Good day, and thank you for standing by. Welcome to the Albany International Third Quarter 2024 Earnings 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 first speaker today. JC Chetnani, VP, Investor Relations and Treasurer. Please go ahead.

Thank you, Verdin, and good morning, everyone. Welcome to Albany International's Third Quarter 2024 Earnings 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 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 and 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 October 30, 2024, as well as our SEC filings including our 10-K. Now, I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar?

Thank you, JC. Good morning, and welcome, everyone. Thank you for joining our third quarter earnings call. I will provide an overview of our business performance. Rob will later discuss our final results in detail. I'm pleased with the overall results of the quarter as we focus on operational excellence evidenced by strong results at Machine Clothing and our ability to generate free cash flow of $78 million year-to-date. Furthermore, our balance sheet is very healthy. Turning to the EAC adjustments announced earlier this month, we are addressing operational issues to stabilize production and to advance the ramp-up of the programs at our Salt Lake facility. Our team is making good progress, leveraging support from our other sites. Machine Clothing revenues at $183 million grew year-over-year, driven by our Heimbach acquisition, partially offset by publication grade globally and packaging in Europe. In the third quarter, Engineered Fabrics delivered year-over-year growth. Overall, the industry's secular growth trends remain in place for packaging, tissue and pulp. In terms of geographies, North America remains a strong contributor, while Europe continues to demonstrate weakness. Overall, Asia is stable, except for China, which is experiencing some softness. Our global order backlog remains stable. Turning to Heimbach. Our integration plan remains on track. We made progress on functional organizational integration this past quarter and the closing of our South Korea and Rochdale U.K. facilities is largely complete. Revenue has seen an impact from the overall weakness in Europe, combined with the SAP implementation, which has delayed some sales into the fourth quarter. In our Engineered Composites segment, we recorded revenues of $115 million, while our profitability was impacted by our previously announced EAC adjustments. In our commercial markets, we have seen near-term weakness in LEAP and our other Boeing programs. Our defense business continues to grow,…

Thank you, Gunnar, and good morning, everyone. I will review our third quarter results and then provide our outlook for the balance of the year. Consolidated net sales came in at $298 million, up 6.1% from the third quarter of last year. Machine Clothing net sales of $183 million increased 9.9% versus the third quarter of the prior year, driven by Heimbach. North American comparable sales were higher year-over-year and reflect the strength in that market. However, we were negatively impacted by continued weakness in Europe and mixed markets in Asia. The SAP implementation at Heimbach has also provided a near-term headwind as we transition to our new systems. Organic sales for Machine Clothing for the period declined 1% year-over-year, largely due to sales delays from the SAP implementation. AEC net sales of $115 million were largely flat versus the third quarter of 2023 on a GAAP basis, inclusive of a $16 million negative top line impact from the EAC adjustments in the quarter. We experienced growth in our space and emerging platforms, offset by lower sales in LEAP and CH-53K. I want to highlight that excluding the cumulative catch-up impact, our underlying sales on our CH-53K program increased as we work towards ramping production to meet our customers' needs. Consolidated gross profit was $90 million, down from $102 million in the prior year, driven by the EAC cumulative casual adjustment of $22 million. Excluding the EAC adjustment, our gross profit for the quarter would have increased to $112 million, with a margin of approximately 36%, in line with last year's results. Machine Clothing gross margin increased from 47.6% in the third quarter compared to 48% -- I'm sorry, increased in the third quarter of 2023 to 48.6% in 2024, marking the first year-over-year improvement since the Heimbach acquisition. The…

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Peter Arment with Baird. Your line is now open.

Yes, thanks. Good morning, Gunnar and Rob.

Good morning.

Gunnar, can you give us your latest updated thoughts on, one, the Gulfstream contract that you talked about earlier this month, just kind of how that progresses from here and what's the latest? And how do we think about kind of revenue for next year?

Yes, Peter, there's no real change on the contract or performance, since our call a month ago. We're putting effort on the program with the team that is there, engineering and working with Gulfstream to get to the right and deliver a part with less hours than we do today. So the effort is there, but there's no really -- not really an update. I don't expect anything to impact our revenues for the program next year.

Okay. That's helpful. And then in your kind of -- I guess, I don't know what you can say about the classified work or business that you've been winning. How does that look in terms of a revenue opportunity when we think about next year and beyond? I know you'll probably give a lot of detail next spring at your Investor Day, but what's going on in the defense classified world for you guys?

