Earnings Call Transcript - AIN Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Albany International Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. I'd now like to turn the conference over to your host, John Hobbs, Director of Investor Relations. Please go ahead.

John Hobbs, Director of Investor Relations

Thank you, Wallace and good morning, everyone. Welcome to Albany International’s third quarter 2022 conference call. As a reminder for those on the call, please refer to our press release issued last night, detailing our quarterly financial results. Today we will make statements that are forward-looking and contain risks and uncertainties. We'll also reference certain non-GAAP measures on this call. Contained in the text of our press 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, the same statements apply to our verbal remarks this morning. Additional details can be found in our SEC filings, including our 10-K. Now I'll turn the call over to Bill Higgins, our President and Chief Executive Officer who will provide opening remarks. Bill?

Bill Higgins, President and Chief Executive Officer

Thank you, John. Good morning and welcome everyone, and thank you for joining our third quarter earnings call. Today, I'll comment on our third quarter business performance with some perspective on our markets and our strategy, and then Stephen will cover our financial results in more detail. We're pleased to report another strong quarter. Both of our business segments executed well. On the top line, we grew total company third quarter sales by 12% or nearly 17% on a constant currency basis. Engineered Composites grew third quarter sales nearly 37% compared to Q3 last year, driven by the ramp in LEAP engine and the CH-53K helicopter programs. Machine Clothing reported revenues that were relatively flat year-over-year on an as-reported basis, while underlying constant currency revenue grew by 4%. On the bottom line, both segments achieved strong operating income and profitability, working hard to overcome inflation, supply chain challenges, recessionary forces in Europe, and a COVID slowdown in China. GAAP EPS of $0.34 per share includes a significant pension settlement charge that Steven will cover in more detail. Adjusted EPS of $1.15 per share was significantly higher than the $0.83 per share adjusted EPS reported in Q3 of last year. Our Machine Clothing segment delivered another solid quarter. On a currency-neutral basis, Machine Clothing grew third quarter sales just under 4% compared to Q3 of 2021. Through a combination of stable top line, disciplined cost control, supply chain management, and great factory execution, our Machine Clothing sector did a great job delivering gross margins of nearly 52% and adjusted EBITDA margins of 38%. We continued to meet our customer delivery commitments by managing supply chain shortages and long lead times and by balancing factory production to optimize output. We're starting to see some improvement in transportation and freight; a hopeful sign that supply chain disruptions are finally improving. On the customer front, global demand for paper machine clothing held up well in the third quarter. On a constant currency basis, sales were higher year-over-year in the Americas, Asia, and Europe. Our order bookings are healthy despite continued lockdowns for COVID in China, the effects of the war in Ukraine, and higher energy costs. Overall, Machine Clothing demand remained steady as we head into Q4, and we had a solid quarter. Our backlog is filling in, setting us up for a good finish to the year. Our Engineered Composite segment delivered another excellent quarter as well. Demand growth and program wins have driven our top line higher this year. Principal contributors to our 37% year-over-year revenue growth are growth in LEAP engine revenues from our partnership with