​2014 was a good year for Albany International, as both businesses met short-term expectations while remaining firmly on track toward their long-term objectives. Although aggregate sales declined 1.1 percent excluding currency effects, Adjusted EBITDA improved by 7.0 percent, even after 10 percent increases in R&D spending in both businesses. Total debt decreased by $32 million, and by the end of the year, our largest pension plans (U.S., Canada, and the U.K.) were fully funded.

In my letter to you last year, I wrote that our strategy, both short- and long-term, comprises three imperatives: hold Machine Clothing (MC) cash flow; execute the LEAP ramp; and advance the Albany Engineered Composites (AEC) pipeline. In 2014, we performed well on all three fronts; we look to do the same in 2015.

Hold Machine Clothing Cash Flow

To hold Machine Clothing cash flow steady, we must offset three sources of downward pressure in the machine clothing industry: the structural decline in the printing and writing grades of paper, inflationary cost increases, and pricing pressures. The essence of our strategy is to offset these downward forces with a combination of (a) strong performance in the GNP-driven growth segments of tissue, packaging, and pulp, and in the growth regions of Asia and South America; (b) incremental productivity improvements coupled with periodic adjustments of capacity to market conditions; and (c) development and delivery of superior products and services. 

All three components of our MC strategy contributed to the good performance in 2014. While our efforts to offset declines in the North American and European publication grades were hampered by economic weakness in South America and the combination of a slowing economy and overcapacity in China, they were helped by strong Albany performance in the packaging, tissue, and pulp markets. Likewise, incremental productivity improvements and lower costs resulting from the 2013 restructuring of our two MC operations in France led to an improvement in gross margins, from 42.8 percent in 2013 to 43.1 percent in 2014. And 2014 saw an intensifying investment and growing momentum in our efforts to advance our new technology platform toward initial market applications.   

We expect a similar pattern in 2015. While inflationary pressure could be somewhat alleviated by the decline in oil prices, the volume declines in the publication grades will likely continue, and with several large contract negotiations at the end of the year, pricing pressures will likely intensify. Offsetting these downward pressures, we expect continued improvement in productivity from our Lean/Six Sigma activities and from the impact of our recently announced restructuring in Germany; our sales into the packaging, tissue, and pulp market segments should benefit from the combination of a stronger US GNP in 2015 and the start-up around the world of several significant machines in these grades. And 2015 should be an important year for learning more about the potential impact of our new technology platform. As I mentioned in our Q4 earnings call, we are starting to see enough success with this new technology in initial applications in the high-performance ends of the tissue and nonwovens markets that we are adding capacity to serve these initial niche markets, while at the same time exploring the broader applicability of this platform through several preliminary field trials.

It is this combination of a focus on the growth grades and segments, continued pursuit of productivity improvements, and growing investment in new technology that we believe provides the foundation for sustained MC cash flow in 2015 and beyond.

Execute LEAP Ramp

 In Albany Safran Composites (ASC), 2014 was devoted to installing, qualifying, and starting up the initial production modules in our two LEAP plants. The most outwardly visible milestones of progress were the plants' formal openings, the first in Rochester, New Hampshire, on March 31, and the second in Commercy, France, on November 24. The latter event was attended by François Hollande, President of the Republic of France. Both plants are now producing the parts required for CFM's engine testing and certification program. 2014 was also notable for the turnaround in our Boerne, Texas, operation, which accounts for roughly a quarter of AEC sales. Following the same approach toward operational discipline being implemented at the two LEAP plants, the team at Boerne made significant improvements in yield and on-time delivery across all of its programs, and most notably in AEC's second largest program – the development and production of composite parts for the LiftFan® of the Joint Strike Fighter. These improvements at Boerne accounted for most of the swing in AEC Adjusted EBITDA, from a loss of $5.5 million in 2013 to positive $1.1 million in 2014.

In 2015 and into 2016, the primary focus for AEC operations shifts from start-up of the LEAP plants and improvement in Boerne to preparation for the ramp-up in LEAP production. When I wrote to you last year, CFM (the joint venture between Safran and GE) had recorded 6,100 orders for the LEAP engine and was suggesting that total annual production volume might reach as high as 1,700 engines per year. As of March 2015, the number of orders for LEAP had grown to over 8,500, and CFM was suggesting that total annual production volume would likely reach 1,800 engines (i.e., 32,400 blades) by 2020. In order to hit such historically high production rates in such a historically short period of time, we must achieve a high-yield, highly repeatable manufacturing process before the ramp begins in earnest. The slope of the ramp curve, and the rate of required production, simply won't allow for a more traditional learning-curve-based process of improving yields incrementally as manufacturing volumes ramp gradually. While it will not be particularly apparent in the form of externally visible milestones, the next year-and-a-half for ASC will be dominated by an all-out Albany effort, coupled with intense collaboration with Safran, to align Safran's required design tolerances with Albany's manufacturing capabilities. It is worth noting in this regard that our partnership with Safran is stronger than ever and by now extends deep into both organizations.

Advance AEC Pipeline

A year ago I outlined the significant investments that we have made in both talent and capital to develop AEC's research and technology pipeline, and explained that our challenge would be to broaden our portfolio of potential customers and applications while simultaneously moving at least some projects closer to commercial reality.    

In 2014, the pipeline produced its first significant commercial agreement. Through Albany Safran Composites, AEC was selected to develop and supply the composite fan case for the GE9X, the engine that will power Boeing's new 777x aircraft. According to GE, the 9X will be the largest turbofan engine ever developed, and thus will require the largest fan case, let alone composite fan case, ever manufactured. AEC's participation on a component as critical and challenging as this fan case represents a significant and highly visible market validation of the advantages of our technology.

At the Farnborough Airshow in June 2014, CFM disclosed that it was looking to make enhancements to LEAP, and that it should be possible to further reduce engine weight by "hundreds of pounds." As we have discussed before, AEC is developing with Safran additional composite parts that are candidates for inclusion in future upgrades to the LEAP engine, and we continue to view this as one of our most promising areas of potential growth.

As we turn to 2015, we expect our R&D activities in aerospace to continue to advance across a range of customers and applications for engines and airframes. We are also intensifying our exploration of applications in the automotive industry. Early in 2015, AEC signed a joint development agreement with Ricardo plc, a UK-based engineering company with a strong presence in the automotive industry. Initially the joint effort will probe the high-performance end of the automotive market.

 

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On the surface, not much will change for Albany International in 2015. Our strategy will be identical to 2014's: hold MC cash flow, execute the LEAP ramp, and grow the AEC pipeline. But beneath the surface, 2015 will be an important year for both businesses. With new machine start-ups in critical MC market segments and preliminary field-based trials of our new technology platform in equally critical MC market segments, an intense concentration on preparing for the LEAP ramp, and the continued exploration of new applications for our composites technology in the engine, airframe, and automotive markets, 2015 could well be as important a year for development of new technology as any in the Company's 120-year history. I look forward to providing you an update as the year progresses.

Finally, let me close with a word about the approximately 4,000 members of the Albany community. Everything I've written about here is the product of their good work. Each of them has my sincere thanks for their commitment to the Company, each other, and you, our shareholders.

 



 

Joseph G. Morone

President & Chief Executive Officer