Good morning, and welcome to the Albany International Second Quarter 2025 Earnings Call. I am Franz, and I'll be the operator assisting you today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to J.C. Chetnani, interim CFO and Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, France, and good morning, everyone. Welcome to Albany International's second quarter 2025 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 on July 30, 2025, as well as our SEC filings, including our second quarter Form 10-Q and our 2024 Form 10-K. came. Now I will turn the call over to Gunnar Klebrand, our president and CEO, who will provide opening remarks. Gunnar.

Good morning, and thank you for joining us as we review our second quarter 2025 results. Overall, I'm encouraged with our progress this year, a year that we have said would be a transition year. Our business segment leaders are performing well as they restructure, invest, and strengthen their operations, all while remaining agile in addressing their terms challenges. Our second quarter financial results lagged our expectations, but as I'll cover, the performance was largely impacted by certain timing and operational issues, and we're confident in our recovery. We continue to monitor the tariff situation and secondary effects that could impact regional market dynamics or customer behaviors. To date, we've not realized any direct material headwinds are mostly regional setup for both suppliers and customers largely insulate our operations from direct impact of tariffs also while we were cautious about the tariff impact in our outlook we now expect global growth to continue as the tariff environments get more predictable increasing activity in the defense sector particularly hypersonics and new programs is expected to result in accelerated growth at AEC in addition to our growth in commercial aerospace over the next several years. In machine clothing, despite some second quarter timing and market headwinds, the business delivered expected returns on the lower volume and showed growth from the first quarter. We've commenced two additional facility closures in the quarter as we remain focused on optimizing our global production footprint to best serve our customers AEC delivers strong sequential quarter growth and continues to accelerate its disciplined long-term operational strategy we're investing in operational excellence to transform how we execute our current portfolio programs allowing us to grow profitably with our continuing new business wins we're making good progress driving process improvements across all of our sites and and with emphasis on our CH53K program. At our last visit to Salt Lake City, it was encouraging to see planning and supply chain aligned with the rapid growth of this program. The EAC adjustment in the quarter reflects our investment in program ramp readiness that we will cover in more detail later. For the quarter, we reported revenues of $311 million, an overall adjusted EBITDA margin of 16.7%, and an adjusted diluted EPS of $0.57. We returned capital to our shareholders through both a regular quarterly dividend and share repurchase program. In the first half of the year, we repurchased $119 million worth of shares, including $50 million in the second quarter. We currently have $143 million of capacity remaining under our latest share repurchase authorization. Turning to our individual businesses, for the quarter, machine clothing reported revenues of $181 million and an adjusted EBITDA margin of 28.8%. As a reminder, comparisons to prior year are impacted by certain intentional and strategic business exits of approximately $5 million per quarter. In terms of grades, while longer-term secular trends in packaging remain strong, the effect of customer consolidations in North America created a delivery headwind in second quarter compared to the prior year. Tissure remains a bright spot globally with expected new machine investments, while pulp and engineered fabrics remain stable. north america had a slight decline in deliveries in the second quarter mainly due to packaging machine production curtailments we're working closely with our customers to solidify our positions where consolidations have impacted their capacity overall europe continues to show solid signs of recovery with good deliveries and orders offsetting weakening conditions in asia in particular in china we're seeing softer demand and continue to await machine restarts from the legacy Heimbach customer that we discussed in the prior quarter. Overall, we continue to follow a disciplined sales approach to mitigate these market dynamics. Our global MC order backlog remains healthy and gives us confidence for a stronger second half of the year. Operationally, we initiated the process to shut two additional facilities in the quarter, St. Union, France, and Manchester, UK. While we were executing to plan the transfer of production and equipment across facilities, does challenge how quickly we can ramp up at the new location in the second quarter the performance at our durian facility lagged as it took on new production resulting in some temporary sales and profit shortfalls during the second quarter we also experienced temporary operational disruption in one of our u.s facilities due to unplanned equipment downtime which led to delayed shipments in the quarter turning to engineered composite segment revenues for the quarter were 130 million with an adjusted EBITDA margin of 8.5%. Revenue grew sequentially by 14% from the first quarter, reflecting continued ramping on our key programs. But profitability remains lower than our expectation as we continued our investment in disciplined operational improvements. We recorded a total EAC adjustment of $7.2 million for the quarter. The EAC is mainly driven by continued investment in our labor force, which led to higher than projected overhead rates. We're seeing the progress from our investment in frontline leader coaching and operator training through improved output and reduced scrap and rework. Our planning and supply chain improvements are evident in material being available for assembly needs on the CH53K program. On LEAP, we're at the contractual inventory levels and well aligned to meet Safran's production schedule as Boeing and Airbus single aisle. delivery rates continue to recover. We have ample capacity to meet any upside to the demand and now expect growth in the second half. The emerging advanced air mobility market remains attractive for our business. We've continued sequential quarter growth and expected strong demand through the course of 2025 with our key customer beta. Advanced air mobility will be a significant source of growth for AEC. As previously highlighted, our new long-term agreement on the Bell 525 program is an attractive new win, where we are already delivering to customer expectations. We have invested in additional equipment in preparation for the JASM program growth, where we also deliver at 100% on time. Having achieved critical milestone at our dedicated facility we're seeing momentum with customers in hypersonic parts development we continue to invest in our capabilities and remain very positive in the medium and long-term attractiveness of this segment also as i highlighted in our last quarter earnings release our application development team continues to evaluate where aec differentiated 3d woven technology in composite parts can be superior alternative to titanium with stronger relative strength to weight benefits This was highlighted at the Paris Air Show, where our display showed examples of parts that we are currently supplying, or in the process of developing for various customers. The response at the show was positive, with customers and others seeing our keen focus on the technology that grew out of our weaving expertise, and this technology's growing strategic uses and value. As we presented in last quarter's call, our solution can be delivered at a fraction of the titanium lead time with domestic materials and a production capacity proven to deliver 100% on time, which is in star contracts to the challenges in the titanium supply. We successfully completed our S4 HANA upgrade across the entire company in May. This investment improves our systems and operational efficiencies and will deliver enhanced analytics to improve our business agility. Finally, I'm excited to announce that Will Station has accepted the role of CFO at Albany International. Will comes to us from McKesson Medical Surgical, where he was Senior Vice President of Primary Care Sales, leading a team of more than 1,200 account executives. Prior to that, he was the subsidiary's Chief Financial Officer and Senior Vice President of Finance. Will's career also includes 16 years at the Boeing Company from 2005 until 2021, where he held a number of increasingly senior finance roles, notably Vice President and Chief Financial Officer for the Commercial Derivatives Airplanes from 2014 to 2021 and Director of Financial Operations for Boeing Commercial Airplanes from 2011 to 2014. He's a great addition to the team and complements the leadership team with large OEM experience as well as his commercial, finance, and business expertise. I also want to take this opportunity to thank JC for stepping up to take on the role as interim CFO and making the transition seamless. JC will continue to support the transition as we'll on boards. And with that, I'll now hand it over to JC to provide more detail on the quarter.

