Q3 2017 CEO Commentary*
CEO Joseph Morone said, "Q3 2017 was an especially strong quarter for Albany International. Aggregate sales, Net income and Adjusted EBITDA grew sharply; MC's performance was outstanding; and AEC continued its rapid growth, took another incremental step forward in profitability, and made good progress on its multiple ramp-ups and new business development. Both businesses are now on pace to outperform our previously upgraded full-year targets.
"MC sales grew in comparison to both Q3 2016 and Q2 2017, due to a combination of strong performance and good economic conditions, especially in the Americas. The market trends of recent quarters continued. Sales in the publication grades again declined, though only by about 3% compared to Q3 2016, while sales in packaging, tissue and pulp grades grew. Although pricing pressure remained intense, Albany's pricing was once again stable, except in the publication grades where pricing pressure is greatest. New product performance was outstanding across virtually all product lines, and development of the new technology platform continued to advance impressively. Gross margins remained strong, due to good productivity gains and lower material costs.
"Because of end-of-year seasonal effects and the regression we typically experience after especially strong quarters, Q4 will likely be the weakest quarter of the year. But on a year-over-year basis, because of good backlogs and healthy economic conditions, we expect Q4 2017 to be comparable to Q4 2016. Given the strong year-to-date performance in MC, this means that we now expect full-year Adjusted EBITDA to be at least at the high-end of our normal $180 million to $195 million range.
"In AEC, compared to Q3 2016, sales increased by nearly 50%, driven by growth in the LEAP, 787 fuselage frames, and CH-53K programs. Every AEC plant is now facing the steepest part of their ramp-ups. Each made good progress on quality and yield improvements, and in hiring, training, and installation and qualification of new equipment. It is worth noting in this regard that we are now constructing a second plant in Queretaro, Mexico. The first plant, which is dedicated to LEAP fan blades and is a satellite of the Rochester, New Hampshire LEAP plant, is on schedule to begin production in Q4. The second plant, which we need to handle growing demand for other engine components, will be a satellite of our Boerne, Texas operation and is scheduled to begin production in the second half of next year.
"As expected, the simultaneously high rates of hiring, training and equipment installation across our plants held back productivity in Q3, and will continue to do so for several more quarters. Nonetheless, AEC continues to make steady, incremental progress toward its long-term profitability objective of 18% to 20% Adjusted EBITDA as a percent of sales by 2020. Because of the discontinuation of the non-aerospace Bear Claw® product line, operating income declined compared to Q3 2016. However, Adjusted EBITDA as a percent of sales grew to 11%, compared to 8% in Q3 2016.
"R&D spending grew sharply in the quarter, in support of rapidly accelerating new business development activity. AEC is actively exploring opportunities for near-term growth with existing customers, both on programs already under contract and on programs that would be new for AEC. Good progress was also made on longer-term growth prospects, on both commercial and defense platforms. Given the encouraging progress, we expect to update our projection of AEC's 2020 revenue potential on our Q4 earnings call.
"As for the near-term outlook for AEC, we expect continued sharp sales growth in Q4, and despite the heavy ramp-up activity, stable or incrementally improved profitability. Last quarter, we revised upward our revenue outlook for the year to the high end of our previously stated outlook of 25% to 35% full-year revenue growth. We now expect full-year revenue growth to be between 35% and 40%.
"In sum, this was an outstanding quarter for Albany, with good performance in both businesses, and a stronger full-year outlook for each business than the already strong, upgraded estimates we provided on our last earnings call."
*From the Q3 2017 Albany International earnings release issued October 30, 2017