Albany International Corp. (AIN) Q3 2021 Earnings Report, Transcript and Summary

00:05 Ladies and gentlemen, thank you for standing by, and welcome to the Albany International Third Quarter Earnings Call. At this time, all parties are in a listen-only mode. We will conduct a question-and-answer session later. Instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded. 00:24 I would now like to turn the call over to our host, Director of Investor Relations, Mr. John Hobbs. Please go ahead, sir.

00:32 Thank you, Brad, and good morning, everyone. Welcome to Albany International's third quarter twenty twenty one conference call. As a reminder, for those listening on the call, please refer to our press release issued yesterday afternoon detailing our quarterly financial results. Contained in the text is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP. 01:04 For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking that contain a number of risks and uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations, the markets we serve and our financial results. For a full discussion, including a reconciliation of non-GAAP measures we may use in this call to their most comparable GAAP measures, please refer to both our earnings release of October twenty fifth, twenty twenty one, as well as our SEC filings, including our 10-K. 01:44 Now, I'll turn the call over to Bill Higgins, our President and Chief Executive Officer, who will provide opening remarks. Bill?

01:51 Thank you, John. Good morning and welcome everyone. Thank you for joining our third quarter earnings call. We're pleased to report another good quarter of results. We executed well and we continue to do a great job for our customers on many fronts in quality, delivery service and our technology partnerships. Our supply chain teams work 24/7 to overcome unprecedented logistics challenges and material shortages to keep our factory supplied, and I'm most pleased that we achieved a record level of performance in safety, something our teams have been working hard at in all of our plants around the world. 02:22 As a company, we delivered GAAP EPS of zero point nine five dollars, zero point eight three dollars on an adjusted basis on two hundred and thirty two million dollars in revenue, an increase of nearly ten percent from Q3 last year. Our Machine Clothing segment continues to fire on all cylinders and grew sales by eleven percent compared to Q3 last year, with excellent profitability and free cash flow generation. 02:44 Engineered Composites delivered top-line growth of nearly seven percent and performed well as we work toward the upturn in commercial aerospace. Our profitability was solid with gross margins of forty percent, operating margins of nineteen percent and adjusted EBITDA margins of twenty six percent. And we continued our strong free cash flow generation over forty million dollars in the quarter. We have low debt and a healthy balance sheet and we look forward to continuing solid performance from our Machine Clothing segment and gradual recovery in commercial aerospace. As we mentioned last quarter, long-term secular trends are favorable and Albany's market positions, global footprint and product development take advantage of these trends. 03:24 In our Engineered Composites segment, we expect commercial aerospace to gradually improve with narrow-body aircraft demand improving before wide-body demand. Consequently, we're hiring employees and planning for ramp up in lead production driven by Airbus A320neo and Boeing 737 MAX growth. We are coordinating with SAFRAN to expand production in our three LEAP facilities in the US, France and Mexico. 03:48 We see positive signs in international travel bookings as borders reopen and people have begun to travel internationally. Although we don't expect any near-term pickup in wide-body production demand, such as for our Boeing 787 composite frames line as there's still inventory in the system and international travel is been slow to recover. 04:08 Our AEC businesses continue to perform well on our military platforms, Sikorsky CH-53K helicopter, Lockheed Martin's F-35 Joint Strike Fighter and JASSM missile programs. We're fortunate to be on excellent programs and our teams are executing well. We also continued our pursuit of new customers and new applications for advanced composites. 04:28 During the quarter, we announced our technology collaboration with Spirit AeroSystems to apply our advanced 3D woven composite technology to hypersonic vehicles and take advantage of our proprietary 3D woven composites in a high temperature environment providing both structural robustness and thermal protection, and building on our proven ability to industrialize 3D woven composites at high volumes. This is an example of the intense collaboration our teams are good at, working closely with our technology partners in the design, development and commercialization of the most advanced composite applications. 05:03 In addition to working on engine components applications with our partner SAFRAN, we continue development of wing applications with Airbus Wing of Tomorrow program and other composite programs in commercial and defense applications. 05:16 Our Machine Clothing segment continued to perform exceptionally well. Our engineers and sales and service teams in MC work closely with key customers to develop the next generation of belt materials for improved operational efficiency, performance and durability, and customers value our service technical expertise and innovation. We saw good demand in the quarter for new products in all product lines. 05:38 Demand in MC's end markets has been resilient and particularly strong in packaging in the Americas. Tissue markets have held up, although demand is mixed and flat overall, as tissue machine utilization is below long-term averages and tissue producers are working through distortions caused by the pandemic's effect on away-from-home paper markets. This should improve as workers go back to offices and students are back in school. 06:02 In other end markets, demand was strong in the quarter for corrugators, nonwovens and building products. Even publication was better this quarter, likely a pause in the longer-term secular decline of printing and writing grades of paper. We are seeing significant logistics challenges in price inflation on various raw materials and wages. So far, supply chain management and operations teams have done an excellent job. They've been able to secure the materials we need to run our operations that only moderate increases in costs. 06:31 In general, we strive to offset inflationary cost through productivity savings, but this time may be different, as we don't see inflationary pressures abating anytime soon. If anything, conditions grew more challenging during the third quarter. 06:45 Let me make a few comments on corporate governance and capital allocation before turning the call over to Stephen. In early August, the company moved closer to a single class share structure following the secondary offering of nearly all of the Standish Family's ownership in the company with their few remaining shares converted to Class A common stock. 07:05 As a result, today, there are more than thirty two point three million shares of Class A common stock outstanding and less than one thousand two hundred shares of Class B stock outstanding, which are held by two former employees. The transaction effectively created a conventional single-class governance structure for our shareholders. 07:23 Regarding capital allocation, as we mentioned in the past, our priority is to use our balance sheet first for organic growth investments, where we can add value for our customers, and then acquisitions that fit our strategy enable us to build on our technology leadership and market positions in both segments. 07:40 Adding to these options, Albany's Board of Directors has authorized a two hundred million dollar share repurchase program, expanding the set of capital allocation alternatives we have at our disposal. We continue to look for acquisitions that advance our technology and market position in a fair price and we're focused on value creation from both an organic and inorganic investment perspective. 08:01 In summary, we had another good quarter. Our businesses are executing well, we continue to push the envelope in our technology development with new products in both segments, and secular trends in our end markets are favorable. 08:13 So with that, I'll hand the call over to Stephen for more detail on our financials. Stephen?