Thank you, Gunnar. I will review our second quarter results and then discuss our outlook for the balance of 2025. Consolidated net sales were $311 million, down 6.2% from $332 million in the second quarter of last year. Machine clothing net sales were $181 million, a decrease of 6.5% versus the second quarter of last year. After adjusting for the effects of planned strategic business exits, the decrease is approximately 4%. This is mainly driven by lower volumes in the quarter, from unplanned equipment downtime in a U.S. facility, a lag in ramping transfer production as part of a footprint rationalization, and softness in Asia, especially China. The majority of the current quarter's production shortfall is expected to recover in the second half. AEC net sales of $130 million went over by 5.7% versus the second quarter of 2024, primarily due to the unfavorable cumulative catch-up impacts from the AEC adjustments, offset by growth in our new programs. Consolidated gross profit was $98 million, or 31.3% of sales, down from $112 million in the prior year, or 33.9% of sales. Clothing gross profit of $84 million decreased from $89 million in the prior year, while gross margin improved by 40 basis points to 46.3 percent. Overall, this performance reflects improved operating efficiencies. AAC gross profit of $14 million decreased from $24 million, largely reflecting the impact of the cumulative EAC adjustment for the quarter. Of the $7.2 million of EAC charges for the quarter, $8.1 million was related to the CS P.K. program, partially offset by a positive $1.6 million Gulfstream reserve adjustment, with a balance spread across other programs. Net R&D expenses at 4% in the second quarter is higher versus the prior year, reflecting our emphasis in material science and UBIS suspensions. Consolidated SGN expenses were $59 million for the quarter, up versus $56 million in the prior year, due to weakening of the U.S. dollar and higher professional fees, partially offset by lower personnel-related costs. The effective tax rate for the quarter was 31.3% versus 27.9% in the prior year. The higher rate is mainly due to favorable discrete tax adjustments in the prior year, resulting from the release of uncertain tax positions. GAAP net income attributed to the company for the quarter was $9.2 million compared to $24.6 million dollars last year, while GAAP related to EPS was 31 cents per share in this quarter versus 39 cents in the same period last year. After adjustments primarily related to foreign currency re-evaluation and net restructuring costs, as detailed in our non-GAAP reconciliation, the adjusted delivery EPS was 57 cents versus 89 cents in the same period last year. Consolid adjusted EBITDA was 52 million for the quarter versus 63 million in the prior year period, while for machine clothing, adjusted EBITDA was 52 million versus 59 million in the prior year. Adjusted EBITDA margin decreased to 28.9 percent versus 30.4 in the prior year, driven primarily by the margin impact from lower shipments due to slower than expected ramp or transfer production, unplanned equipment downtime, and softness in Asia. AEC adjusted EBITDA was $7 million as compared to $20 million in the prior year period. Margin at AEC was 8.5% of sales versus 14.3% in the prior year, primarily reflecting the current period AEC cumulative catch-up adjustments. Moving to free cash flow, free cash flow has improved sequentially and was positive $18 million in the second quarter versus a negative $14 million in the first quarter. For the first half of 2025, total free cash flow of $4 million is down versus the prior year of $46 million. This was partially driven by investment in working capital as we ramp up new programs in 2025. And our balance sheet remains strong with a cash balance of $107 million and $355 million of borrowing capacity under our current committed credit facility. In terms of full-year guidance, we expect the second half to be stronger than the first half. We project continued ramping programs at AEC, recovery in shipments at NC, as well as bottom-line improvement from continued operational efficiencies across both businesses. Accordingly, we are reaffirming our full-year guide. Now, I'd like to open the call over for questions.

