Albany International Corp. (AIN) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Albany International Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator instructions]. As reminder this conference is being recorded.I would now like to turn the conference over to our host, Mr. John Hobbs, Director of Investor Relations. Please go ahead.

Thank you, Grace, 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 a full discussion, including a reconciliation of non-GAAP measures, we may use on this call to their most comparable GAAP measures, please refer to both that earnings release as well as our SEC filings, including our 10-K.Now, I would turn the call over to Bill Higgins, our Chief Executive Officer, who will provide some opening remarks. Bill.

Thank you, John. Good morning, welcome everyone and thank you for joining our fourth-quarter earnings call. I'm happy to be here on my first earnings call as CEO of Albany as I'm sure you saw last night's press release, we delivered another strong quarter, capping a great year. While, I will let Stephen go through the details, let me point out a few highlights from the quarter and then give my perspective on our strategy and my priorities.The Company delivered strong results in the fourth quarter and met or exceeded all the revenue and profitability guidance we had issued on our third quarter earnings announcement. I'm particularly pleased with the adjusted EBITDA margins in both segments. In the fourth quarter, we delivered margin of 35.1% in Machine Clothing and 22.6% in Engineered Composites.I'm also proud of the Company's cash performance this year. The Company generated over $130 million in free cash flow, and for the first time since beginning on our growth trajectory several years ago, the Engineered Composites segment delivered positive free cash flow for the year.I would like to thank our employees across the globe for their contribution to the growth and success of the Company and while on the board, I have had the opportunity to visit our operations around the world and I have been impressed with the talent and dedication I have seen. I would also like to thank my predecessor, Olivier Jarrault for his pursuit of operational excellence and contributions.As you may know, I have been on the Albany Board since 2016. I was appointed Chairman last year. I appreciate the trust the Board is placed in me and I'm honored to be responsible for the success of this great Company. In parallel with my transition into ensure continuity and consistency at the Board level, my predecessor Erkie Kailbourne is stepping back into the role of Chairman.I have known Albany for a long time, in fact, when I completed engineering school what is now way too many years ago, I had a job interview at Albany in upstate, New York. Preferring aerospace at that time, I went to work as a jet engineer at Pratt & Whitney aircraft in their advanced technology group.Since then, I held a variety of technical, manufacturing and business roles within AlliedSignal and Honeywell, and after Honeywell I was privileged to serve as CEO and Chairman of CIRCOR International, a public company that has similar strides to Albany, and like Albany it has global manufacturing businesses that serve both aerospace and industrial end markets.So, I bring to this role not only prior experience as public company CEO and as a Director on multiple public company boards, but offer considerable experience with our markets, technology and operational excellence.With the full support of the Board, I intend to continue executing on the two-pronged strategy that was first established by our Company several years ago. First, I will continue to focus on growing our Engineered Composites business. While there are obviously near-term challenges, driven by the ongoing grounding of the Boeing 737 Max fleet, our longer-term vision and objectives have not changed.Most important, we need to continue to perform on our LEAP contract with Safran to support both the continued ramp on the LEAP-1A engine for the Airbus A-32 Neo family and a return to future ramp that will be required for the LEAP-1B engine once the Boeing 737 Max returns to production. Safran is a critical customer of ours with whom we have had almost 20-year history. We deeply value the relationship with Safran and look forward to strengthen it further overtime.We will also continue to grow the balance of our Engineered Composites business by ramping with our existing platforms by winning new competitions and by finding new applications for our industry-leading composite technologies across addressable market segments, including the next generation of commercial aircraft.The recent announcement of Albany's participation in the Airbus Wing of Tomorrow collaborative development effort is testament to the value that our technologies offer additional customers in the future. This proven strategy remains sound and we believe that will deliver strong long-term returns to our shareholders.Second, we will continue to solidify and build upon our leadership position in Machine Clothing segment. We are the clear leader based on our technology and the strength of our offerings to our customers in paper Machine Clothing market.That said, we are not resting on our laurels. In order to maintain our PMC’s leadership position, we are constantly investing in this business. Leading to new product solutions to meet our customers changing needs to new manufacturing processes into improved support for our customers. We expect to continue to invest in Machine Clothing consistent with past investment levels to maintain our leadership position and profitability.This two-pronged strategy has served our shareholders well. Today, we have two strong profitable businesses. In 2019, our Machine Clothing segment performed extraordinarily well, delivering even higher level of EBITDA than we had expected after a very strong 2018.The Engineered Composites business even with the challenges caused by the 737 MAX situation in the back half of the year, delivered over $100 million of EBITDA and for the first time