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Edited Transcript of XRM earnings conference call or presentation 27-Jul-18 1:00pm GMT

Q2 2018 Xerium Technologies Inc Earnings Call

YOUNGSVILLE Aug 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Xerium Technologies Inc earnings conference call or presentation Friday, July 27, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clifford E. Pietrafitta

Xerium Technologies, Inc. - Executive VP, CFO & Treasurer

* Mark Staton

Xerium Technologies, Inc. - CEO, President & Director

* Phillip B. Kennedy

Xerium Technologies, Inc. - Executive VP , General Counsel & Secretary

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Conference Call Participants

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* William McGoldrick Mastoris

Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Xerium Technologies 2018 Second Quarter Conference Call. (Operator Instructions) At the request of Xerium Technologies, this conference call will be webcast and recorded.

I would now like to turn the conference over to Xerium's General Counsel, Phillip Kennedy. You may begin your conference.

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Phillip B. Kennedy, Xerium Technologies, Inc. - Executive VP , General Counsel & Secretary [2]

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Thank you, and welcome to Xerium Technologies' 2018 Second Quarter Financial Results Conference Call. Joining me this morning are Mark Staton, CEO and President of Xerium Technologies; and Cliff Pietrafitta, Executive Vice President and Chief Financial Officer. Mark will lead the discussion this morning, and Cliff will discuss our Q2 2018 financial results. Then we will open up the lines for questions.

I would like to remind everyone that our discussions during this conference call may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those indicated and that those statements speak only as of the date of this call. We undertake no obligation to update or revise any forward-looking statements.

Discussions on this call will also include financial measures not prepared in accordance with generally accepted accounting principles. Those measures are not and should not be viewed as substitutes for GAAP financial measures. For a full discussion of these matters, please refer to our earnings release and our 10-Q that were made available yesterday afternoon as well as in our other SEC filings, all of which can be found on our website.

Now I will turn the call over to Mark Staton, our President and CEO, who will provide the opening remarks. Mark?

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Mark Staton, Xerium Technologies, Inc. - CEO, President & Director [3]

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Thank you, Phillip. Good morning to everyone listening in. I'd like to begin today by recapping the outcome of our strategic alternatives review process, followed by highlights on our financial results for the quarter.

As previously reported on June 24, the company's strategic alternatives review process led to a definitive agreement for Andritz AG to acquire 100% of the shares of Xerium for $13.50 a share. Although we do not anticipate any complications, the completion of the transaction is subject to the approval by our stockholders, regulatory approvals and other customary closing conditions. We expect to close the transaction later in the second half of 2018. We will not make any additional comments on this pending transaction during our call today.

Turning to the second quarter results. Our business continued to perform very well during the period. Consolidated sales were $125.3 million, up 4.1% compared to the second quarter of 2017. The improvement was attributable to a favorable foreign currency environment and continued stability in the end markets we serve.

Our profitability was also improved in the second quarter, resulting from our cost-out and efficiency programs, although on a consolidated level, the impact of onetime costs associated with the strategic alternatives review were greater than the CEO transition costs in the prior year, resulting in GAAP operating income of $14.7 million compared to $15.3 million in the second quarter of 2017.

Second quarter adjusted EBITDA was $27.5 million, which marked a modest increase from the prior year results of $27.2 million. Notably, this is our strongest quarterly EBITDA performance since the second quarter of 2016.

Cash flow was another highlight of the quarter, with operating cash flow of $20.8 million and free cash flow of $18.8 million compared to 2017 cash flow from operations of $10.2 million and free cash flow of $7.1 million.

We were very pleased with our performance in the second quarter. The Xerium team continues to work diligently to execute on our commitments to drive efficiency and growth across our global facilities and to generate strong cash returns.

Now I'll turn it over to Cliff for a closer look at the numbers.

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Clifford E. Pietrafitta, Xerium Technologies, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Mark. Referring to Page 3 of the slide deck, consolidated revenue in the second quarter 2018 increased 4.1% to $125.3 million compared to the prior year level of $120.3 million. Our second quarter gross profit was $49 million or 39.1% of sales compared to $49 million or 40.7% of sales in the second quarter of 2017.

On Slide 4, by segment, we saw Rolls & Service sales improve 2.5% to $49.1 million in the second quarter of 2018 compared to $47.9 million in the second quarter of 2017, driven by favorable currency impacts and improved volumes in Europe and Latin America, partially offset by lower North American rolls sales.