08:18 Thank you, Bill, and good morning to everyone. I will talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year. 08:28 For the third quarter, total company net sales were two hundred and three point four million dollars, an increase of nine point six percent compared to the two hundred and twelve million dollars delivered in the same quarter last year. Adjusting for currency translation effects, net sales rose by eight point eight percent year-over-year in the quarter. 08:48 In Machine Clothing, also adjusting for currency translation effects, net sales were up nine point nine percent year-over-year. All major grades of product led by engineered fabrics and packaging grades contributed to the year-over-year increase in net sales. 09:05 Engineered Composites' net sales again after adjusting for currency translation effects grew by six point seven percent, primarily driven by growth on LEAP and CH-53K, partially offset by expected declines on the 787 and F-35 platforms. 09:23 During the quarter, the ASC LEAP program generated about twenty five million dollars in revenue, comparable to the first two quarters of this year, but up about nine million dollars from the third quarter of last year. We are pleased with the reduction in our inventory of LEAP-1B finished goods. During the most recent quarter, we reduced that inventory by over thirty engine shipsets, down to about one hundred and forty engine shipsets on hand. 09:52 Given the current rates of the inventory consumption on that program, we would not plan to have that inventory level drop below about one hundred engine shipsets. So we can see the light at the end of the tunnel in terms of inventory destocking. I'm looking forward to an earnings call when I no longer have to discuss LEAP-1B inventory at all. 10:13 We hope to return toward a more normal level of production on LEAP-1B on par with the current production rates for LEAP-1A early in twenty twenty two. However, we do have some concern with the rate at which Boeing is destocking its inventory of finished 737 MAX aircraft, so there is still some lack of clarity around twenty twenty two build rates. We will hopefully have better insight for you on our fourth quarter call. 10:41 Also during the quarter, we generated under three million dollars of revenue on the 787 program, down slightly from the second quarter, but down from almost nine million dollars in the same quarter last year. Third quarter gross profit for the company was ninety two million dollars, an increase of over five percent from the comparable period last year. The overall gross margin decreased by one hundred and sixty basis points from forty one point two percent to thirty nine point five percent of net sales. 11:13 Within the MC segment, gross margin was flat at fifty one point five percent of net sales. As the benefit from improved absorption was offset by the impact of year-over-year foreign currency changes and rising input costs. For the AEC segment, the gross margin declined from twenty one point six percent to sixteen point one percent of net sales caused by a smaller impact from changes in the estimated profitability of long-term contracts, a change in program mix and lower fixed cost absorption due to the lower 787 and F-35 revenues and the impact of sharing with our customer base, a portion of the Aviation Manufacturing Jobs Protection grant received during the quarter. 12:00 The five point eight million dollars benefit of this grant appears in the corporate portion of the results. While the reduced profitability caused by sharing a portion of the grant with our customer base is reported in the segment results. During the quarter, we recognized a net favorable change in the estimated profitability of AEC's long-term contracts of about two million dollars, but this compares to a net favorable change of about three point five million dollars in the same quarter last year. 12:31 Third quarter selling, technical, general and research expenses were forty seven point four million dollars in the current quarter, down slightly from forty seven point eight million dollars in the prior year quarter, and were down as a percentage of net sales from twenty twenty point six percent to twenty point four percent, while R&D was up over one million dollars this quarter, and while we also incurred higher travel expenses. These were more than offset by a foreign currency revaluation gain this quarter compared to a foreign currency revaluation loss in the same quarter last year. 13:13 Total operating income for the company was forty four point five million dollars, up from thirty eight point eight million dollars in the prior year quarter. Machine Clothing operating income rose by nine point eight million dollars, driven by higher gross profit and lower STG&R expense, and AEC operating income fell by three point nine million dollars caused by lower gross profit and higher STG&R expense, partially offset by lower restructuring expense. 13:45 The income tax rate for this quarter was twenty nine point four percent compared to twenty four point seven percent in the same quarter last year. The higher rate this year was caused by the generation of a higher share of our global profits in jurisdictions with higher tax rates and by less favorable discrete income tax adjustments. We reported over two million dollars in expense under other income and expense this quarter, primarily due to a true-up of indirect taxes in a foreign jurisdiction. 