Ladies and gentlemen, thank you for standing by. Welcome to the Albany International Fourth Quarter 2021 Earnings Call. At this time, your telephone lines are in a listen-only mode [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to our host, Director of Investor Relations, John Hobbs. Go ahead, please.

Thank you, Alan, and good morning, everyone. Welcome to Albany International's fourth quarter 2021 conference call. As a reminder, for those listening today, please refer to our press release issued last night detailing our quarterly financial results. Contained in the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures, and their associated reconciliation to GAAP. For the purposes of this conference call, these 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 February 15, 2022 as well as our SEC filings, including our upcoming 10-K. Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer will provide opening remarks. Bill?

Good morning, and welcome everyone. Thank you for joining our fourth quarter earnings call. We're pleased to report another strong quarter capping on great year in 2021. Our employees performed remarkably well throughout the year. We continued to do a great job for customers, won new business, brought new products to market and navigated successfully through supply chain and COVID challenges. We generated record free cash flow of more than $160 million in 2021. Our highest cash flow in history of the company on sales of $929 million with over 40% gross margins, 27% adjusted EBITDA margins, and world class operational performance in delivery, quality and safety. At the segment level Machine Clothing’s operational performance and financial results continued to be exceptional with better than expected customer demand at year end, Machine Clothing was able to deliver fourth quarter sales growth of nearly 10% over prior year fourth quarter, and do have a great flow through to the bottom line at 52% gross margins and 38% EBITDA margins. Engineer composites also perform well in the quarter with solid program execution across the board. Commercial aviation recovery is underway and it's an initial stages in 2022, the recovery will be seen as a mix shift as our lead production volumes ramp back up to support narrow body aircraft demand. Beyond 2022, as the recovery progresses we are excited as growth is expected to continue for our lead and CH-53K programs, and the anticipated wide body demand recovery begins. We also expect new business wins will layer on top of that to provide a solid foundation for longer term growth beyond 2023. As we ended last year, demand in our end markets was healthy yet still recovering in a few areas. Machine Clothing demand was better than expected and appears robust entering…

Thank you, Bill. Good morning to everyone. I will talk first about the results for the quarter and then about our initial outlook for our business in the coming year. For the fourth quarter, total company net sales were $239.9 million, an increase of 5.7% compared to the $226.9 million delivered in the same quarter last year. Adjusting for currency translation effects, principally the decline in the euro to the U.S. dollar, net sales increased by 6.4% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were up 9.4% year-over-year, driven by growth in all grades of product. Engineered composite’s net sales, again, after adjusting for currency translation effects grew by 1.3% with growth on LEAP and other commercial programs offset by declines on the F35 and 787 platforms. During the quarter, the LEAP program generated revenue of just under 27 million compared to a little under 25 million in the same quarter last year. LEAP revenue was also up modestly sequentially as we had delivered revenue of around 25 million in each of the first three quarters of 2021. We finished the four quarter with about 115 LEAP 1B engine ship sets in contract assets, largely completing the destocking of LEAP 1B finished goods on our balance sheet. We now expect our production of LEAP 1B units to be more or less in line with our deliveries. Although, we should point out that there is still considerable uncertainty related to Boeing's demand and our planned production rate is still subject to revisions. Also from time-to-time, we do expect to see some periods of finished goods, inventory stocking and destocking in our customers supply chains for both LEAP 1A and LEAP 1B components. So there will not always be full alignment between aircraft production…

Thank you [Operator Instructions]. Our first question will come from the line of Steve Tusa with JP Morgan. Go ahead please.

Can you, just talk about what you expect from kind of a volume basis for the 787 related business and the leaves just from a unit perspective?

Maybe just a little bit, Steve, right up front. From where we sit, we are running at very low levels and we are gonna continue to run at a low level. And our customers work with us to keep the line running at a rate where we can actually run it. So we run it about as low as we can to not lose the technical capability that we have in the manufacturing process.