ever, delivered positive free cash flow. We continued to believe that, at this time, given the technology overlap and resource sharing of people, ideas and funding between the two businesses were stronger as one Albany.So with that continuation of our existing strategy to my backdrop, my priorities for the business are threefold. First, I will continue to focus on operational improvement across both segments that has helped drive the improvement in our financial results over the last few years. I'm fortunate to have two strong operational leaders, who themselves are supported by strong teams.Daniel Halftermeyer has a long history of driving continuous improvement across the Machine Clothing segment. The strong margins at the segment has delivered - demonstrated our commitment to delivering shareholder value.Leading the Engineered Composite segment, we are fortunate to have Greg Harwell who joined us late last year. Greg brings extensive experience managing and operating global aerospace businesses.Second, we will continue to focus on growth within a renewed focus on winning new business in the Engineered Composite segment. Not too long ago, we were in a position where we had won so much business on LEAP, on the F-35, on the 787, on the CH-53K that we had to demonstrate to our customers, our ability to ramp and execute on those programs, before expecting them to trust us with additional work. We have accomplished a lot, are tracking well on existing programs and now are actively pursuing and winning new opportunities in aerospace.Third, I firmly believe in our long-term vision to advance the state of the art in composite technologies and find new applications in aerospace and beyond, as well as to maintain our leadership position in Machine Clothing. I believe that successfully executing on our vision represents a tremendous opportunity for our shareholders.We will continue to deploy return seeking capital to maintain our leadership positions and to drive organic growth. We have achieved strong returns for our shareholders from the investments we have made in working capital and capital expenditures across both of our segments.At the same time, we have got the balance sheet and wherewithal to complete acquisitions that extend our capabilities and support our strategy. In fact, we have recently completed a small high tech acquisition in Germany CirComp, which brings us new technologies and capabilities.However, our strategy doesn't depend on completing acquisitions and we are not prepared to chase some of the pricing we are seeing in the M&A market. We do not believe that it would be a prudent use of our shareholders’ capital to overpay for assets.Looking forward to 2020, our strategy is continuing to bear fruit. We expect another strong year with continued high margins for our Machine Clothing business and thus for the current production halts in the 737 MAX, we would be expecting to provide guidance for the AEC segment that needs in the case of revenue or even exceeds in the case of margin, the long-term 2020 objectives we established and published for that segment several years ago.However, the continued grounding and the recent suspension in production of the Boeing 737 MAX will obviously have an impact on our 2020 financial results. The 737 MAX through the work we perform on LEAP-1B engine components is a very important program for Albany.While our hardened public reports of Boeing's progress toward safely returning the 737 MAX platform into service, there continues to be a significant lack of clarity into the return to service timeline and the subsequent production ramp for the aircraft.We do not have any additional insight into the status of the program beyond public reports. We believe that our guidance for 2020 reflects a realistic approach with respect to demand for the LEAP-1B components in 2020.In 2019, we are able to overcome the impact of 737 MAX grounding through a combination of over-performance elsewhere in AEC build ahead of LEAP finished goods inventory and the structure of the LEAP contract with Safran.However, in 2020, the magnitude of the impact of the 737 MAX will be too large for us to overcome, resulting in a material reduction of AEC revenues in 2020, compared to the long-term 2020 objectives we established several years ago.It is important to note that, not withstanding this impact, the balance of AEC is continuing on its growth trajectory and also the guidance for 2020 reflects adjusted EBITDA margins for the segment higher than those that had been reflected in our long-term 2020 objectives.These are both strong indicators that our strategy for AEC remains sound that the revenue reduction in our 2020 guidance is only because of the 737 MAX grounding and that the long-term outlook for the business remains strong.On a separate note, we are of course monitoring the Corona Virus situation in China. As you may be aware, we have two large Machine Clothing manufacturing locations in China. Our first priority is the safety and well-being of our employees at those facilities, and we have taken actions that we felt were appropriate to help mitigate the risk to our employees.Both of our facilities have been significantly impacted by the ongoing situation, so we are seeing a real time impact of the situation on our Machine Clothing segments performance. If the travel and work restrictions were to continue for a meaningful period, not only would that significantly exacerbate the impact on Machine Clothing and enforces to execute contingency plans, but we would also likely to see an impact on the aerospace industry demand and global supply chain, which could start to impact the Engineered Composite segment.At this time, it is too early and there are too many unanswered questions for us the size of full potential impact on the Company's 2020 results. However, we have incorporated with the guidance, Stephen will provide the direct impact we are seeing of the current disruption.With that, I would like to turn the call over to Stephen, who will provide more details of the quarter and our initial guidance for 2020. Stephen.

