Xerium Reports Third Quarter 2015 Financial Results
Q3 2015 Highlights:
- Adjusted EBITDA was $28.3 million or 24% of sales representing a 130 basis point YOY improvement. TTM Adjusted EBITDA increased to $111.9 million or 23% of sales representing a 240 basis point YOY improvement. Gross margins were 41% and improved YOY for the 12th consecutive quarter.
- Sales repositioning program remains on track. 2 new plants, 8 expanded plants, and 39 new products.
- We anticipate the current commodity grade production decline environment to continue into Q4, now expect full year 2015 Adjusted EBITDA to be approximately $110 million.
- We continue to reposition operational profile with closures of our Warwick, Canada and Middletown, VA facilities.
- We remain on track for a ~$30 million YOY free cash flow improvement, and it is expected to accelerate.
- We completed the refinancing of our existing ABL facility – the new facility provides more flexible terms at a lower overall cost of borrowing.
YOUNGSVILLE, NC, November 4, 2015 (BUSINESSWIRE) -- Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of industrial consumable products and services, announced its Q3 2015 results.
Net sales for Q3 2015 were $118 million, a decrease of $(9.9) million, or (7.1)% compared to Q3 2014, on a constant currency basis, driven by the decline in sales to commodity grade paper producers, particularly in North America. These decreases were partially offset by increases in rolls sales outside of North America. See "Non-GAAP Financial Measures" and "Segment Information" below.
Q3 2015 gross profit was $48.3 million, or 41% of net sales, excluding one-time start-up costs of a new machine clothing plant in China; a new rolls plant in Turkey; and plant closure costs.
SG&A expenses were $32.1 million, or 27.3% of net sales in Q3 2015, a decline versus Q3 2014 expenses of $34.2 million, or 24.6% of net sales.
Adjusted EBITDA was $28.3 in Q3 2015, sequentially flat to Q2 2015. Q3 2015 TTM Adjusted EBITDA was $111.9 million, an increase of $1.2 million over Q3 2014 TTM Adjusted EBITDA.
Q3 2015 basic earnings per share were $0.06 per share versus a loss per share of $(1.32) in Q3 2014. Excluding the non-recurring items and foreign currency gains, basic adjusted earnings per share were $0.30 in Q3 2015, compared to $0.43 in Q3 2014 as a result of lower sales volumes and gross margins, partially offset by favorable currency effects and improved SG&A. See "Basic Adjusted Earnings Per Share" below.
"Commodity grade paper production declined strongly in Q3, particularly in North America due in part to the strong dollar. Xerium is exposed to this set of market dynamics and it is a key reason for its multi-year 10 project sales repositioning program. This program remains on track with 8 of the 10 projects completed and the majority of the spending completed." said Harold Bevis, President and CEO of Xerium Technologies, Inc. “Our largest sales growth projects are both on line now – new machine clothing plant in China to pursue Asian board, packaging and tissue; and a new rolls plant in Turkey to pursue board, packaging and tissue in that region.
In October 2015, we announced the closure of a rolls plant in North America in order to initiate our 11th sales repositioning project. We will move that equipment into a new rolls plant in a new geography focused on the growing pulp market. These initiatives are part of our firm commitment to move Xerium into growing grades and geographies. This will increase our earnings potential.
Winning new business for this new capacity is paramount and is based upon technical performance on our customer’s machines. Xerium has developed 39 new products and created over 150 new patents in this endeavor. The sales repositioning programs will be a main driver of our ongoing success. At the same time, we are repositioning the company’s cost structure. As a result, the company has systematically improved its gross margin rates and EBITDA rates.
8 of the first 10 sales repositioning projects have been completed and the other 2 projects will be completed in Q4. The majority of the spending on these projects has been completed as well. Free cash flow is expected to improve ~$30 million year-over-year and this progress will continue into 2016."
We expect currency market dynamics and currency exchange rates to remain the same in Q4 2015. Consequently, adjusted EBITDA is now expected to be approximately $110 million for 2015. This is confirmation of the importance of the company’s repositioning program. The economic payback of these investments will become increasingly apparent as we move forward. Furthermore, with the most significant capital investments behind us, we will improve the company’s free cash flow as we go forward.
