Ladies and gentlemen, thank you for standing by and welcome to the Albany International Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. I'd now like to turn the conference over to your host, John Hobbs, Director of Investor Relations. Please go ahead.

Thank you, Wallace [ph] and good morning, everyone. Welcome to Albany International’s third quarter 2022 conference call. As a reminder for those listing on the call, please refer to our press release issued last night, detailing our quarterly financial results. Today we will make statements that are forward-looking that contain risks and uncertainties. We'll also reference certain non-GAAP measures on this call. Contained in the text of our press release, is a notice regarding 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, the same statements apply to our verbal remarks this morning. Additional details can be found in our SEC filings, including our 10-K. Now I'll turn the call over to Bill Higgins, our President and Chief Executive Officer who will provide opening remarks. Bill?

Thank you, John. Good morning and welcome everyone and thank you for joining our third quarter earnings call. Today, I'll comment on our third quarter business performance with some perspective on our markets and our strategy, and then Stephen will cover our financial results in more detail. We're pleased to report another strong quarter. Both of our business segments executed well. On the top line, we grew total company third quarter sales by 12% or nearly 17% on a constant currency basis. Engineered Composites grew third quarter sales, nearly 37% compared to Q3 last year, driven by the ramp and LEAP engine and the CH-53K helicopter programs. Machine Clothing reported revenues that were relatively flat year-over-year on an as reported basis, while underlying constant currency revenue grew at 4%. On the bottom line, both segments achieved strong operating income and profitability, working hard to overcome inflation, supply chain challenges, recessionary forces in Europe, and a COVID slowdown in China. GAAP EPS of $0.34 per share includes a significant pension settlement charge that Steven will cover in more detail. Adjusted EPS of a $1.15 per share was significantly higher than the $0.83 per share adjusted EPS reported in Q3 of last year. Our Machine Clothing segment delivered another solid quarter. On a currency neutral basis, Machine Clothing grew third quarter sales just under 4% compared to Q3 of 2021. Through a combination of stable top line, disciplined cost control, supply chain management, and great factory execution, our Machine Clothing sector did a great job delivering gross margins of nearly 52% and adjusted EBITDA margins of 38%. We continued to meet our customer delivery commitments by managing supply chain shortages and long lead times and by balancing factory production to optimize output. We're starting to see some improvement in transportation and freight;…

Thank you, Bill. Good morning to everyone. Before I go into the results, I will note that late in the quarter, we completed the purchase of group annuity contracts to eliminate the liability associated with our US defined benefit pension plans. We first publicly disclose our intention to go down this path in our Q3 2021 10-Q. We believe that it was the right action for both our shareholders and our active and prospective retirees. There was a significant accounting charge of $49.1 million and a much smaller cash impact of $12.6 million associated with this transaction. This charge had a significant impact on our GAAP reported income and income taxes as I will discuss in a moment. We have excluded the accounting charge and associated tax effects for our adjusted EPS and adjusted EBITDA measures to aid investors in evaluating our ongoing underlying business. Moving on, I will talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year. For the third quarter total company net sales were $260.6 million, an increase of 12.1% compared to the $232.4 million delivered in the same quarter last year. Adjusting for currency translation effects, net sales rose by 16.5% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were up 3.8% year-over-year, driven by increases in packaging, pulp and engineered fabrics grades, partially offset by modest declines in tissue and publication grades caused by timing of customer orders and deliveries. Publication revenue remained close to 17% of MCs revenue this quarter. Engineered composites net sales, again after adjusting for currency translation effects, grew by 41.6%, primarily driven by growth on the LEAP and CH-53 cath platforms with much of the growth on the latter…

[Operator instructions] Our first question is coming from the line of Peter Arment from Baird. Please go ahead.

