Albany International Corp /De/ Q4 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the Albany International Fourth Quarter and Full Year 2022 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, John Hobbs, Director of Investor Relations of Albany International. Please go ahead.

Thank you, Lois, and good morning, everyone. Welcome to Albany International’s fourth quarter and full year 2022 conference call. As a reminder, for those 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’ll make statements that are forward-looking that contain a number of risks and uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations, the markets we serve, and our financial results. For a full discussion, including a reconciliation of non-GAAP measures we may use in this call to their most comparable GAAP measures, please refer to both our earnings release of February 13, 2023, as well as our SEC filings, including our 10-K. Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill?

Thank you, John. Good morning. Welcome everyone. Thank you for joining our call. We're pleased to report another strong quarter, capping a good year in 2022. Over the course of the year, our team successively navigated multiple challenges, including the continuing COVID pandemic, the China lockdown, supply chain shortages, higher inflation, tight labor markets, threats of recession, and geopolitical uncertainty. Despite these headwinds, we were resilient, and delivered solid results for shareholders. Revenue and adjusted EBITDA continued to trend higher, approaching 2019’s record highs. Sales grew 12% year-over-year to $1,035 million. Gross margins exceeded 37% and adjusted EBITDA margins were 24.5%. We had a good year and our long-term strategy is on track. The past year benefited from our rock-solid balance sheet, our global leadership position in machine clothing, organic growth from our aerospace composites business, and our employees’ outstanding operational performance. We continue to focus on customers, excelling in product quality, reliability, delivery, and technical service. We won new business and brought new products to market. Our strong balance sheet allows us to invest in our businesses and execute our growth strategies. At the segment level, Machine Clothing's operational performance and financial results continued to be impressive. For the full year 2022, net sales were up nearly 2% on a constant currency basis, compensating for $10 million in revenue loss from our Russian market exit. The Machine Clothing segment delivered excellent profitability with gross margins exceeding 50% and adjusted EBITDA margins exceeding 37%, despite the inflationary environment. The Engineered Composites segment grew full-year net sales by 37%, nearly 40% on a constant currency basis, with significant contributions from both new work on the Sikorsky CH-53K helicopter and recovering commercial aviation production on the LEAP program, driven by the ramp in narrow-body aircraft production of the Boeing 737 MAX and Airbus A320neo aircraft. Adjusted EBITDA was $79 million, up about $10 million from 2021's results. As we enter 2023, we expect demand for Machine Clothing products to be relatively healthy. We benefit from our reputation for exceptional reliability, quality, and delivery. Our focus on higher value-added end markets helps drive profitability, while the replenishment nature of our consumable belts ensures relatively steady demand. Tissue markets, where Albany has a leadership position, hold up better during volatile economic times, while packaging and printing-grade markets tend to be more sensitive to economic activity. You may recall that as we entered the fourth quarter of 2022, demand in our Machine Clothing markets was strong. Through the fourth quarter, demand in the Americas stayed healthy and remains strong today. European and Chinese market demand slowed somewhat in Q4 but now appears to be recovering with China reopening and the easing of European energy concerns. We're encouraged that Machine Clothing demand should hold up in 2023. In AEC, the longer-term outlook for growth remains healthy, driven by recovering narrow-body production and our portfolio of great programs in defense. In the near term, as you've heard, demand in the commercial aerospace market is outstripping the industry's ability to supply. Therefore, the year-over-year growth driven by commercial aircraft production is more muted than we anticipated after a year of significant top-line growth in 2022. Once supply chains improve with growing passenger travel and airplane demand, we would expect to see production growth for the Boeing 737 MAX, Airbus A320neo, and Boeing 787 aircraft. For now, however, our outlook for 2023 does not contemplate near-term growth in these programs. On the defense side, we have significant programs including the Lockheed Martin F-35, Sikorsky CH-53K helicopter, and the JASSM missile. These programs have stable or growing production profiles for years to come. The CH-53K is set to enter full-rate production and is expected to remain our largest defense program. Additionally, we've won several smaller aerospace programs with new OEM customers in both defense and commercial markets, programs that our customers do not want us to disclose. These new wins contribute to our longer-term growth portfolio, diversifying our customer base and leveraging our composite materials expertise. Let me now discuss our long-term strategy. Our strategy for growth and competitive differentiation is based on two fundamentals. The first is that we're really good at developing advanced material solutions, and the second is that we excel in serving our customers. These elements combined—material expertise and operational excellence—position us as the partner of choice for our customers. This gives us an advantage that our customers value: product development capability, our ability to industrialize a process, technical support, and operational consistency in delivering the highest quality products on time and reliably. We sustain this growth and differentiation because we continue to invest in our employees, capital equipment, and processes to efficiently produce the advanced material products our customers value. Effective capital allocation remains a top priority focused on driving long-term organic growth. It begins with research and development for product and process advancement. You'll notice that throughout the pandemic, we invested nearly $40 million per year on average in research and development in our business, about 4% of net sales over the last three years. These efforts often align with customer partnerships and specifically target product development and process improvement goals. These collaborations and material advancements are essential investments in our future success in both machine clothing and engineered composites. Our capital expenditures focus on not only maintaining our current capabilities but also advancing our production efficiency and expanding our capacity as our business base grows. In December, we increased our regular dividend by 19% to $0.25 per quarter. Over the past two years, our Board of Directors has approved a share repurchase program, and we've executed just over $100 million of repurchases, retiring about 4% of our shares. Finally, we'll continue to evaluate targeted, disciplined acquisitions to supplement our long-term growth strategy. Historically, acquisitions have played an essential role, enabling us to build on our technological leadership and strengthen global market positions with key customers in line with our strategic priorities. In summary, we ended the year 2022 in great shape with a robust balance sheet. Our employees are excelling in serving customers with a relentless focus on operational excellence and developing advanced materials in both segments, and we continue to invest in R&D to position Albany for long-term organic growth. We believe we are poised for another solid year of results in 2023. With that, I'll turn it over to Stephen to provide more details on the quarter and our outlook for 2023. Stephen?

