Welcome to the Third Quarter Earnings Call of Albany International. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer section. Instructions will be given at that time. At the request of Albany International, this conference call on Tuesday, October 31, 2017, will be web cast and recorded. I would now like to turn the conference over to the Chief Financial Officer and Treasurer, Mr. 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. Our format for Q&A will be similar to last quarter. We will first take questions from people on the call and then go to any questions from participants on the web cast. After that, we will take any follow-up questions. 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 our Q3 2017 earnings call. As always, I'll start with an overview of the quarter. John will provide more detail. I'll follow with our outlook, and then we'll go to Q&A, including, we hope, both live questions from those of you on this conference call and e-mailed questions from those of you on the webcast. Q3 2017 was an especially strong quarter for Albany. Aggregate sales, net income and adjusted EBITDA all grew sharply. Machine's Clothing -- Machine Clothing's performance was outstanding, while AEC continued its rapid growth, took another incremental step forward in profitability and made good progress on its multiple ramp-ups and new business development. Both businesses are now on pace to outperform our previously upgraded full year targets. Machine Clothing sales grew in comparison to both Q2 -- Q3 2016 and Q2 2017, due to a combination of strong performance and good economic conditions, especially in the Americas. The market trends of recent quarters continued. Sales in the publication grades again declined, although only by 3% this time compared to Q3 2016, while sales in packaging, tissue and pulp all grew. Although pricing pressure remained intense, Albany pricing was once again stable except in the publication grades, where the pricing pressure was most intense. New product performance was outstanding across virtually all product lines, and we continue to make promising advances in the development of the new technology platform. Gross margins remained strong due to continuous incremental productivity improvements and lower material costs. As for AEC, driven by growth in the LEAP, 787 fuselage frame and CH-53K programs, sales increased by nearly 50% compared to Q3 2016. AEC is now in the steepest part of its multiple program ramps. Each of our plants made good progress on quality and yield…

Thank you, Joe. I'd like to refer you to our Q3 financial performance slides. Starting with Slide 3, net sales by segment. Total company net sales in Q3 increased 16.1% compared to Q3 2016. MC net sales in Q3, excluding currency effects, were up 4% compared to Q3 last year as increases in the tissue, packaging and pulp grades more than offset declines in the publication grades. AEC net sales in Q3 increased by almost 49% due to the growth in the LEAP, 787 fuselage frames and CH-53K programs. Turning to Slide 4. Total company gross margin as a percentage of net sales was 35.8% in Q3 compared to 37.9% in Q3 2016. The lower gross margin percent reflects an impact of 1.4% related to the $3.2 million Bear Claw inventory write-off. As expected, the trend of lower total company gross margins continued in Q3 as our business mix changes with the significant growth in AEC. MC gross profit margin in Q3 continued to stay strong at 48.5% of net sales compared to 47.5% of net sales in Q3 2016. Slides 5 and 6 show net income and adjusted EBITDA by segment for the quarter and year-to-date. Adjusted EBITDA for the total company in Q3 2017 was $51.9 million compared to $42.7 million in Q3 2016. Q3 2017 adjusted EBITDA includes a $2 million insurance recovery gain related to the theft in Japan that was reported in Q4 2016. On a year-to-date basis, through September 2017, adjusted EBITDA for the total company was $126 million compared to $130.6 million in 2016. As a reminder, year-to-date 2017 adjusted EBITDA includes a Q2 charge of $15.8 million for AEC contract revisions. MC adjusted EBITDA was strong in Q3 2017 at $52.3 million compared to $48.9 million in Q3 2016. And AEC adjusted…

Thanks, John. Turning to our outlook and starting with Machine Clothing. Because of end of the year's seasonal effects, coupled with the regression that we typically experience after especially strong quarters, Q4 will likely be Machine Clothing's weakest quarter of the year. However, if you look at this on a year-over-year basis, because of good backlogs and healthy economic conditions, we expect Q4 this year to be comparable to Q4 of 2016. Given the strong year-to-date performance in Machine Clothing, this means that we now expect 2017 full year adjusted EBITDA to be at least at the high end of our normal $180 million to $195 million range. As for the near-term outlook for AEC, we expect continued sharp sales growth in Q4 and, despite the heavy ramp-up activity, sequentially stable or incrementally improved profitability. Last quarter, we revised upward our revenue outlook for the full year to the high end of our previously stated outlook of 25% to 35% full year revenue growth. We now expect full year revenue growth to be close to be between 35% and 40%. In sum, this was an outstanding quarter for Albany, with good performance in both businesses and a stronger full year outlook for each business and the already strong upgraded estimates that we provided on our last earnings call. And with that, let's go to your questions. Operator?

