Okay. Let's get started. I'm Chigusa Katoku, a multi-industry analyst at JP Morgan. Today, I'm very excited to have with me Willard Station, CFO of Albany International. I think I have a bunch of questions. We'll just jump right in. Yeah, Aerospace is obviously really topical right now, so a lot of my questions are gonna be focused on AEC. Maybe just first starting off with the most recent quarter, the fourth quarter, the top line at AEC was really strong at 45% organic growth. Can you kind of unpack this for us between the material pull forward that you commented on, some accounting nuances, and then what's like the actual underlying demand trends that you're seeing here?
Sure. Overall, you know, we had a solid Q4 within our AEC business. A way to think about it, there was three primary drivers. First being we had, you know, across the portfolio, we just had solid performance across each of our programs across the portfolio, and that was largely driven by LEAP, BETA, and then our Boeing one-piece frame. Secondly, I would say we had a quarter finally with no EAC adjustments or cost growth, which impacted our performance that we saw in the prior year. Third, I would say we have the material pull forward, which was aligned with the ramp-up that we're seeing in our overall business. If you look at our current production rate, we're expecting revenues to be about $120 million per quarter.
In Q4, we're at $143 million, and we're not expecting that to repeat, as we look into fiscal 2026, but we will continue to see some steady improvements and ramp-ups throughout the year. Overall, the business performed very well in Q4. I'm really pleased with those results.
Okay. That's great to hear. If there weren't those nuances like the material pull forward, etc .
Mm-hmm
Can you break down how much the organic growth was or not something that you would break out?
Yeah, I would say if you want to think about it, I would break it into thirds.
Mm-hmm.
I would say a third of it was just solid performance with the programs. We had a third of it driven by the fact that we didn't have any material EAC growth in the quarter, and then a third was just the accounting treatment with the material pull forward. Surely we're seeing some organic growth driven by the ramp-up in LEAP, and then there are some rate ups in BETA as well, but I would look at it in thirds.
All right. That's super helpful.
Yep.
Shifting to the first quarter, AEC organic growth is implied around 5% at the high end of guidance. Compared to the fourth quarter, this kind of deceleration, but what is driving this?
What's driving the growth?
Yes. The first quarter, you gave guidance for the first quarter AEC organic growth.
Mm-hmm.
It's implied around 5% even at the high end of the guidance. Is this conservatism or what's driving this deceleration from the fourth quarter?
Yeah. I think so. I think what we provided in Q1 is more reflective of the ramp-up that we're gonna see throughout the year. We're gonna start Q1 with a modest growth rate, and again, it's driven by the program ramps. As those programs ramp up throughout the year, we'll continue to see stronger growth throughout the year. The pacing item for AEC in Q1 specifically is just we're aligning with the program ramps. The growth we provided is in line with the ramps that we expect to see across the programs for Q1. Then again, it's gonna ramp up as we perform throughout the remainder of the year.
That's super helpful.
Yeah.
For the full year, do you expect about high single-digit range organic growth for AEC?
No, I don't think I would say that.
Okay. You're not gonna comment. Okay. Okay, that's fine. Moving on to margins, I think on the conference call you mentioned 10% margins.
Yep.
Can you clarify what part of the business that is about?
Yeah. We're referring to AEC. If you go back to Q3, margins are in at about 9.7%, and then in Q4, we came in at 13%. Again, Q4 was driven by some of the performance items I mentioned earlier. As we look at our performance for the full year, we're expecting our range to be within that 10%-13% for our AEC business. Now, once we make it through and complete the strategic review of our Salt Lake City site, we will have better quality of earnings for the remaining programs. Now, obviously, we gotta go through a transition period where we work through the fixed costs and the stranded costs.
Once we complete that, we're expecting the overall margins for that business to be in the mid- to upper teens% for AEC, which is solid performance.
Mm-hmm.
Very solid performance.
Sounds great. That's a great segway. Maybe just talk about the progress on the structured assembly business exit. Maybe can you talk about first a reasonable timeline here?
I would just say this, it is the top priority for the business. We believe divesting this business is gonna drive greater value for Albany and our shareholders, as well as drive greater value for that site itself. We have invested in that space quite a bit. It's a well-capitalized site, tons of automation and technology, and I'll tell you, the team there, strong manufacturing, strong operational background, and we continue to deliver to our customers and support the war fighter, which we're very proud of what we've done at that site.
