Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2024 Albany International earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one. If you would like to withdraw your question, again, press star one. I would now like to turn the conference over to JC Chetnani, VPIR and Treasurer. You may begin.

Thank you, Desiree, and good morning, everyone. Welcome to Albany International's fourth quarter 2024 earnings conference call. As a reminder for those listening on the call, please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking and contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to both our earnings release of February 26, 2025, as well as our SEC filings, including our 10-K. Now I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar?

Thank you, JC. Good morning, and welcome, everyone. Thank you for joining our fourth quarter earnings call. I'll provide an overview of our business performance, and Rob will later discuss our financial results in detail, and then the outlook for 2025. We continue to perform well in both our businesses as evidenced by strong results at machine clothing and ongoing operational progress under new leadership at Engineered Composites. While we recognize additional EAC adjustments at AEC, the overall business fundamentals are strong, and we expect higher revenues and improving profitability over the next several years. For the full year, we reported record revenues of nearly $1.25 billion driven by organic growth at AEC and the Heimberg acquisition. Our focus on working capital and cash flow generated free cash flow of $59 million in the fourth quarter and $137 million for the full year, underlying the strength of the combined businesses. Our balance sheet continues to be in excellent shape, giving us the ability to execute our growth strategy. With the current and projected cash flow and strong balance sheet, we are able to return value to the shareholder as part of our capital allocation strategy. We have initiated our share repurchase program. In the fourth quarter of 2024, we repurchased $15 million of shares. The board has also authorized a new share repurchase program which supersedes our current program and is now up to $250 million. Turning to our businesses, machine clothing revenues in the fourth quarter were slightly below the same quarter last year due to a strong comparative period. Our focus in the second half of 2024 was to consolidate our operations and discontinue unprofitable product lines, primarily at the Heimberg business. This is part of the integration plan, and while it leads to lower top-line growth in…

Thank you, Gunnar, and good morning, everyone. I will review our fourth quarter results and then provide our outlook for 2025. Before reviewing our fourth quarter results, I wanted to discuss an important change that we made in the fourth quarter regarding how we report global information cost. Previously, our global information system cost, or GIS, was shown in aggregate as part of corporate SG&A expenses. We are now reporting those costs at the segment level. It is our view that this better reflects the performance of the individual segments and is how we will review segment performance on a go-forward basis. Our consolidated EPS remains unchanged, and the individual gross margins for the individual segments remain the same, but our adjusted EBITDA margins for the individual segments will be impacted by this allocation. For Q4, we will discuss margins with and without the allocation for comparison, but starting in 2025, our conversation will focus on the margins including GIS costs. Consolidated net sales came in at $287 million, down from $324 million in the fourth quarter last year, primarily driven by lower revenue at AEC, which we will discuss further. Machine clothing net sales of $188 million decreased 1.9% versus the fourth quarter of the prior year, primarily driven by a comparison to a strong fourth quarter in 2023 in the packaging and publication grades in North America, offset with increased sales in engineered fabrics. AEC net sales of $99 million were lower versus the $132 million in the fourth quarter of 2023 on a GAAP basis, primarily due to a $14 million negative top-line impact from the EAC adjustments in the quarter, coupled with lower LEAP revenues of $10 million and lower 787 volumes of $2 million. However, we continue to experience growth in our space and advanced…

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue.

And our first question comes from the line of Steve Tusa with JPMorgan. Your line is open.

Hi. This is Chigusa Katoku on for Steve. Thanks for taking my question. My first question is on AEC. You provided an update on the CH-53K and Gulfstream where you've been seeing some challenges. But what's embedded in your 2025 outlook as to how these progress through the year? And then on the AEC margins, it's implied in, like, the 13.5% range for 2025 versus the 4Q exit rate of 6%. But how do you kind of expect the margin to ramp through the year? You probably can't get back to the 20% because of the cost reallocation. But can you get back to, like, the 17% range adjusting for the 3% impact that you mentioned maybe in the back half?

Well, so the plan for 2025 is with a current projection of performance at AEC. We believe that over time, we can, and with the adjustment from GIS, we can be in the mid to high teens performance. And it'll take us going through 2025, but our plan now with our current projection is as as as

Yeah. Chigusa. I just if I may. The way to think about it is these EAC adjustments that we've taken through the fourth quarter reflect our best estimate of the go-forward margins, which are reflected in our outlook of 13.5%. To Gunnar's point, we have a number of actions in place to do better than that over time. But I think it's just important to remember that the guide reflects an EAC that is our current best estimate as to how the program will perform going forward.