Safran and growth in revenues on the Sikorsky CH-53K helicopter program. On the bottom line, AEC delivered third quarter adjusted EBITDA margins of 20%. As with Machine Clothing, our supply chain and factory teams are doing a great job keeping materials and hardware flowing to feed operations and meet customer production needs. We continue to do a great job for customers. We have a number of new program pursuits underway and growing interest from new customers that recognize our composites expertise and our reliable delivery. We're taking advantage of our strong balance sheet to invest in new product development and organic growth. Looking to the fourth quarter, our defense program portfolio and our lead program are on good trajectories, setting us up for another solid quarter. So let me take a few minutes here to make some comments on our strategies in each business segment. We've demonstrated that our Machine Clothing business is resilient. Over the past three years, we've grown trailing 12-month adjusted EBITDA by $30 million despite the pandemic, the strong dollar, and input cost pressures we've faced. Our Machine Clothing success is based on a well-executed long-term strategy. We are the leader in Machine Clothing product technology. Our technology and new product development are targeted by higher growth and value-added markets of packaging and tissue, which sets us up for long-term growth. We serve tier one customers strategically positioned on the most efficient machines, and these machines are best positioned to sustain production during a downturn. We operate at an optimum global manufacturing scale, providing superior service reliability in all markets. Our customers consider us the partner of choice. Our belts help reduce the overall cost of production for our customers. Our products are mission-critical and consumable. Belts get replaced regularly, resulting in less cyclical, repeatable demand. These leadership strengths serve us well during the challenging economic conditions, particularly the consumable and recurring demand for our products. Now turning to our Engineered Composites strategy. When the pandemic struck in 2020, coming on the heels of the Boeing 737 MAX grounding in 2019, our AEC team did a great job looking for new customers and more content with existing customers. We have demonstrated that 3D woven is a new and leading composite technology that is successful on the most advanced jet engine, the LEAP engine. The slowdown during the pandemic in 2020 gave us time to take a breather and seek new areas to apply our composites expertise. We won new content with Boeing, Sikorsky, Lockheed Martin, and others, mostly on defense programs. Today we're nearly 50% government and defense work. Between the government work and the cost-plus nature of our contract with Safran for LEAP, AEC is more resilient today, more diverse, and better insulated from the economic cycle. Longer term, we're pursuing new opportunities with various OEMs on hypersonics, wings, and fuselage space in both commercial and defense applications, fixed-wing and rotorcraft. Our strategy is to continue to diversify our customer base and bring our composite leadership to the next generation of aircraft development. So both of our business segments are operating well and have sound strategies in place. Our employees have done remarkably well learning how to be nimble and productive and continue to do a great job for customers. We've demonstrated resiliency as a company and an ability to perform at high levels during the ups and downs over the last few years. We have a rock-solid balance sheet, which we've prudently and successfully used to invest in our people and organic growth, win new customers and develop new materials, and pursue acquisitions that fit our strategy. So with that, I'll hand it over to Stephen. Stephen?