As we look forward, you know, once we divest the Salt Lake City business, which is again a top priority for us, we're then gonna start working through those stranded costs, those overhead lingering costs, and then focus more on the high growth areas, aligned with our 3D weaving technology, where we see very strong economics and we see very strong market demands. You know, our strategy is to really focus on that technology that distinguish us from our competitors, where we have strong IP, and where we're seeing a lot of demand for. You know, the margin profile for our programs, aligned with that technology is solid. We're going to continue to invest and grow that and make that a focus as we move forward for the business.
Okay. That's great. I have a few follow-ups on that. Firstly, can we expect maybe by year-end? Is that kind of a reasonable timeframe?
I mean, like I said, it's a top priority.
Mm-hmm.
We're all focused on it. We have strategics, private equity. We've seen a lot of interest in that space, well-capitalized site, a lot of capabilities. There's over 11 autoclaves at that site. It's a top priority for us. We're gonna keep pushing forward. I can't comment to say we'll be done by the end of the year, but we're giving all our efforts to make sure we can transition and divest this space as quickly as we possibly can.
Okay. Sounds good. On the stranded cost comment.
Mm-hmm.
About how big do you expect that to be, and how many months do you expect it take to drive that down?
That's a good question. We're still working through that. We've hired an accounting firm to help us kinda work through identifying the stranded costs. They're in the final stages of completing their analysis.
Mm-hmm.
It's just gonna be a focus, right? Working through that stranded cost is gonna be a key focus for us. We're anxious to share and show the true value of the business once you separate Salt Lake City and really look at what's remaining. It's a strong quality of earnings, we know that. We have to work through their stranded costs, and so it's a top priority for us. We're not gonna do it incrementally, so we're not gonna wait until we divest the site and then start tackling the stranded costs. We're gonna start tackling as soon as we get through the analysis from the accounting firm and start positioning ourselves to be ahead of the curve instead of behind the curve as we work through the divestiture.
Okay, that sounds good. This year, margin's probably in the 10%-13% range, even as you kind of-
Absent any additional EAC issues.
Okay.
Yes.
Absence. Although you'll maybe start to work down some of the stranded costs beforehand.
Yep. Yes.
Ultimately, maybe it's not right after you divest in 2027, but maybe 2028 onward, you, your AEC margins could potentially be in the mid-
Mid-
to high-teens range.
Yeah, yeah.
Okay.
Yeah.
That's helpful. Building off of that, can you kind of help us understand the AEC business competition today a little bit better? We know that LEAP is about 35% of AEC sales, and then CH-53K is the second largest. Can you remind us of the revenue contribution from CH-53K today?
Yeah. I don't think we've shared revenue by program. That's not something that we've shared. I can say, though, as we work through the divestiture, obviously LEAP will be a larger portion of the company's revenue as we move forward. Then in addition to that, you know, we're seeing a lot of interest coming in for additional 3D weaving opportunities for the business. The pipeline is strong in terms of growth and opportunity as we move forward. We haven't shared any program-related revenue by business and so yeah, we'll not share that.
Okay. That's fair. Maybe can you kind of rank contribution, after LEAP and CH-53K, maybe if you can rank the contribution from Boeing one-piece frame, GE9X Engine, F-35 JASSM or LRASM, AM, Space, Hypersonics, all these businesses, if there's any way you could help us?
The Boeing one-piece frame would be part of the site and what we're divesting for the AED site, right? You have some of the beta, large structure beta work would be part of the divestiture. Boeing one-piece frame will be part of the site in the divestiture there. Obviously, you got the CH-53K, and you got a little of the F-35 work. We have beta and F-35 work at our Boerne, Texas site as well, so it can get a little bit confusing. Boeing one-piece frame won't be part of what I would say would be the growth as we move forward. JASSM, LRASM, LRSO missiles obviously will be part of our growth as we move forward, along with LEAP.
I would say each of those programs, you know, are adding tremendous value to our business. LEAP, obviously, with the projected rate up over the next few years, is gonna be a bigger portion of our revenue for the overall business. Any further breakdown, we haven't provided with JASSM, LRASM, LRSO, and all the other remaining programs. We haven't provided that level of detail.