[Operator Instructions]. Our first question comes from the line of John Franzreb with Sidoti. Please go ahead.

Good morning guys. Great quarter.

Thanks John. Good morning.

Want to start with Machine Clothing. It seems like, if I understand this properly, the second half of the year is going to be stronger than the first half of the year. Certainly, an unusual phenomenon given all recent trends, historical trends. Could you talk to why that's the case?

Yes, you're right. Ordinarily, we would expect the second half of the year to be weaker than the first half, and it's just because of seasonal effects that, there's a summer slowdown in Q3 and the holiday slowdown in Q4. So why didn't we get that this year or why haven't we gotten it so far? Q3 was so strong. There's a longer-term issue, and then there's this shorter-term volatility. The longer-term issue is that the -- as I think we've discussed before, the cycle times in this business, the order cycles have shortened dramatically. And so as much as 40% of our sales can come from orders that are dropped in during the quarter. And that means that our actual sales in the quarter are much more subject to whatever market volatility is taking place at that particular moment. Since economies around the world are in pretty strong shape right now, that short-term volatility tends to be favorable. We're at a -- in a strong part of the business cycle. And since so much of our sales -- over 75% of our sales now are in GDP-driven grades, we're getting some of that benefit of strong GDP, resulting in stronger drop-in orders, if you will, during a quarter where ordinarily, we would think seasonal effects would have a more marked impact. So that's part of what's going on, shorter cycle times, coupled with good economic activity in a business that's now mostly exposed to GNP growth. They're driven by grades that are driven by GNP growth. Now there is still that 23-ish percent of sales that's exposed to the publication grades and that still remains in sectoral decline, and we would ordinarily expect 5% to 10% decline per year. I think it's -- per year and year-over-year, so per quarter year-over-year and so I think it's notable that this quarter, it only dropped 2.5% to 3%. That's not because there's a change in the structural trend downward. We just happened to hit on one of those quarters where there was less effect year-over-year in publication decline than we would ordinarily see. So that helped to make this a stronger quarter. Next quarter, it could just easily go back to 10% declines again.

Well, I mean, 2 things, and maybe they kind of play on each other. Is there a possibility that some of your customers pushed orders from the first half into the second half until they were more comfortable with the recovery in whatever region they're operating in? And also, given the short delivery cycle, if the publication grades -- maybe they were the primary one that they pushed orders back because they were most concerned about how their end markets are performing.

It's possible, but I don't -- we're not particularly seeing that this was more -- I think the explanations I gave you are the better explanations. Think business cycle and think hot part of the business cycle. We're just -- we're getting growth around the world -- economic growth around the world, which is helping our growth grades. So we're not -- if you take out the $2 million or $3 million of less decline in publication and publication had been down about the normal 10%, we'd be looking at a 2% growth quarter, and you wouldn't be asking this question. So I think the way to understand this business is the way we've always tried to describe this business. Think there are long-term structural trends that drive 77% of our sales with GDP and 23% of our sales sectorally, and superimpose on that a combination of seasonal effects and short order cycles. And that gets you most of the explanation.

And switching over to AEC, you mentioned that it's outperforming your initial expectations. You also cited some of the challenges that you have in the ramp-up. So can you kind of break down what's doing better than you expected? Because I think the challenges of the ramp-up were kind of widely understood. So what is doing far better than you expected this year?

Yes. The -- if you look at our -- let me start with the productivity improvements and our ramps. It's what we expected. I mean, we've been expecting steady incremental improvements in EBITDA as a percent of sales, and that's what we're getting. And we saw another step forward this quarter on a sequential basis and also certainly on a year-over-year basis. The upside on revenue is just a little bit of all of the above. It's a little bit upward pressure on all of our programs. It's nothing that jumps out as being one unique factor that's driving us to higher sales. There's more in LEAP. There's more in fuselage frames. There's more on JASSM. There's a little bit more on CH-53K, so a little bit more on JSF LiftFan. It's --

Okay, that's fine, Joe. And then there is one last question on the R&D spend. A little bit more color on to how much you all are planning to spend on a go-forward basis, when does that kind of peak out and maybe some of the programs that have the nearest-term opportunity for you.

