Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Call of Albany International. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time. At the request of Albany International, this conference call on Tuesday, May 3, 2016, will be webcast and recorded. I’d 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 will provide some opening remarks. Joe?

Thanks, John. Good morning, everyone. Welcome to our Q1 2016 earnings call. My comments this morning will be a bit more extensive than they usually are. As always, I’ll summarize the highlights of the quarter, John will follow-up more detail. I’ll then turn to our outlook and we’ll close with Q&A. But since this is my first opportunity to talk with all of you since we completed our composites acquisition on April 8 and since the acquisition effectively doubles the size and growth potential of AEC, we thought today’s call would be the right time to give you a more detailed view of our outlook both near- and long-term for the new combined AEC. But first, let’s start as usual with the review of the quarter, which was another good quarter for the company against an unusually strong Q1 2015 and despite a sharp drop in year-over-year Machine Clothing sales, Q1 adjusted EBITDA was essentially flat compared to a year ago. Both businesses again performed well as Machine Clothing continue to generate strong profitability and AEC’s strong growth. For Machine Clothing, even though sales excluding currency declined 7% compared to Q1 2015, there were no top-line surprises. Essentially, the trends of the previous three quarters continue through Q1. That 7% year-over-year sales decline was due primarily to the significant and permanent drop in publication sales that we experienced in the first half of last year and that we talked about in last year’s earnings calls. When we exclude that drop in the publication market or alternatively if we look at the top-line on the sequential basis, what we see as the follow-up. Sales in the Americas, Europe and China were stable. Sales in the growth grades were stable. Sales in the growth grades accounted for 75% of total sales. We…

Thank you, Joe. I’d like to refer you to our Q1 financial performance slides. Starting with slide 3, net sales by segment, excluding currency effects, total company net sales in Q1 decreased 3.9%. Also excluding currency effects, MC net sales were down 7.2% in the quarter against that strong Q1 2015 that Joe just referred to. AEC net sales increased 18.8% due to growth in the LEAP program. Turning to slide 4, total company gross margin was 42.1% in Q1, compared to 42.3% in Q1 of last year. MC gross profit margin improved to 47.9% of sales in Q1, compared to 47.5% in Q1 2015 despite the drop in sales. The step-up in MC gross margin over the past five quarters is partially due to a stronger U.S. dollar against most major currencies since early 2015, particularly the Brazilian real and Mexican peso. MC gross profit in absolute dollars declined to $69.6 million in Q1, compared to $75.3 million last year as a result of the lower sales. Looking at slide 5, earnings per share, we’ve reported net income attributable to the company in Q1 of $0.42 per share, compared to $0.38 per share on Q1 of last year. Q1 2016 EPS was reduced by $0.03 per share for acquisition expenses. We expect an additional $5 million to $6 million of direct acquisition expenses in Q2. While restructuring expenses only had a $0.01 effect in Q1, Q1 2015 EPS was reduced by $0.18 per share for restructuring. Restructuring charges on both periods were principally related to MC plant closure costs in Germany. Other EPS effects in one or both periods related to discrete tax items and foreign currency revaluation as noted on the slide. Excluding all the adjustments, adjusted EPS in Q1 2016 was $0.46 per share, compared to $0.45…

Thanks, John. Turning to our outlook, Machine Clothing, we do not see any significant deviation from our expectation that given the current exchange environment, full-year 2016 adjusted EBITDA should be in the upper-end of that normal $180 million to $195 million range. The typical seasonal pattern in this business is for sales to increase from Q1 to Q2 and for margins to decline as the annual salary increases are implemented. Last year’s unusually strong performance in Q1 notwithstanding, we expect to return to the normal pattern this year. Q2 sales should improve somewhat over Q1. Profit margins should decline. The net effect is that we expect Q2 2016 adjusted EBITDA to improve compared to Q2 2015 and first half 2016 adjusted EBITDA to be comparable to first half 2016. The primary risk for this outlook continues to be global macroeconomic conditions particularly in commodity driven economies like Brazil. Turning to AEC, our short-term outlook remains unchanged from what we described in our Q4 earnings call and then in our February, 29 Investor Call about the acquisition. We expect the acquisition to contribute roughly $65 million of sales and $10 million of adjusted EBITDA to our results in 2016 that’s since the date of acquisition April 8 through the end of the year, $65 million of sales roughly $10 million of adjusted EBITDA. On a pro-forma full-year basis, the acquisition would add $80 million to $90 million in the sales and $13 million to $15 million in adjusted EBITDA. If we look at AEC as a whole, including the acquisition, our pro-forma full-year 2016 outlook is for sales to grow to a $190 million to $200 million compared to pre-acquisition full-year 2015 revenue of $100 million. Pro-forma full-year adjusted EBITDA for the combined AEC would be $15 million to $17 million,…

