Good day and thank you for standing by. Welcome to Albany International Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. John Hobbs, Director of Investor Relations. Please go ahead, sir.

Well, thank you, Norma, and good morning, everyone. Welcome to Albany International's third quarter 2023 conference call. As a reminder, for those of you listening on the call, please refer to our press release issued yesterday afternoon 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, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to both our earnings release of November 6, 2023, as well as our SEC filings including our 10-Q. Now I'll turn the call over to Gunnar Kleveland, our President and Chief Executive Officer, who will provide opening remarks. Gunnar?

Thank you, John. Good morning, and welcome, everyone. Thank you for joining our third quarter earnings call. I'm pleased to be here today on my first call as President and CEO of Albany International. The Company has again produced very good results in the third quarter with excellent operational execution and positive free cash flow for both the quarter and on a year-to-date basis. Before we get into the details, I'd like to take a moment to acknowledge Bill Higgins' steadfast leadership of Albany as President and CEO through the past several years. While he has retired from his role, he continues to provide guidance and counsel as a member of the Company's Board of Directors. My transition has proceeded smoothly, and Bill leaves a legacy of a great company with innovative proprietary technologies, businesses that are performing well and a healthy balance sheet. The business segments each have impressive product quality and exceptional customer service. I know from experience, these elements are the foundation of excellent customer relationships, continued business opportunities and a sustainable competitive advantage. These factors weighed on my decision to join Albany. I spent my first few weeks getting more familiar with operations, traveling to numerous sites across the business, meeting with our team and having meaningful conversations at all levels of the Company from the shop floor to the C-suite, really spending my time focusing on the technology, operations and getting more familiar introducing myself as well as gathering impressions from our customers and the investment community. The Company's technologies and track record of innovation really strike me as strategic assets. The same underlying weaving technology is fundamental to the Company's businesses and driver of ongoing technical collaboration and [indiscernible]. Within Aerospace, to push towards lighter weight, more environmentally friendly designs is the number one…

Thank you, Gunnar, and good morning, everyone. I will now turn to our third quarter results and then provide our updated outlook for the year. As Gunnar mentioned earlier, we are reporting GAAP net sales of $281 million, up 7.9% from the third quarter of last year. Excluding currency translation effects and the one month of Heimbach sales, revenue growth for Albany was 2% versus the prior year period. Machine Clothing net sales, excluding Heimbach, declined 1.5%. Higher sales in packaging and tissue product lines were offset by contraction across our other product lines, most notably in pulp and engineered fabrics. Compared to a year ago, European markets are clearly softer, while Asian markets have been mixed. The North American market continues to perform well with modest growth over the prior year period. Engineered Composites net sales of $115 million grew 5.7% on a constant currency basis compared to the third quarter of 2022, driven principally by year-over-year growth on the LEAP, 787 and various space programs. This was partially offset by lower CH-53K revenues. Our CH-53K results from the prior year provided a difficult comparison for us as the last year benefited from significant amounts of nonrecurring revenue for the helicopters as transition program. The CH-53K nonrecurring items largely concluded in second quarter of this year. So we will continue to see tough comparisons through the first half of next year. Our CH-53K program sales will grow as the program moves toward full rate production. The AEC LEAP program generated $45 million of revenue in the third quarter, nearly $5 million higher than the same period last year. We now expect full year ASC LEAP revenues to be up approximately $15 million compared to the full year 2022. 2023 LEAP revenues are higher than we had previously guided as…

[Operator Instructions] Our first question comes from the line of Peter Osterland with Truist Securities.

I'm on for Mike Ciarmoli this morning. So first, I just wanted to ask about the guidance around the Heimbach acquisition. With $2 million of EBITDA assumed for the year seems to imply a margin of around 4%. So I was just wondering, are there any elevated cost pressures there you call out or any seasonality that is impacting the margins in the early stages here?

Sure. Yes, Peter, this is Rob. Good to see you on the call. Yes. So as it relates to Heimbach, we definitely are seeing some level of seasonality. And as we published in our materials when we announced the acquisition, right, for the full year '22, they were running about 9% EBITDA margin. So to see the fourth quarter roughly in the range of 5% is not unexpected. And as anticipated, we're working with the team and have a number of actions to really just improve the efficiencies and the margin profile of the business.

Great. Makes sense. And then just a follow-up I had on the EPS guidance for the year. So the implied fourth quarter range would be $0.52 to $0.87, which just seems like a pretty wide range at this point in the year. So I was just wondering where are the biggest areas of uncertainty or risk that might drive the business towards the lower end of the range?

Yes. Peter, that's a good question. The $0.35 range is really just a function of the math. If you look at our EBITDA guide by segment, right, we have about a $10 million range for Machine Clothing, which is really also accounting for Heimbach, right? We just bought the business, so it's hard to know exactly what they'll deliver. And then it's $5 million spread. So if you add those two, you got a $15 million spread, which is really what translates to $0.35. So in order for us to be at the low end, both segments would have to perform at the lower end of the range, which -- while the possibility is certainly not what we're working towards. We have confidence in the operating team. I think what's more relevant here is to look at the midrange of the guide. And if you look at the midrange, we're at $0.70, and if you adjust the Heimbach impact of roughly $0.04, $0.05 in the quarter, we're pretty much right on top of what we delivered last year.

Our next question comes from the line of Ron Epstein with Bank of America.

This is Jordan [indiscernible] on for Ron. So looking out towards next year, have you guys started to see any demand uptick from Safran for AEC?