Stephen Nolan, Chief Financial Officer

Thank you, Bill. Good morning to everyone. Before I go into the results, I will note that late in the quarter, we completed the purchase of group annuity contracts to eliminate the liability associated with our US defined benefit pension plans. We first publicly disclosed our intention to pursue this path in our Q3 2021 10-Q. We believe that it was the right action for both our shareholders and our active and prospective retirees. There was a significant accounting charge of $49.1 million and a much smaller cash impact of $12.6 million associated with this transaction. This charge had a significant impact on our GAAP reported income and income taxes, as I will discuss in a moment. We have excluded the accounting charge and associated tax effects for our adjusted EPS and adjusted EBITDA measures to aid investors in evaluating our ongoing underlying business. Moving on, I will talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year. For the third quarter, total company net sales were $260.6 million, an increase of 12.1% compared to the $232.4 million delivered in the same quarter last year. Adjusting for currency translation effects, net sales rose by 16.5% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were up 3.8% year-over-year, driven by increases in packaging, pulp and engineered fabrics grades, partially offset by modest declines in tissue and publication grades caused by the timing of customer orders and deliveries. Publication revenue remained close to 17% of Machine Clothing's revenue this quarter. Engineered Composites net sales, again after adjusting for currency translation effects, grew by 41.6%, primarily driven by growth on the LEAP and CH-53K platforms with much of the growth on the latter driven by non-recurring tooling and engineering efforts associated with the app transition effort. During the quarter, the ASC LEAP program generated about $40 million in revenue, similar to this year's second quarter. As we've discussed in the past, our annual production plans call for fairly stable LEAP production across all four quarters of 2022. Third quarter gross profit for the company was $100.5 million, an increase of over 9% from the comparable period last year. The overall gross margin decreased by 100 basis points from 39.6% to 38.6% of net sales, driven by the mix effects of the higher growth in the AEC segment. Within the Machine Clothing segment, gross margin was up slightly at 51.7% of net sales as the benefits of one-time reversals of previously recognized expenses of $1.2 million and some pricing increases were offset by increased input costs. For the AEC segment, the gross margin increased from 16.1% to 19.8% of net sales driven by a larger benefit from changes in the estimated profitability of long-term contracts, higher fixed cost absorption, and mix effects. During this quarter, we recognized a net favorable change in the estimated profitability of long-term contracts of about $2.6 million compared to a net favorable change of only about $800,000 in the same quarter last year. Third quarter selling, technical, general and research expenses were $46.8 million in the current quarter, down slightly from $47.4 million in the prior year quarter and were down as a percentage of net sales from 20.4% to 18.0%, driven by the impact of foreign exchange rates on Machine Clothing, partially offset by increased investments this year in R&D and selling expense. Total operating income for the company was $53.6 million, up from $44.5 million in the prior year quarter. Machine Clothing operating income rose by $1.8 million, driven by lower SG&A expense and AEC operating income rose by $7.1 million, driven by higher gross profit, partially offset by higher SG&A expense. We reported over $42.2 million in expense under other income and expense this quarter, primarily driven by the $49 million pension charge, partially offset by favorable foreign exchange currency revaluations of almost $7 million. The pension settlement charge also resulted in the recognition of an income tax benefit previously included in our other comprehensive income. In combination with the low pre-tax profit caused by the pension charge, this tax benefit resulted in an effective tax rate of negative 41.9% compared to the 29.4% effective tax rate in the same quarter last year. Absent the effects of the pension charge and the associated tax benefit, the effective tax rate this quarter would have been 26.6%, lower than the same quarter last year due to favorable discrete adjustments this quarter. Net income attributable to the company for the quarter was $10.7 million, a reduction of over $20 million from $30.9 million last year. The reduction was caused primarily by the higher other income and expense, partially offset by higher operating income and this quarter's unusual tax rate. GAAP earnings per share was $0.34 this quarter compared to $0.95 last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, expenses associated with the CirComp acquisition and integration, the pension settlement impacts, and the impact of the aviation manufacturing jobs protection grant on last year's results, adjusted earnings per share was $1.15 this quarter compared to $0.83 last year. Adjusted EBITDA increased by 13% to $68.1 million for the most recent quarter compared to the same period last year. Machine Clothing adjusted EBITDA was $59.1 million or 38.5% of net sales, roughly flat compared to $59.2 million or 38.4% of net sales in the prior year quarter. AEC adjusted EBITDA was $21.5 