Albany International Corp /De/ Q2 FY2025 Earnings Call

Good morning, and welcome to the Albany International Second Quarter 2025 Earnings Call. I am Frans, and I'll be the operator assisting you today. 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, Frans, 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 of July 30, 2025, as well as our SEC filings, including our second quarter Form 10-Q and our 2024 Form 10-K. Now I will turn the call over to Gunnar Kleveland, 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 near-term 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 have not realized any direct material headwinds. Our 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 2 additional facility closures in the quarter as we remain focused on optimizing our global production footprint to best serve our customers. AEC delivered 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 of 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 with emphasis on our CH-53K 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 and 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 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 the second quarter compared to the prior year. Tissue 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 2 additional facilities in the quarter, St. Union, France and Manchester, U.K. While we are 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 Duran 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 Composites 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 expectations 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 CH-53K 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 with 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 JASSM program growth, where we also deliver at 100% on time. Having achieved a 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 on 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's differentiated 3D woven technology in composite parts can be a 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 is growing in 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 production capacity proven to deliver 100% on time, which is in stark contrast to the challenges in the titanium supply. We successfully completed our S/4HANA 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 J.C. for stepping up to take on the role as Interim CFO and making the transition seamless. J.C. will continue to support the transition as Will onboards. And with that, I'll now hand it over to J.C. 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 the U.S. facility, a lag in ramping transfer production as part of our footprint rationalization and softness in Asia, especially China. The majority of the current quarter production shortfall is expected to recover in the second half. AEC net sales of $130 million were lower by 5.7% versus the second quarter of 2024, primarily due to the unfavorable cumulative catch-up impacts from the EAC 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. Machine 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%. Overall, this performance reflects improved operating efficiencies. AEC 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 CH-53K program, partially offset by a positive $1.6 million Gulfstream reserve adjustment with the balance spread across other programs. Net R&D expenses at 4% in the second quarter is higher versus the prior year, reflecting our emphasis on material science and new business ventures. Consolidated SG&A expenses were $59 million for the quarter, up versus $56 million in the prior year due to the 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 attributable to the company for the quarter was $9.2 million compared to $24.6 million last year, while GAAP diluted EPS was $0.31 per share in this quarter versus $0.39 in the same period last year. After adjustments primarily related to foreign currency revaluation and net restructuring costs as detailed in our non-GAAP reconciliation, the adjusted diluted EPS was $0.57 versus $0.89 in the same period last year. Consolidated 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% versus 30.4% in the prior year, driven primarily by the margin impact from lower shipments due to slower-than-expected ramp of transfer production, unplanned equipment downtime and softness in Asia. AEC adjusted EBITDA was $11 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 cumulative 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 MC 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 up for questions. Frans?

And your first question comes from the line of Peter Arment from Baird.

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?

Yes. I believe as Boeing increases production and reduces inventory by bringing in materials, we are gradually ramping up our operations. Both with Boeing and the LEAP program, we have reached our contractual inventory levels and are adjusting to how Safran is drawing from that inventory. Overall, I would say there is a positive trend towards the previous production levels.

And is there anything we should kind of 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?

Yes. You should focus on Machine Clothing, where the Heimbach synergies are contributing significantly, along with recovering lost revenue due to machine downtime and transitions. At AEC, the growth and profitability are heavily influenced by the increase in commercial programs and the return of higher return programs. The improved performance is included in our guidance, and we anticipate better results in the second half.

Can you provide an update on the latest adjustments you've made? It appears that some of this was strategically planned to support your transition into low rate production. Please share your current thoughts on that program.

And Peter, I missed the program.

The CH-53K, sorry.

We are taking a very controlled approach to ramping up the CH-53 program. We are heavily investing in this initiative, focusing on both team leadership and training. While it may seem like the process is taking longer, we are dedicating significant effort as the program develops. We are continuing to grow each component, with the most significant being the Aft, which is the latest transition. I personally observed our facility and saw that all of our jigs are operational, with parts in place, which assures me that we are on track to achieve the targeted rate of two units per month by the end of this year.

