Conference Transcript - AIN 2026-06-10

Analyst — Michael Ng, Analyst — Goldman Sachs

Well, thanks everyone for joining us. I'm here with Gunnar Cleveland, President and CEO of Albany International, Will Station, EVP and CFO of Albany. Welcome guys. Thanks for being here today. Thanks for having us. So, Gunnar, maybe just to start out, for someone who's new to Albany, can you just give us a brief overview of the business?

Gunnar Kleveland, CEO

Yeah, Albany is well over a hundred year old company that had been privately owned initially, but been on New York Stock Exchange for the last 50 years. Started out in making textiles and then specialized in paper machine clothing, which is what goes on the paper machines to make paper, and have expanded that capability of doing weaving and material science to go beyond paper machine clothing in in what we continue to have as engineered fabrics there was at the time a company called albany doors and and other companies that spun out of this but the focus then is was to take this capability of weaving and material science to create an aerospace company and that started about 20 years ago uh a vision from the from the company at the time um selling off some of the other businesses to to fund fund this a big part of that expansion into aerospace was a collaboration with the front uh and so the first uh the first aerospace business the company got into was making the fan blade for the Leap Engine, which is not an easy part to make. And essentially, what Safran and Albany did together was take what was normally a titanium blade and replace it with a woven three-dimensional shape that had been injected with resin. And it has been an absolute success, as with the Leap Engine, having the majority of the share, 100% with Boeing, and then a large portion of the Airbus content. To expand on the aerospace side, they made some acquisitions, both in Salt Lake City as well as in Burnley, Texas. But today we have several sites around the U.S., Mexico, and Europe, and it's a big growing part of the business. While our machine clothing is definitely a stable, high return, great cash generator for the business, the foundation is the same. It is weaving and material science, which is why these businesses are together, even though they're going into two different channels. Yeah, thanks for that explanation. It's really about that core weaving technology that kind of keeps them together, weaves them together, so to speak. Weaves them together.

Analyst — Michael Ng, Analyst — Goldman Sachs

Over the past year, you've talked about becoming a more focused and disciplined organization.

Gunnar Kleveland, CEO

What has changed most significantly from where the company stood 12 to 18 months ago? we're definitely more focused on both sides of the business we're focusing in on areas where we have a competitive advantage where we can we can generate a better return and in machine clothing for example we made an acquisition of Heimbach which was a significant acquisition in that part of the business but it did not have very good return so what we've been doing on that side of the business is consolidating our capacity into the key product centers in the US Europe and in Asia we've shut down five we're in the process of shutting down the sixth site lowering our cost concentrating our output and and focusing on on the most profitable part of that business we we we made a sale of a small part of that business and we actually stopped several of their lines that weren't profitable. So significant effort in the last 18 months, 24 months. That business was announced the same day I started. So it's been quite a show. On the aerospace side, I think what a lot of people will be asking about is the you know the Salt Lake City and our strategic assessment of that business. The the foundation of our aerospace business is weaving material science, weaving, braiding, winding, resin transfer, molding and what had happened at the Salt Lake City was an expansion into into what is basically We're making almost half a helicopter there, and that part of the business is so different from what our competitive advantage is, which is why we're doing the assessment there. And we're focusing all of our sales effort on growth in certain businesses. We're looking at engines, missiles, aircraft engines, missiles. We're looking at space. and a new area for us is ceramic matrix composites, so carbon-carbon, carbon-sick, which is something that we have invested in heavily and we're standing very ready to support. But at the base of it, it's weaving, braiding, winding, and resin transfer molding. We'll still do some autoclave work, but the future of aerospace is in autoclave components, and that's where we have an advantage. So all of that is a very, very much a strategic shift for the business.

Analyst — Michael Ng, Analyst — Goldman Sachs

Yeah, you certainly have been busy since you joined.

Gunnar Kleveland, CEO

Is this the new baseline or you think there's more work to be done? There's always more work to be done. You know, continuous improvement. I'm an operator. I've run operations for large corporations. And my mindset is that we can always do better. But it is a baseline. It is where we want to go. I'm really excited. Tomorrow, we're having a strategic business review with our aerospace business back in Rochester. It's a full day. We've set off to do that. And I think we will see exactly what we're talking about here, where they're putting their effort, where we're investing, what are the people we're hiring. And, you know, in the end, also, over the last two years, the whole team is new. We have a lot of people with backgrounds from large OEMs in the aerospace business. So I feel that we're definitely, last year was a transition year. Now it's all about execution and showing and sharing our strategy. Yeah, that's great. Yeah.

