Good day, and thank you for standing by. Welcome to the Albany International Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today. JC Chetnani, VP, Investor Relations and Treasurer. Please go ahead.

Thank you, Verdin, and good morning, everyone. Welcome to Albany International's Third Quarter 2024 Earnings 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 reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking and 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, please refer to both our earnings release of October 30, 2024, as well as our SEC filings including our 10-K. Now, I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks.

Thank you, JC. Good morning, and welcome, everyone. Thank you for joining our third quarter earnings call. I will provide an overview of our business performance. Rob will later discuss our final results in detail. I'm pleased with the overall results of the quarter as we focus on operational excellence evidenced by strong results at Machine Clothing and our ability to generate free cash flow of $78 million year-to-date. Furthermore, our balance sheet is very healthy. Turning to the EAC adjustments announced earlier this month, we are addressing operational issues to stabilize production and to advance the ramp-up of the programs at our Salt Lake facility. Our team is making good progress, leveraging support from our other sites. Machine Clothing revenues at $183 million grew year-over-year, driven by our Heimbach acquisition, partially offset by publication grade globally and packaging in Europe. In the third quarter, Engineered Fabrics delivered year-over-year growth. Overall, the industry's secular growth trends remain in place for packaging, tissue, and pulp. In terms of geographies, North America remains a strong contributor, while Europe continues to demonstrate weakness. Overall, Asia is stable, except for China, which is experiencing some softness. Our global order backlog remains stable. Turning to Heimbach. Our integration plan remains on track. We made progress on functional organizational integration this past quarter and the closing of our South Korea and Rochdale U.K. facilities is largely complete. Revenue has seen an impact from the overall weakness in Europe, combined with the SAP implementation, which has delayed some sales into the fourth quarter. In our Engineered Composites segment, we recorded revenues of $115 million, while our profitability was impacted by our previously announced EAC adjustments. In our commercial markets, we have seen near-term weakness in LEAP and our other Boeing programs. Our defense business continues to grow, primarily on the CH-53K and JASSM platforms. Though we have seen some near-term reduction in the Joint Strike Fighter program this year, we expect recovery in 2025 and beyond. Our backlog is well over $1 billion. And longer term, we continue to see growth in space and our other commercial programs. With the LEAP program, we're monitoring the situation at Boeing. But as previously announced at our second quarter earnings call and earlier this month, we have twice lowered our 2024 production plan. We're working with Safran on our 2025 production plan, and we'll share that with you when it is finalized as part of our overall 2025 guidance. Our long-term fundamentals for the business remain strong, and we have new operating leadership in place, all of which gives me strong confidence in the future of the segment. It's important to note that the updated margin profile of the business remains well ahead of our peer group. Overall, our business fundamentals remain solid, and I have my team in place. We have Chris Stone as a new leader at Albany Engineered Composites. Chris brings strong experience and discipline and strategic agility to the segments, which will support our strong growth projection. In Albany Machine Clothing, Merle Stein took over leadership after several years of being groomed to the role, and will take his industry experience and strong business development capability into shaping the future of our Machine Clothing segment. As disclosed earlier, due to the common material science of our businesses, Rob Hansen was appointed CTO and is leading our overall innovation and R&D. In order to capitalize on our significant investment in R&D, we recently hired Paul Watts to lead our new business ventures. Paul has experience from Boeing and Textron and will take new products through our gated process for addition to our businesses. With all this change in momentum, we also plan on hosting an Investor Day in the spring of 2025 to showcase the plans for the next five-year period and give analysts and investors the opportunity to hear directly from our new management team. With that, I'll hand it over to Rob to provide more details on the quarter.