14:21 Net income attributable to the company for the quarter was thirty point nine million dollars, an increase of over one million dollars from twenty nine point six million dollars last year. The increase was caused primarily by the higher operating profit, partially offset by higher interest expense and higher tax rate. 14:42 Earnings per share were zero point nine five dollars in this quarter compared to zero point nine two dollars last year. In addition to the normal non-GAAP adjustments, we typically make to cover the impact of foreign currency revaluation gains and losses, restructuring expenses and expenses associated with the CirComp acquisition and integration. This quarter, we are also adjusting out the impact of the Aviation Manufacturing Jobs Protection grant as we do not believe it is reflective of ongoing profitability. 15:15 After making these non-GAAP adjustments, adjusted earnings per share was zero point eight three dollars this quarter compared to zero point nine six dollars last year. Adjusted EBITDA declined by two point six percent to sixty point two million dollars for the most recent quarter compared to the same period last year. Machine Clothing adjusted EBITDA was fifty nine point two million dollars or thirty eight point four percent of net sales, up from fifty two point six million dollars or thirty seven point nine percent of net sales in the prior year quarter. 15:53 AEC adjusted EBITDA was sixteen point three million dollars or twenty point eight percent of net sales, down from last year's nineteen point five million dollars or twenty six point six percent of net sales. 16:08 Turning to our debt position. Total debt, which consists of amounts reported on our balance sheet as long-term debt or current maturities of long-term debt remained steady at three hundred and fifty million dollars. We have a floating to fixed interest rate swap in place at that level for the life of the current credit agreement and currently we do not intend to pay down total debt below that level. Cash increased by about thirty three million dollars during the quarter resulting in the reduction in net debt by the same thirty three million dollars. 16:41 Capital expenditures in the quarter of about nine million dollars were roughly the same as incurred in the same quarter last year. From a capital deployment perspective, as Bill mentioned, our priorities are unchanged. The first priority is organic investments, followed by disciplined and targeted acquisitions followed by returning capital to shareholders. Our fundamental strategy has not changed. 17:07 However, given our modest leverage and strong free cash flow outlook, the Board of Directors has authorized a two hundred million dollars share repurchase program. We believe that such a program will be the most efficient, effective and value-additive approach to returning additional capital to our shareholders. 17:28 While there is no guarantee that we will execute all or even any of this authorization, it is the company's intention to make use of this authorization, subject to prevailing market conditions and while recognizing the inherent limitations on how quickly we can execute such a significant program. Fully executed, the share repurchase program would increase our net leverage a little under one turn of EBITDA, leaving us with sufficient dry powder for additional strategic actions. 18:03 As we look forward to the balance of twenty twenty one, the outlook for the Machine Clothing segment remains strong. Q3 revenues were up over eleven percent compared to last year, partially aided by some currency tailwinds to revenue, primarily due to stronger Euro. Packaging and tissue grades remain the primary drivers of long-term growth, while we also saw a nice recovery in publication revenue in the third quarter, driven by a return to offices and schools, a continuation of this recovery is in Jeopardy as a result of the Delta Variant surge which has paused some return to office efforts. Also, after we get through the pandemic effects, we do not expect any change in the long-term secular decline in the publication market. 18:56 I would also like to note that the growth rate for the MC segment this quarter was unusually high, driven by timing of customer needs. Segment orders year-to-date are up about six percent compared to last year and backlog entering Q4 is only modestly higher than at the same time last year. We typically generate about twenty three percent to twenty five percent of the segment's revenue in the fourth quarter and we expect this year to be broadly similar to that. As a result, we are raising our previously issued guidance of revenue for the segment to between -- to be between six hundred million dollars and six hundred and ten million dollars, up from the prior range of five hundred and eighty five to six hundred million dollars. 19:41 From a margin perspective in Machine Clothing, we delivered another strong quarter with adjusted EBITDA margins of almost thirty nine percent. We are seeing increased pressure from input expenses of all types, particularly logistics and expect these pressures to continue to increase through the balance of the year. However, as previously discussed, many of these cost increases, which began in Q2 and accelerated in Q3 have yet to materially impact our results due to both the terms of our supply agreements and the roughly six month lag between procuring raw materials of higher cost and those cost being reflected in the segment's cost of goods sold. We will see more impact from these cost pressures in Q4, but we will not see the full impact until twenty twenty two. 20:36 In addition, late in the third quarter and early in the fourth quarter, we have seen some relaxation of travel restrictions in certain regions and are beginning to see our level of visits to customers increase, which will result in somewhat higher STG and -- sorry, SG&A in the fourth quarter. Driven primarily by the strong revenue performance, we are increasing our adjusted EBITDA guidance for the segment to a range of two hundred and fifteen million dollars to two hundred and twenty five million dollars, up from the prior range of two hundred and ten million dollars to two hundred and twenty million dollars. 