We are running at an very low single digit rate in terms of units per month. We do anticipate that there may be periods during the year where we have to pause production completely on those Bill has mentioned, we are doing everything we can to level load the plant. So I'm not sure the average is that meaningful if I try and forecast what's going to happen in the back half of the year, but I would just say very low single digit right now. On LEAP our customer doesn't like us talking about revenue dollars and units. So we typically don't disclose the actual number of units we're producing. But look generally what we're seeing from Boeing, which is a rate in that let say 31 per month and what we're seeing from Airbus, which is more in the 50 rate per month recognizing that 60% to 65% of those are equipped with LEAPs and the balance with geared turbofan, that's roughly the demand level we are expecting that is driving the production volume we expect.

And then anything on the working capital side that on the engine business that you guys see out there for this year, anything moving around on that front. You mentioned capital CapEx, but maybe just talk about working capital.

As we mentioned, work close to our normal inventory levels on both LEAP 1A and LEAP 1B, it goes up and down a little bit, quarter-to-quarter, but there's not a lot of additional contract asset value to unwind on that program this year. We're more or less where we expect to finish 2022. The big working capital change in 2022, quite frankly is going to be on the CH-53K app transition program. As I mentioned, we will be putting in inventory the equivalent of over 30 million of revenue based on the anticipated revenue recognition approach on that contract based on the structure. So that will be the biggest growth of working capital this year on the AEC side.

Our next question will come from Gautam Khanna with Cowen.

I was wondering on the 737 Max assumption that you mentioned you're sort of aligned with the customer. But at what point do you have to put more inventory back into the system, and sort of get ahead of it? I'm just curious how you guys think your shipments will track with -- when you look Safran’s forecast, we've talked about 2,000 total LEAP deliveries in ‘23, 1,500 this year. At what point do you guys run ahead of that if at all, just given the need to get inventory back into the channel?

Right now, we're close to our desired level of inventory. We're within spitting distance of it. In 2022, we do not anticipate a need to build significant additional inventory, that could come in future years if both Boeing and Airbus continue to ramp up, but that's not in our current forecast for 2020.

I would say we're sort of more at a normal level of inventory in stock just as a buffer, and we'll always carry some inventories as a buffer in the channel. We don't see anything changing dramatically this year.

And just to be clear on the guidance. At AEC, you're not assuming any assumed catch ups, is that right? Favorable profit adjustments…

I understood the reference, Gautham. We're not anticipating any significant, there's a normal level of cost savings that would be built through all of our planning assumptions. But in terms of outsized -- out period profit increases, no, there are no material ones assumed in 2022.

And then the last one for me, just on F-35. At one point you guys thought it'd be a $20 million headwind or ‘20, maybe of the ‘20 ships that headwind, I can't remember. But what is the impact this year and then what do you -- if you could quantify the dollar value and then what do you think what happens in ‘23? Do we recover all of that?

So in 2021, we were down slightly from 2020. I think we put out the number externally on F-35 about $85 million in 2020 down slightly in 2021, and now we see this $15 million reduction. We believe that the primary driver of the $15 million is inventory destocking both at the OEM level and also at the Depot sustainment level, and so we would expect that law largely to be one time as that the stocks that we would then start to replenish. But we don't have clear insight yet into our customer's order level for 2023, but we would certainly expect a rebound in 2022 assuming this reduction don’t materialize in 2022 as we expect.

Next we'll go to the line of Ron Epstein with Bank of America.

I just want to follow up on your commentary on the frames for 787. What are you seeing there? And where do you expect those rates to go as we go through the year into next year?

Yes, it's a hard question to answer, Ron. We're kind of taking it in periods, let's call it 6 months at a time here, where our outlook for this year is really just to run at a low rate, working with our customers in the channel and producing at a rate where we can keep the technology going. But as Stephen pointed out, running at single digits is kind of how we expect the year to go. We're hoping to get going after that next year, but it would be hard for us to opine on what that looks like.

Look, and Ron to give you an idea, in fact, if you go back before the decline when Boeing was producing more in the 13 ships -- 13 units a month range. Our revenue was north of $50 million. As we mentioned, our revenue was less than $10 million in 2021, and we expect it to be flat to down in 2022. To give you an idea, we're less than 1/5 of the revenue. So you could -- since it's a fixed price program, you could just do the math and get a rough indications that we're somewhere in that 2 to 3 shipsets on average per month.