Thank you, Bill. Good morning to everyone. I will talk first about the results for the quarter and then about our initial outlook for our business in the coming year. For the fourth quarter, total company net sales were $268.8 million, an increase of 12% compared to the $239.9 million delivered in the same quarter last year. Adjusting for currency translation effects, primarily the decline in the euro relative to the U.S. dollar, net sales increased by 15.5% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were flat year-over-year, with growth in tissue and packaging grades offset by declines in pulp and engineered fabric grades. Engineered Composites’ net sales, again after adjusting for currency translation effects, grew by 44.7%, driven by growth on CH-53K and LEAP, partially offset by declines on the F-35 and 787 platforms. During the quarter, CH-53K generated revenues of over $35 million, up from $13 million in the same quarter last year, while the ASC LEAP program generated revenue of about $41 million compared to $27 million last year. We finished the year with $159 million of revenue on the ASC LEAP program and over $100 million on CH-53K. While we had seen a decline in downside risk in Q3, entering Q4, we still had been carrying some risk reserve on revenue for the fourth quarter to account for a variety of supply chain and other challenges across our portfolio of programs. However, those risks did not fully materialize, resulting in higher than anticipated fourth quarter revenues. Fourth quarter gross profit for the company was $97.1 million, an increase of 1.1% from the comparable period last year. The overall gross margin declined by 390 basis points from 40.0% to 36.1% of net sales, caused primarily by the relatively higher revenues in the lower margin AEC segment. Within the Machine Clothing segment, gross margin declined from 52.3% to 49.8% of net sales, caused by higher input costs, the absence of a one-time benefit we recorded in 2021, and lower absorption due to lower production volumes. Within Engineered Composites, the gross margin increased from 16.9% to 18.8% of net sales, caused primarily by improved absorption from higher revenues and the reversal of $1.4 million of previously established reserves, partially offset by losses recognized on the startup program and a less favorable net change in the profitability of long-term contracts. During the quarter, we recognized an unfavorable net change of $1.7 million in these contracts compared to a favorable change of $1.7 million in the prior year quarter for a net year-over-year difference of $3.4 million. Fourth quarter selling, technical, general, and research expenses increased from $53.2 million in the prior year quarter to $59.3 million in the current quarter and were essentially flat at about 22% of net sales. The increase was caused by higher foreign currency revaluation expense, increased incentive compensation expenses, and investments in sales and marketing. Total operating income for the company was $37.9 million, down from $41.7 million in the prior year quarter. Machine Clothing's operating income fell by $9.5 million, caused by lower gross profit and higher STG&R expense, while AEC operating income rose by $7.8 million, driven by higher gross profit. Other income and expense in the quarter netted to an expense of $3.8 million, compared to income of $1.2 million in the same period last year. The decline this quarter was primarily driven by unfavorable foreign currency revaluation effects of $8.8 million, partially offset by a gain of $3.4 million from the sale of excess IP addresses. The income tax rate for this quarter was 42.1%, compared to 27.3% in the prior year quarter. The higher rate this quarter was caused by discrete tax adjustments primarily related to incremental foreign withholding taxes and the guilty provisions of the U.S. tax code, plus a true-up of prior quarter's tax rate. For the full year, our effective tax rate was 26.9%. Net income attributable to the company for the quarter was $18.1 million, compared to $28.6 million last year, caused by lower operating income, unfavorable other income and expense, and the higher tax rate. Earnings per share were $0.58 in this quarter compared to $0.89 in the same period last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, expenses associated with the CirComp acquisition and integration, and the exclusion of the gain from the sale of IP addresses this quarter, adjusted earnings per share were $0.75 this quarter, compared to $0.86 last year. Adjusted EBITDA fell from $60.6 million in Q4 2021 to $58.4 million in the most recent quarter. Machine Clothing adjusted EBITDA was $52.2 million or 34.7% of net sales this year, down from $59.7 million or 38.1% of net sales in the prior year quarter. AEC adjusted EBITDA was $22.3 million or 18.8% of net sales, up from last year’s $16.1 million or 19.3% of net sales. During the quarter, the company generated free cash flow defined as net cash provided by operating activities less cash used in investing activities of a little over $17 million. We finished the quarter with a net leverage ratio of about 0.58. I would now like to turn towards the coming year and provide our initial financial guidance for 2023. Machine Clothing delivered another exceptional year in 2022 with strong top-line performance and profitability in a challenging