21:13 Turning to Engineered Composites. We delivered a strong quarter, very much in line with expectations. Last quarter we indicated that we expected Q3 profitability to be similar to that delivered in Q1 and it was within a few hundred thousand dollars of that level. We were very pleased to be awarded an Aviation Manufacturing Jobs Protection grant during the quarter of five point eight million dollars, which recognizes the challenges that we, along with the rest of the industry have experienced due to the COVID pandemic. However, as I already noted, we have adjusted the effects out of both Q3 adjusted results and segment guidance for the year as it is not reflective of continuing operational performance. 22:02 While unlikely to have any material impact on the balance of twenty twenty one, we are concerned about the slow recovery of the Boeing 787 program, where Boeing has indicated that they will continue to produce at a low rate for the foreseeable future. 22:18 As at the end of the third quarter, we had the equivalent of about five shipsets of 787 product in either finished goods or with, which is not unusually high. However, significant quantities of our finished goods exist in Boeing's overall supply chain, which combined with Boeing's low level of production will likely lead to very low levels of production for us for the foreseeable future and may even lead to significant production gaps. Any impact in twenty twenty one would be modest. As we are not anticipating any significant recovery on the program this year, but it will likely delay any meaningful recovery on the program until beyond twenty twenty two. 23:07 As you know, our production levels on the F-35 have been uncertain this year as our customer has dealt with issues elsewhere in the supply chain over the last eighteen months and with lower depot consumption of aftermarket parts. We are confident in our outlook for the balance of the year, but I will note that Lockheed Martin and its government customer have established a new outlook for program production but plateaus at one hundred and fifty six aircraft in twenty twenty three, a lower rate and then earlier date than the previously planned plateau. 23:43 F-35 remains a very good and profitable program for us. This programmatic change has no impact on this year, but it will likely temper the revenue upside in the program for us in future years. Overall for the AEC segment, the year is progressing largely as we expected when we last issued guidance, although we are now less concerned about downside risk. 24:08 Therefore, we are raising the lower end of our guidance range for segment revenues resulting in the range of between three hundred million dollars to three hundred and ten million dollars, up from the previous range of two hundred and ninety million dollars to three hundred and ten million dollars. From a profitability perspective, given the year is progressing largely as expected, we are maintaining the previously issued guidance range for AEC adjusted EBITDA of between sixty five million dollars and seventy million dollars. 24:39 We are also updating our previously issued guidance ranges for company-level performance including revenues up between nine hundred million dollars and nine hundred and twenty million dollars increased from prior guidance of eight hundred and eighty million dollars to nine hundred and ten million dollars. Effective income tax rate of twenty eight percent to thirty percent unchanged from prior guidance. 25:00 Depreciation and amortization of about seventy five million dollars unchanged from prior guidance. Capital expenditures in the range of forty million dollars to fifty million dollars also unchanged from prior guidance, GAAP earnings per share of between three point twenty three dollars and three point thirty eight dollars increased from prior guidance of two point eight four dollars to three point one four dollars. 25:27 Adjusted earnings per share of between three point one five dollars and three point three zero dollars increased from prior guidance of two point nine zero dollars to three point two zero dollars and adjusted EBITDA between two hundred and thirty million dollars and two hundred and forty million dollars increased from prior guidance of two hundred and twenty five million dollars to two hundred and forty million dollars. 25:50 Overall, while the pandemic is not yet behind us and risks still remain across our business, we are very pleased to be able to raise guidance yet again, reflecting the hard work and dedication of our teams across the globe. The coming years will continue to be a challenge as we in the rest of the industry slowly recover from the severe downturn in commercial aviation. And as the Machine Clothing market searches for its new post-pandemic normal. 26:19 We also recognize that our risks ahead in terms of supply chain constraints and inflationary pressures should the recent and current increases be more than transitory. However, our track record of operational excellence and continuous improvement positions us well to address these challenges. 26:39 With that, I would like to open the call for questions. Brad?