Yeah, good morning Bill, Steve and John. Bill, congratulations on the results. Just a follow up here on the MC margin kind of outlook. It seems like you are managing the inflation headwinds very well with the first three quarters and margins of kind of average 38% and just wondering, just when we think about guidance, just some of the inputs that would have you kind of at the lower and your range. I think that if the -- your EBITDA guidance for MC implies that you would be below a 30% margin in the fourth quarter if you at the lower end of your range. Just wanted to understand how you're thinking about that. Thanks.

Yeah, thanks Peter. Yeah, we've done -- the team's done a remarkable job and, we -- I think people like to think supply chain challenges are over, but we're still managing them 24X7. Our teams are working very closely across the supply purchasing, factory planning to adjust. So we are expecting cost pressure we are seeing, the inflation effects on wages and labors and the labor costs and expecting that to increase a little bit in the fourth quarter. We've done really good job of offsetting that with absorption with a little bit of price as we gone so far. I don’t know Stephen, you want to add to that?

Yeah, look, Peter, as we mentioned on a constant currency basis without some one time benefits, the margin this quarter gross margin was down about 160 basis points to last year. As we've said, that increases quarter by quarter both because inflation is increasing through the year and also as we're consuming product that was fabricated using that more expensive material. So, we'd expect a somewhat larger margin compression in the fourth quarter. I also mentioned we have some allowance for some downside risk in that business in the fourth quarter. Our job is to manage those risks so they don't materialize and not to be at the low end of the margin. But look, we think it is prudent to give that range because those risks exist and our job as I say, is to manage through them. So, we're confident, we can stay within the guides range, certainly not far below it. But there's always some risk on the horizon in the current environment.

Okay, and just as a follow up to that Stephen, thanks. Can you just update us on your, kind of your pricing, how that kind of rolls through? Is it more we would expect to see some of the pricing flow through as we get into next year and just to try to offset some of these headwinds?

Yeah, as we talked about before, we have contracts and with various terms and one, two, three years plus with our customers. So as we come to those contracts, we're managing those and those customers that we don't have contracts, we're obviously trying to get price with them as well. So we'll keep working that. I think it'll evolve over time. It's not just going to happen overnight.

As I mentioned to ICE Group, we have seen some benefit from pricing quarter to date and we expect to see a continuation of that benefit in the fourth quarter. But large slugs of our pricing is more sticky as Bill mentioned, requires an anniversary of a contract signing.

Yeah, certainly on the input side, we've seen price increases from our suppliers significant price increase from our suppliers we're working with.

Appreciate the color. Thanks guys.

Thank you. The next question is from Michael Ciarmoli from Truist Securities. Please go ahead.

Hey good morning guys. Nice results. May maybe just a little bit more on the guidance and to kind of stay where Peter was, what are the drivers behind the implied fourth quarter guidance? It looks like a pretty big step down across the board versus the results you've been putting up sort of the cadence on the third quarter. Is there more seasonality in there or just trying to frame up why the fourth quarter looks pretty weak?

So, look, there are a couple of factors in there. Looking at the top line, obviously we're going to see more impact in the fourth quarter from the week euro than we saw in prior quarters. It's now below parity. There's average to dollar six below this. That's significant step down. That brings with it obviously significant drop through margin of just the lower revenue in nominal terms. Secondly, there are mix effects that go on, partially driven by those currency effects and partially driven by just o other issues globally that gives us some pause and we try to factor that into our business. The fourth quarter, when you say seasonal, there's always a delicate dance around the end of the fourth quarter. It's a holiday period, Shipping becomes more difficult. So it's not uncommon for deliveries to slip from the end of the fourth quarter into the first quarter and if there's certainly allowance for some of that potentially happening again this year, which can cause a lower fourth quarter revenue and as I mentioned, the drop through margins are so high in Machine Clothing that significantly can significantly impact it. And finally, as I mentioned to Peter, just the rising input costs have continued to rise and so we expect to see more impact in fourth quarter than we saw starting in third quarter and we had the benefit in third quarter of $1.2 million to $1.3 million of onetime prior accrual reversals, which certainly benefited us as well and we expect -- we don't expect to see a repeat of that in fourth quarter.