Willard Station, CFO

And I'll just add to it. I think we, you know, I've been here nine months. Gennar and I have been touring several of our facilities here in the U.S., internationally, etc. And I'll say we have very strong operators. We've got a very strong team. We've got a strong culture. And I think everyone is disciplined and focused about adding value. How do we add value to the shareholders? How do we improve our performance and how we compete and show up in the marketplace? And it's evident when you sit and you meet with our teams, even at the factory floor level, they're focused on how do I add value? How do I cut costs? How do I ensure we're producing the best products for our customers? And you're seeing that throughout the business.

Analyst — Michael Ng, Analyst — Goldman Sachs

Yeah, that's great. A lot of time spending getting the foundation right and then building from there. So let's talk a little bit more about AEC. As you mentioned, a lot of exciting tailwinds within all parts of aerospace and defense. And Will, you were just mentioning adding value. Gunnar, you've talked a lot about focusing more on higher value applications. What does that mean in practice?

Gunnar Kleveland, CEO

Yeah, so it is really about where you have a competitive advantage. And you can find a solution for our customers that they want. I think a great example of that is where we're going on Ceramic Matrix composites. We've made the investment in that for a reason, because one, there's not enough capacity for all of the new missiles and hypersonic missiles out there. And two, we have a technology that is new and much better than the way it used to be. So this is a perfect example of value. Today, they make a carbon-carbon part as a square part, and then they machine away half of it. It's a very expensive machining operation because it takes away this highly, well, it's carbon-carbon. It takes a lot to get there. With our weaving and 3D weaving, we're able to make these parts as a near-net shape. And we can do the same processes with minimal machining at the end of it. So the cost of making it is significantly lower. The time to make it is lower. And the cost to the buyer is much lower. That is perfect value. Will we give them all of that cost? Because we have a technology where we can charge for that. and we're building up that capacity in Rochester we've had a lot of interest in it but it but it's the same thing with with our 3d woven parts we currently have well over 200,000 lead blades flying extremely successfully it is an example of titanium replacement titanium has been a great part for for the aerospace business I've I have dealt with titanium my entire career I don't necessarily like it and I and to have a replacement for titanium that is lighter and stronger and does not have the fatigue characteristics of titanium is essentially providing a value to our to our customers that we need to show them I think we've been we've been focused on leap which is the right thing we're delivering a hundred percent to saffron we've got a good relationship there but we need to we need to evangelize what we have and can offer industry because titanium in the end has fatigue characteristics i know it both from being an

Analyst — Michael Ng, Analyst — Goldman Sachs

operator of the aircraft and from being a manufacturer of aircraft we have a better solution and that's what we bring to the market yeah and let's stick on that munitions theme given the global conflict that we're seeing right now i don't think there's ever been a greater focus on missiles and munitions more broadly you talked a little bit about the carbon carbon And how should everybody think about what parts of that market you plan, either specific programs you're chasing, or the broader opportunity for Albany in that market?

Gunnar Kleveland, CEO

So it's the emerging is the carbon carbon. And there's a lot of interest there. There's not enough capacity for what they want in the market. So we are a new entrance. I see a lot of opportunity there. I think it will be good, strong growth for us. I used to say it's a medium to long term. And today I'm saying it's a near to medium term growth opportunity, but we also make the make cases. So the case for the JASM and LORASM is made by us. And it's it's another example of where we're delivering 100 percent on time, which is why the Department of War came to us and said, can you increase output? So we are we have provided feedback on doubling production. We're currently increasing with our current constraints, but we have provided feedback of doubling the production and we've provided feedback on quadrupling production and it's opened the eyes for other companies to see how can we use composite as a case for these missiles. Again, there's not enough capacity in the industrial base right now to meet the demand, and we have both the technology as well as the capacity to do that. So it is – I don't know how big this is going to be, but like I mentioned earlier, missiles and carbon could be – carbon-carbon could be the strongest growth area that we have. Yeah, and I'll just add the economics are strong. you know so if you think about our portfolio and programs we would want to grow this is definitely one area we would want to grow and you said something interesting there you talked about the benefits of composites more broadly it sounds like there's a little bit of education that that can be done with the customers when you have those conversations how do you see that resonating when i have the conversation with them they listen they understand when we bring them to rochester or one of our other facilities and we show them what we do it completely opens their eyes because it is so and i take it back two years ago when i came to the company the reason i came to the company was because i saw what we could do with 3d weaving i have made a lot of composite parts in my time or been part of making composite parts a bell helicopter makes amazing composite parts the traditional way our approach to making a composite part is just simply better and and i've used the word evangelize it's actually chris stone's using it because we have to be out there and showing what we can do and the benefits of this so it's like any new technology it takes a while to to grab on but the fact that we have well over 200 000 parts flying on the front of the aircraft that probably all of you came here in

Analyst — Michael Ng, Analyst — Goldman Sachs

is a testament to the technology that we're bringing into the market and i think it's largely untapped yeah maybe now pivoting more towards commercial aerospace congratulations on the new contract with pratt and whitney can you talk a little bit more about that what does it mean no not only in terms of current scope but future potential with pratt you want to do that Yeah, I could talk it.