Yes. We're very active in on the defense side and also with some commercial opportunities. I'm not going to get into details there and we're not announcing any specific deals this quarter. But there's a lot in work. I see a great opportunity for us going forward. The buildup of our backlog over the last three quarters is indicative, I think to what we're doing.

Okay. I appreciate it. And just one quick one, Rob. On your guidance for AEC's EBITDA for the year kind of obviously implies a nice step-up in the fourth quarter. Can you talk a little bit about some of the moving parts there and the confidence level around that EBITDA?

Sure. Yes. Peter, we have a fairly high confidence level in our guide, especially considering we're two months out from finishing the year. What we've seen is a really good increase in volume in some of our more higher margin areas as well that we expect to see continued growth in the fourth quarter. We are controlling expenses as needed. So overall, certainly with Chris on board and the team's focus on turning things at Salt Lake, we feel good about the guide. I mean the implied margin range, as I'm sure you did the math, is 17.5% for the fourth quarter. That's the midpoint of our AEC guide. And it's a good business, so we feel good about the profile.

Appreciate the color. And I'll jump back in queue. Thanks.

Thank you so much. One moment for our next question, please. Our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is now open.

Hey, good morning guys. Thanks for taking the question. Just to stay on Peter's last question. I mean 17.5% is good, but I mean these margins are trending down. How should we think about the longer-term trajectory? And you're doing more defense classified work, presumably, that's first-of-a-kind products or structures, which always inevitably are going to carry design, development, engineering risks. So how can we be confident in these margins on a go-forward basis?

Yes. So I mean, of course, once we will give the '25 guide when we announce our year-end results, and we're planning on Investor Day. But Mike, I think what should give us a lot of confidence is a lot of the areas where we're seeing good levels of growth are in higher margin programs, especially on the commercial and kind of emerging or Advanced Air Mobility platforms and space. So those are very good areas for us. And you're absolutely right. We definitely have a focus on some defense work, which does provide in the right contract setting, a really good margin opportunity and visibility. So we feel really good about the blend. I mean we're definitely looking to have visibility given our strong backlog on what the margin profile should look like. And it's going to come down to execution. I think to your point, Mike, right? On the commercial and space and other programs, we need to execute. And we're definitely feeling good about where we're situated going forward.

Are these classified? Are they cost plus initially? Or did you bid anything in the more high risk firm fixed price development? Or -- because I would think if it's cost plus, that would be a little dilutive as you kind of go through them at first?

Yes. I mean, Mike, I mean, when we're looking at these development programs, we're very careful about the amount of risk we're going to share with our customers. We will typically look for some level of our protection. So I don't think we're putting ourselves at a very significant risk on these development programs like some others. So...

Okay. Fair. And then just shifting gears to LEAP. I mean the output has been revised down now, down 10%. I mean that's the third time. Can you talk to maybe the ramp trajectory? I mean I know you're not going to give '25 guidance, but it seems like the overall ramp there is going to be lower than planned. And I mean, can you give us any sense of what kind of inventory in the channel you might have? I mean it seems like there might be at least 200 shipsets based on kind of if you were tracking tightly with Safran and how many provisions based on this year. So any color on the LEAP program you can give us?

Yes. We're comfortable with where we're at for the year, and we are working with Safran on our 2025 plan. And there is a balance there, right? Our reductions have fit with where Safran is, and we'll continue to do that. It's a tight relationship. We also know that there is growth in the future. And we can't pull back too far and not be able to do the ramp-up. So that's part of the balance as well. We're not going to give guidance for next year, but you can imagine that there is a balance there between maintaining the capability and the ramp-up as well as minimizing the inventory.

Yes. And Mike, and just one other thing to kind of keep in mind. When we provided our LEAP guide for the year, we were holding flat, and that was against a backdrop of a 25% expected increase at the beginning of the year. And obviously, that's been ratcheted down as the situation of Boeing has unfolded during the year. But the relative impact to us relative to those expecting those 25% increases, was much more modest. We have taken our estimates down, but not. And if you look at Safran's most recent earnings release, they were very clear to state that they understand the balance of their supply chain. The long-term program is in excellent shape. The backlog is there. They want to be very careful not to damage the supply chain, of which we are a very important part of that.

Okay. Fair Enough. Is the $600 million in AEC revenues from '26 still good?

Yes, Mike, we'll be providing long-term guidance when we come out with our Investor Day. So let's wait until then.