environment with Russia’s invasion of Ukraine and our subsequent exit from the Russian market, the inflationary environment, Europe’s energy crisis, and China’s COVID challenges, all creating headwinds for the business. As we enter 2023, conditions are ripe for another good start to the year, particularly in the Americas. For the full year 2022, orders in the Americas were up mid-single digits over 2021, and again for the full year 2022, orders to sales were greater than one. While Eurasia was strong for 2022 overall, with orders to sales above one, we did see some tail-end weakness in the year. In Q4 2022, orders to sales in Eurasia were below one, driven by macroeconomic conditions in both Europe and China. However, we do not expect this to be a long-term trend. In fact, we have already seen stronger orders activity in those regions in the first few weeks of 2023. Unlike in 2022, we do not expect to see a continuation of foreign exchange headwinds for the full year. We finished 2022 with an average Euro to U.S. dollar exchange rate of $1.05 for the full year, and the current exchange rate is modestly above that level. That said, we will see some challenging year-over-year comparisons in the first half of the year, as the exchange rate in the first half of last year was above current projections for this year. From a product mix perspective, we expect the market for packaging and tissue grades to remain robust, and we do not expect any material shifts in those grades. However, we do not expect the rebound we have seen in publication grades since COVID to be sustained in 2023. Overall, for the segment, we are providing initial revenue guidance of $590 million to $610 million. From a Machine Clothing profitability perspective, in Q4, we saw the continuing impact on gross margin of the current inflationary environment as more of the higher-cost raw material that had been sitting in the inventory was incorporated into cost of goods sold. However, on the inflation front, we are beginning to see some bright spots ahead of us. Logistics and energy input prices have both seen reversals of prior increases, and while raw material and labor input prices remain higher, we’ve offset some of that impact through higher pricing to our customers. In 2023, we may have some tough year-over-year adjusted EBITDA margin comparisons in Machine Clothing, particularly in the first three quarters of the year, as we compare ourselves to periods prior to recognition of the full impact of inflation in our financial results. However, we still expect to deliver margins in line with our long-term expectations for the segment of adjusted EBITDA margins in the mid to high-30s for the full year. As a result, for 2023, we are providing initial guidance for Machine Clothing adjusted EBITDA of $205 million to $225 million. Turning to Engineered Composites. The segment significantly overdelivered on the top line in 2022. While none of this was an intentional pull forward of revenues into 2023, it does, given the nature of the programs in which we’re performing, limit the upside in 2023. As Bill referenced, our guidance does not envisage any material upside on the Boeing 787 frames program in 2023. There is also limited near-term upside on the LEAP program. In 2022, ASC’s LEAP program generated close to $160 million of revenue through the supply of engine cases, fan blades, and spacers on the 737 MAX and A320neo platforms. However, as has been well publicized, both Boeing and Airbus are facing supply chain challenges that are limiting their output of single-aisle aircraft. We now expect that in 2023, ASC LEAP revenue will be largely flat compared to 2022 before growing again in 2024. We also expect revenue from the CH-53K program overall, including the Aft Transition work package to be roughly flat to 2022, with an increase in recurring production fully offset by a decline in non-recurring revenue, both tooling and non-recurring engineering related to the Aft Transition portion. That said, as Bill indicated, longer-term as we transition to full-rate production in that program, we expect solid growth on the CH-53K. In 2023, we also expect to see growth on several other programs, including some recent wins. Overall, for the AEC segment, we are providing initial revenue guidance of $420 million to $440 million. From a profitability perspective, in AEC, we expect to experience some inflation headwinds primarily regarding labor costs in 2023. However, we expect better overall operation performance and better overhead absorption than in 2022. As a result, we are providing initial AEC adjusted EBITDA guidance of $80 million to $90 million. At the total company level, we are providing initial 2023 guidance as follows: Revenue of between $1.0 billion and $1.05 billion, effective income tax rate of 28% to 30%, depreciation and amortization between $70 million and $75 million, capital expenditures in the range of $90 million to $100 million, GAAP and adjusted earnings per share of between $3.10 and $3.60, and adjusted EBITDA of between $225 million and $255 million. Returning to the present, we are very pleased with how the company performed overall in 2022. We’re also excited about the long-term positioning of both segments and look forward to delivering another strong year of performance in 2023. With that, I would like to open the call for questions. Lois?