Willard Station, CFO

One, it's an exciting one. It's aligned around our strategy. Our team did a really nice job negotiating that contract. And the agreement has some really solid economics, some solid returns for us. Being part of the Gear Turbo fan and supporting that, I think it's exactly where we want to play. it's leveraging our capabilities work that we have done and demonstrated what we can do and so the team is is excited for for this opportunity I think we're well positioned to perform on this effort in Pratt & Whitney has already come back to our facility and talked about additional work that we can perform for them so it's a overall it's a win-win for both sides and and I think we're well positioned to perform on this effort yeah I just want to add that you know this is our first contract with Pat and Whitney I think a lot of people looked at us as saffron bound engine is an area that we want to grow it takes a

Gunnar Kleveland, CEO

little bit to get in with a new OEM but it is definitely expanding our opportunities we do some work with Rolls-Royce as well and with GE so like Will said, this is a growth area for us in engines and high volume. We're good at high volume.

Analyst — Michael Ng, Analyst — Goldman Sachs

Congratulations, significant milestone for sure, breaking in with Pratt. How many other programs like this are you bidding on?

Gunnar Kleveland, CEO

We, there's a lot, we're in a high bid environment. We're trying to be very selective of where we're bidding. And I can't tell you a number, but there are several. So there's a lot of new entrants and new programs that we are engaged with. We're trying to focus our conversation around our technology rather than more traditional parts. I think there is a case for us continuing to utilize the capacity that we have to make traditional parts but our but that is our entrance into some of the new customers that we have but once we're in there we take them to rochester we show them what we can do and again eyes wide open we had no idea anyone could do this we had one oem that i know very well that came in and said we didn't think rtm could be used for high volume and that's exactly how you use it so So it's an exciting time. I think we can easily get overwhelmed and we don't want to get in a position where we're not delivering to our customers because that is the essence of our value proposition. So we'll be selective and we'll make sure that we continue to expand our margin as we go through this transition.

Analyst — Michael Ng, Analyst — Goldman Sachs

So very much a land and expand strategy. Once the customer sees what you can do, it seems to be runway intended for future opportunities. Right.

Gunnar Kleveland, CEO

And, you know, as I mentioned, I've been an OEM. I've had many suppliers. The suppliers that weren't performing, which sadly happens a lot in aerospace, we didn't give more business. The ones that were delivering to us and, you know, I wanted over 90 percent on time delivery. in aerospace that's not that's not very common very sad to say us delivering at an average of above 98 percent brings our customers back yeah so we want to continue to do that we're not going to overwhelm it but i i see significant growth at the same time uh possible with with our current capacity yeah schedule predictability has become even more of an emphasis for oem so i'm sure as deliver on time that's something they they notice yes yes they do aec over the past two quarters

Willard Station, CFO

has been doing roughly 140 million dollar range i think your guidance is roughly 155 to 160. what are the biggest growth drivers a lot of that is the performance it's several things i look at it in two ways one is performance of the team so you think of programs such as ch53k even though it's been a challenge historically, as we set the new baseline for that team, they're performing to that new baseline. So we're continuing to deliver and meet our commitments to the customer on that program. Other parts of it is demand is just coming in higher than what we were anticipating. So you think about the LEAP program, think about Boeing 787, throw in beta, we're seeing more demand greater than what we had originally planned. But again, to Gennar's first point, we're delivering on time we're performing the team is executing it's allowing us to capture that demand and perform and deliver and so we're excited about what we're seeing in the AEC space we're growing on the programs where we would like to grow on they have strong economics and the team is just doing an outstanding job performing to our commitments and we and there could be additional opportunity in the future for us as we think about that business and growth prospects yeah absolutely and when you think about the industry as a whole coming out of COVID production obviously constrained the aftermarket was very active and now it seems like the pendulum has shifted back as you see build rates increasing i suspect that's all good news for your business great news for us

Gunnar Kleveland, CEO

yes great news and the team is performing well that's great engines have been depressed you know through the boeing issues and uh right now it's all about how do we how do we expand uh and and stay on track with our OEMs.

Analyst — Michael Ng, Analyst — Goldman Sachs

Can you talk a little bit about the Pratt contract before? Is there any updates you can share with Leap Leap?

