Xerium Technologies' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Xerium Technologies, (XRM)

Xerium Technologies, Inc. (NYSE:XRM)

Q4 2013 Earnings Conference Call

March 5, 2014 09:00 ET


Kevin McDougall - Executive Vice President, General Counsel and Secretary

Harold Bevis - President and Chief Executive Officer

Cliff Pietrafitta - Executive Vice President and Chief Financial Officer

Dave Pretty - President, North America


Melissa Tan - R.W. Pressprich

Katja Jancic - Sidoti & Company

Craig Hoagland - Anderson Hoagland and Company


Good day, ladies and gentlemen and welcome to the Xerium Technologies’ Fourth Quarter and Full Year 2013 Financial Results Conference Call on March 5, 2014.

I will now hand the conference over to Kevin McDougall, Executive Vice President and General Counsel. Please go ahead, sir.

Kevin McDougall

Thank you, and welcome to Xerium Technologies’ fourth quarter and full year 2013 financial results conference call. Joining me this morning are Harold Bevis, CEO and President of Xerium Technologies; and Cliff Pietrafitta, Executive Vice President and Chief Financial Officer. Harold will start the discussion this morning and then we will provide further financial details with respect to the quarter and full year results. Subsequently, we will open up the line for questions.

Xerium Technologies’ financial results for the quarter and year-to-date periods were made available with the filing of our 10-Q after the market close on Tuesday, March 4, 2013. And we are also announcing a press release issued after the filing of the 10-K. Notification of this call was broadly disclosed and this conference call is being webcast using the link on the Investor Relations page of our website at www.xerium.com.

I also note that we will make comments today about future expectations, plans and prospects of the company such as our general expectations for 2014. These statements constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those described in Tuesday’s press release and in our SEC filings. These forward-looking statements represent our review as of today, March 5, 2014, and we specifically disclaim any obligation to update these forward-looking statements.

Lastly, on this call, we plan to discuss supplementary non-GAAP financial measures such as adjusted EBITDA that are key metrics for our credit facility and that we use internally to assess liquidity and financial performance and therefore believe will assist you in better understanding our company. Reconciliation of these measures to the comparable GAAP numbers, are available in our press release, which is posted in the Investor Relations section on our website at www.xerium.com.

With that, I’d like to turn the call over to Harold.

Harold Bevis

Thanks, Kevin. Good morning everyone. Thank you for joining us this morning to review our fourth quarter and year-to-date results. I’d like to start off with pointing out a few significant highlights. First of all, our Q4 adjusted EBITDA increased almost 17% on steady sales and strong cost reduction. Our constant currency sales were slightly above Q4 of 2012. Our roll sales improved 6.4% primarily due to strength in North America, while machine clothing sales declined 3.2% primarily due to market decline in Europe.

Our Q4 adjusted EBITDA was $24.1 million and this is an increase of $3.5 million or about 17% versus Q4 of 2012. And it’s primarily driven by a steady market and strong cost reduction activities. Cost reduction added $4.7 million in the quarter for adjusted EBITDA. Q4 orders were strong for machine clothing and the company has a large backlog going into the Q1 2014. And that backlog has increased also during this quarter which we will get to a little later.

It’s customary in the industry to receive blanket orders for specific machine positions at year and that happened to us. And while orders are a good leading indicator of sales, actual production hours for our customers will be the driver of sales. And we are going to give you an update on current events regarding production machine hours also. The macro environment was slightly weaker than expected at the end of 2013 with weakness in North America containerboard market specifically which is the largest market segment in the global market.

In that specific area, producer inventories rose in Q3 and the industry, the company’s customers was disciplined to idle machine output and to balance demand and inventory or what’s referred to in the industry as market curtailment. This correction is still holding in Q1 with certain swing capacity still idle and some expected to short – to start up shortly. This is an indication that GDP based activity industrial production was weaker than expected. Of course many of you are investors and inspectors in other companies and know that and so this is a consistent comment and it’s consistent with information at least from buyer industry also and our major customers as many as who are public. And in addition to that the severe weather in North America in Q1 has exacerbated the issue from the timing standpoint.

The company increased its inventory positions in 2013 as it embarked upon the global raw material substitution project that resulted from 2013 global bid-out of procured raw materials. Savings are expected to result in 2014 with a carryover into 2015 and the inventories will be brought back in line this year in 2014.

