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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
PARTICIPANTS
. Joseph Morone, Albany International Corp., President and CEO . Michael Nahl, Albany International Corp., EVP and CFO . David Pollock, Albany International Corp., Corporate Representative . Paul Mammola, Sidoti & Company, Analyst . Ned Borland, Next Generation Equity Research, Analyst . John Emerich, Ironworks Capital, Analyst . Arnie Ursaner, CJS Securities, Analyst . Mark Connelly, Credit Suisse, Analyst
OVERVIEW
Co. reported that it is on track towards realizing two near-term objectives and strong 2009 cash flow, despite a weak North American paper industry and general economy, weakening European paper industry and general economy and growing pressure on costs from rising oil and commodities prices.
FINANCIAL DATA
A. Key Data From Call 1. 2Q08 CapEx = $41.9m. 2. 2Q08-end net debt = $422m.
PRESENTATION SUMMARY
S1. 2Q08 Business Summary (J.M.) 1. Highlights: 1. For past two years, Co. has been pursuing a cash flow and growth strategy with two near-term objectives: 1. Restore long-term cash-generating potential of PMC. 2. Establish a family of new businesses with significant potential for sustainable and profitable growth. 1. Primary near-term measure of success for this strategy is strong free cash flow, beginning in 2009. 2. Results suggest that:
1. Despite a weak North American paper industry and general economy, weakening European paper industry and general economy and growing pressure on costs from rising oil and commodities prices, Co. is on track towards realizing those two near-term objectives and strong 2009 cash flow. 2. PMC: 1. Strategy for past two years has been to offset the impacts of maturation of North American and West European markets by: 1. Growing volume in these mature markets.
2. Growing with the emerging markets in Asia and South America.
3. Reducing cost significantly through a company-wide, three-year restructuring and process-improvement program. 2. This is exactly what took place in 2Q08. 1. Excluding currency effects, global PMC sales were up slightly. 2. With increased volume more than offsetting declines in prices, sales were strong in Asia and South America, which grew by 7% and 5% respectively. 3. Despite accelerating inflationary pressures, costs in PMC declined as the effects of last year's plant closures and establishment of European shared services center were clearly reflected in operating income. 3. Excluding the costs associated with restructuring and performance-improvement initiatives, EPS and EBITDA showed strong improvement vs. 2Q07.
1. About half of this improvement is due to lowering operating
costs in PMC. 4. Expenditures associated with restructuring and
performance-improvement activities that contributed to these
lower operating costs will decline over the next few quarters.
1. SAP expenditures accounted for nearly 40% of performance-improvement initiatives as the project passed its toughest and most important milestone go-live in North America at the beginning of July. 5. Planning to accelerate SAP implementation through the rest of
enterprise. 6. Expects expenditures to decline from North American go-live peak and for the project to be substantially completed by 3Q09-end. 3. Machine Relocation: 1. Costs associated with various plant closures accounted for a third of performance-improvement costs. 1. Start-up costs associated with new capacity in Asia accounted for nearly 20% of that total.
2. Machine relocations should continue through the year, while
Asian expansion is entering a new and critical phase. 3. Construction in two plants in China and in third plant in Korea should be completed in this qtr., with operations starting to ramp up no later than the start of 4Q08. 4. Goal for these plants is nothing short of world-class products enabled with world-class quality. 1. That means that Co. will go to have to go through a measured, deliberate pace of scale-up over next few quarters, which will depress earnings in Asia because of higher depreciation and underutilized capacity. 2. Once fully operational, these plants will dramatically enhance long-term prospects of global PMC business. 5. Outlook: 1. As 2Q08 increases in PMC volume suggest, Co.'s competitive position in North America and Europe continues to strengthen. 1. Made good progress on a number of important contract
negotiations in both markets. 2. Short-term outlook for PMC remains clouded by economic environment, cascading effects of the rise in oil and commodities prices, and impact of both on the already
struggling paper industry. 3. In 2Q08, Co. once again saw the sharp slowdown in North American PMC consumption at 2Q08-end. 1. Expects this pattern to continue through the economic slowdown.
4. Moreover, in four of last five years, PMC revenues were weaker in 3Q than in 2Q, largely because of the effect of summer slowdowns in Europe. 5. Strong 2Q08 and growing competitive strength suggest that Co. should see continued improvement in YoverY performance.
4. Albany Engineered Composites (AEC): 1. Performed well. 2. Sales, 96% ahead of last year. 3. Business broke even for second and third months of 2Q08. 4. New business development opportunities continue to emerge. 5. Remains optimistic about near and long-term growth prospects of this business. 1. One indicator of these prospects is the array of customers that Co. is now working with on current revenue generating and future business development projects. 5. Commercial Engines: 1. Customers include Snecma, Rolls-Royce, Pratt & Whitney, Honeywell, and GE. 2. Current and future projects range from engine parts for business jets to regional jets to next-generation single-aisle aircraft.
3. For commercial airframe applications, customers include
Messier-Dowty, for the Boeing 787 landing gear struts, and Eclipse Aviation, for E500 Very Light Jet. 4. For military platforms, involving engine, airframe and other applications, customers include Boeing, Northrop Grumman, Rolls-Royce, US Army, and US Navy. 5. Primary challenge facing this business is to take full
advantage of an expanding array of new business development
opportunities, most of which won't generate significant
revenue until 2013 and beyond. 6. Most of the costs associated with these new program development activities are included in corporate R&D rather than in segment earnings. 1. So beginning next year, Co. will disclose the portion of corporate R&D expenses associated with these new aerospace composite development projects.
7. Optimism about the future prospects of this business is based
on a growing stable of new business development projects that
are laying the foundation for significant, growing and
sustainable cash flows at attractive returns. 6. Albany Door Systems:
1. Continues to perform exceptionally well. 1. Business does have a seasonal cycle with 4Q by far the strongest. 2. But the top-line strength exhibited in 4Q07 has continued through 1H08.
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