Good day, and thank you for standing by. Welcome to the Albany International Corporate Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Hobbs, Director of Investor Relations. Please go ahead.

Thank you, and good morning everyone. Welcome to Albany International’s second quarter 2023 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 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, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, including a reconciliation of non-GAAP measures we may use in this call to their most comparable GAAP measures, please refer to our earnings release of July 26, 2023 as well as our SEC filings, including our 10-Q and 10-K. Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill?

Thanks, John. Good morning and welcome everyone. Thank you for joining our second quarter earnings call. We're pleased to report another strong quarter of results with revenues of $274 million, up nearly 5% compared to the same period last year and solid execution across our operations. GAAP EPS of $0.86 was down from last year to $1.25 impacted by non-operational items that Rob will cover. Adjusted EPS was $0.90 and adjusted EBITDA was nearly $65 million in the quarter. As a result, we finished the first half of the year in good shape and we're raising our guidance for the full year. The Machine Clothing segment continues to deliver healthy results with revenue growth of 5.6% on a constant currency basis, gross margins in excess of 50% and adjusted EBITDA margins exceeding 37%. Our Machine Clothing team has done an outstanding job navigating the challenges posed by macroeconomic headwinds in Europe and China, inflation and the effects of the war in Ukraine. Since the end of 2022, trends in Machine Clothing's revenues, operating profit and adjusted EBITDA have all been positive and now exceed our pre-pandemic performance. These impressive results are testament to the effectiveness of Machine Clothing's disciplined operating model, the consumable nature of our products and our well-earned reputation as a supplier of mission-critical paper machine clothing products with exceptional reliability and value to our customers. Last month, we announced our agreement to acquire the Heimbach Group, a manufacturer of machine clothing based in Germany. Heimbach is a great fit and creates opportunities to provide our customers with even more value. Geographically, Heimbach is strong in Central Europe, which complements our Northern European presence. The addition of Heimbach’s Asian operations will augment our presence in faster-growing Asia as well. Heimbach and Albany each have long, proud legacies in machine clothing and we look forward to working with the Heimbach team and leveraging the best of both companies to add value for our customers and shareholders. We expect the transaction to be accretive in both earnings and cash flow in our second year of ownership. And we have good news this morning, we just heard from the regulatory authorities that we've been approved to proceed with the closure of the deal, and we're going to move towards closing. So as we've said before, we expect closing to be in the second half of the year and we’re pretty excited about the news we received this morning. The Engineered Composites segment achieved top-line growth of approximately $5 million in the second quarter, up nearly 5% compared to Q2 of 2022. Growth in the quarter was driven by higher revenues from commercial programs and from some smaller programs that we've brought on over the past 12 months. Our aerospace team continues to ramp up the CH-53K production line and is doing a great job managing supply chain delays and supporting our customers. Adjusted EBITDA in this segment was about $21 million, relatively flat with the second quarter of last year. AEC continues to do a great job for customers and on-time delivery, quality, and customer satisfaction, and its strong operational performances are notable in an industry that's still hampered by supply chain delays and other challenges. It gives our customers confidence in our ability to take on new business either through more content on existing platforms or new programs. Our aerospace team did a great job at the Paris Air Show and our business development teams, our engineering teams had a full slate of meetings to discuss new opportunities for growth. In many ways, it built on the momentum we achieved last year at Farnborough. We continue to build our reputation as the premier partner of choice in composites manufacturing. Finally, I can report that our Board of Directors is working diligently on my succession, and the CEO search process is well underway. I'm committed to a smooth transition, working with the Board and the management team to continue executing our strategy and doing a great job for customers and shareholders, and we'll let you know as soon as we have an announcement to make. So with that, I'll hand the call over to Rob.

