Ladies and gentlemen, thank you for standing by. Welcome to the Albany International Fourth Quarter Earnings 2020 Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct 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 John Hobbs, Director of Investor Relations. Please go ahead, sir.

Thank you, Brad, and good morning, everyone. Welcome to Albany International’s fourth quarter 2020 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 same statements apply to our verbal remarks this morning. Where we will make statements that are forward looking, containing 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 the call, to their most comparable GAAP measures, please refer to both our earnings release of February 10, 2021 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 some opening remarks. Bill?

Thanks, John. Good morning, and welcome everyone, and thank you for joining our fourth quarter earnings call. Let me provide highlights on our 2020 performance, share my expectations for 2021 and comment on our strategy going forward. And then Stephen will cover our fourth quarter results and guidance for 2021 in more depth. We finished the year strong with fourth quarter results much better than expected. We delivered another solid quarter in a pandemic year that was challenging and unpredictable. Our operations demonstrated agility and our relentless focus to deliver great bottom line results, despite pressure on the topline and downturns in some of the end markets that we serve, and this was our story throughout the year. Beginning in early 2020, we took swift action to ensure the safety and wellbeing of our employees. Our teams work tirelessly to reset our manufacturing and supply chains and many times during the year to meet our customer's needs as they changed. We did a great job for customers and continue to drive efficiency and productivity improvements. We took early action to manage our costs well, and consequently, we are able to deliver outstanding margins for our shareholders and generate solid free cash flow and add to our strong balance sheet. Also notable, our customer performance metrics are at record levels for service, on-time delivery and quality. Our safety performance ended the year as the best in the history of the company. Our factory productivity and supply chain initiatives contributed to our bottom line success. And we managed to launch a number of employee training and development initiatives. I am most proud of how our employees found ways to work safely and how they've innovated to not only do our work, but to improve how we do it. It's not an accident…

Thank you, Bill. Good morning to everyone. I will talk first about the results for the quarter and then about our initial outlook for our business in the coming year. For the fourth quarter, total company net sales were $226.9 million, a decrease of 12% compared to the $257.7 million delivered in the same quarter last year. Adjusting for currency translation effects, net sales declined by 13.6% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were down 6.6% year-over-year, driven by declines across most major grades of product, partially offset by growth in engineered fabrics. Once again, the most significant decline of over 21% on a constant currency basis was in publication grades, which represented about 17% of our MC sales in the quarter. However, we do see signs with generally improving machine clothing market. First, while we did see year-over-year declines in packaging and tissue grades in the quarter driven by the same factors that we discussed on our third quarter call, the year-over-year declines we saw in those grades in the fourth quarter were considerably smaller than we had seen in the third quarter. Second, segment net sales in the fourth quarter were sequentially higher than the third quarter and modestly exceeded our expectations. Engineered composites net sales, again, after adjusting for currency translation effects declined by 23.5% compared to last year, primarily caused by significant reductions in LEAP and Boeing 787 program revenue, partially offset by growth on the F-35 and CH-53K platforms. During the quarter, the ASC LEAP program generated revenue of a little under $25 million compared to $48 million in the same quarter last year. However, this quarters ASC LEAP revenue was up significantly on a sequential basis, 48% higher than the third quarter, driven by the…

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

Yes. Good morning, Bill and Stephen. Congrats on the strong results given the challenging year. I guess, I wanted to just first touch base Stephen on – the AEC revenue guidance kind of implies, I guess if I look at the midpoint of revenues around $71 million a quarter, which I – and I know that's probably not how it's going to play out. But maybe if you could just walk us through how you think the revenue cadence maybe a high level given all the moving pieces around destocking?

So yes, look, I'm not going to get into quarterly guidance. We don't provide quarterly guidance. Although, I don't expect it to be terribly lumpy as we go through the year. So not given the quarterly guidance, you suggested just dividing the midpoint by four, but you're probably not that far off. So your general approach is nominally correct. Look, the challenge we face is, while ASC revenues will certainly be fairly flat, they were more lumpy in 2019. So those will be spread more evenly throughout the quarters, which should mean that for ASC, no quarter is as bad as the worst quarter we saw in 2019. However, we have to layer on top of that at 787 and F-35 decline than the other smaller commercial programs. The effect of which will be spread throughout the year. In 787 and F-35 in both, there was considerable inventory in the channel that needs to be cleared out before we can start to produce and recognize revenue. And it's not as – that means, we will take a holiday from production in Q1. That decline in production will be spread throughout the year. So we'll be producing a little ahead of the need in some ways, if you'd like to think in the first half of the year and be catching up – they'll be catching up the business as we get into back half of the year. So we have somewhat level loaded those production quantities throughout the year as well. Bill, I don't know if you have other thoughts on that.