million or 20% of net sales, up from last year's $16.3 million or 20.8% of net sales. Turning to our debt position, total debt, which consists of amounts reported on our balance sheet as long-term debt or current maturities of long-term debt was $447 million at the end of the most recent quarter down from $485 million at the end of the second quarter. However, cash also fell by $44 million during the quarter. As I mentioned earlier, the purchase of a group pension annuity entailed cash of about $13 million, and we also continue to invest in the CH-53K program. As we look forward to the balance of 2022, the outlook for the Machine Clothing segment remains strong in a still challenging environment. As Bill mentioned, constant currency sales were up almost 4% for the quarter over the same quarter last year. Looking at as-reported nominal currency results year-to-date, the average Euro to US dollar exchange rate has been $1.06 compared to $1.20 in the same period last year, and obviously the rate is even lower below parity today. We now expect an average rate for the full year of just over $1, which has an expected full year impact of over $20 million in terms of reduced revenues. Some of this has been offset by increased demand for some products, while some has been offset by pricing actions resulting in year-to-date revenues that were modestly higher than in the first three quarters of last year on a constant currency basis. While there are still some concerns about the sustainability of that demand in light of the growing risk of global economic contraction and the ongoing energy crisis in Europe, we have not seen any reduction in demand for our product. In fact, on a constant currency basis, including the benefit of higher pricing on certain products, orders in the third quarter of this year were up more than 4% compared to the same quarter last year. For the full year, we now expect that the revenue decline due to the Euro exchange rate will be effectively offset by pricing and increased demand, resulting in somewhat flat revenues for the full year compared to the $602 million delivered last year. Therefore, we are narrowing the range for revenue guidance to $595 million to $610 million compared to the prior range of $590 million to $610 million. From a margin perspective in Machine Clothing, we are continuing to see a rise in raw material costs, although logistics costs have come down significantly from our highs. While the gross margin in the quarter was a very strong 51.7%, in line with the reported results from the same quarter last year, absent one-time benefits and currency effects, gross margin was down about 160 basis points year-over-year caused by those higher input costs. We still expect to see additional inflation pressure in the fourth quarter. Combined with the lower expected volume in the fourth quarter, this will likely lead to some sequential margin compression consistent with our prior guidance. That said, we do not see as much downside risk to margins as we'd expected when we last updated guidance. Therefore, we are raising the bottom end of our segment guidance range by $5 million, resulting in the new range for Machine Clothing adjusted EBITDA guidance of $215 million to $225 million. Turning to Engineered Composites, we delivered a strong quarter very much in line with expectations. Overall, the year is progressing largely as we expected when we last issued guidance, although we are now less concerned about downside risk in 2022. Therefore, we are raising our guidance range for segment revenues to a range of between $395 million and $405 million, up from the previous range of $380 million to $400 million. From a profitability perspective, given the year is progressing largely as expected, we are maintaining the previously issued guidance range for AEC adjusted EBITDA of between $75 million and $80 million, although we currently expect to be closer to the upper end of that range. We are also updating our previously issued guidance ranges for company-level performance, including revenue up between $990 million and $1.01 billion, an increase from prior guidance of $970 million to $1.01 billion, effective income tax rate of 25% to 27%, down from 28% to 30%, depreciation and amortization of between $71 million and $72 million unchanged from prior year guidance, capital expenditures in the range of $75 million to $85 million, unchanged from prior guidance, GAAP earnings per share of between $2.84 and $3.14, reduced from prior guidance of $3.45 to $3.75, adjusted earnings per share of between $3.50 and $3.80, increased from prior guidance of $3.30 to $3.60, and adjusted EBITDA of between $240 million and $255 million, increased from prior guidance of $230 million to $250 million. Returning to the present, it was another strong quarter for both segments. We are very pleased with the resiliency in terms of both sales and profitability of the Machine Clothing business. We believe that it is well positioned to weather the macroeconomic conditions we may see in Europe and globally in the coming quarters. We are also very pleased with the top line performance of the Engineered Composite segment, validating our growth strategy for that business. We believe that its position on key programs heavily indexed towards narrow body, commercial, and defense programs is the right place to be in its markets. I would like to thank our employees in both segments for the hard work and results they continue to deliver for the company. And with that, I would like to open the call for questions.

