Albany International Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 26, 2022

Key Takeaways

  • Positive Sentiment: In Q1, total net sales rose 9.8% to $244.2 million year-over-year and adjusted EPS increased to $0.91 from $0.87.
  • Positive Sentiment: The Aerospace Composites segment saw net sales grow ~23% driven by LEAP program ramp-up, while Machine Clothing posted mid-single-digit gains.
  • Negative Sentiment: Persisting inflationary pressures in materials, wages, logistics and energy, coupled with supply chain disruptions, are expected to weigh on profitability for the year.
  • Negative Sentiment: Albany ceased Russian operations, recording ~$600K of WIP reserves, a $2.4 million raw material write-down and an estimated $10 million annual sales loss.
  • Neutral Sentiment: Full-year guidance remains unchanged with sales of $920 million – $960 million, adjusted EPS of $2.80 – $3.30 and adjusted EBITDA of $215 million – $245 million despite global uncertainties.
AI Generated. May Contain Errors.
Earnings Conference Call
Albany International Q1 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International First Quarter Earnings Call. At this time, your telephone lines are in a listen only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. As a reminder, your conference call today is being recorded.

Operator

I'll now turn the conference call over to your host, Director of Investor Relations, John Hobbs. Go ahead, please.

Speaker 1

Thank you, Alan, and good morning, everyone. Welcome to Albany International's Q1 2022 Conference Call. As a reminder, for those listening on the call, Please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward looking statements and the use of certain non GAAP financial measures and their associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning.

Speaker 1

Today, we will make statements that are forward looking that contain a number of risks, uncertainties, among which are the potential effects of the COVID-nineteen pandemic and the potential effects of the Russian invasion of Ukraine on our operations, the markets we serve and our financial results. For a full discussion, including a reconciliation of non GAAP measures we may use in the call to their most comparable GAAP measures. Please refer to both our earnings release of April 25, 2022, as well as our SEC filings, including our 10 ks. Now I'll turn the call over to Bill Higgins, our President and Chief Executive Officer, who will provide opening remarks. Bill?

Speaker 2

Thank you, John. Good morning, and welcome, everyone, and thank you for joining our first earnings call of 2022. Today, I'll comment on our Q1 results, our strategic progress and corporate governance, and Stephen will then cover our financial results in more detail. First, let me express our concern for the people of Ukraine following the Russian invasion. The will of the Ukrainian people and the resistance is inspiring, We hope this senseless war comes to an end soon.

Speaker 2

Like many companies, Albany has ceased doing business in Russia. Specifically, we have stopped shipping machine clothing belts to paper companies in Russia and we're withdrawing from a very small joint venture in Russia that produce belts for local paper manufacturers. Our business exposure in Ukraine is small. We have no employees there and we typically export a modest amount of machine clothing to paper making customers there and we look forward to continuing to support those customers in the future. The combined effects had a minor impact on our Q1 results, which Stephen will outline.

Speaker 2

Our 2022 outlook assumes no Russian sales moving forward. Suffice it to say, 2022 has I'm pleased to report strong revenue growth in the Q1 in both our business segments. In fact, our Aerospace Composites segment grew net sales by more than 20% Our Machine Clothing segment posted mid single digit growth compared to the Q1 last year. In the Q1, we achieved GAAP EPS of $0.87 per share, up $0.02 per share from last year's $0.85 and adjusted EPS of $0.91 per share versus $0.87 per share adjusted EPS last year. Most impressive is our team's ability to be adaptive to work together to overcome difficult supply chain challenges, logistics barriers, material shortages, while replanning operations to deliver to our customers on time.

Speaker 2

In machine clothing, for example, we continue to see delays of raw material delivers from our suppliers, but we are still able to hit record levels of output, improve absorption and productivity, deliver to customers on time and produce excellent financial results. This took a lot of extra effort working across the globe to share materials and rebalance factory capacity and output. We have great teams that are performing exceptionally well. On the cost front, we're closely monitoring and actively managing Inflationary pressures in materials, wages, logistics and energy. We're passing through cost increases where we can.

