Good day. Thank you for standing by. Welcome to Albany International Business Update Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star one one again. Please note that today's conference is being recorded. I will now hand the conference over to your host, JC Chetnani, VP of Investor Relations and Treasurer. Please go ahead.
Thank you, Livia, and good morning, everyone. Welcome to Albany International's Guidance Update conference call. As a reminder for those listening on the call, please refer to our press release issued early this morning, detailing our updated full-year guidance. 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 our SEC filings, including the Form 8-K SEC filing of October 3rd, 2024, and our previously filed Form 10-K.
Now, I will turn the call over to Gunnar Hovland, our President and CEO, who will provide opening remarks. Gunnar?
Thank you, JC. Good morning, and welcome, everyone. Thank you for joining our call to review and discuss our earnings pre-announcement, which was detailed in our press release filing earlier this morning. I'll provide an overview of our business performance and the key drivers that have resulted in us revising our full-year guidance. Rob will then provide details on our revised financial guidance. As highlighted in our press release, we have decided it is appropriate to provide an update to our full-year earnings guide, largely due to changes in our 2024 outlook for our Albany Engineered Composites segment. That said, I want to assure you that we're focused on improving the operations so that we can deliver on the full promise of the business, and that we now have the right team in place to do that.
The changes in our outlook are driven by changes in assumptions on a few key aerospace programs, combined with the decision to defer a portion of the planned material receipts at our Salt Lake City facility. As part of our normal quarterly EAC review process, we have adjusted a number of our program assumptions to reflect the performance challenges we are encountering on a few of our large, complex aerospace programs. The revised estimates reflect our current view on how the programs will perform over the life of the contract. Given the size and long-term duration of these contracts, a modest change in assumptions results in a meaningful current period charge. Before Rob reviews the details regarding the items impacting our aerospace outlook, I want to comment on the condition of the overall business.
Albany's business segments are each leaders in their respective industries with excellent capabilities and the same underlying material science technologies. We are highly focused on serving our customers and have a strong reputation for delivering high-quality products on time. Albany will continue to invest in R&D to drive continued innovation, building future profitable growth. I'm confident we have the right leadership in place to execute our strategy. At AEC, specifically, in spite of these forecast adjustments, the business remains very well-positioned with strong backlog and improving cash flow versus prior periods. Our bid pipeline remains robust, and AEC will continue to deliver value to its current and prospective customer base. With Chris Stone leading the business, we're confident that we will successfully execute on the opportunities in our growing aerospace business. Our Machine Clothing business continues to perform well in spite of challenging markets, most notably in Europe.
However, they're on track to meet their previous EBITDA guide. The Heimbach integration has been proceeding well, and we're confident in delivering the long-term synergies we have previously discussed. The leadership transition from Daniel Halftermeyer to Merle Stein is also going well. On a consolidated basis, we're delivering strong free cash flow, and our balance sheet is in terrific shape. We have significant balance sheet capacity to strategically invest in the business for the long term. We will provide more color on our Q3 business results and full-year outlook in our Q3 earnings call. At this point, I would like to turn the call over to Rob, who will review our revised full-year guide and discuss in detail the items impacting our results. Rob?
Thank you, Gunnar. Before discussing the changes to our outlook for our Albany Engineered Composites segment, I want to highlight that while we have lowered our Machine Clothing revenue guide, our midpoint estimate for Machine Clothing's Adjusted EBITDA remains unchanged. For AEC, we are reducing the midpoint revenue guide from $520 million to $490 million, and the midpoint of Adjusted EBITDA from $102 million to $70 million. A large majority of the reduction is due to net unfavorable changes in estimated contract profitability on our long-term contracts, most notably on our CH-53K program, as well as on our Gulfstream contract. Additionally, we are reducing the pace of planned material receipts at our Salt Lake City facility in order to improve manufacturing flow.
