© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Earnings Call of Albany International. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. At the request of Albany International, this conference call on Wednesday, October 31, 2018 will be webcast and recorded.
I would now like to turn the conference over to Chief Financial Officer and Treasurer, John Cozzolino for introductory comments. Please go ahead.
Thank you, Operator, and good morning everyone. As a reminder for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results with particular reference to the Safe Harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP. And for purposes of this conference call, those same statements also apply to our verbal remarks this morning. And for a full discussion, please refer to that earnings release as well as our SEC filings, including our 10-K.
Now I will turn the call over to Olivier Jarrault, our Chief Executive Officer, who will provide some opening remarks. Olivier?
Thank you, John. Good morning. And welcome everyone and thank you for joining our third quarter earnings call.
We will follow a similar format of past calls. I will begin with an overview of the quarter. Then John will take you through our financial results in more details. After which, I will provide an update to our outlook. And we will then take your questions.
Q3, 2018 was another very good quarter for Albany International, as strong performance continued across both businesses. Total Company net sales increased 14% or 16% excluding the impact of ASC 606 and currency translation effects.
Compared to Q3, 2017 net income and adjusted EBITDA both increased sharply. Net income increased to $28 million while adjusted EBITDA grew to $63 million due to higher sales and continued improvement in productivity in both MC and AEC.
MC sales in the third quarter, excluding the impact of ASC 606 and currency translation effects, increased 4% compared to last year. Globally, MC sales grew in the packaging, tissue, publication and pulp grades, with particular strength in South America and Asia.
MC gross margin was very strong during the quarter, increasing to 49.9%, compared to 48.5% in Q3 last year. The increase was principally due to higher sales as well as continued productivity savings and a favorable currency rate environment.
Operating income and adjusted EBITDA both increased significantly compared to Q3 2017 with adjusted EBITDA improving to $58 million in the quarter.
Q3 was another quarter of strong improving performance for AEC with significant growth in net sales, operating income, and adjusted EBITDA compared to Q3 2017. Net sales, excluding the impact of ASC 606 and the currency translation effects, increased 40%, while profitability continued to improve compared to last year.
The increasing sales was, once again, primarily driven by the LEAP program, sales of fan cases, fan blades, and spacers for LEAP engines, which represented about 48% of AEC Q3 2018 sales, grew 74% compared to Q3 2017, reflecting our execution related to the unprecedented steep ramp-up of this jet engine program. Higher sales of Boeing 787 fuselage frames, as well as F-35 and CH-53K components also contributed to the growth in sales.
AEC operating income improved to $3.6 million in Q3 compared to a loss of $9.3 million in Q3 2017. Adjusted EBITDA also showed strong improvement in the quarter as it doubled compared to last year, increasing to $16.5 million or 17.5% of net sales. The increase reflects higher sales volume and productivity improvements.
AEC profitability in Q4 is expected to be comparable to the results of the first three quarters of the year, keeping the business on track for strong incremental improvement in full-year adjusted EBITDA as a percentage of sales compared to 2017.
In R&D, our new product development activities which focus on existing, derivative, and new technologies and our process improvement projects which aim to optimize our operational performance across AEC continued to build upon the progress of prior quarters.
Our execution to date on major existing contracts along with anticipated new contract wins continue to provide the potential for AEC to reach annual sales of $475 million to $550 million in 2020. The potential for AEC beyond 2020 will be based not only on executing on the continued ramp-up of existing programs on which we are already well established, but also on increasing share or acquiring first-time contents on ramping programs while at the same time, winning new contracts on future commercial and defense airframe and engine platforms.
Now let's go back to John for more details on the quarter. John?
Thank you, Olivier.
I'd like to refer you to our Q3 financial performance slides. Starting with Slide 3, net sales by segment, total company net sales in Q3 increased 14% compared to Q3 2017 and 15.5% excluding both currency effects and the impact of the new revenue recognition standard ASC 606.