Thank you, Bill. I will talk first about the results for the quarter and then about our initial outlook for our outperformance in 2020. For the fourth quarter, total Company net sales were 257.7 million, an increase of 2.4%, compared to the 251.6 million delivered in the same quarter of last year.Adjusting for currency translation effects, net sales grew by 3% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales grew by 0.7% driven by strong growth in tissue and packaging grades partially offset by declines in publication and pup grades and in engineered fabrics.Engineered Composites net sales, again after adjusting for currency translation effect, grew by 6.4%, primarily driven by growth in the CH-53K program. The acquisition of CirComp, which was completed in the back half of the fourth quarter, contributed an immaterial portion of a fourth quarter AEC sales.Fourth quarter gross profit for the Company was $96.6 million, an increase of 9.9% over the comparable period last year. The overall gross margin increased by 260 basis points from 34.9% to 37.5% of net sales. Within the MC segment gross margin improved from 48.6% to 50.2% of net sales principally due to reduced depreciation expense.Within AEC, the gross margin improved from 14.5% to 19.6% of net sales driven by a $3.3 million favorable net change in the estimated profitability of long-term contracts by higher net sales driving increased fixed cost leverage and by improved labor productivity.Fourth quarters selling, technical, general and research expenses increased from 48.7 million in the prior year quarter to 51.3 million in the current quarter and also increased as a percentage of net sales from 19.3% to 19.9%.The increase in the amount of expense was driven primarily by the revaluation of non-functional currency assets and liabilities which resulted in the loss of 1.4 million in Q4 2019 while that had only a negligible impact in the same period last year and by $600,000 in expenses related to the acquisition of CirComp including just over $100,000 of the deferred purchase price, which has being treated as an expense for gap purposes due to the fact that it is payment is dependent on certain future obligations being met.These increases were partially offset by a decline in R&D expense for the quarter. Total operating income for the Company was 43.6 million, an increase of 16.5% from 37.4 million in the prior year quarter.Machine Clothing operating income increased by 3.4 million driven by higher gross profit and lower restructuring expense, partially offset by higher STG and our expense while AEC operating income grew by 63.8% to 10.9 million driven by higher gross profit, partially offset by higher restructuring and STG and our expense.Income rate for the quarter was 24.8% compared to 37.9% in the same period last year. Discrete tax items and the change in the estimated annual income tax rate reduced income tax expense by 1.3 million in Q4 2019 while the same factors had increased the expense by 1.8 million in Q4 2018.Net income attributable to the Company for the fourth quarter was 29.1 million, an increase of 65.7% from 17.6 million last year. The increase was driven by the improved operating income and the lower tax rate earnings.Earnings per share was $0.90 in this quarter compared to $0.55 last year after adjusting for restructuring expenses, the impact of foreign currency revaluation, gains and losses, pension charges related to de-risking initiatives and expenses associated with the CirComp acquisition adjusted earnings per share was $0.97 this quarter compared to $0.69 in the comparable period last year.Adjusted EBITDA grew 10.8% from last year to 63.9 million for the most recent quarter. Machine Clothing adjusted EBITDA was 52.8 million or 35.1% of net sales this year up from $51.2 million or 34% of net sales in the prior year quarter. AEC adjusted EBITDA grew from $18.1 million or 17.9% of net sales last year to $24.2 million or 22.6% of net sales this quarter.Turning to our debt position. Total debt which consists of amounts reported in our balance sheet as long-term debt or current maturities of long-term debt remains steady at $424 million at the end of Q4 and cash increased by about $22 million during the quarter, resulting in a reduction in net debt of about $22 million.Under the definition of leverage ratio used in our credit agreement, which limits us to $65 million of cash netting against gross debt, we finished the quarter with a leverage ratio of 1.35. While disregarding the limitation on cash netting results in an absolute leverage ratio of 0.89.Our reduction in net debt this year has been a part driven by our working capital initiatives, partially offset by a significant working capital investment in the LEAP program, primarily to support the buildup of finished goods inventory in the back half of the year.For the full-year, net cash provided by operating activities increased from $132 million in 2018 to $200 million in 2019. Also for the full-year, free cash flow, which we defined as net cash provided by operating activities, less capital expenditures, increased from $50 million in 2018 to $132 million this year.I would like to point out that, as Bill alluded to in his remarks, this cash performance included AEC delivering positive free cash flow for the year in spite of the LEAP working capital investment. Capital expenditures in Q4, 2019 were about $19 million, reflecting continued investments in equipment to support multiple ramp ups in AEC.We mentioned last quarter, that capital expenditures for the full-year would be lower than initially expected, driven by the timing of some projects, some of which will now be completed in 2020 and that the lower level of spending does not represent any material change in our investment plans or priorities. Overall, across both segments on all metrics, we were very pleased with the performance of the business last year.Looking forward to 2020, as previously discussed on prior calls, Machine Clothing faces ongoing weakness in its end-use markets with the latest RISI data suggest that, in the third and fourth quarters of 2019, global production of paper and board products declined by between 2% and 2.5% on a year-over-year basis with declines in North America over these most important markets of over 5%.As Bill indicated earlier, while we cannot yet anticipate the full impact to the segment of the Corona Virus in China, it also incorporated into our expectations a modest impact from the current disruption to those operations, assuming that those operations face some degree of disruption for about four weeks.To put this impact to our Chinese operations in perspective, we disclosed in our 2018 10-K that our sales directly to customers from operations in China were around $50 million, and while we have yet to disclose them, our equipment sales in 2019 were roughly similar.Our overall expectations for the Machine Clothing segment take into account the anticipated impact of Machine Clothing, demand of the lower level of paper production globally over the last few quarters. The current impact of the Corona Virus situation I just referenced and the impact of our ongoing currency weakness in several markets where we generate Machine Clothing revenues in local currencies.As a result, we are guiding 2020 revenues for the segment of between $570 million and $590 million. However, notwithstanding the slightly weaker revenue compared to 2019, we