Q4 2016 CEO Commentary*
President and CEO Joseph Morone said, "In Q4 2016 both Albany businesses again performed well, as AEC generated especially strong growth and MC continued to generate strong profitability. Unfortunately, we had to take a $2.5 million charge in Q4 due to a theft by a third party in a small operation in Japan. Even so, the Company ended the quarter and full year with sales and net income in line with our expectations, and with AEC poised for rapidly accelerating growth and MC for continued strong profitability in 2017 and beyond.
“Q4 2016 sales in MC were essentially flat compared to Q4 2015. From a regional perspective, Q4 year-over-year sales were stable in every major geographic market. From a grade perspective, Q4 year-over-year publication sales declined by another 10%, but the decline was offset by incremental growth in the other grades. We continue to be encouraged by new product performance and especially by the potential of the new technology platform in the tissue, nonwovens, pulp, building products and corrugator grades, which together accounted for 35% of total sales in Q4 2016. For the full year, 2016 sales dropped 4.3% primarily because of the declines in publication grades coupled with weakness in South America.
“Q4 gross margin once again held close to 47%, due in large measure to good plant utilization despite year-end slowdowns. As a result, full-year profitability was once again strong, with slightly improved gross margins, improved segment net income and Adjusted EBITDA at the high end of our normal $180 million to $195 million range.
“Looking ahead to 2017, we expect recent market trends to continue. Publication sales will likely continue to decline, but now that they comprise only 25% of total sales, and as the other grades hold steady or grow incrementally, we expect an easing of the recent trend of downward year-overyear comparisons in MC sales. As for profitability, after two years of favorable currency and inflationary environments, we expect some regression toward the mean in 2017, and as a result, we expect full-year Adjusted EBITDA to pull back from the high end toward the middle of that $180 million to $195 million range. The primary risks to this outlook are associated with macro-economic and geopolitical conditions.
“AEC sales grew to $68 million in Q4, compared to an average of close to $50 million for the previous two quarters. The sequential growth was driven primarily by the LEAP program. Sales from our recently acquired Salt Lake City operation (SLC) were stable. Excluding SLC, Q4 sales were $47 million compared to $32 million in Q4 2015. For the full year, including nearly three quarters of sales from SLC, sales were $197 million. Excluding SLC, sales for the year were $131 million compared to $101 million in 2015.
“Q4 performance was particularly strong in the LEAP, F-35 JSF LiftFan®, and Boeing 787 Fuselage Frames programs. More generally, AEC remains on track for the ramp up in all of its major growth programs. Although demand has reportedly softened in some segments of the aerospace industry, the near- and long-term demand outlook for AEC’s major growth programs remains robust. Meanwhile, R&D and new business development continues to progress on each of the three fronts discussed on our last call: incremental new sales on existing aerospace platforms, development of opportunities on potentially new aerospace platforms, and the continuing probe into the automotive market.
“AEC profitability continued to improve during the fourth quarter; segment net income/loss improved to a loss of $1.3 million and Adjusted EBITDA grew to $5.5 million. Q4 2016 results include costs of roughly $1 million associated with SLC integration and the consolidation of AEC legacy programs into our Texas operation, and a $1 million per quarter acceleration in R&D spending to support a cross section of the growth and new business development initiatives mentioned above. Good progress was made during the quarter on integration, particularly in the major effort to integrate ERP systems, which resulted in SLC going live at the beginning of February. All business-wide functions, such as finance, human resources, procurement, information technology and business development are now fully integrated, and our focus is now shifting almost exclusively to strengthening operational execution. While much remains to be done in 2017, our experience in Q4 suggests that AEC is firmly on track toward our long-term stated objective of 18%-20% EBITDA margins by 2020, on at least $450 million of sales.
“Turning to our short-term outlook, driven by accelerating ramps in LEAP, Boeing 787 Fuselage Frames, and F-35 JSF airframe components, we look for AEC sales to grow by 25% to 35% for each of the next two years. And, driven by the effects of integration, STG&R leverage, and learning curve effects, we expect gradually strengthening margins through the period. The primary risk factor for AEC will continue to be execution, especially during this period of ramp ups across multiple programs and sites.
“In sum, apart from the theft in Japan, this was a strong quarter and full year for both businesses, with continued strong competitive performance and profitability in MC, accelerating growth in AEC, and good progress on the integration of our recently acquired SLC operation. For 2017, for MC, we look for Adjusted EBITDA in the upper half of the normal $180 million to $195 million range; and for AEC, rapidly accelerating sales and gradually improving margins."
* From the Albany International Q4 2016 earnings release issued February 8, 2016