[Operator Instructions] And we do have a question from the line of John Franzreb from Sidoti and Company. Please go ahead.

Good morning. Hi Joe and John.

Good morning, John.

I guess, I want to start with the Machine Clothing. You’ve highlighted your expectations in Q2 versus Q1, but just take at a step further. Would you expect the second half of the year to be down versus the first half of the year by historic norms?

Yeah. I think the best way to think about this is how we - again how we think about the full-year, year-over-year, there’ll be fluctuations quarter-to-quarter, but everything we see says we should be in the upper end of that normal range. And going into the second half we would be right there.

Got it, okay. And regarding your discussion on the acquisition, two things, one, on how many of these programs that you outlined are you the sole supplier? And two, in 2020, if this place out as you’re outlining, what would you expect the blended AEC operating margin to look like?

Well. The blended EBITDA margin is what I described to you 18% to 20%. So that would be for everything. If you take those six key programs, let’s leave LEAP aside because LEAP is an extraordinary relationship that we have with unique technology, exclusive relationship, life of program, a unique kind of contractual arrangements. So the other programs, mostly are sole sourced. The primary exception is that some of the parts on one of the variants of the JSF is a dual source, but I think the more significant point is for many of these programs, which are DoD programs. You wind up and has the sole source supplier and then the contracts proceed in blocks. So the next block of purchases for JSF, it will be a three year block and sockets you get a three year contract, you’ve mostly the sole source through that and then towards the end of that block you negotiate the next block. And as long as, there are such pretty standards life and DoD, as long as you don’t screw up, you continue to renew those contracts because as the program ramps it’s high risk for the customer to switch out suppliers unless they really are forced to do it because of systemic performance values. So, there isn’t this - the guarantee and certainty that you would expect on the LEAP side, but you should take literally what we say as long as we perform, as long as we execute on the requirements in the schedule, we should be able to realize that revenue potential and profit potential.

Okay. I think something, little bit about the numbers here. Okay, post acquisition, what would expect your DNA actually to look like and could you talk a little bit about the step-up in capital spending? How much is it associated with the hours purchase? How much is it accelerated internal CapEx?

Well. Let’s take CapEx and then the cost can give swag on the DNA. What we had said before the acquisition was that we expected total CapEx for the company, including AEC and reinvestment in Machine Clothing to be on average $70 million a year, for between, 2015 and 2020, on average $70 million a year. 2015 was light, but we expected 2016 and 2017 to be heavier and above that average because those are the peak spending for LEAP because that’s when we need to invest all the equipment for the steepest part of the ramp for the LEAP program. And then we thought unless there were major new programs hitting that CapEx spending would drop off, but over the periods $70 million a year on average. With the acquisition, it’s a similar story add about $10 million on average per year through the period, but that will be front loaded. At the same time, that we’re investing heavily with LEAP, our colleagues in Salt Lake will be investing heavily for the ramp on the Boeing forward fuselage frames and then JSF. So, while it’s likely the average $10 million a year over the five years, the first two years will be closer to $15 million to $17 million average. So add all that together, we should be in the $85 million to $90 million range of capital spending in 2016 and 2017 and then, probably dropping off from that below the $80 million average for the period. Now, all of this is subject to caveat. The first is timing can vary. This is, basically we’re giving you a picture into the projects, the volume of projects we’re approving the precise timing of them may get delayed or may come forward a bit. Sockets, Q1 was a little bit late, but we expect the surgeon capital spending over the next several quarters. And then on DNA, John?

