Ladies and gentlemen, thank you for standing by, and welcome to the Third 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, November 1, 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 Q3 2016 call. As usual, I'll start with a summary of the quarter and John will follow with more details, I'll then review our outlook and we'll close with Q&A. In Q3 2016, we continued on the trajectory of the last several quarters, Machine Clothing again generated strong income, AEC again generated strong sales, and both businesses remained firmly on track toward their full year and longer-term objectives. I'll start as always with Machine Clothing, which was up against a strong comp in Q3, 2015. Unlike last year, Q3 this year exhibited the normal seasonal pattern of weakness in the two summer months, followed by a strong finish to the quarter. As a result, compared to Q3 2015, sales declined 7%, and were down on a year-over-year basis in virtually every region and grade. However, on a sequential basis in comparison to the prior to three quarters, sales were essentially flat in every region and grade except for publication in Europe and Asia, which declined substantially on both the year-over-year and a sequential basis. New product performance in Q3 across all of our product lines was especially strong, with the new technology platform having a significant impact on our competitive position on new machines in the tissue and nonwoven grades. In fact in the Americas, precisely because of the new product performance the tissue and nonwoven grades now account for 26% of sales compared to 20% in publication. In Europe and Asia, where market growth and the packaging grades is more significant long-term factor than growth in the tissue grades, new product performance helped drive our sales and packaging to 37% of total Eurasian sales compared to 30% in publication. Machine Clothing profitability followed the same pattern of sales. Compared to the…

Thank you, Joe. I would like to refer you to our Q3 financial performance slides. Starting with slide three, Net Sales by Segment, total company net sales in Q3 increased 7%. Currency affects compared to Q3 2015 were minimal. MC net sales were down approximately 7% compared to a strong Q3 last year, while AEC net sales increased by almost $24 million as the new acquisition added just over $20 million to third quarter sales. Turning to slide four, total company gross margin was 37.9% in Q3, lower than the 42.4% margin in Q3 2015, but now reflecting the change in the business mix due to the Aerostructures acquisition. MC gross profit margin in Q3 was relatively consistent with the last three quarters, at 47.5% of sales, compared to a strong 48.4% in Q3, 2015. AEC gross profit was $4.6 million in Q3 2016, with the acquisition adding about $1.7 million. Moving to slide five, Earnings Per Share, we reported net income attributable to the company in Q3 of $0.41 per share compared to $0.30 per share on Q3 of last year. Adjustments for restructuring and tax items in Q3 were minimal, and there were no additional acquisition expenses in the quarter. Q3 2015 net income attributable to the company was reduced $0.12 for tax items, and $0.07 for restructuring. Excluding those two items and a $0.02 gain from foreign currency evaluation, net income attributable to the company was $0.47 per share in Q3, 2015. Slide six and seven show net income and adjusted EBITDA by segment for the quarter, and year-to-date. Adjusted EBITDA in Q3 2016 was $42.7 million, compared to $42 million in Q3 last year. MC adjusted EBITDA was $48.9 million in the quarter, compared to $53.3 million in Q3 last year. On a year-to-date basis, as shown on slide seven, MC adjusted EBITDA was $148 million through September, slightly below the $150.4 million last year, but we're on track to meet the upper end of our expected range of performance. AEC adjusted EBITDA improved to $3.7 million in the quarter, compared to a loss of $1.2 million in Q3 last year. The acquired business added $3 million to adjusted EBITDA in the quarter. Lastly, slide eight shows our total debt and net debt. While total debt increased just over $5 million, cash and cash equivalents increased about $20 million during the quarter. As a result, net debt decreased almost $15 million, to $295.6 million as of the end of September. Capital expenditures were about $23 million in the quarter, and approximately $54 million through September. We expect a similar amount of capital expenditures in Q4, bringing the full year spending to $75 million to $80 million. That was lower than our previous estimate as certain AEC projects are now expected to be incurred in 2017. Now, I'd like to turn it back to Joe for some additional comments before we go to Q&A.