And your next question comes from Steve Tusa from JPMorgan.

This is Chigusa Katoku on for Steve. So firstly, just digging in a little bit more into the AEC margins. So I think in your most recent update, it sounded like things were turning the corner here and things are improving on Boeing versus a couple of 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.

The AEC is performing well across all programs. However, we face challenges with the CH-53K program, which differs significantly from our other offerings. Our focus has been on this program, and it has taken longer to ramp up and required more resources. In evaluating our performance in the second half, we realized we underestimated our overhead costs. It's important to note that this is a 10-year program, so even minor adjustments in the overhead rate can greatly affect the estimated at completion costs. We are investing in this program and are beginning to see positive results from that investment. Additionally, our focus on planning and supply chain has allowed us to stock our tool jigs with necessary parts, enabling our teams to perform effectively. Having all parts available is crucial for demonstrating our performance, and we are turning a corner as we move into the third quarter.

Okay. Great. As a follow-up, you reaffirmed your full year guidance, which suggests a 30% increase in EBITDA in the second half. Can you provide more detail on what you expect to ramp up in the second half that supports your confidence in this guidance?

Yes. 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. Heimbach synergies, again, are a big part. They're becoming cumulative as well as some of the timing at MC. For AEC, it's really the growth that we're seeing both on the commercial side and the defense with CH-53K and performance there. That gives us the confidence to say we're holding the guide.

And your next question comes from Michael Ciarmoli from Truist Securities.

To continue discussing the guidance, there are a few challenges to address. What were the reasons behind the decision not to lower the guidance? Additionally, the projection for AEC indicates that revenues could either decrease by 11% compared to the first half or increase by 9%. What are the factors that could lead us to the higher or lower end of these guidance ranges? The range seems quite broad, especially considering recent performance.

Yes. Michael, I'm not discussing the range itself, but it's really about improving the program's performance to the level we believe it is capable of achieving. The low performance is driven by the EACs. If we can perform at the level we know we can, with the parts we have and the trained team, that’s where we see the high end of the range. The low end indicates we aren’t able to reach that. For AEC, this concerns the CH-53K program. We are maintaining our position because we are confident that the team has progressed to a point where we will start seeing the results of our efforts. We observe this gradually, with fewer quality issues and reduced hours spent on each operation. Therefore, there is progress in the short term.

Okay. I mean, is anything else ramping up? I mean, your pipeline, maybe other programs that you've secured, do you have to relook at other contracts and other assumptions across other defense programs? I mean, how do we get comfortable with the AEC profile on a go-forward basis? What's potentially in that pipeline that we don't really know yet?

We have both existing and new programs that are ramping up in the second half. While we haven't discussed it much, Bell is part of that. The LEAP program is now growing after we kept it flat for the year to align with what Safran is building. The JASSM-LRASM program continues to grow as well. During my recent visit to Salt Lake, we invested significantly in that program and continue to deliver on schedule. This also indicates growth for the second half. I would keep the Joint Strike Fighter flat for now and will monitor Lockheed Martin's developments in that area. Additionally, our engine programs at the Bernie and Queretaro facilities are seeing increased orders from both Airbus and Boeing as they ramp up. Thus, the second half is expected to show growth across both commercial and military programs.

Your next question comes from Alex Preston from Bank of America.

So I wanted to touch on the 3D woven composite parts and the replacing titanium. 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.

Yes. 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 A350 there, and they had a brake brace. It takes 4 per landing gear, and they had 2 of ours and 2 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 use 3D woven technology to help them design their lift blade. We had that in Paris as well. And then we are 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 the opportunity to replace titanium on current programs, but we'll have a big place in new programs.

There are no further questions at this time. And now I would like to turn the call back over to Gunnar Kleveland 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.