I would just add. I think the programs that are where we're destocking through the year, we’re projecting and planning for a low level of production. We'll probably see some pickup in the back half of the year, and we have other growth programs, like CH-53K as the volume longer-term grows and maybe a little bit more in the back half of the year as we go into 2022 and expect to get beyond destocking and then grow from there. So there'll be probably a little bit more in the back half of the year. But as Stephen said, I don't think it will be real lumpy.

Okay. That's really helpful. And then just around just the sensitivity of the EPS range on adjusted EPS that you provided, I think we struggle a little bit of what it's some of the factors that maybe we're not thinking about that implied you getting to the lower end of your range. I mean, could you maybe walk us through, maybe some assumptions there that you’re thinking about?

Well, it's derived from the lower end of our EBITDA range for the two segments. There's obviously the table in the earnings release that shows how we get from our adjusted EBITDA range to our EPS range. So assuming the questions is really at the adjusted EBITDA range, look, from an AEC perspective, we mentioned the headwinds we face now on our long-term contract profitability with the declining volumes placing upward pressure in rates. That's something we're going to have to manage very carefully through the year. It certainly generates the risk that you could actually have adjustments to long-term contract, which would be unfavorable. We obviously are not planning on that, but there's certainly a risk there. So that's one of the biggest risks on the AEC side. On the Machine Clothing side, there's certainly FX risk, which could push us towards the bottom end. There's inflation on the input costs, I talked about, which we always try to offset with cost reduction initiatives given we are unable given the competitive environment to raise prices to completely offset those rising input costs. We try to identify cost savings initiatives to offset those increases, but there's no guarantee as we entered the year that we'll be successful in offsetting all of those. And there's also a bit of a mix issue of just exactly where the spread is going to come as we go through the year for machine clothing, as we've discussed previously, but certainly regional differences in margin, and even some margin differences between grades of product. So there's certainly a product mix risk, which could drive us towards the lower end of the range as well.

Okay. And just lastly – thank you for that, Stephen. And then just lastly, Bill, maybe just your thoughts on – you guys are generating a lot of cash and you've got a really strong balance sheet. Just thoughts on how you're thinking about M&A in this environment just given the pandemic? Thanks.

Yes. Sure, Peter. We are generating great free cash flow and paying down debt. And our primary objective, as I said, is going to be the organic growth investment we make and the programs we're working on. But we will consider M&A. We're particularly interested in things that would help us advance our technology, our processes and the product development around engineered materials and advanced composites. So it is something that we would consider if the right property came along, we've been fairly conservative in nature and prices have been high over the past year. So we'll keep looking. But if the right property came along, we would consider it.

Thanks very much.

And we do have a question from the line of Gautam Khanna with Cowen and Company. Please go ahead.

Yes. Hey guys. Good morning. This is Dan on for Gautam. So listen, I wanted to ask a little bit more detail on the F-35 destock and just kind of the puts and takes behind that and how long that could last. And I guess kind of like what rates were you producing at versus what they delivered this year? And I mean there's still a pretty substantial ramp in deliveries through 2022, so kind of just how you expect that to play out? Thanks.

Hey, Dan. This is Bill. I think that maybe the first part of the question Stephen could add some color to it. We're expecting this – we'll work this through this year in 2021. The program for us, the F-35 program is a great program, it's been growing quickly. We've been – we added production capability and grew with it. And just came to find out somewhat of a surprise at the end of the year that there was inventory in the channel that we're getting ahead of the overall rate what Lockheed Martin was looking at. So it's a short-term revision to the growth rates longer-term. So I think in 2022, we'll be back at a healthy growth rate on the program.

Okay. Got it. I guess as a follow-up to that, is it kind of like that that's a pretty big snapback, if say, Lockheed goes to delivering 170 at 2022. Then that's a pretty big step up, right, for you guys? Or is it already that all of that inventory is in the channel?

