel enough pressure either on competitive pressure or fuel efficiency pressure that they're going to take the leap on a new technology, and that typically will happen with a new platform, next-generation single. Now that's for example, I'm just speculating here, but say, next-generation somewhere. Now at that point, once the technology starts getting down the learning curve, then they'll look for other ways of using the technology to create incremental enhancements on existing platforms.

But for instance on the LEAP, I mean, the size relative to the old plane, there really wasn't a retrofit option. It sounds like that on the nozzle that this wasn't the case. I mean, it could be a retrofit if it's desired by the industry?

I could be, but I think we're in speculation on speculation. I think the best, the safest way to think about the nozzle is it's a very interesting high-temperature -- part of the high-temperature portfolio of applications that we're exploring. And that's one of the longer-term ones that unless something changes, unexpected isn't going to kick in until next decade some time. It's like the next, next S curve -- candidate for the next, next S curve.

And we have no further questions in queue.

Thank you, everyone, for participating on the call and for your questions. And as always, John and I will look forward to meeting many of you in the upcoming investor conferences. Thank you, and have a good day.

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 your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.