Speaker 2

Inflationary cost increases continued into Q2 and are expected to impact our profitability for the year overall. For example, rail transport from China to Europe across Russia is no longer viable and has been replaced by boat transport, adding cost and doubling the shipping time. Truck transportation within China is stymied by pandemic lockdowns and driver quarantines and truck availability in Europe is impacted by the loss of Ukrainian truck drivers who returned home contributing to an estimated 10% reduction of Truck transport capacity in Western Europe. On a positive note, our confidence will continue to be nimble and flexible. Our supply chain and operations teams have demonstrated their Agility by navigating the challenges of the last 2 years and the Q1 remarkably well.

Speaker 2

Despite this global environment, we're optimistic about our growth opportunities. Our strategy is to invest in R and D and product development to drive organic growth, to collaborate with key customers to design the next generation of advanced materials for long term growth and to position Albany as the Technology leader and partner of choice in both of our segments. This means we must be good at both developing Advanced Materials Solutions and operational performance. In machine clothing, we have a strong operating culture. We've earned a reputation for producing products of exceptional quality and durability for our customers.

Speaker 2

We're the global technology and market share leader in paper machine clothing, a market whose underlying long term demand trends are expected to grow with economic activity, e commerce trends and a secular shift toward renewable and recyclable materials as paper replaces plastic. In our Engineered Composites segment, our strategy is consistent to bring the next generation of advanced materials to market The durability and performance of 3 d woven composites exceed the performance of any other fan blade material, Titanium or 2 d composite blades. Moreover, we achieved high rates of commercial production and demonstrated the commercial feasibility of 3 d woven composite components. Our success with LEAP is a springboard to propagate the use of 3 d woven structures across the aircraft. We're excited about the long term opportunities for advanced 3 d woven composites on the next generation airframe and engines with a variety of OEM and Tier 1 customers and partners.

Speaker 2

In the near term, we're ramping up production on the LEAP program Layered into the future, these programs and opportunities lay the foundation for sustainable long term organic growth. The strategy takes advantage of long term secular trends driven by climate change and energy efficiency. Our aim is to be at the center of this shift to lighter composite aircraft Now let me make a couple of comments about recent changes in our corporate governance. First, we're pleased to welcome 2 new members to our Board of Directors, Christy Alvoort and Russell Toney. As part of our Board refresh process.

Speaker 2

We're excited to have Christy and Russell join Albany. They bring strategic, operational, technical leadership experience to the Board. With their collective experience in materials, aerospace, technology and diversified global manufacturing, our governance, strategic planning and growth capability is enhanced. And second, we've effectively transitioned Albany to a single class share structure. 100% of Class B shares have now been converted to Class A shares and all outstanding common stock is now Class A.

Speaker 2

Therefore, all shareholders now have equal voting rights. Our next step will be the formal retirement of the dual class structure and our bylaws, which we intend to bring to a shareholder vote in 2023. So with that, I'll hand the call over to Steven. Steven?

Speaker 3

Thank you, Bill. Good morning to everyone. I will talk first about the results for the quarter and then provide an update on our outlook for our business for the balance of the year. For the Q1, total company net sales were 244 $200,000 an increase of 9.8 percent compared to the $222,400,000 delivered in the same quarter last year. Adjusting for currency translation effects, principally the decline in the euro relative to the U.

Speaker 3

S. Dollar, Net sales increased by 11.5% year over year in the quarter. In Machine Clothing, also adjusting for currency translation effects, Net sales were up 5.7% year over year driven by growth in all grades of product. Engineered Composites net sales, again after adjusting for currency translation effects, grew by 23.1% with growth on LEAP and CH-fifty 3 ks partially offset by a decline on the F-thirty 5 platform. During the quarter, the LEAP program generated revenue of almost $38,000,000 compared to a little under 27,000,000 in the same quarter last year.