Thanks, John. Turning to our outlook for Q4, for Machine Clothing, given current market trends and our solid Q3 performance, we continue to expect full-year adjusted EBITDA to be at that upper end of our $180 million to $195 million range. The primary risk factor for Machine Clothing and for our ability to maintain performance within this range for the foreseeable future continues to be global macroeconomic conditions. As for AEC, we expect a strong end to the year driven by sequential growth in LEAP, coupled with steady sequential sales in the rest of the segment. There is some uncertainty associated with end-of-the-year inventory affects. Q4 sales might not be quite as strong as we expect if our customers, particularly Safran delay in pulling finished goods from inventory. Apart from this short-term timing risk, the primary risk factor for AEC for the foreseeable future continues to be our own execution, especially in our efforts to integrate our new division, and to bring it and all of our ramping programs up to expected levels of operational excellence. In sum, this was another good quarter for Albany, with both businesses remaining firmly on track toward their full-year 2016 and longer term strategic and financial performance objectives. And with that, let's see if you have any questions for us. Caroline?

All right, I'll give instructions. [Operator Instructions] And we'll go to the line of John Franzreb with Sidoti & Co. Please go ahead.

Good morning, Joe and John.

Good morning, John.

Actually, Joe, I want to start off with your last comment about the inventory drawdown timing with Safran. Could you just give us a little color as why you're a little bit cautious about the timing of that, and when it begins, how that works out, plays out?

For the demand, both near and long-term is there, but as can happen that as sometimes happens with any company if they're trying to make their year-end numbers, you might see delays in pulling products out of inventory, and which for us in this case represents shipments. It's not something we have any reason to expect, but it's just important to note. You can always get some of those end-of-the-year delays.

Okay. So it's not a function of other suppliers not being able to meet timing of…

No.

Okay.

No, this, we're feeling -- right now all the pressure continues to be ramp, ramp, ramp, produce, produce, produce.

Okay. And when you think about the new combined aerospace unit, you said that there was some integration costs in the quarter. Could you just talk about what your incurring costs, and how long that's going to play out?

Yes, we had said $1 million to $2 million of cost in the second half of this year. And it's now looking like $1 million to $2 million of cost spread through Q1. So we have 400 or so thousand in Q3. I think it's reasonable to expect somewhat higher costs, but not wildly higher, in Q4 and in Q1. The go-live for our ERP system into Salt Lake is scheduled for February. So there'll be some -- there's intense integration activity going on right now. So I think it's slightly higher run rate for the next two quarters.

Okay. And switching to MC, the growth in tissue and nonwoven in the quarter, it seems like you're kind of enthusiastic about that. Can you just provide a little bit more color on how you're getting such a good hit rate?

Yes, we are enthusiastic because it's an important part of our long-term strategy to make the conversion from a publication-centric industry to a packaging, tissue, pulp, and nonwoven-centric industry, and as you know, our whole strategy is to make that conversion while trying to preserve EBITDA in that normal range we always talk about. What's significant about tissue and nonwovens is they are not only incrementally growing segments, but they really are the primary segments in the paper industry where you can still clearly differentiate, and where the customers are still actively trying to differentiate their products from their competition, softer, more absorbent tissue and towel is still a big deal. So we can make belts that enable the customer to deliver differentiated tissue and towel, then they're willing to pay a premium to us. So there's a combination of this is one of the key growth segments, and it's the growth segment where, since the customers are still differentiating, we can still differentiate clearly. And so technology plays a big role there. And so it's an important segment for us. And yes, we are excited about what's going on there. And it is being driven by new products and our new technology platform.

Got it. And the gross margin profile stabilized in MC and the lack of any sizable restructuring costs in the quarter. Should I infer that you're kind of satisfied with the footprint of the company, at least on the MC side? And do you kind of have a supply/demand or production/demand equilibrium?

We're never satisfied, John. And this industry is not yet -- if you go back 10 years and you look at how our business has, and the industry we're serving has changed, our sales in the overall market is down about 30% as publication melted away. And our EBITDA is up, over that period, is up 10%. And that's just a continuous process of both big change, big restricting, and continuous improvements constantly. And this journey through the melting publication market to the stable GNP-driven other grades, it's not over yet. It's still 20%-25% of our overall sales. So we will continue to face pressure to continuously improve in order to maintain our margin. And sometimes those will be big hunks, and often they will be invisible to you, but not to the teams working on this.

Okay, fair enough. I'll get back into queue. Thank you.

Thanks, John.

[Operator Instructions] We have a follow-up from John Franzreb. Please go ahead.

Okay. John, could you talk a little bit about the deferred capital expenditures in AEC, what's that all about? Just a new plan to the timing of that or a little bit more color would be helpful there.

