Ladies and gentlemen, thank you for standing by. Welcome to the Second 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 section. Instructions will be given at that time. Please note, Albany International, has added an additional feature for the question-and-answer session. Webcast attendees will now have the ability to submit questions online during the call. At the request of Albany International, this conference call on Wednesday, August 02, 2017 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, Sir.

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. I would like to add some additional details around the new webcast Q&A feature. Webcast participants should see the Ask Questions box at the top of your screen. I would encourage you all to take advantage of this feature as we hope that it provides another avenue to get your questions answered. Please note that it is important for you to identify yourself when logging in so that we can refer to you accurately on the call. Now I'll 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 Q2 2017 earnings call. As always, I'll start with an overview of the quarter, John will then go into more detail and I'll follow with our outlook. I'll also add a few comments about my retirement plans and the succession process that we announced last night and then we'll go to Q&A. Aside from the charge associated with those projected future losses on the BR 725 and A380 programs, which we described in an earlier release, Q2 was another strong quarter for Albany International. Machine Clothing again generated stable sales and strong income, while AEC grew sharply and took another incremental step toward improved profitability. Both businesses are now trending a little ahead of our expectations for the full year and remain firmly untracked with their longer-term objectives. Turning first Machine Clothing, Q2 sales were again stable, slightly ahead of the preceding three quarters and slightly behind the strong Q2 2016. The market trends in recent quarters continued. Publication sales again declined on a year-over-year basis, this time by nearly 8% and once again the decline was almost completely offset by incremental growth in packaging and tissue and this pattern held in every major geographic region. Meanwhile pricing with stable across all regions. New product development and performance were again very strong, particularly in tissue, packaging and nonwovens and gross profit margin improved slightly above Machine Clothing's already exceptional levels due to business-wide continuous improvement efforts. As for AEC, Q2 sales grew by 27% compared to Q2 2016, which included virtually a full quarter of Salt Lake City sales. This year-over-year growth was driven primarily by leap and secondarily by the F35 and Boeing fuselage frames programs. Each of AEC's key growth and legacy programs performed well in Q2 with good execution…

Thank you, Joe. I'd like to refer you to our Q2 financial performance slides. Starting with Slide 3, net sales by segment; total company net sales in Q2 increased 6.1% compared to Q2 2016. MC net sales in Q2 excluding currency effects were down 1% compared to Q2 last year as declines in publication grades were mostly offset by increases in other grades. AEC net sales in Q2 increased by just over 27% with the increase primarily due to the growth in LEAP. Turning to Slide 4, total company gross margin as a percentage of net sales was 29.2% in Q2 compared to 38.5% in Q2 2016. The lower gross margin percent reflects an impact of 7.3% related to the $15.8 million AEC charge discussed in the release. The lower margin percent also reflects the change in the business mix due to higher AEC sales, a trend that we expect to continue. MC gross profit margin in Q2 continue to stay strong at 48.3% net sales, compared to 47.6% of net sales in Q2 2016. Slides 5 and 6 show net income and adjusted EBITDA by segment for the quarter and year-to-date. As a reminder, the 2017 total company and AEC adjusted EBITDA results include the $15.8 million AEC charge in the quarter. Adjusted EBITDA for the total company in Q2 2017 was $30.6 million compared to $46.6 million in Q2 2016. On a year-to-date basis, through June 2017 adjusted EBITDA for the total company was $74.1 million compared to $87.9 million in 2016. The decline in adjusted EBITDA for both periods was mainly due to the AEC charge as MC adjusted EBITDA stayed strong and with slightly time last year and AEC EBITDA excluding the charge has shown incremental improvement with the growth in sales. Moving to Slide 7,…

