Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Call of Albany International. [Operator Instructions] At the request of Albany International, this conference call, on Wednesday, May 1, 2019, will be webcast and recorded. I would now like to turn the conference call over to Chief Financial Officer and Treasurer, Stephen Nolan, for introductory comments. Please go ahead.

Thank you, Alan, 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 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 to GAAP. For the purposes of this conference call, those same statements also apply to our verbal remarks this morning. For full discussion, including a reconciliation of non-GAAP measures we may use on this call to our most comparable GAAP measures, please refer to both that earnings release as well as our SEC filings including our 10-K. Now I will turn the call over to Olivier Jarrault, our Chief Executive Officer, who'll provide some opening remarks. Olivier?

Thank you, Stephen. Good morning. Welcome, everyone, and thank you for joining our first quarter earnings call. I like first to welcome, Stephen, to the Company and to his first earnings call results. Stephen has more than 16 years of experience in operational and strategic finance. Most recently, serving as CFO for Esterline Corporation. Stephen brings to us an extensive experience within the aerospace and defense sector, and an impressive track record of strategic execution. His expertise will be of significant value to the Company. Q1 2019 was another very good quarter for Albany International as excellent performance continued across both businesses. Once again, we delivered strong growth. Total company net sales increased 12%, or 15% excluding the impact of currency translation effects. As you know, we are working across the business to improve profitability and that was reflected in dramatic improvement in this quarter's results. Compared to Q1 '18, operating income grew by 136%, net income attributable to the Company by 281% and adjusted EBITDA by 22%. While this quarter did benefit from a handful of adjustments, both to long-term contract profitability and income taxes, our underlying performance was strong and puts us firmly on pace to achieve our long-term expectation. That performance is a testament to the people we have working for us and to their dedication to our company and to generating shareholder value. I have now been at the helm of Albany for just over a year, and I am thrilled with the progress we have made during that time. My focus has been on ensuring that we have a solid foundation for revenue and profitability growth. Albany has a long proud history and has been an exceptional performer for many years. However, when I arrived, I realized there were several actions we could take to…

Thank you, Olivier. I would like to thank everyone, for joining us on the call this morning. It's great to be here at Albany. As I mentioned in the earnings release last night, I've been incredibly impressed by the people I've met in my first month here, and I'm thrilled to be able to present such good results this morning. I will talk first about the results for the quarter and then give a brief update to the guidance for fiscal '19 that was provided as part of the Q4 fiscal '18 earnings call. For the first quarter, total company net sales were $251.4 million, an increase at 12.4% over the $223.6 million delivered in the same quarter last year. Adjusting for currency translation effects, the growth in net sales was 15.2%. On the same organic basis, excluding currency translation effects, MC grew at 4.8%, primarily driven by growth in tissue and packaging grades globally, and in the North American market across all major grades. While AEC grew at 33.1%, primarily driven by growth in the LEAP and CH-53K programs. First quarter gross profit for the Company was $91.8 million, an increase of 18% over the comparable period last year. The overall gross margin rate increased by 170 basis points from 34.8% to 36.5% of net sales. Within the MC segment, gross margin rate improved from 46.8% to 51.6% net sales due to higher net sales driving increased fixed cost leverage and improved labor productivity. Within AEC, the gross margin rate improved from 14.1% to 16.1% of net sales driven by higher net sales driving increased fixed cost leverage, improved labor productivity and a favorable net change in the estimated profitability of long-term contracts. First quarter selling, technical, general and research expenses declined from $52.2 million or 23.3% of net…

Thank you, Stephen. As indicated by the guidance Stephen just provided, we continue to feel very good about the year. And are very confident in our ability to deliver the segment results I discussed on the last call. MC is performing well in a challenging environments with markets and input cost pressures that is more than awarding its own. AEC is ramping up production and moving down the learning curve, putting them in a very strong position to hit the 2020 objective we have established for them. Overall, I feel very good about the business and our ability to hit our expectations. With that, let's go to the line for any questions. Operator?

[Operator Instructions]. Our first question will come from the line of Peter Arment from Baird.

Olivier and Stephen, thanks for the good results starting the year. I guess, Olivier, to, I guess, get a little more specific on the 737 ramp. So Safran has been indicating that there is no change in plan. So maybe if you could just give us a little color that you are planning to be at a higher rate either in second half of this year, which previously was 57 a month? Or where that stands, at least, from your perspective?