still expect the margins to remain very robust and are guiding 2020 adjusted EBITDA for the segment of 190 million to 200 million.Before, I provide 2020 guidance for AEC, it may be helpful to highlight a few items from AEC’s 2019 results. First in 2019 including the impact recognized in the fourth quarter, we recorded a cumulative total of over $12 million in net favorable changes in estimated long-term contract profitability. This result in both recognized revenue and gross profit of $12 million in 2019.While we review the estimates of profitability of long-term contracts every quarter, any changes recognized as a result of that process, maybe either favorable or unfavorable, and we have seen changes in both directions over the last several years. These adjustments to profitability are usually difficult to forecast. However, these types of benefits are unlikely to be recorded in the same magnitude in 2020, as we recognize in 2019.Second in 2019 the full impact of the grounding of the MAX fleet and Boeing’s subsequent decision to suspend production at the aircraft had yet to be felt in our results. In 2019, we recognize LEAP revenues in our Albany Safran joint venture of just over $210 billion.Of this, just over 60% or almost $130 million was recognized on LEAP-1B components destined for the 737 MAX with a balance related to the LEAP-1A engine. The outlook for components for the LEAP-1A variant that powers the A-320 NEO family remains strong. However, as Bill mentioned earlier, there is a continuing lack of clarity into the return to service timeline and subsequent production ramp for the 737 MAX.We believe that our assumption with respect to demand from our customer for LEAP-1B components this year, which is at a level much lower than in 2019 is realistic but it remains uncertain.This reduced demand expectation will drive significantly lower levels of production of LEAP-1B components. A secondary but less important driver of our LEAP fan case, blade and spacer production levels in 2020 relates to the finished goods inventory we have on-hand at the end of 2019.As we have previously disclosed in the second half of 2019 we made the decision with the full support of our customer Safran and based on our mutual expectation that the return to service at the 737 MAX was only months away.That in order to minimize any workforce disruption at our ASC facilities, we would maintain a production rate of components for both LEAP-1A and LEAP-1B variance at a rate higher than would meet Safran's immediate demand and would allow for a modest increase in finished goods inventories.Due to the current GAAP revenue recognition requirements for contracts like our LEAP contract with Safran, we were required to recognize revenue on those components at the time of production, rather than at the future point of delivery resulting in the recognition of those revenues in 2019, under reporting of the finished goods inventory on the balance sheet as a contract asset.As a result of this action, and in-line with our expectations from the time we made the decision, we finished 2019 with sufficient finished goods inventory on-hand to support 50 aircraft from the Airbus A-320 family and 100 737 MAX aircraft. However, as you all know, our expectation for a near-term return to service for the 737 MAX was not met, and in fact Boeing announced a pause in production of the aircraft in December.Following Boeing's announcement in early 2020, we reluctantly began to implement reductions in-force our ASC facilities. We are now assuming that during 2020, we will start to burn down the excess finished goods inventory for both LEAP-1A and LEAP-1B in place at the end of 2019, which will flip the impact we saw on the back half of 2019. This finished goods inventory burn-down will result in recognized revenues in 2020 of our lower than actual shipments to our customer in the same period.I would like to point out that the structure of our contract with Safran, where we recover actual costs, means our revenues will not go down directly proportionally to any reduction in the quantity of produced LEAP-1B components, since a portion of the revenue recognized on those components in 2019 was related to fixed costs and associated fee.If as expected we deliver fewer LEAP-1B components in 2020, those fixed costs will be absorbed by and recovered on the remaining LEAP-1A and LEAP-1B components that are produced in 2020.However, we will experience a reduction in ASC revenue caused by the absence of the variable costs and associated fees that we had incurred in producing the higher quantity of LEAP-1B components in 2019.Third. Outside of the ASC joint venture, we do also support the LEAP program with traditional laminated composites under another small fixed price contract. While we would have previously expected revenues from this program to grow in 2020 in-line with the expected ramp for both LEAP-1A and LEAP-1B engines, we now expect 2020 revenues from this program to decline by $5 million to $10 million compared to 2019.I would like to point out that much of AEC is performing in-line with or ahead of expectations. In fact, as Bill mentioned earlier, work not for the 737 grounding and production pause, our AEC guidance for 2020 would be at or above the prior long-term objectives we had set for the segment. For non-LEAP programs overall, we are experiencing significant improvements in 2020. Additionally, we expect that the segment overall, even after the impact of the 737 MAX slowdown will for the second year in a row generate positive free cash flow in 2020.However, the impact of the three factors I just discussed, the absence of net favorable changes in estimated long-term contracts profitability in our expected 2020 performance. Lower revenues for the ASC joint venture and the lower revenues from the smaller fixed price LEAP program are too great for those other improvements to offset. As a result for 2020, we are guiding AEC revenue of 400 to 420 million and AEC adjusted EBITDA of 80 to 90 million.At the total Company level, we are also providing initial 2020 guidance as follows. Revenue are between $970 and $1.01 billion. Adjusted EBITDA of between 210 million and 235 million. The effective income tax rate including tax adjustments of 26% to 28%. Depreciation and amortization of between 75 million and 80 million. Capital expenditures in the range of 75 million to 85 million.GAAP earnings per share of between $2.69 and $3.08, and adjusted earnings per share of between $2.75 and $3.15. The difference between our GAAP and adjusted EPS guidance ranges represents a known charge which will be recorded in Q1 of [$3] (Ph) million related to severance payments for our outgoing CEO.While we do not formally guide R&D spending, I would like to note that we do expect to increase R&D expenditures in 2020. Most notably in the Engineered Composites segment, we will continue to demonstrate the applicability of our advanced and unique composite solutions to the production of a variety of aircraft components to support our customers' needs.As Bill mentioned earlier, our long-term vision for success in that market has been unaffected by the current 737 MAX situation and we are continuing to invest in support to that vision. We continue to believe that the strategic outlook for both of our segments remains strong and will lead to significant long-term value creation.With that, I would like to open the call for questions. Grace.