Thank you, Gunnar, and good morning, everyone. I will review our third quarter results and then provide our outlook for the balance of the year. Consolidated net sales came in at $298 million, up 6.1% from the third quarter of last year. Machine Clothing net sales of $183 million increased 9.9% versus the third quarter of the prior year, driven by Heimbach. North American comparable sales were higher year-over-year and reflect the strength in that market. However, we were negatively impacted by continued weakness in Europe and mixed markets in Asia. The SAP implementation at Heimbach has also provided a near-term headwind as we transition to our new systems. Organic sales for Machine Clothing for the period declined 1% year-over-year, largely due to sales delays from the SAP implementation. AEC net sales of $115 million were largely flat versus the third quarter of 2023 on a GAAP basis, inclusive of a $16 million negative top line impact from the EAC adjustments in the quarter. We experienced growth in our space and emerging platforms, offset by lower sales in LEAP and CH-53K. I want to highlight that excluding the cumulative catch-up impact, our underlying sales on our CH-53K program increased as we work towards ramping production to meet our customers' needs. Consolidated gross profit was $90 million, down from $102 million in the prior year, driven by the EAC cumulative adjustment of $22 million. Excluding the EAC adjustment, our gross profit for the quarter would have increased to $112 million, with a margin of approximately 36%, in line with last year's results. Machine Clothing gross margin increased from 47.6% in the third quarter compared to the third quarter of 2023 to 48.6% in 2024, marking the first year-over-year improvement since the Heimbach acquisition. The margin increase was primarily driven by reduced input costs. Excluding Heimbach, Machine Clothing gross margins increased approximately 270 basis points to 53.4%, reflecting continued excellent execution. We continue to make progress on our Heimbach integration and are on track to meet our long-term synergy targets. AEC gross margin decreased from 19.7% in the third quarter of 2023 to 1.3%, driven by EAC adjustments that were detailed previously. Absent the $22 million EAC cumulative adjustment, AEC's gross margin for the quarter would be 18.2%, a 150 basis point reduction from the prior year. Net R&D expenses increased $1 million in the third quarter versus the prior year, remaining at approximately 4% of revenue. SG&A expenses for the quarter were essentially flat. However, as a percent of revenue, SG&A has decreased from 18.5% to 17.5%. Corporate expenses decreased $0.5 million versus the prior year to $14.3 million. The effective tax rate for the quarter was 6.6% versus 25.3% in the prior year, mainly due to favorable discrete tax adjustments. This discrete tax benefit is mostly attributable to the true-up of the prior year estimated taxes and the release of a valuation allowance in a non-U.S. jurisdiction to positive evidence indicating that a full valuation allowance was no longer required. GAAP net income attributable to the company for the quarter was $18 million compared to $27 million last year. The reduction was largely due to the EAC adjustments, which negatively impacted net income by $17 million. GAAP diluted EPS was $0.57 per share in this quarter versus $0.87 in the same period last year. After adjustments primarily related to the Heimbach acquisition and other restructuring activities as detailed in our non-GAAP reconciliation, the adjusted diluted EPS was $0.80 versus $1.02 in the same period last year. Our EAC and cumulative adjustments negatively impacted our third quarter diluted EPS by $0.55 per share. Please note that our third quarter EPS also benefited from the timing of certain operating expenses, which we expect to occur in the fourth quarter. Consolidated adjusted EBITDA was $54 million for the third quarter versus $65 million in the prior year period. Machine Clothing adjusted EBITDA, including Heimbach was $64 million, an increase of 12% versus the prior year. Adjusted EBITDA margins were 35.2% versus 34.5% in the prior year with the increase reflecting improved operations across the business. AEC adjusted EBITDA was $4 million as compared to $22 million in the prior year period. Adjusted EBITDA margin at AEC was 2.1% of sales versus 19.3% in the prior year. AEC's adjusted EBITDA, excluding the EAC cumulative adjustments would have been $26 million or 19.8% of sales. During the third quarter, free cash flow was $32 million with positive operating cash flow of $47 million, offset by capital expenditures of $15 million. This brings our year-to-date free cash flow to $78 million versus $25 million in the prior year. Our balance sheet remains strong with a cash balance of over $127 million and $440 million of borrowing capacity under our committed credit facility. Net leverage is below one turn. Turning to our outlook for the balance of 2024. We are tightening our guidance for the balance of the year relative to the guidance provided earlier in the month. We have narrowed our revenue guidance for both segments, effectively leaving our midpoint similar to the guide we provided earlier this month. Our consolidated adjusted EBITDA guidance is slightly higher than our prior guide and has also been narrowed. It should be pointed out that our full-year AEC EBITDA guide translates to high-teen margins for the fourth quarter, reflective of the underlying strength of the business. The midpoint of our adjusted EPS guidance is $3.20, a $0.05 increase from the prior guide. We plan on providing full-year 2025 guidance when we announce our year-end results. We will also provide longer-term guidance when we host our Investor Day next spring.

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Peter Arment with Baird. Your line is now open.

Yes, thanks. Good morning, Gunnar and Rob.

Good morning.

Gunnar, can you give us your latest updated thoughts on, one, the Gulfstream contract that you talked about earlier this month, just kind of how that progresses from here and what's the latest? And how do we think about kind of revenue for next year?