Yes, John, it's really just related to timing. So it's related to the capitalization of the lead plans. And it's just related to the timing of the equipment as it goes into those plants. So there's a lot of orders that are in place. And basically everything there is still on schedule, but the actual cash disbursements that coincide with the delivery of the equipment, some of that has pushed into 2017 compared to the original plan. So it's really just a shifting of the dollars from one year to the next.

Okay. So we're going to have a spike in spending in '17, and then it's going to kind of drift down again in '18, is that how it plays out?

Yes, I mean, we'll give a better estimate of what that number will be for '17 probably in our next release as we go through our year-end planning now, but yes, I think right now, preliminarily, I would think there'll be a spike next year, and then it'll start to tail off after that.

We're still thinking of total CapEx for the company steady state with -- after the acquisition of about $80 million a year average. And it spikes entirely because of LEAP, and so next year or the year after will be the peak investment years for LEAP. Interestingly enough, the other ramps we have are really spread out in sequence. So in the new division, the 787 ramp fuselage frames is between now and '18-'19. The JSF ramp doesn't really pick up until '18. And then the -- '17 –'18. And the CH-53K ramp doesn't begin till later in the decade. So those are nicely paced out, and we should be able to therefore maintain smoother capital spending. But the real spike is because of this very unusual ramp in LEAP.

Okay. And for my part, I just [indiscernible] post Harris that the R&D spend would be higher than it is, and certainly higher than it's recorded right now. We are looking at a steady state kind of a number around $10 million, or does that change as other projects start to materialize, can you just kind of…

Yes, that will -- I think you are thinking about it the right way. That will be opportunity-driven. So, as new major opportunities come along, we could see growth in R&Ds. We should see growth in R&D spend. I will just give you the two obvious examples. If the work we are doing on automotive translates into an actual contract on an actual platform, there is going to be a ramp up in R&D spending, which then turns into development expense. Likewise, if Boeing decides to go middle of the market, there is going to be an increase in R&D spends on that side assuming CFM is selected as the engine supplier. So this is what we are seeing now there will be -- if you adjust that for inflation, given the existing portfolio of opportunities, this is a pretty good number; maybe it creeps up a little bit, but then as major opportunities come along, we will increase R&D accordingly.

Okay, Joe. So, how much of your R&D spend actually goes into the automotive venture, and can you just kind of give us an update on where that stands relative to your expectation, say, six months ago?

I wish I could tell you more, but we are constrained and that we can't talk about the people we are working with, but I would say, we are at least as perhaps more encouraged today than we were six months ago. We are continuing to make good progress, and we haven't seen anything yet to say to us that this isn't an important area of opportunity for next wave of growth. The uncertainty is still the exact timing. And are we or are we not going to be able to get on a new platform in time to generate sales this decade, I mean, that's really the question, but we are encouraged. We haven't really disclosed how much of our R&D spend is going to the automotive, but I think at this point we just assume not go there.

Okay. One last question, could you talk a little bit about major contracts in the Machine Clothing side of the business? What the pricing environment is? How the landscape looks, especially in light of the fact that the publication grades I am assuming, is pressuring everybody, how about some color there, that would be great?

Pricing has been stable. If you look over -- when we look at our data over the course of the year, we are seeing stable pricing. The longer term, the competitive environment hasn't really changed. With the same players chasing the same market, we do feel like our investment in technology and in new product is helping offset what would otherwise be downward pricing pressure. The reason we keep emphasizing that the primary risk factor in this business is global macroeconomic conditions is that if and when developing economies begin to accelerate again, I am thinking Brazil, China, rest of the Asia, then that takes some of the pressure off and some of the risk off the downward pricing pressure, because there is just more demand out there for the industry, and there is more opportunity available for our customer. So, they are feeling less pressure. So, our competitors are feeling less pressure. So, we are feeling less pressure. So that's still in our minds the variable to watch if we -- if Brazil doesn't start coming around, China doesn't start accelerating, if U.S. GNP stays relatively anemic, then there is always pressure on our customers, and therefore there is always pressure on us. So far we've been able to withstand that pretty well. There is no new contract coming up that opens the window to potential instability there right now.

Okay. Perfect. Thank you for taking my question, guys.

Thanks, John.

And next we'll go to the line of Anthony Young with Macquarie Securities. Please go ahead.

Hey, guys. Thanks for taking the questions.

Hey, Anthony.

Just sort of on the macro side of things, first on the automotive opportunity; has having the 2D, or the standard laminate technology helped you guys out in any way in this market, or are you still focused on the 3D for the automotive?