Gunnar Kleveland, CEO

We're just following what he is doing.

Analyst — Michael Ng, Analyst — Goldman Sachs

We're expanding quickly.

Gunnar Kleveland, CEO

All of our factories are running and we're looking at, actually starting to look at 27 and 28 because the expansion continues to go through there i think we are being careful uh in 25 we saw we you know we we were ahead of the curve uh i don't want to be behind but i also don't want to be uh be too far ahead so we're going to very very carefully monitor what the output of airbus and Boeing is to make sure that we we stay on track with that but all the all the signals are are good at some point is there going to be another bottleneck in aerospace it is likely can they get to 70 a month at Airbus you know what's the next level for Boeing we are expanding based on what they are saying they're going to do but we're also looking at what Safran is pulling every week for from us and making sure that we do not end up in an inventory position.

Analyst — Michael Ng, Analyst — Goldman Sachs

One thing you mentioned in one of your earlier comments is around the strategic review. Can you provide an update on that?

Gunnar Kleveland, CEO

Yeah, so the strategic review we announced after third quarter last year, and it's really an assessment of the site in Salt Lake City. We have two sites in Salt Lake City. So part of the strategic review is that one site, we make JASM, LORASM, LRSO, and we have an MRO business there for the waste tanks for Boeing. Great business, separated from the other Salt Lake facility, and we're absolutely keeping that, and in fact, right now, expanding.

Analyst — Michael Ng, Analyst — Goldman Sachs

The Salt Lake City facility has got four programs.

Gunnar Kleveland, CEO

The AED, Amelia Earhart Drive. It's got the Boeing 787 frames. It's a good program for us. We just renegotiated a contract with Boeing there. uh it has the joint strike fighter program good steady program it has beta which is new and exciting and and growing uh significantly and then it has the ch53k ch53k we make all the composite parts for what we deliver to sikorsky but we also do all of the assembly there the assembly part is a separate business we have to buy all the parts we have to store and present to the line and we have to assemble which is completely different from making parts and I'm gonna be a little bit flip here but what we do is we buy string tape and glue and we put it together to amazing parts that is very very different from buying thousands of parts and assembling it so my position is we should not be doing that so we're working with Sikorsky about how we can we can do that the reason why why we're doing it was because of the because of the forward loss that we had to take on that program because it just doesn't fit in it's not that we're not performing because we are It's just not a good contract for us. A 10-year fixed price contract. All of you that have been in aerospace, I've heard about these. while Sikorsky might feel good about it, that they got a good price, it's not good for the program or for us. So we are looking for a solution with Sikorsky and we're looking at a solution to sell. the the the site itself has value because it has three very good programs and one losing program but overall it has value the the interest in this site is significant it's it's you know we have said previously that we had well above 10 entrants into this this process that continues We're taking the next steps through, you know, all marketing material is out there. We'll get bids and we'll weigh our options here in the short term. But the project is following our path.

Willard Station, CFO

Yeah, I would say we're on schedule. You know, this was all about how do we maximize value for our shareholders. As Gunnar said, the CH53K statement of work just doesn't align with where we want to go as a business, and that's what it really boils down to. But the strategic review is going as planned. We got both strategics and non-strategics who are interested in that site. It's a well-capitalized site. We got over 11 autoclaves in that facility. And so we're still working to our schedule, and so far things are going as planned.

Analyst — Michael Ng, Analyst — Goldman Sachs

And, Will, following that strategic review, what do you see as the margin potential for AEC more broadly?

Willard Station, CFO

You know, our goal is to get to the mid to upper teams. And part of getting there, you know, we divest the site. We will definitely have to work through those stranded costs. And we're working through those stranded costs today. So we're not waiting to divest the site then to pivot and say, okay, now let's get after the cost. We are constantly working our cost structure and making sure we're being disciplined about our costs at all times. And so we're working the cost structure today, but, you know, working through the stranded costs is going to be key to getting to that mid to upper team margin, which is where we're aiming to be, or even higher than our once more, or even higher. So we're working to get there. As he said earlier, the work never stops. Work never stops. Work never stops.

Analyst — Michael Ng, Analyst — Goldman Sachs

Maybe now we'll pivot towards machine clothing. It seems like volume stabilized in Q1. Can you discuss what you're seeing in each of your primary regions and then maybe even more specifically a little bit more color on China?