26:42 Yes. Thank you. [Operator Instructions] And we'll first go to the line of Peter Arment with Baird. Please go ahead.

27:05 Hi, good morning. You actually have Eric Ruden on the line for Peter today. And if I could start maybe just at AEC in terms of the MAX destock there. Just thinking through this. It actually looks like you grew contract assets by about three million dollars which compares to those sixteen million dollars and ten million dollars burn downs in the first half of the year here. How does that actually tie to this destock? I know you mentioned the thirty shipsets decrease, I would have expected the cash piece to be a bit higher there. Can you just help us think through the puts and takes on revenue and cash recognition there?

27:40 Sure. Look, your general premise is correct that with burning through those, that inventory finished goods, those are in contract assets on which we have already recognized revenue and profit and we just collect cash as we ship them. So in general, that has leads to better cash flow conversion. 27:59 I think it's important to understand that within contract assets is far more than just LEAP-1B, in particular, the F-35 and the CH-53K programs are also in there, 787 is in there, and those programs are lumpy. CH-53K in particular is a lumpy program wherein certain quarters, we go grow contract assets significantly in other quarter as we collect cash based on deliveries of our product. So those parts particularly the very large parts of CH-53K the sponsors and the vertical rotor pylons, they are very large parts, it take a long time to reduce. So we build a lot of contract assets as we go through those production processes, which we then liquidate when we ship and invoice after part delivery. So it's really driving that contract assets growth is other programs, other than LEAP-1B.

28:55 Okay, thank you. That's pretty helpful. And then just in terms of thinking through the rest of this year. Can you just provide some commentary around how we could end up actually seeing the bottom end of the EBITDA guidance range coming into play or is it safe to say you should be trending much closer above or to the top of the end here? Especially at MC, I think if I run the math for the fourth quarter implied margin would be below thirty percent on the bottom end, which would be a pretty dramatic fall off from the levels we've been seeing in recent memory here?

29:28 It's certainly true that we're trending. Based on recent experience, we're trending towards the upper end of our guidance range. And we certainly hope to deliver in the upper half of our guidance range. But it's early in the quarter. If there is still a lot that has to get done to deliver on that. So I'm not prepared to tighten the range at this stage, but certainly, your basic premise is correct that based on recent experience, we should be trending towards the upper half of that range.

29:53 Yes. I might add, just some color -- the MC business. We have customers that took delivery of material, which helped with our sales growth in Q3. And I think there is a lot of concern out there in the supply chain, logistics and people not able to acquire materials they need. There is probably some behavior out there of bringing material in early. We did that a little bit. We had a little bit to our inventory so that we're protecting our ability to produce. So, that could slowdown and things get better. So we're just going to look at the cyclicality and the lumpiness of the businesses.

30:29 Okay. That's helpful. And then just looking to twenty twenty two at MC, I know obviously no guidance here, but just, is there anything you can give us in terms of sizing the actual margin impacts you're thinking about in terms of the supply chain headwinds, given that there is that six-month lag for the rising input costs actually flow through? Just anything you can give us there would be helpful.

30:54 It's a little early to tell for the full twenty twenty two given, we don't know when these increases are going to end. So the increases we've seen to date have certainly been in the few hundred basis points, let's say. But those increases are continuing and it's premature of us right now to talk about what the impact might be for the full year twenty twenty two when you get around to issuing guidance in February. Hopefully by then, we look more clarity into when whether this inflationary spike was transitory or sustained. And if sustained will be better able to project what the impact will be in the full twenty twenty two. It's a little early to project that at this stage.

31:39 Okay, thank you. I appreciate the color. I'll hop back in queue.

31:43 Thank you.

31:44 And next we'll go to line of Michael Ciarmoli with Truist Securities. Please go ahead.

31:52 Hey, good morning guys. Thanks for taking the questions. Nice results here. I kind of wanted to stay on both of those lines of questioning, but maybe just thinking about the mechanisms you guys have in place to pass through some of these costs. Can maybe we start with the engineered components. I know you have a cost-plus agreement with SAFRAN. Does that cover some of the raw material increases or just naturally under master contracting agreements, assuming Hexcel is raising prices or other chemical components are seeing significant inflation, are you able to pass all of this through or what can you kind of say on the aerospace AEC side first with the pricing environment?

32:42 Yes, so look, we have two types of contracts. On the cost-plus contract it's SAFRAN, all of those cost increases get passed through, whether there're increases in raw materials or increase in labor costs or increases in the logistics, all of that gets passed through. So we are protected there from price increase. 33:00 On the bulk of the rest of our business, which is primarily fixed price contract. Some of its government business, some of it commercial business. On the commercial business, we will typically have entered into some multi-year contract that at the firm fixed price. There will be some protection on the raw materials and particularly with the fiber and the resins which you typically specified by our customers, we purchase that under an enabled material supply contract from our customer and typically we will get to pass along some of those if not all of those price increases in the core raw materials. 33:40 There are lot of raw materials that don't end up in the finished product. If you like non-end item as stuff that's used within our factoring, whether it's vacuum bags or gloves or anything else. On those sorts of contracts, those sort of increases we will not have protection for, nor will we have protection for increases in labor costs in those sorts of contracts. 34:02 On government contracts. It's kind of a hybrid in the middle and it depends on the specific contract. But the way a lot of our government contracts work is they negotiate a fixed price contracts, where each time we get a new award, we disclose all of our prior cost and pricing data and establish a new baseline with allowing for profit margin. 34:25 If are those price increases that occur in the system, we do get to pass those along in the next go-round of that -- of negotiation of the next phase of that contract. How long that is before we get to negotiate that next phase really depends on the individual contract. In some cases, we're pricing a new buy every year or eighteen months and others it could be three or four years in between negotiations. So that's why it's a hybrid somewhere in the middle. There is some protection, but certainly not as much as on the SAFRAN contract. So overall on AEC, we have certainly some exposure, particularly to the labor cost. But on the core raw materials were largely protected.