For the automotive, our primary focus right now is 3D, because the play here is lightweight impact resistance, and that's the -- if you go back to the example of a bird hitting a fan blade, and what makes our technology uniquely suitable for the fan blades is the size of the ones that are on the LEAP engine. It is because of their interlocked structure they're able to withstand the impact of a bird's strike or out-of-plane load. It's that logic that applies to the applications we're going after in the automotive industry, I think crash-worthy structures, you need a composite -- what gives us reason to believe we can break into this market is composite capability that can withstand an out-of-plane load with the impact resistance of the metal at 20%-30%-40% lower weight. That's exactly the play. So, it's very much a 3D play.

Okay.

May be that as we break in, we'll find that there're complimentary parts, or we can make more complex assemblies that combine 3D and 2D, but the entry way in is 3D.

Okay. And then with respect to the ramp up in some of the other programs; you guys have Joint Strike Fighter and the 787, can Salt Lake handle all of that, or there will be a requirement for another facility?

Salt Lake can handle all of that and then some.

Okay.

And so, we'll -- if our new business development activities or as our new business development activities play out the way we expect them to play out, we'll have to add some capacity, but it's more likely to be capacity and low cost markets like our third plant in Mexico for LEAP than it would be adding new capacity in some of our existing plants in North America.

Okay. Okay. And then just one last one, obviously, Boeing has been pushing back on suppliers for margin and price. Obviously, the 3D contract that you have with Safran and GE is for fixed margin. Are you getting any pushback on any of your other programs that are out there? Again, I guess more on the lines of the 787 and anything else that you might have with Boeing? I guess the GE9X, that engine comes along. Are you seeing any pushback as far as what margins may look like going forward?

Yes. Let me try to answer that broadly, although just a point of clarification. The LEAP contract is a variable margin contract. As we hit our targets, our margins go up; as we miss our targets, our margins goes down, there is a minimum there, but -- so it's not fixed margin, but in general, what you're describing, the pressure coming from the OEMs like Boeing's Partnering for Success program is part of a industry-wide shift and it's really a cyclical shift after 10, 15 years of emphasis on new platform development. Air framers and engine manufacturers, commercial and defense, as those platforms come into service, there is now a cyclical industry-wide shift to emphasizing return on investment. And for the OEMs that means not only internal cost cutting, but also putting pressure on the supply chain as Boeing has famously done. Now, the way it typically manifests itself is that the OEMs will ensure that there are two suppliers for every part and then try to level one supplier against the other and the more pressure the OEMs are feeling or they'll try to extract some margin from the supply chain. Now that actually if you are good at operations, if you're good at classic Lean Six Sigma manufacturing, this effort by the OEMs to get out cost and to often outsource parts that they had been making internally, outsourced them in a competitive bidding process. If you are good at Lean Six Sigma, this can actually work to your advantage, and that is really one of the reasons we put so much emphasis on operational execution, operational execution, operational execution, because we see this shift to return on investment by the OEMs as an area of opportunity for us to pick up more business. And that example I gave, I wish I could have -- I wish I could mention the customer, but we're under confidentiality agreement. That example we site in the earnings release and I mentioned today about this new business, $15 million to $20 million of revenue per year by 2020, that's a perfect example of that. That was an OEM that was making a part in-house that in the effort to maximize return on investment they put it out to bid, and given what they saw and our ability to manufacture high quality and good delivery, and given our confidence and our ability to do so at highly competitive cost, we won that contract. It was an open bidding. And as long as you are smart about not bidding yourself into contracts that you can't perform on, which is something we have done in the past in our legacy programs, this sea [ph] change in the industry is actually an area we think of it more as opportunity than as risk.

Okay. I mean, I wouldn't build any of this into the model or anything, but I mean, do you think that $20 million sort of contract that you won, I mean, are there ones and twos of those per year, or do you think it's a bigger opportunity than that?

I think ones and twos per year in the fleet of $15 million range is probably a good way of thinking about it.

Okay.

In terms of the opportunity, but that adds up after a while.

Absolutely, absolutely. Thank you for taking the questions.

And there are no further questions at this time. Please continue.

Okay. Well, thank you everyone for joining in the call and we'll as always look forward to connecting with all of you in between calls in our non-deal road shows, and if we don't talk to you, we'll talk to you next quarter. Thank you.

Ladies and gentlemen, a replay of this conference call will be available at the Albany International Web site 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.