Yes, John, the AEC segment in Q1 had DNA of $3.4 million and so that’s our current run rate. We expect with this acquisition, probably not quite get to $5 million for quarter for the rest of this year. So, it will add going in, it looks like it’s about $5 million of annualized depreciation, amortization for the acquisition. So, if you add that to our current run rate, it brings us the little under $5 million per quarter going forward for the rest of this year and of course, that number will increase as we put the CapEx and over time. But if you just look at rest of this year, $1.3 million to $1.5 million more of depreciation and amortization for the acquisition is probably a good estimate.

Great. I’ll get back in the queue. Thanks guys.

Our next question comes from Anthony Young from Macquarie Securities. Your line is open.

Good morning guys.

Good morning, Anthony.

Good morning guys. Thanks for taking the question.

How are you?

Good, good. Just wanted a follow-up. You guys gave, in a press release on a call you guys just gave a good feel for the ramp, I’m actually glad to [indiscernible] things for the LEAP. Can you just say where you are right now as far as production goes and sort of where you guys are with respect to the 100 this year, 500 next year, 2020? I mean, more than three plants to be able to handle, the 2000 shipsets or will you have to possibly look to add another facility for that?

The three plants including the one that we’re building now in Mexico are based on the assumption that - are based on the expectations that CFM and Safran have going out well into next decade. Sockets, we do not anticipate the need from more than three, but they’re going to be three very full plants.

Okay. And then just in terms of where you are now as far as like, how many here you were able to make per month?

Yeah. We’re not - we’re right on track. I mean we’re not - we’re meeting delivery schedules right on track.

Okay.

The challenge for us now is we’re ramping up each plant and we’re about to start a third plant, but at this stage, we’re right on track and from everything we see, we should be right there as it rents.

Okay. That’s helpful. And then, just second question on the AEC side of things. I mean, you mentioned and I would agree that the contract you guys have with the LEAP and with Safran is special contracts, but there’s been a lot of headlines about Boeing, pushing back on suppliers and train again cost savings were able to can and can you guys - is there any sort of living room, were they can come back and try their – recoup additional savings from you guys or do you think sort of?

Yeah. It’s a really interesting phenomena and that goes well beyond Boeing. In our minds, the right way to think about this is, there is a sea change taking place in the aerospace industry. Across the Board, up and down the supply chain, every OEM is making the swing from 10 years or more, 10 years plus of massive investment in new platforms and now it’s making the turn to return on investment and recovering the - basically recovering from the massive investment and development. So, literally every OEM is doing everything possible to squeeze cost out of themselves and out of their supplier chain. So success in this environment, the premium goes from unique technology to operational excellence. Operational excellence means in the end high quality, low cost. That even as you become more and more productive, reduce your cost, you then have to share those gains with your customers and so doing not only preserve your position on existing contracts, but you have an opportunity to get more contracts. And that’s how we view it, but we do feel that’s applying into our strength.

Okay, that’s helpful. I appreciate your time guys.

Thanks, Anthony.

[Operator Instructions] We do have a question from Jim Foung from Gabelli & Company. Please go ahead.

Hi, good morning.

Good morning, Jim.

Joe, just following up on that last question, are you feeling any pressure to increase investment in R&D to continue participating in the next gen say LEAP engine in other programs that you have?

Well. We’re spending heavily on R&D and our view is if we have an opportunity that’s coming our way because of the next generation CFM engine. As long as the ROI is there, we’re delighted to invest more in capital and more in development in R&D to go there. I mean one of the beauties in our minds of this model of the combination of these two businesses as we are very well position to take advantage to make the investments require, to take advantage of significant opportunities as they come along in aerospace industry and there are not that many independent Tier 2 suppliers capable of saying that. So, to us, let’s say Boeing pulled the trigger on some sort of middle market aircraft and CFM one of the business and that would require us to ramp up investments both capital and R&D, we would be thrilled and we are prepared to do that. That’s ROI for us and for our investors.