The components of the change to our Albany Engineered Composites Adjusted EBITDA outlook are as follows: An unfavorable change in estimated labor costs, combined with higher than expected material costs, totaling approximately $15 million on our CH-53K program. An approximate $7 million negative impact related to elevated scrap and labor costs on our Gulfstream contract. An approximate $6 million negative impact relating to the timing of material receipts at our Salt Lake facility. We anticipate receiving these materials in fiscal 2025. An approximate $2 million impact arising from reduced Boeing demand on the LEAP and 787 programs, and approximately $2 million relating to changes in other forecast assumptions across other programs. Now turning to our revised 2024 full-year guide. We expect total company revenue to be between $1.22 billion to $1.26 billion.
An effective income tax rate of approximately 27%. Capital expenditures are projected to be in the range of $90-$95 million. Adjusted Diluted Earnings Per Share will be estimated between $2.90 and $3.40, with our second half earnings per share weighted towards the fourth quarter. Total company Adjusted EBITDA between $230 and $250 million. Machine Clothing revenue between $740 and $760 million. Machine Clothing Adjusted EBITDA between $235 and $245 million. Albany Engineered Composites revenue is forecast to be between $480 and $500 million, and AEC's Adjusted EBITDA is forecasted to be between $65-$75 million. Now, I'd like to go ahead and open the call for questions. Operator?
Thank you. Ladies and gentlemen, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, simply press star one one again. Please stand by while we compile the attendee roster. Now, first question coming from the line of Michael Ciarmoli with Jefferies. Your line is open.
Hey, good morning, guys. Thanks for taking the questions. Rob, I guess you just elaborated on some of the programs there. You know, you had the charge last quarter as well. Were there any new programs or was this kind of just an extension of more challenges across all those programs you took the charges on last quarter?
Yeah, I mean, Michael, it's a good question. You know, in the prior quarter, the programs that I mentioned also did have some negative impact. There was definitely some Boeing impact last quarter as well. So this quarter, it's really looking at, you know, as we went another quarter, you know, how the labor rates and the bill of material was shaping out on the CH-53K that drove the majority of this change. We're also seeing challenges on the Gulfstream contract that we mentioned. You know, those are really the two programs where you've seen the vast majority of these adjustments on the EACs. And, as you can appreciate, we have a lot of eyes on this.
I mean, this is part of our normally quarterly review, and, as Gunnar mentioned in his prepared commentary, these are, you know, in particular, the CH-53K is a very large program, and, this cumulative adjustment on that program represents a very small percentage of the overall contract value.
Okay. Okay. And then just, you called out the LEAP and the 787 . You know, what actually drove a charge on the LEAP, considering that's cost plus? And is there any real impact here from the Boeing strike? I mean, it would seem like, you know, 787 not impacted by the strike. You know, what's kind of, you know, what are the knock-on effects from the strike, if any?
The strike is reducing some of the demand that we're seeing. And on the LEAP, you know, while it's cost plus, you know, not every cost is necessarily cashable, you know, recoverable under that contract. So there's... And a lot of this is really overhead impacts that we're seeing in the business across even some other programs, but it's being driven by reduced Boeing demand in the near term.
Okay. So you're already seeing where's that reduced demand coming from? I mean, we're only a couple of weeks into the strike. You know, I think you guys might be the first ones to be publicly talking about it. I mean, are you seeing, you know, a slowing of demand from your engine OEMs? Is it more on the structure side, or, or what, what's driving that slowing?
We are in, Michael, we're in continuous dialogue with Safran, and as we've gone into this quarter, there's been the factors of the slowdown. This just added to it, so we took some action to respond to that.
Okay, but proactively, they haven't given a new production schedule yet to you or just trying to... I mean, obviously, you know, Boeing-
Like I said, we're in continuous dialogue with them. Right. This wasn't something that came up because of the strike. This happened prior to the strike, and with the strike, we made a decision together.
Okay. Last one that I had: You now have, I guess, within the past couple of months, you've made key personnel changes in both segments. I mean, did the AEC challenges sort of drive that change? And, I mean, I think it was earlier in maybe August, you made a swap at the Machine Clothing, but were these changes in response to kind of what's going on from a programmatic standpoint?