Thank you. [Operator instructions] And our first question is from John Franzreb with Sidotti & Company. Please go ahead.

Hi good morning Bill and Stephen, welcome back both.

Thanks John.

Good morning.

My first question is embedded in your guidance. How long do you assume production halt will continue for the MAX?

So John, thanks for the question. In terms of the 737 MAX our guidance, and John please put your on phone on mute, because we are getting some background noise. Our guidance is based not on necessarily any expectation of what Boeing does with the 737 MAX program either in terms of its returning to service and the subsequent production ramp.Our guidance is based more on an expectation of demand we anticipate seeing from our direct customers front. So, it has somewhat removed our various levels of removal from what Boeing does, what Safran does in terms of as we say, not only Boeing's return to service and Boeing clearing of the backlog of existing aircraft as in the fleet and also aircraft that is yet to deliver. But also, clearing through the backlog of finished goods inventory that lies not only on our books that I discussed, but also within the supply chain, within the Safran and CFM joint venture.

Thank you. And next we will go to the line of Kristine Liwag with Bank of America. Please go ahead.

Hi. Good morning guys.

Good morning.

For the 737 MAX, what production rates will you be producing through 2020? And then at what point do you restart production and at what rate are you producing?

Yes. So, as we have discussed before, at the request of our customer, we do not talk about our specific build rates after for 737 MAX. And so, I can't answer that question directly. We are still in production for LEAP-1B components. Sitting here today, we are still producing, but obviously at a much lower rate than we had previously been producing, which is not only a result of the demand from our customer, but also exacerbated as I mentioned by the finished goods inventory we already have on-hand, on which we have already recognized revenue.

I think, Stephen. It is important to emphasize too, just as we noted in our comments, the lack of clarity. It really is difficult as we look at the year to time travel exactly what it will be. So, we have taken an approach we think is a realistic approach and it is probably something we will just have to update everyone on as we go through the year.

Thanks. And in the non-AEC portion of Engineered Composites, can you discuss your cost cutting initiatives there and how we should expect you to balance growing of F-35 rates but declining 787 rates. How does that net out?

Yes. As we mentioned, we have a number of programs that we are ramping up on right now. So we are watching each of those. We are watching the 787 and how that will play out. But, we also have growth programs. So, we will be shifting appropriate workforce as needed as the growth shifts.

I will point out that outside of LEAP-1B and the impact of that program on our AEC results, the balance of AEC, we anticipate double-digit revenue growth in 2020 and that is embedded in our guidance.

Thank you. And then switching gears to Machine Clothing. Bill, you mentioned that you have two facilities in China that could have been affected by Corona Virus. Can you quantify the magnitude of the possible effect of this and should we see some resolution on when activities normalize? Is there a dollar amount that you can speak to in terms of per quarter and then also once things normalize, do you expect to recover all of that so that the full-year is intact?

It is really hard to make a call right now, because the situation is so fluid. We do have two facilities there. One is basically shutdown, the other is running at very small rate. And then there is the logistics problem of ships and shipping is just not running yet. So, we are just going to watch it as we go. I don't know if we -.

Yes. So, Kristine as to your dollar question, as I have mentioned in my remarks, last year we disclosed we generated roughly $1 million a week of sales from Chinese operations directly to customers. We are seeing a kind of two types of impacts right now. One, we are seeing reduced sales obviously. So not only are we shutdown, but our Chinese customers has shutdown. So sales to Chinese paper mills or any of other Chinese customers obviously on holds and that is causing a direct revenue impact.The secondary impact we are seeing is there are some products which go from outside of China from those Chinese facilities, some elsewhere in Asian and some into Europe. Those customers still need those products. We are having to come up with contingency plans of reduction that those products, which is causing that product to be produced at a higher cost than it would have been produced in China, which is causing additional EBITDA impact beyond the revenue hit we are seeing from just the overall slowdown in China.

Thank you very much.

Thank you Kristine.

Thank you. And next we will go to the line of Pete Skibitski with Alembic Global. Please go ahead.

Yes. Good morning Bill and Stephen. So understanding, confidentiality with the customer and stuff. But to that end to go further on the LEAP-1B, guys should we expect first half revenue you know just talk about timing, just first half revenue AEC be fairly meaningfully below second half revenue?

That depends on too many unknowns quite frankly Pete, because we really don't know. I still had alluded to when we are going to be able to step up production rate. So, I think it is too early to say that given the uncertainty around LEAP-1B.

Okay. And then, just curious about free cash flow conversion. Stephen just given, it sounds like you had the big working capital build that - it sounds like it will reverse, I'm not exactly sure of the timing, but are you expecting free cash conversion to be maybe greater than one this year given the working capital build from last year?

