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Article Excerpt
OPERATOR: 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 Tuesday, November 4, 2008, will be webcast and recorded.
I would now like to turn the conference over to our host, President and Chief Executive Officer, Joseph Morone. Please go ahead.
JOSEPH MORONE, PRESIDENT AND CEO, ALBANY INTERNATIONAL CORP.: Thank you, Mary. Good morning, everyone and welcome to Albany International's Q3 2008 earnings call. As always, we'll begin with my commentary, which this time will be a little longer than normal because we think it's important that our investors understand why, even despite the looming recession, we're feeling pretty good about where we are as a company right now. And then after my commentary, as always, Michael Nahl, Executive Vice President and CFO, will add his amplifying comments, which will focus on cash flow and CapEx. And then, as always, we'll turn over to your questions.
Despite a rapidly deteriorating general economy and paper industry, and the effects of the previously announced slowdown at Eclipse Aviation, earnings in Q3 2008 were comparable to earnings in Q3 2007, excluding the effects of restructuring, performance-improvement initiatives, and income tax adjustments. The effects of weak PMC and EF sales and AEC income were largely offset by continued reductions in cost and another outstanding quarter for Albany Door Systems.
More generally, the Q3 results offer a window into the performance trends that we anticipate for the next few quarters. The top line, particularly in PMC, is certainly being hurt by the global recession. On the other hand, even in a long and deep recession, we expect to continue to make good progress, just as we did in Q3, toward our twin objectives of restoring the long-term cash generating potential of PMC, and establishing a family of new businesses with the potential for significant, sustainable, and profitable growth. We are of course acutely aware of the likelihood of a prolonged global recession. But fundamentally, we are confident that our cash and grow strategy is sound, and that we will come out of the recession in an even stronger competitive position in each of our businesses than we were in at its outset.
Turning first to PMC, Q3 sales, excluding the effects of currency translation, were 8% lower than in Q3 2007. This was an across-the-board effect. Sales in every region were lower than normal, primarily due to lower sales volume. Sales were especially weak in August 2008, suggesting that normal seasonal downturns are likely to be magnified during recession. Operating income in Q3, excluding costs associated with restructuring and performance-improvement initiatives, was 5% lower than a year ago as continuing cost reductions partially offset the lower sales.
We expect this global slowdown in PMC sales to continue for the length of the recession, as paper makers in every region reduce mill operating rates, slow down operating speeds, extend downtime periods, and accelerate the pace of machine slowdowns. And yet, as the paper industry weakens, our competitive strength in the PMC market continues to grow, which is why even in the face of global recession we are confident about our overall strategy and progress. We gained market share year to date in the Americas, Europe, and China; maintained what is for this time of year a strong order-to-sales ratio in North America; continued to make progress with key contract negotiations in Europe; and completed promising new product trials in each of our major product lines.
Meanwhile, our three-year, global restructuring process enters its final year on schedule. The pacing item now in this process is the ramp-up of our three plants in Asia. The expansion of our Korean plant is largely complete, and the team there has already expanded its production rates while maintaining exceptional quality levels. And the new plant in Hangzhou, China, passed an important milestone in early October, when it successfully produced its first set of products for shipment.
Engineered Fabrics had another tough quarter in Q3. As we have discussed before, this business shares many similarities with PMC, and about 30% of its revenues derives from sales to markets adjacent to paper. Another 20% of revenue derives from products that serve the struggling building products market. If there is a silver lining here, it is that 40% of EF's revenue derives from sales to the nonwovens industry, which is still growing even in North America and Europe. Q3 2008 orders for the nonwovens industry grew by 25% compared to Q3 2007, and by 15% compared to Q2 2008. Moreover, as sales -- our sales to the building products industry appear to have bottomed. Orders in Q3 2008 were comparable to Q3 2007 and considerably stronger than in Q2 2008. For this reason, even though EF sales performance in Q3 was similar to PMC's, there is reason to believe that the recession will not have as large an effect on this business as it is already having in PMC.
Turning next to Albany Door Systems, Q3 2008 was another strong quarter. Compared to Q3 2007, and excluding currency effects, sales grew by 16% and operating income by 250%. Once again, performance was strong across the board, in all regions and in both product sales and aftermarket. Orders in Q3 2008 were 20% higher than Q3 2007. Nonetheless, we still expect a slowdown in this business next year. How severe the effect will be is uncertain. Product sales will likely decline, which will especially affect North America, where product sales represent 90% of revenue.
On the other hand, in Europe, which represents 70% of total segment sales, the impact of recession should be lessened by the aftermarket business, which should continue to...
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