Yes, Peter, there's no real change on the contract or performance since our call a month ago. We're putting effort on the program with the team that is there, engineering and working with Gulfstream to get to the right and deliver a part with fewer hours than we do today. So the effort is there, but there's not really an update. I don't expect anything to impact our revenues for the program next year.

That's helpful. Could you share any insights about the classified work or business you have been securing? How does that look in terms of revenue opportunities for next year and beyond? I know you'll provide more details at your Investor Day next spring, but what is currently happening in the defense classified sector for your company?

Yes. We're very active on the defense side and also with some commercial opportunities. I'm not going to get into details there and we're not announcing any specific deals this quarter. But there's a lot in work. I see a great opportunity for us going forward. The buildup of our backlog over the last three quarters is indicative, I think, to what we're doing.

Okay. I appreciate it. And just one quick one, Rob. On your guidance for AEC's EBITDA for the year kind of obviously implies a nice step-up in the fourth quarter. Can you talk a little bit about some of the moving parts there and the confidence level around that EBITDA?

Sure. Yes. Peter, we have a fairly high confidence level in our guide, especially considering we're two months out from finishing the year. What we've seen is a really good increase in volume in some of our more higher-margin areas as well that we expect to see continued growth in the fourth quarter. We are controlling expenses as needed. So overall, certainly with Chris on board and the team's focus on turning things at Salt Lake, we feel good about the guide. I mean the implied margin range, as I'm sure you did the math, is 17.5% for the fourth quarter. That's the midpoint of our AEC guide. And it's a good business, so we feel good about the profile.

Appreciate the color. And I'll jump back in queue. Thanks.

Thank you so much. One moment for our next question, please. Our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is now open.

Hey, good morning guys. Thanks for taking the question. Just to stay on Peter's last question. I mean 17.5% is good, but I mean these margins are trending down. How should we think about the longer-term trajectory? And you're doing more defense classified work, presumably, that's first-of-a-kind products or structures, which always inevitably are going to carry design, development, engineering risks. So how can we be confident in these margins on a go-forward basis?

Yes. So I mean, of course, once we will give the '25 guide when we announce our year-end results, and we're planning on Investor Day. But Mike, I think what should give us a lot of confidence is a lot of the areas where we're seeing good levels of growth are in higher-margin programs, especially on the commercial and kind of emerging or Advanced Air Mobility platforms and space. So those are very good areas for us. And you're absolutely right. We definitely have a focus on some defense work, which does provide in the right contract setting, a really good margin opportunity and visibility. So we feel really good about the blend. I mean we're definitely looking to have visibility given our strong backlog on what the margin profile should look like. And it's going to come down to execution. I think to your point, Mike, right? On the commercial and space and other programs, we need to execute. And we're definitely feeling good about where we're situated going forward.

Are these classified? Are they initially cost plus? Or did you bid anything in the more high-risk firm-fixed-price development? I would think if it's cost plus, that would be a little dilutive as you go through them at first?

Yes. I mean, Mike, I mean, when we're looking at these development programs, we're very careful about the amount of risk we're going to share with our customers. We will typically look for some level of our protection. So I don't think we're putting ourselves at a very significant risk on these development programs like some others. So...

Okay. Fair. And then just shifting gears to LEAP. I mean the output has been revised down now, down 10%. I mean that's the third time. Can you talk to maybe the ramp trajectory? I mean I know you're not going to give '25 guidance, but it seems like the overall ramp there is going to be lower than planned. And I mean, can you give us any sense of what kind of inventory in the channel you might have? I mean it seems like there might be at least 200 shipsets based on kind of if you were tracking tightly with Safran and how many provisions based on this year. So any color on the LEAP program you can give us?

Yes. We're comfortable with where we're at for the year, and we are working with Safran on our 2025 plan. And there is a balance there, right? Our reductions have fit with where Safran is, and we'll continue to do that. It's a tight relationship. We also know that there is growth in the future. And we can't pull back too far and not be able to do the ramp-up. So that's part of the balance as well. We're not going to give guidance for next year, but you can imagine that there is a balance there between maintaining the capability and the ramp-up as well as minimizing the inventory.

Yes. And Mike, and just one other thing to kind of keep in mind. When we provided our LEAP guide for the year, we were holding flat, and that was against a backdrop of a 25% expected increase at the beginning of the year. And obviously, that's been ratcheted down as the situation of Boeing has unfolded during the year. But the relative impact to us relative to those expecting those 25% increases was much more modest. We have taken our estimates down, but not. And if you look at Safran's most recent earnings release, they were very clear to state that they understand the balance of their supply chain. The long-term program is in excellent shape. The backlog is there. They want to be very careful not to damage the supply chain, of which we are a very important part of that.