Thank you. And we will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to join the queue. If you would like to withdraw your question as well, simply press star 1 again. If you called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of Peter Arment from Baird. Please go ahead.

Good morning, Gunnar and JC. Welcome, Will. Gunnar, can you talk about where you are in terms of overall build rates in aerospace, maybe not calling out specifically, but just in general where you are matching up with the OE rates and the planned production?

Yeah, I think we're getting, as Boeing is ramping up and destalking, as they have been uh you know bringing material in we're seeing our ramp up uh slowly occurring um both on the boeing and then as i mentioned on the leap program uh we have seen uh we we have reached our contractual level of of inventory and we're building to match uh how safran is pulling from that inventory. So I would say overall, there is a momentum towards the prior level of production.

And is there anything we should be thinking about for the second half that could either put you at the low end or the high end of the range, of the revenue range?

Yeah, I think what you need to look at, if you see machine clothing, The Heimbach synergies are driving a lot of this, together with recapturing the lost revenue from the machine down as well as the transition. At AEC, the increase in commercial programs is a major factor to growth and profitability as well as the higher return programs coming back at AEC. Now, the improved performance is part of our guide. We expect our performance in the second half to be better.

CH53K, can you just maybe on just, you know, kind of the latest adjustments that you've made? It seems like obviously some of this was all strategically planned to support your move into low-rate production, but maybe just give us your latest thoughts on that program. And Peter, I missed the program. The CH53K, sorry. Okay, CH53, yes.

the ramp-up there,

we're taking a very

controlled approach to how we're wrapping that up we like like I've said the investment in that program both in how we lead our team and how we train our team I wouldn't say that it's taking longer but we're putting putting a lot of effort into it as the program grows we are we are continuing to to grow each of the monuments if you want the biggest one being the aft which is the latest transition that we had but I can tell you that I was there I saw all of our jigs in at the facility and we have we have we have parts in all of the jigs which which gives me the confidence that we're we're building and and and and working towards that two-per-month rate that we're going to be at towards the end of this year.

I appreciate the call. I'll jump back in the queue. Thanks.

And before we proceed to the next question, we ask that you please limit your question to one question and one follow-up only. And after that, you can just simply join the queue again. Thank you. And your next question comes from Steve Tusa from JPMorgan. Please go ahead.

Hi, this is Chigusa Katoku on for Steve. Thanks for taking my question. So firstly, just digging in a little bit more into the AAC margins. So I think in your most recent updates, it sounded like things were turning the corner here. And things are improving you know, Boeing 2 versus a couple quarters ago. So I just was wondering if you could provide some additional color on what happened here that you kind of need to make additional investments in the labor.

Yes. Good morning, Chigusa. The AEC is performing very well across all of the programs.

Our challenge has remained at the CH53K program, primarily because it's a very different program from all of the other parts that we provide at AEC so the focus has been there it has taken us longer to to do the ramp and it has taken more resources and as we looked at the performance in In the second half, we realized that we had underestimated our overhead charges there. And I think also what is important to remember is that this is a 10-year program. So when you do a small adjustment in the overhead rate, it has a very large impact to the EACs. So we are investing in this program. We're seeing the result of the investment in the program. uh more importantly the the investment in both our planning and supply chain now has us uh filling up our tools tool jigs with with parts giving our teams the ability to perform uh which has been an issue right if you if you don't have the parts it's hard to show your performance with all the the parts available, you have a chance to show how you can perform. And that is the turning the corner, as you say, we're seeing coming into the third quarter. Okay, great. Thanks. And then as a

follow-up, so you reaffirmed your full year guidance, which implies that it's maybe like a 30% over half ramp in EBITDA. So if you can kind of just dig in a little bit deeper into what kind of what you expect will ramp in the second half that gives you confidence to reiterate the guidance?