Okay. Thanks. And then as a follow-up on the free cash flow, you did well over 100% this year, which is great. But how should we think about that for 2025 and then maybe on a go-forward basis as some of these ramp issues are resolved? Thanks.

Yeah. No. No. It's a good question. You know, we expect cash flow to

range between, let's call it, $90 million and about $120 million this year. Our internal targets are to return net cash flow above 90% of net income in terms of our conversion, that's really what we target. And the team has done a phenomenal job at really attacking the working capital balances. So what you saw this year is probably a slight level of overperformance in terms of, you know, taking down the working capital. But going forward, and as Gunnar mentioned, with our new incentive comp structures, right, people are aligned to focus on cash and balance sheet efficiency.

Okay. Great. Thank you.

Thank you, Chigusa.

Our next question comes from the line of Peter Arment with Baird. Your line is open.

Yes. Good morning, Gunnar and Rob. Could you

Hey. This is Rob. Can Gunnar, could you maybe talk a little bit about you mentioned a more conservative kind of view on Boeing's production rates. Just trying to square that with, obviously, we're seeing higher potential rate breaks. Is it more of an inventory issue or just cautiousness just given the history that we've seen with Boeing in the last couple of years?

That's a good question, Peter. And it is a function of inventory that we're working through, but we are being cautious. And as I talk to others in the industry, I think we're not alone about being cautious about the recovery. It is like I said, it has some positive signs on what the delivery is, but I am cautious to see the actual move rate at Boeing before we make adjustments. And also on LEAP specifically, we're working with Safran. We're aligned on our build plan there, and we are continuously this is a month by month. I am beginning to be hopeful that there could be a ramp up towards the end of the year because there is light at the end of the tunnel. And next year is going to be a strong year. I firmly believe so the ramp-up there is what we're preparing for right now.

And, Peter, just one other thing there. Based on our manufacturing footprint and our experience with the program, we have the ability to ramp very quickly. So we have the flexibility to adjust to market conditions as they evolve.

Okay. So potentially cadence potentially higher in the back half of the year if need be. So, Gunnar, just also on the CH-53K, obviously, you've replaced the team there last year. You're feeling confident about that team. Just how do you talk about just kind of some of the challenges that you worked through this past quarter and how do we think about that, the improvement for that program as we go into 2025?

Yeah. The I would say in the fourth quarter, a lot of the actions there were with, you know, Chris Stone at the helm. He got in there, worked with our frontline leadership development with our training of our employees with the processes. The two areas of focus outside the factory were supply chain. The supply chain is quite extensive on this program with, you know, our internal supply chain much easier to balance than the external supply chain. And then the planning. So supply chain planning, training, and frontline leadership have been the key areas of improvements. And we've also made in the first quarter this year, we've made or added talent in those areas. So we have operational leadership that has a strong background in the assembly of complex aircraft, we have planning talent that has a strong background in aircraft assembly, and we have a new supply chain leader for AEC that also has a strong background in complex supply chain. So with the focus on the improvements as well as adding the talent in there, that's what gives me the confidence about the path forward.

Got it. Appreciate the call. And then just lastly, Rob, just around working capital, how do we think about that or cadence-wise for this year?

Yeah. We're going to continue to focus on working capital. I think what you're going to see is we're going to continue to make some headway on our working capital balance this year. We expect our net earnings clearly to be higher, minus all these adjustments. So once again, the team has just done a phenomenal job. And this is also, whether it's supply chain, working with our vendors and our customers. Right? Everyone's kind of chipping in. Excuse me. To continue to work at it. Because I think in particular, as we integrate Heimberg, we're finding opportunities of machine clothing as well to take down the working capital balances.

Got it. I appreciate the color. I'll jump back in queue. Thanks, guys.

Thank you, Peter.

And our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open.

Hey. Good morning, guys. Thanks for taking the questions. I guess just back to LEAP, thinking about where plant production is of LEAP volumes this year, I guess, up 15% to 20%. I think, I don't know if the math is exactly accurate. Maybe you guys are down 10% to 12%. So presumably, all destocking and is that how we should think about the inventory in the channel?