35:14 Okay. Got it. And then presumably Machine Clothing, it's really just to grind, you've got to use productivity to offset any of those increases because I think the contracts are more lengthier in nature and they don't often come up for renewal. Is that correct?

35:30 Yes. It depends on the customer in the specific contract and -- There are three types of contracts. Some are reprised regularly, some are from fixed price for many years with no reopen, some have an escalator in there, whether it'd be tied to some industrial and consumer price index. But overall, it's certainly true that we do not yet to pass along the full impact of the cost increases to our customers. And as you say, we do have to rely on continuous improvement efforts to offset a significant portion of that increase.

36:01 Yes. As I noted in my commentary, we've done a really good job over the years of offsetting inflation, wage inflation at lower levels. Now that we are seeing higher increases and wage pressure around the world in both segments. But in Machine Clothing, it's more work to try and offset that through productivity and cost savings, but we'll be able to get part of it, but it just depends on how high wage inflation goes there.

36:27 Got it. Helpful. And then just shifting to the F-35. Obviously, you guys articulated the new plant from Lockheed. I mean, are you guys going to be dealing with any sort of inventory destock? I mean those original plans, I think called for maybe close to one seventy units this year moving to one eighty. Are you going to have to deal with any excess capacity? Presumably, there is going to be a headwind on revenue as that program flattens out, but anything else on the destock or maybe excess capacity weighing on margins that we should be aware of?

37:07 I don't see any destocking challenges anything of that severity. It's more the revenue pressure and managing the production through the next couple of years and trying to keep it at a level rate, so that we're going to be most effective, most cost-effective in the factory with our suppliers as well.

37:27 As we said before, Mike. We did go through some degree of inventory destocking this year unrelated to the plateau on fifty six. And so that we're absorbing that impact this year as I think you know, we have been on their trajectory for what we're growing our average revenue per shipsets. So at the same time as this is leveling out, there has been some growth in that. So it's a little noisy in terms of showing our exact profile. It doesn't -- our exact revenue profile won't match Lockheed's build profile exactly. 38:05 But there is a little uncertainty in the Lockheed, exactly how those two effects are going to favor together and what sort of growth or lack thereof we might see in twenty twenty two, twenty twenty three, twenty twenty four, but we'll have more color when we issue guidance.

38:19 Yes. I would say to the other thing, it's a little hard for us to predict what the demand is going to be for sustainment for the aftermarket repairs and overhauls and whatnot, something that's hard for us to see going forward.

38:29 Got it, got it. Yes, I think they actually put out Lockheed called sustainment maybe growing six percent CAGR through twenty six in their slides today. Last one I had, I know you're not going to obviously provide twenty twenty two guidance, but matching this all together, F-35, 787 a drag, sounds like the MAX production rate, it's still an unknown. You're going to exit the fourth quarter with the Machine Clothing EBITDA margin thirty percent, maybe it's a little bit better. Sounds like that gets more challenging as we go into next year. I mean just trying to calibrate us for twenty twenty two, I mean it seems like it could be a challenge to grow earnings year-over-year if there is pressure, all those kinds of unknowns and pressures and is that the right way to kind of be thinking about the operations as you move into twenty twenty two?

39:31 No, again, as you pointed out upfront. We're not going to give guidance for twenty twenty two. I will note in your list of things that the -- you noted Machine Clothing margins close to thirty percent in Q4. I'd be careful about using that at some sort of jumping-off point for predicting at twenty twenty two margins that business typically Q4 has is one of our lower absorption quarters at a lot of holidays in the quarter. And therefore, lost production days and therefore lower absorption. Therefore, fixed cost is more of a drag on our production costs in the fourth quarter. So that's not a normal number. I would be careful rolling that forward into twenty twenty two. 40:19 The other questions you talked about certainly exist in twenty twenty two and we have to deal with them. We -- as I'd say that it's premature for us to start giving you any specifics. Bill, I don't know if you have other colors to give on that.

40:35 No, not at this point. I think we'll come back to it.

40:38 Okay, fair enough. Thanks, guys. I'll jump back in queue.

40:42 And next we'll go to the line of Pete Skibitski of Alembic Global. Please go ahead.

40:48 Hey good morning, Bill, Stephen and John. Nice quarter.

40:52 Thanks, Peter.

40:52 Let me, I guess just start with Machine Clothing even at the low end of your revenue guidance here, the updated guidance. It looks like you're expecting to be pretty much back to your pre-COVID volume levels, up six percent year-to-date order wise. I'm just trying to get a better feel from you if kind of the mid-term outlook for Machine Clothing is the same or you're thinking flat to maybe up low-single digits or has that changed at all for you guys after COVID with this kind of packaging surge? How you kind of thinking about that?