Also excluding currency and ASC 606 effects, Q3 MC net sales were up 4.1% compared to last year and up 2.9% YTD. AEC net sales excluding currency and AEC 606 effects increased 39.6% in Q3 compared to last year and 36.5% year-to-date.
Turning to Slide 4, total company gross profit margin was 36.7% in Q3 compared to 35.8% in Q3 2017. AEC gross profit margin was 14.6% in Q3 2018 compared to 9.3% in Q3 2017. AEC's gross profit in Q3 2017 was reduced by $3.2 million due to the write-off of inventory and a discontinued product line. MC gross profit margin in Q3 rose to 49.9% compared to 48.5% in Q3 last year.
Slides 5 and 6 show net income and adjusted EBITDA by segment for the quarter and year-to-date. Adjusted EBITDA for the total company in Q3 2018 was $63.3 million compared to $51.9 million in Q3 2017. On the year-to-date basis through September 2018, adjusted EBITDA for the total company is $176.2 million compared to $126 million in 2017.
MC adjusted EBITDA was strong in Q3 of $58.4 million bringing the year-to-date total to $165.9 million, both results are improvements over last year. AEC adjusted EBITDA in Q3 was $16.5 million and $45.2 million year-to-date, very good performance compared to last year.
Moving to Slide 7, earnings per share. Net income attributable to the company in Q3 was $0.87 per share compared to $0.47 per share in Q3 of last year. Excluding adjustments for restructuring, tax items, currency revaluation and the 2017 inventory write-off, net income attributable to the company was $0.85 per share in Q3 compared to $0.57 per share last year.
On a year-to-date basis through September, net income attributable to the company, excluding the same adjustments, is $2.23 per share in 2018 compared to $1.18 per share last year.
Lastly, Slide 8 shows our total debt and net debt. Total debt increased about $5 million to about - to $530 million at the end of Q3, which included a $12.7 million non-cash increase related to a modification of the company's lease for its primary manufacturing facility in Salt Lake City.
The lease modification extended the lease to December 31, 2029 and included additional manufacturing space to support anticipated growth. The combined effect of the increase in total debt along with the $6 million increase in cash resulted in a decrease to net debt of $0.7 million or a decrease of $13.3 million, excluding the impact of the lease modification.
During the quarter, the company contributed $5 million to the U.S. defined benefit pension plan, resulting in the planned now close to being fully funded. Payments for all capital expenditures in Q3 2018 were about $22 million, reflecting continued investments in equipment to support multiple ramp-ups in AEC. We expect capital expenditures to range from $20 million to $25 million in the fourth quarter.
Now I'd like to turn it back to Olivier for some additional comments before we go to Q&A.
Thank you, John.
Now let's turn to our outlook. MC adjusted EBITDA in Q3 significantly exceeded our expectation of $47 million to $50 million per quarter for the second half of 2018. As a result, full-year adjusted EBITDA is well on track to exceed the high-end of the company's historical range of $180 million to $195 million.
Assuming no significant changes in global economic conditions or currency rates, and taking normal year-end seasonal effects into account, we continue to expect Q4 adjusted EBITDA to be in that range of $47 million to $51 million.
AEC is expected to continue its strong performance in Q4. As a result, we expect an increase in full-year 2018 net sales above the upper-end of the 20% to 30% range we discussed in past quarters, while adjusted EBITDA, as a percentage of net sales, should show strong incremental improvement compared to 2017. In addition, we continue to be on track toward our goal of 18% to 20% adjusted EBITDA as a percentage of sales in 2020.
So, in summary, this was another very good quarter for the company with continued outstanding financial performance in MC and solid sales and income growth in AEC. MC is firmly on track for full-year adjusted EBITDA to exceed the high-end of the company's historical range of $180 million to $195 million, while AEC is also on track to exceed full-year sales growth expectations and to show strong incremental improvement in profitability compared to last year.