Machine Clothing net sales increased 5.2% to $76.2 million during the second quarter of 2018 compared to $72.4 million in the second quarter of 2017. The increase in Machine Clothing sales was benefited by favorable current -- foreign currency impacts as well as improved volume in Asia and Europe, partially offset by lower North American Machine Clothing sales as Q2 2017 benefited from the catch-up of sales related to 2016 production shortfalls.

Rolls & Service gross margin, as shown on Slide 5, decreased to 34.6% in Q2 2018 from a gross margin of 36.2% in Q2 2017. The decrease was primarily due to onetime production costs in Q2 2018.

Machine Clothing gross margin declined to 42% compared to the prior year period of 43.8% in the second quarter of '17. Gross margin was unfavorably impacted by the timing of production and the impact it had on overhead absorption rates compared to Q2 2017.

Turning back to our consolidated results. SG&A was $34.9 million or 27.2% of net sales in Q2 2018 versus $32.9 million or 27.3% of net sales in Q2 2017. The decrease in the SG&A percentage of sales was primarily attributable to higher sales, the onetime impact of CEO transition costs in Q2 2017 and savings achieved through the company's cost-out initiatives, net of inflation, partially offset by costs associated with the strategic alternatives review process.

Cash taxes were $2.3 million for the second quarter, which are primarily impacted by income the company earns in tax-paying jurisdictions relative to income it earns in nontax-paying jurisdictions, primarily the United States.

Q2 2018 basic loss per share was $0.26 per share versus Q2 2017 basic loss per share of $0.21 per share. This change from prior year was driven by strategic alternative expenses, lower gross margin percentages and higher foreign currency exchange losses, partially offset by higher sales, Q2 2017 CEO transition costs, lower restructuring costs and lower income tax expense.

On Slides 6 and 7, second quarter 2018 adjusted EBITDA was $27.5 million or 21.9% of net sales compared to the second quarter of 2017 adjusted EBITDA of $27.2 million or 22.6% of net sales.

Turning to Slide 8. Net cash provided by operating activities during the second quarter of 2018 was $20.8 million, and our free cash flow was $18.8 million. Net debt at the end of Q2 2018 was $500.7 million compared to $504.7 million at the end of Q4 2017.

The company's net debt leverage ratio at June 30, 2018, was flat compared to the end of the year 2017 at 5x adjusted EBITDA.

With that, we would like to open up the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Bill Mastoris from Baird.

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William McGoldrick Mastoris, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [2]

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Mark, I know you said that you wouldn't get into any type of details as far as the actual transaction of the acquisition. But what are the regulatory hurdles that you must clear at this point, both here in the United States and overseas?

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Mark Staton, Xerium Technologies, Inc. - CEO, President & Director [3]

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Well, we obviously have to get shareholder approval and -- which will be coming hopefully. And we have to go through some antitrust filings overseas.

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William McGoldrick Mastoris, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [4]

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Okay. And those would be the only 2 regulatory approvals that you really need at this point. Would that be correct?

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Mark Staton, Xerium Technologies, Inc. - CEO, President & Director [5]

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To my understanding, yes.

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William McGoldrick Mastoris, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [6]

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Okay. And the timing on those would be over, let's say -- I guess, those filings have already been made. Would that be fair?

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Mark Staton, Xerium Technologies, Inc. - CEO, President & Director [7]

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I can't comment on that, Bill, at this point in time, but the filings are in process as is the processing for the shareholder meeting.

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William McGoldrick Mastoris, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [8]

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Okay. I'm just trying to get an idea of the timing of the completion. And really, that's all...

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Mark Staton, Xerium Technologies, Inc. - CEO, President & Director [9]

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I said in my prepared comments it would be later in the second half of 2018, and I'm sure you would appreciate and understand. But we have to have a little bit of vagueness because we're in the hands of third parties, especially the antitrust filings.

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Operator [10]

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(Operator Instructions) There are no further questions at this time. I turn the call back over to the presenters.

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Mark Staton, Xerium Technologies, Inc. - CEO, President & Director [11]

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Okay. Well, thank you very much for your time this morning and look forward to talking to you again in October. Thank you very much. Bye.

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Operator [12]

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This concludes today's conference call. You may now disconnect.