Speaker 3

LEAP revenue was also up significantly sequentially as we have now completed the planned of our finished goods. We finished Q1 with less than 100 LEAP-1B engine chipsets in stock, in line with the safety stock levels required under our contract. 1st quarter gross profit for the company was 91,600,000 an increase of 3.5% from the comparable period last year. The overall gross margin declined by 130 basis points from 39.8 percent to 37.5 percent of net sales caused mainly by the mix shift due to AEC's top line growth outpacing that of the MC segment and a lower gross margin in AEC. Within the MC segment, gross margin was flat at 51.5 percent of net sales as the drop through benefit of the increased revenue was fully offset by higher input costs and fully reserving about $600,000 of WIP and finished goods that had been destined for Russian customers.

Speaker 3

Within AEC, gross margin declined from 16.4% to 13.6% of net sales caused primarily by raw material and WIP reserve, mixed effects and a slightly larger net unfavorable change to long term contract profitability. During the quarter, raw material held at a 3rd party storage facility was determined to have been stored inappropriately with temp which are fluctuations that effectively consumed its useful life. While we will pursue options for recovery of some or all of our loss, We made the determination to reserve $2,400,000 in Q1 for the raw material and the width into which The suspect material had been incorporated. To the extent that our recovery initiatives are successful in a future quarter, We would at that time reduce the reserve appropriately. 1st quarter selling, technical, general and research expenses Increased from $46,700,000 in the prior year quarter to $52,600,000 in the current quarter and increased as a percentage of net sales from 21.0% to 21.5% caused primarily by the impact of our decision to exit the Russian market and higher R and D expenses.

Speaker 3

During the quarter, we fully reserved about $1,200,000 in receivables from our Russian customers. Total operating income for the company was $38,800,000 down from $41,800,000 in the prior year quarter. Machine Clothing operating income decreased by about $700,000 caused by the higher gross profit being more than offset by higher STG and R and restructuring expenses. Meanwhile, AEC operating income decreased by about $1,700,000 caused by lower gross profit and higher STG and R expense. Other income and expense in the quarter netted to income of $3,900,000 compared to expense of about $600,000 in the same period last year.

Speaker 3

The improvement was primarily driven by a more beneficial foreign currency revaluation effect in this quarter, partially offset by the write down of the $800,000 net book value of our equity stake in our small Russian Paper Machine Clothing joint venture. With respect to the latter, we have provided notice to our joint venture partner of our intention to fully exit that relationship. The income tax rate for this quarter was 28.1% compared to 26.7% in the prior year quarter. The higher rate this quarter is primarily due to the absence of a beneficial true up of estimated tax payments recognized in the Q1 last year. Net income attributable to the company for the quarter was 27,700,000 Essentially flat compared to last year as lower operating income and higher tax rate were only partially offset by the favorable change in other income and Earnings per share was $0.87 this quarter compared to $0.85 in the same period last year.

Speaker 3

After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, The discrete impact of exiting the Russian market and expenses associated with the Surcomp acquisition and integration, Adjusted earnings per share was $0.91 this quarter compared to $0.87 last year. Adjusted EBITDA increased slightly to $61,000,000 for the most recent quarter compared to the same period last year. Machine Clothing adjusted EBITDA was $57,700,000 or 37.4 percent of net sales this year, up from $54,900,000 or 37.1 percent of net sales in the prior year quarter. AEC adjusted EBITDA was $13,700,000 or 15.2 percent of net sales, down from last year's $16,700,000 or 22.6 percent of net sales. During the quarter, the company had negative free cash flow, defined as net cash used in operating activities, less capital expenditures of about $21,100,000 This was not at all unexpected as it is typical for the company to Negative cash flow in the Q1 due to seasonality in receipts and incentive compensation payments for performance in the past year.

Speaker 3

This quarter's cash flow performance does not change our outlook for free cash flow for the full year. During the Q1, we returned over $50,000,000 of cash to our investors, comprised of over 6,000,000 in regular dividends and almost $44,000,000 in share repurchases. We repurchased almost 515,000 shares during the Q1 at an average price of $85.35 Share repurchases have continued in Q2. Our net leverage ratio is now about 0.52, which still provides us significant flexibility to return cash to shareholders without impairing Our ability to make strategic investments should an opportunity arise. I would now like to provide an update on our financial guidance we talked about on the prior call, including input cost increases and the weak euro.

