Michael Burke - SVP & CFO Joe Morone - CEO

Jason Ursaner - CJS Securities Mark Connelly - CLSA Ned Borland - Hudson Securities Paul Mammola - Sidoti & Company

Thank you, operator, and good morning, everyone. As a reminder for those listening on the call, please do refer to our detailed press release issued last night regarding our quarterly financial results and with particular reference to the Safe Harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP.

And for purposes of this conference call, those same statements also apply to our verbal remarks this morning. And for a full discussion, please refer to that earnings release as well as our SEC filings, including our 10-K.

Now, I'll turn the call over to Joe Morone, our Chief Executive Officer, who has some opening remarks, before we do go to the Q&A. So, Joe?

Good morning, everyone. Welcome to our Q2 2010 earnings call.

There is a lot of material in our release, and I know you have a lot of question. So we'll get to them fast, but let me just quickly run through, for you, what we view as the highlights of the quarter.

In sum, this was an outstanding quarter for Albany International. Sales were 7% ahead of Q2 '09 and 6% ahead of Q1 2010.

We've said in our previous releases several times that we expect to enjoy significant fixed cost leverage, and you really see it this quarter. More than 50% of the increase in sales between Q1 and Q2 dropped through at EBITDA which was $42 million and excluding GAAP based restructuring $43 million.

Cash from operations was $44 million. Gross margins were very strong.

PMC was nearly at 42%. So this is a very strong quarter.

You can't help it notice in the release that we're going to a great deal of detail about currency and that because it had a big effect in this quarter. EBITDA was nearly $7 million higher than it would have been as of no change in currency during the quarter.

Most of that effect was due to the sharp drop in the value of euro during the quarter. Now most of that drop has reversed itself in Q3, so you have to watch out in Q3 for the reverse effect on profitability from currency.

But given the overall results and given the effects of currency, how do we think about the normalized EBITDA run rate coming out of the quarter like this? Well, here is how we think about it, we start at $43 million of EBITDA, that's the 42 excluding GAAP based restructuring so $42 million then subtract out to currency effect, that puts us at 36 and then depending on how much of those $3 million of lingering cost associated with restructuring you chose to add back like a 1.5 million of equipment relocation which should end soon, you get to the upper 30s.

So the way we think of this is for this level of revenue, if there was no changes in currency we should be in the 36 to $39 million of EBITDA of normalized run rate. We had said in Q1 that Q2 is usually free of seasonal effect so that Q2 sales and order levels should give a pretty good indication, pretty good snapshot of the post recession short-term sales environment and we've tried to lay that out for you in the release.

To make a long story short the sales and order patterns in Q2 suggests steady sales in PMC going forward and additional growth endorse in EF and robust growth both the short-term and long-term for AEC. The important caveat here is historically has an important seasonal effect in Q3 in almost all of our businesses except for AEC because of those summer shutdowns in Europe.

So you will have to watch out for that. Finally in Q2 we've passed several and noteworthy milestones, first as we described in the release we refinanced our revolved with a five year unsecured agreement which in combination with a swap leaves us with a blended rate of 3.55% so thanks to Michael and his team.

Now that contract PMC contract negotiation that we've been referring to has progressed very well and we should sign a formal long-term agreement shortly. And finally and very importantly for the long-term growth prospects of our composites business in separate talks at the recent Farnborough Air Show both the CEO of Airbus and the COO each separately stated that the business case to reengineering the A320 a single line aircraft is favorable and they expect to make a formal decision to reengineer later this year.

So, overall a very good quarter promising outlook with the important caveat about the seasonal effects in currency. So let's go to your questions.

Congratulations on the results. Just looking at PMC, if I am looking at the revenue you gave order rates again, in Q1 orders were up 23% globally and you said that this quarter was on parity.

But if look at revenue it's only up about 4% year to year and you'd mentioned that it's in precise cage for future sales. But do these orders continue to flow through, should we anticipate some acceleration or just some better way to think about this?

Well, orders are ahead of last years pace. I think we made that clear.