Yeah. That's fair. After the structures business assembly exit, your portfolio, your AEC portfolio is going to be close to half LEAP, is what I estimate. Then you also mentioned some missile exposure.
Mm-hmm.
I think, maybe I just wanted to dig into this. Is there any way maybe you could help us understand your percent exposure to missiles and space too? These are kind of really growthy markets.
I would say space and missiles, they are a meaningful and growing portion of our business, and obviously we're seeing, you know, new business opportunities as we look forward. We haven't provided any percentage breakdowns of what that looks like for us and so, we're not ready to talk it at that level. We're seeing a tremendous amount of opportunities there. Again, it's just another example of where we're leveraging our 3D weaving technology in growing markets that have great returns. We're excited about what we're seeing in that space, and we're excited about the role that we're playing today, and we're looking forward to capturing those new businesses opportunities that are on the horizon. I think we're well-positioned there.
The business today, I would say it's steady, but we're seeing a lot of opportunities for growth.
Makes sense.
Yeah.
It's maybe like still low single digit percent exposure.
You try and get an answer out of me. No problem. Yeah, I'm not sharing.
Yeah. Okay, that's fair. Yeah, so you touched on the 3D weaving opportunities.
Yeah.
Maybe can we get an update on how it stands right now in terms of how big they are? I think LEAP is the biggest, and then when Boeing 777X begins full-scale production, you'll be supplying two fan cases for GE9X.
Yes.
You have EVTOL space, hypersonics, et c., but if you can give us an update on how big this 3D weaving is today and how big it could get.
I'll say this, it's a healthy pipeline. As you mentioned with the 777X, the fan case there, we're excited for the opportunity to be a part of that. Obviously with LEAP, I think year to date we've provided over 200,000 or so LEAP fan blades. So you think about that. Over 200,000 x we have replaced titanium with our composite 3D weaving capabilities. It's exciting, and we're seeing additional applications as we move forward. We have an interest from all the major engine OEMs. We haven't, you know, obviously done any business with them yet, but we have interest coming in from all, I'll say, the major engine OEMs. We're seeing a very healthy pipeline.
If you think about, you know, the strategic review and the position we took with our structure business, you know, a lot of that was we see more value, greater value, greater returns, greater growth, when we focus on that 3D weaving technology. The marketplace seems to be responding very well to our technology. We are in a position with leading capabilities. We believe we can drive the price point that we desire in this space and, yeah, we're just looking forward to the growth opportunities.
Yeah.
Looking forward to the growth opportunities.
Yeah, it's definitely exciting, and I've visited your 3D weaving facility.
Mm-hmm
It was very impressive. I feel like for you, more the near-term execution, especially given you've already had those AEC adjustments, for the past year.
Yeah.
I think people pretty much agree that the long-term story is very exciting, and so I think it's more about the near-term execution.
Yeah, we have to get through the strategic review.
Yeah
With the CH-53K program. The good thing, as I mentioned earlier, we stabilized the site. We're delivering today. Our team, strong team, they're producing the Aft section. They're meeting our commitments on the legacy contract that we have there with the sponsons, horizontal H-stab, et c. The team is performing well today, and we have very, very strong operators, and it's a well-capitalized site. But when you think about us and our strategy and where we want to focus and grow as a business, it's just not aligned with that focus and growth. Our goal is to unlock the maximum amount of value we can for our shareholders. Yes, working through that strategic review is going to be a top priority for us. It is the key focus for us.
Since we mentioned it in Q3 till today, we have made it a top priority as a business. All the leaders within the business are focused on divesting that site.
Yeah.
Yeah.
Sounds good.
Yeah.
In the third quarter, you recorded a charge for the remainder of the life of CH-53K.
Yes.
It was a pretty meaningful charge, but it was very nice to see in the fourth quarter you didn't have any EAC adjustments. I guess my question is that comprehensive, the charge that you took in the third quarter?
Yeah.
that we won't see those.
It's a firm-fixed-price development program for those who are not familiar with it. Under the rules, once you get into a loss position, you have to recognize those losses for the duration of the program. What we estimated in Q3 was estimating eight years out what our labor and material impacts would be for that program. I'll say we did it in a very conservative way. We removed any type of performance improvements that were already baked into the estimates. We assumed that we were gonna get hit by the majority of the labor and material cost growth. You know, we want to be conservative.