Another key highlight is with regards to full year adjusted EBITDA which grew 20% driven again by steady sales and strong cost reduction which is our game plan. 2013 sales were $547 million, an increase of $9.2 million or about 1.7% versus 2012 on a constant currency basis. The sales growth resulted primarily from the reduction of rolls backlog in North America and Europe and a small amount of global market growth. We believe that the global market grew between zero to 1% in 2013 and we were consistent with this.

Full year 2013 adjusted EBITDA was $107 million and this is an increase of a little over $18 million or 20% as I mentioned. And steady sales continue a little bit of ebb and flow to the business here due to timing. But we have steady sales and orders and backlog and we have strong cost reduction supplementing that as we go along 2014 is going to be more of the same which I will give you some highlights on but it’s a continuum for us in 2014 so you are going to expect similar performance. Cost savings were partially offset by a reinstatement of incentive comp in 2013 and that will carry forward into ’14.

Full year 2013 roll sales outperformed machine clothing sales with an increase of almost $9 million or 5% excluding currency. Machine clothing sales for the company were flat year-to-year. A bright spot in the company’s sales profile continues to be mechanical services. Our full year sales grew almost 14% in 2013 and we have mentioned this for customers are seeking increasing level of product offerings and services from us as the industry continued to outsource and as they continued to desire stronger and more sophisticated offerings to achieve further cost reductions. This is consistent with the growth of the company’s Smart Roll program and Rezolve products which are our highest value add products and are strongly performing. Both of these products emphasize machine automation and are high level of value adds for our customers. The company is aggressively expanding it’s capabilities in this area.

I wanted to highlight a couple of them. One is the expansion of our service facilities in our plants in Ruston, Louisiana. We are just currently underway if you vary. It’s a centerpiece facility for us from the services standpoint, it’s in the center of the Southeast U.S. market, which is globally competitive and we are expanding our ability to delay on services there. We also implemented a Smart Roll production center in China. This year we introduced the next generation Smart Roll product, which allowed the company to service suction roll covers which is important tissue producers. We introduced our next generation of Rezolve program which provides papermakers a more sophisticated unique tool to improve their machine efficiency and operating cost while giving an integrated view of the operation of their clothing and rolls together. We also equipped our North American sales engineers with Xerium’s engineering tools just to do onsite service checks on paper machines. We hired machine experts in Asia, China specifically to provide sophisticated machine service and we installed our equipments in France after it was refurbished into our plants in China to continue the growth that’s underway in that country and to provide more and more sophisticated more products that covers themselves the drill patterns and grooving to achieve specific outlet for position on the machine.

Asian market growth and Asian sales continue to be a bright spot for us. Our full year Asian sales grew almost 4% constant currency. The yen did depreciate, so our reported numbers are slightly different, but our unit volume was up. And we believe that’s in line with market growth. We believe that we are one of the market share leaders for tissue products in Asia, if not the leader and in China specifically. The company is implementing a new plant in Bacheng, China, which we have released press release on that and we will find it on footnotes as well in terms of our obligations to invest there and build the facility out and that is underway. The construction is underway right now and will hit run rate output towards the end of 2015 and begins production sooner than that. It will be a material advancement in our adjusted EBITDA.

Our 2013 orders were $550 million, which were up about 7% versus 2012. In the machine clothing, we are seeing increased orders in the Americas and in Asia offset by a decrease in Europe. Rolls and mechanical services as I mentioned are continuing at a steady pace. And going forward into this year, we don’t anticipate any change in the pattern for the backlog trends that we have had over the last two years.

Cost reductions drove the majority of our improvement. We do a bridge on our year-to-year performance. Cost reduction is a big deal and we are having similar effort and plan for this year. Our efforts in 2013 delivered $23.5 million and as I mentioned $4.7 million in the quarter. In 2014, we intend to do the same kind of program again and we are articulating a $20 million number. We have an internal number higher than that. And we see further cost savings in the out years. We haven’t fully planned ‘14, ‘15, or ‘16, but we have a continuum of cost reduction ideas underway.

Gross profit margins trended higher in ‘13 versus ‘12. You can see that our fourth quarter numbers were seasonally down as they were in the prior year, but we have a plan to increase our gross profit margins again in ‘14 versus ‘13 by 4 points as we continue our cost reduction activities. Our plant efficiency programs are really important, consistent waste reduction helping us to be a more sustainable supplier in this industry, procurement programs as we bid out our procured raw materials, productivity and logistics programs that’s shipped direct to our customers in cost effective ways and those accounted for 40% of our cost reduction savings while restructuring programs were about 60%. We are in the finishing phases has a few closures that we started last year. We started one already which we announced previously and we have another that’s sort of the start. And we are going to continue this program until we have eliminated the redundant cost in our plant network

Turning to the future or beyond the period here, according to RISI, which is one of the leading trade mats out there and there are others, approximately 70% of the industry’s growth will be in Asia over the next five years. So Asia is important for everybody including us. And Xerium has multiple initiatives underway to grow in Asia. We are a leader in Asia now. We are competitive now. And we continue to invest and maintain that position. We are expanding output at all of our Asian plants, all four of them were undergoing an expansion and capability enhancements and were (indiscernible) in the fifth plant in Shanghai and we are adding sophisticated talent to our human resources. And this is the largest trade market in the world to machines in the U.S. and the world and very sophisticated demand from all suppliers including us.