And they are at the end of Q2 and parity with Q2 sales ordinarily by Q2 they are not at parity they are orders are lagging sales because the an off a lot of orders come in at the beginning of the year and as the year progress the rate of orders decline. So the fact that they are at parity at the end of Q2 is a pretty strong signal of at a minimum stability in sales going forward.

You know any attempt to project revenue in PMC is got to go back to the bigger picture. And the bigger picture is, sectoral trends here will as we reach a new level of stability coming out of the recession, sectoral trends - long term sectoral trends take over.

And as we've said repeatedly, the way we plan for PMC is we listed the rapid growth in China which we are enjoying will offset erosion in Europe over time, and that steady growth in South America will offset erosion in North America. We think in terms of grades, tissue grades and the packaging grades will continue to grow, but anything related to printing is going to gradually erode.

So we view this business, short-term and long, as a cash generator and not as a growth business, even though there might be incremental improvements in growth at seasonal effects as we still come out of this recession. But the story of this quarter for PMC is cash.

I mean, you really saw it this quarter.

All right. And looking at cash, I mean, free cash flow was over $1 a share in the quarter, but obviously it had some working capital gains and there was a deferred tax reversal.

How should we think about, I guess, working capital needs going forward and just more generally out on free cash flow?

But there wasn't much gain on working capital. I think they pretty much offset each other.

So you're really seeing the effects of profitability driving cash flow in the quarter. And I think that given that we're coming out of recession, given that there is growth and, therefore, there will be some growth in inventory, but the big gains in working capital are probably behind us.

And in terms of CapEx? I mean, this is obviously the cash part of the story, we've talked a lot about AEC and the reinvestment in that.

Is this covering that or has some of the long-term outlook there changed?

We're under our projection in CapEx, and that's primarily because after all the restricting in PMC we're moving and relocating equipment rather than buying new equipment. And so we're spending less on CapEx than we had anticipated.

On AEC, our long term projections haven't changed. We still expect that as these big long term programs kick in and we build plans for them that our CapEx spending will grow, but that the total CapEx spending for the company for the next five years will continue to be at depreciation and amortization or lower.

We don't yet see anything that would drive us above that.

And then just last question for me and then I'll turn back in the queue. You mentioned, an accounting error I guess associated with the severance in France?

Yeah.

And you talk about possibly materiality of accounting, how should we think about expense for correcting the error going forward?

In second half of last year we closed a plant in France, called River in the town of Ribérac. And we discovered in Q1 an error that was made in Q4 '09 in the accounting associated with that closure having to do with pension.

And then just at the end of this quarter, we discovered a second mistake have been made in the restructuring associated with that plant in France, a second mistake in Q4 when we did the initial accruals for the restructuring. And so a second mistake, now the combination of the two are not material to results of 2009 but a second mistake got our antenna Working overtime and we want to take a close look here to make sure that we don't have a serious control issue or had a serious control issues associated with restructuring in that end to the back in '09.

So given our bias to disclose early we've just thought that that was enough of a concern for us two mistakes like that that we needed to let our investors know. And we are all over as you can imagine.

I mean, do you have any quantifiable range for what this might run to work it over?

We don't know of any thing other than what we've just described. So the two areas which we quantified are all we know about.

But I'm saying to look back for all the accounting and legal expenses…

…internal we will use our internal audit and people from our control offers to…

Drive the analysis…

Drive the analysis and make sure we are okay. And if we felt like it ran deeper and we need outside help we would certainly hire the outside help.

But we are not putting in it because we don't anticipate any sort of expense we thought we should put it in there because we clearly have some sort of a control weakness.

Couple of questions when you think about CMC from here most of the paper companies are expressing a little bit more caution now but they are running pretty full and most of the increase profitability in the paper business now is coming from price hikes rather than volume pick ups at least within North America, so I'm curious how you're thinking about volumes from here, is there an opportunity for you to pick up more volume or pick up share in the markets that are running relatively full or are you going to be looking for volumes in the markets that haven't quite got there yet?

