Q1 2016 CEO Commentary*
President and CEO Joe Morone said, "Q1 2016 was another good quarter for Albany International. Against an unusually strong Q1 2015, and despite a 7% drop in year-over-year MC sales, Q1 2016 Adjusted EBITDA held constant against Q1 2015. Both businesses again performed well, as MC continued to generate strong profitability and AEC strong growth. And, shortly after the end of the quarter, we announced the completion of our acquisition of Harris Corporation's composite aerostructures division, which effectively doubles the size and growth potential of AEC.
"Turning first to MC, there were no top-line surprises in Q1, as the trends of the previous three quarters continued. On a year-over-year basis, sales declined 7%, excluding currency effects, primarily because of the significant drop in publication sales that we experienced in several of our markets in the first half of last year. On a sequential basis, sales in the Americas, Europe and China were stable; sales in the growth grades were stable and reached 75% of total Q1 sales; we continued to perform well on new machines in the growth grades; and we were particularly encouraged by the performance of our new technology platform in development trials and product sales in the tissue market.
"Profitability remained strong as the combined effect of restructuring, productivity improvements, and lower material costs effectively offset the impact on Adjusted EBITDA of last year's large drop in publication sales.
"As for the outlook in MC, we do not expect any significant deviation from our expectation that full-year 2016 Adjusted EBITDA should be in the upper end of the $180 million to $195 million range. The normal seasonal pattern in this business is for sales to increase from Q1 to Q2, and for margins to decrease as annual salary increases are implemented. Last year's unusually strong sales in Q1 notwithstanding, we expect a return to the normal pattern this year. Q2 sales should improve somewhat over Q1 and profit margins should decline. The net effect is that we expect Q2 2016 Adjusted EBITDA to improve compared to Q2 2015, and first half 2016 Adjusted EBITDA to be comparable to first half 2015. The primary risk to this outlook continues to be global macroeconomic conditions, particularly in commodity-driven economies, and especially in Brazil.
"AEC also had a strong first quarter. Driven by growth in LEAP, sales improved by 19% and Adjusted EBITDA swung from a loss of $0.9 million to a positive $1.5 million. From an operational perspective, performance was strong across the board -- preparation for the LEAP ramp, deliveries and quality on key programs in Boerne, Texas, the plan to improve the profitability of our legacy programs, and new business development all continued on track. And, of course, shortly after the end of Q1, on April 8, we announced the completion of our composites acquisition. We will include the acquisition in our consolidated AEC results starting with the Q2 2016 earnings release.
"Our outlook for AEC remains unchanged from what we described last quarter and in our press release and investor call about the acquisition. We expect the acquisition to contribute roughly $65 million of sales and $10 million of Adjusted EBITDA to AEC in 2016; on a pro-forma full-year basis, it should add $80 million to $90 million and $13 million to $15 million, respectively. For the combined entity, our pro-forma full-year 2016 outlook is for AEC sales to grow to approximately $190 million to $200 million. Pro-forma full-year Adjusted EBITDA for the combined entity should be roughly $15 million to $17 million, including $10 million of R&T spending.
"Our longer term outlook for the combined AEC also remains unchanged. The new AEC has the potential to reach approximately $450 million of annual revenue by 2020. Recent progress in new business development adds to our confidence in this growth potential. And, driven by growth-related operational efficiencies and STG&R leverage, we expect steadily improving EBITDA margins through the rest of the decade, growing to 18% to 20% by 2020.
"The new AEC's growth potential hinges on operational execution and market demand in six sets of key programs:
- Fan blades and cases for the LEAP engine: LEAP continues to achieve unprecedented market success. Total orders now exceed 10,500 engines, and CFM's latest forecast is for engine sales to grow from 100 in 2016, to 500 in 2017, 1200 in 2018, 1800 in 2019, and 2000 by 2020. AEC sales should be somewhat higher than this annual rate. This program has the potential to account for as much as $200 million in annual sales by 2020.
- Airframe Components for the Joint Strike Fighter: AEC is producing a variety of parts for the airframes of each of the three versions of the Joint Strike Fighter. Total sales, which should account for roughly $30 million of pro-forma annual sales in 2016, are expected to begin to ramp in 2017, and have the potential to reach $75 million to $100 million by 2020.
- Forward Fuselage Frames for the Boeing 787: AEC production in this program began to ramp this year, and has the potential to contribute roughly $50 million to $60 million in annual sales by 2020.
- CH-53K components: AEC is producing the tail rotor pylon, horizontal stabilizer, and sponsons for the Marine's next generation heavy lift rotorcraft. The first versions of the CH-53K are currently undergoing flight tests, low- rate initial production is scheduled to begin in 2017, and the ramp is expected to begin in 2019. This program has the potential to generate more than $20 million of annual revenue by 2020, and at full-rate production early next decade, more than $100 million in annual revenue.
- Components for several other new engine programs, including the LiftFan® of the JSF, and fan cases for GE9X. The ramps for these programs will be spread out through the rest of the decade and into early next decade, and depending on the outcome of current negotiations on other engine programs, have the potential to generate $25 million to $50 million of revenue by 2020.
- Numerous legacy programs, most notably bodies for a family of Lockheed Martin standoff air- to- surface missiles, and vacuum waste tanks for most Boeing aircraft. In aggregate, these legacy programs have the potential to generate $50 million to $70 million in sales by 2020.
"It bears emphasizing that our ability to realize the revenue potential of these programs is by no means certain. Each requires successful execution against demanding requirements and schedules, and assumes no significant slippage in schedule. Given the strategic importance to our customers of each of the program platforms, we continue to view operational execution as the primary risk to our ability to maintain our position on these programs and thus realize the new AEC's revenue and profit potential.
"In sum, Q1 2016 was another good quarter, highlighted by strong profitability in MC, LEAP-driven growth in AEC, and the acquisition of our composite aerostructures division. Our outlook for MC continues unchanged: we expect to end the first half of 2016 on track toward full-year Adjusted EBITDA in the upper end of the normal $180 million to $195 million range. And for AEC, including the acquisition, we expect pro-forma full-year 2016 sales to grow to $190 million $200 million, and assuming good execution and an absence of market-based delays across the six sets of key programs, rapid growth through the decade accompanied by steadily improving profitability."
* From the Albany International Q1 2016 earning release issued May 2, 2016