We obviously had very strong free cash flow conversion in 2019, we expect another strong year in 2020. We don't guide free cash flow, so I'm not going to tell you whether it is above or below one, but it should be a strong year. We certainly though see some unwinding of the working capital position we have taken in LEAP and obviously the at balance of the day is we delivered very meaningful cash in 2019 given the segment overall was positive free cash flow and obviously as always a Machine Clothing was a very strong cash generation, we expect that to continue in 2020.

Okay great, and maybe one for Bill. Bill in your opening remarks you kind of were alluding to as the M&A market being a little pricey, but it sounds like you were really looking at kind of new bids - projects on kind of current aerospace platforms and I'm not sure whether it is more commercial or military or not, but how kind of active is the new bid opportunity set, in terms of the size, how big is in the opportunities set. I'm just curious because you know a lot of these programs are very long lived. And so we don't see a lot of new opportunities at the high level, but maybe at your level they are more active. So, I'm just curious as to what you are seeing there.

Well, and as we announced The Wing of Tomorrow, is it is a long-term program. So, it really speaks to the long-term technology and investment, our belief in the technology and our customers expected benefits from the composite technology. So, we will keep working. As we are working on other long-term opportunities, we will disclose them when our customers are ready to do that. But in nature, I would say they are longer term. They are not something that is going to happen within a year.

There is a fairly full pipeline though and we were successful in some opportunities in 2019. But to put these in context, these tend to be ones which are either military in nature, which means they are by somewhat definition smaller, because the build rate is lower or there are takeaways from another supplier, and these programs tend to be smaller.These are certainly not LEAP type programs that we are pursuing and winning right now in terms of its revenue impact, but they are meaningful. Some of them are certainly in that $10 million to even $30 million of revenue per year. We could potentially get out of these programs that we are chasing today. And given the size they see, we only need to win a handful of those every year to have a meaningful impact on our growth rate.

Okay, it is great. That makes sense. Thanks for the color guys.

Thank you Pete.

Thank you. And next we will go to the line of Peter Arment with Baird. Please go ahead.

Yes, thanks. Good morning Bill and Stephen. Stephen, just a quick one, on the forecast for Machine Clothing. The global production you said down 2% to 2.5%, 5% down in North America. Have you already started to see weakening order rates from North American customers?

You know, it is tough to tell right now here in Q1. I couldn’t say. The early part is always fairly decent order flow. It is a quarter where, and I haven't lived through this before, typically, the corporate stuff just starts to see a panic of the lack of order flow and it all comes into the back half of Q1.So, it is a little early to tell right now. It is a little weaker at this point [Technical difficulty] expect. Buts it is not something meaningful at this point. And you know obviously - this is not like aerospace where we get the orders very long lead time. These are fairly quick terminal orders and so it is not - we don't typically carry a large backlog.

Okay. No, that is helpful. And then just quickly on AEC, I know we have talked a lot about LEAP. Are you getting more pulled out of LEAP to fill in on for the LEAP-1A from your customer? I know there was expectations that they were going to accelerate some production on their end?

So, LEAP-1A is certainly up from 2019 absolutely, and we are seeing some modest increases in LEAP-1A demand. I think there are a couple of factors going on. One, as we have discussed before, if you look at some of the more recent orders for the A-320 NEO family, the proportion of those aircraft which are LEAP-powered as opposed to being powered through - by the alternative engine has increased overtime, and therefore we would expect to see even for the same A-320 NEO build rate, a larger number of LEAP-1A engines being produced.And secondarily, Airbus has talked about increasing the actual build rate of the A-320 NEO. Now that takes time. I don't think it is reasonable to expect to see the impact of a higher build rate of A-320 NEO in our current numbers. The global supply chain for aerospace takes time to move, and I'm sure Airbus will trickle it up overtime, but we are not seeing that impact today.

Yes. I was going to add, Stephen. To answer the question, I don't think we are seeing an impact to MAX order rate slow down or the production rates lowdown, and is there a competitive reaction on the A-320. We are not seeing that yet. There is an increase in LEAP business, the LEAP-1A business.

Okay that is helpful. Bill maybe just a quick one for you. Given that you were on the Board and you have had kind of a front row seat of the improvements, you mentioned operational improvements that you are expecting for both segments to continue, maybe just give some perspective on kind of the runway that is still in front from your seat now?

Yes, we are going to continue to focus on operational improvements. We have got strong teams in place, a number of leaders put in place last year. There is still plenty of opportunity to continue improving quality performance, cost productivity, service to our customer, we have got the I will say the foundation there, but there is still a lot more work to do on top of that.

I appreciate it. Thanks for all the color.

Thank you. And next we will go to the line of [Patrick Bowman] (Ph) with JP Morgan. Please go ahead.

Hi good morning gentlemen. Just maybe starting with some the mid-term 2020 targets that you guys had provided some time ago. I think you mentioned that you would be at or above those numbers absent these MAX issues. Is there any reason to believe that when MAX gets back to where it was supposed to be that you will be able to achieve those levels. I guess what I'm asking is, the supply chain impaired in any way from the issue such that or make it difficult to normalize back to what you thought the entitlement might be for that business? I'm talking about the 500 to 550 in revenue and a hundred in EBITDA that you had put out there, I guess a couple of years ago?