If you look at the grade of the paper, printing, writing and newsprint continue to decline due to digital substitution. We all know that, but GDP grades of paper are increasing in all regions. And these are packaging grades these are what we are called brown paper grades, linerboards, kraftliner, testliner, corrugated mediums, shipping type of products and consumer packaging kind of products. So, these continue to grow in line with GDP and we are seeing that. And we have multiple new product and new capacity initiatives underway, which really participate in that growth.

Tissue and personal care products are specific segment that continue to grow globally and we have a strong product line there now and we are a leader there now, but there are demands to be better and we are continuing those advancements. Non-woven fabrics also were a high growth area. There are estimates out there between 7% and 8% growth globally. And we have strong product lineup now and we are expanding our efforts as we have mentioned previously. We formed a new division in 2013 to specifically grow non-paper business and non-woven is one of the big ones. Another big one is fiber cement siding and backerboard, which is tied to housing construction, which is well followed in North America, not followed in some other markets, but it is a growth industry globally. We have competitive product line for these machines and companies that make these products are growing in that area.

Geographically, again just touching on the big picture, Asia grew about 4%, Americas 2% and Europe was flat. And so we see a similar pattern here you have heard it for months in others, so not a big change in the forward outlook. Q1 2014 market condition has started off soft. They are getting stronger. North American containerboard correction on rebalancing that happened and this is one of the largest segments in the world and we are one of the largest providers in the world. So, we are going to be affected by industry phenomenon like that. In North America, 75% of the markets controlled by a few producers, they are all customers and they are public and they have all announced their plans. So, we have very clear expectations from what they are doing with their machines and they are getting through that now.

On a broader picture, if you look at the public commentary released by the top producers, it appears that the industry dynamics are little changed. Turning right into newsprint, papers are declining globally, especially in Europe. Board and packaging is growing with GDP. South American pulp market is growing. Tissue is growing globally. Asia is growing in all roll products. Fiber cement is growing. Non-woven fabric production is growing very strongly. And mechanical services are growing. (indiscernible) is due to desire by customers to outsource, but also as machine utilization increases and the non-competitive machines are focusing more of the world’s production on higher end machines. There is a need for higher end services from people like ourselves provided.

Our ability to secure growth in these markets is largely an internal matter, because the growth opportunities are there and is dependent upon our product and service offerings, our capacity positioning and human resources. We are not a full product and service provider in all market segments. Our market shares are irregular across regions and across product lines. And one of the key things we are doing there strategically is to try and we have similar shares across the machines from the beginning to the end. And we are expanding our dedicated output in certain areas to correct those efficiencies. And specifically, we have 11 new product programs underway here and a comprehensive service expansion globally. These are complex multi-year efforts. They are strategic efforts. And our longer term plan is balanced between base market, market share maintenance, focused sales growth and continuous cost reduction. So we do intend to grow faster than the market to drive initiatives and we do intend to grow our EBITDA faster than our sales growth due to our cost reduction activities.

We are making a lot of forward investments. If you look at our CapEx spending in Q4 2013, we are going to have another year of that kind of spending. We are doing a lot of long lead time ordering and lot of base facility spending. We do see a continuation of that for the moderation, that’s in the out years. So 2013 was a year of steady trends for the markets that we serve. And our board and paper are our largest markets of course and those markets grew slightly. Our sales grew stronger than that. A portion of it was one-time backlog catch-up, but some of it also was due to our own internal initiatives. We do expect that the backlog thing did not happen again we fixed our problems primarily in our roll plants that we backed up.

And geographically, we think that our sales will be in line with reported paper and board production plus we will add our own initiatives. The roll business grew 5% and we think it’s going to continue throughout roll along with mechanical services. We have lower market share in Asia than in other geographies and we are doing everything we can to get part out there. So, we see a lot of opportunity.