Got it and just to follow up too, and maybe not to totally extrapolate this, and you're probably not going to give '23, but I would imagine some of the FX headwinds, and you're seeing, I guess the easing logistics, but should these cost, should we be thinking about these same trends going into '23 and I guess even what tying AEC, does the -- you've done really nice here in the recent quarters on the CH-53K, but is that going to be a headwind to revenues next year? Or can that program grow in '23?

Yeah, the first question, or the first part of your question, I guess is yes, we expect to see input costs. They've been going up, we're still looking at inflationary environment that hasn't -- we haven't seen that improve. So we, we will be planning for that as we go into next year, CH-53K this year, we're building up the additional work. We do some work already on the CH-53K with sponsors and vertical tail, and we're building a new production line. So there's tooling and machines going in this year, so it will grow next year, but pretty -- it's a different picture next year as we're looking at production. Yeah, so it, look Mike, a follow up, taken the last part first on 53K, and we talk now just about 53K in total externally, but if I go back to the two constituent parts, but the legacy work we had in the most recent app transition, the legacy work is certainly growing in production volume and it's a great program. It's continuing to grow and that program this year will be in the $50 million range and it will grow next year. The add on this year about transition, which will be also be about $50 million this year, a little more than $50 million, a large chunk of the revenue we recognize this year is one time tooling expense and non-reoccurring expense. Those who -- that program on which we will recognize revenue. Obviously that goes away next year, but we start to see growth in production revenue. So look net, net, so production revenue on both parts is growing where the non-recurring is going away. Last, when we spoke to you last quarter, we thought would be about a $100 million for the year and we said, look, we'll certainly shoot for getting somewhere close to that next year. We now expect north of $100 million this year on app transition, or I'm sorry, 53K in total. More in the $105 million, $110 million year. That number will go down somewhat next year. We're not going to hit $110 million on 53K next year, but we will see growth of other programs which will offset that. So 53K is still a great program. The underlying production is growing. We've just got this slug of one time revenue this year. On the first question just to ask what Bill said, we will next year see more of a benefit from pricing on the machine clothing side. So I don't think you should take, the margins that you assume based on our guidance for fourth quarter and just kind of drag that through the fourth quarter, the four quarters of 2023.

Okay. Okay. Just one more follow up and I'll get outta the way. Just on, you mentioned a lot on FX, you've got a lot of European operations. Are you getting a significant tailwind there to operating income or is the moving parts around rising wages, energy, everything else with operating European footprint, negating any of those potential up income or OpEx cost savings?

Well, look, if I think, just in aggregate, obviously, and I mentioned FTGNR was down to Machine Clothing because of the weakness of the Euro, but overall the top line is coming down. So, if the euro is weaker, the top line comes down, all of the expenses may come down. So I'm not losing if you like things, but on a transactional basis. On a translation basis, I'm still losing because the a $100 million of revenues a year ago is, worth only $80 million of revenues today and even if I generate the same operating margins, it's lower -- it's lower revenue. So I I'm not sure we're getting a huge tailwind to operating profit from that because the revenue is coming down by more than our costs are coming down. In terms of the other factors you mentioned in Europe, those are clearly a concern energy is increasing and there are all of those other impacts which are further depressing. So certainly I would not view in any way the weak euro is a tailwind or earnings. It is clearly a headwind. But it's -- that headwind is exacerbated by increased costs in Europe particularly energy right now.

Okay, perfect. Thanks a lot guys. I'll jump back in the queue.

Thank you. And the next question is from Pete Skibitski from Alembic Global. Please go ahead.

Hey, good morning guys. Nice quarter. Let me start guys, can you kind of reset us on where you're at with the 787 now that Boeing is delivering again and understanding they have a lot of inventory to clear, but it's a strong margin program for you. So I'm just trying to figure out what kind of ramp you see ahead now that they're delivering the aircraft again?