Just taking them reverse order, certainly the EBITDA guidance range of the 18% to 20%, our guidance that we are providing for 2020 certainly implies a rate above that 18 to 20% range. So we don't see a challenge with that. In terms of 500, 550 billion of revenue, we do not see anything which has permanently impaired the business in any way. We do see this as a short term effect.Obviously we are not guiding beyond 2020, so I'm not going to predict the future, but there is nothing in what we are seeing right now, which should be lasting in nature, it is directly driven by reduced demand for LEAP-1B engines caused by the 737 grounding and production pause and that should reverse itself once the 737 comes back online.

Okay. Any update on progress for the GE9X for the 777?

So, we are obviously in low rate production for aircraft. We are very pleased to see the first flight at the triple 777X, a month ago or so and so we expect to be producing that, this year there was a delay in that program, it slipped about 12-months to the right, which obviously impacted our production ramp. But we are expecting to increase production this year in that program in-line with our customer's demand. We are facilitizing for that ramp and there are no particular challenges in that program today.

And then what about the 787, what is the outlook for that within your business for 2020?

Yes. Obviously there have been the two step downs, 14 to 12, 12 to 10 and that will not be - it has any material impact here in 2020, there could be some impact in 2021, but it does depend on the mix of aircraft. As there are three variants for the 787. We provide frames for two of the three variants today.And so, it really depends on the production mix in a given year, how significant that impact would be. Even works though to all the details in our variance, it is not as if it would have a material impact on our overall AEC revenues. It is an important program, but it is much, much smaller than LEAP obviously, and one of a handful of other significant programs in that, but not significant enough that any reduction that program is going to materially drive revenues up or down.

Well maybe if you could just - and last one from me. By order of importance, I think you mentioned the double-digit revenue growth you expect for your segment, excluding Safran business through 2020. By order of importance, what are the big drivers? Maybe you said this earlier and I just missed it. What are the big drivers in that double-digit growth program wise?

Yes. So, we don't get into guiding specifically by program, but outside of LEAP, the other big programs that we have an AEC, are 787, CH-53K, the F-35 program, JASSM which is the Joint Air-to-Surface Standoff Missile for Lockheed Martin, our wastewater tanks program for Boeing Aircraft and then a variety of smaller programs. Those are most significant programs and the bulk of the growth will be coming out of those programs.

Okay. Very good. Thanks a lot. Good luck.

Thank you.

Thank you. We do have another question from John Franzreb. Please go ahead.

Yes. I will ask quickly and mute myself again. But could you just discuss, it has been over year that the taking up, how does that impacted the pricing environment in Machine Clothing? And secondly, recycled pulp has come down considerably in pricing. Is that impacted your customers spending end at all? Just talk to those issues, margin profile in Machine Clothing [Technical difficulty].

So, thanks John. So in terms of the [Zurium] (Ph) acquisition, obviously that was as you say completed some time ago. We have not yet seen a significant impact in the market. It obviously strengthens that competitors of ours. Zurium is a strong competitor, and they remain a strong competitor in the market. The pricing environment in Machine Clothing has been fairly stable. But, we are always very mindful of that and watch it. We have not seen significant impacts of that yet.In terms of your question about pulp, and the pricing is obviously down. We have seen a bit of a shift with some of our pulp customers, the markets for our products as they acquire being down somewhat at various points in time during the year, but not the material at the top-line level when we roll it all up. It hasn't meant a material shift for the year.Overall during the most recent year, pulp was up for the year compared to 2018, slightly low single-digit growth in pulp for the year on a constant currency basis. But bulk of the growth as we typically see in the Machine Clothing business was driven by primarily growth in packaging and tissue with -.Again, for the full-year, as you would expect, full-year declines on a constant currency basis in publication grades of roughly 10% for the year. But we did see some growth in pulp for the year. So, while there were specific customer impacts of what you talked about overall, it didn't affect our top level sales.

Thank you. And next we will go to the line of Gautam Khanna with Cowen & Company. Please go ahead.

Hey thanks, good morning guys.

Good morning Gautam.

Good morning.

Great, thank you. So a couple questions just for clarification. First, in terms of EAC adjustments, Stephen, what are you expecting in the guidance for a 2020?

We typically take a neutral stand on EAC adjustments, we don't embed them, either positive or negative in our planning, as we have seen in the past, we have had years where we have had significant unfavorable adjustments. We were very fortunate, and fortunate is probably the wrong words because it - of the hard work of our employees and leaders in the business. But we enjoyed some very favorable adjustments this year. But in a typical year we would assume a neutral position.

Okay. And then you gave some color on the LEAP-1B revenue last year at 130 million and then you made a couple comments, something was down five to 10 million and I wasn't clear if that was the LEAP-1B components that was not in the 130 and maybe can you just frame what you are anticipating, what revenue expectations embedded in the EAC guidance for LEAP-1B revenue in 2020?