And then changing gears here on the Machine Clothing side. As the economy continues to recover, and people get out and start living their lives again and maybe in a more normal fashion. Do you have any sense on what that's going to do to that business? Are you expecting any downward pressure, upward pressure? I mean just at a very high level, how are you thinking about that?

Yes, it's an interesting question. There's a mix that's going to -- we think is going to take place. The away-from-home business that was -- has suffered over the last couple of years will probably come back some more. And then we've already seen, and if you look at the industry, tissue, for instance, had kind of a flat to down year in '21 because it was such a high growth year in '20 with everybody running off to the grocery store to buy extra tissue. So that will come back in line. So I think it will come off of the sort of the slowness of '21. So going forward, things look pretty good. One area we're cautious on is just -- has there been some inventory built up. But I think globally, the demand looks pretty solid going forward.

And then maybe just one last one, if I can. Your input costs on the aerospace side, is that passed through to your customers? Or how does that work on your raw materials?

It really varies, Ron. There are certain programs, obviously, in a program like LEAP since it's more of a cost type program, it's a pass-through. There are other contracts where we're buying the raw materials under an enabled contract negotiated by our customer, and therefore, that price is a pass-through. But to be clear, on those sorts of contracts, there are still a lot of raw materials, non-end-item raw materials that don't -- that aren't the resin or 5 that are in the finished product, but that are used in the production of the product, whether that be vacuum bags, or gloves, or release agents and the like. We typically do not have coverage for those. And we do not have coverage even for fiber and resin on 100% of our use of such materials, but we do on a lot. And obviously, labor other than on the LEAP contract where it's cost tight, labor inflation is not typically a pass-through either. So it's a mixed bag. The resin and fiber largely protected other input costs not protected other non-LEAP.

[Operator Instructions] We'll go to the line of Pete Skibitski with Alembic Global.

Stephen, I'm trying to just think through kind of where, I guess, EBITDA margin could go at AEC. You guys just talked about that a little bit. But from the standpoint of LEAP, likely to be your kind of most meaningful growth program through the midterm cost-plus program. I know there's some niche type of contract terms on that. But how do we think about where margin rate could go at AEC given the positive outlook for LEAP?

We're seeing great growth in LEAP over, let's say, the next 12 to 24 months as the narrow body recovers. And during that time frame, it will put some downward pressure on those margins. However, during the back half of that 12 to 24 months and certainly beyond that 24 months, -- we expect to see a lot of growth on fixed price programs, CH-53K, particularly now with the addition of the Aft Transition content, F-35. While it's not within this calendar year and depending on how Boeing does maybe not even within next calendar year, we do expect to see a rebound on the 787 program. We still think that's a fantastic aircraft. We're still very happy to be on that platform. So as those rebound, those will offset some of the dilutive impact we're seeing of the growth in LEAP over the next 12 to 24 months. So I think you're seeing a bit of a dip in margins, particularly this year, but I do expect to see those margins start to increase again beyond this year and maybe into the middle half of next year as LEAP continues to add growth. So I think we'll start to get back. Our goal has always been north of 20% margins in that business. Clearly, we peaked well north of that in 2019 and 2020. And our goal is to gradually get back to those more sustained levels well above 20%. But in the very short term, the LEAP growth is just too much of a challenge.

And then just given the relationship you have with Lockheed Sikorsky right now with the CH-53K, do you have a similar relationship with them on the Army new programs, [FLARA and FARA]? And do you guys view those as big opportunities? And any color you could provide there would be great.

Yes, it's certainly something that we're interested in, Pete. And the relationship with Sikorsky is so important to us. So we're going to keep working on that. We're very interested in those programs going forward. And as we talk about with advanced composites, one of the great benefits is we can bring 3D woven composites into the actual design upfront, then we can really maximize the benefits we get from the material advantages. So yes, we're pretty excited about our relationship with Sikorsky longer term.

The next question will come from the line of Michael Ciarmoli with Truist Securities.