Gunnar Kleveland, CEO

Yeah, the machine clothing continues to be a very profitable, high cash generating part of our business. We did in the second half of last year see some erosion in China, primarily because of our production in the paper mills and then followed by reduced orders to us. So that has stabilized. First quarter, we're happy to see that. We are monitoring that continuously. In fact, Will and I came back from China last week. We have three facilities there. They are completely locally run. our sales team is local we have every opportunity to compete well in that market and so we're looking we spend time there both to look at our facility and our meet our team but also to to meet with our sales teams and how how do we how do we compete both in China and in and in Asia so we we intend to take this as an opportunity to uh to to get a stronger position as a as a supplier to the paper makers there but i think that the oversupply has continued there is uh if you look at the the the paper makers there they're not really making money there's only one that's making money so so it it'll continue uh for some time i can't i can't right now predict how long that that is going to be if you look at europe we came out of we came out of the slump following the over the the higher production and then followed by overproduction following uh uh covet uh europe is pretty strong for us right now and we're there with both heimbach and albany brands and uh and that's a good uh good position to be in america's remain i would say stable and the reason i'm saying stable is that the papermakers in the U.S. are making good decisions about curtailment of all the machines and putting more of effort onto their higher performing machines. While we are seeing some loss of revenue on the curtailments, we're seeing increase in revenue on the higher performing machines because that's where we outperform our competition. We are one to two percent of the cost of making paper and uh and the highest cost is fiber obviously uh energy uh water and chemicals our product helps the paper makers reduce their cost of all the high cost input so when a paper machine is large and running at full speed they need our product And where do you see the best opportunities for growth in this business? There's going to be, so in this business, we have paper machine clothing and we have engineered fabrics. Engineered fabrics is used in making anything from non-volvements, diapers and the like, to compressed wood, to fiber cement, to tanneries, and the list goes on. We have a very good position in that market, but it's eroded because our focus has been on paper machine clothing. And engineer fabrics is a large portion of our business. So our effort over the last probably 12 months have been R&D in that area so that we can go into new positions in that market work with the OEMs the machine makers to get our product on there as the prime product because we we believe that we have a better solution for them there as well so I I see that as a growth area I'm not ready to share exactly where it is today but we will paper machine clothing if it's stable 1% 2% growth it kind of depends on the region that we're in tissue we have the best product in tissue so we wherever there is a growth in tissue including Asia we see we see growth and we have we have put a machine into or we put capability that we saw last week to make a product that is specialized for tissue into Asia so that we don't have to ship it from from the US maybe I'll pause I'll see if there's any questions Any questions from anyone in the audience before I keep going?

Analyst — Michael Ng, Analyst — Goldman Sachs

Okay. And, Will, maybe I'll come back to you. Albany has historically been a strong cash generator. How do you think about capital allocation decisions going forward in terms of growth capital, share repurchase dividends?

Willard Station, CFO

I'll say, as you mentioned, we've been a strong cash generator and we're going to continue to be that. You know, as we think about capital allocation, it's probably one of the most important aspects of Gennar's and my job. And we're being disciplined around how we allocate that capital. You know, we're setting ROIC targets that are absolutely necessary for our business and ensure that we're putting capital into the right programs, into the right efforts. And we're going to continue to make sure that, you know, we continue to pay our dividends. And when the economics makes sense, you know, we'll do share repurchasing. But, you know, capital allocation is something that's going to say it earlier. It's ongoing. Right. The work never stops. It's something that we talk about on a constant basis. And we're holding our teams accountable to their returns. We're also trying to accelerate those returns. And, you know, so for me, it's the speed in which, you know, we can get to break even and start to get the payback period for those investments. And so we're looking at ways that we can go faster there as well. But it's a it's a big effort for us. And we got clear targets, the team to understand what the ROIC needs to be. And we got a disciplined approach about how we're getting after it.

Analyst — Michael Ng, Analyst — Goldman Sachs

So, Gennar, maybe I'll go to you with the last question here. So for any investors that hasn't followed the Albany story closely, why is now an interesting time for them to take a look?

Gunnar Kleveland, CEO

Yeah, I think it's kind of where I started. Don't look back at what Albany was, but look at what we have reset and where we're going as a company. We are a material science company that has an amazing capability in weaving that we have two different channels that we can do. We were also looking at, we had an innovation program last year, we had a, so there's so much innovation in the company that I see expanding what we do using that material science, using that weaving as a growth and not only in machine clothing or in aerospace. space. So there's a lot happening, a lot of effort. I'm looking forward to the next month or so where we're going through our strategic reviews and to share that as we come back to new conferences and our earnings calls.

Analyst — Michael Ng, Analyst — Goldman Sachs

Yeah, exciting times ahead. But Gunnar, Will, thank you both very much for being here.

Gunnar Kleveland, CEO

Thank you, Michael.