41:31 Yes, It's not easy to see through how it plays out. Again, we're kind of talking about next year as we go forward. Obviously, we really like packaging and tissue markets and that's where we've moved our strategic approach to and we've had good run there. So far, a tissue is been sort of a mixed market as we noted in our comments were at home and away from home. It behaved differently in the distribution channels production. 41:55 But overall, packaging has been really strong in the Americas. We see a little bit of a slowdown in Asia. We're watching China for instance with the energy shortages there and some material shortages. We're seeing a little bit of softness in China. But then Europe, it seems like it's a little bit behind in the recovery. So it's coming up a little bit. So it's a real mixed picture around the world. So that's kind of gets hard to look through into next year at this point. And hopefully, we'll better view on when we get to the fourth quarter report.

42:27 Okay. Yes. I mean, I think some of the energy issues in China. So I hear you there. And then, I just wanted to switch gears. Lockheed is talking about pretty meaningful supply chain issues on the military side. So not necessarily inflation in logistics per se. It seems like maybe more sort of shortages. I guess we'll learn more later. But are you guys seeing any of that on your side, real genuine, we can get in the parts supply chain issues on the military side? And do you have any visibility into any inventory building up on the military side for you guys because of that?

43:05 Yes, we don't really see it or should say, we don't really experience that. We start with raw materials of fiber and resin and we make a lot of our components. We're not buying a lot of manufactured components that we assemble then into subsystems. So, the products that we make were earlier in the supply chain and we seem to be doing okay. I will say, the behavior we see out there includes Albany as well, where we've added a little extra inventory for cushion is probably driving capacity constraints at suppliers in general. So I imagine that's what Lockheed referring to it in addition to the logistics and shipping challenges from all over the world. So we're not having that same experience though.

43:50 Okay. And just again, maybe you can talk to this generically or directionally, but it looks like CH-53K is kind of all systems go. I think Lockheed talked about another production award accelerating production there. And it seems like your F-35 comp would be easy going into twenty twenty two. So just directionally should we feel good about those two programs?

44:18 Yes, we feel really good about CH-53K and longer term, F-35 as well. We just got to work through the next year or so in F-35.

44:27 Okay, okay. Great. Thanks for the color, guys.

44:32 And next we can go to line of Gautam Khanna with Cowen. Please go ahead.

44:37 Hey, Good morning, guys.

44:40 Good morning.

44:42 So, couple of questions. Maybe, Stephen, could you talk about -- could you quantify us the destocking again for 787, F-35 in any other programs in twenty twenty one? Just update us on what you expect those to shake out at?

45:02 Yes, look, again kind of as we talked before that in twenty twenty back in twenty nineteen, 787 was north of fifty million dollars was in the forty million dollars range last year in twenty twenty and this year we will be in the ten million dollars range when all is set and done. We've been in that two million dollars to three million dollars from a quarter range and each quarter so far, so be in that range. So you see there, it's been an impact of that thirty million dollars. Now that's a mix of destocking and just reduced production rates overall. But just give you an idea, that's the impact here in twenty twenty one, 787. 45:43 F-35 with smaller, we'd originally feared it could be a significant reduction. There will be some reduction this year, but it will be lower than we'd originally feared. We'll see exactly where we come out. But reduction is somewhere in that close to ten million dollars range is probably fair five million dollars to ten million dollars for the full year is probably not unreasonable to assume. 46:07 And that's -- in that case, that's largely driven by some destocking where they produced fewer aircraft last year. They expected and consumed less in depots came into the year with more of our finished goods on hand than they had originally expected.

46:23 Okay. And those were the only programs you'd call out in terms of destocking this year? I mean obviously –

46:33 Yes, look, on LEAP overall, obviously we talk a lot about the destocking we're going through. But as we mentioned in terms of revenue, last year we produced close to one hundred million dollars of revenue in that program. This year it's going to be similar number, trending a little higher than that. But a few million dollars higher than that this year but materially roughly similar level as the growth in 1A has picked up nicely and even though we're not generated a lot of revenue on 1B overall. It's about the same level of production as last year.

47:10 Okay. And I may have missed this in your opening remarks, but I think you mentioned two million dollars of favorable AEC's at Engineered Composites this quarter. And if that was the number, then what explains the sequential EBIT margin decline ex if we take out AEC's? Was there anything about the mix underline that was different or any other costs that you want to call out specifically –

47:39 Yes, look, it's primarily what I called out mix is a big driver, where while year-over-year we have revenue growth. If you look where we grew year-over-year leap grew, whereas programs like 787 and F-35 declined, F-35 and 787 certainly 787 as it was last year, much higher margin than LEAP last year. And so as we just grow one shrink, the other you get a mix impact for the margin comes down. This quarter with a little unusually low for F-35 compared to some other quarters that didn't help us and LEAP was unusually high on a relative basis. 48:22 And then the lack of fixed cost absorption because about both 787 and F-35 being down, both our fixed price programs produced in our Salt Lake City facility, we have to worry about the overall fixed cost absorption there, that was challenging this quarter. You're right with the two million dollars of AEC pickups. It was three point five three point five million dollars a year ago. So that one point five million dollars alone represents a couple of one hundred basis points of your margin degradation. You had a few of those factors together you get there.