Right. Because you obviously need to participate in some of these future programs then?

But you really getting a piece of what are the core as of our whole model as a company is position ourselves to aggressively invest in up yielding new opportunities as they come along.

Right.

The only way as you know, the only way you grow an aerospace, you cannot do sockets in a cash start mode.

Right.

And the ROI has to be there, but if it is then we’ll continue to move aggressively.

Very good. And then, one of the narrow producers in the conference call earlier this quarter said that, the airframe manufactures are moving slowly in transitioning from the legacy airplanes to the next gen because they want to be deliberate and they don’t want to create problems in rushing it, are you seeing any slowdown in the demand, in the near term demand for LEAP engines as they kind of move slowly in this transition?

No and it’s not slow, I mean the ramp-up of LEAP is taking place in an incredibly compressed period of time. We’re talking basically three years, going from start 2000 engines a year, that has never happened in commercial aviation history, and the ramp down of CFM is happening at the same time with the same velocity. So, while - would you describe maybe happening on some platforms, it is certainly not happening on the platform that is right in front of us and if you listen to the Safran earnings call, the GE Aviation talks about, they spend an enormous time in energy focused on making sure their supply chain can deliver, but in the case of CFM, GE, and Safran most of the suppliers are the same. And the parts are not radically different. We are the - we are one of the major points of change as they go from CFM engine to the LEAP engine.

Okay. That’s helpful. And just lastly, even though you had these numbers, so could you provide shipset numbers to like, your new programs, like the Joint Strike Fighter, the deliveries of those numbers have been changing month-to-month depending on the budget and stuff.

Yeah that’s why we try to give the range. Give an estimate of full-year 2016 and a range for 2020 that’s as much as we are prepared to disclose now and a shipset number isn’t pretty - isn’t all that meaningful since there are multiple parts on three different variants, so we’re really not ready to go there beyond the disclosure we just gave you.

Okay, I understand that. You just got into these programs, but as you understand the volumes in these units change constantly, so it’s kind of - how to keep the aggregate number? Very good, thank you very much. That’s all I have.

Thanks Jim.

We have a question from John Franzreb from Sidoti & Co.

Guys, could you talk a little bit about the Machine Clothing revenue mix, where would you expect to see it a year from now? You mentioned about 75% of your sales are in the growth markets, which I assume is packing and tissue, could you just kind of forecast how you see that playing out?

Yeah, I think, rather than give you precise number for next year, if we, if you think in terms of broad trends that 25%, which is publication grade that’s part of a structural decline driven by digital displacement, that’s heading down 4% to 6% per year no matter what and sometimes it’s lumpy as we saw last year. The interesting question about that decline is, does it level off at some point, is there some tail in the publication grade industry where there is a kind of a steady state capacity to supply limited amounts of publication papers and it’s hard to gauge where that is, but what we can say, just with mathematical certainty is with every step down in the market, our exposure to that market declines and when you are down to 20%, 15% of sales even a big drop in that 15% has a small effect on our revenue and on our income. So, we are slowly, but inexorably moving to the zone where big drops in the publication markets will have diminishing effect on us, there is an asymptotic effect there. If you look on the other side, the 75%, which are growth grades, that growth is almost completely a function of GNP. So the 25% is going to head down no matter what, the 75% is only going to grow when there is healthy GNP around the world. So one of the challenges over the past couple of years is we’ve seen these step-downs in publication and we haven’t had economic juice to drive the growth grades and that’s why we’ve been relying more on cost reduction of various sorts to offset the publication declines. At some point, that’s got to switch over. In the long term, we need the growth grades to pick up to 1% to 2% to 2.5% GNP driven growth while that 25% shrinks to 15%.

Joe, wasn’t there a time when you thought that growth in developing markets will limit some of the degradation that you saw in the publication grades?

Yes.

What happened to that?

