Ladies and gentlemen, thank you for standing by. Welcome to the Albany International first quarter earnings call. At this time, your telephone lines are in a listen-only mode. Later, there will be an opportunity for questions and answers, with instructions given at that time. If you should require assistance during your call, please press star then zero and an AT&T specialist will assist you offline. As a reminder, your conference call today is being recorded. I will now turn the conference call over to your host, Director of Investor Relations, John Hobbs. Go ahead, please.

Thank you Alan, and good morning everyone. Welcome to Albany International’s first quarter 2022 conference call. As a reminder for those listening on the call, please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of 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, 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 and the potential effects of the Russian invasion of Ukraine 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 on the call to their most comparable GAAP measures, please refer to both our earnings release of April 25, 2022 as well as our SEC filings, including our 10-K. Now I’ll turn the call over to Bill Higgins, our President and Chief Executive Officer, who will provide opening remarks. Bill?

Thank you John. Good morning. Welcome everyone and thank you for joining our first earnings call of 2022. Today I’ll comment on our first quarter results, our strategic progress and corporate governance, and Stephen will then cover our financial results in more detail. First, let me express our concern for the people of Ukraine following the Russian invasion. The will of the Ukrainian people and the resistance is inspiring and we hope this senseless war comes to an end soon. Like many companies, Albany has ceased doing business in Russia. Specifically, we have stopped shipping machine clothing belts to paper companies in Russia and we’re withdrawing from a very small joint venture in Russia that produced belts for local paper manufacturers. Our business exposure in Ukraine is small. We have no employees there, and we typically export a modest amount of machine clothing to paper making customers there, and we look forward to continuing to support those customers in the future. The combined effects had a minor impact on our first quarter results, which Stephen will outline. Our 2022 outlook assumes no Russian sales moving forward. Suffice it to say 2022 has already started out as another year with unpredictable events, the effects of which may not be entirely visible yet. Despite the unpredictable environment, I’m pleased to report strong revenue growth in the first quarter in both our business segments. In fact, our aerospace composite segment grew net sales by more than 20% and our machine clothing segment posted mid-single digit growth compared to the first quarter last year. In the first quarter, we achieved GAAP EPS of $0.87 per share, up $0.02 per share from last year’s $0.85, and adjusted EPS of $0.91 per share versus $0.87 per share adjusted EPS last year. Most impressive is our teams’…

Thank you Bill. Good morning to everyone. I will talk first about the results for the quarter and then provide an update on our outlook for our business for the balance of the year. For the first quarter, total company net sales were $244.2 million, an increase of 9.8% compared to the $222.4 million delivered in the same quarter last year. Adjusting for currency translation effects, principally the decline in the euro relative to the U.S. dollar, net sales increased by 11.5% year-over-year in the quarter. In machine clothing, also adjusting for currency translation effects, net sales were up 5.7% year-over-year, driven by growth in all grades of product. Engineered composites net sales, again after adjusting for currency translation effects, grew by 23.1% with growth on LEAP and CH-53K partially offset by a decline on the F-35 platform. During the quarter, the LEAP program generated revenue of almost $38 million compared to a little under $27 million in the same quarter last year. LEAP revenue was also up significantly sequentially as we have now completed the planned de-stocking of our finished goods. We finished Q1 with less than 100 LEAP 1B engine chipsets in stock, in line with the safety stock levels required under our contract. First quarter gross profit for the company was $91.6 million, an increase of 3.5% from the comparable period last year. The overall gross margin declined by 130 basis points from 39.8% to 37.5% of net sales, caused mainly by the mix shift due to AEC’s top line growth outpacing that of the MC segment and a lower gross margin in AEC. Within the MC segment, gross margin was flat at 51.5% of net sales as the drop-through benefit of the increased revenue was fully offset by higher input costs and fully reserving about $600,000…

[Operator instructions] We’ll first go to the line of Pete Skibitski with Alembic Global. Go ahead.

[Indiscernible] AEC in particular, it seemed like the ramp on LEAD was really strong, maybe over 300 chipsets or so in the quarter, and so I’m wondering if you think the visibility for that ramp to continue is really good at that point. There’s some questions about China accepting deliveries or not, but from your end anyway, does it seem like all systems go on LEAP?

