Albany International Corporation (AIN)

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Albany International Corp. (AIN)

Q3 2013 Earnings Conference Call

November 05, 2013; 09:00 a.m. ET

Executives

Joe Morone - Chief Executive Officer

John Cozzolino - Chief Financial Officer & Treasurer

Analysts

Jason Ursaner - CJS Securities

John Franzreb - Sidoti & Company

Steve Levenson - Stifel

JB Groh - D.A. Davidson & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter earnings call of Albany International.

At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. At the request of Albany International, this conference call on Tuesday, November 5, 2013, will be webcast and recorded.

I would now like to turn the conference over to the Chief Financial Officer and Treasurer, John Cozzolino for introductory comments. Please go ahead.

John Cozzolino

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’ll turn the call over to Joe Morone, our Chief Executive Officer, who’ll provide some opening remarks before we go to Q&A. Joe.

Joe Morone

Thanks John. Good morning everyone. As always I’ll start with some introductory remarks that amplify John’s and my commentary in the release and then we’ll get to your questions.

Q3 was a disappointing quarter due to weak sales in Machine Clothing. In many ways Q3 was similar to Q1, 2012, which was the last time we had a weak quarter. Then as now, seasonal softness was compounded by unexpected weakness in the key market. The unexpected weakness then was in Europe, this time it was in Asia.

In the typical annual Machine Clothing business cycle there are two seasonal soft spots; the beginning of the year when sales are dampened by weak shipments from late December because of holiday slowdowns in late December, and the first two months of Q3 when sales and margins are dampened by summer slowdowns.

The severity of these two seasonal soft spots depends on the strength of the overall economy. The stronger economy mitigates the softness and weaker economy exacerbates it. In Q3 all of the markets we served exhibited at least some economy weakness.

We do expect a quick rebound in Machine Clothing, just as we experienced in the months following Q1 2012. Even if Asia remains soft, the absence of a seasonal effect should result in improved performance in Q4, which is consistent with what we’re seeing through the first third of the quarter.

There will likely be a slowdown at the end of the year as our customers drive down their inventory and as we shut down our plants for the holidays, but unless our customers perceive a significant weakening of the economy and pull back even more than we are anticipating, this late December effect is likely to be reflected more in the typical slow start to the new year than in Q4 results.

And even with the slow start to the year, we expect that the first half of 2014 should be strong and for the full year 2014 Machine Clothing adjusted EBITDA and cash flow should be roughly comparable to 2012 levels.

Turning to AEC, the sales growth continued to be driven by the LEAP program, LEAP now represents half of total AEC sales. EBITDA strengthened beginning what we expect to be a long-term trend of steady improvement, and as we discussed in the release, three important recent developments in AEC that are mentioned.

First, the initial test of the LEAP engine, the so-called “first engine to test” have been very successful and our composites have performed well. Second, we expect to sign the agreement to create Albany Safran Composites very soon, probably later this week. As we discussed in the release, ASC, that is Albany Safran Composites will be a new division within, owned 90% by Albany and 10% Safran.

With this agreement ASC will be the sole source for all applications of our 3D weaving technology within Safran. Initially ASC will comprise all of the AEC people and equipment dedicated to the LEAP program. Any new parts that we’d make for Safran, whether on LEAP or on any other Safran platform will also be housed within ASC.

Excluded from ASC and housed in the other two divisions of AEC will be 3D woven parts for applications outside of Safran and all composite parts, whatever the application that utilize AEC technology other than 3D weaving.

Safran will pay $28 million worth of 10% stake, which puts the initial value of ASC at $280 million. Safran would have the option to purchase the remaining 90% of ASC, but only Albany were to sell AEC to a competitor of Safran or if ASC failed to perform and was unable to remedy the failure in a reasonable period of time.

The initial value for the remaining 90% of the AEC will be set at the current valuation of $280 million and will grow as the LEAP program grows to full production. After LEAP hits full production the valuation will be equaled to ASC EBITDA times 9.5.

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