Ladies and gentlemen, thank you for standing by and welcome to the Albany International Third Quarter Earnings Conference Call. And at this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session. And instructions will be given at that time. [Operator Instructions] As a reminder today's conference is being recorded. I would now like to turn the conference, over to the Director of Investor Relations, John Hobbs. Please go ahead sir.

Thank you, Brad, and good morning, everyone. Welcome to Albany's Third Quarter Conference Call. 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 notice, contained in the text of the release, about our forward-looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP. For the purposes of this conference call, those statements apply to our verbal remarks this morning. We will make statements that are forward looking, that contain a number of risks and uncertainties, among which, are the potential effects of the COVID-19 pandemic on our operations, the markets we serve and our financial results. For a full discussion, including a reconciliation of non-GAAP measures, we may use on this call, to their most comparable GAAP measures, please refer to both our earnings release, as well as our SEC filings, including our 10-K. Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill?

Thanks John. Good morning. And welcome everyone. Thank you for joining our third quarter earnings call. We delivered another solid quarter. Our Q3 revenues were as expected. And our profitability was better, than expected -- got a little bit of echo there. Alright, I'll continue. We're especially pleased with our operational performance, doing a great job for our customers and our ability to drive profit to the bottom-line. Before going into more detail, let me say a few words about the COVID pandemic environment. Our employee's health, safety and well-being, remains our top priority. We continue to adapt, our operations and offices to ensure our employees are safe as possible and commend our leadership teams. And our employees, we've remain disciplined and created safe environments, inside our facilities. And we've also provided support advice and supplies to our employees that our homes to encourage, safe behaviors in their communities. In spite of these challenges, our management team has done a remarkable job, delivering commendable Q3 results. In Q3, we delivered adjusted EPS of $0.96, better than expected with both segments contributing to the solid performance. Our customer performance is outstanding, in both segments. We offer a range of value-added products, strong customer technical support and best-in-class on-time delivery performance. In the quarter we continue to adjust our operations to right-size production levels, to new levels of expected demand. We work closely with our customers to be prepared for demand shifts. This intense focus on the customer, complemented by our strong, operational excellence programs, technology development and productivity have resulted in our ability to continue to execute well and to deliver historically attractive margins, despite the effects of the pandemic, on our top line. Now let me talk about the segments. Our machine clothing segment continues to deliver exceptional, operational performance…

Thank you, Bill. Good morning, everyone. I will talk first about the results for the quarter and then about our revised outlook for our business for the balance of the year. For the third quarter, total company net sales were $212 million, a decrease of 21.8% compared to the $271.1 million delivered in the same quarter last year. Adjusting for currency translation effects, net sales declined by 22.6% year-over-year in the quarter. In machine clothing also adjusting for currency translation effects, net sales were down to 9.5% year-over-year driven by declines across all major rates of product Sales of publication grades, which declined over 14% compared to last year represented only 18% of our MC sales in the quarter. However, we also saw declines in packaging caused partly by declines in overall economic activity earlier in the year. In tissue grades as Bill referenced earlier, the shift in consumer demand from away-from-home to at-home products has caused demand to exceed supply in at-home products, limiting the upside in our sales of products for the at-home market while our customers were forced to idle or run at lower capacity a number of their lines serving the away-from-home market, resulting in an aggregate decline in sales of our tissue grade products. Engineered composites net sales again after adjusting for currency translation effects declined by 39.2% primarily caused by significant reductions in LEAP and Boeing 787 program revenue, partially offset by growth on the F-35 and CH-53 K platforms. During the quarter the LEAP program generated a little under $17 million, compared to $54 million in the same quarter last year. This quarter's leap revenue was up only marginally from the $15 million generated in the second quarter of this year due to the fact that the reopening of our three LEAP facilities…

Of course. [Operator Instructions] Our first question today comes from the line of Peter Arment with Baird. Please go ahead.

Yes. Good morning, Bill. Good morning, Stephen. Stephen, thanks for all the details on kind of the LEAP dynamics, and congrats on obviously a strong quarter just given what's going on, but can you help us just understand a little bit. I understand on the LEAP A kind of fast recovery LEAP-1B taking a long time, do you expect, I guess, qualitatively speaking, should LEAP revenue be higher in 2021 versus 2020?