Yeah, I think I wish we were delivering again basically our production still idle. We didn't deliver anything in the quarter. So in that's the way it sits right now. So until we get further word from Boeing, that's where it's going to sit.

Yeah, I think, Pete, if you'd asked us six months ago, certainly nine months ago, we would've expected some nice rebound in 787 in 2023. While we still certainly hope to restart production 2023, I don't think we expect to see the same rebound we would've seen six months or nine months ago just to get the rate at which Boeing is, destocking their inventory. It's just not really fast enough to get production up and running in a meaningful way anytime soon.

Okay. That's helpful. I'm -- I just, I asked you that I wanted to get a better feel for kind of the AAC margin outlook because I think that, with a huge ramp you've seen in LEAP this year, to me the margins at AAC have held up pretty well, right? I think all in, maybe you're down a couple points for 2022 in EBITDA margins despite a huge ramp in LEAP and I'm guessing maybe, CH-53 maybe is a big part of that. And maybe, I know the LEAP will be up again next year, but we're hearing maybe not much of a tail from 787 and maybe a flattish CH-53. So maybe that for kind of a, I don't know, a flattish outlook for margins for AEC next year. Is that fair? Or are there other kind of strings you can pull on there?

Look, one of the benefits we'll get next year compared to this year in AEC, this year while CH-53K is generating a lot of revenue. As I mentioned, a chunk of that revenue is tooling. That tooling, while it absorbs SG&A, it does not absorb plant overhead because there's no labor involved in making it. We're buying it from a third party. We have a small amount of labor, obviously, in terms of scoping out the tooling. So it absorbs some engineering overhead, but it doesn't absorb plant overhead. And so the contribution margin from that tooling revenue is less than the contribution margin from manufacturing revenue. That tooling revenue goes away next year. A portion of it will be replaced by increased manufacturing revenue, which will be beneficial. So there are some tailwinds, certainly to AEC margin next year. We're obviously not in position right now where we're guiding next year. So I'm not going to comment on whether it's flat or up or side sideways, but it's certainly -- there are some tailwinds to that margin.

The timing of your question is a very good one. We're just about to go into our final annual operating plan reviews for next year, next couple weeks.

Okay. Yeah, no, that's helpful color on CH-53 there. I appreciate that. Last one for me guys on Chasm [ph], I know it's not a massive program for you guys in AEC, but a decent one, I think and we're hearing that they're looking at potentially different variants of chasm and maybe that program could expand. So I'm just wondering if, and so I'm just wondering if you have a feel for what that means for you guys? Are you seeing greater to mad signals for you guys over the next year or so?

We're pretty pleased with the Chasm program and I don't really want to comment on what the outlook is for next year, but I feel like we're in pretty good shape on it.

Yeah, we have a very good relationship with the customer there. Yeah. And so, as that program matures and develops, I expect us to mature and develop along with the customer.

Okay. Sounds good. Look forward to hearing the update next quarter. Thanks guys.

The next question is from Gautam Khanna from Cowen. Please go ahead.

Yes, good morning. Could you remind us who the customers are on the 787 for you guys? Obviously it's Boeing, but which subcontract manufacturers?

Yeah, So yeah, so we go through two intermediary customers, Spirit and Kawasaki Heavy KHI.

Okay. And they haven't provided visibility on when you would restart production?

Not that I know of.

Okay. on the LEAP program, we saw the GE numbers in terms of deliveries today. I was curious, like is there any kind of pinch point on your end in terms of continuing to ramp production and what are your expectations for next year's LEAP deliveries?

Any, pinch point? You mean any delays? No, we don't have any pinch points in our production. We've been ramping back up from a capacity standpoint, we've said this before when we built the capacity in 2019, we've continued to improve our productivity and efficiency and we have plenty of capacity to ramp up over time here. What was, the second part of the question? Does that answer your question?

That was the first part. The second part is what do you expect LEAP deliveries to be next year?