Speaker 3

However, we continue to see risks in the balance of the year. First, it is unlikely that the high sales performance we saw this year will continue at the same level as we believe that the revenue growth we saw this quarter in both the North American and European markets exceeded underlying demand and was driven by timing of certain customer requirements. In future quarters, we do not expect to be Able to fully offset the impact of input cost inflation through higher revenue driving increased drop through. This challenge is exacerbated by the fact that inflation is still rising. In fact, in the 10 weeks since we issued our initial guidance for 2022, our assessment of the impact of inflation on the segment's bottom line for the full year has risen by about $4,000,000 2nd, the risk of the destocking cycle we discussed on our last call remains.

Speaker 3

Many of our customers have continued to operate with a higher than normal safety stock of our finished goods at their facilities, driven by fear of future supply chain disruptions. Given global events, including the invasion of Ukraine and resulting sanctions, The inflationary environment and the lingering impact of the pandemic, those fears did not abate in the Q1. We do not know when or to what extent that risk will manifest itself in terms of impacts to our revenue, but it is Still possible we will see some impact in 2022. 3rd, we have new challenges resulting from Russia's invasion Ukraine and the tragedy that is unfolding there. Direct impacts of our exit from the Russian market include both the write offs and reserves that we recognized in the Q1 and the loss of approximately $10,000,000 in sales per year.

Speaker 3

As Bill noted, there also have been significant disruptions The cost and availability of shipping options between Asia and Europe. Potential indirect impacts such as effects on our supply chain or to global demand for our customers' end products are unknown at this time, but could be significant. As a result, we are maintaining our previously issued segment guidance for net sales of $590,000,000 to 610,000,000 and adjusted EBITDA of $205,000,000 to $225,000,000 Turning to Engineered Composites. We are seeing no meaningful direct impacts from Russia's invasion of Ukraine as the segment has almost no Russia sourced revenue. However, there are secondary risks, most notably that our customers could see disruptions elsewhere in their supply chains or that the potential economic impact of the conflict and the sanction regime could disrupt the recovery in the global aerospace market.

Speaker 3

At this time, while it is not possible to assess The size or probability of the impact of these risks on the segment's top line performance, we do not expect meaningful impact from those risks on our 2022 segment outlook. The Q1 was challenging from an underlying profitability perspective for the segment as the lower revenue on some fixed price programs, most notably on the F-thirty five program, meant that we did not see any improvement in gross margin from a higher revenue this quarter compared to last year. This effect, combined with the raw material related reserve and the previously announced higher investments in new business pursuits and R and D caused us to temporarily deliver an adjusted EBITDA margin Under 20%. For the full year, we still expect to deliver an adjusted EBITDA margin of over 20% for the segment. Therefore, we are maintaining our segment guidance for revenue of $330,000,000 to 350,000,000 and adjusted EBITDA of $65,000,000 to $75,000,000 At the total company level, we are maintaining most of our previously issued full year guidance as follows: revenue of between $920,000,000 $960,000,000 unchanged Effective income tax rate of 29% to 31%, unchanged depreciation and amortization of $75,000,000 unchanged Capital expenditures in the range of $75,000,000 to $85,000,000 unchanged.

Speaker 3

GAAP Earnings per share of between $2.76 $3.26 updated from prior guidance of between 2.80 and $3.30 adjusted earnings per share of between $2.80 3.30 also unchanged, and adjusted EBITDA of between $215,000,000 $245,000,000 also unchanged. Returning to the present, it does remain a challenging environment. Over the past 3 years, our employees have had to deal with the effects of the 7 37 MAX Grounding, the pandemic, the inflationary environment and now the Ukrainian crisis. Through it all, our employees have performed admirably, particularly our production management, supply chain and human resources personnel who have had to manage through a constantly changing environment every week has brought new challenges. The company owes all of our employees a debt of gratitude for their hard work, their diligence and persistence and at all times for commitment to safety.