Sure. And thank you very much for being here with us. Listen, as I was explaining, I mean, you understand I cannot comment really on Safran's future potential plan and Safran is our customer, our main partner and -- as you just pointed out, we follow their guidance and we follow their requirements. So I can restate once again that Safran has communicated to us many times in the past few weeks. They have reassured that they no current plan to change the LEAP-1B production schedule. They're really consistently indicating to us that they will not change any production schedule nor any ramp requirement. You certainly also listened to Mr. Petitcolin last week during the Safran earnings release. And so he reiterated the fact that the CFM division had maintained the production rate for the LEAP-1B at this point, and will undertake only temporary adjustment only if necessary. So for us what does it mean? It means that you just pointed out that we continue to drive our ramp-up across our global manufacturing footprint to meet the ramp-up requirements of the 57 -- right, the 57 -- that Boeing had in mind prior to that -- to that drop, right? So there we are really pushing -- executing on the plan that we had devised for the year. I'm very, very happy about the progress we've been making in Q1 across fan blades, across fan cases, across spacers versus Q4, and we are going to execute on that ramp-up as planned. We have already indicated that we will be explaining all the indicators in place to follow and track our progress -- our ramp-up progress on a daily basis. Okay?

Okay. That's great color. And just as a follow-up, you mentioned on kind of your 4 strategic initiatives around driving operational metrics, both at MC and AEC. Is there any kind of metrics that you want to call out on, like at least the gains you're seeing on labor productivity or you're on the equipment side?

All we are seeing, it's quite interesting. As I was explaining you a little bit earlier, right, in the year, I mean, we have developed a system at AEC, which we are by the way spreading across the MC as well more and more as we speak, to track down our labor productivity on a daily basis, by flow path, by segments, and of course, by plant. And every day I have a call at 1:00 for two hours, with all my plant managers to drive and dissect and understand the products we're making versus a day before versus a week before, right? It's all labor productivity, labor utilization and labor efficiency. And when you reverse back to the assets -- to our key assets, our looms, our ovens, our auto clears, our key pacing assets, it's all about effectiveness. So I'm seeing quarter-over-quarter very nice gains of about 2%, 3%, 5%, 6% depending on the flow path and depending on the effects, right? So it's pretty interesting to track and we'll become more and more transparent about it once we have the entire system free, organized that way and track it. But I'm very encouraged. That's why I was saying, I'm extremely encouraged with the progress we have been making in the past quarters, okay. And it will continue as we speak in the next -- in the following quarters, right?

Our next question will come from the line of John Franzreb with Sidoti & Company.

My first question is regarding your initial EPS guidance. If I kind of understand some of the puts and takes, it may suggest you're looking at a lower overall gross margin profile for the balance of the year than you achieved in the first quarter. If I'm right in that assumption, is that because maybe Machine Clothing over-achieved? Or is there something else, some other operating expense that's going up and that I'm not cognizant of?

Well, I mean, let me -- and Stephen will jump into it as well, but let me go back to the fundamentals. You know, we had a very good quarter in MC, very good first quarter as I pointed out. You noted the increase in revenue year-over-year. But just Q1 which was remember very well. We did discuss Q1 was relatively weak, right. Q1 '18 was relatively weak quarter, right? So we had a 5% increase [indiscernible] in volume year-over-year that, of course, rolled, increased, fixed cost leverage. We had some normal, good very strong labor productivity improvements. We also did benefit from the restructuring. Remember, we restructured the Sélestat, France in front of the French plant. And we also saw some nice -- some favorable, I would say, year-over-year, favorable pricing, favorable mix, right, year-over-year, right -- in Q1 '19. So -- we saw as an example, we saw some nice increases in packaging grades PMC sales, across North America, South America, even Europe or the flat in Asia Pacific. All that was driven by some good quarterly, some good seasonal orders. We saw, from a mixed standpoint, a pretty nice increase in our tissue grade PMC sales in North America, in South America, in Asia Pacific, all driven by consumptions. And you can revert to publication grades. You know, our first quarter from a mixed standpoint was not that bad either, because we saw in North America and in Europe a slight increase in our publication grades PMC sale, driven by some very specific, if you will some specific orders, that may or may not duplicate -- replicate in the next quarters. And any way, that would all offset on the net business, more than offset by a decrease in Asia Pacific and South America. So you know…

John, so -- as I look at the margin for the full year, if I look at the EBITDA margin, while recognizing we provided range for both EBITDA guidance and net sales guidance for the year. At the midpoint of those ranges just for - to pick a point, it equates to around about 22% adjusted EBITDA margins. For Q1 we delivered 22.9%. So slightly higher than our guidance for the year. As 2 things to call out though. One, as we noted in our remarks earlier, we had an adjustments to the probability of some long-term contracts within AEC. You will see in the queue that will be filed later today, that was about a $600,000 benefit within the year. So take that as a benefit to Q1 compared to the rest of the year. And then secondly, within MC, we had called out, but we expected it to be relatively flat net sales for the year compared to last year. Obviously, Q1 is up compared to Q1 last year, which implies Q2 through Q4 will be slightly down compared to last year, just in total. With a little less fixed cost absorption as a result, so you add those together. You really explain the kind 100 basis point difference between our guidance for the full year and our Q1 results. So I don't think there's something unexpected coming at us later in the year that's resulting in a lower guidance for the year in Q1. As we look at it, it's fairly consistent -- the full year is fairly consistent with what we would deliver in Q1, absent those 2 kind of onetime benefit we got in Q1.