Operator, Operator

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

Peter Arment, Analyst

Yeah, good morning Bill, Steve and John. Bill, congratulations on the results. Just a follow-up here on the Machine Clothing margin outlook. It seems like you are managing the inflation headwinds very well with the first three quarters and just wondering, when we think about guidance, just some of the inputs that would have you kind of at the lower end of your range. I think that if your EBITDA guidance for Machine Clothing implies that you would be below a 30% margin in the fourth quarter if you are at the lower end of your range. Just wanted to understand how you're thinking about that. Thanks.

Bill Higgins, President and Chief Executive Officer

Thanks, Peter. The team has done an outstanding job, and while some may think the supply chain challenges are behind us, we are still managing them continuously. Our teams are collaborating closely in supply purchasing and factory planning to make necessary adjustments. We anticipate ongoing cost pressures and are already noticing the effects of inflation on wages and labor, which we expect to rise a bit in the fourth quarter. We have effectively managed to offset these pressures through absorption and some price adjustments so far. I'm not sure if Stephen would like to add anything to that.

Stephen Nolan, Chief Financial Officer

Yeah, look, Peter, as we mentioned on a constant currency basis, without some one-time benefits, the gross margin this quarter was down about 160 basis points to last year. As we've said, that increases quarter by quarter both because inflation is increasing through the year and also as we're consuming product that was fabricated using that more expensive material. So, we'd expect to see somewhat larger margin compression in the fourth quarter. I also mentioned we have some allowance for some downside risk in that business in the fourth quarter. Our job is to manage those risks so they don't materialize and not to be at the low end of the margin. But look, we think it is prudent to give that range because those risks exist and our job, as I say, is to manage through them. So we're confident we can stay within the guidance range, certainly not far below it. But there's always some risk on the horizon in the current environment.

Peter Arment, Analyst

Okay, and just as a follow-up to that Stephen, thanks. Can you just update us on your pricing, how that kind of rolls through? Is it more we would expect to see some of the pricing flow through as we get into next year and just to try to offset some of these headwinds?

Stephen Nolan, Chief Financial Officer

Yeah, as we've talked about before, we have contracts and various terms with our customers. So as we come to those contracts, we're managing those and those customers that we don't have contracts with, we're obviously trying to get price with them as well. So we'll keep working that. I think it'll evolve over time. It's not just going to happen overnight.

Bill Higgins, President and Chief Executive Officer

As I mentioned to the ICE Group, we have seen some benefit from pricing quarter-to-date and we expect to continue seeing that benefit in the fourth quarter. But large slugs of our pricing are more sticky as Bill mentioned, requiring an anniversary of a contract signing.

Stephen Nolan, Chief Financial Officer

Yeah, certainly on the input side, we've seen significant price increases from our suppliers that we're working with.

Peter Arment, Analyst

Appreciate the color. Thanks, guys.

Operator, Operator

Thank you. The next question is from Michael Ciarmoli from Truist Securities. Please go ahead.

Michael Ciarmoli, Analyst

Hey good morning, guys. Nice results. Maybe just a little bit more on the guidance and to kind of stay where Peter was, what are the drivers behind the implied fourth quarter guidance? It looks like a pretty big step down across the board versus the results you've been putting up sort of the cadence on the third quarter. Is there more seasonality in there or just trying to frame up why the fourth quarter looks pretty weak?

Bill Higgins, President and Chief Executive Officer

So, look, there are a couple of factors in there. Looking at the top line, obviously we're going to see more impact in the fourth quarter from the weak euro than we saw in prior quarters. It's now below parity. There's an average of around the dollar six below this. That's a significant step down. That brings with it obviously significant drop-through margin of just the lower revenue in nominal terms. Secondly, there are mix effects that go on, partially driven by those currency effects and partially driven by just other issues globally that give us some pause, and we try to factor that into our business. The fourth quarter, when you say seasonal, there's always a delicate dance around the end of the fourth quarter. It's a holiday period, and shipping becomes more difficult. So it's not uncommon for deliveries to slip from the end of the fourth quarter into the first quarter and if there's certainly allowance for some of that potentially happening again this year, which can cause lower fourth quarter revenue. And as I mentioned, the drop-through margins are so high in Machine Clothing that it can significantly impact it. And finally, as I mentioned to Peter, just the rising input costs have continued to rise, and so we expect to see more impact in fourth quarter than we saw starting in the third quarter. We had the benefit in the third quarter of $1.2 million to $1.3 million of one-time prior accrual reversals, which certainly benefited us as well, and we expect – we don’t expect to see a repeat of that in the fourth quarter.