Speaker 3

With that, I would like to open the call for questions. Alan?

Operator

We'll first go to the line of Pete Skibitski with Alembic Global. Go

Speaker 4

ahead.

Speaker 5

At AEC in particular, it seemed like the ramp on LEAP was really strong, maybe over 100 chipsets or so in the quarter. And so I'm wondering if you think the visibility for that ramp to continue It's really good at that point. There's some questions about China accepting deliveries or not. But from year end anyway,

Operator

does it seem like kind

Speaker 5

of all systems go on LEAP?

Speaker 3

Yes. I'm sorry, Pete, we missed the first part of your question. I don't know, at least at our end, the first couple of things. But I think I got the gist of your question. Look, LEAP, as we said, was up fairly significantly this quarter, certainly compared to Q1 of last year.

Speaker 3

I'm not sure it's quite the 300 chipsets you referenced, but if you have to talk about total number Kippman, it's you're probably our total number of units produced, you're probably in the right directional range at least. We certainly feel we have as much insight into demand as our direct customer, Safran, has. We get regular updates from Safran, their outlook for it. I am not sure that right now that outlook is Heavily dependent on the Chinese market reopening, although clearly at some point it will be. That is a significant market, as you know, for single aisle aircraft.

Speaker 3

And we would expect at some point in the future, 7 37s and A320s to be selling there in Quantity is comparable to what they were that we saw before the crisis. Right now, I would say that we think our look into the balance of this year is good. As we get into 2023, it's less hazy or more hazy, I should say. But I don't think there are significant risks to our outlook for this year.

Speaker 5

Okay, got it. One last one for me on machine clothing, also kind of related to China and the global economy. With regard to the lockdowns in China, How much is that how much of that negatively impact you revenue wise in the quarter? And then, there are some Concerns about the potential for a global recession, maybe early next year, late this year. And machine clothing, I think, is at least partially viewed as sort of A staple product, if you will, maybe modestly discretionary.

Speaker 5

But how are you guys thinking about the potential for A meaningful slowdown in machine clothing late this year or next year with the inventory in the channel, with the Potential for the economy slowing, it's been sort of a mixed record, I think, historically, if I look back. So what are your thoughts as you see it today?

Speaker 2

Yes. Pete, let me start with that. So far, Machine Clothing has performed remarkably well. And We keep in fact, we're asking again last night, are we seeing any effects in China with the lockdowns now across Beijing in addition to Shanghai and other places. Our facilities in China have been up and running.

Speaker 2

We've been able to keep them operating. So far so good. So, it feels pretty solid right now. I think that we're watching the customers that we think have built up Extra inventory because of the supply chain sort of risk mitigation that will probably continue for a little bit longer while we're seeing these transport Interruptions and bottlenecks and delays. But I think for now, machine clothing looks pretty solid As we go into the year, packaging, tissue has been strong, particularly in North America.

Speaker 2

What happens in China longer term? Is there a recession? Those are big questions I'd like to know the answers to As we mentioned in

Speaker 3

the commentary, we've just been through the MAX, the Pandemic and now this war effect. So we hope we don't go into a recession, but we don't see any events of it affecting us just yet. There's probably Pete, to your question about the excess inventory, there's probably of our products in the channel, in the tens of 1,000,000 of dollars in total of extra product out there That would be presumably consumed first were we to see some slowdown to kind of size the risk The immediate risk level. As you said, we are a stable product. But as a consumable product, We do see a much more muted cycle than many members of the pulp and paper supply chain, which are providing more capital intensive products.

Speaker 3

Our belts wear out. And if you look at prior cycles, the volume consumed even during prior economic cycles, While it clearly goes down, it is a cyclical business. It's a much more muted cycle than many cyclical industries.

Speaker 5

Yes. Steve, I mean tens of 1,000,000, so that's On the order of 10% of your machine clothing revenue, that's kind

Speaker 3

of I wouldn't say as high as 10%.

Speaker 5

Okay, okay, okay. All right. Thanks so much guys.

Operator

Our next question will go to the line of Peter Arment with Baird. Go ahead, please.