Our first question is from Peter Arment from Baird. Please go ahead.

Yes, good morning, Bill and Stephen. I was wondering if I could just touch base on the LEAP program. You mentioned that it had a strong 2022. Could you maybe, Stephen, provide clarity on whether you are currently in sync with the existing build rates or are you lagging because you’ve already delivered some additional ship sets?

Yes, Peter, this is Bill. As we look at the year, we set a plan and we level load the factory for the full year in cooperation with Safran, our customer, based on their outlook. There is some material in the channel inventory that we’ve produced and is further down the channel. But it’s not at an unusual level that I’m aware of. So we’re—if that’s your question, regarding what the channel looks like. As we plan for the first part of the year, it’s relatively flat, and if things pick up in the latter half of the year, we could improve that.

Okay, that’s helpful. And then—as you mentioned, the 787 also seems not a big contributor this year. Boeing has some longer-term outlooks. Maybe your thoughts on syncing up and what you’re seeing for 787 demand to step up?

Yes, the 787 is a great airplane. So we’re hoping to see that pick back up. But at this point, we’ve nearly idled the production line. We’re keeping it process qualified, but we don’t have any expectations, at least in the beginning part of this year, to do any production there. We’re waiting for the call to ramp that back up, but it’s not in our guidance.

Okay. And just one last follow-up on AEC. You mentioned the non-recurring on the CH-53K will be coming down, but offset to a degree with production picking up. Are we expecting any impact on margin mix there, or how do we think about that? Thanks.

Yes. I think, Peter, look, the gross margin is comparable on both the non-recurring and the recurring production. The difference is the recurring production is out on the factory floor to absorb plant overhead. And I referenced in my comments where I mentioned the AEC profitability guidance that we do expect improved overhead absorption in 2023, which will lead to better margins. While the gross margin is comparable, the contribution margin is higher on recurring CH-53K revenue than on non-recurring revenue.

Appreciate all the details. Thanks, guys.

Thanks, Peter.

And the next question is from Gautam Khanna from Cowen. Please go ahead.

Hi, good morning, guys.

Good morning.

I was curious. I’m trying to reconcile the LEAP commentary, because if you listen to what CFM has said, they’re going from approximately 1,100 units in 2022 to 1,800 or more, targeting 2,000 this year. So what explains the disconnect? Did you actually ship much closer to the 2,000 unit level? Maybe I’m not following.

I think, Gautam, part of what happened here is as Safran put together their demand plan for us for 2022, they had anticipated entering 2023 at our higher production rate for Boeing and Airbus on their aircraft. Therefore, they might have had us produce more than they might have done had they known what that actual profile would look like as Boeing and Airbus ramped up. They may be in a situation where they might have a little more of our product than they’d anticipated, and therefore, we’ll burn through some of that inventory in 2023. We don’t have full insight, but I’ve seen the public statements and you have to—I don’t have additional insight into their production rates but they may produce more engines in 2023 than we deliver components in 2023.