There's some destocking across the whole channel, and I would say that's per task, Michael. And then I, you know, we're ready for what happens in the second half depending on how the recovery and the ability of Airbus, frankly, to grow. Remember, Airbus is a major part of the LEAP program, and so we're monitoring that as well.

Yeah. And, Mike, just I mean, I'm sorry, you know, right? And last year, both Safran and GE had started the year in 24% to 25% growth expectations for LEAP deliveries. And that ratcheted down to where we ended, I think, down probably 10% or 15%. So when Gunnar mentions that we're being a little bit conservative, you know, that is really what we're trying to do is not get too far ahead and partnering with Safran. Right? They see the same thing. So and we have the ability to flex.

Got it. That makes sense. And then just on the new comp structure, Rob, maybe. I guess two questions. I mean, where I think you said total shareholder return was one of the bogeys there. But if I think about kind of the EACs you've taken, I don't know if you can share if it's your AEC margins have been sort of structurally pressured here. And why are EBITDA margins? I guess I interpret that as absolute EBITDA dollars being part of the bogey, but is it more challenging to think about EBITDA margins on a go-forward basis given some of the execution and even maybe other new start programs that we might not be aware of?

Yeah. So you know, if I think about your question, the long-term comp, right, as Gunnar mentioned, has an adjusted EBITDA component to it. And that level is set in conjunction with work with the board on our long-term plan. Based on, you know, which is going to reflect kind of the go-forward margin expectation for the business. And as you can appreciate, the plan is definitely success-oriented. I mean, it's definitely a target that is not easy to achieve. Right? The board wants us on our front foot. And, you know, that's and then the shareholder return, I mean, that is something that's new. I mean, I would say we did a lot of work with our outside compensation consultant to design a structure that should drive, you know, long-term shareholder creation, especially with the addition of ROIC. That is something in terms of capital efficiency on the balance sheet that we are very focused on as we deploy capital. So that is something that we feel really good about where that long-term structure is headed. And we really believe that diversifying the metrics will result in long-term shareholder value creation.

So if I may add, the EBITDA is dollar. And we have it in both the short term and the long term. So returns in the short term and long term remain important to us. We added the cash in the short term because we wanted to focus there on working capital, making sure that we converted our earnings to cash so that we could use it for all the other things that we're trying to do. But in the long term, the relative total shareholder return is an important metric for us, as well as the return on invested capital. So I think it is a much healthier setup for the long-term incentive. But we're both interested in how we spend our capital as well as the earnings that we make.

Got it. Fair. Alright. Thanks, guys. I'll jump back in with you.

Thanks, Mike.

Press star then the number one on your telephone keypad. And we have a question coming from the line of Jordan Lyonnais with Bank of America. Your line is open.

Hey. Good morning. Good morning, Jordan. Could you guys talk through how you're thinking about tariff risk, an increase in pressure just with trade for China? And is it contemplated in your guide? And if it is, to what degree?

Yes. I mean, I would say that uncertainty is high, and we're not making any reactions to the uncertainty right now. We're doing a lot of analysis on potential impacts and our reaction once a decision is made. The impact with China is de minimis. So, you know, we've done all of the hard staff work to be ready for this. Where it'll end up, I cannot predict, Jordan.

No. That's fair. I just wanted to see how you guys were thinking about it. Alright. And then two, on the new defense programs that you guys have coming up that you're ramping on, are you concerned at all with the new administration's focus on driving costs down? You'll see that pressure from the primes on those contracts?

Yes. I think there might be some pressure on certain programs. Which programs will be targeted is uncertain. Our position on those targets or on our programs, because we do have an increased focus on long-term contracts, I feel fairly certain about our stability in the long term there. The volumes could change. And I would say they could change in both directions depending on which program you're on. So we're watching that diligently. And, again, there's a lot of uncertainty. Nobody likes the uncertainty. But we are working through scenarios where we think that there might be exposure. Right? So this is taking a lot of our time, Jordan.

Alright. Thank you. Appreciate the time.

Thank you.

That concludes the question and answer session. I would like to turn the call back over to Gunnar Kleveland for closing remarks.

Thank you. And thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you, and have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.