Albany International Corporation (AIN)

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Albany International (AIN)

Q4 2007 Earnings Call

November 4, 2008 09:00 a.m. ET


Joseph Morone – President and CEO

Michael Nahl – Executive Vice President and Chief Financial Officer


Mark Connelly - Credit Suisse

Jason Ursaner – CJS Securities

Ned Borland – Next Generation Research

Paul Mammola – Sidoti & Company



Ladies and gentlemen, thank you for standing by. Welcome to the third quarter earnings call of Albany International. (Operator Instructions) I would now like to turn the conference over to our host, President and Chief Executive Officer, Joseph Morone. Please go ahead.

Joseph Morone

Thank you, Mary. Good morning, everyone and welcome to Albany International's Q3 2008 earnings call. As always we'll begin with my commentary, which this time will be a little longer than normal because we think it's important that our investors understand why even despite the looming recession, we're feeling pretty good about where we are as a company right now.

And then after my commentary, as always, Michael Nahl, Executive Vice President and CFO, will add his amplifying comments which will focus on cash flow and CapEx. And then, as always ,we'll turn over to you for questions.

Despite a rapidly deteriorating general economy in the paper industry and the effects of the previous-announced slow-down in Eclipse Aviation, earnings in Q3 2008 were comparable to earnings in Q3 2007, excluding the effects of restructuring, performance improvement initiatives and income tax adjustments.

The effects of weak PMC and EF sales and AEC income were largely offset by continued reductions in cost and another outstanding quarter for all the endorsements. More generally the Q3 results offer a window into the performance trends that we anticipate for the next few quarters. The top line, particularly in PMC, is certainly being hurt by the global recession. On the other hand, even in a long and deep recession we expect to continue to make good progress just as we did in Q3 toward our twin objectives of restoring the long-term cash-generating potential of PMC and establishing a family of new businesses with a potential of significant, sustainable and profitable growth.

We are, of course, actually aware of the likelihood of a prolonged global recession, but fundamentally we are confident that our cash and growth strategy is sound and that we will come out of the recession in an even stronger competitive position in each of our businesses than we were in at its outset.

Turning to first the PMC. Q3 sales, excluding the effects of currency translation, were 8% lower than in Q3 2007. This was an across-the-board effect. Sales in every region were lower than normal, primarily due to lower sales volume. Sales were especially weak in August, 2008, suggesting that normal seasonal downturns were likely to be magnified during the recession.

Operating income in Q3, excluding costs associated with restructuring performance improvement initiatives, was 5% lower than a year ago, as continuing cost reductions partially offset the (inaudible 00:06:07). We expect this global slowdown in PMC sales to continue for the length of the recession, as paper makers in every region are reducing their operating rates, slowdown operating speeds, extend down-time periods and accelerate the pace machine slowdowns.

And yet as the paper industry weakens, our competitive strength in the PMC market continues to grow, which is why even in the face of global recession we are confident about our overall strategy to progress. We gained marketshare year-to-date in the Americas, Europe and China, and came with us for this time of year a strong order-to-sales ratio in North America. We continued to make progress with key contract negations in Europe and completed promising new product trials in each of our major product lines.

Meanwhile our three-year global restructuring process enters its final year on schedule. The pacing item now in this process is the ramp-up of our three plants in Asia. Expansion of our Korean plant is largely complete and the team there has already expanded its production rates while maintaining exceptional quality levels. And a new plant in Hang Zhou, China, passed an important milestone in early October, when it successfully produced its first set of products for shipment.

Engineered fabrics had another tough quarter in Q3. A we have discussed before, this business shares many similarities with PMC, and about 30% of its revenues derives from sales to markets adjacent to PMC. Another 20% of revenue derives from products that serve the struggling building products market.

If there's a silver lining here it is that 40% of EF's revenue derives from sales to the non-wovens industry which is still growing, even in North America in Europe. Q3 2008 orders for the non-wovens industry grew by 25% compared to Q3 2007 and by 15% compared to Q2 2008.

Our sales to the building products industry appear to have bottomed. Orders in Q3 2008 were comparable to Q3 2007, and considerably stronger than in Q2 2008. For this reason even though EF sales performance to Q3 were similar to PMC's there is reason to believe that the recession will not have as large an effect on this business as it is already having in PMC.

Turning next to Albany door systems, Q3 2008 was another strong quarter, compared to Q3 2007, and excluding currency effects, sales grew by 16% and operating income by 250%. Once again performance was strong across the boards in all regions and in both product sales and after market. Orders in Q3 2008 were 20% higher than Q3 2007. Nonetheless, we still expect a slowdown in this business next year.

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