Okay. I mean, do you anticipate at any point a sequential dip, or are you getting destocked or just held at a flat rate in the guidance that you’ve embedded in Q1, Q2, et cetera?

Look, it bounces around always quarter-to-quarter; there are rises and dips. Certainly, as we assess the year, and as Bill mentioned, we endeavor to the great extent possible to level load across all four quarters. There’s no material dip; it’s roughly flat from 2022 to 2023. But quarter-to-quarters can be a little noisy depending on how many holidays and other things are present in any given quarter.

Yes. As I said, we try to plan the year together with Safran, establishing a level-loaded plan for the year. If the 737 MAX goes from the low 30s per month to the high 30s per month, that could change. But right now, we’ve planned it as it is for the year, and we’ll adjust later in the year if things pick up. However, we’re not expecting significant growth.

Would you be willing to opine on what your unit shipments were by 1A/1B in 2022, like 1,500 in aggregate or…

Yes. We haven’t in the past nor are we going to get into right now disclosing production rates or delivery volumes. One of the reasons being our customer has requested us not to discuss what we’re charging per ship set. We do disclose the full revenue, obviously, for the program, given its materiality to the company. We avoid giving exact ship set quantities because it’s straightforward to calculate the price at that point.

Yes. I think when Safran reports in the next few days, you can listen to what they say about engine production. We’re closely synced with them.

Yes. Last one for me. In your opening remarks, I think you made reference to some unnamed aerospace programs where you picked up some content. Are these new programs or are these you gaining additional content on existing in production programs? If you could at least give us some color around…

There are actually new programs with new customers. So as you think about the customers we discuss, Safran, and others, we work on hypersonics and a few different programs. We have a number of customers we are collaborating with in both the commercial and defense sectors on new programs.

Yes. In some cases, Gautam, it would be a program that’s certainly on a platform that is new for us but might be an existing in-production platform. So in some cases, they are genuinely new programs; in others, it’s a switch-over from an incumbent to us on an existing project.

Yes, they’re not new aircraft, to put it that way.

Okay. I appreciate it. Thank you, guys.

The next question is from Steve Tusa from J.P. Morgan. Please go ahead.

Hi, this is Sam Yellen on for Steve Tusa. I was just wondering what the overproduction load was into Q4. I don’t recall hearing this through Q3, just as a follow-up to the last one.

Sorry, I went a little fuzzy in that moment there. You’re asking for the overproduction…

Yes, the overproduction. Was there overproduction at all in Q4?

Look, as we noted on the LEAP for the year overall, we probably—not intentionally—level-load the factory. There wasn’t necessarily significant overproduction in Q4. Specifically, I wouldn’t characterize Q4 as a big overproduction quarter. We had not planned to pull additional production into Q4 from future periods. But given the nature of the program, if you take LEAP, if we produced more collectively over 2022 than our customer might have decided they have perfect insight into the future, that means we’ll produce less in 2023 than we otherwise might have. So, in some ways, there has been a shift of revenue from 2023 to 2022; however, I don’t want you to view Q4 as materially higher due to that. This was over the full year.

All right. Got it. And then on the LEAP inventory, does that sit at the CFM JV or at Safran?

It’s a combination. We certainly recognize revenue as we produce parts, and when we ship them, we invoice for them. After producing them but prior to shipping, they sit in contract assets in our book. We have recognized revenue on them, and they’re in our books in contract assets. When we deliver them, which entails shipping them across a line in the factory floor, they move over to accounts receivable until we collect the money for them. There is some of that in our books, but not a huge amount of inventory. It’s not a situation like a couple of years ago where we had talked about having 250 ship sets in the factory of excess inventory. But Safran does hold some excess inventory, and we have to burn through that.

As part of our arrangement with them, we will always hold some to ensure that if business picks up, we have inventory in the system. That’s part of the arrangement, but it’s not at an unusual level.

All right. Got it. And then just one last one for me. It looks like in ASC Q1, seasonality typically calls for a high-single-digit sequential step up. How should we think about the seasonality this year? Any reason Q1 should be different than normal?

Yes. Look, I understand it looks like seasonality. The nature of our ASC businesses is that it really isn’t seasonal. It’s more that when it’s growing and the fact that we level-load on LEAP; when LEAP sees a lot of growth, that appears in Q1 because we step up across all quarters. Therefore, there’s a noticeable jump from Q4 in the prior year to Q1 in the current year, but it’s not really seasonality, it’s more effectiveness like that. I don’t expect to see a big jump up in Q1 of this year; in fact, if you look at the revenue we delivered in Q4 of last year, it was quite high. I would expect this year to be similar, but I’m not saying the quarters will be identical.