We want to ensure that we covered our cost exposure for the next eight years, and that's the approach that we took. I believe it was the right approach because as you mentioned, we had Q4, and there was no additional EAC issues or growth on that program, which now allows us to really showcase, okay, here is what the rest of the business looks like, right? In Q4, we had margins of about 13% for AEC. I believe we're gonna finish this year in that 10%-13% range. Then once we exit out of the strategic review and work through those stranded costs, you know, we'd be mid to upper-teens .
Our goal is to really give our investors an insight of what the remaining business look like and how healthy the 3D weaving technology is for us and how well we are performing. We conservatively went into that Q3 record forward loss. We want to kinda get rid of the noise that was around CH-53K, which really was hindering showcasing just how well the team is performing.
Yes. That sounds great. Maybe we'll shift a little bit maybe on the raw material topic, just to touch on this because inflation has been topical recently. Can you talk about your raw material basket and kind of if you're seeing any impacts to margins from this?
I'll say this. It goes back, I hate to keep talking CH-53K. At some point we're gonna stop talking CH-53K. When you think about our business, CH-53K is the one program where I would say we are locked into a firm-fixed-price agreement over, it was a 10-year contract. Meaning whereas we saw our cost increase, whether it be material cost, labor cost, we really didn't have any remedies in the contract to adjust and reprice. As we look at the remaining business, we don't have that type of condition. We don't have any long 10-year type fixed price agreements. As we continue, if we see cost pressure, inflation, whether it be oil, whatever, we see any type of those type of cost pressures, moving forward, we will have the ability to reprice in our current agreements.
There could be some near term increases in cost, but we're not expecting it to be meaningful. On a long-term basis, contractually we have the remedies in place where we can go in and reprice and acknowledge that cost growth, and make sure that we're passing that cost growth over to the customers and not absorbing it as a company.
Makes sense. Is there like a lag, a typical lag that you can talk to pass through pricing?
Today, I would say right now we're not seeing any signs of any lags today. There could potentially be some in the future, but right now we're not seeing anything that will suggest that we'll have any type of meaningful EAC impacts to our business.
Okay.
Yeah.
That sounds good. Maybe touching a little bit on your other business, which is actually bigger, it's 60%-
Mm-hmm
of sales. Machine Clothing starts off slow in 2026. You mentioned that you could make up the lost volumes for the remainder of the year. Do you expect this business to grow this year, or it's kind of?
I would like for it to grow.
Yeah.
We'd like all our businesses to grow. When you look at Q1, I think you got to keep in mind we had a significant equipment failure, right? We discussed that on a call. We had an equipment failure for Machine Clothing in Q1, and that's impacting our performance for Q1. We're expecting to recover that throughout the year. So far today we have the equipment up and running, and it's performing fine, which is good. So we expect that to recover, again, for the remainder of the year. I will say overall, you know, there's kind of mixed demand across the geographies in Machine Clothing. In North America we have stability through the fourth quarter, but our order intake was pressured during that same period due to the industry consolidations.
In Europe we saw a strong recovery in the fourth quarter and signs of stability coming from a down cycle. It's really what we're seeing in Asia and particularly in China, where you have that overcapacity, and we have a limited, you know, view of what's gonna take place within China for the remainder of the year. We can say that we saw stability in Q4, which was good. We're expecting as we think about fiscal 2026 and the performance of that business in fiscal 2026, we're expecting it to be flat to what we saw in fiscal 2025. That being said, you know, Machine Clothing is a steady, predictable cash flow business, and we're expecting that cash flow to be similar to what we saw in 2025 in fiscal 2026.
Okay.
Yeah
MC top line flat versus 2025.
Yeah.
Okay.
That's what we're expecting.
Okay. That's helpful. Yes, you touched on the cash point.
Mm-hmm.
Historically MC has really very good cash conversion.
Yes.
AEC was they've more a user of cash.
Yes.
How is that profile now versus MC versus AEC?
I think as you know, you know, AEC is the growth business. MC, as you say, a strong cash flow, stable business. We're leading in the marketplace, performing well. Customers love what we do on the Machine Clothing side of the business. AEC is where we see a tremendous amount of growth. We expect the cash conversion to be slightly below 100% as we move forward, and that's largely driven by the fact that we're going to continue to invest, you know, in our AEC business. You know, it's a high growth business with strong economics, and we're gonna overweight our investments there.