So Michael, I'm really excited to have Chris Stone join the team. He brings a capability that this company needs to do the growth that we have had and will have going forward. He has great experience, both from an operational standpoint. He and I have worked together for many years in much more complex systems than what we have, and his supply chain experience and knowledge of the whole aerospace business. So between the two of us, you know, I see a better sophistication on where we're going as a company. So very excited to have Chris here.
Got it. Okay, perfect. I'll jump back in the queue, guys. Thanks.
Thank you, Michael.
Thank you. And our next question coming from the lineup, Pete Skibitski with Alembic Global. Your line is open.
Hey, good morning, guys.
Hey, Pete.
Hey, guys. Hey, guys, can you talk about the Gulfstream issue? Just 'cause you guys don't talk about bizjet exposure too frequently. So maybe just kind of, I don't know if you're on the engine on some of the Gulfstreams, but could you talk about that more? And is it an issue of, you know, changes in end market demand in biz jets?
No, this is a program on the structure for Gulfstream. We're not gonna get into the detail, but it's a very, very difficult part for us to make, and we took that realization in this quarter, and we're working with our engineering team and our manufacturing team to overcome some of those challenges, as well as with Gulfstream.
Okay, so it's sort of a new engineering project. It's a new program, not something that's been in production?
We're very early in production, so this is a very long program, and we are only a few ship sets into the build. So we're going through the learning curve. We're realizing that we're not meeting that learning curve, and we're taking action to recover that. But we decided to take a not as steep curve as we had initially.
Okay, got it. And then for a couple of these different charges that you took, you guys mentioned supply chain. Could you talk about, is it raw material issues or something else? And just you guys are kind of seeing, you know, supply chain go the wrong way this quarter instead of, you know, I think across the industry the last year or so, we've, you know, seen modest improvements in the supply chain, but are you guys now seeing things go kind of in the opposite direction?
No, not really. We have, like everybody else, you know, with a large program like the CH-53K, there are a lot of parts, so there are always some issues. That's not necessarily the cause here. We've had material go through our factory. We're basically streamlining our factory to the rate that we're building, so we're slowing down some of the input. That's really what it is about, and I think I mentioned in an earlier call that the company has taken actions to own difficult parts to make sure that we had inventory. So we've had some exaggerated inventory in Salt Lake City, and so we're streamlining that now with a better supply chain visibility.
Yeah
... if that makes sense.
Yeah. Pete, the $6 million negative impact that I referred to on material received, that's really timing. And, I think what we're seeing as part of the material cost on the CH-53K is the realization that some of the material savings, right, just based on some of the contracts we've entered into, we're not gonna get to where we earlier had estimated. So we're taking that into account right now, just based on where we are, contractually with our supply chain.
Okay, okay. And you guys, just so I'm clear, you guys are basically done with the engineering on the CH-53K, right? We're really in, like, early... I know you added content that you-- last year you did engineering, but at this point, you're sort of done with that part, right? And you're kind of more so in the low-rate production. Is that right?
Yeah, we're transitioning from low-rate production to full-rate production.
But yes. Yep, Pete, yeah, the NRE spend is behind us.
Okay. Okay. Thanks, guys.
I think, I think it's worth noting here, though, that we are, you know, part of what we took over was from a failed, failing supplier, and so we took over this, very large and complex program in the middle of a ramp-up. So not only did we have to learn how to build it, we have to ramp up very aggressively to meet the schedule of Sikorsky. So that has been a factor in this as well. But the team is doing a great job with that. We'll get our learning curves once we stabilize.
Okay. Okay, makes sense. Thank you.
Thank you. And our next question coming from the line of Gautam Khanna with TD Cowen. Your line is open.
Yeah, thanks. Good morning, guys. Just to follow up on Pete's Gulfstream question, I'm just curious, do you guys actually have a solution? Like, are you able to manufacture these parts better now? Like, is there an identified path to improving, or is this something that's still in discovery? I'm just curious, like, do you have an answer on how to make this yet efficiently or not?
Yeah, I think it is. It's a good question. I, you know, we are producing it. We have produced several ship sets, so we are capable of producing it. We're not producing it at the rate and the hours that we predicted. So we're working with our internal team and with Gulfstream to get to that, both the rate and the hours. But that's.
Okay.