Well, it’s exactly what I just described particularly if you take key markets like China, Indonesia, the Brazil, Vietnam, Southeast Asia, all of South America as those economies GNP revise, then sales and the growth grades are going to accelerate. But if they remain in the bull drums and again if you think of this as linked to oil prices, so many of those economies are commodity driven and oil prices get depressed, their economies get depressed, you just don’t have economic juice to drive the top line on that 75%. As that returns, then we should come back to the point where 2% to 3% growth in that 75% more than offset 75% going to 80%, going to 85% more than offset to 5% to 7% decline in the publication grades.

Got it.

So where is that economic activity? Look at Brazil, look at China.

Okay. Sticking with I guess a blend of both segments here, could you provide an update on new product development outside of aerospace R&D spend? I know you have a couple resizable opportunities outside A&D. You mentioned one in the press release, can you just provide some more color on what you see going on there?

On the automotive side, we are continuing our probe. We’ve been working with two OEMs at the very high end of the automotive market and we’ve now – those opportunities have now matured to a point where we have to make a bet and start spending real money. And so we’ve decided to go with one of those two which is a much bigger array of opportunities with a substantially larger OEM. And so we are taking a hard run at that this year and it will be development of genuinely crash worthy structures, it goes front of the cars. And so that probe is continuing and now that is not – that is in our minds, a next generation family of growth opportunities. So that is not – we haven’t tracked anything into, anything in the way of revenue from that probe into our estimate, a potential for $450 billion in revenue in 2020. There is a second probe that we haven’t really talked about is part of – came with part of the acquisition that our Salt Lake City colleagues have been working on which is, as they make parts they make frac plugs for the oil and gas industry and this isn’t the best time in the world to talk about the oil and gas industry, but those are interesting parts. They are basically consumable parts have to be replaced and so they have been exploring that market and have learned a lot in that process, the parts are good, the challenge is how you distribute parts into the field in a highly fragmented industry like that. Few years ago, when we did the diversification study, analysis of possible application to outside aerospace, that lead us to the automotive market. We concluded that the second most compelling application was down-hole drilling. So we will continue to probe both, but it really is important to think of them as probes, I mean this is like you get in there, explore and then learn and what you learn may lead you to conclude, yeah, keep going, or it may lead you to conclude wrong model, let’s back-off. So neither of those is going to have any material way in the [indiscernible].

Fine. That’s fair enough. And then the tissue?

The next platform that we’ve been investing in machine clothing side, it really is – I guess the simplest way to describe it is it really is a composite structure where we’re applying and exploring the application of composite structures to the production of these belts that we make for the paper and related industries. And what we’ve so far found, we’ve really went into it looking to see if we could come up with an inherently lower cost way of making these belts, but our first – but most encouraging set of applications so far is that we are finding that when we make instead of traditional woven structures, we make these composite structures for the tissue industry that it is allowing our customers to make differentiated tissue. So tissue and towel for example is softer or bulkier. And so, it wasn’t the outcome that we were expecting going into this, but the first wave of applications are very encouraging, is really to apply these belts to customers in the tissue and towel market that creates performance advantages for the customer.

Okay. And may be just one for John. Can you just talk about your repatriating cash, where are on the process, where do you kind of see that playing out?

Yeah, John, as you know, we’ve been doing that over the past few years and we will continue to do that. The machine clothing business generates a lot of cash, generates it in various countries. So I don’t think there is really any major change to the plan. We will keep looking at those pockets where the cash gets generated and try to – we try to average $20 million to $30 million a year of repatriated cash. Again, the key objective there is to minimize the cash tax cost of doing that. So that’s an ongoing plan that we are continuing into this year and forward.

How much was repatriated in the first quarter?

Well, the actual cash that we used to pay down the debt was money that was part of a $20 million repatriation that came back at the end of – in December, at the end of 2015. So we didn’t do any actual repatriations in the first quarter, we used cash that it come back right at the end of the year.

Got it, got it. Okay, guys, I will actually get back into queue.

Okay, thanks, John.

And there are no further questions in queue at this time. I will turn it back over to you.

Thank you, everyone, for participating and for the questions. And we will be out there in a variety of conference and visiting as many of as possible over the next couple of months and if we don’t talk to then, we will talk to you on our next earnings call. Thanks. Thanks a lot for participating. Bye.