Thank you, Bill, and good morning, everyone. My first full quarter with Albany has been tremendous. I visited a number of our locations in both the US and Europe and I'm impressed with the very visible operational excellence across both businesses. The culture and our people are very inspiring and I'm grateful for the opportunity to be on the team. We had another great quarter and continued to execute on our growth strategies, including the recently announced Heimbach acquisition. As Bill mentioned earlier, Heimbach is an excellent fit for us and creates real opportunities for significant value creation for our shareholders over time. Pro forma for the Heimbach transaction, our financial leverage will remain very modest, with net leverage slightly above 1 times EBITDA as we plan to fund the transaction with available overseas cash. We will continue to have considerable room under the financial covenants in our revolving credit facility to invest in organic and inorganic opportunities. I will now turn to our second-quarter results and then provide our updated outlook for the year. For the second quarter, total company net sales were $274 million, an increase of 4.9% compared to the prior year period. On a constant currency basis, net sales increased 4.8% year-over-year. In Machine Clothing, also adjusting for currency translation effects, net sales grew 5.6% compared to the same period in 2022 with higher sales across all paper machine clothing product lines, somewhat offset by contraction in engineered fabrics as nonwoven demand has returned to its lower pre-pandemic levels. Engineered Composite net sales, after adjusting for currency translation effects, grew by 3.8% compared to the second quarter of 2022, driven by growth over a number of programs, including some recent wins. This growth more than offset the temporary decline in CH-53K as we transition from nonrecurring development efforts last year to recurring production in 2023. The ASC LEAP program generated revenue during the second quarter of about $45 million, approximately $5 million higher than the same period last year. While our first-half LEAP revenues were above the prior year, that is mostly timing and we expect our full year LEAP revenues to be generally flat when compared to 2022. Second-quarter gross profit for the company was $103 million, an increase of about 2% from the comparable period last year. The overall gross margin declined 100 basis points to 37.5% of net sales. This was caused primarily by higher input costs and lower absorption in Machine Clothing combined with program mix impacts and a $1.9 million unfavorable change in the estimated profitability of long-term contracts within the AEC. Second-quarter selling, technical, general, and research expenses increased from $50 million in the prior year quarter to $57 million in the current quarter. There were a number of factors driving the year-over-year increase. We saw a negative FX impact of approximately $2.5 million at Machine Clothing. We also incurred higher corporate expenses related to executive transitions, professional services related to business development activities, as well as expenses related to the Heimbach acquisition. We also had increased IT spend to support our growth and to enhance security. Other income and expense in the quarter netted to income of $4.5 million compared to $7 million of income in the same period last year due to lower foreign exchange revaluation gains. The effective income tax rate of 42.8% this quarter was unusually high due to discrete tax items, driven by withholding taxes resulting from international tax planning as well as a provision for international tax audits. As we look at the back half of the year, we expect the tax rate to normalize to our historical levels between 28% and 30%. For long-range forecasting purposes, we believe that these same effective tax rates apply for our current operations, absent unusual tax items. Net income attributable to the company for the quarter was $27 million compared to $39 million last year. GAAP earnings per share was $0.86 in this quarter compared to $1.25 in the same period last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, acquisition and integration expenses, adjusted earnings per share was $0.90 this quarter, down from the $1.06 reported in the second quarter of 2022. Adjusted EBITDA of $65 million declined approximately $1 million from the $66 million reported in the second quarter of 2022. Machine Clothing adjusted EBITDA was $59 million or 37.3% of net sales, up from $58 million or 38.2% of net sales in the prior year quarter. AEC adjusted EBITDA was $21 million or 18.2% of net sales, approximately flat with last year. During the quarter, the company generated $12.4 million of free cash flow, defined as net cash provided by operating activities, less capital expenditures, which for the quarter totaled $18.7 million. During the quarter, we experienced some working capital investment that we expect to unwind in the second half, leading to improved cash flow performance in the second half of the year. I would like now to turn to the outlook for the full year. Overall, we are pleased with our first-half performance and are raising our guide for the full year. Machine Clothing delivered another exceptional quarter. Overall business conditions were similar to those we experienced in the first quarter. On a constant currency basis, we experienced demand growth in all paper machine clothing product lines, and as we noted last quarter, a return to lower pre-pandemic levels in our Engineered Fabrics business. Given typical vacation and winter holiday impacts in the second half of the year, combined with softer markets this year in Europe and Asia, we expect revenue in the second half of 2023 to be modestly lower than the first half. Taking into account our strong first half, we are increasing Machine Clothing's revenue guide by $20 million on the low end and $10 million on the high end to a range of $610 million to $620 million for the year. As we've mentioned for the past couple of quarters, inflationary pressures are easing and for some raw materials, we are even seeing price reductions. However, in general, raw material prices remain above pre-pandemic levels. Despite the easing price pressure, it will take a few quarters to see this flow through our results as we work through the raw materials acquired in prior periods. We continue our efforts to offset the inflationary impact through ongoing continuous improvement efforts and input cost management. Logistics have largely normalized with both better pricing and better availability. We expect Machine Clothing's adjusted EBITDA margins to be in line with our long-term expectations of mid-30% for the full year. As a result for 2023, we are narrowing our guidance for Machine Clothing pulling up the bottom end of the EBITDA guide by $5 million. We now expect Machine Clothing adjusted EBITDA to be between $210 million to $225 million. Turning to Engineered Composites. Our outlook for the year improved with some recent new business wins. We are still expecting full-year revenues for our two largest programs, LEAP and CH-53K to be relatively stable this year compared to 2022. For CH-53K, we are largely complete with our tooling and NRE work on the app transition. So revenues on that program will grow as the production ramps towards full rate over the next few years. Taking into account the performance so far this year, we are raising the revenue guidance by $10 million. We now expect AEC revenue to be between $430 million and $450 million. Our AEC full-year adjusted EBITDA guidance of $82 million to $92 million is up $2 million and implies margin expansion in the second half of the year as we see improved program mix and continued strong operational excellence in the second half. At the total company level, we are updating our 2023 full guidance as follows: Revenue between $1.04 billion and $1.07 billion, a $30 million on the low end and $20 million on the high end from prior guidance; adjusted EBITDA between $232 million and $257 million, up $7 million on the low end of the range and $2 million on the high end; an effective income tax rate of 32% to 33%, implying effective tax rate of approximately 28% to 30% in the second half of the year; depreciation and amortization between $72 million and $74 million; capital expenditures in the range of $85 million to $95 million, this is $5 million lower than our previous guidance as we expect some investment to move into next year; GAAP earnings per share between $3.07 and $3.67; adjusted earnings per share between $3.15 and $3.75, up $0.05 on the low end and $0.15 per share on the high end. With that, let's open the call for questions.