Yeah. I would expect it to be very marginally higher. If you will recall, we had a good first quarter of this year for producing both significant 1A components and a modest amount of 1B in the first quarter. Obviously, Q2 and Q3 no production, but revenue recognized on the fixed costs in that business. So I would expect might be marginally up next year, but we really expect very little 1B revenue. If you will recall Peter, we said three quarters ago, we said, we finished 2019 with about 200 engine sets of LEAP-1B on hand. Today, we have a little more than that on hand and LEAP-1B, meaning, we've produced a few more this year than we actually shipped and marginally higher than the 200, but that still is a lot of shipped sets on which we have already recognized revenue and that will power the first Boeing aircraft completed for which they are not already engines either on the aircraft today or in the Safran chain. LEAP-1A is in obviously a much different situation, we have lower inventory today than we had at the end of 2019 when we had about 100 shipped engine shipsets on hand, but still just looking at the trajectory, I would expect next year to be only marginally higher than this year.

Okay. And just the dynamics around kind of the margin, adjusted EBITDA margin guidance, it's quite a range, I guess, AIC for Q4. What are some of the puts and takes there that we should be thinking about?

As you know, there is always a little uncertainty in the business like AIC, which is long-term program accounting about whether there may be adjustments one direction at the other, and so even in a relatively short time period there that could be quite a broad range of potential outcomes, because those numbers could be positive or negative in any given quarter, and so some amount of it is to leave allowance for that from an operational perspective. I do not think we need to as wide range as we have suggested there, because there's not a huge amount of uncertainty in terms of production rates here in the fourth quarter. All of our production rates and programs is pretty much locked in. It's like you just on the profit rate we recognize on some of those long-term programs.

I appreciate that. And just if I could squeeze in one more quickly just on MC, are you -- thanks for all the details there, but you see on the in terms of different grades and what you're seeing on orders, how is the pricing environment if you've seen any kind of material change, I guess, sequentially and how should we be thinking about that. Thanks.

Yeah. Peter look as we've said before, it is a very competitive market and always has been. It has been competitive market for years, we faced very strong competitors there, every day there was a knife fight out there for every single bit that is available and we always have to make trade-offs in terms of price or market share. And that is certainly true today. However, we have not seen a significant uptick in that you know driven by the pandemic and overall economic conditions. It's more or less today in line with what we have seen over the last, let's say, 12 to 18 months.

I appreciate that. Thanks Stephen.

Thanks Peter.

And we do have a question from the line of Caitlin Dullanty with Bank of America. Please go ahead.

Good morning guys. Bill you mentioned that the commercial aero downturn should be a good opportunity for Albany to ramp up the technology capabilities, so that you guys can be well positioned for recovery. Can you tell us a little bit more about your strategy for that in terms of what technology areas are you evaluating, do you see only incremental investment driving this or would you consider maybe small M&A? And then kind of tangentially, how do you see OEMs spending on advanced materials development?

Sure. Caitlin, great question. It is a time we're working sort of a broad spectrum of opportunities commercial military defense to see where we can develop materials and then the processes behind the materials manufacturing processes to bring next-generation of composites to the marketplace. So we're working across the board, there is probably a little bit less work now on the large, I'll say, large OEM as there is more opportunity in the near term on defence, military defence opportunity. So we're going to continue working that where we've positioned ourselves really well on the LEAP program on the engine, but we're also looking at wing and fuselage and other applications. So it's challenging one of the things we've learned through the pandemic is it's challenging just to get into customers' facilities and have customers getting to ours that we've committed to the R&D and the development to do that. We're doing a lot by video and a lot of meeting. So, there's a number of programs that we're working on currently. And as you as you stated it is part of our strategy is we want to get through this downturn and have a broader portfolio of applications as we go forward. And certainly from an inorganic standpoint, we would consider technology company the right type of M&A as we as we noted before we bought a small company in Germany last year CirComp that brings some other capabilities around thermoplastics and thermoset technology to all that perhaps we didn't have before and we can develop that further as well. So yes, will continue -- we'll continue to work on it. The OEM environment we're watching it and see how that how that pans out and we want to be there at the table. And I think we've demonstrated we have the capability and the operational backing behind it to make things happen. So we're going to take every advantage we can.

Okay. Bill, thank you very much.

And we do have a question from the line of John Franzreb with Sidoti. Please go ahead.

Hi. Good morning guys. I'm curious about your thoughts on the reopening of the office place in 2021. How that mix change hurt you or benefit you in the machine clothing side of the business, is there any reason to think that MC wouldn't have a better 2021 than 2020?