Yeah, it's fair because we see not only better returns, but we also see higher sales in the third and fourth quarter, which is what's giving us the confidence to say that we'll keep the guide. uh high back synergies again is a big part they're they're becoming cumulative uh as well as some of the timing uh at mc for for aec it's really the growth that we're seeing both on the commercial side and the defense with ch52k and performance there that gives us the confidence

to to say we're holding the guide okay thank you and your next question comes from michael Charmoldi from Truist Securities. Please go ahead.

Hey, thanks. Morning, guys. Just to stay on that topic of the guidance, I mean, you know, a couple challenges here. I mean, what were the drivers or the decision-making in not lowering the guidance? And then even the bridge for AEC, I mean, that second-half range implies that revenues could be down 11% for the first half or up 9%. What are the swing factors that are going to take you to the high end and the low end of those guidance ranges? I mean, it just seems like a pretty wide range, especially in the context of the recent performance.

Yeah, and good morning, Michael. I'm not addressing the range itself, but but it's really about getting the performance on the program to the level that that we believe that the program has which is which is it's the EACs that is driving the low performance right so if we can perform at the level that we we we believe we have the ability to do now with with parts at hand and with the with the team trained and continued ramp is where we see the high end of the range the low end of the range range obviously is we were not able to achieve that so for AEC it is it is really around the CH 53 K program but the reason why we held it is because we have we have confidence that the team has has has come to a point where we will see the results of all of this impact. We see it gradually, right? We see it with less quality issues. We see it with less hours being spent on each operation. And so the progress is there. Okay.

And in the short term. I mean, if anything else ramping up, I mean, your pipeline, maybe other programs that you've secured, you know, do you have to relook at other contracts and other assumptions across other defense programs? I mean, how do we, how do we get comfortable with the AEC profile on a go forward basis? You know, what's potentially in that

pipeline that we don't really know yet? We have, there's both existing and new programs that are ramping up in the in the in the second half and we've talked we've not talked that much about it Bell obviously as a part of that the LEAP program is growing and we have we had kept that flat for the year and at this point we're saying that it's growing as we are batching what what Safran is is building the JASM LORASM program continues to grow the and when I was in Salt Lake recently we've invested quite significantly in that program and and continue to deliver on time so that is a growth for the for the back half as well i would say joint strike fighter i would i would keep flat uh for now and we're watching where uh lockheed martin is is going on that uh and then the engine programs uh at our bernie facility and our cadet that our facility as both Airbus and Boeing are ramping up, there is an increase in orders to us. So the second half does have growth in it across both commercial and military programs.

Okay. Thanks, guys. I'll jump back in the queue.

Before we proceed to the next question, again, if you would like to join the queue, simply press star 1 and your next question comes from Alex Preston from Bank of America please go

ahead hey good morning guys thanks for taking the question morning so I wanted to touch on the 3d woven composite parts and the replacing titanium you know you mentioned you got a good reception in Paris maybe if you could just go a little deeper and sort of where that program stands, maybe how long do you expect until certification might be in play, a go-to-market strategy, maybe just a little more detail on that would be really helpful.

You will see more information about this for each quarter as we expand our target opportunity there. But I think a good example here is at the Paris Air Show, if you went to the Safran display, they had the landing gear of an A350 there, and they had a brake brace. It takes four per landing gear, and they had two of ours and two in titanium on that display. And clearly, it's a perfect example of how we are replacing a part that is titanium today that can be replaced with a 3D woven part at a lower weight. That is a great example, and we were excited that both Airbus and Safran were aligned there with us. And we're developing that certification is in the next 18 months or so, I would say. So some of these commercial programs or military programs, when we are actually replacing current titanium, will take some time. So our focus has been around the new programs. Beta is a great example. We used 3D woven technology to help them design their lift plate. We had that in Paris as well. And then we were meeting with the developer of the new aircraft, military aircraft, to show where we can replace titanium on new development programs. And then, of course, we're using the 3D woven technology in our hypersonic development, which would replace, not titanium, but use our technology to get a near net shape rather than the current box type that has to be machined. so 3D woven is our focus we're going to put a lot of effort on it over the next several years I think we'll have opportunity to replace titanium on current programs but we'll have a big place in new programs

got it, thank you very much

further questions at this time and now I would like to turn the call back over to Gunnar Cleveland for closing remarks. Please go ahead.

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.