We expect at some point as the programs ramp up and mature and we get to a steady rate, that we'll see an improvement in the cash flow for our AEC space, but that's gonna take a little time, and we recognize that that's gonna take a little time. We do believe with the strategic review and the decisions we made with the Salt Lake facility, our AEC site specifically, we do believe that's gonna allow us to get to the other side a lot faster when it comes to our AEC business and overall performance.
Right now, is AEC a use of cash, or is it gen-
It's historically a use of cash. Yeah.
Yeah. That makes sense. Okay. Maybe just to talk about the portfolio.
Yeah.
You're trading at a discount to some of the parts. As you clean up these cost overrun issues, and you're looking ahead, you have a cleaner aero portfolio. It's not generating cash now, but are there any opportunities or do you get any interest for like a split up? Because your aero asset is pretty attractive, and MC is also stable cash cow.
Yeah. I would say, no, I'm not aware of any opportunities for a split-up. Quite frankly, we don't believe that will maximize value for our shareholders. You know, the way to think about our business is, yes, it's disparate end markets, right? The end markets are definitely different, but the technology is the same. It's the exact technology. The technology that's making us successful and positioning us for growth in our aerospace business was born in Machine Clothing. You know, sometimes when I walk through a Machine Clothing part of our business and aerospace part of our business where we're doing 3D weaving, sometimes I just close my eyes. When I close my eyes, I hear the exact same thing. I hear the exact same thing. You hear the weaving.
You hear the loom. It's the exact same thing. We're excited about having these two businesses together. We believe from a technology standpoint, from a financial standpoint, it makes a lot of sense to keep these two businesses together. We're looking forward to, you know, the growth opportunities for both. You know, Machine Clothing, yes, we've had some challenges, I would say, these past couple of years. We have plans to grow in that business just as well as we're gonna grow in our aerospace business. I don't think from a shareholder value standpoint, we would create greater value separating the two. The two belong together. The technology is the same.
I'll say overall, when you think about us, you know, we find markets, attractive markets with strong returns where we can land and expand our technology, we're gonna look for opportunities to land and expand that technology. It doesn't necessarily tie us to one space, which I think is good for us, good for our shareholders, and it's good for growth. Yeah, I mean, the two are joined. There is a connective tissue between the two. Many people don't understand it, but if you walk through a Machine Clothing production facility and the AEC production facility and you just close your eyes for a bit, it sounds the exact same.
Yeah.
Sounds the exact same.
Yeah. It's amazing. Yeah, the AEC technology is definitely coming from.
Yeah
Machine Clothing. I guess the end market exposure is. It's different, and the strategic initiatives are probably different too because one side is growing very quickly, and the other side is more stable.
Yeah.
For example, at MC, you guys bought Heimbach a few years ago.
Mm-hmm.
I guess the integration process and the margins that you're getting for it is kind of being masked by the overcapacity issues in China.
Yes.
How do you have focused strategic and capital allocation decisions for these two businesses? Because they're pretty different.
Yeah, I would say the AEC capital allocation historically has been focused on growth. It's been largely focused on growth, which is what you would see, for instance, with the Salt Lake facility. While I'd say it's well capitalized with 11 autoclaves, like, it has been focused on growth. Also been focused on growth within Rochester and where we're doing our 3D weaving and expanding that technology. MC business was more or less focused historically on sustainment, right? Maintenance and sustainment. Let's just make sure none of the equipment fails, right? 'Cause if it fails, it could be very impactful to the business. As we look forward, we're looking for growth opportunities within MC as well. You know, we're continuing to make advancements with our technology. We're continuing to see additional applications for that technology.
You know, one thing that we're doing now is we're challenging both segments to grow. For MC, we want top-line growth. We're not gonna get into 2026. I already mentioned that. For MC, we want to position that group for top-line growth, and so we're making investments in that space to achieve it. For AEC, it's the quality of the earnings, right? We want to improve the quality of the earnings. Yes, we've demonstrated we can generate top-line growth. It has to be profitable growth. The economics have to make sense, has to be cash flow, positive cash flow. We're continuing to invest in both. The focus is a little different for each of the segments, but growth is definitely a top priority for the businesses as we move forward.
