In my letter to you last year, I wrote that our acquisition of Harris Corporation's aerospace composites business in Salt Lake City marked another branch point in Albany's "cash and grow" journey, and that with the continued focus of Machine Clothing (MC) on the right grades and customers and the enhanced scale of Albany Engineered Composites (AEC), the Company was well positioned for 2016 and beyond. One year later, I am happy to report that we remain firmly on track toward our cash-and-grow objectives, both near and long term.
As I have often discussed, our overarching objective in MC is to hold annual Adjusted EBITDA within a range of $180 million to $195 million. To do so over the long haul, we must overcome three sources of downward market pressure: digital displacement of the printing and writing grades of paper; pricing pressures around the globe, particularly in Europe and Asia, due to structural overcapacity in the MC industry; and cost inflation in the face of limited pricing power due to the first two factors. Our strategy for countering these 3 long-term market pressures remains unchanged:
- focus on the stable and incrementally growing geographic markets and paper grades;
- maintain investment in development of superior technology and products;
- continuously pursue incremental improvements in productivity, while periodically reducing capacity to maintain alignment with market demand.
During 2016, most of these market conditions and strategic responses were in full view. Sales declined 4% primarily because of the continuing erosion of the printing and writing grades, compounded by sluggish economic conditions around the globe and continuing pressure on pricing. Despite the decline in sales, we were able to hold Adjusted EBITDA at the upper end of our target range, thanks to a combination of strong new product and technology performance, particularly in the tissue, pulp and nonwoven grades; good plant utilization through the year, even during seasonal soft spots; and the cumulative impact on productivity of the 2015 restructuring and early-retirement programs.
For 2017 and beyond, we expect to see a similar interplay between these structural market conditions and our strategic countermoves. Printing and writing grade sales will likely continue to decline, pricing pressures will likely continue unabated, and inflation will likely continue to increase our costs. On the other hand, given our focus on the stable and incrementally growing grades, our product and technology advantage in those grades, additional productivity gains, and the prospect of some improvement in the global economy, we expect to once again in 2017 deliver Adjusted EBITDA well within our annual target range. After two years of performance at the high end of that $180 Million to $195 Million range, we think it is prudent to expect some regression in 2017 back toward the center of the range. But more generally, our experience in 2016 and early 2017 reinforces our conviction that unless and until the global economy falls into recession, our long-term view of this market remains accurate, our long-term strategy for competing in it remains sound, and our expectation of annual Adjusted EBITDA between $180 million and $195 million remains realistic.
AEC came of age in 2016. Sales nearly doubled to $200 million, and Adjusted EBITDA swung from a loss to $16 million. Although the legacy AEC operations performed well and grew by 30% in 2016, the addition of our Salt Lake operation had a significant impact, generating $67 million in sales and $9 million of Adjusted EBITDA after the close of the acquisition in April. Just as importantly, and as I discussed in last year's letter, the acquisition gives AEC the scale and breadth to be a more significant, visible player in aerospace composites, which is already beginning to translate into new opportunities for growth.
We made good progress in 2016 integrating Salt Lake into AEC; by early 2017, AEC was operating with a unified leadership team, one ERP system, and fully integrated business-wide functional organizations in finance, human resources, procurement, information technology and business development. Apart from integration, the overwhelming focus within AEC in 2016 was on meeting customer expectations in the key growth programs and across the full business portfolio.
As I have often discussed, our objective for the new AEC is to grow to at least $450 million in revenue and to 18% to 20% Adjusted EBITDA margins by 2020. Our ability to achieve if not surpass this objective is overwhelmingly a matter of execution. While the near-term market for some segments of the aerospace industry has softened (most notably business jets, business-related rotorcraft, and wide-body aircraft), each of our key growth programs are on aerospace platforms enjoying strong market demand. Realizing our 2020 objectives will not therefore require winning new business or overcoming adverse market conditions. What it will require is operational execution – maintaining our positions on existing programs by meeting customer expectations, while steadily improving margins through the classic process of continuously improving safety, quality, delivery, and cost.
AEC made excellent progress on operational execution in 2016, particularly in the programs that started to ramp in 2016, most notably the fan blades and cases for LEAP, components for the LiftFan® and airframe of the F-35 Joint Strike Fighter (JSF), and fuselage frames for the Boeing 787. These ramps will accelerate in 2017 and again in 2018, and as they do, so will the intensity of the requirement to continuously improve safety, quality, delivery and cost. Success here is within our control. As we remind ourselves on a daily basis, "It's all about SQDC -- safety, quality, delivery and cost."
At the same time that AEC is focused on execution on its existing programs, it continues to lay the groundwork for the next wave of growth through accelerating efforts in R&D and new business development. In our quarterly earnings calls during 2016, I described this as a three-front process: pursuit of incremental new business on existing aerospace platforms, development of opportunities on potentially new aerospace platforms, and probes into new markets outside of aerospace. In 2016, we experienced progress on all three-fronts: a new business win announced in Q3 with the potential for up to $20 million of annual sales by 2020, the potential for a new "Middle of Market" aircraft that Boeing is openly discussing, and our continued probe into the automotive industry.
So 2016 was another good year for Albany. As we turn to 2017 and the balance of the decade, my primary message to you, our shareholders, is that we are firmly on track toward our near- and long-term objectives. And barring unexpected downturns in the global economy, staying on track is mostly within our control. In both businesses, it is all about execution . . . which means it is all about our people, my 4,400 colleagues around the world, many of who are themselves shareholders, and all of whom I am proud to represent.
Joseph G. Morone
President & Chief Executive Officer
March 29, 2017