Well certainly, the reopening of offices and other revenues as I mentioned in my opening remarks that have been heard at the away from home marketplace, we would certainly benefit from that longer-term if that comes back. The at-home business has been real strong, but that the away-from-home market for Machine Clothing has certainly suffered through this downturn and we would enjoy that coming back.

So should we think about resetting maybe our margin contributions and EBITDA contributions from Machine Clothing. It just seems to me that over the past year-and-a half for every good quarter we've kind of reset the bar lower only to see that we then exceed those lower bars. I'm just wondering maybe if the -- where the mix changes had been going on for the past five years that our starting point maybe should be a little bit higher now in MC?

I just I would caution a little bit on it it's early. This is an incredible marketplace and an economic environment to try and predict things. Just look at what happened -- has happened through this year. So we have a mixed effect that didn't occur like we expected. Our mix actually turned out to be a little better than we expected in this quarter, but we're still kind of watching a long-term effects of the lag between when machines are idled and start back up and when belts are consumed getting into customers facilities right now on the MC side is difficult as well, Trying to run trials of new products is very difficult right now. We're trying to commit to that next generation of belt technology and it's a challenge in this environment. So I would just be cautious. I wish I had a crystal ball is so that I know exactly what this is going to look like going into next year, but I don't think any of lets do and with a lag effect in the different mix and different impact globally. It's a little hard to call right now. So I think I'd be patient for another quarter or two. Let's see what next year looks like.

And certainly, John, irrespective of what the top line looks like next year and Machine Clothing certainly the first half of this year, the margins we delivered in that business were outstanding even by historic norms and certainly, you've seen they've been somewhat lower here in the back half of the year, repeating the margin performance we delivered in the first half of the year maybe a challenge. Just as you think about next year. Even if it's another strong top line year and we had particularly good mix in the first half of the year, we benefited from exchange rates as you know. It was overall just a very good first half of the year. Those margins where we got to the mid '50s on gross margin then high 30% to 40% range on the adjusted EBITDA margin, they may be tough to replicate. So I'd be careful about just kind of rolling that sort of margin performance going forward.

Yeah. But I guess the question was that next year, we're going to see schools reopen. We are going to see office is coming back online. I would just assume that would be a margin beneficiary, but maybe I'm not understanding that properly.

You would certainly get some increased fixed cost absorption absolutely if revenue rebounds, you certainly get that benefit. It's just our other factors such as mix and FX impact which benefited us in the first half of the year, which may not have the same outsized impact on this next year, if some of these other markets such as the publication rate for office and school recovers. So again, we do not yet we're not guiding for 2021. So I'm not suggesting any specific numbers you use. Certainly, we have said before that MC has stepped up from its traditional historical level of EBITDA. If you go back to what we might have thought three or four years ago, but it's certainly jump to a higher plane. But I wouldn't say jump to automatically considering that we can replicate the first half of this year again in subsequent years.

And I think it's a little bit -- it's a little bit longer-term, but we also have to think about I don't know if there's going to be any pricing, if there is going to able to get pricing as we go into this environment next year and then there is always inflation. So we think that we got to think about as we go in that will affect margins.

Okay. Just switching to EC for a second, could you just talk to us about what's going on as far as labor retention a lot of downtime. I'm wondering if that's been a problem on that and how do you see yourself ramping up in the coming year as things start to come back online maybe at a quicker pace?

Yeah. I can comment on that, we've been very methodical in how we've restarted the all the new software and composites venture business, which was shut down Q2, Q3. As we started those back a very careful on how we're bringing people back on and training. We've had excellent progress so far and how that's occurred. So I think we feel like we're in good shape with our employees and bringing them back online with extensive training and support as they come on. So I don't -- I don't feel like that's an issue. If your question is longer-term as capacity comes back up. One of the things, we are still continuing to do so even though we're running very low rates of production on that on the LEAP program. We're still working on improving the processes and improving the efficiencies in the quality of the throughput. So that as things do come back up we've got plenty of capacity that we've already installed to work with.

Great. Thanks for taking my questions, Bill.

[Operator Instructions] And we do have a question from the line of Patrick Baumann with JP Morgan. Please go ahead.

Hi. Sorry, I was on mute. Good morning.

Okay. Good morning, Patrick.

Thanks for taking my question. Quickly -- I'm sorry I missed the beginning of the call, why were the margins in AEC strong in the quarter. Was there a reason that you discussed as to why that was the case and why the fourth quarter is guided to be little bit softer. Is it maybe like the LEAP coming back in that mix, it hurts the mix a little bit. Just curious on what you've said on that? I'm sorry if I am repeating yourself.