Okay. That's helpful.
Yeah.
Maybe just stepping back. How many months has it been?
It feels like it's been a few years.
Yeah, there's a lot going on.
I'm six months in.
Since you started.
Six months in.
You're six months in.
Yeah.
And-
Still learning. I got a lot to learn.
Yeah, there must be.
Yeah. Yeah.
Just, like, what do you think you could bring to Albany that's different? Because it has obviously been in this situation for the past year with these crossover issues. To kind of move it in the right direction.
Yeah. I would say this. I think, one, I'll say I'm very proud to have the opportunity to be a part of this team. This team was already a strong team well before I got here. Gunnar our CEO, when he came in, he recognized some of the challenges and some of the strengths. Where we had weaknesses, he brought in leaders to kinda, you know, advance the business and move the business forward, and I was probably one of the final pieces of that vision for him. We have very, very strong operators within Albany. Many of them have been here for years and for decades, and they have set us up to do some tremendous things as we look forward.
The leaders that I'll say we have on the leadership team now, I think we all bring a tremendous amount of experience coming from larger companies, you know? I came from Boeing. We have folks there from Lockheed. Believe it or not, you got Lockheed and Boeing people working together. I never thought that'd happen. We're working together, we're teaming together, we're partnering, we're bringing in our expertise, we're aligning that with the folks who have been there before us, and we're making some tremendous improvements. You know, I'm excited about where we're headed. I'm excited, really excited about the technology and the focus on the technology. We're focusing on the things that really differentiate us in the marketplace, and that's how people should think about us.
As we make that the primary focus, and we're getting attention from OEMs and all sorts of, you know, different opportunities are coming forward, now it's about how quickly can we execute on those and really show what we can do as a company. You know, it's been six months. It's been a fun six months. I have learned a ton, and I'm really excited about the team that we have, the culture that we have in Albany, the technology. It's just a great place. It's a great place.
Yeah.
Yeah, I'm fortunate to be here.
Yeah.
Yeah.
The runway is definitely exciting.
Yeah.
It just really all comes back to how the CH-53K.
Yeah
this is going to work out. Maybe I just have a quick follow-up on this.
Mm-hmm.
Would a renegotiation of the contract terms with Lockheed be necessary for a sale to either appear-
No
Strategic to occur?
Contractually, no. Contractually there is
Would there be interest with the current contract structure with Lockheed from the buyers?
I think so. Yeah. I think when you look at one, it's an eight-year program, right? There's eight more years left on that contract. Two, it's a well-capitalized site, and so for some strategic buyers it makes a lot of sense. You know, try to get 11 autoclaves into a space up and running. It would take a few years to get there, and this has it today. You know, would a buyer wanna renegotiate the contract with Lockheed? They could. Do I necessarily have to renegotiate the contract to sell it? I don't. I think we are positioned to divest that regardless of how the contract sits with Lockheed today. It could be part of the buyer's strategy, but it's not something that's a requirement for us as we move forward.
Okay. That's because.
Yeah
Regardless of the contract structure of the asset, the, and the
I think the facility.
...
I think the facility is very, very attractive facility when you think about the capabilities, the automation that's there. Like I say, we had several strategics who are interested in the space now, and it's a very, I think it's a very attractive facility. Yeah.
Okay. Interesting. In theory.
Mm-hmm
Let's say you are not able to sell it.
Mm-hmm.
Given that you have already recorded these charges.
Mm-hmm
In the third quarter, will we not see any charges going forward, even if you are, you know, you still have it?
I hope your theory is completely wrong. I'll say this. We believe we did a really nice job estimating the labor and material cost growth over the next eight years. We believe we did a really nice job estimating that. Could there be some additional exposure or cost growth on that program? Sure. That's with all programs, you know? I can't predict what the future's gonna look like eight years from now.
Right now it looks like our estimate aligns with our production capabilities, and we're feeling confident in where we sit today. There's always the risk with a fixed price, long-term agreement of additional cost growth, especially if you don't have any natural remedies built into the program, into the contract, which we don't today.
Okay.
Yeah.
That makes sense.
Yeah.
Okay. I think we are at 12:05.
All right.
Thank you so much for coming.
Thanks for having me.
Thanks.
Thanks for having us out.
Thank you.
All right. Thanks.