So we're not ready to guide for 2024. We are looking at a year where we have higher LEAP revenue generation, and we expect to continue at that level.

Okay. And then do you have a sense of how much they've burned through the excess inventory they've had earlier through the year?

So inventory is a -- there will be inventory at our facility, and there will be inventory at Safran and there will be inventory at GE. And it's -- there will be some buffers at each location, and I don't have the details on that.

Yes. And Jordan, just one other thing. I mean we typically go through an annual process with Safran as we start thinking about production volumes and demand levels for next year, we're not there. We don't have information for that. We'll certainly update the community as we get on our year-end call. But certainly, we're working very closely with them to make sure that the entire chain is managed appropriately so that our ultimate end customers get the product that they need to support the demand in commercial aircraft.

Our next question comes from the line of Pete Skibitski with Alembic Global.

Maybe to start with one on Machine Clothing. You guys mentioned some of the softness in Europe and the orders were down. I just was wondering, do you guys -- I mean you are very global. Do you have a sense right now of whether the demand pull in PMC is kind of bouncing along the bottom, if you will? Or there's some concern out there, I think, that the macro is deteriorating, that maybe we'll be in a take your pick a soft landing or a harder recession next year. Do you guys have any sense of kind of the way things are shaping up for you in terms of the three major geographic end markets for PMC?

And it is -- if you look at the three markets, it's kind of interesting because in the U.S., we're seeing growth. And in Asia, we're seeing mixed markets. China seems to be up right now. And then -- but Europe is definitely down. Where that takes us through fourth quarter and into next year is not something we can predict at this point. But we're seeing also a shift in the type of product. But I would say that we should expect in the short term now to be similar growth in the U.S., soft in Europe and maybe we should look at China and see if that picks up.

Yes. And Pete, just -- I think it's important really to note that we've been very successful. I mean, if you look at overall demand across publications and some other grades, those have clearly softened and what really distinguishes our Machine Clothing business is the ability to generate a pretty consistent level of gross margin really through various different demand scenarios. So I think Daniel and his team have done a good job. So we'll manage the demand. I mean, this is one where the brand and product quality actually should hopefully provide us an advantage in a tough market.

Yes. Yes, and it's cloudy out there. That's for sure. Okay. Maybe just one more for me. Just switching gears. The CH-53K, Rob, I don't know if you could share with us, maybe I missed it, what your total revenue in -- for the 53K was this quarter? And then I think -- so you'll be at zero next year. I think you've said that before in NRE for the 53. And I'm just wondering if we should expect -- because I know Lockheed got a pretty sizable, I think, either LRIP or production contract for CH-53K. So it seems like production volume should be up for you guys next year. I'm wondering if it will all kind of equal out year-over-year if you're still determining that.

Yes. So yes, good question. And you're correct. I mean the NRE is pretty much going to run off. As we exit this year going forward, we're not expecting to see any notable NRE whatsoever. And then on a kind of full run rate operational basis, even this year, if you strip out the NRE relative to last year, we expect sales to be up on CH-53K in the mid-teens or so. So we feel really good about where the program is trending. If you were to visit our Salt Lake facility, right, we got the next -- the automation line. We just actually had a rig on cutting with Sikorsky on that line. So things are progressing really well for CH-53K. And as you said, the order book looks terrific. So this will be a good long-term program for us.

[Operator Instructions] Our next question comes from the line of Jack Ayers with TD Cowen.

And welcome, Gunnar. Great to have you. Quick question, and I hate to go back to the Q4 sort of implied guide here. And if my math is right, just AEC specifically, I mean, are we kind of thinking Q4 is going to be down sort of high single digit, low double digit sort of in the Q4 implied there with margins actually stepping up both sequentially and year-over-year? So the sales down year-over-year and sequentially, but margins up year-over-year and sequentially. I guess like what's going on there and just the wide range, is that conservatism or just other moving pieces with sort of LEAP inventory like sort of just excess? Just any color there would be helpful.

Sure. Yes. No. Jack, happy to help. So your math is correct, as we would expect. And we are probably being a bit conservative on top line at AEC, but we are going to see a couple of programs' volumes in the fourth quarter come off. So we're just trying to account for that. And as it relates to the margin, that's really a function of the shift in mix of programs that we expect during the quarter. As you can imagine, right, LEAP we're running ahead. That will kind of cool off in the fourth quarter is our expectation. So we are expecting to see a higher employed margin. There are some programs like 787 and others, where the margin profile is much better than LEAP, and we're seeing those volumes pick up in the fourth quarter.

Okay. Okay. And then just one quick follow-up on Heimbach. And I appreciate sort of the moving sort of demand dynamics going on there. But Q4 implied sales of like $35 million to hit the $50 million for the year. I mean if we run rate that, that looks like we're getting to like $140 million. What -- is that the right way to think about that as we sort of roll that forward into '24, Rob?

Yes. No, yes, the math once again spot on, Jack. But no, you really shouldn't be run rating Q4 sales in Machine Clothing and at Heimbach. That is definitely seasonally, and I think it's probably even a bit more pronounced for Heimbach more seasonal in the fourth quarter. So if you look at what we delivered in '22 for what Heimbach delivered was about EUR 160 million. And we're certainly working with the team to make sure that the sales volumes stay where they need to stay.

I would now like to turn the conference back over to Mr. Gunnar Kleveland, President and Chief Executive Officer, for closing remarks.

All right. Thank you, Norma, and 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, feel free to reach out to John Hobbs, our Director of Investor Relations. Thank you, and have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.