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Xerium Technologies Inc. Message Board

  • wantstoretireearly wantstoretireearly Jun 20, 2010 1:15 PM Flag

    NPR Freak - why do you like XRM

    Hi NPR freak, from this message board, I can tell you closely follow the company and care enough to post. (I play a similar role on the NAVI board.) How long have you been invested in the company, why are you bullish and can you tell me anything about the quality of management? What is your timeframe for investing here and where do you hope the stock will be in a year?

    Thanks,

    Wants

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    • I give up - it's not even letting me post a single copied paragraph now. So quick summary on two longish paragraphs.

      I think the paper industry is transitioning more than going away. Smaller, more versatile and energy efficient mills are replacing the old bohemoths. Fiber stock is recycled and mills can be located away from forests. Newsprint may be dead but we have a long way to go to get to a paperless office. Tissue and packaging will continue. I also see some possible non-paper applications. Thin film solar comes to mind and GE is working on sheet based OLED lighting. We already have paper circuit boards but I don't believe they are in wide use yet.

      I hope the stock is over $100 in a year, but that's not the question you intended to ask. Qualitatively, I think $30 is not out of the question by the end of the year and $40 or more a year out.

      I don't want to put myself out there quantitatively until a starting point is known. We have probable addition back to the Russell 2000 and the end of NYSE out-of-compliance this month which could bring institutions back. Next is earnings in August. We shall see.

    • So that's a few reasons why I am bullish. Add to that virtually zero analyst coverage and the fact that no one has heard of the company except all the institutional holders who have pulled out and it looks like an explosive combination if all goes even halfway well, particularly considering the tiny float.

    • Boy I hate Yahoo sometimes. No error and no post. I'm going to try one paragraph.
      -------
      -Speaking of roll covers, the SmartRoll product is a value-added roll with monitoring capabilility that can improve energy efficiency, output quality and reduce downtime. It ain't cheap (prices on the Stowe Woodward section of the company website) but has done well in pilots.

      • 1 Reply to nprfreak
      • A correction on SmartRoll: the dollar figures on the website are not prices, but savings for a paper mill under the scenarios they lay out in each box. Sorry.

        The whole series of posts was pretty much stream of consciousness, so I'm sure I got some other stuff wrong too.

        XRM was the only stock in my portfolio to end in the black today. Nice. I just returned home but see there was a green one-minute candle with 50k shares. Double nice!

    • Why I am bullish:

      With the state of various economies and the paper industry, there is every reason to be bearish. But despite its size, I think Xerium has some competitive advantages. I'll just make this a bullet list. I won't guarantee the accuracy of every point.

      -Metso and Voith are the primary manufactures of papermaking machines. They both have clothing and roll cover divisions but sell some portion of new machines without those components. Xerium has both standard and value added products, and a robust distribution and repair network that could capture that startup business and potentially replace OEM and after-market competitor products over time.

      -Largest US competitor in clothing is Albany (AIN) and they do many other things. XRM is more focused and responsive.

      -Pre-IPO, the company saw the future and began cutting back N.America and European operations in favor of locations closer to the more likely to expand customer base in the developing world. As that effort has continued, Xerium has built a solid distribution and service networks in Asia and S. America while maintaing the same in N. America and Europe.

      -China is the main thing at the moment. Xerium bought a roll cover company pre-crisis and is on the verge of a deal with (or for) a clothing manufacturer there.

      -Cash flow has been very good for most of Xerium's history and is likely to improve significantly with the reduced debt service. (They are required to apply 50% of annual "excess cash" to debt principal. I actually like and the company has historically made voluntary debt reductions anyway.)

      -The hard work of restructuring that has occurred over the last few years, and particularly since last year, is done. For Q2, there will significant related one time costs with the possibility of a small hit in Q3 (with the final court hearing in August).

      -As demand returns, Xerium is positioned to ramp up production but rehire gradually. The cuts were sharp enough but they elected to not to get to skeleton crew levels, anticipating an opportunity to maintain some inventory for fast delivery on recovery and only start rehiring when the recovery looks sustainable. For clothing, that pretty much where they were for Q1 - running at 100% capacity but unsure if orders indicate recovery or are just inventory replenishment. A similar burst of orders could be coming for roll covers.