Okay. Fair. Thanks guys.

Good question Fair question. Thanks.

Thank you so much. One moment for our next question, please. Our next question comes from the line of Jordan Lyonnais with Bank of America. Your line is now open.

Hey, good morning. Thanks for taking the question. Again, looking long-term.

Good morning.

Good morning. I appreciate you won't give guidance on it now, but on the 787 and GE9X and NX, how are you guys thinking about the programs given we've seen the softness on the 788, the 777X just got delayed. And presumably, those engines will also have an impact.

So 787, we expect growth. So they're not affected by the strike and there is demand there. So we believe that, that's a good program going into next year. There is a delay on 9X. There is no impact this year. And I think for next year, as this is development and continued development of the engine, a minimal impact, Jordon.

Got it. Awesome. Thank you.

Thank you, Jordon.

Thank you so much. One moment for our next question, please. Our next question comes from the line of Chigusa Katoku with JPMorgan. Your line is now open.

Hi, this is Chigusa Katoku on for Steve Tusa. Thanks for taking my question.

Good morning.

Good morning.

My first question is on free cash flow. Year-to-date, the free cash flow conversion has pretty good improved over last year. But how should we think about conversion in 2025? And do you have any color on how it is by business? Does AEC continue to be a user of cash versus a generator?

Sure. No, great question. So yes, the year-to-date conversion ratio is about 110%, which is certainly probably a bit higher than we would expect over a very long-term cycle. So -- but we are focused on it. I mean cash flow has become a very critical focal area for us, because that's going to drive our future growth. So as it relates to the business, we do expect AEC they were significant users of free cash flow capital last year. We're seeing some of that come off this year as we are better managing our inventory, working capital balances at that business, but also at Machine Clothing. So I think going forward in the aerospace side, cash flow will tend to be a bit more volatile depending on the types of programs that we sign up for because typically early-stage programs are a user of cash. So but that's a balance that we're working on. I think what you should expect from Albany consolidated is continued strong cash flow generation as we go out into the future.

Okay. Great. Thanks. And then shifting to MC, the margins were stronger than we had expected, and you attributed it to operational execution. But can you elaborate on that? And what's the right runway to think about as we head into 2025?

I can start with that. I think it reflects the efforts that we're doing with the integration. It's not only affecting the improvements that we're getting from -- that you see at Heimbach, but also at the core business. And it's also just excellent execution and cost management by the team in a little bit of uncertain times. So just kudos to the team for performing at that level.

Okay. Thank you.

Thank you so much. [Operator Instructions]. One moment for our next question. Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is now open.

Yes, hey guys. This is Jack Ayers on for Gautam today. Thanks for the question.

All right, Jack.

Hey, Rob, just for LEAP, I hate to go back to it. But just to be clear, did you guys take production down incrementally more from your last update? Because I think you guys called it down modestly last quarter, or maybe the 10/3 update. But since GE took it down 10% now. I just want to be clear for you guys for '24?

Yes. So we had a lower plan for the year than what was projected from both Safran and GE. And then we took it down in the second quarter and we took it down again on the 3rd of October. We have not changed it since then.

Okay. And would you be willing to maybe quantify the sort of step change? I think you guys put some numbers around it last quarter.

Yes. It was very minimal. I mean we're talking maybe a few million dollars, Jack, from the second quarter to the October 3rd call, pretty nominal.

Okay. All right. Okay. And then just F-35, I know maybe in your script, you talked about -- you discussed some softness there, expectations this year. But I guess like moving forward, does the Lockheed sort of delivery restart, does that help you guys at all? And I guess how far away are you guys from that? I think $80 million target you might have called out last Investor Day, just wanted to kind of get the cadence of the growth trajectory there? Thanks so much.

We've seen a softness through the middle of this year, and we expect that to come back starting into next year for Joint Strike Fighter. But how -- we're pretty far out in the supply chain here. So that does affect us maybe to a lesser degree, but I expect the Joint Strike Fighter numbers to be steady into next year.

All right. And Jack, we provided a view in 2022 on kind of what the potential was for F-35 and we'll certainly update that again at the Investor Day. But we believe in the program long-term. The fundamentals remain intact. The program, the Lockheed, now that they got the tech package three and up and running. That's all positive signs that we're seeing right now on F-35.

Thank you.

Thank you so much for your question. I'm showing no further questions at this time. I would now like to turn it back to Gunnar Kleveland for closing remarks.

Thank you, and thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you, and have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.