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…

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…

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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