With that in mind, let's go to the line for any questions. Operator?
[Operator Instructions] And our first question will come from the line of John Franzreb from Sidoti & Company.
First question is on Machine Clothing. I was kind of surprised that the publication grades was up year-over-year. Can you talk to what's going on there? If you have actually hit the bottom maybe and we should think of differently about publication?
Listen, we had, as you saw, I noted a very nice increase - total, right - in total for PMC about 4.1% in net sales this quarter with really particular strength, as I noted in South America and Asia compared to Q3 2017, right.
So let me share with you, at a high level, our view, right - our current view of the PMC market. I mean, if you take a look at it in the U.S., as I mentioned already last quarter, the PMC market seems to be stable this year due to packaging and tissue grades consumption offsetting declines in publication grades, especially newsprints, but continuing on it what we have seen all year long.
We've good news on the Brazil - continued good news on the Brazilian PMC market which continues to be pacing as we talked about already before due to positive economic conditions and really rising pulp grade demand.
European PMC markets, if you take a closer look at it, it continues to drop as a result of lot of conversions of machines from publication into packaging and those machines consume less PMC than publication machines. So, same trend as we saw in Q2.
And then when you look at the overall Asian Pacific market, PMC market, you see Southeast Asia continuing to grow at a higher rate than China and you are very well aware of what's happening in China with all the restriction, the current restrictions on environmental regulations and restriction on imported recycled fiber.
So anyway, as we noted this quarter, we saw an increase in our publication grades versus 3Q 2017, principally in Europe and in Asia Pacific that were driven by some specific orders. I don't want to give any - of course, any comments about - more details about, especially in China.
So looking at this over the long term, we continue to think that publication grades PMC sales are likely to continue to erode at 5% to 10% annual run rate in dollar value and we continue to expect board and packaging grades PMC sales increases, as well as tissue and towel paper grades PMC sales increases to offset - to offset declines in publication grades PMC sales.
How about if I think about this a different way Olivier? You are going to well exceed your adjusted EBITDA margin ranges in Machine Clothing this year. That's coming off of a really good one in 2018. What would have to happen to retest the low-end of your adjusted EBITDA margin expectations for the business? How much for sales drop and what could actually happen if it - drive that kind of correction, or we permanently reset maybe your expectations on what that business can contribute?
First of all, I am very pleased. So you also saw that EBITDA performance this year and what we are expecting for the full year. So to your point, we were about $166 million of EBITDA year-to-date September. You add that range of - as we noted a $47 million to $51 million. So we are going to end up in the range of, let's say, $213 million to $217 million. So very nice performance.
Now listen, I think, looking forward, we'll continue to, of course, drive productivity gains. We continue to, going forward, to strengthen our leadership position in technology offering best technical solutions to our customers to optimize the machine performance.
We think it's fair today - we have to really finish the year to see where we really end up, and then we'll discuss certainly in early Q1, new ranges, better ranges. I think it's fair to assume that looking forward our gross margins will stay in that range that you've seen in the 48% to 49%. We have to really understand the effect, the favorable or unfavorable effect of the changes in global economic conditions.
We have to really assess, going forward, the plays of the currencies, the pesos, Brazilian currency, versus the Chinese currencies, the euro. We have to put all that in equation, we're able to derive a better target. So give us the time to finish the year and to do our homework properly to have a good view of the economic conditions and we'll at that time derive new targets. Okay?
And one last question if I may. On the engineered component side of the business, could you talk a little bit about, when you came on board, it seems like you wanted to address some of the core side of the equation and that was something that you wanted personally dive into this year. Could you talk about what kind of progress you've made on that front? Are we starting to see it in the numbers or it's still on its early stages?
No, listen, I am - we are very pleased - as you saw, we are very pleased about the improvement in EBITDA margin performance not only year-over-year, but quarter-to-quarter, if you look at what we have done so far this year. I mean, we are at $13.5 million of EBITDA in Q1, $15 million went in Q2, we are at $16.5 million in Q3, so which means that the system - operating system that we are slowly putting in place across all plants are starting to pay off.