      --Too verbose still - one more break

    • Management and Board of Directors:

      Whether is was APAX or Light or both, there is better paper industry representation in both the executive suite and in the boardroom than there was when I started investing. Given the difficulties and rapid change in the industry, that experience could assist Xerium in capturing market share. (I suspect paper is a pretty incestuous industry with players all knowing each other and folks moving between companies.)

      I don't know a tremendous amount about the division heads (an understatement - "I know nothing" would be more accurate), but they seem to know what they are doing and have long tenure. CFO Dave Maffucci came to Xerium from newsprint maker Bowater (aquired by Atibibi and now in Ch 11). He hasn't screwed up to my knowledge - his predecessor was the one that did the rate swaps wrong - and the street really seems to like him. That spike in the stock price last June was apparently a response to his being named CFO after serving on the BOD for some time. He doesn't say much on earnings calls anymore, but there hasn't been that much to say with the debt problems in limbo for more than six months. CFO is a demanding job with Xerium spread over 13 countries with different rules, laws and currencies.

      Obviously, I am a Light fan and I have to check my assumptions periodically to insure that is not blinding me to some negative reality. (If the company had not gotten itself into such dire straits I would say he is overpaid.) Xerium gives no forward guidance - ever - on anything earnings related. But Light's prepared presentation on the earnings calls is clear and reasonably complete.

      He doesn't white-wash bad news and started warning about the potential 9/30/09 covenant violation as early as the Q4 08 earnings call. With two of their largest customers in bankruptcy (AtibibiBowater and Smurfit Stone) it was inevitable. It's clear during the QandA session on the calls that Light has all the facts at his finger tips and it didn't take him along to get there. It's obvious his first priority when he was hired was to learn the details of the products and the business I haven't detected any verbal hedging when answering questions until recently and that was mild and clearly the result of legal advice. (And yes, SA has recent transcripts after stopping for a couple of quarters.)

      So I'm impressed with the management team sitting here on the outside looking in. They seem to be very hands-on with the divisions. They have executed well and consistently on plans and have continued to move forward during the chaos. I'm sure many were surprised that they were negotiated with a Chinese clothing manufacturer even during the bankruptcy procedings.

      This is getting long, so one more.

    • Follow closely is an understatement - I've been fairly obsessed, particularly in the last several months.

      I bought my first shares (long since sold) for the juicy dividend way back in late 06 or early 07 despite some concern about the debt level. I have maintained a position since then though the share count has fluctuated. The dividend was cut in half (last div paid 12/07) but was still pretty juicy.

      You ask about the management team and that's a big part of why I stuck around. A little history: Private equity firm APAX Partners bought the company in 1999 and mounted an IPO in 2005. Post IPO they held 54% of shares (declining to 50% over time due only to employee share dilution) but were passive investors. Several things happened in late 2007: The company had to restate earnings for improper accounting for interest rate swaps, the dividend ended, and APAX became an active investor. They expanded the BOD to add two Apax Directors (plus some other changes) and recruited the current CEO.

      The research I did on the CEO Stephen Light was the decider for me. He was most recently at FLOW, another specialty industrial company in similar balance-sheet difficulty and had won some award - Turnaround CEO of the Year or something like that. I was able to turn up some quasi-negative stuff but it was back pretty far and (I think) his first CEO job.

      Light worked out a PIPE for FLOW. While not my favorite solution, it still preserves some value for existing shareholders. That stock is struggling again now but rose nicely and for an extended time after the PIPE was completed.

      Light started his career at GE (again, I think) after getting a bachelors degree in Mechanical Engineering. I don't know if or how long he actually did engineering vs. management, but the base knowledge is beneficial in this kind of business.

      I added some shares after the CEO announcement but before the stock price fully rebounded from the earlier disappointments, and then took some profits at the top. After the Lehman bankrupcty I got more aggressive with buys whenever I had some spare cash in the account.

      So that's my history and some background on company history. I will continue in another post.

 
XRM
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