The -- on R&D spend, I think if you take the average -- the quarterly average for the year, so you take our current run rate and average that out, it's like about $3.3 million, $3.4 million per quarter. That's probably a pretty good run rate into next year -- through Q4 and into next year. The -- there's 2 sets of activities driving the R&D growth. One is more aimed at improvements in the underlying technology, and it's really aimed at what you might think of as affordable high-performance composites. So we're accelerating our work on new weaving systems, new injection systems, new material systems that all get us to shorter cycles, so lower cost without compromising performance. And that's something we see leading to significant benefit in aerospace and ultimately, longer term, we think, it's exactly what you need to do to drive automotive as well. Now around -- at the same time that, that underlying technology work is accelerating, and it's accelerating because we see opportunity to make advances in getting to lower cycle, lower cycle times, so lower costs. We are working on several applications for next-generation platforms. And some of it is in commercial engines, and some of it is in defense applications. And on the defense side, it ranges from land-based applications, like body armor, to space-based applications.

And we have no further questions on the phone at the moment.

Okay. We do have a few questions on the webcast. And our first question comes from Ben Klieve at NOBLE Capital Markets. And can we quantify the impact of Bear Claw on sales and EBITDA through -- for this year -- so far this year?

Yes. If you look at the full year last year, that was a breakeven business with about $3 million to $4 million in sales. We went into this year thinking sales would be up a bit, but we were also expecting breakeven. And that's a pretty good assumption. You should at this point assume that it has no impact on an EBITDA basis.

Okay. Our next question -- next couple of questions from Shaji John at Pioneer Investments. Machine Clothing, there have been several recent announcements from some large papermakers on converting publication machines to containerboard. In general, how do we see that impact on Albany as a positive or negative or perhaps neutral?

The way we think about this is exactly in line with the long-term structural trends we've been talking about, that everybody here is seeing the same thing, that the structural demise of the publication grades is -- I think for a while, people thought there might be an asymptote. Now it's not clear there's going to be an asymptote. So -- and at the same time, the containerboard market, particularly given what people dub the Amazon effect seems to have some growth in it. So that's why you're seeing these conversions. What you have to watch out for from our point of view is, do these conversions and additional capacity in containerboard lead companies to take out older capacity? Because as you know, the name of their game is to run their machines at close to full capacity of 96%, 97% operating rates since we're talking about a commodity business. What we're seeing so far is these conversions are keeping up with market growth. And so the -- as we look out to 2018 and into 2019, we still see very high operating rates in the containerboard market in North America. So that's only good. That means there'll be either the same or more positions that need to be clothed with our kinds of products. We're seeing similar trends in the tissue market, heavy investment in new, higher-technology tissue machines. And that, we believe, will clearly lead to overcapacity in the tissue market in North America. So we'll see some of the older, lower-technology, more conventional tissue machines come out of the market in 2019 -- 2018, 2019, 2020. But that kind of shift works to our advantage, because we're really very strong on the high-technology machines.

Okay. And our other question from Shaji is, how much was LEAP sales in the quarter? And how much did that grow in a comparable quarter last year? And did we have any, in nonrecurring engineering, R&D-type sales revenue in the quarter?

Yes. We don't break down performance by program. But in -- as a -- just speaking generally, roughly half the sales growth year-over-year was LEAP. The other half was programs in our Salt Lake operation and was split between the fuselage -- growth in the fuselage frame program and CH-53K program, with some growth in our missiles -- JASSM missiles programs as well. There was some nonrecurring engineering revenue in the quarter in Salt Lake, so would expect -- and it was probably to the tune of $3 million to $4 million. But nonetheless, we still expect significant growth sequentially from Q3 to Q4 as well as significant growth year-over-year, Q4 to Q4.

Okay. Well, at this point, we have no further questions either on the webcast or the phone line.

Okay. Well, thank you all for participating on the call and for e-mailing questions. And we will be pretty active meeting with investors over the next few weeks at a few conferences. So we look forward to seeing you all there and, if not there, talking to you between now and our next earnings call. Thank you all.

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.