Thanks John. Turning to our outlook, in Machine Clothing because of seasonal effects, the second half of the year tends to be weaker than the first half. Year-over-year basis given Machine Clothing's strong competitive performance, stable market conditions and a good order backlog, we think it's reasonable to expect continued stable performance in the second half of the year, again that's on a year-over-year basis. Last quarter we reported that Machine Clothing was on track toward full year 2017 adjusted EBITDA in the middle of our expected range of $180 million to $195 million. With Machine Clothing's strong first half performance and encouraging outlook for the second half, full year 2017 adjusted EBITDA now appears more likely to be in the upper half of that range. As for AEC, we had previously stated that we were looking for full-year 2017 revenue to grow by 25% to 35% compared to full year 2016, coupled with gradually improving adjusted EBITDA as a percent of sales. We now expect full year 2017 growth to be at the high end of that range and for the trend of incremental sequential improvements in adjusted EBITDA as a percent of sales to continue through the second half of the year. One last comment before we turn to Q&A and this one on a more personal note, it's always been my intention to retire at 65 and I'll be 65 next April. By then I'll have served in the Albany Board for 22 years and as Albany CEO for 12 of those years. The Board is known for quite a few years about my desire to retire at the normal retirement age and has planned accordingly. Late last year, it established a Search Committee, which developed a profile for my successor and then after a competitive process,…

[Operator instructions] Our first question will come from the line of John Franzreb. Your line is open.

Good morning, John.

Good morning, guys. Joe congrats and good luck. I am glad to hear that you're sticking around for a little while though.

Thank you, John. I am sticking around to make sure this works, as I tried to suggest in the comments. I've got a lot -- I had a lot of personal stake in this.

My first question actually I want to expect a little bit to the two program write-downs, could you discuss what happened there in some detail and in addition, looking back at some of the other programs, are any of them running behind plans relative to your expectations, I don't know, a year ago?

Okay. So, let's take the two, the BR 725 and A380, in the world of program accounting, when you have a fixed price contract, you have to regularly model the estimated profit of completion of the contract. So technically, these contract blocks let's say you've won a position on a program like the F35, your contract progresses in blocks of two or three years and so you do this sort of calculation over that known contract block. In the case of BR 725 that contract which we discussed in the past is really for the life of the program, so at a much longer block of time. The A380 is a relatively long block, it extends into early next decade and what you have to do basically each quarter is you have to model future estimated sales for the program, future estimated cost and cost trends and based on that modeling, you calculate your future profitability. If in that exercise, your modeling shows that the program is in a loss position for the life of the contract, so the total profits are a loss for the life of the contract, you need to take a charge associated with all those future projected losses in the current period and that's what happened with both of these programs. What's changed is that for both programs coincidentally our estimates of future sales dropped dramatically because it now looks like the BR 725 has a shorter life, significantly shorter life than we had been anticipating and A380 has been some very well-publicized reductions in projected production because the system demands are weak. So, we have to redo our models with these lower sales forecast and that pushed both programs into a loss position, which led to the charge. With BR 725, we had been…

Got it. Perfect. And is there any lessons learnt here that just list of operating in the aerospace and defense market?

Yeah, there is big lesson learned which we really have tried to apply to every new contract negotiated since we learned -- the lesson we learned on BR 725 is you can't -- when you sign a fixed price contract, you better be prepared to live with it. And so, if you're signing a contract for a program that is early in its life where the requirements are still not well defined and your capabilities relative to those requirements are still not proven, you need to build in large conservativism. For those uncertainties, you need to have possibility of escalation for inflation and you can't be -- you can't go chasing new contracts for the sake of new contract unless you really are confident about your cost estimates and your understanding of the customer's requirements and we've really tried to apply that rigorously in every new contract we've taken on. The A380 was one we inherited with Salt Lake. We knew right out of the box that that was a troubled -- that that was going to be a troubled contract. We actually did make some opening balance sheet adjustments to write-off what we felt was impaired -- some impaired inventory and we felt this was a breakeven program that that was assuming better outlook for A380. So yes, it's some ways it's fortuities that we got hit with BR 725 early in the history of AEC because it's had a dramatic effect on how we think about -- how we think about contracts and contract negotiations and we love getting RFPs on good platforms, but we're always trying to apply discipline and lessons learned from BR. And in fact, on -- when we looked at acquisitions and when we ultimately settled went hard after Salt Lake, it was because as from what we could see of most important growth in legacy contracts that they had won, the market demand was robust and the cost estimations were relatively reasonable. It was in the front of our brands.

