Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of industrial consumable products and services, announced its Q2 2015 results.
- Adjusted EBITDA improved to $28 million, representing a margin improvement of 170 basis points compared to Q2 2014 and the 5th consecutive quarter of improved Adjusted EBITDA margins.
- Gross margins have improved over the last 11 consecutive quarters.
- SG&A at constant currency declined 4% sequentially.
- Updated full year 2015 guidance to be similar to 2014, reflecting near-term newsprint and graphical grade decline trends and weak euro.
- Sales growth investment programs remain on track with 8 facilities beginning production or ramping up production capabilities in the second half of 2015 coupled with over 39 new patented products.
Net sales for Q2 2015 were $123.1 million, an increase of $2.1 million, or 1.7%, over net sales of $121.0 million for Q1 2015. On a constant currency basis, net sales increased $3.6 million or 2.7% over Q1 2015 net sales, primarily driven by an increase of 3.2% in machine clothing net sales and an increase of 1.8% in rolls net sales. Constant currency SG&A declined by $1.3 million, or 4.1% to $30.4 million in Q2 2015 from $31.7 million in Q1 2015. Q2 2015 Adjusted EBITDA increased to $28.0 million, up 6.9% from $26.2 million in Q1 2015, driven primarily by the increase in sales volume and the decline in SG&A, partially offset by FX losses in Q2 2015 related to the revaluation of non-functional currency balances. See "Non-GAAP Financial Measures" and "Segment Information" below.
Net sales for Q2 2015 decreased by $(3.9) million, or (2.8)% compared to Q2 2014, on a constant currency basis, primarily driven by the decline in the printing, writing and newsprint markets in North America and lower mechanical services sales in North America. See "Non-GAAP Financial Measures" and "Segment Information" below.
Q2 2015 gross profit was $49.4 million, or 40.2% of net sales, compared to $55.4 million, or 39.6% of net sales in Q2 2014. Machine clothing gross margin improved to 43.9% (excluding $0.9 million of one-time Kunshan, China startup costs) in Q2 2015 from 41.1% in Q2 2014. These improvements were a result of positive currency effects that were partially offset by unfavorable fixed cost absorption. Rolls and service gross margin decreased slightly to 36.0% (excluding $0.2 million of Corlu, Turkey one-time start-up costs) in Q2 2015, from a gross margin of 36.5% in Q2 2014, primarily due to unfavorable currency effects.
SG&A expenses were $30.4 million, or 24.7% of net sales, in Q2 2015, down from Q2 2014 SG&A expenses of $35.4 million, or 25.4% of net sales, primarily due to favorable currency effects and lower management incentive costs.
Q2 2015 basic earnings per share were $(0.05) per share versus Q2 2014 basic earnings per share of $0.05 per share. Excluding non-recurring items such as restructuring costs, plant startup costs, foreign currency gains/(losses) and one-time tax reserve charges, basic adjusted earnings per share were $0.37 in Q2 2015, compared to $0.43 in Q2 2014. See "Basic Adjusted Earnings Per Share" below.
“Despite the current difficult industry trends, our Q2 2015 results demonstrated that our initiatives to improve our cost structure continue to deliver both sequential and YOY improvements in Adjusted EBITDA margins, gross margins and SG&A rates. As our sales growth investment programs come on line, we will begin to generate sales growth despite the decline of graphical grade production,” said Harold Bevis, President and CEO of Xerium Technologies, Inc. "Our 2 1/2 year $87 million sales growth investment program is nearing completion. We have completely renovated our products and factories and it has led to many patentable inventions. The second half of 2015 is a turning point for Xerium, which will enable us to expand our ability to gain sales in the competitive marketplace. We are excited about the progress we are making and expect positive financial returns as we ramp up production in the second half of 2015 and into 2016."
During the second quarter of 2015, the machine clothing and rolls sales environment was more challenging than we had anticipated due to customer shutdowns and curtailments. Consequently, we expect our full-year Adjusted EBITDA will likely be comparable to last year's Adjusted EBITDA, due to this quarter's results as well as our expectation for the remainder of the year. We view this as a temporary dynamic given our multi-year sales growth investments are in the early stages of gaining traction and will increasingly augment our sales growth. We expect the incremental earnings from our sales growth investment programs to more than offset the permanent market declines in graphical paper production.
To further increase our profit rates, we are continuing to take costs out of the business. This includes the recent closure of a machine clothing facility in Warwick, Quebec, Canada. The cost structure at this plant was operating at almost twice the level of our low-cost facilities. We still have other facilities with very large cost reduction opportunities. Beyond our improving cost structure and new geographic footprint, we will also benefit from new product introductions. Currently, we have 425 issued patents and 97 pending patents. Additionally, as our capital expenditures begin to decline, we will begin to pay down our debt with the surplus cash flow.
Sales Growth Investment Program Update
The following sales growth investment programs, totaling $87 million, involve a full gamut of initiatives that will enable Xerium to deliver significant incremental Adjusted EBITDA growth and further increase our earnings potential. Most of our spending is behind us and these multi-year programs are coming on line in the second half of 2015.