Okay. Fair Enough. Is the $600 million in AEC revenues from '26 still good?

Yes, Mike, we'll be providing long-term guidance when we come out with our Investor Day. So let's wait until then.

Okay. Fair. Thanks guys.

Good question Fair question. Thanks.

Thank you so much. One moment for our next question, please. Our next question comes from the line of Jordan Lyonnais with Bank of America. Your line is now open.

Hey, good morning. Thanks for taking the question. Again, looking long-term.

Good morning.

Good morning. I appreciate you won't give guidance on it now, but on the 787 and GE9X and NX, how are you guys thinking about the programs given we've seen the softness on the 788, the 777X just got delayed. And presumably, those engines will also have an impact.

So 787, we expect growth. So they're not affected by the strike and there is demand there. So we believe that, that's a good program going into next year. There is a delay on 9X. There is no impact this year. And I think for next year, as this is development and continued development of the engine, a minimal impact, Jordan.

Got it. Awesome. Thank you.

Thank you, Jordan.

Thank you so much. One moment for our next question, please. Our next question comes from the line of Chigusa Katoku with JPMorgan. Your line is now open.

Hi, this is Chigusa Katoku on for Steve Tusa. Thanks for taking my question.

Good morning.

Good morning.

My first question is on free cash flow. Year-to-date, the free cash flow conversion has improved pretty well over last year. But how should we think about conversion in 2025? And do you have any color on how it is by business? Does AEC continue to be a user of cash versus a generator?

Sure, that's a great question. The year-to-date conversion ratio is approximately 110%, which is somewhat higher than we would anticipate over a long-term cycle. We are paying close attention to this as cash flow has become a critical focus for us, as it will drive our future growth. Regarding the business, we expect AEC to remain a significant user of free cash flow. This year, we are seeing some improvements as we manage our inventory and working capital balances better, both in AEC and Machine Clothing. Looking ahead, cash flow in the aerospace sector could be more volatile based on the types of programs we pursue, as early-stage programs typically require cash. This is a balance we are addressing. Moving forward, you can expect Albany Consolidated to continue generating strong cash flow.

Okay. Great. Thanks. And then shifting to MC, the margins were stronger than we had expected, and you attributed it to operational execution. But can you elaborate on that? And what's the right runway to think about as we head into 2025?

I can start with that. I think it reflects the efforts that we're making with the integration. It's not only affecting the improvements that you see at Heimbach, but also at the core business. Additionally, it showcases excellent execution and cost management by the team during uncertain times. So, kudos to the team for performing at that level.

Okay. Thank you.

Thank you so much. One moment for our next question. Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is now open.

Yes, hey guys. This is Jack Ayers on for Gautam today. Thanks for the question.

All right, Jack.

Hey, Rob, just for LEAP, I hate to go back to it. But just to be clear, did you guys take production down incrementally more from your last update? Because I think you guys called it down modestly last quarter, or maybe the 10/3 update. But since GE took it down 10% now. I just want to be clear for you guys for '24?

Yes. So we had a lower plan for the year than what was projected from both Safran and GE. And then we took it down in the second quarter and we took it down again on the 3rd of October. We have not changed it since then.

Okay. And would you be willing to maybe quantify the sort of step change? I think you guys put some numbers around it last quarter.

Yes. It was very minimal. I mean we're talking maybe a few million dollars, Jack, from the second quarter to the October 3rd call, pretty nominal.

Okay. And regarding the F-35, I know you mentioned some softness in expectations for this year. Moving forward, does the restart of Lockheed's deliveries help your position at all? Also, how far off are you from that? I recall an $80 million target mentioned at the last Investor Day, and I'm curious about the growth trajectory moving forward. Thank you.

We've observed some softness in the middle of this year, but we anticipate a recovery starting next year for the Joint Strike Fighter. However, we are quite far along in the supply chain, which may impact us to some extent, although I expect the Joint Strike Fighter numbers to remain steady into next year.

All right. And Jack, we provided a view in 2022 on kind of what the potential was for F-35 and we'll certainly update that again at the Investor Day. But we believe in the program long-term. The fundamentals remain intact. The program, the Lockheed, now that they got the tech package three and up and running. That's all positive signs that we're seeing right now on F-35.

Thank you.

Thank you so much for your question. I'm showing no further questions at this time. I would now like to turn it back to Gunnar Kleveland for closing remarks.

Thank you, and 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 for your participation in today's conference. This does conclude the program. You may now disconnect.