That'll be a success story for both, for both sides, right? So there, there's still work to be done, but we are producing.
Okay. And do you? It sounds like most, if not all of these impacts were at the Salt Lake facility. Is that true, or does it extend to the other facilities in New Hampshire, Mexico?
This is largely almost entirely in Salt Lake.
Yeah.
So that's where all our effort is, and also where Chris Stone has been spending most of his time after he started.
Gotcha. And I'm just curious on the timing. You mentioned, you know, you do these EACs every quarter. This quarter, we had a number of them, you know, across a number of programs. What changed in terms of the methodology of looking into the EACs and if at all?
Yeah.
Like, why all now?
No, yeah, no, Gautam, I mean, we have ups and downs across all of our programs every single quarter. They just, you know, usually are not of this magnitude, and I think really what's changed is, as Gunnar talked about, I mean, our EAC review process has not changed. We have a very robust process involving, as you would imagine, operational finance, operations, corporate finance. Our Chief Accounting Officer, myself, as part of the corporate control process, we review the EACs with the full team each quarter, reviewing all the assumptions and the projections. So nothing has changed there. What has changed, as Gunnar mentioned, is, you know, we were accelerating up the steep part of the ramp, and the labor hours just were not getting there.
The material costs, as we build out long-term agreements across the BOM on a number of areas on CH-53K, the savings estimates did not come through as expected. So now that we have data, we're able to to update the EACs accordingly. And as I mentioned, you know, the, the charge, the catch-up is large, but that's a, a function of the contract size as well, and the fact that these are very long-dated contracts with multiple years to go. So, you know, we're, we're clearly not pleased to to have to to announce this, but this is, as, as you well know, not, not an uncommon, state of, you know, situation for an aerospace company.
Especially for us, given the fact that we have a handful of very large programs that are in ramp relative to the size of the company.
Gotcha. And it sounds like in none of the cases is this, like, impacting the customers, right? It's not. It's a, it's contained at Albany. The customers are still getting the product.
Yeah.
The quality is okay. It's just what it's costing you guys. Is that fair?
Yeah, we're continuing to deliver to our customer and a quality part, and that is very, very important for us.
Great. Thanks, guys. I appreciate it.
Thank you, Gautam.
Thank you, and our next question coming from the line of Peter Arment with Baird. Your line is open.
Yeah, good morning, Gunnar and Rob. Thanks for the update.
Hey, Peter.
Hey, Rob, just a clarification. On the material receipt, the $6 million you mentioned, is that included in the $15 million you mentioned? Sorry if you repeated this, just because I dropped from the call for a second.
Oh!
Thanks.
No worries. No, no, that, that is separate from the material cost. The, the material cost is really our updated expectation on the material cost for CH-53K over the life of the program. The, the negative $6 million impact relating to the timing of receipts, so under percentage of completion accounting, as those materials are received and then assigned to a program, we would recognize, revenue and, and associated margin on that. But because we are, choosing to delay the receipt, as Gunnar mentioned, to, to let the manufacturing flow improve, we're gonna be pushing those receipts out until next year. So it's timing.
Got it. And okay, yeah, timing. Thanks, thanks for that clarification. And just on the Gulfstream contract, maybe I just haven't heard you guys talk about Gulfstream work out of Salt Lake before. It's always been around, you know, F-35s, you know, CH-53K or 787. Have you called out exactly what the program is or related work with it? Thanks.
Yeah, we have not called out exactly what it is or which program at Gulfstream, but it's a new development. I can say that we took that over from another failing supplier, and so we're going through the ramp-up and development at the same time.
Got it. Okay. Appreciate that. And then just lastly on pretty minor impacts, I guess, on the 787, any. So it sounds like, Gunnar, just this is all tied to Salt Lake and not no material impact from LEAP, but it seems like just because of your contract structure there. Is that correct?
Yes, that is correct.
Yeah
... Peter.
Perfect. Thanks, guys. I'll jump back in queue. Appreciate it.
All right. Thank you, Peter.
Thank you. I am showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Gunnar Hovland, President and CEO, for any 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, that is our conference for today. Thank you for your participation. You may now disconnect.