Michael Ciarmoli, Analyst

I understand, and just to follow up, while you may not want to provide specifics for 2023, I'm curious about the foreign exchange challenges you are encountering and any easing in logistics. Should we anticipate these trends continuing into 2023? Additionally, regarding the AEC, you've performed well recently with the CH-53K program, but could that become a revenue challenge next year, or is there potential for growth in 2023?

Bill Higgins, President and Chief Executive Officer

Yes, we do expect input costs to continue rising as we navigate an inflationary environment that hasn't improved. We will be planning for this as we head into next year. For the CH-53K, we are currently ramping up additional work. We've already commenced some tasks with sponsors and are working on the vertical tail, while also setting up a new production line. This year, we are investing in tooling and machinery, which will support growth next year. However, the production outlook for next year will look different.

Michael Ciarmoli, Analyst

Yeah, so it, look Mike, a follow-up taking the last part first on 53K, we talk now just about 53K in total externally, but if I go back to the two constituent parts, but the legacy work we had in the most recent app transition, the legacy work is certainly growing in production volume and it's a great program. It's continuing to grow and that program this year will be in the $50 million range and it will grow next year. The add-on this year about transition, which will also be about $50 million this year, a little more than $50 million, a large chunk of the revenue we recognize this year is one-time tooling expense and non-recurring expense. Those who that program on which we will recognize revenue. Obviously that goes away next year, but we start to see growth in production revenue. So look net, net, so production revenue on both parts is growing where the non-recurring is going away. Last, when we spoke to you last quarter, we thought would be about a $100 million for the year and we said, look, we'll certainly shoot for getting somewhere close to that next year. We now expect north of $100 million this year on app transition, or I'm sorry, 53K in total. More in the $105 million to $110 million range. That number will go down somewhat next year. We're not going to hit $110 million on 53K next year, but we will see growth in other programs that will offset that. So 53K is still a great program. The underlying production is growing. We've just got this slug of one-time revenue this year. On the first question just to ask what Bill said, we will next year see more of a benefit from pricing on the Machine Clothing side. So I don't think you should take the margins that you assume based on our guidance for the fourth quarter and just kind of drag that through the fourth quarter, the four quarters of 2023. Okay. Okay. Just one more follow-up and I'll get outta the way. Just on, you mentioned a lot on FX, you've got a lot of European operations. Are you getting a significant tailwind there to operating income or is the moving parts around rising wages, energy, everything else with your European footprint negating any of those potential operating income or OpEx cost savings?

Bill Higgins, President and Chief Executive Officer

If I look at the overall situation, FTGNR was affected in Machine Clothing due to the weak Euro, and overall revenue is decreasing. A weaker Euro means lower revenue, and while expenses might decrease, I'm still facing a loss on a transactional basis. For example, the $100 million in revenue from a year ago is now only worth $80 million. Even if I maintain the same operating margins, it's based on reduced revenue. Thus, I don't see a significant boost to operating profit from this situation as revenue declines more than costs. Regarding other factors in Europe, energy costs are rising, which is a concern. Therefore, I wouldn’t consider the weak Euro a benefit to earnings; in fact, it’s more of a challenge, worsened by rising costs, especially in energy right now.

Michael Ciarmoli, Analyst

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

Operator, Operator

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

Pete Skibitski, Analyst

Hey, good morning guys. Nice quarter. Let me start guys, can you kind of reset us on where you're at with the 787 now that Boeing is delivering again and understanding they have a lot of inventory to clear, but it's a strong margin program for you. So I'm just trying to figure out what kind of ramp you see ahead now that they're delivering the aircraft again?

Bill Higgins, President and Chief Executive Officer

Yeah, I think I wish we were delivering again; basically our production is still idle. We didn't deliver anything in the quarter, so in that's the way it sits right now. So until we get further word from Boeing, that's where it's going to sit.