Got it. Now on a more positive note, you've talked well how you see revenue growth in 2017 is going to be at the high end of 25% to 35% range. From what I recall though, that range was kind of a two-year outlook and you haven’t applied anything on 2018. Are we borrowing some revenue from 2018 into 2017 or is that growth sustainable into 2018 based on the rollout of those three contributing programs that you decided earlier?

No borrowing. This is nothing to do with borrowing 2018. So, the only way that our estimates for '18 could go down a little bit is because the base that we're calculating from is going up higher than we thought, but basically we see '18 as another very strong growth year and we haven't seen anything to move off of what we were estimating before.

Got it. And one last question, I'll get back in the queue, the increase in your EBITDA expectations for PMC, is that a function of the publication degradation slowing, the packaging growth exceeding with you may be modeling in the second half or is it your own internal cost takeout? Can you walk us through why you're comfortable at the hiring end versus the middle of the range previously?

Yeah, I think that's an important question John and it's not -- the publication grades are going to -- there is no reason to think they're not going to continue to decline at the kind of rate that we've been seeing but as we've been talking about for several quarters now, it's a small enough percentage of our total sales that the impact is shrinking. I think the longer the reasons that we're inching our expectation for the second half of year forward is just we're seeing reasonable economic activity around the world right now and particularly for packaging and secondarily for tissue, but particularly for packaging, that is so tightly tied to economic activity. And if you look in Asia and when we look at our Bellwether, let's take International Paper in the U.S. and take Nine Dragons in Asia and Nine Dragons is building once again building new paper machines. International Paper is performing very well and a lot of their analysts are starting to talk about the impact of Amazon-type shipments on incremental sales for International Paper. So, it's decent economic activity in North America stabilizing in South America, Europe having decent economic activity, Asia having decent economic activity. All of those translate into incremental demand and roles, which makes us reasonably confident that we should be able to continue to offset those step-downs in publication. Likewise, if you see incremental increases in demand, so reasonably healthy GNP around the world, it tends to be less price pressure because this is more demand to go around. So, it's much more macroeconomic that we're seeing, coupled with good performance in the first half that leads to this incremental bump up in our outlook.

Okay. I'll get back into queue. Maybe some of those web questions coming through.

Okay. Thanks John.

[Operator instructions] And our next question will come from the line of [Mark Guzmazkey]. Your line is open.

Good morning, guys. I guess James, he doesn’t roll right off the tongue.

Good morning, Mark.

Good morning. Hey Joe, first off congrats on your announcement. I guess I am not surprised since you've always done what you said, which has been very beneficial to us as shareholders over the last eight years as I've been a shareholder -- we've been a shareholder. And I must say probably one of the most forthright few years I've worked with, so which leads me kind of to the question at hand, which is around your replacement, I just want to pick your brain in terms of the skills that you think the next CEO is going to need? Obviously, a strong understanding of the manufacturing process has got to be important I imagine given what lies ahead for you guys, but also curious as to what type of exposure this individuals had in the past. You have two different businesses. There are some similarities, but the end markets that they're serving is so different, I am curious what the -- what you and the Board are thinking at this point in time?

Well, the Board has spent a lot of time arguing about, thinking about the profile for my successor and very explicitly linking it to what our strategy is and what it's likely to be going forward and so the way they think about it is number one. As would any Board doing a search, they want somebody with strong leadership skills and very close to -- and by the top of that list is high integrity and then but when you get off the generic leadership skills to specific link to our strategy and our strategic options going forward, not is going to surprise you. It's somebody who's going to be able to; A, help Machine Clothing maintain and extend its leadership for the long-haul and its capability of good performance. B, make sure we execute on the current AEC growth trajectory and C, and probably the most challenging and most critical to this, to define and then execute the next wave of growth. And finally, to be able to lead the company in those three fronts; preserve, extend the life of Machine Clothing, execute on the existing ramp, lay the foundation for the next wave of growth, do it in a way that clearly serves the long-term interest of the shareholders and that is communicated to the shareholders in a clear concise fashion. So that's how -- that's their search profile. Now how that translates to particular candidates I don't want to get specifically into particular candidates other than to say clearly it has to be somebody with a strong industrial background. Clearly, they'll be strong candidates from the aerospace industry. I think the Board doesn't want to overly constrain the pool and say only aerospace people, but so it'll almost surely include people beyond the aerospace industry, but it'll be a mix.