I am very happy to see our team monitoring and making progress, if you will, and monitoring daily with a lot of focus, a lot of new metrics of productivity, our labor productivity, our labor efficiency, our critical assets effectiveness.
So removing costs also - removing costs from the - across the manufacturing footprint, removing costs, waste, scrap costs and rework costs. So we are at the beginning of it. There is much more to do. I am pleased about the progress. We know we have the experience of doing it, and we can only expect improvements as time goes quarter-after-quarter.
Thank you. And our next question will come from the line of Pete Skibitski of Alembic Global Advisors.
I guess, I want to ask about CapEx. I had kind of peak CapEx in 2017, it looks like maybe 2018 would be flattish with 2017 CapEx wise. What are you guys kind of thinking going forward in terms of if you built out the capacity need for the kind of the skyline you see for the business?
We've had, as you saw, CapEx Q3 at about $21.5 million, about $22 million. We'll continue to be in that range of $20 million to $25 million in Q4. I think that we need to keep on funding the increasing capacity on some specific equipment across AEC. We have the chance don't forget to be positioned on the highest growth platform jet engines in the military and commercial platforms right in Salt Lake City and Boerne ramping up.
So, I think, 2019, it's fair to think that we will continue at the same rate of about $20 million to $25 million per quarter throughout 2019. And then as we have brought the capacity in by end of '19, enough capacity in, I think it's fair today for us to think that we'd be more averaging about, let's say, $60 million a year of CapEx wise in 2020 right and beyond. That's the way I view - that's the way we look at it today.
And so as you're not building new facilities you're just adding new machinery to the current facilities to get up to the maximum ramp that you see out there on the single aisles.
Exactly. It's single-aisles and associated jet engine programs. It's also, as we noted - it's also the ramp up of very important platform for us in Salt Lake City, the CH-53K, right, which is, as you know, ramping up in the outlook. I think it's about two air crafts - two platforms in 2020 going to 10 platforms in 2022 and more than doubling.
Don't forget, very good prospect for us, very good growth for us that more than doubling to 25 per year in 2025, 2030. And don't forget we're making very large structural composite components. We're producing the sponsons, huge parts, huge assembly sponsons that we are assembling. We're producing the tail-rotor pylons, we're producing the horizontal stabilizers. So, it's a very nice one for us.
That's why we expanded our lease, by the way, in Salt Lake City of 120,000 square feet. Right. And we also have the ramp-up programs such as the F-35 of extreme importance for us as well again for Salt Lake City.
So, primarily, yes, it is really adding machineries - the equipment, very specialized equipments across our various technologies.
I guess to that end given CapEx will decline going into 2020, you're going to continue to rapidly de-lever and your dry powder for acquisitions will build pretty nicely I think. So just want to ask you what's your view on the M&A environment is currently and maybe more qualitatively how you're thinking about areas you'd like to build out?
Obviously we don't want to discuss really publicly strategic options in M&A. But I mean - we would - we are, how could I phrase it, we're always open to look at various options. There will be, as you very well know, more and more options available in the coming years as OEM look at divesting of some of their divisions maybe, or some - there'll be targets available, we know that.
We just simply with my team, we'll take the time to look at each of them to review, if you will, how they would strengthen our position in the global aerospace supply chain. What type of returns they would provide to us and how much does it would make of - how much it would maximize shareholder value as well. So it's really a very methodical approach that we will be and we're always in the process of conducting.
And at this time there are no further questions coming from the phone line.
Well, again thank you all for joining us on the call today. We do appreciate your time today and your continued interest in Albany International. I would like also to conclude today's call by recognizing the entire Albany team for another very strong quarter performance. Thank you all.
Ladies and gentlemen, a replay of this conference call will be available at the Albany International website beginning at approximately noon Eastern time today. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.