Sales Growth Repositioning Program
The company has completed 17 of the 19 plant repositioning projects in its 3 year program. This transformation program has the goal of realigning our geographic footprint, cost structure and machine re-purposing with market growth opportunities. In June, we announced that the closure of the machine clothing plant in Canada was due to its high cost structure. Those machines are moving to Asia. In addition, in October, we announced that we were closing the Virginia rolls plant due to it being redundant to other North American facilities and Xerium having strong alternate use for those assets in a brand-new high-growth market location (new location not yet announced).
For at least the next 2 years, the company will be repurposing and relocating its machine clothing and roll assets and personnel to new growing market positions.
Machine Clothing Sales Growth Repositioning
We have completed the company’s sales growth repositioning program at 10 machine clothing plants.
- 4 plant closures in Spain, Argentina, Canada, and Brazil
- 5 plant expansions in Canada, Austria, Japan, and Brazil
- 1 new plant in China
This 3 year refitting program will better position Xerium to pursue machine clothing sales in growing grades and regions that are outpacing global industry growth. In addition, this global renovation program helped reconfigure our machine clothing plants into a unified global network that eliminates redundancy, standardizes on best practices and shortens lead times. The company has a few more remaining steps to complete its machine clothing repositioning program (those steps not yet announced).
The most significant project was building the company’s new machine clothing in China and it began production in August of 2015. The Asia team has already won new incremental business for Q4 2015 and beyond. Its strategic location in the world’s largest paper-making region is ideal. Over half of the world’s paper machines are in Asia, and over half of those machines are in China specifically. This is the company’s first machine clothing plant in China. It has the company’s newest equipment and newest product designs.
Rolls Sales Growth Repositioning
The company is also on track to complete in Q4 the company’s sales growth repositioning at 9 rolls plants.
- 4 plant closures in France, Germany, United States
- 4 plant expansions in China, United States
- 1 new plant in Turkey
This 3 year refitting program will better position Xerium to pursue roll sales in growing grades and regions that are outpacing global industry growth. The company has installed its first working roll plant in China and is winning new business and moving existing production from Europe to China. The China plant has the company’s newest equipment and newest product designs.
EVP and Chief Financial Officer, Cliff Pietrafitta said: "We spent approximately $16.8 million of cash on capital expenditures and restructuring costs in Q3 2015 and we expect to spend cash of approximately $50 million in 2015 on capital expenditures and approximately $13 million on restructuring costs for the entire year of 2015. Our estimated restructuring costs have increased from prior guidance, due to the acceleration of the Middletown, VA closure and other cost out initiatives, as we are proactively addressing the ongoing weakness in the commodity grade markets.
As of September 30, 2015, we had an aggregate of $33.0 million available for additional borrowings under our Credit Facility and smaller lines of credit and our cash balances totaled $10.7 million. In addition, Q3 2015 free cash flow (defined as cash flow from operations less capital expenditures) improved $1.3 million to $(2.3) million from $(3.6) million in Q2 of 2015, primarily as a result of improved cash flow from operations in Q3 2015.
Net debt (which is defined as total debt less cash) increased to $478.7 million in Q3 2015 from $473.4 million in Q2 2015, primarily as a result of negative free cash flow and unfavorable currency effects. Our net debt leverage ratio was 4.3x in Q3 2015, compared to 4.1x in Q2 2015. We expect our net debt and leverage to improve in 2016, as we utilize free cash flow to pay down debt.
On November 3, 2015 we completed a refinancing of our existing ABL revolver. This new $55 million facility extends the maturity date to November of 2020 and provides more flexible terms at a lower overall cost of borrowing. The terms of this new facility will provide us additional optionality as we continue our strategic initiatives.
Trade working capital decreased $15.6 million to $116.0 million at September 30, 2015 from $131.6 million at December 31, 2014, primarily as a result of favorable currency impacts. Net of favorable currency, trade working capital improved $2.6 million. See "Trade Working Capital Information" and "Non-GAAP Financial Measures" below.
Our effective income tax rate for Q3 2015 was 45.2% compared to 334.0% in Q3 2014. Excluding the effects of settling a tax assessment in Brazil in 2014, restructuring, non-recurring tax reserve adjustment and the Australian valuation allowance release, our effective tax rate was 55.9%, compared to 38.0% in Q3 2014, primarily due to the mix of earnings in tax paying jurisdictions versus earnings in non-tax paying jurisdictions.
(Click here to read the entire press release on our investor relations page)