48:56 Okay. And I know you don't want to guide twenty twenty two, but I am curious. Machine Clothing been an upward revision story for a while now for years actually. So I'm curious, one point we thought that one hundred million dollars, two hundred million dollars of EBITDA was the right baseline. I think a quarter or two ago you mentioned it might be two hundred million dollars-ish or slightly better as the run rate even with publication grade declines and what have you? 49:29 Do you guys have an updated view, I mean obviously this year you took up the numbers again, but how much of over earning are we actually see in order of magnitude? Is there any way to kind of frame and I'm not asking about twenty twenty two, I'm asking about long-term, what is sort of the right, I mean reversion level we're going to move back to?

49:53 Yeah, we don't see a reversion back to where we were before, below the two hundred level. I mean we can't predict the future and we haven't given guidance for next year, but we're going through our annual planning, our strategic look for the next number of years and profitably is very, very good in MC. The work that we've done, the strategic work to shift the business towards the higher growth markets packaging and tissue and where the technology development is today, particularly in tissue. 50:24 And then the global footprint we've had, we've done a really good job. The team has done a great job over the years. And you mentioned it has been an upward revision for years. Because of that strategic footprint that we've worked towards by consolidating sites and moving towards where the customers are and having our operations running at best utilization rates we can round the world. 50:46 And then shifting the mix once in a while as we need to optimize. So the team has done a really good job. We expect to -- we're still going to run above that two hundred million dollars. I can't say exactly how high above it. But we'll come back around on that when we talk about next year, but it is at a new level of performance and we're really pleased with the team's and how they've done.

51:08 Sure. So two hundred million dollars plus is sort of the low-end and we're at two twenty five million dollars this year. Last one, Stephen, I also thought you mentioned that Q3 had some more just timing of deliveries that benefited Machine Clothing in the quarter. Are there any, I imagine your salespeople are pretty close to when these things are there or going to need replacement. Are there any things you point out at least in twenty twenty two about, hey, this quarter is going to have more activity than that quarter, even directionally just based on how these things are being utilized? And thank you.

51:49 Yes, look, nothing unusual points really in twenty twenty two. As we look at third quarter of twenty twenty one, so certainly two things are true. One, third quarter of twenty twenty was a little low. The third quarter of twenty twenty had been down. I think it was eight percent year-over-year from third quarter of twenty nineteen, and almost I think was nine percent sequentially from second quarter of twenty twenty. 52:16 So third quarter of twenty twenty with a fairly low quarter. So it was relatively easy comp. Parts what explains that the high growth in the third quarter of twenty twenty one. But also as Bill alluded to, there is a little bit of our customers being little risk of us and maybe taking delivery of some product a little earlier they made otherwise do so to make sure they can get it in the doors, since that worried about logistics since in supply chain constraints. 52:45 But that partly might explain a little bit of a weaker Q4. I'm not sure yet. It's a little premature to talk about some particularly weak or strong quarters in twenty twenty two. At this stage, we don't see anything terribly unusual in twenty twenty two. But it's early yet. Things have a habit of changing quickly over the last couple of years. So that's why it's a little early for us to start giving any specific guidance.

53:15 Thanks, guys.

53:17 Thank you, Gautam.

53:19 Next, we'll go back to Michael Ciarmoli with Truist Securities. Please go ahead.

53:25 Hey, guys. Thanks for taking the follow-up. Just on the LEAP-B and the MAX in general, can we assume that your current production are in line with Boeing's stated sixteen a month and just remind us what if Boeing is going to take that thirty one a month and realizing you've got a little bit of destocking left to get to that one hundred, but I think what would you say thirty units this quarter? So fifteen planes and maybe twenty left to go. I mean, when should we see or what's the normal lead time if they are going to go up to thirty one per month?

Yes. So, right now, it looks, they're consuming not only as you mentioned. Then correctly during the quarter, we shipped thirty more engine shipsets than we produce equivalent to about five aircraft a month. So you take that off the top. There was also a product finished goods of our product within -- elsewhere within the Boeing supply chain that's being consumed whether it's at SAFRAN or elsewhere in the engine supply chain. 54:34 So, right now, we're producing well below Boeing's target build rate right now and we don't expect that to materially change starting here in Q4. As I mentioned, we hope to see it pick up early in twenty twenty two, assuming everything goes smoothly and Boeing hits marks. But there is another couple of quarters to go before we settle down fully.

55:03 Yeah, I would say -- the short answer is, no we're not totally lined up with Boeing's production, but we are with Airbus A320.

55:11 Got it, perfect. Thanks, guys.

55:16 And currently, we have no further questions in queue.

55:23 Thanks, Brad. Thank you everyone for joining us on the call today. We appreciate your continued interest in Albany International. And of course, if you have any questions, please feel free to reach out to John Hobbs, our Director of Investor Relations. His number is 630-330-5897. Thank you, and have a good day.

55:46 And that does conclude our conference for today. Thanks for your participation, and for using AT&T Teleconference. You may now disconnect.