Thank you. We will now conduct the question-and-answer session. Our first question is from Gautam Khanna of TD Cowen.

I was curious if you could update us on your expectations for the LEAP program this year, and perhaps if you have any early view into next year and also on the CH-53K? I know both were relatively flat this year. But what's your visibility on a reacceleration into next year, if any?

We're excited about the positive news regarding the 737 production rates for the long term. The A320 narrow-body market remains strong, and we'll see how that develops over the next year. As we mentioned, we exceeded our LEAP plan for the first half of the year, showcasing our ability to ramp up production quickly. Our operations are running smoothly, and our inventories are moving well. Looking ahead to next year, we're optimistic, but we don't have any updates to share for this year. We are maintaining a steady level for now, although our current run rate is better than expected. We anticipate growth next year, but we don't have specific figures yet. Regarding the CH-53K, as Rob mentioned, we have transitioned from tooling and development to production. One production line is successfully operational, and we are actively shipping products to Sikorsky for the CH-53K. We're also bringing a second automated production line online in the next few months, with production and shipments expected to start in the second half of this year. Overall, we're pleased with the progress and the long-term demand for the CH-53K.

And then just if you could also update us on your view on 787 and F-35. 787 looks like Boeing says they're at four a month on the way to five on the way to 10. I didn't know if you guys are finally starting to see demand pick up with the Boeing subcontract manufacturers that you ship to and likewise in the F-35, if you have an update?

On the 787, we're pretty much synced with the Boeing demand. We are running the production line. As you know, last year, we had stopped the line and prior to that, we had run at a really low level, so the line is up and running. We were cautious in how we started up the line to make sure that demand was coming and it looks like it's pretty good so far. So we're in sync with that four going to five rate level as we go from this year into next year, and we'll continue to ramp up from there. So that looks pretty good so far, so we haven't heard any changes to the production demand there. The F-35, also good news out there about longer-term demand, so we're waiting to see. I don't have anything to report today on the demand for it, but we're excited as we look at next year and beyond.

Our next question comes from Michael Ciarmoli of Truist Securities.

To follow up on Gautam's questions regarding some of the platforms, it's still early in relation to the Pratt & Whitney disclosure. There's been some discussion about whether any airline or Airbus delivery delays could lead to a shift towards more LEAP platforms. How are you all considering this in terms of the future of LEAP production?

I think we're watching it with interest, and full disclosure. My first job was at Pratt & Whitney in the Turbine Engine Group, so I'm watching it with a lot of interest. Longer term, it's just a great program to be on the LEAP program and we look forward to increasing our share and being really competitive. So we're just going to watch it and see how it goes.

I don't want to be disrespectful with this question, but the Heimbach deal seems to be a strong acquisition. From a strategic perspective, how did the decision to acquire them come about? Rob, I assume you were too new to be closely involved, and Bill, you're leaving soon. Was this decision possibly influenced by Daniel from the Machine Clothing side, or was it the Board? I'm just trying to understand who was really behind this decision strategically.

It was a real strong team effort. The Board, Daniel and his team, myself, we're all very highly engaged and worked it for a long period of time, I will say. So we're very excited about it. As I said, Heimbach has a long tradition, it's got a great brand in the industry and we're excited about working together with that. So it was a collaborative approach, a lot of work, but we're really excited to get moving forward here.

And Mike, I'll just add. I came in, obviously, late into the picture. But giving an independent view of it coming in, it's a phenomenal deployment of capital for the company. When you look at the opportunities to create value and to really build out the Machine Clothing business, which, as we all know, generates a ton of cash and has given us the strategic flexibility to pursue a lot of growth across the company.