Yes. We're reading exactly the way you are, its been a bounce back but as I said before, I think that as we come out of this bounce back in the industry, the longer terms sectoral trends start kicking in.

and the fact that the paper companies are starting to express caution in our mind is precisely a reflection of the reality that those longer term trends kick in. So our view is we will ride the growth in Asia.

We will ride the growth in South America, but that inevitably Europe and North Americas begin to erode and the combination of those lead up to flat to slightly higher or less than 1% increase in revenues. And that's why for us is, we've talked about Mark with you, the PMC story is a cash story.

And you really get a sense of the power of that cash this quarter. And our challenge internally is start with the assumption, as no growth, drive cash generation and that's how we're managing this business.

So, probably safer to assume that you don't pick up market share from here just leave the share static as we're modeling, I mean, I would assume with the cost that you have taken out, fixed cost you have taken that you might be in a position to push some people out of the market but when that happens, it tends to be pretty bumpy process. So I assume that's not your highest priority?

Right, our highest priority now is to make the most productive use possible of the capacity and equipment and talent that we have, drive new technology to market that could drive revenue or reduce cost. But we're not treating this as a growth business.

We're treating this as a business where you've got to optimize the use of your assets.

Okay.

This is now becoming a return on invested capital business.

Great. Now, if we switch to AEC for a minute, you talked about the opportunity for an acceleration of revenue but limited by your ability to ramp production.

How significant are those limitations? A couple of years ago, we ran into this problem, and you did an acquisition that alleviated that short-term issue.

But is this something that we have to just sort of assume as part of dealing with a lumpy growth business that from time to time, the orders are going to get ahead of you and you may not be able to completely keep up with the growth in the short term?

Yeah. I think that's a really interesting question.

And the short answer is yes. But let me give you more of the background.

The last time we faced this kind of a growth spike, as you allude to, was in 2008, and it was down in our operation in Texas when the Eclipse program was starting to take off. And so we had a very steep ramp curve and learning curve that we had to get through with Eclipse.

And just as we were getting through it, it was lumpy at the outset. And the lumpiness is, as you're coming out of development, starting production and you've got to learn how to make the parts in high volume and you run into challenges on productivity, on cap time, define bottlenecks we're anticipating, you might find quality issues that you have to go back and rework, all that makes up a learning curve.

Every time we introduce a new program you've got to go through that curve. But all of the learning curves that went through in 2008, we got no benefit from ironically.

Because Eclipse went bankrupt so we lost all of that. The recession hits and in our Texas operations, three of the programs that were just hitting production got dramatically scaled back by our customers, because they were oriented toward business jets.

The business jet market crashed. And two more programs that we've been selected for were completely eliminated.

So all those learning curves that we were just getting through, we'd basically got no benefit from. Now as we come out of the recession there is whole new set of programs with actually more significant long term prospect but we're going through the front end of those learning curves simultaneously all over again.

And its joint strike fighter, its LEAP-X, it's the landing brace, it's a difference set of programs from the ones we went through in 2008, but we're right back that front end again. So we see big customer demand with orders in hand, we know where we have to get but getting there is going to be lumpy as we run through these early stages of the learning curve.

That's inherent in the nature of the business, when you're at the front end of these transitions from development to production, as we are simultaneously in sub-report.

And Joe you've been pretty clear in the last couple of quarters that there was going to be some need for incremental spending to deal with that sort of issue, can you give us a sense of how much of that spending we saw or are seeing I assume that its not all showing up in the recession technical line?

Fair amount of it is, if you look at CapEx let's break it into pieces if you look at CapEx we continue to expect that total CapEx spending each year over the next five years will be at or below depreciation and amortization that hasn't changed. Only radar would change is that the major new program came along that we had to invest in fast with new clients that we haven't been anticipated but that would be a good front.

If you look at R&D we are ramping up spending in R&D and that does show up in the technical line.

How should we think about a run rate on R&D then?

I think the run rate you see is probably pretty good.

Okay.

