Q4 2015 CEO Commentary*
President and CEO Joe Morone said, "Q4 was another good quarter for Albany International. Both businesses continued to perform well, as once again MC generated strong margins and AEC continued to grow and progress toward the LEAP ramp. Company-wide cash flow was strong, with net debt declining $18 million to $81 million.
"In MC, full-year sales excluding currency were essentially flat, despite soft Q4 sales due to the economic weakness in key markets. Profitability was outstanding. Adjusted EBITDA for the quarter and for the full year was 9% ahead of 2014. Roughly half of this increase was due to the favorable impact of the strong dollar on currency translation. The rest of the increase was from several sources: the shutdown of our plant in Germany, restructuring activities that reduced STG&R expense, lower cost of raw material due to lower energy prices, and higher labor productivity across many of our plants. In Q4, MC took an additional step to reduce STG&R expense by implementing an early retirement program for its salaried employees in the U.S.
"Q4 2015 was also a good quarter for MC on the technology and new products front. The new composite technology platform continues to gain momentum at the high end of the tissue and towel market, and we are encouraged by initial trials in the packaging market. Finally, we successfully completed negotiations to renew our contracts with two of our largest customers, one in the U.S. and one in Europe. Although competitive pricing pressures persist in all of our markets around the world, our prices were for the most part stable in Q4.
"AEC sales excluding currency grew almost 14% for the full year. The growth was driven by a combination of higher development and parts sales associated with the LEAP, Joint Strike Fighter (JSF) LiftFan®, and GE9X fan case programs. Most importantly, AEC continued to make good progress in preparation for the LEAP ramp, which begins late this year. In R&D and business development, good progress also continued on several fronts. In addition to continuing to support advances in the LEAP program, and to position ourselves for content on both the engine and airframe for next-generation single-aisle aircraft, our efforts were focused on several new platforms that have the potential to generate initial revenue either later this decade or in the first half of the next decade. The most significant of these new platforms are Boeing's 777x aircraft; a new mid-size airplane that Boeing is reported to be considering; the Department of Defense's JSF and Long Range Strike Bomber; and new supercar and premium sports and luxury vehicles in the high end of the automotive market.
"As for our outlook, our near- and long-term expectations for both businesses remain unchanged. To reiterate the view we expressed about MC last quarter, notwithstanding the 9% increase in Adjusted EBITDA in 2015, we continue to view MC as a business capable of generating steady year-over-year Adjusted EBITDA and cash flow, with annual Adjusted EBITDA in the range of $180 million to $195 million. Despite the likelihood of a slower start this year than last due to continued strong economic headwinds in key markets, and barring further deterioration in the macroeconomic environment, our strong margins and continuing productivity improvements should make it possible for us to keep well within that normal Adjusted EBITDA range.
"For AEC, we anticipate annual revenue growth of roughly 5-10%, with some upside depending on a host of variables related to the LEAP ramp. EBITDA should also improve, at a steeper rate than sales. But the real significance of 2016 is that it represents the final year of preparation for the LEAP ramp, and so our highest priority will be on continuing efforts to improve yield, accelerate cost reduction, and prepare our Mexican plant for start-up in 2017. Assuming Airbus and Boeing do indeed increase production of the A320neo and 737MAX to roughly 60 aircraft per month by the end of the decade, AEC will need to manufacture over 40,000 blades and 2,000 fan cases a year by 2020, compared to roughly 2,500 blades and 100 cases in 2015. At these levels of production, LEAP revenue should grow from $50 million in 2015 to close to $200 million by 2020. Total AEC revenue, assuming no new programs beyond the ones already secured (an assumption we hope is conservative), should grow from $100 million in 2015 to roughly $250 million in 2020. The steepest ramps in production and therefore in AEC revenue and income will likely be in 2017 and 2018.
"2016 should also be a pivotal year for AEC's legacy operations, which accounted for 40% of AEC's 2015 revenue and were responsible for a significant drag on AEC profitability. In January, we announced internally that we plan to consolidate most of our legacy programs, which are currently spread over two plants, into our facility in Boerne, Texas. At the same time, we are finalizing with Rolls-Royce a long-term supply agreement for production of composite parts for the JSF LiftFan. The expected growth from this program as demand begins to ramp in 2017, coupled with the program consolidation into Boerne, should drive significant improvements in margins by the second half of 2017.
"So in sum, performance in both businesses was strong in Q4 and for the full year, and we expect performance to remain strong in 2016. Despite the significant economic headwinds and barring further deterioration in the macroeconomic environment, we look for MC to generate Adjusted EBITDA well within its normal range. And for AEC, we expect roughly 5-10% revenue growth coupled with improving profitability in this the final year of the lead-up to the LEAP ramp."
*from Q4 earnings press releasaed issued February 8, 2016