Q2 2016 CEO Commentary*
President and CEO Joe Morone said, "Q2 2016 was another good quarter for Albany International. Including our new composites division, net sales grew by 18% compared to Q2 2015, while net income improved to $10.1 million from a loss of $2.1 million. Second-quarter Adjusted EBITDA was $46.6 million in 2016 compared to $18.8 million in 2015, which included the $14 million charge for BR725.
"Both businesses again performed well, as MC continued to generate strong profit margins and AEC strong sales growth; each remains firmly on track toward its near- and long- term objectives.
"Turning first to MC, net sales were essentially flat compared to Q2 2015 – in the aggregate, and in each major region and grade. We had expected Q2 2016 net sales to be somewhat stronger than Q2 2015, but the expected growth was held back by slowdowns and tighter inventory controls by leading papermakers in the packaging grades in the US, Brazil, and China. Nonetheless, driven by new product technology and strong field services, MC continues to perform well in each major region, particularly in the growth grades, which once again accounted for 75% of net sales.
"Ordinarily, we would expect MC profit margins to decline in Q2 as a result of annual salary inflation. But margins held at Q1 levels due to unusually strong capacity utilization in Q2, coupled with the lower materials costs, restructuring actions, and productivity improvements discussed in previous quarters. As a result, even though Q2 2016 sales were flat compared to Q2 2015, net income improved by 6% and Adjusted EBITDA by 11%.
"AEC's Q2 results include an essentially full quarter of performance of the newly acquired aerostructures division, which as shown in Table 1, had a significant, positive impact on performance. Without the acquisition, sales for AEC would have been $29 million, compared to $22 million in Q2 2015, driven by growth in LEAP sales. With the acquisition, sales were $54 million for the quarter. Net income for the segment was a net loss of $5.8 million, which includes acquisition expenses and costs associated with the previously described restructuring programs. Adjusted EBITDA, which excludes these factors as well as the non-controlling interest in ASC, was $5.7 million or roughly 10% of sales.
"It is important to note that $7 million of the total sales in the quarter were the result of development tooling reimbursable from customers. Of the remaining sales, LEAP accounted for about 33%, airframe components for Joint Strike Fighter (JSF) about 16%, and the next largest programs—Forward Fuselage Frames for the Boeing 787, bodies for Lockheed Martin standoff air-to-surface missiles, components for the LiftFan® of the JSF-B, and waste tanks for Boeing aircraft—each accounted for roughly 5%.
"At the recent Farnborough Air Show, there were several developments of relevance to AEC. Orders for 400 more LEAP engines were announced, bringing the total orders to over 11,100 engines, and reinforcing once again that in the narrowbody market, there are no indications of market weakness. The market pressure on suppliers to the LEAP engine, like AEC, continues to be for more volume, sooner. Also of significant note at the Farnborough Air Show was a flight of the JSF-B, and dramatic demonstration of the capabilities of its LiftFan. And, in multiple forums before and during the air show, Boeing made clear that it is seriously considering a new middle-of-market aircraft for possible entry into service mid-next decade.
"We continue to be encouraged by new business development activity on multiple fronts, but the primary focus in AEC is on execution, and in particular, on the integration of the new division, enhancement of its operational capabilities, and the successful ramp-up of our key growth programs. Integration is on track, and during Q2, we made good progress on the ramp-ups for LEAP, Boeing Forward Fuselage Frames, and JSF.
"Turning to our outlook, for MC, given the strength of its performance in the first half of the year and assuming a stable currency and macroeconomic environment, we now expect full-year Adjusted EBITDA to be at the upper-end of our previously discussed range of $180 million to $195 million (see Table 18 for reconciliation to GAAP segment net income, including identification of certain items that cannot reasonably be predicted). Barring any additional significant slowdowns in the paper industry, sales for the remainder of the year should remain stable. Because of normal seasonal effects during the summer and at the end of the year, we expect capacity utilization and margins to come off their first-half peaks, and second-half Adjusted EBITDA to therefore lag somewhat behind the first half of the year.
"As for our outlook for AEC, while net sales tend to fluctuate significantly in this business from quarter to quarter, we expect average quarterly net sales of close to $50 million in the second half of the year with gross profit margins roughly comparable to Q2. We also expect $1 million to $2 million of integration costs associated with the acquisition in the second half of 2016.
"The risk to this outlook for AEC continues to be execution-based. Successful completion of the integration of the acquired division, enhancement of its operational capabilities, and ramp-up of the key growth programs, will drive near-term performance in this business.
"In sum, Q2 2016 was another good quarter, highlighted by continued strong profitability in MC, and accelerating growth in AEC, driven by LEAP and the acquisition. Both businesses remain on track for their near- and long-term goals."
* August 1, 2016 press release issued by Albany International