No, I totally agree. I mean it sounds like a great path to earnings and EBITDA accretion for sure. Just the last one for me and I'll get out of the way here. I guess, just looking at the guidance, what has to happen for second half earnings to be down 26% versus first half to get to the low end of the range? I mean, I know you talked about Machine Clothing and normal European seasonality and other pressures. But I mean, it just seems like it would be a real struggle to get down there. And I mean you even had a pretty big tax headwind here in this current quarter. So can you maybe give us some of the mechanics on the ranges out there for the guidance?

Let me start and I'll hand it over to Rob. It's a fair question. We conduct a detailed analysis of all our programs, examining each platform in AEC and assessing the market in Machine Clothing. As you know, the Machine Clothing business has bookings that extend over time, but not too far into the future. We evaluate the market and monitor the activities of the paper companies, as well as the machine which is currently experiencing significant downtime due to maintenance. We often make sales during these maintenance periods, even when the downtime is prolonged, possibly because demand is slower at the moment. Publication is down considerably in Europe, and there are more closures anticipated, so we are keeping an eye on that. It would take quite a lot to reach the lower end of our guidance range, but we consider potential fluctuations in the market. Since we don't have bookings for the end of the year, at least not in substantial amounts, we are trying to set some boundaries around it. It's unlikely we'll reach that lower end of the range, but that’s how we are approaching the situation.

And Michael, I mean, I think it's really just a real caution that we have around the macros in Europe and some parts of Asia, including China. So we wanted to just ensure that the range, as Bill said, kind of captured that possibility. We don't think it's a high probability if we're going to wind up at the low end, of course but we just wanted to bookend it. And I think you raised a fair point that a lot would have to happen negatively for us to get there.

Our next question comes from Jan-Frans Engelbrecht of Baird.

Good morning, Bill, Rob, and John. I'm stepping in for Peter this morning. I have a quick question regarding Machine Clothing and its margins since it seems that the acquisition may have closed earlier than expected. In looking at the first year, specifically the first half, the EBITDA margins for Machine Clothing were at 35.8%, and the midpoint guidance suggests around 35.4%. I assume this does not include the Heimbach acquisition. Could you discuss what we should anticipate for the second half of the year in terms of margins for Machine Clothing?

There's nothing in our guidance related to Heimbach, as it is not included at all. What we are observing is that the second half of the year typically tends to be a bit softer, which is reflected in slightly lower sales. This decrease in sales also affects absorption at Machine Clothing, influencing our expectations for the latter half of the year. Additionally, we usually see a slight level of seasonality in Machine Clothing between the first and second halves, and this is what is ultimately impacting the margin.

There's also some costs that we incurred higher from the inflation that we've experienced where we had material costs we brought in that we've got to work through the system. It'll take a few more months to work through that into the fourth quarter, probably before those higher cost materials flow through the P&L.

And then if I could just have a quick follow-up. And I understand 2026 is far off, but if I just looked at the Investor Day targets for LEAP, 787 and CH-53K, are you sort of still comfortable with those targets? If you just look at 787, I think we're doing, let's say, about $5 million this year and that the previous target was at $40 million for 2026 for annual revenues. If you can just talk through those three programs, I guess...

I think certainly kind of looking at 787, we're at a low point right now, clearly, with the production. But if Boeing's forecast is correct and they ramp up to those production levels then I think we would feel pretty comfortable with our longer-term outlook for 787. And in terms of CH-53K, I mean, we definitely feel comfortable with that. And certainly, if you were to look at our backlog numbers that we reported in the Q, a lot of growth relating to CH-53K. We've done very well in getting contracts there. And then on F-35 or LEAP, we feel comfortable with where those productions are based on everything we're seeing.

Our next question comes from Ron Epstein of Bank of America.

This is Jordan on for Ron. So actually on the 2026 targets too, with defense spending and all the restocking and also the European spending, are you guys thinking about those targets, especially for missiles improving long term? And then also to anything else that you guys are seeing down the pipe that you think would be really interesting for hypersonics?

We didn't discuss technology on this call as we usually do, which I find exciting, especially the hypersonics topic. We are optimistic about that area in the long term and are making some investments, although it is a longer timeline. Concerning the 2026 targets we've mentioned before, we intend to double the AEC business in that period, and we are still on track to achieve that. The business mix has shifted slightly as we've secured contracts to compensate for areas that were not developing as quickly as anticipated, such as the 787's slower ramp-up. However, our team has excelled in securing new business across various applications, which contributes positively. We are quite confident about reaching, if not surpassing, the 2026 targets.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to Bill Higgins for closing remarks.

Great. Thank you. Thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. And of course, if you have any questions, feel free to reach out to John Hobbs, our Director of Investor Relations. So thank you, and have a great day.

This concludes today's conference. Thank you for participating. You may now disconnect.