Thanks Gautam. So, as there are two questions and the first part, the reduction of five to 10 million. We have a small program, at customer requests we don't typically talk about externally and I don't divulge the exact nature of the program, which is a fixed price contract for traditional laminated so 2D composites. So this is outside of the Albany, Safran joint venture.We would have expected that program to grow from calendar 2019 to calendar 2020 in line with just the ramp of LEAP. In fact, that program is declining by about five to 10 million from 2019 to 2020. So that is the first question. So this was not in the 130, because 130 was only LEAP-1B revenues within the Albany, Safran joint venture.And to answer your second question, in terms of LEAP-1B revenues for calendar 2020, we are not going to break those out, they are clearly down appreciably vary significantly from 130 we recognized in 2020. But we don't want to get into issuing guidance down at the product line or business unit level at the segment level is as low as we are comfortable going.

Okay. Can you give us some framework on how much EBIT dollars associated with the LEAP-1B reduction compares to that of the revenue decline. Obviously it won't be as big, but any order of magnitude?

So, look, as you see, so if we look at 2019, and if you strip out 12 million of profit and revenue associated with the EAC adjustments we just talked about, you are going to come out with the exactly how you do the calculation and EBITDA margins to be here somewhere North of 20% in the 20.3% to 20.5%. The midpoint of our guidance on AEC for 2020 implies an EBITDA margin for 2020 at 20.7% so North of 2019.So, basically what that tells you, since we said we weren't assuming EAC pickups in 2019, we are assuming that the margin overall expend. Embedded in that is an assumption that while the revenue will go down within ASC as a result of LEAP-1B productions, our EBITDA margin, certainly our gross margin, that that business will generate will not decline appreciably.As we have talked before, given the cost plus nature of that business, our gross margin percentage is relatively immune to shifts in volume. And I think relatively new, it can be slight changes, but relatively it is fairly stable. So, our dollars of profit, gross profit dollars that the ASC business generates will go down but effectively pro-rata with the revenue line.So, we will see a percentage reduction in gross profit consistent with a percentage reduction in revenue we are seeing and that is because we will still absorb our fixed costs over the remaining business. So, we will not see any margin compression within that business.

Okay. Last one, sorry, just a re-ramping. Now that you have had some workforce reductions, what is your level of concern about Albany's ability to re-ramp? You know, obviously these decisions are made with some production ramp in mind, what that profile looks like, but in terms of your ability to kind of hire those folks back, preserve learning curves. I’m just wondering how this impacts kind of your longer-term thinking on the margin profile of this contract. I mean, does it severely impair the ability to get to a point where you are in a position to negotiate a fixed price contract down the road or, and I'm just curious, how do you think about new ramp potential given this?

Yes, let me try that a little bit. I think the words we used for - our reluctance to reduce the workforce was precisely because of some of the reasons you stated. It is a growing business. It is a developing technology. We have a lot of promise with. So, we wanted to keep the expertise that we have developed and continue to develop.As Stephen went through in detail, the production of the inventory at the end of 2019 provides us with some time as we burn-off that in our assumption we are producing today, LEAP-1B, but we will also have the inventory that we can burn off as we go through 2020, we believe gives us enough time to look ahead and see as the ramp comes to shift people around and bring people back on as needed.So we have given that a lot of thought. It was a more normal business, we probably would have taken deeper cuts, but we are trying to protect the production capability and the technology as we go forward.

Thank you.

Thank you, John.

Thank you. We will go back to the line for Patrick Bauman. Please go ahead.

Alright. Thanks for sneaking me here. I just have one quick follow-up. When you said, the year of business was free cash flow positive for 2019 and you expect it to be for 2020. I just wanted to be clear in the definition, how do you build to that? Is it EBITDA minus CapEx and if it is more than that, how do you treat like all the other components like corporate and how do you allocate on the other stuff working capital and taxes and all that stuff?

Very good question. So our free cash flow for this purpose is just the free cash flow from operations for that business, less CapEx for that business. So that does not include the corporate elements and so it is - leaving aside that free cash flow is not a GAAP measure. This is even you know kind of less than the GAAP measure which is why we are not giving you actual hard numbers, because it is somewhat artificial at the business level. But it just says at the end, that that business sense corporate a check for cash at the end of the year, which was very positive in prior years if it has consumed as much as $50 million of cash in a given year. So, which has been a remarkable turnaround for that business.

Okay. So the statement is basically EBITDA minus CapEx number?

No, not EBITDA. it is free cash flow from operations, less CapEx and not EBITDA. So it is much more of a true cash flow measure than the EBITDA minus CapEx. So it is the operating profit less all of the changes in working capital for that business less CapEx.

Got it okay, but it is excluding you know the corporate is what you said. Got it. Okay.

Exactly. Yes.

Understood. And then as you look at 2021 like as you ramp back up hopefully with Safran, with the MAX, would you expect to be able to say that again at that point or is this a function of kind of a little bit of a pause in the growth trajectory more than kind of a statement on the business itself?

So obviously we are not guiding 2021 and beyond, but I would say that the positive cash flow we expect in 2020 is not really a result of a pause. It is more results that the underlying strength of the business.

Okay. Thanks so much.

Thanks Pat.

Thank you. And I have no further questions in queue at this time.

Alright. Thank you, Grace. This is Bill Higgins. If I can, I would like to thank you all for joining the call. We appreciate your time today and your continued interest in Albany International. I would like to conclude today's call by recognizing the entire Albany team for another very strong quarter performance. Thank you everyone.

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