And then the really primary drivers of the margins in AUC decides that we allude to apart from those two factors CapEx and the 1AM R&D on the other really are at this stage driven more by what we refer to in the release the difference between our advanced composite operation in Rochester which is roughly a deal breakeven. That will be lumpy and the operation which is more conventional composites which is really where all the losses are right now.

Just the follow up on Mark's question about PMC and you know we know that the topline growth is going to stay kind of steady, but can you just sort of help us think about the profitability, I mean, you know profitability in Asia, where the growth is that's offsetting Europe. The profitability is going to be a lot better producing over there and then also in South America.

So, I mean, if topline stays flat, does the EBITDA actually get better as these trends develop from a macro level?

Well, you are right that the margins are very strong in Asia, prices are lower than in Europe. But nonetheless the margins are strong.

So if you assume flat growth, I think the safe assumption right is that what you see is what we should be able to sustain, that would be a safe assumption because we will see improvements in productivity in profitability driven by what you just described. But we also on the other hand need to absorb inflation - offset inflation.

So you got to take that into account. So I think the safe assumption now is you know we told them 42% gross margins in PMC, don't get greedy.

Okay, fair enough. And then, maybe, on the competitive front, assuming that this negotiation goes favorably, what does that do to opportunities for some of your competitors to create headaches for you again?

Well, I think, it's a safe bet that the negotiation has. This negotiation has gone favorably.

We just have to sign on the dotted line, but we're really pleased with how that went. And as we have discussed before, the window for that instability gets wide open when you have major contract negotiations.

So the fact that we got through this and this will lead to a long-term agreement is significant. And all this is really well for stability in the Americas.

Now, there is the next big contract negotiation in Europe takes places at the end of this year. So the window opens up again in Europe.

I think, fundamentally, nothing has changed. That underlying risk, primarily in the Europe, that is overcapacity in our industry is still there.

Our fear was that that risk of instability was spread, and that's why this recent contract negotiation was so important. And the fact that it is concluding the way it did leads to a reasonable conclusion that that risk is not spreading.

That risk of instability is not spreading out of Europe.

Okay. And then maybe some of other businesses that saw some growth here, Engineered Fabrics and Door Systems, pretty strong top line growth, I mean, particularly engineered fabrics, I mean what's driving that?

Primarily the original equipment manufacturers in the non-wovens industry, so the people who build the machines that make not woven products. They are seeing economic recovery.

They are starting to build new machines and so that's a good sign and that's still a growth business, particularly in Europe and Asia. Its not facing the same long term sectoral decline that the paper industry is.

So that's still the big driver there. The secondary driver, smaller impact but important is still the housing market and at some point we see recovery in the housing market that should lead to additional growth as well.

On the door side, we were encouraged by what we're seeing. We keep with what we keep reporting is that that is a business that does grow at a multiple of GNP and the more encouraging noise coming out of Europe is good news for that business.

So keep in mind that Q4 is the season high for that business and if you momentum coming out of Q2 because of the summer effect Q3 tends to be soft. You have momentum in Q2 that usually says you're going to have a good Q4.

If I can just take you back to the contract renegotiation I'm trying to reconcile stability in your words also with you're pleased. So is it fair to say that you saw some price improvement generally speaking of course in the renegotiation and is that the first price improvement you've seen in a contract renegotiation thus far?

Well, we really don't want to get into price Paul but I think the best way to understand why we're pleased is to explain it this way. Our share is disproportionately high with customers who think in terms of when they go into a negotiation like this think in terms of reducing their total cost of ownership.

So when they view us as someone who can help them optimize their systems reduced total cost of ownership we do well. We do disproportionately well.

That is we have higher share than our average. For customers who just view this as a procurement transaction and were just focused on minimizing the price to have to pay for PMC rather than looking at the overall impact that the PMC supplier can have on their overall productivity.

We do disproportionately battle we have disproportionately low share. The big question coming into this negotiation was, was this critical customer going to focus more on total cost of ownership and what we can do for them to improve to reduce their total cost of ownership or were they going to go the more traditional procurement rule of pounding their supplier and trying to set up a price war among the suppliers.