Stephen Nolan, Chief Financial Officer

Yeah, I think, Pete, if you'd asked us six months ago, certainly nine months ago, we would've expected some nice rebound in 787 in 2023. While we still certainly hope to restart production in 2023, I don't think we expect to see the same rebound we would've seen six months or nine months ago just to get the rate at which Boeing is destocking their inventory. It's just not really fast enough to get production up and running in a meaningful way anytime soon.

Pete Skibitski, Analyst

Okay. That's helpful. I'm just, I asked you that I wanted to get a better feel for kind of the AEC margin outlook because I think that, with a huge ramp you've seen in LEAP this year, to me the margins at AEC have held up pretty well, right? I think all in, maybe you're down a couple points for 2022 in EBITDA margins despite a huge ramp in LEAP and I'm guessing maybe CH-53 maybe is a big part of that. And maybe, I know the LEAP will be up again next year, but we're hearing maybe not much of a tail from 787 and maybe a flattish CH-53. So maybe that for kind of a, I don't know, a flattish outlook for margins for AEC next year. Is that fair? Or are there other kind of strings you can pull on there?

Bill Higgins, President and Chief Executive Officer

One of the advantages we will have next year in AEC, compared to this year, is that although the CH-53K is currently generating significant revenue, a large part of that revenue comes from tooling. This tooling revenue, while it does cover selling, general, and administrative expenses, does not account for plant overhead since it is sourced from a third party. While there is some labor involved in planning the tooling, it does not take up plant overhead, which means the contribution margin from tooling revenue is lower than that from manufacturing revenue. Next year, we will not have that tooling revenue, but we will see an increase in manufacturing revenue to fill some of that gap, which should be advantageous. Consequently, there are positive factors that could support AEC margins next year. However, we are not in a position to provide guidance right now, so I won't comment on whether it's expected to be flat, increase, or remain the same, but there are definitely some positive factors for that margin.

Stephen Nolan, Chief Financial Officer

The timing of your question is a very good one. We're just about to go into our final annual operating plan reviews for next year, next couple of weeks.

Pete Skibitski, Analyst

Okay. Yeah, no, that's helpful color on CH-53 there. I appreciate that. Last one for me, guys on Chasm. I know it's not a massive program for you guys in AEC, but a decent one, I think, and we're hearing that they're looking at potentially different variants of chasm and maybe that program could expand. So I'm just wondering if you have a feel for what that means for you guys? Are you seeing greater demand signals for you guys over the next year or so?

Bill Higgins, President and Chief Executive Officer

We're pretty pleased with the Chasm program, and I don't really want to comment on what the outlook is for next year, but I feel like we're in pretty good shape on it.

Stephen Nolan, Chief Financial Officer

Yeah, we have a very good relationship with the customer there. So, as that program matures and develops, I expect us to mature and develop along with the customer.

Pete Skibitski, Analyst

Okay. Sounds good. Look forward to hearing the update next quarter. Thanks, guys.

Operator, Operator

The next question is from Gautam Khanna from Cowen. Please go ahead.

Gautam Khanna, Analyst

Yes, good morning. Could you remind us who the customers are on the 787 for you guys? Obviously it's Boeing, but which subcontract manufacturers?

Bill Higgins, President and Chief Executive Officer

Yeah, so we go through two intermediary customers, Spirit and Kawasaki Heavy KHI.

Gautam Khanna, Analyst

Okay. And they haven't provided visibility on when you would restart production?

Bill Higgins, President and Chief Executive Officer

Not that I know of.

Gautam Khanna, Analyst

Okay. on the LEAP program, we saw the GE numbers in terms of deliveries today. I was curious, like is there any kind of pinch point on your end in terms of continuing to ramp production and what are your expectations for next year's LEAP deliveries?

Bill Higgins, President and Chief Executive Officer

Any pinch point? You mean any delays? No, we don't have any pinch points in our production. We've been ramping back up from a capacity standpoint. We've said this before when we built the capacity in 2019, we've continued to improve our productivity and efficiency and we have plenty of capacity to ramp up over time.

