Albany International Corporation (AIN)
Q2 2008 Earnings Call Transcript
August 5, 2008 9:00 am ET
Joseph Morone – President and CEO
Michael Nahl – CFO and EVP
David Pawlick – VP and Controller
Paul Mammola – Sidoti & Company
Ned Borland – Next Generation
John Emrich – Ironworks Capital
Arnie Ursaner – CJS Securities
Mark Connelly – Credit Suisse
Previous Statements by AIN
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» Albany International Corp. Q1 2008 Earnings Call Transcript
I would now like to turn the conference over to our host, President and Chief Executive Officer, Joseph Morone. Please go ahead.
Thank you, Bob. Good morning, everyone. Welcome to the Q2 2008 earnings call for Albany International. As always, I’ll open with some commentary, and then we’ll turn the call over to Michael Nahl, our CFO and Executive Vice President, who’ll make some amplified comments about how we think about cash flow.
For the past two years, we’ve been pursuing a cash flow and growth strategy with two near term objectives, restore the long term cash generating potential of PMC and establish a family of new businesses with significant potential for sustainable and profitable growth.
As we’ve discussed in recent earnings calls, the primary near term measure of success for this strategy is strong free cash flow beginning in 2009. Our Q2 2008 results suggest that despite a weak North American paper industry and general economy, a weakening European paper industry and general economy, and growing pressure on costs from rising oil and commodities prices, we are on track toward realizing those two near term objectives and strong 2009 cash flow.
In PMC, our strategy for the past two years has been to offset the impacts of the maturation of the North American and West European markets by growing volume in these mature markets, growing with the emerging markets in Asia and South America, and reducing costs significantly through a company-wide three-year restructuring and process improvement program. This is exactly what took place in Q2.
Excluding currency effects, global PMC sales were up slightly, with increased volume more than offsetting declines in prices. Sales were strong in Asia and South America, which grew by 7% and 5%, respectively. And despite accelerating inflationary pressures, costs in PMC declined as the effects of last year’s plant closures and establishment of the European shared services center were clearly reflected in the operating income.
Excluding the costs associated with restructuring and performance improvement initiatives, Q2 2008 earnings per share and EBITDA showed strong improvement, compared to Q2 of 2007. About half of that improvement is due to lowering operating costs in PMC. Expenditures associated with restructuring and performance improvement activities that contributed to these lower operating costs will decline over the next few quarters.
SAP expenditures accounted for nearly 40% of the Q2 performance improvement initiatives that we’ve detailed on table three. As the project passed its toughest and most important milestone, the go-live in North America at the beginning of July, we’re now planning to accelerate SAP implementation through the rest of the enterprise. And we expect expenditures to decline from the North American go-live peak and for the project to be substantially completed by the end of Q3 2009.
Machine relo costs associated with the various plant closures accounted for a third of the performance improvement costs on table three. And start-up costs associated with the new capacity in Asia accounted for nearly 20% of that total. Machine relocation should continue through the year while the Asian expansion is entering a new and critical phase. Construction in the two plants in China and in the third plant in Korea should be completed this quarter, with operations starting to wrap-up no later than the start of the first quarter.
Our goal for these plants is nothing short of world-class products made with world-class quality, but that means that we’re going to have to go through a measured, deliberate, pace of scale up over the next few quarters, which will depress earnings in Asia because of higher depreciation and underutilized capacity. Once fully operational, these plants will dramatically enhance the long term prospects of our global PMC business.
Regarding the outlook for PMC revenues, as the Q2 increase in PMC volume suggests, our competitive position in North America and Europe continues to strengthen. And we have made good progress on the number of important contract negotiations in both markets. Nonetheless, the short term outlook for PMC remains clouded by the economic environment, the cascading effects of the rise in oil and commodities prices, and the impact of both on the already struggling paper industry.
In Q2, we did once again see the sharp slowdown in North American PMC consumption at the end of the quarter. And we now expect that pattern to continue through the economic slowdown.
Moreover, in four of the last five years, PMC revenues were weaker in Q3 than in Q2 largely because of the effect of summer slowdowns in Europe. Still, the strong Q2 and our growing competitive strength suggest that we should seek continued improvement in year-over-year performance.
AEC, Albany Engineered Composites, also performed well in Q2. Sales were 96% ahead of last year and the business broke even for the second and third months of the quarter. New business development opportunities continue to emerge, and we remain optimistic about the near and long term growth prospects of this business. One indicator of those prospects is the array of customers that we are now working with, both on current revenue generating and future business development projects.