Yes. Two factors, I would point to. And we didn't really give an explanation for it, Patrick. So you didn't miss much in that respect. First off, from a year-over-year perspective, we had a roughly comparable level of net favorable adjustment to long-term contract profitability of about $3.5 million during the quarter. So that certainly contributes to the level of margin and also, and certainly if you're looking and again it depends what your comparison point is, if you look at the year-over-year basis, we certainly get a mix benefit on a year-over-year benefit -- basis from a margin perspective due to LEAP being a smaller share of our revenue this quarter. I mentioned LEAP was only $17 million this quarter where as it was you know almost 3 times that a year ago so it was a much greater share of our revenue. If you go back a year ago, it was close to it half of AIC's revenue and as we discussed it is a somewhat lower margin, whereas this quarter it was only about 24% of our revenue, so much lower share. So those were the two primary things If you're looking on a year-over-year comparison base.

Okay. So if I do the math on the contracted favorable contract adjustments, which you seem to be continually getting. So I'm not even sure if that's non-recurring anymore. It seems like it's you're executing well I suppose on contracts, but if I adjust that out in the third quarter is the EBITDA margin like closer to like 23% in that ballpark?

Yeah, look as you know we've been targeting. If you go back a few years ago, we had said, we were looking for adjusted EBITDA margins in that business with 18% to 20% and we have beaten those. And kind of right now, I think it'd be safe to say absent those long-term favorable -- adjustment long-term contracts, the EBITDA margins typically are somewhere in those low '20s, let's say 21% or 22% range. So your calculation is not far off that kind of normalized EBITDA margin.

Yeah, so that's what I'm looking for. Yeah, so basically, when we think about next year, we shouldn't be. I mean, this year was it looks like ending up being more mid-20s, but if we were normalize things, you would kind of talk -- you would think about more low '20s as the right level going forward tomorrow.

Yeah look in future years as LEAP certainly grows, if as we've discussed as that is a lower margin business that will put some downward pressure on those numbers, but as we mentioned next year LEAP should be only marginally higher in terms of revenue this year. So that will not be a significant factor next year.

Got it. And then the cash flow this year I think is being reasonably solid given the environment, how should we think about free cash flow and CapEx normalize any change in kind of your view on conversion or CapEx to sales ratios. How should we think about those going forward?

So just a couple of things there. One, clearly CapEx has taken a significant step down and consistent with the slower ramp we expected in AIC where we're really in a recovery mode rather than just a ramp-up mode particularly on the program like LEAP. So CapEx certainly is a step down which certainly helps conversion. I will say CapEx is a little lumpy right now because of the LEAP program and as I mentioned in my remarks, the revenue, a lot of the revenue we generated in Q2 and Q3 from LEAP was cashless revenue because we will not collect that cash some of it in the fourth quarter as we invoice and shipments. But the majority of it, quite frankly will not be collected in fourth quarter, but will be collected as part of the true-up in voice we submit the Safran at the end of the year and we'll collect early and we expect to collect early in Q1 of 2021. So certainly a shift of cash out of this year into next year given and that's an artifact of the significant reduction in volumes that we saw in the LEAP as we went through the year, because the rate at which we're invoicing Safran on shipments is based on production volume far higher than the actual production volume and that means that that cash collection shifts out of the year or early next year. So Q4 will be a little unusual given that shift of cash out of it into Q1, but overall we certainly don't see any if you normalize for that, we don't see anything which is significantly impacting the cash conversion of the underlying business. We expect to maintain our strong free cash flow conversion for the foreseeable future.

Last year you did about $50 million of free cash flow. I mean, how much of an impact is the shift of payments into next year?

Yeah look the exact number is yet to be determined, but it's certainly a double-digit number in terms of millions of dollars that will shift out of this year into 2021.

Got it. Okay. That's helpful. And yeah, I'll jump off the line. I will let others ask the question. Appreciate the time.

Hey, thank you, Patrick.

[Operator Instructions] And it does appear at this time there are no further questions from the phone lines. Please continue.

Thank you, Brad. I'd like to thank everyone for joining us on the call. We appreciate your continued interest in Albany International and on behalf of the entire management team, we wish you all a safe and healthy end of the New Year. Thank you.

And ladies and gentlemen, on details regarding the recording of today's conference please reference the Albany International website. And at this time that does conclude your conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.