Okay. And then just one question and you can answer this quickly. Historically, Q2 has been stronger than Q1 for PMC. Were there some jobs -- unusual jobs last year that result in that not being a dynamic this year that Q2 will be flatter down versus Q1 this year? I'm now talking in terms of revenue.

Yes. John, so two things I'll say to that. One, certainly this year we have a stronger Q1 than we've had in a couple of years. And that was driven by a couple of events -- a couple of significant customers who took -- who had some line start ups during the quarter resulted in a very solid Q1. We don't provide quarter guidance. So I can't give you an exact guidance for MC revenue in Q2. But certainly, this Q1 was stronger than we would typically expect. And look, that's supported by the share of the revenue, if you look just at our guidance of revenues for the year flat to last year and how much of that guidance we delivered in Q1. That's more than we would traditionally have expected to provide in what you pointed out as a seasonally weak Q1. So I think the general trends we see will hold this year. But this was a particularly strong Q1.

[Operator instructions] We'll go next to the line of Christian Herbosa with NOBLE Capital Markets.

I just got a couple of questions. First, as you mentioned in your comments, operating income margins in the AEC segment has improved significantly. What do you attribute that success to you -- mostly in? And how high do you think those margins can grow?

Yes. Definitely, AEC -- when we look back at the performance over the past couple of years, we keep on improving in a very, very fast pace. You saw, I think, '17 was about $31 million of EBITDA once you exclude some unfavorable exchange in estimated probability of some contracts, or 11% of EBITDA margin. We grew it to 60 -- $20 million of EBITDA last year or 17.1%. We just delivered 19.1% in the first quarter. Once again, as Stephen reminded us, we had the net benefit - favorable benefit of a challenging -- profitability of some contracts. But still the performance is very strong. I'm very encouraged with it, and it's basically due to pure, as I was explaining, deployment of a standardized daily operational financial system, driving productivity gains, driving the labor efficiency, driving down our -- even though our cost, our nonquality cost, and ensuring that we minimize our key effects, the downtime -- unplanned downtime. And really focusing at the asset level at the employee level, and making sure that we continue very strongly deploying what I call an overall a very strong continuous improvement program Six Sigma driven. So that basically you see in here really a -- that the deployment I would say of manufacturing operations, aerospace one-to-one in order to boost that profitability. And as we are, as I was explaining, we have a huge potential to continue boosting that performance. So I reiterate my guidance. In here, we said that we would drive in '20 revenues of $500 million to $550 million and remember we just increased a quarter ago. And that we would drive towards an 18% to 20%. That way the position is very well in the $90 million to $110 million of EBITDA. And I feel very encouraged based on last year and again first quarter, very encouraged about our ability to deliver that range in '20. And then later on past '20, of course, keep on growing that revenue, that volume and improving our productivity. Right? Okay?

Okay. Great. Thanks for the color. You also mentioned in the comments that your working capital management initiatives on improved current cash generation. Can you expand on what those initiatives are? And how they work?

Sure. Sure. I mean we, part of the management of operations, especially on the aerospace side, has been since I joined to really focus, if you will, on working capital efficiency. If you track year ago our Q1 '18 working capital efficiency versus our Q1 '19 working capital efficiency, as expressed in days of working capital, because metrics have been deploying with my team across our plants, you would see that March '19 QTD versus March '18 QTD, we roughly improved orders by 20%, roughly. So very nice project improvement. We can do much more, and we'll continue to do much more. The daily focus on AR on receivables. The daily focus at each plant across the system MC and AEC on APs and of course, more and more focused and we'll continue to gradually improve the efficiency of our inventories, a big focus on manufacturing inventory on raw materials and LEAP and finished goods. So you saw that nice progress we did generate, as Stephen mentioned. I was very pleased with it. $25 million of cash from Ops versus the use of $18 million last year. That's a first, that's a very, it was very good for us, we're very, very proud and I thank all my team to be able to deliver it. And you'll keep on seeing quarter after quarter even more and more focus on improving the efficiency of the working capital. Okay?