Okay. I extremely appreciate that. And maybe just one kind of operational question, in terms of AEC incremental margins, has that changed at all? We've got, you've walked everyone through the incrementals and how we step up, but any change to that?

No, we're feeling pretty good about the March 2, 18% to 20% and for the reasons that I've talked about before, if we just manage SG&A correctly and the SG&A leverage will get us most of the way there, but there is also plenty of opportunity to improve our gross margins.

Okay. Okay. All right. Joe, again congrats and thanks.

Thanks Mark.

Thank you. And at this time there are no further questions coming from the phone line.

Okay. We do have a few questions on the webcast. We have a couple questions from Tim Todaro at Rice Hall, the first question being the split in the charge between BR 725 and A380 program, which I can provide the BR charges is $10.1 million and the A380 charges was $5.7 million. And Tim's second question is to discuss more the organic growth that core AEC and the growth at the acquired AEC business in Salt Lake City and the respective margins.

Tim, thanks for the question and really appreciate your weighing in here. Let me try to answer the organic growth question this way. If you array the buckets of organic growth opportunities from largest to smallest from what we see today, I think it goes something like this. LEAP number one, CH, so that would be by terms of your question, that would be core AEC. CH53-K number two. Probably the new middle of market opportunity as it lies given that there is both opportunity in airframe and engine number three. Number four, F-35 both the airframe parts and also the LiftFan parts, so that's both Salt Lake, Airframe and LiftFan's legacy. Number five so LEAP, CH53-K, new middle of market F-35; there is really a cluster of other engine parts for other growing engines that would be the one like the GE9X and another one that we won or that we're active bidding on. Number six figure the 787 fuselage frames. Number seven, Lockheed missile bodies, number eight, a cluster of opportunities in military and space aero structures; number nine, the waste tanks, which would be Salt Lake and number 10, our activities in diversification. And so, from largest to smallest, those are the general categories that we're currently looking at and if you push it one step further, there is still additional growth potential on almost all of them beyond what we've projected to 2020. So, LEAP like I mentioned there is still more demand, CH53-K we haven't really built in the potential for foreign sales, which could be significant in the middle of market is all upside. F-35, we haven't really talked at all about the impact of spares. Once that fleet is flying, there is a significant demand for spare parts. Number five, other engine parts,…

We also have a question from Roger Rama at Cortina Asset Management; could there be further write-downs on BR 725 and A380?

Well in theory, there could be. But we've taken the sale projections way down in those programs and we've taken pretty, pretty large reserves against future losses. So, it has to be something else unexpected, some clear error that we've made in our estimates of our cost burned down on each of those programs, but we call that a very high risk.

Okay. We have no further questions on the webcast. Operator, we would like to go back to the call line for any questions.

Okay. We do have a question coming from the line of Gautam Khanna.

Thank you. Yes, thank you. I was wondering if you could talk a little bit about where the big opportunities are for cost production on the LEAP engine within your manufacturing process. I know you have a big learning curve over the next five years. I just wanted to see if it's material, is it with some internal debottlenecking. Where do you see the biggest buckets of opportunity?

Thanks for the question. It really at this point with the ramp that we're looking at, it is classic, its two bucket, it's classic learning curves efficiencies, which would affect labor efficiency and potentially material efficiency. So direct labor material consumption and then just given the very sharp increases in volume is fixed cost leverage. So, it's exactly what you'd expect for a learning curve this deep.

And to that point, is there -- can you break out buckets of cost by the relative contribution today, is it mostly material, is it mostly labor, any proportion would be helpful?

Well we tend not to break those out but we certainly do internally and we do with our customer, but I think if you view material as on the order of 25% to 30% of your -- if first approximation you and one third material, one labor, one third overhead, you're not far off, but that's a rough swag, but that's probably a pretty good way to think about this and really a lot of composites. Material is a component of cost and composites.

And within materials, how much -- like where do you think that by the flight goes from where it is now? Do you think it's a 50% reduction over the next four or five years? Any sense for that.