Speaker 6

Yes. Good morning, Bill

Speaker 7

and Susan.

Speaker 6

A question is really on just kind of Certainly a little bit on what Pete was asking about on MC, just on kind of the top line cadence. I guess historically, your second quarter has And a little bit stronger seasonality. And I'm just wondering, you mentioned that there was some timing on some shipments with North America and Europe. Is there How should we be thinking about just kind of the cadence? Do we still think we're growing sequentially or it seems like it'd be a tough year over year number when we look at the Q2 last year and MC on the top line.

Speaker 2

Yes. I don't know that we're looking for big growth. I mean, we're holding our guidance. Things Feel pretty steady. Our bookings coming into the quarter are solid.

Speaker 2

So I think we feel like we're in pretty good shape, but I don't think we're expecting a Big step up here.

Speaker 3

Yes, Peter, we try not to get involved in giving quarterly guidance. But as Bill says, We are in a strong position heading into the Q2. Certainly, our order book is strong, albeit probably on balance A little weaker than it might have been at the same time last year. So expecting another blowout quarter. It's we expect to see it continue to perform well, but you mentioned Q2 is a tough comp.

Speaker 6

Yes. Okay. No, that's helpful. I just wanted and then just, Steve, just on kind of FX, can you remind us a little bit kind of the dollar, obviously, It continues to really strengthen a lot of against a lot of currencies around the world. What your exposure is on that front?

Speaker 3

Yes. Against the euro, We have sales of over $100,000,000 in euros. And so clearly, at the top line, we see a drag with the euro having come down. Last year, we had an average close to $1.20 in terms of the euro dollar exchange rate. Now we're down a little north of parity, quite frankly, bounces around, but down in $6,000 $1.07 range at times.

Speaker 3

So top line over $100,000,000 At the bottom line level, We're along the euro still probably round numbers in that, let's say, close to $50,000,000 range. And so as you look at that, the over 10% decrease we've seen this year in the That will drive north of $5,000,000 of impact to the bottom line.

Speaker 6

Great. Thanks so much.

Operator

Our next question will come from the line of John Franzreb with Sidoti and Company. Go ahead.

Speaker 7

Good morning, guys. Just on the higher inflationary cost, I'm curious about what your staffing level looks like between the two segments. Are you fully staffed? Or are you still having any troubles kind of bring people on board?

Speaker 2

I would say in machine clothing, we're fully staffed, John. In AEC, we're adding folks for both the lead production growth as quickly as we look To exit this year going into next year for the future and then we're building the CH-fifty three ks production facility in Salt Lake City where we're adding As well. So we are staffing up folks there in very tight labor markets.

Speaker 7

And when do you expect that to be done though?

Speaker 2

Well, the lead production, I think, will go into next year. The CH-fifty three ks is probably most of it this year.

Speaker 7

Okay. And just on go back to the China question, maybe I missed it. How much of revenue was deferred out of the Q1 into the second Or was there any? Because as you can say, we were fully operational.

Speaker 3

So in China, We are fully operational in the Q1 and nor did we see any material impact to our customers, either order demand in the Q1. So for us, Q1 was relatively unimpacted by What's going on with COVID in China at the current time, not to say that there could not be impact to Q2. There's clearly there's some news about it spreading to other cities and seeing the kind of stringent lockdown we saw in Shanghai most recently. But Certainly. There was no impact to our Q1 results, no deferred revenue.

Speaker 7

Great. Thanks, Vascey. I appreciate it.

Operator

Our next question will come from the line of Gautam Khanna with Cowen. Go ahead please.

Speaker 8

Hi, how's it going guys? I may have missed this, so pardon if I ask a repeat question. But On the LEAP-1B visibility that you guys have, how firm is that schedule? And I just do I just wonder how much it's changed around over the last 6 months and How far of a forecast forward you get from Safran on this? And are you guys still kind of comfortable with the 2,000 Deliveries of total lead product that they talked about for 2023?

Speaker 8

That's my first question.