And they went down the past of total cost demolition. And you know on more sophisticated customers who think seriously about how to manage their supply chain?

That's what they think about.

Okay. That's helpful, I certainly understood.

I know you said order rates are up 8% in PMC, but could you give us a sense if there was any sort of discernable trend in order rates to core that may suggest maybe June was better than April?

No, I think the most important indicator is still over interpreted because there's still a fair amount of noise as the industry comes out of recession. But the unusual indicator, usually which is on the encouraging side, is that, we are at the half way mark of the year in order to sales ratios are at parity, that's pretty good.

We don't usually see that. By this time in the year orders have dropped for most sales because there's an order pattern that fair number of customers will put in bulk orders at the beginning of the year.

So it seasonally always get higher orders in Q1 and it usually tails off in Q2.

Okay. And then could you give us a sense on geographical order trends in the quarter or really sales trends rather, I guess, the most curious to hear how North America did relative to Europe?

Sales trends North America and the Europe, is that what you asked?

Yes. I mean, are they holding hands or is maybe Europe worse than North America?

It really are different dynamics at this point. They're completely different markets, that North America you have distinguish between Canada and the U.S..

The Canadian market is - because it's so dependent on newsprint is in trouble. Mark was alluding to this earlier, the paper industry is in pretty good shape right now.

They are running at high capacity. Their inventories are low.

They're increasing prices. And our attitude is don't be fooled by that, that longer-term those same sectoral trends will gradually erode the U.S.

market. Europe is somewhere between U.S.

and Canada. They still have overcapacity.

They still have overexposure to newsprint. Asia is just going gangbusters.

There are a lot of new machines going in, and it's everything we thought it would be, and we're really happy with how we're doing there. And South America is somewhere in between U.S.

and Asia. It's a strong market, and we're a very strong competitor there.

Have you seen, I guess, a low-cost, organic, singular supplier of PMC kind of come out of the woodwork in Asia or is it really just the same folks you see across the globe?

It's the same folks.

Okay. And then, finally, do you think the restock of PMC is complete at this point?

I know, maybe, during the year, we saw some knee-jerk reaction to low PMC levels. Do you think that's complete?

I think so. That's why we think Q2 is a pretty good indicator.

Hi, Joe. Just following up on PMC profitability.

I'm trying to balance conservatism with what you're saying. It doesn't sound like we should expect profitability to get worse.

But if I'm looking at operating margins, 25.5 margin in PMC and 23% in fabrics with all the work you've done, do you think these are sustainable and then do you have ever given thought to giving long term profitability targets?

We think they are sustainable and the challenge for us internally with the way we describe it to ourselves is year over year we need to add a minimum with productivity gains, incremental productivity gains to beat inflation year over year, a if we do that and that's where we're oriented toward doing than those margins are sustainable. No, we don't do guidance and there is nothing and we often suggest that we would go down that road to perdition.

Well, not guidance but in term of a long term projection, just because the margins with all the work you've done, I mean there really isn't any historical comparison at this point.

Well, I think for now what we're trying to say is if you take our currency and those one timers, use this quarter as the baseline. That's the best information we have.

Now, with all of the noise behind this, all of the restructuring and recession behind this, the best information we have is use this quarter as a base line. And then for PMC while there will be incremental swings up and down, the sectoral trends to us say, use the top line within a few percent as the baseline.

And the caveat is of course those seasonal effects. Don't forget the seasonal effects.

Right. And then just quickly on the composites, for the re-engine programs, there has been a lot of talk and speculation in the industry between trade off on re-engine versus the clean sheet and I just kind of want to get your thoughts on in terms of the clean sheet it sounds as if the reason they might be holding back isn't the engine but some of these other efficiencies in air frame and other parts of the plane which sounds as if it would might incorporate your technology later on down the road and I just wanted to hear a little bit more from your perspective would a clean sheet that pushes a back a little bit would it really be a negative or might you have much larger content?

Right. Well, so let's just go back to the basics here.

Originally, Airbus and Boeing back up even more the single aisle aircraft Boeing just came out with its projections for new aircraft sales over the next 20 years. They see it not just for them but market overall, $3.5 trillion market.

