Q3 2016 CEO Commentary*
President and CEO Joe Morone said, "In Q3 2016, Albany continued on the trajectory of the last several quarters. MC again generated strong income and AEC strong sales growth, as both businesses remained firmly on track toward their full-year and longer-term objectives.
"Against a very strong Q3 2015, MC sales declined 7%. Unlike a year ago, in Q3 this year we experienced a normal seasonal pattern of weakness in the two summer months of the quarter, followed by a strong finish. Compared to Q3 2015, sales were down in virtually every region and grade. However, except for declines in publication grades in Europe and Asia, sales were essentially flat in every region and grade compared to the previous three quarters.
"New product performance in Q3 across all of our product lines was especially strong, with the new technology platform having a significant impact on our competitive position on new machines in the tissue and nonwoven grades. In the Americas, these grades now account for 26% of sales compared to 20% of sales in the publication grades. In Europe and Asia, where market growth in the packaging grades is a more significant long-term factor than growth in the tissue grades, new product performance helped drive MC sales in the packaging grades to 37% of total Eurasian sales in Q3, compared to 30% in the publication grades.
"MC profitability followed the same pattern as sales. Compared to the strong Q3 2015, gross margin dropped from 48.4% to 47.5%, segment net income dropped by 5% and Adjusted EBITDA by 8%. But, in absolute terms and on a sequential basis, gross margins, net income, and Adjusted EBITDA remained strong and at roughly the same levels as the previous three quarters, for all the same reasons -- continuous productivity improvements, good plant utilization, low material costs, and the cumulative effect of the restructuring efforts of the previous quarters.
"AEC also performed well. Including our new division, sales were $48 million for the quarter, which is in line with our expectations and last quarter's sales trends (as discussed in Q2, the $54 million of sales last quarter included $7 million of sales from development tooling reimbursable from customers). Without the new division, sales would have been $28 million, 14% above Q3 2015 sales. This growth was driven by LEAP. Net income was a loss of $4.5 million; Adjusted EBITDA, which includes costs related to the integration of the new division, was $3.7 million, or 7.7% of sales.
"There were a number of significant developments in the quarter. The ramp up of LEAP fan blades and cases, which accounted for 35% of Q3 sales, is proceeding well, with excellent progress on yield, cost, and capacity. Preparations for Plant 3 in Querétaro, Mexico, are on schedule. Meanwhile, the market pressure to ramp up continues to be intense. Performance was also strong on the most significant other AEC engine programs -- components for the Joint Strike Fighter (JSF) LiftFan® and the GE9X fan case. Integration of the legacy AEC programs into Boerne, Texas, is on schedule and nearing completion.
"As for our new division, the three key long-term growth programs (JSF airframe parts, 787 fuselage frames, and CH-53K parts) and the largest legacy program (Boeing waste tanks) had strong delivery performance and good quality improvement trends in Q3. Of particular significance, the 787 program, which is the first of the three key growth programs to start ramping, is on schedule and meeting customer expectations. On the other hand, we also saw evidence in Q3 across a number of programs of the execution challenges facing the division. We remain intensely focused on integrating the new division into AEC, and on strengthening its operational capabilities. Both efforts are progressing well and as planned.
"Finally, our new business development efforts continue along three fronts – competing for incremental new business on existing aerospace platforms (commercial and defense, engines and airframes), collaborative R&D to position AEC to compete on future new aerospace platforms, and R&D probes into markets outside of aerospace. Of particular note in Q3 was an example of progress on the first of these fronts. AEC was awarded a contract to produce composite components on an existing platform utilizing conventional 2D laminate composite technology. We expect this contract will generate sales of $15 million to $20 million per year by 2020.
"Our outlook for both businesses remains unchanged. For MC, given current market trends and our solid Q3 performance, we continue to expect full-year Adjusted EBITDA to be at the upper-end of our previously discussed range of $180 million to $195 million (see Table 19 for reconciliation to GAAP segment net income, including identification of certain items that cannot reasonably be predicted). The primary risk factor for MC, and for our ability to maintain performance within this range for the foreseeable future, continues to be global macro-economic conditions.
"As for AEC, we expect a strong end to the year, driven by sequential growth in LEAP coupled with steady sequential sales in the rest of the segment. There is some uncertainty associated with end-of-year inventory effects; Q4 sales might not be as strong as we expect if our customers, particularly Safran, delay in pulling finished goods from inventory. Apart from this short-term uncertainty, the primary risk factor for AEC for the foreseeable future continues to be execution, especially in our efforts to integrate our new division, and to bring it and all of our ramping programs up to expected levels of operational excellence.
"In sum, this was another good quarter for Albany, with both businesses remaining firmly on track toward their full-year 2016 and longer-term strategic and financial performance objectives."
*Quarterly earnings release issued by Albany International Corp. October 31, 2016