Speaker 2

Yes. So I think maybe the context of it is that our production isn't directly linked to what Boeing is doing or even engine shipments. We work it out with saffron, the production we're going to plan for the year. We set that in motion and in January kick it off. In some years, like when the pandemic, it got changed quite a bit, but this year is pretty steady.

Speaker 2

So we're working to a production plan that we've agreed to with Saffron that might be A little different than what you're seeing with Boeing.

Speaker 8

Okay. And One of the things we hear from a number of industrial companies is inflation in resins and inflation And availability of resins has come down. Has that impacted any of the carbon fiber prepride product That you guys are sourcing or is that all well sourced and you don't see the inflation in those impacts?

Speaker 2

We are seeing inflation, as I mentioned. Generally, we're seeing inflation in cost of materials and Resins and yarns and chemistries in both AEC and MC, both Segments are managing on a it's a 20 fourseven job. So if you were to sit it in our business reviews with our supply chain teams, I mean, you could write a book on It's amazing, the effort that goes into keeping production going. In the Machine Clothing segment, we actually manufacture some of our own polymers. And because machine clothing products are all custom made, we buy a lot of different size and types of polymers.

Speaker 2

So we're ramping up our internal production to shore up the needs that we have there. And then in the AEC side, we work with very large OEMs that are helping us, saffron, Sikorsky and whatnot, when we buy materials.

Speaker 3

Yes. For most of the end item raw materials, The resins carbon fiber, whether it's prepreg or just raw carbon fiber that we use in AEC, there are long term contracts entered with those suppliers by our customers, and we are buying under those agreements. And so we're a little bit insulated from the impact of inflation in AEC, not completely, certainly a lot of the non end item materials, whether it be gloves, release agents, vacuum bags, Everything else that goes into making parts, we are procuring on the open market and are subject to inflation just like any company. But on the And a lot of the end item raw materials that are in the finished product, as I say, they're bought under contracts. Our customers negotiate.

Speaker 3

And we, along with other Suppliers to those customers are buying under that master contract.

Speaker 8

That's very helpful. And then just on 787, could you talk a little bit about what your expectations are for the year, where we are in that destock? And Have you seen any uptick yet in production queues to you guys?

Speaker 2

Yes. We don't have it in the commentary because we're just kind of running the line to keep it warm. And that's sort of the plan for this year. So we have very little on the plan.

Speaker 8

Our revenue

Speaker 3

in the quarter on 787 was under $2,000,000 Gautam, so it's and we finished last year close to 10. So view that as essentially flat Because it's a little noisy quarter to quarter. We are seeing no uptick right now. It is keep the line warm, operate at the lowest level possible.

Speaker 8

Great. And one last one. We talked about Russia Ukraine as risk. Is there any Forthcoming opportunities that are created by it? I don't know.

Speaker 8

Was any of your customers sourcing from Russia and Ukraine that may want to create their own infrastructure outside of the region, machine clothing side or is it just a potential negative?

Speaker 2

I don't see any opportunity at this point. It's probably slowed down Europe a little bit more. North America has been very strong. I was Thank you, Gautam.

Operator

Our next question will come from the line of Michael Ciarmoli with Truist Securities. Go ahead.

Speaker 4

Hey, good morning guys. Thanks for taking the questions here. Just, I don't know Bill or Stephen, all the Commentary around machine clothing, risks seemingly significantly increasing. You've got the rush headwinds, why not lower the guidance? It seems like your commentary is much more biased to the downside there.

Speaker 3

Well, we certainly had a very strong Q1,

Speaker 8

which puts us in

Speaker 3

a good position, covers Some of that risk and allows us to stay within the same guidance range. It's also quite frankly, Mike, it's Q1. We're 1 quarter through the year. There are many uncertainties in the balance of the year, Unless we're quite sure how some of them are going to unfold, it feels a little early to be thinking about changing guidance in either direction For either segment, unless something is very short at this stage.

Speaker 4

Okay. No, that's fair. I mean, you kind of talked about inflation still rising. Just calling out those risks, figured I'd ask it. What about has anything changed with your confidence level getting back on the world and things looking a bit more hazy here.