I think, it is a step back. I don't know that I would describe it as a snapback. We'll manage it over time, so that it's a well-managed operational increase. But yes, we do expect it to come back beyond 2021. And as I said, it's a good program.

Okay. Cool. And then just on the – you guys have the Safran cash true-up, right, that occurs. Is it partially in Q4 and partially in Q1? What was the amount of that?

Yes. We’re expecting a true-up in Q1. Stephen, I don't know if you have the numbers on that or we've – something…

We haven't disclosed that number. Typically, we've said in prior years being high-single digits of millions of dollars. And at this stage, we're not giving any further guidance than that.

Okay. Sounds good. And then just lastly, how's the progress that – reopening the LEAP facilities, have you run into any snags or is it going pretty smoothly?

It's gone remarkably well. We brought all the three facilities all back online. After they’re closed – partially closed in the second and third quarters and productions picked right back up. We've still working on improving the product, as I said, in my remarks, and it's going very well. We've made some strides in manufacturability of the product while where things were slow, and we're happy with how it's going right now. We're just waiting for the rest of the market to pick up.

Okay. Sounds good. Thanks guys.

And we do have a question from the line of Steve Tusa with JPMorgan. Please go ahead.

Hey guys. Good morning.

Good morning, Steve.

So I think we counted roughly in the way of kind of $60 million to $65 million of revenue headwinds at AEC from your comments. Your guide is down $40 million to $45 million at the midpoint, I guess. What is – are we kind of calculating that correctly and kind of what would be growing and I guess is the $60 million to $65 million – how much of the $60 million to $65 million is destock?

Yes. Let me take that first. So your math is generally correct. It's about $60 million to $65 million. The growth is coming. We mentioned CH-53K and some other new programs we have on board that are growing that we have not talked about, and I'm not talking about at this stage. So they're smaller in nature right now for delivering some of the growth that you see there. The $60 million to $65 million, it depends how you count destock. The vast majority of it is destock quite frankly. If you look at the primary driver is being LEAP-1B, 787 and F-35, all of those are destock. And I think if you add those three together, you get into that $50 million to $55 million range of your $60 million to $65 million. So we certainly – while it's difficult to predict the future, F-35 appears to certainly be a transitory destocking event and we should get back on track after Lockheed manages to get back to their planned build rate post – the pandemic supply chain challenges. On 737 and 787, the big question there is just what does Boeing do with build rates as we go forward. Obviously we're not relying on a lot of revenue this year. So our 2020 revenue – or 2021 revenue, sorry, is unlikely to be significantly affected by Boeing's decision to build rates. But the question is to how quickly that recovers as we go into 2022, really depends on the rate at which they build and therefore consume that channel inventory. So it's a little difficult to predict the exact quarter right now where we return to growth on those programs. But in some, the vast majority of it is destocking.

If you look at the kind of 737, I would assume that that flips a bit in 2022 as these guys kind of start to think about a bit of an increase in 2022. Would you expect that to kind of go back to them stocking more regularly kind of ahead of those potential production rate increases if they start to ramp a little bit there on LEAP?

Yes. The one caveat being in the back-end of your sentence there, if they start ramp a little, if they meet their publicly stated build rates, then sure we would expect it to flip in 2022. They face a lot of challenges as well in getting back up to rate. So that's why – we're not guiding 2022 at this stage. And I don't want to pretend to know exactly when in 2022 that's going to flip on us.

Right. But the headwind goes away, like you'll be normalized on that front from what you know today by the end of 2021. So it's a hit to you guys today. It's a cash benefit to your customers, but then that goes away in 2022 because it'd be more aligned. Is that right on 737?

That's what we would expect, yes.

Okay. Great.

Yes. On LEAP-1B and just to say, the other thing is on LEAP-1A. We'll watch Airbus too as we exit 2021 with the production rates for A320neo. They've talked about raising the build rates. So that would help us to as we go beyond 2021.

Right. So it's really a 1B kind of dynamic that you’re most talking about. Okay. Great. Thanks for all the detail. I appreciate it. Thanks.

[Operator Instructions] And it does appear at this time there are no further questions in queue. I'll turn it back to Mr. Higgins for closing remarks.

Thank you, Brad, and thank you, everyone for joining us on the call today. We appreciate your continued interest in Albany International. And I would like to reiterate my thanks to Albany's employees across the globe for delivering a safe and successful 2020. Thank you, everybody. Have a good day.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.