Yeah, we haven't -- we don't have next year's plan yet. So we can't really speculate on it, but as we did this year, we tend to set the whole year and try to level load the factory. So we'll go through that discussion with Saffron over the next couple months.

Okay. And at Machine Clothing, could you talk a little bit about channel inventory if you still see any access or are they just running with higher buffer and kind of what's the feedback from your sales folks who are close to that?

Yeah, we don't see, we don't see excess inventory in the channel. We're watching the end market. There's some -- there's a few signs around the world of some slowdowns and some of it being normal, we saw some flatness in the quarter and a couple of the grades which could be noise. But we're watching our orders have been good, coming out the third quarter, going into the fourth quarter. Demand we're watching, box and packaging demand around the world and see how that plays out as we've kind of gone past the Christmas season, demand for boxes as we go into the end of the year. So we're watching that right now but so far, so good.

And just lastly, at AEC, where are the largest content growth opportunities for you guys? Which platforms at this point?

So look, so as we, from this point forward, there's still growth in Leap Force. There's still growth for CH-53K once we get full rate production. As you know, we're still in low rate initial production on that program overall. Leaving aside for a moment, the fact that we're in start-up mode on the app transition, even on the prior content. It is low rate initial production will continue to grow over the next several years. There are several other programs that are out there that are nice growth opportunities that are smaller that we haven't talked about publicly. And 787 at some point will rebound and bring with it some nice growth. I wish I could give you date for when that's going to happen, but it will ultimately happen. That is still a great aircraft, its fantastic platform. It's a program that we're very happy to be on and we're happy to meet the demand for that once it recovers.

Right. But in terms of -- that's in terms of unit growth, but in terms of content growth, are there any things that you're there you can talk about.

Sorry, I misunderstood your question. Sorry. look, there are a variety of programs. Certainly, our pipeline is fairly full right now, a lot of defense opportunities in the near term, both miss out type programs and rotor craft type programs and there are several, if you like, other smaller commercial opportunities out there. So nothing we can really publicly talk about in terms of specific opportunities at this stage.

Yeah, I would think about it as a pursuit opportunity for us. If you go back in time and look at our demonstrated success, we were building the Boeing 787 frames. We won a new section on the aircraft that the pandemic slowed down, but that'll come around eventually but one more content with Boeing. We won more content on the F35, we're now up over, I don't know, 230 part numbers or something. And with Sikorsky, we've won more work with them with the big win being the App transition program. But the theme is that, we're very reliable supplier, we're a partner of choice. We work really closely with these companies, and so we'll continue pursuing more content with them. That's what the existing OEMs that we talk about publicly. There's a couple of others that we don't talk about publicly that we're working with as well.

Thank you, guys.

[Operator instructions] And we have a follow-up question for Michael Ciarmoli. Please go ahead.

Hey guys, thanks for taking the follow up. Just looking out, you're going through the planning period now for '23, but, you guys had that $450 million in revenue EAC out there. Is that -- as you're looking at the landscape here, with 787 LEAP, is that still doable or how are you guys thinking about that?

Yeah, look, I'm not going to provide guidance three months early on 2023, but that number out there nine months ago or six months ago, I guess. Look, as I mentioned, I think on one of our prior calls there are puts and takes every quarter. Obviously the biggest negative we've seen from when we first put that number out is 787. As I mentioned, we wouldn't expect that to recover to the same extent we would've expected six or nine months ago. But there are some things which have moved the other way. Look net, net, net, I say there are puts and takes and we'll update you on that in three months time. Certainly we -- everything suggests to us right now that AEC will have a solid 2023 with great results. But we're not prepared to issue guidance at this stage.

Thank you. And at this time, there are no further questions.

Thank you, Luis. Thank you everyone for joining us on the call today. As always, we appreciate your continued interest in Albany International. Thank you and have a good day.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T event conference and you may now disconnect. One moment, please.