Q2 2015 CEO Commentary*
President and CEO Joe Morone said, "Following our good performance in Q1, Q2 2015 was a weak quarter for Albany International with sales and EBITDA considerably lower than in the comparable period in 2014. Nonetheless, year-to-date MC Adjusted EBITDA and AEC sales are in line with expectations and ahead of last year's pace, and we remain on track toward our full-year outlook of comparable year-over-year Adjusted EBITDA in MC and 5-10% growth in sales in AEC. And of significance for the longer term, there were several important developments during the quarter, the most notable being a decision to respond to the rapidly growing demand for LEAP engines by building a third plant.
"In MC, excluding currency effects, sales were down 7% compared to Q2 2014, primarily due to a sharply weaker market and lower sales in the publication grades in North America and Europe. The other grades performed as expected. And despite the economic instabilities, sales in China and South America were stable. Year to date, and excluding currency effects, sales are 2% behind the first half of 2014 and orders are 3% ahead.
"Q2 Gross profit margins remained strong and well above Q2 2014 levels. This mitigated the impact of the weak sales on adjusted EBITDA, which declined 4% compared to Q2 2014 and which leaves year-to-date Adjusted EBITDA 1.5% ahead of the first half of 2014.
"We continued to make good progress during the quarter on the shift of sales mix away from publication grades. Meanwhile, in the development of our new technology platform, we ran successful trials with important customers in the tissue segment, scheduled initial trials in the packaging sector, and are seeing encouraging results from initial prototypes across all of our product lines.
"Turning to AEC, during Q2 we recorded a charge of $14 million related to composite parts for the BR725 engine, a small, legacy program, manufactured in our Boerne, Texas, operations and governed by a contract signed in 2007 that sets very aggressive pricing levels. As discussed in previous releases, Boerne's operational performance has improved dramatically, with strong on-time deliveries and good yields, including on the BR725 program. But as we've gained more manufacturing experience with the BR725, we've concluded that future costs are likely to be higher than previously estimated, and given the challenging price levels, this led to the conclusion that we needed to take the $14 million charge.
"In other respects, AEC performed well, and is firmly on track both for our full-year forecast of 5-10% growth in sales and for the LEAP ramp that begins late next year. The most important development this quarter was the decision to build a third joint plant with Safran for the LEAP program, this one in Mexico. Annual production of the LEAP engine is now projected to reach at least 1,900 engines by 2020, and Boeing and Airbus are publically pressuring CFM to increase production to even higher levels. The addition of the GE9X fan case, which we will produce in Rochester, the much higher-than-expected demand for LEAP engines, and the possibility of still higher levels of demand by next decade all led to the decision to move forward with plant three as soon as possible. Groundbreaking is scheduled for next year, with initial operation targeted for late 2017. We are not at this time altering our projection of total annual capital spending for the company of, on average, $70 million. The likely impact of the higher LEAP demand and third plant will be to stretch the years of peak spending for LEAP by one to two years, rather than increase peak spending in any one year.
"As for R&D, this was a very encouraging quarter, with good progress on a number of potentially important airframe and engine projects, for both the near and long term. While significant uncertainties remain on all of them, several are approaching important development or commercialization decision points. Likewise, with Ricardo, we are actively engaged with a number of automotive OEMs in technical assessments of the viability of AEC technology for application in the high-performance, super-luxury segment of the automotive market. We expect to have developed a clear understanding of the near-term commercial viability of our technology for this market segment within the next six to twelve months.
"As mentioned above, our outlook for the full-year remains unchanged. We continue to view macroeconomic uncertainties as the primary source of downside risk to our outlook, and given recent developments in such key growth markets as China and Brazil, that risk appears to be growing. But barring further deterioration in the macroeconomic environment, we continue to expect MC Adjusted EBITDA for the second half of the year, and thus full-year Adjusted EBITDA, to be comparable to last year; and for AEC, we expect a strong second-half of the year, with full-year revenue at least 5-10% ahead of 2014.
"In sum, this was a weak quarter due primarily to lower MC sales in the publication grades in North America and Europe, compounded by the charge for the BR725 program. But in the larger picture, we remain firmly on track in both businesses -- in the short term, toward our full-year outlook, and for the longer term, toward our strategic objectives of steady EBITDA and cash flow in MC, and a decade or more of double-digit growth in AEC, driven primarily by LEAP and additionally by new projects emerging from the pipeline."
* from Q2 earnings press release issued August 4, 2015