Thanks for all of the detail here on '22. But not to blow right past '22. I think you said AEC revenues can get back to $450 million in '23. That implies a very healthy 32% growth rate at the midpoint of this year's guidance. And I'm just wondering with unknowns around the 787 and wide-bodies in general and just even where narrow-body production is going to go from here, what gives you that confidence to get back to that $450 million? Presumably, in '19, you guys were overbuilding to catch up to the engine manufacturers to support the rate. So I'm just trying to figure out what kind of line of sight you have into that growth rate into '23?

There's always some uncertainty, Mike. It's -- we're not at stage where we're providing formal guidance for 2023 yet, and we'll see where we sit 12 months from now. But certainly, on a risk-adjusted basis, we see good line of sight to the $450 million. You have to realize, if you're referencing back to 2019, clearly, we were building at very high rates on the engine side in 2019. As we look at 2023, we see a lot of new business that we did not have in 2019, not only the Aft Transition, but other programs on which we have been successful or expect to be successful in the coming months. And so I think that we have -- I would say we have better-than-average line of sight, but there's obviously no certainty looking out 12 to 24 months in this sort of market. We are making projections on what we think will happen on 737 and 787, on the other programs. And I say, we have built in some amount of risk in those programs, but there could always be downside to that outlook at this stage.

Are there certain program milestones we should track? I mean, clearly, you're assuming narrow-body rates get to some monthly level. I don't know if we need to see the GE9X really start to ramp up. And you mentioned the new programs. I mean, anything else, I mean if we see MAX rates get to 42 and hold 42 into next year, for example, is that enough to get to $450 million?

We're certainly not expecting rates on any program above what the primes published rates have. And in some cases, we have factored that somewhat. Certainly on a program like GE9X, while we expect that to be a great program in the future. That's not a near-term revenue driver. So that's not a material portion of our even 2023 outlook at this stage. So we're not making any heroic assumptions on rate to get to that range.

No, it's a pretty conservative buildup program by program, number of aircraft by number of aircraft, looking at things like the growth in the CH53K, even for the existing work that we already do today.

And then just -- I think I'm pretty clear on this. The AEC margin pressure in '22, you're getting some good top line growth, you're getting that EBITDA margin compression. It sounds really like it's just overall mix with more of your cost plus work ramping up? And then is there significant -- you called out the CH-53K F program and $30 million of nonrecurring. But I'm assuming that's going to be sort of dilutive and even more of a margin headwind as you ramp that up in the beginning of the year here in '22?

No, we won't be recognizing any revenue or profit on that here in 2022. I think that the real way to think about the mix. Take the F-35. We said it's down $15 million, and that's a fixed price programs. And we have said before that typically fixed price programs have a higher average gross margin than LEAP, which is growing. But that's at the average level. The way to think about the decremental margins on fixed-price programs, obviously, not only is it delivering the average margin, but it's absorbing some fixed costs, which is no longer does. So the decremental gross margins we've talked before that it's not unusual on fixed price programs for there to be decremental or incremental gross margins in the 30%, 40% range after you factor in the fixed cost absorption of the programs. So losing that $15 million of revenue, there's a significant loss of EBITDA that goes with it. On the flip side, as LEAP grows because of the fact that LEAP recovers all of its fixed costs irrespective of the volume, the incremental gross margin on LEAP is effectively equal to the average gross margin on LEAP. We don't get those economies -- those benefits from additional volume. And so you're adding revenue at a somewhat lower average gross margin, but losing revenue at a far higher decremental gross margin on the fixed price programs. And that's what's driving the lack of EBITDA growth on the increased revenue.

And with no further questions in queue, I'll turn the conference back to Bill Higgins.

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 phone number is(630)330-5897. Thank you, and have a good day.

Ladies and gentlemen, this conference is available for replay beginning today, February 16, 2022, at 5:00 p.m. and running until April 16, 2022, at midnight. During that time, you may access the AT&T replay service by dialing toll-free (866) 207-1041. If you are unable to dial a toll-free number, you can use area code (402) 970-0847. The access code for the call is 9413320. I'll repeat those numbers. The total fee number is (866) 207-1041, also area code (402) 970-0847 with the access code 9413320. That will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.