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Albany International Corp. (AIN)
Q2 2013 Earnings Conference Call
August 1, 2013 9:00 am ET
Joseph Morone -President, Chief Executive Officer
John Cozzolino - Chief Financial Officer, Treasurer
Jason Ursaner - CJS Securities
John Franzreb - Sidoti & Company
Steve Levenson - Stifel
Previous Statements by AIN
» Albany's CEO Discusses Q1 2013 Results - Earnings Call Transcript
» Albany International CEO Discusses Q3 2010 Results - Earnings Call Transcript
» Albany International Corp. Q2 2010 Earnings Call Transcript
» Albany International Corp. Q1 2010 Earnings Call Transcript
I would now like to turn the conference over to the Chief Financial Officer and Treasurer, John Cozzolino for introductory comments. Please go ahead.
Thank you, Operator, and good morning, everyone. As a reminder for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results, with particular reference to the Safe Harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP.
And for purposes of this conference call, those same statements also apply to our verbal remarks this morning. And for a full discussion please refer to that earnings release, as well as our SEC filings including our 10-K.
Now, I will turn the call over to Joe Morone, our Chief Executive Officer, who'll provide some opening remarks before we go to Q&A. Joe?
Thanks John. Good morning everyone. As always, I will provide a few introductory remarks that add some color to John’s and my commentary in the press release and then we will turn to your questions.
I will comment on three of the topics that we addressed in the release, year-over-year Q2 performance, which we view as essentially comparable. Our outlook for the rest of the year which is unchanged even though year-to-date, we are ahead of last year and some thoughts about the long range outlook for AEC especially in light of the recently concluded Paris Air Show.
So, let’s begin with year-over-year Q2 performance. Adjusted EBITDA declined from a very strong $40 million in Q2 last year to $36 million this year. But, when we look at the actual operating results we see similar year-over-year performance. Now probably the best way to view this is to compare tables 5 and 6 in the text of the earnings release.
So, if you go to those tables that’s tables 5 and 6 on page 4 of the release. And then starts with the Machine Clothing column, you see the year-over-year adjusted EBITDA declined by $1 million or a bit less than 2%. Now keep in mind that Machine Clothing sales were virtually identical in the two quarters.
The difference in adjusted EBITDA is entirely attributable to a slight drop in gross margin from 44.2% in Q2 2012 to 43.8% in Q2 2013. 43.8% is well within our target range and right at the full year gross margin for 2012.
Moving next to the Engineered Composites column, you can see that year-over-year adjusted EBITDA in AEC dropped by about $900,000. Well, $900,000 is the cost of the inventory write-offs associated with the close out of the Legacy program in our Texas operation that I mentioned last year – last quarter.
And then moving over to the third column, you come to the largest year-over-year delta in adjusted EBITDA, which is unallocated expenses. The difference between the two years is just about entirely due to accrual adjustments in both periods for stock-based incentive compensation and other items. The accrual adjustments increased this year’s expense by $400,000 and as I discussed in last year’s call reduced Q2 2012 expense by about $1.5 million. In short, when you look at the repeatable year-over-year performance Q2 2013 was comparable to Q2 2012.
That brings me to item number 2; our outlook for the rest of 2013 and beyond. Turning first to Machine Clothing, year-to-date for the first half of 2013, Machine Clothing adjusted EBITDA is $8 million or roughly 7.5% ahead of first year 2012 adjusted EBITDA meanwhile orders in Europe and Asia in Q2 were considerably stronger than they have been in several quarters. The benefits of the restructuring in France should begin to flow into earnings in Q4 and in our key segments in the Americas, the market is stable, our customers are healthy and our share is of anything growing.
Nonetheless, we are sticking to our outlook of flat full year adjusted EBITDA in Machine Clothing. In other words despite the encouraging first half and underlying conditions, we expect adjusted EBITDA in the second half of the year to be weaker than it was in the second half of 2012.
As we explain in the release, the primary reason is the shift in treatment of inventory away from consignment that we made a year ago with our largest customer. This had the effect of accelerating about $8 million of revenue in Q3 of 2012. We will see the reserve effect in the second half of this year as our customer works off the inventory that we recognized as revenue last year. It is this reverse effect that is holding us back from upgrading our outlook for the year in Machine Clothing.
As for Albany Engineered Composites, we see the first half of 2013 with breakeven EBITDA as the low order mark for profitability. We expect to see steady and significant improvements in EBITDA for the second half of 2013 continuing into next year and basically through the rest of the decade. Better profitability in our Legacy programs in our Texas operations should contribute to this improvement over the next several quarters but of course the primary driver will be the LEAP program particularly once LEAP production begins to ramp in the second half of 2015.