We now will go to line of John Franzreb for a follow-up call with Sidoti & Company.

Olivier, you've mentioned, you've got the team in place that, that you want now. In previous calls you've mentioned, you want to be more aggressive in organic growth. Can you kind of give us an update of what you're looking as far as acquisitions? What kind of targets you think are most appealing, anything along those lines would be helpful?

Sure. Listen, you understand that we don't, of course, we don't comment publicly about any strategic potential funding transaction. But, listen, it's clear as I've already said in the past that we continue to explore, how could I say it, potential inorganic targets. Whether we would act on any of them depends, of course, on a variety of factors. How each of those targets would basically strengthen our position in the supply chain? How each of those targets would enhance our long-term market positioning? How each of these targets would basically, I mean, the level of returns that each of those targets could bring? And of course the value that they would trade for shareholders? So we're exploring. And -- but as I said a little bit earlier, we would be very prudent acquires. I have lots of experience myself into making acquisitions, Stephen as well. And we know what it takes, and we are capable of, if you will, really assisting. We will move only and only after having really accessed that we can integrate properly and we can generate, the net synergies and the returns. So that's all I can share with you.

Is there a specific size of an acquisition you are looking at? Is this something of a smaller scale or larger scale or tuck-in? What are you thinking about how willing you are to lever up to purchase something?

So -- generally, we have said before, we would ideally like to look for businesses with revenue of above $100 million. Just below that -- it ends up being almost as much work without the real needle-moving impact on the Company. That said we are going to be prudent at the upper end, I would not see us levering up to -- to what you would consider high levels to execute on very significant transactions. I think they are going to be in that in a relatively narrow band, probably north of $100 million. Not that we would not look at something below that if it had particularly unique technology or capabilities but somewhere in the north of $100 million, but that the upper end is not certainly in the hundreds and hundreds of millions of range. We're not going to lever up to the level required to execute to transaction of that size.

I think it's a very good point, Stephen. It's -- in one point, I'd like to reiterate on that point, that we are really, really focused on the IT, on the high technology type acquisition, bolt-on acquisition, high IT, high technology, proprietary product end-process type company.

We'll next go to line of Christopher Hillary with Roubaix Capital.

I just wanted to ask, you had extensive comments on productivity improvements that you see in your pipeline and you also talked a bit about how much you upgraded the talent of your team. Do you anticipate that expressing itself in your margins going forward because it just seems like you have a rich opportunity set for material improvements based upon the comments I was hearing today?

Yes. Look, we have delivered significant improvements in margin. One thing you do need to recognize from productivity perspective, right now a significant program for us is LEAP with our Albany Saffron Composite joint venture, of which we are the 90% owner. The way that contract is currently structured, it is a cost plus type contract. So as a result, the productivity improvements we're driving there are in a perverse way actually reducing our revenue, but they're getting us down a curve we need to get down to, to make ourselves competitive and secure the long term future of that, but also step up to the profitability if we hit certain price targets on that program. So some of what you're seeing in terms of productivity improvements are not hitting the bottom line right now. However, that said, as Olivier mentioned in his comments a few moments ago and I think it's quite clear, if you look at the profitability of the aerospace composites business most notably, but even of the Machine Clothing business, there have been significant improvements in profitability over just the last 12 months, and I think we would expect that to continue to improve on the AE side, getting us solidly into that 18% to 20% range on the adjusted EBITDA margins in fiscal '20.

Yes. That's a very good point. In addition to that to go back to talent that you just mentioned, talent additions, and reverting back to the aerospace business, one thing that -- and I can't give you more details about it publicly because it is not allowed to yet. But I mentioned that we reorganize ourself. In fact, we know the foundation for a good strong dedicated, experienced aerospace commercial team. It paid off already. We -- you will see in the next few weeks when we allow to announce it. But we recently successfully negotiated the extension of one of our key long-term agreements, serving -- supporting one of the highest high key -- high growth platforms for 5 more years -- an extension of five more years. And in addition to that, we're able to expand our work share on that particular high growth platform. So more details to come, but we're very pleased really in that equation of the things that we are doing to improve talent, organize ourselves on the aerospace side to grow organically. And therefore a good margin and to bring profitability up. So I'm very encouraged again by our commercial success this quarter.

We have no further questions in queue at this time. Please proceed.

All right. Again, well, thank you. Thank you all for joining us on the call. We do appreciate your time today and your continued interest in Albany International. I'd like to conclude today's call by recognizing my entire Albany team for another very strong quarter of performance. Thank you all.

Ladies and gentleman, a replay of this conference will be available at the Albany International website beginning at approximately noon eastern time today. That does conclude our conference for today. Thank you for your participation. You may now disconnect.