Yes, I’m sorry, Pete - we missed the first part of your question, I don’t know, at least at our end the first couple of things, but I think I got the gist of your question. Look - LEAP, as we said, was up fairly significantly this quarter, certainly compared to Q1 of last year. I’m not sure it’s quite the 300 chips that you referenced, but if you’re talking about total number of shipments or total number of units produced, you’re probably in the right directional range at least. We certainly feel we have as much insight into demand as our direct customer, Safran has. We get regular updates from Safran, their outlook for it. I am not sure that right now, that outlook is heavily dependent on the Chinese market reopening, although clearly at some point it will be - that is a significant market, as you know, for single aisle aircraft, and we would expect at some point in the future 737s and A320s to be selling there in quantities comparable to what we saw before the crisis. Right now, I would say that we think our outlook into the balance of this year is good. As we get into 2023, it’s less hazy--or more hazy, I should say, but I don’t think there are significant risks to our outlook for this year.

Okay, got it. One last one from me on machine clothing, also kind of related to China and the global economy with regards to the lockdowns in China. How much of that negatively impacts you revenue-wise in the quarter, and then there are some concerns about the potential for a global recession maybe early next year, late this year, and machine clothing, I think is at least partially viewed as sort of a staple product, if you will, maybe modestly discretionary. How are you guys thinking about the potential for a meaningful slowdown in machine clothing late this year or next year, with the inventory in the channel, with the potential for the economy slowing? It’s been sort of a mixed record, I think historically if I look back, so what are your thoughts as you see it today?

Yes Pete, let me start with that. So far, machine clothing has performed remarkably well, and we keep--in fact, we were asking again last night, are we seeing any effects in China with the lockdowns now extending across Beijing in addition to Shanghai and other places, our facilities in China have been up and running. We’ve been able to keep them operating, so far so good. It feels pretty solid right now. I think that we’re watching the customers that we think have built up extra inventory because of the supply chain risk mitigation. That will probably continue for a little bit longer while we’re seeing these transport interruptions and bottlenecks and delays, but I think for now machine clothing looks pretty solid as we go into the year. Packaging tissue has been strong, particularly in North America. What happens in China longer term, is there a recession, those are big questions I’d like to know the answers to because, as we mentioned in the commentary, we’ve just been through the MAX, the pandemic, and now this war effect, so we hope we don’t go into a recession, but we don’t see any evidence of it affecting us just yet.

There is probably--Pete, to your question about the excess inventory, there is probably of our product in the channel in the tens of millions of dollars in total of extra product out there that would be presumably consumed first, were we to see some slowdown, to kind of size the immediate risk level. As you say, we are a staple product, but as a consumable product we do see a much more muted cycle than many members of the pulp and paper supply chain, which are providing more capital-intensive products. Our belts wear out, and you look at prior cycles, the volume consumed even during prior economic cycles, while it clearly goes down, it is a cyclical business. It’s a much more muted cycle than many cyclical industries.

Yes Steve, I mean, tens of millions, so that’s on the order of 10% of your machine clothing revenue. That’s kind of--

I wouldn’t say as high as 10%.

Okay, okay. All right, thanks so much, guys.

For our next question, we’ll go to the line of Peter Arment with Baird. Go ahead, please.

Yes, good morning. Morning Bill and Stephen. My question is really on just circling a little bit on what Pete was asking about on MC, just on kind of the top line cadence. I guess historically, your second quarter has always been a little bit stronger, seasonality, and just wondering, you mentioned there was some timing on some shipments with North America and Europe. How should we be thinking about the cadence? Do we still think we’re growing sequentially or, you know, it seems like it’d be a tough year-over-year number when you look at the second quarter last year in MC on the top line.

Yes, I don’t know that we’re looking for big growth. I mean, we’re holding our guidance, things feel pretty steady. Our bookings coming into the quarter are solid, so I think we feel like we’re in pretty good shape, but I don’t think we’re expecting a big step-up here.

Yes Peter, we try not to get involved in giving quarterly guidance, but as Bill says, we are in a strong position heading into the second quarter, certainly. Our order book is strong, albeit probably on balance a little weaker than it might have been at the same time last year, so expecting another blowout quarter, it’s--we expect to see it continue to perform well but, as you mentioned, Q2 is a tough comp.

Yes, okay. That’s helpful. I just wondered. Then Stephen, just on FX, can you remind us a little bit, kind of--the dollar obviously continues to really strengthen against a lot of other currencies around the world, what your exposure is on that front?

Yes, against the euro, we have sales of over $100 million in euros so clearly at the top line, we see a drag with the euro having come down. Last year, we had an average close to $1.20 in terms of the euro-dollar exchange rate. Now, we’re down a little north of parity, quite frankly - you know, it bounces around but down in that $1.06, $1.07 range at times. So top line, over $100 million; at the bottom line level, we’re long the euro still probably, round numbers in that, let’s say, close to $50 million range. As you look at that, the over 10% decrease we’ve seen this year in the euro, that will drive north of $5 million of impact to the bottom line.

Great, thanks so much.