70% of the new aircraft that they project to be delivered during these 20 years will be single aisle aircraft. So the Boeing 737 are successor Airbus 320 are successor, the single aisle aircraft that the Chinese introduce 70% over 20,000 flight it's a massive market.

Originally back in 2006, 2007, 2008 when we were getting going in this business it appears that Boeing and Airbus were going to introduce new clean sheet single aisle aircraft in the middle to late second half of this decade and then they backed off that by 2008, 2009. And instead began talking about reengineering.

And reengineering is simply taking the new 737s or A320s that are build with slight modifications and putting a much more fuel efficient engine on. Airbus said at the Air Show that they don't see enough gain for the massive investment required to build a whole new aircraft until way out in 2027 that they see a solid business case instead for taking the existing air frame A320 and putting a re-engine, putting a new engine on it.

And we're talking 10 to 15% improvement in fuel efficiency with those new engines, if you just do the math, at current fuel prices, not the future fuel prices, at current fuel prices the net present value of the fuel savings over the life of a plane was 15% fuel efficiency gain, is like $8 million, big deal. Big savings from just that kind of fuel efficiency, so they have concluded you don't get enough banks for the additional investment in a whole new aircraft, this decade, really don't until you get out to 2027.

And that's because there are not enough incremental fuel efficiencies from our whole new aircraft until out then. A large part of the reason is, the next generation of engine, beyond the ones we're talking about now, Leap Action, EuroTurbo aren't ready until out sometime next decade.

So they are convinced re-engineing the business cases there. And it's for the reasons I just described.

Boeing is going through the same logic. They are saying if we could seize the business case for a whole new aircraft this decade, then it doesn't make sense to stay with the existing model of re-engining.

Let's do a whole new aircraft. And when Airbus ran that analysis, they said you don't get the bang for the buck until later next decade.

Boeing publicly are saying it's weighing those two options. What they're not saying is there is a huge crowd on the horizon in the form of COMAC, the new Chinese entrant into this single-isle aircraft.

And COMAC is targeting an entry into service in 2015-2016 with the engines that we're participating on. Neither Boeing or Airbus can afford to be to wait very long to come up with a fuel-efficient solution or they will start losing that all-important single-isle market with the Asian part of it which is huge to COMAC.

So all this dance behind the specter that's out there is they have to do something or start losing share to the new Chinese aircraft, which will be more fuel-efficient, it will have the new engines than the existing generation of single-isle. If Boeing decides that it really does make sense to go with a whole new aircraft this decade and they can get there fast enough to prevent an erosion of market share because of COMAC, it would present new opportunities for us on the airframe.

On the other hand, we might have less sales on the engine, because a whole new airframe would mean they'd probably design it to allow not only not only our engine but also, craft engine. So may be a lot of opportunity, its hard so say without getting a lot of quantification about whether the opportunity is bigger with the re-engine or with whole new aircraft and now you have tasted the big opportunity.

Right, okay. And in terms of the Airbus's economic case with the fuel savings, they also though seems as if they've kind of gone back and they're now saying that they'll offer it with the old engine or the new one.

And the maintenance, that the leasing company is saying that NPV may offset some of that, have you heard anything that now that they might offer it with both, if they do just like to go forward with it, that there would be less demand for putting the LEAP-X on and ordering it with the new ones in.

Jason, we don't have insight information on that. What we have is economic logic and if you buy a plane and you're stuck with it for 25, 30 years, what is going to happen to the price of oil during the lifetime of that plane.

And fuel efficiency is huge driver in thinking about the economics of future aircraft. One of the reasons that the OEMs we're working with, the GE Snecma joint venture, one of the reasons that they went into design they went with is that its compatible with the maintenance systems of the existing CFL engine.

LEAP-X engine is the same basic structure so there is a lot of compatibility in the maintenance approach.

Great. Thank you all for participating and look forward to talking to you individually in the various investor Conferences or on the phone before that.

Thank you and have a good day.