Yes, and some of the programs aren't seasonal. As we transition to production for the CH-53K, we’ve done all the tooling work and all that. As we convert over to actual production, it may not be seasonal at all; it may be counter-seasonal.

Okay. Thank you very much.

Thank you. And the next question is from the line of Pete Skibitski from Alembic Global. Please go ahead.

Hey, good morning, guys. A couple of housekeeping questions. Steve, I might have missed this, but what are you guys assuming even directionally for corporate expenses in 2023? And then, the second one just on CapEx kind of came in above the guide for 2022, and it stays elevated for 2023, so I was just wondering what was going on there? Thanks.

Yes. We don’t explicitly guide corporate, but you can get there by taking our segment guidance and our overall company guidance. Factors contributing to somewhat higher corporate expense in 2023 versus 2022 include a general increase in compensation, which combines a higher normal merit raise due to the current inflationary environment, plus the addition of some targeted headcount where we feel we are lacking capabilities at corporate. We’ll add those in 2023. In addition, our IT area (we call it GIS internally) is incurring additional expenses to comply with U.S. DoD cybersecurity requirements for our programs as a government contractor. We’re required to comply with CMMC, the Cybersecurity Maturity Model, which requires some degree of separation of our data within AEC and additional expenses. Some of that will disproportionately hit in 2023 compared to 2022, leading to the higher corporate expense level next year. From a CapEx perspective, there are a number of reasons. New program growth, as we’ve discussed, requires significant spending on programs like the CH-53K. A portion of that was in 2022 and a portion will be in 2023. Additionally, certain capital expenditures approved back in 2021 and 2022 were deferred due to the pandemic and some uncertainty around cash flow and future program growth. A lot of those expenses are now catching up as we make those investments in 2023. It’s a combination of those deferred catch-up spending. I wouldn’t view our 2023 CapEx as a new normal; it’s aberrantly high, driven by both of those factors.

Okay. Appreciate the color. Thank you.

Thank you. Now we'll go to Michael Ciarmoli from Truist Securities. Please proceed.

Hey, good morning, guys. Thanks for taking the questions. Just to revisit the LEAP and production. Just for clarity, what’s your lead time? If we are expecting rate breaks high or later in the year, if Boeing is successful in ramping the 787 output to five per month, how soon or how far ahead do you guys start ramping up that production?

Yes. We don’t consider that particularly as a lead time, but from our ability to ramp the business and processes, we have the capacity and equipment in place; it’s about training people. That might take a few months to bring someone new on and train them. So we’d be ready to go; it wouldn’t take us too long.

Yes. As the rate increases, the timing to switch to our new production pace does depend on how much finished goods inventory Safran has at that time and how much safety stock, if you like, they’re willing to absorb in anticipation. It does vary. But likely something like six months would be a reasonable estimate for when we might transition to increases in production, but that fluctuates based on their existing inventory levels.

And we would know well ahead of time. It’s not the kind of thing that happens at the last minute.

Okay. And then, Bill, you mentioned training people and new employees. Are there any other choke points out there in the supply chain? I mean, as you assess your current staffing levels and where you might need to be, is there going to be significant demand for new employees or how are you thinking about additional staff here?

Yes. The labor market has been really tight overall, and while it’s improved slightly, we’ve been able to acquire the personnel we need and focus on training new staff, bringing them up to speed, and investing in training for existing employees. We’re feeling more comfortable by not seeing major bottlenecks at this point.

Okay. And then Stephen, just one for clarity. The engineered EBITDA margins in the quarter were down year-over-year and sequentially. Was that due to mix, or were there other factors pushing those margins down?

No. Look, let me address this. The CH-53K is certainly not a low-margin program; it’s a solid program. I think it’s a combination, and I mentioned briefly in my remarks, that one of our newer programs faced some startup challenges. The challenges on new programs come from long-term program accounting, where we manage to spread the pain or gain, either bad or good news over the life of a program and adjust the booking rate. In the case of a new program, we typically have an order for just a very short period, so the gain all gets recognized almost like a period expense rather than through long-term program accounting; thus, the quarter’s performance reflected that.

Got it. Helpful. Perfect. Thanks, guys.

Thank you. And at this time there are no further questions in queue. Please continue.

All right. 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. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T TeleConference. You may now disconnect.