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

Good morning guys. Just on [indiscernible] inflationary cost, I’m curious about what your staffing level looks like between the two segments. Are you fully staffed or are you still having any troubles kind of bringing people on board?

I would say in machine clothing, we’re fully staffed, John. In AEC, we’re adding folks for both the LEAP production growth as quickly as we look to exit this year, going into next year for the future, and then we’re building the CH-53K production facility in Salt Lake City, where we’re adding people as well, so we are staffing up folks there in very tight labor markets.

And when do you expect that to be done, Bill?

Well, the LEAP production, I think will go into next year. The CH-53K is probably most of it this year.

Okay. Just to go back to the China question, maybe I missed it, how much revenue was deferred out of the first quarter into the second, or was there any, because you did say you were fully operational.

In China, we are fully operational first quarter, and nor did we see any material impact to our customers, either their operations or their demand in the first quarter. For us, first quarter was relatively un-impacted by what’s going on with COVID in China at the current time, not to say that there could not be impacts to Q2. There is clearly--you know, there is some news about it spreading to other cities and seeing the kind of stringent lockdown we saw on Shanghai most recently, but certainly there was no impact to our Q1 results, no deferred revenue.

Great, thanks guys. I appreciate it.

Our next question will come from the line of Gautam Khanna with Cowen. Go ahead, please.

Hi, how’s it going, guys? I may have missed this, so pardon if I ask a repeated question, but on the LEAP 1B visibility that you guys have, how firm is that schedule? I just wonder how much has changed around over the last six months and how far of a forecast forward do you get from Safran on those. Are you guys still kind of comfortable with the 2000 deliveries of total LEAP product that they talked about for 2023? That’s my first question.

Yes, so I think maybe the context, Gautam, is that our production isn’t directly linked to what Boeing’s doing, or even engine shipments. We work it out with Safran on production we’re going to plan for the year. We set that in motion in January, kick it off, and in some years, like when the pandemic hit, it got changed quite a bit; but this year, it’s pretty steady, so we’re working to a production plan that we’ve agreed to with Safran that might be a little different than what you’re seeing with Boeing.

Okay, and then one of the things we hear from a number of industrial companies is inflation in resins and availability of resins has come down. Has that impacted any of the carbon fiber prepreg product that you guys are sourcing, or is that all well sourced and you don’t see the inflation in those inputs?

We are seeing inflation, as I mentioned. Generally we’re seeing inflation in cost of materials and resins and yarns and chemistries in both AEC and MC. Both segments are managing on a daily--it’s a 24/7 job, so if you were to sit in our business reviews with our supply chain teams, you could write a book on it. It’s amazing the effort that goes into keeping production going. In the machine clothing segment, we actually manufacture some of our own polymers, and because machine clothing products are all custom made, we buy a lot of different size and types of polymers, so we’re ramping up our internal production to shore up the needs that we have there. Then on the AEC side, we work with very large OEMs that are helping us - Safran, Sikorsky and whatnot, when we buy materials.

Yes, for most of the end item raw materials, the resins, carbon fiber, whether it’s prepreg or just raw carbon fiber that we use in AEC, there are long term contracts entered with those suppliers by our customers and we are buying under those agreements, and so we’re a little bit insulated from the impact of inflation in AEC, not completely. Certainly a lot of the non-end item materials, whether it be gloves, release agents, vacuum bags, everything else that goes into making parts, we are procuring on the open market and are subject to inflation, just like any company; but on a lot of the end item raw materials that are in the finished product, as I say, they’re bought under contracts our customers negotiate and we, along with other suppliers to those customers, are buying under that master contract.

That’s very helpful. Then on 787, can you talk a little bit about what your expectations are for the year, where we are in that de-stock, and have you seen any uptick yet in production queues to you guys?

Yes, we don’t have it in the commentary because we’re just running the line to keep it warm, and that’s sort of the plan for this year. We have very little in the plan for this year.

Our revenue in the quarter on 787 was under $2 million, Gautam, so it’s--you know, and we finished last year close to 10, so view that as essentially flat because it’s a little noisy quarter to quarter. We are seeing no uptick right now. It is keep the line warm, operate at the lowest level possible.

Great, and one last one. We talked about Russia-Ukraine as a risk. Is there any forthcoming opportunities that are created by it? I don’t know - are any of your customers sourcing Russia-Ukraine that may want to create their own infrastructure outside of the region on the machine clothing side, or is it just a potential negative?

I don’t see any opportunity at this point. It’s probably slowed down Europe a little bit more. North America has been very strong. I was happy to see that the strike in Finland ended, but I don’t see any upside from the Russian invasion.

Thanks guys.

Thank you Gautam.

Our next question will come from the line of Michael Ciarmoli with Truist Securities. Go ahead.