Speaker 4

Any kind of sentiment change there?

Speaker 3

Sorry, look, no sentiment change. Is there more just global uncertainty than when we last spoke 2.5 months ago? Sure. There's clearly more global uncertainty With the invasion and the sanctions regime that's in place. But right now, we certainly we're not kicking ourselves regretting Making that statement 2.5 months ago, Mike.

Speaker 3

So I think we still feel generally good about that. And we'll see how this year unfolds and obviously give you better guides for 2023 when we get together in 9 months.

Speaker 2

And I think taking the longer view, as I said in my commentary, we're optimistic because we're working on programs. We've talked about a number that CA-fifty three ks being the most recent win. Hypersonics, we talked about our collaboration with Spirit last year, Getting that off the ground. There's some other ones that we haven't talked about. So we're just optimistic longer term that we've got some growth in front of us.

Speaker 4

Got it. Makes sense. And then just one more if I can. Just on the AEC margins, obviously weaker in the quarter, you talked about the 20%, sounded like some just under absorption on the Joint Strike Fighter. And I guess, presumably, The write down of some of the assets may have been in there, but what's it going to take specifically, I guess, In terms of programs and volume to drive those margins, is it continued leap?

Speaker 4

It certainly doesn't sound like 787 is going to be a contributor. Is it joint strike fighter ramping? What's going to drive the EBITDA margin as we move through the year here?

Speaker 3

Yes. If you look, Mike, if you look at the shortfall, let's say, to that 20% level during the quarter, roughly half it, Close enough, a little over half of it was driven by this reserve we had to take on raw material and our width Related to that issue. That should not be a repeating issue. So that gets us back Halfway there, just from the absence of that. The rest, as you say, it was really from F-thirty 5 being particularly low this quarter.

Speaker 3

Certainly, our plan is not dependent on enormous Recovery in programs beyond what we're seeing today. So I do not think that getting Back to a 20% EBITDA requires some and it's very easy for me to say herculean effort. I'm sure for the guys in the operating segment, every day is circulating an effort these days. But it doesn't require enormous leaps. We think we're on a solid path That is what I'm saying, Mike.

Speaker 3

It's not like falling off a log, but there's certainly a solid path to delivering that without some heroic assumptions around demand beyond what the trends we're already seeing in the market.

Speaker 4

Got it, got it. Makes sense. Thanks guys. I'll jump back in the queue. Thanks Mike.

Operator

We'll go next to the line of Pete Skibitski with Alembic Global for a follow-up question.

Speaker 5

Yes. Just one follow-up, guys. Since we have a defense budget now and it looks like a little bit better outlook, I just want to get kind of your updated thoughts on, Bill, I think you touched on missiles in general and hypersonic missiles in particular. I know there's been testing going on across the industry, but how soon should we think that Beyond jazz, I guess, how soon should we think the hypersonic missile category could be a part of the growth story for you?

Speaker 2

We've got a ways to go still on that. Probably could give more color on that toward the

Speaker 3

end of the year into next Sure. It's a development program right now. So look, without saying anything, we can't say publicly out there, Various companies talking about testing plans over the next 24 months, let's say 18 to 24 months. I would not expect Material revenue for us before that time period. But hopefully, some programs will go into production where it's certainly Toward the middle of the decade, we could see some meaningful revenue.

Speaker 5

Okay. Yes. No, I know it's sensitive area. I just wanted to get a I'm just curious if visibility had improved since we had a better budget outlook. So thanks for the color.

Speaker 5

Thanks.

Operator

And speakers, we have no one else in queue at this time.

Speaker 2

All right. Well, I'd like to thank everyone for joining us on the call today. We are holding an Investor Day, May 25 in Boston. If you'd like to register to attend the in person event, please Feel free to reach out to John Hobbs, our Director of Investor Relations. As always, we appreciate your continued interest in Albany International.

Speaker 2

Thank you, and have a good day.

Operator

Ladies and gentlemen, the replay for this conference call will be available on the Albany International website.

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