$71 Million Global Machine Clothing Sales Growth Investment Program
On July 22, 2015, we announced that our Kunshan, China press felt plant began production. This two year, $47.8 million greenfield press felt plant, is located in the center of the largest paper-making region in the world. This facility significantly improves Xerium's competitive positioning, from both a lead time and cost perspective, enabling Xerium to more closely partner with customers who were previously served from our European plants through a lengthy and costly supply chain. Xerium will conduct business in local currency and local languages and will be able to service the largest pulp, paper, paperboard, and tissue machines in the world, as the main machine in the plant is over 15 meters wide. For some press felt designs, Xerium will be able to make three pieces simultaneously - a first for the Company.
Our Piracicaba, Brazil expansion project remains on track to be completed in late 2015, which after three years and a $9.1 million investment (includes $2.7 million in sales growth capital investment and $6.4 million in restructuring capital investment), will have been expanded to offer higher quality dryers, increased exports for spiral and woven dryers, forming fabrics and non-woven fabrics. In addition, this expansion will result in significantly shorter lead times to our customers, and will enable us to consolidate three mid-sized South American plants into one low-cost plant in Piracicaba, Brazil that is globally competitive.
We continue to remain on schedule with our other second half 2015 initiatives at Kentville, Nova Scotia ($4.4 million investment); Gloggnitz, Austria ($12.9 million investment); and Asahi, Japan ($3.2 million investment). Xerium is expanding its product lines and capacity in these plants to better enable it to grow sales. These plants have either recently been or will soon be commissioned and will ramp up their respective production capabilities throughout the second half of 2015.
$16 Million Global Rolls and Service Sales Growth Investment Program
On July 16, 2015, we announced that our Corlu, Turkey Rolls facility began production. This two year $4.3 million greenfield rolls and service plant is in a key emerging market. This facility is a new regional hub, serving customers in Turkey, Southeast Europe and the Middle East. Xerium has conducted business in these regions for many decades as an exporter, and now will serve as a local low-cost provider with shortened lead times to customers. The plant has one of the largest grinding machines in the region and was built to handle rolls up to 80 metric tonnes in weight. For the first time ever, customers in this under-served region will receive locally provided and locally optimized state-of-the-art rubber extrusion and polyurethane roll covering technology.
While the award-winning Ruston, LA facility completed its expansion late last year ($2.1 million investment); Griffin, GA ($4.1 million investment) and Neenah, WI ($5.5 million investment) expansions will all be completed in the second half of 2015. These facilities will expand Xerium's product lines and capacity to better enable it to grow sales.
Collectively, these programs compliment our legacy business model and enable Xerium to replace sales from declining graphical business segments. We will be close to key customers, with short lead times and low costs. Additionally, we are broadening our product and service offerings to give us a wider aperture into new markets and new machines types. These are key turning points for Xerium's business.
EVP and Chief Financial Officer, Cliff Pietrafitta said: "During the second quarter of 2015 we continued to take costs out of the business with quarterly gross savings of $5.5 million. We spent approximately $21.7 million of cash on capital expenditures and restructuring costs in Q2 2015 and we expect to spend approximately $50 million in 2015 on capital expenditures and between $8 and $10 million on restructuring costs for the entire year of 2015.
As of June 30, 2015, we had an aggregate of $30.3 million available for additional borrowings under our Credit Facility and smaller lines of credit and our cash balances totaled $9.2 million. Q2 2015 free cash flow (defined as cash-flow from operations less capital expenditures) decreased $(3.3) million to $(9.1) million from $(5.8) million in Q2 of 2014, primarily as a result of increased capex spend and Q2 2015 sales decreases.
Net debt (which is defined as total debt less cash) increased to $473.4 million in Q2 2015 from $464.7 million in Q1 2015, as a result of increased debt outstanding. Our net debt leverage ratio was 4.1x in Q2 2015, substantially the same as 4.0x in Q1 2015. We expect our Net debt and leverage to improve in the later part of 2015, as free cash flow becomes positive and we begin to pay down debt.
Trade working capital decreased $8.4 million to $123.2 million at June 30, 2015 from $131.6 million at December 31, 2014, primarily as a result of favorable currency impacts. See "Trade Working Capital Information" and "Non-GAAP Financial Measures" below.
Our effective income tax rate for Q2 2015 was 117.7% compared to 75.3% in Q2 2014. Excluding the effects of restructuring and a non-recurring tax reserve adjustment, our effective tax rate was 63.2%, compared to 39.2% in Q2 2014, primarily due to the mix of earnings in tax paying jurisdictions versus earnings in non-tax paying jurisdictions.
About Xerium Technologies
Xerium Technologies, Inc. (NYSE:XRM) is a leading global provider of industrial consumable products and services. Xerium, which operates around the world under a variety of brand names, utilizes a broad portfolio of patented and proprietary technologies to provide customers with tailored solutions and products integral to production, all designed to optimize performance and reduce operational costs. With 27 manufacturing facilities in 13 countries around the world, Xerium has approximately 3,100 employees.
Source: Xerium Technologies, Inc.
Xerium Technologies, Inc.
Cliff Pietrafitta, 919-526-1444