Yeah, you're going beyond what we've disclosing and can disclose. It's certainly something we actively work with very close concert with our customer, but I think the best I can give you is that those learning curve efficiencies apply in all three categories and are very much in the front of our brains as we map out and express with confidence this journey from 10%, little over 10% adjusted EBITDA as a percent of sales to 18% to 20% by 2020. That's a big part of our story right in LEAP in the way you're thinking about it.

Thank a lot guys.

Thank you.

Thank you. And we have a follow-up question from John Franzreb.

Hey John.

Yeah, can you just talk a little bit about the CapEx spending next year and when you'll be through with this process and how the facility tooling and how that's working out right now?

What we've said is the two peak years for cash expenditures CapEx are this year and next year and that's the actual payments for capital expenditures. So, the leading indicator that we see and that is what new projects are we approving and the new projects for LEAP will come down fast in '18 as all three plants get close to being fully ramped and then they'll be in lower in 2019. So, we would expect new capital projects for the full company next year to actually be below that $80 million average that we've talked about and then the following year to be even lower. Cash spending will lag that because we're still making cash payments to vendors as equipment is coming online. So '18 will probably be cash expenditures for CapEx will probably still be pretty close to what they are in '17, but then as those projects that we approved in '18 decline in the '19 cash expenditures should come down pretty fast in '19 and '20. As for how we're doing? By early next year we're close to being fully equipped in Rochester and France and we would then finishing off the equipping of Mexico. Where we will be producing carts in Mexico this year, the end of this year, the fourth quarter there will be initial parts, but it will be -- but it will be in -- making significant number of parts for the next year. So, by next year we'll be pretty much in full production. We won't be fully ramped, but we'll have three plants at full production and pretty much fully equipped. The caveat is always on CapEx it is some major new project comes along, which would be good news, CapEx spending would grow, but right now, we think the estimates that we've been giving, that average of 80 between '16, 80 a year between '16 and '20 above the average '17 and '18 but low '19 and '20 that's still good and that does take into account additional spending for incremental projects.

And I guess on the flipside any thought about capacity PMC given the current environment?

I don't -- I think we have the capacity we need to meet the demand that we project. The real issue is to make sure the capacities in the right places A and then B, is to utilize that capacity effectively. You never want to -- the cycle time I think I've talked about this before, the cycle times are so short now, the demand cycle is so short, large percentage of the orders we get, we get in the current quarter. And so, if -- so you always have to have a little flex to respond if there is an uptick in demand and you don't want to overreact if there is a downtick in demand. Right now, one of the reasons that the margin in this business are so strong is because of management team has just done an outstanding job of balancing capacity with demand.

Okay. And I guess one last question, can you give us an update on non-aerospace EC initiatives and new programs?

Well, we're always probing, we're still probing automotive, we're probing a few other areas. I'll just give you one example and just the probes, so don't get too excited by it, but one of the areas that we've always explored is armor applications and we're still exploring it. There is still some interesting possibilities there. So that would be a second example.

Okay. As how's the automotive industry going?

We're getting a clear -- we've made clear progress on understanding what our cost performance curve looks like and we continue to explore with OEMs but we are not ready to pull the trigger on any project. We're also looking at some other potential applications beyond crash worthy structures in automotive. This is still at this point very much R&D modeling the behavior of our -- of our materials, exploring combinations of 3D, 2D and metals. I would say, there is a lot of learning going on. We're not in a hurry to pull the trigger to an application because we just -- we don't really think we've gotten far enough down the cost performance curve. It's still a very promising area of opportunity that's out there.

Okay. Sounds great, thanks.

Thanks John.

Thank you. And at this time there are no further questions coming from the phone line.

Okay. Thank you everyone. We really appreciate all the calls and the email -- the questions coming in from the webcast as well. Thanks for the good conversation. John and I have a busy schedule of investor conferences and investor visits for the remainder of the year. So, we look forward to meeting with many of you over the course of the next few months and if we don't talk to you we don't meet you before next earnings call, see you on the next earning call. Thank you.

Ladies and gentlemen, a replay of this conference call will be available at 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.