Hey, good morning guys. Thanks for taking the questions here. Bill or Stephen, all the commentary around machine clothing risks seemingly significantly increasing, you’ve got the Russian headwind, why not lower the guidance? It seems like your commentary is much more biased to the downside there.

Well, we certainly had a very strong first quarter which puts us in a good position, covers some of that risk and allows us to stay within the same guidance range. It’s also--quite frankly Mike, it’s Q1. We’re on quarter through the year. There are many uncertainties in the balance of the year. Unless we’re quite sure how some of them are going to unfold, it feels a little early to be thinking about changing guidance in either direction for either segment unless something is very sure at this stage.

Okay, that’s fair. You kind of talked about inflation still rising and just calling out those risks. Figured I’d ask it. What about--has anything changed with your confidence level getting back to the $450 million in revenue in AEC by ’23, again just given what’s going on in the world and things looking a bit more hazy here? Any kind of sentiment change there?

No sentiment change. Is there more just global uncertainty than when we last spoke two and a half months ago? Sure, there’s clearly more global uncertainty with the invasion and the sanctions regime that’s in place, but right now we--certainly we’re not kicking ourselves, regretting making that statement two and a half months ago, Mike. I think we still feel generally good about that and we’ll see how this year unfolds, and we’ll obviously give you better guidance for 2023 when we get together in nine months.

I think taking the longer view, as I said in my commentary, we’re optimistic because we’re working on programs--we’ve talked about a number, the CH-53K being the most recent win, hypersonics we talked about our collaboration with Spirit last year, getting that off the ground. There are some other ones that we haven’t talked about, so we’re just optimistic longer term that we’ve got some growth in front of us.

Got it, makes sense. Then just one more, if I can, just on the AEC margins, obviously weaker in the quarter. You talked about the 20%, it sounded like some under-absorption on the joint strike fighter, and I guess presumably the write-down of some of the assets may have been in there. What’s it going to take specifically, I guess, in terms of programs and volume to drive those margins? Is it continued LEAP? It certainly doesn’t sound like 787 is going to be a contributor. Is it joint strike fighter ramping? What’s going to drive the EBITDA margin as we move through the year here?

Yes, if you look, Mike, at the shortfall, let’s say, to that 20% level during the quarter, roughly half or close enough, a little over half of it was driven by this reserve we had to take on raw material and our WIP related to that issue. That should not be a repeating issue, so that gets us back halfway there just from the absence of that. The rest, as you say, it was really from F-35 being particularly low this quarter. Our plan is not dependent on enormous recovery in programs beyond what we’re seeing today, so I do not think that getting back to a 20% EBITDA requires some--and it’s very easy for me to say Herculean effort, I’m sure for the guys in the operating segment, every day is a Herculean effort these days. But it doesn’t require enormous leaps. We’re think we’re on a solid path to get to that, is what I’m saying, Mike. It’s not like falling off a log, but there’s certainly a solid path to delivering that without some heroic assumptions around demand beyond the trends we’re already seeing in the market.

Got it, got it. Makes sense, thanks guys. I’ll jump back in the queue.

Thanks Mike.

As a reminder, ladies and gentlemen, if you do have questions, press one then zero on your touchtone phone at this time. We’ll go next to the line of Pete Skibitski with Alembic Global for a follow-up question.

Yes, just one follow-up, guys. Since we have a defense budget now and it looks like a little better outlook, I just want to get your updated thoughts on--Bill, I think you touched on missiles in general and hypersonic missiles in particular. I know there’s been testing going on across the industry, but how soon should we think that--beyond JASSM, I guess, how soon should we think the hypersonic missile category could be a part of the growth story for you?

We’ve got a ways to go still on that. I probably could give more color on that towards the end of the year, into next year. It’s a development program right now, so.

Look, without saying anything we can’t say publicly out there, there are companies talking about testing plans over the next 24 months, let’s say, 18 to 24 months. I would not expect material revenue for us before that time period, but hopefully some programs will go into production where certainly toward the middle of the decade we could see some meaningful revenue.

Okay. I know it’s a sensitive areas, I just wanted to get a--I was just curious is visibility had improved since we had a better budget outlook, so. Thanks for the color.

Thanks.

Speakers, we have no one else in queue at this time.

All right, well I’d like to thank everyone for joining us on the call today. We are holding an investor day May 25 in Boston. If you’d like to register to attend the in-person event, please feel free to reach out to John Hobbs, our Director of Investor Relations. As always, we appreciate your continued interest in Albany International. Thank you and have a good day.

Ladies and gentlemen, the replay for this conference call will be available on the Albany International website. That will conclude your conference call for today. Thank you for your participation and for using AT&T event teleconferencing. You may now disconnect.