Gautam Khanna, Analyst

What was the second part of the question? Does that answer your question? That was the first part. The second part is what do you expect LEAP deliveries to be next year?

Bill Higgins, President and Chief Executive Officer

We don't have next year's plan finalized yet, so we can't make any predictions at this time. However, similar to this year, we aim to establish our plan for the entire year and work to balance the production capacity. We will discuss this with Safran in the upcoming months.

Gautam Khanna, Analyst

Okay. And at Machine Clothing, could you talk a little bit about channel inventory if you still see any excess or are they just running with a higher buffer and kind of what's the feedback from your sales folks who are close to that?

Bill Higgins, President and Chief Executive Officer

We don't observe any excess inventory in the channel. We're closely monitoring the end market. There are some signs of slowdowns globally, which in some cases could be considered normal. We experienced some flatness in a couple of grades during the quarter, which might just be noise. However, our orders have been solid coming out of the third quarter and heading into the fourth quarter. We're keeping an eye on demand, particularly for boxes and packaging worldwide, to see how that evolves as we move past the Christmas season and approach the end of the year. So far, everything looks positive.

Gautam Khanna, Analyst

And just lastly, at AEC, where are the largest content growth opportunities for you guys? Which platforms at this point?

Bill Higgins, President and Chief Executive Officer

So look, so as we, from this point forward, there's still growth in LEAP Force. There's still growth for CH-53K once we get full rate production. As you know, we're still in low rate initial production on that program overall. Leaving aside for a moment the fact that we're in start-up mode on the app transition, even on the prior content. It is low rate initial production that will continue to grow over the next several years. There are several other programs that are out there that are nice growth opportunities that are smaller that we haven't talked about publicly. And 787 at some point will rebound and bring with it some nice growth. I wish I could give you the date for when that's going to happen, but it will ultimately happen. That is still a great aircraft, it's a fantastic platform. It's a program that we're very happy to be on and we're happy to meet the demand for that once it recovers.

Stephen Nolan, Chief Financial Officer

Yeah, I would think about it as a pursuit opportunity for us. If you go back in time and look at our demonstrated success, we were building the Boeing 787 frames. We won a new section on the aircraft that the pandemic slowed down, but that'll come around eventually. But we won more content with Boeing. We won more content on the F35, we're now up over, I don't know, 230 part numbers or something. And with Sikorsky, we've won more work with them with the big win being the App transition program. But the theme is that, we're a very reliable supplier, we're a partner of choice. We work really closely with these companies, and so we'll continue pursuing more content with them. That's what the existing OEMs that we talk about publicly. There's a couple of others that we don't talk about publicly that we're working with as well.

Gautam Khanna, Analyst

Thank you, guys.

Operator, Operator

And we have a follow-up question for Michael Ciarmoli. Please go ahead.

Michael Ciarmoli, Analyst

Thank you for the follow-up. As you are planning for 2023, I wanted to ask about the $450 million in revenue EAC you mentioned. Considering the current landscape with the 787 LEAP, do you still believe that is achievable, and what are your thoughts on it?

Bill Higgins, President and Chief Executive Officer

I'm not going to provide guidance for 2023 three months in advance, but the figures we discussed nine months or six months ago do have some fluctuations each quarter. The most significant challenge we identified since that earlier estimate is the 787. We don't anticipate a recovery to the same level we expected six or nine months ago, but there have been some positive developments as well. Overall, I would say there are both positives and negatives, and we will give you a clearer update in three months. Right now, everything indicates that AEC will have a strong 2023 with good results, but we are not ready to provide guidance at this point.

Operator, Operator

Thank you. And at this time, there are no further questions.

Bill Higgins, President and Chief Executive Officer

Thank you, Luis. Thank you everyone for joining us on the call today. As always, we appreciate your continued interest in Albany International. Thank you and have a good day.

Operator, Operator

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