If we talk about our top customers for a minute, we do have 80:20 kind of top customer list that matter a lot here and those customers actually grew faster than the rest of our customer base. We are very focused on them and they grew 2.5% actually in the year and appear to be in good health going into 2014. They continue to see movement obviously away from grades of paper and they are doing machinery dedications and they are adding machines in the areas that are growing we are right in there with them.

And in addition, Xerium took actions in 2013 and will do so in 2014 to address the growth opportunity that we see in non-paper as well. It’s been an area of the company we haven’t focused on strongly, but that we are now and we do need dedicated machinery, dedicated product offerings and dedicated human resources and we have taken those actions. So the base market is undergoing from a change, but we are reorienting ourselves so that we can continue growing.

If you look back at 2013, it was a transition year for us. You can almost say it’s a turnaround year for us given the decline we were on. We feel we have regained credibility, but now we are looking forward without add to what we have done. We did grow 20% in EBITDA (Technical Difficulty) but it did in our plan this year. So we have some spending that we have to do in China that won’t benefit us in this period. This is going to be heavy spending year for that project as we would put the fielding in place and put the machinery in place and we have final payments on everything, but we are not going to get a benefit till ‘15 or ‘16. We do expect an inflation or negative price mix. We will limit our cost out of activity. So right now, we are committing to increase between $87 million in ‘14. We can adjust that later if things are going profitably, but we would like to set your expectations around that from us.

And finally, from a cash flow perspective, the completion of our raw material substitution programs, are underway and we do expect to free up cash flow this year of $6 to $8 million and have higher EBITDA. So we will be paying down from debt this year. And so as kind of a recap on where we are, we fill it in the questions in a few minutes.

I’d like to turn it over to Cliff to add some more specific financial facts.

Cliff Pietrafitta

Thank you, Harold. On a constant currency basis, Q4 2013 net sales increased slightly above Q4 2012, with an increase of 6.4% in the roll covers segment partially offset by a decrease of 3.2% in the machine clothing segment. Gross margins in Q4 2013 improved to 36.7% from 35.1% in Q4 2012. These improved results were largely due to reduced operating cost as a result of restructuring savings and operational efficiencies partially offset by unfavorable regional and product sales mix.

Our operating expenses decreased by $3.3 million, or 8.6% to $35 million from operating expenses of $38.3 million in Q4 2012. This decrease is primarily a result of our cost reduction activities, partially offset by the reinstatement of the management incentive program in 2013.

Our effective income tax rate for the year ended December 31, 2013 was 51.2%, compared to 16.5% in 2012. The effective tax rate reflects the fact that we have losses in certain jurisdictions where we receive no tax benefit, including losses related to restructuring and debt refinancing expenses. The 2013 effective tax rate also includes $6.2 million of tax benefits related to the release of a valuation allowance against Canadian deferred tax assets. Excluding the effects of the release of the valuation allowance against Canadian deferred tax assets, restructuring and debt financing expenses, our effective tax rate was 39% on the normalized basis.

2013 free cash flow declined to a negative $8 million as capital expenditures increased to $44.1 million and were partially offset by cash provided by operations of $36.1 million, which included $22.3 million of cash restructuring payments. Net debt leverage declined to 3.9 times at December 31, 2013 from 4.6 times at December 31, 2012, primarily as a result of the improvement in adjusted EBITDA.

In 2013, in order to support our ongoing restructuring activities, we refinanced our bank term debt credit facility to a covenant-lite term loan credit facility, which increased our capacity for capital expenditures and restructuring activities, increased our borrowing capacity and decreased our interest rates. In addition, on March 3, 2014, we amended our ABL Credit facility, adding a Euro tranche and increasing our borrowing limit to $55 million from $40 million. All other terms in the ABL remained essentially the same.

Trade working capital increased to $136.4 million at December 31, 2013 from $131 million at December 31, 2012. This increase is primarily the result of increased sales volume on accounts receivable and a decrease in inventory turns from 2012 to 2013 related to the temporary effect of a global yarn substitution program. Increased accounts payable, as a result of increased capital expenditures included in accounts payable at year end partially offset the increase in accounts receivable and inventory.

We had a very successful year in restructuring our operations. We are at the final stage of four plant closures and we expect that we will have a fifth plant closed in Q2 of 2014. Total cash spent on restructuring in 2013 was $22.3 million and we expect to spend $24 million in 2014. However, restructuring expenditures are expected to decline to about $10 million in both 2015 and 2016 respectively.

Lastly, in addition to our restructuring efforts, we have partnered with Oracle, and have upgraded our management reporting throughout the organization. We have completed the first phase of this upgrade in January of 2014 and are excited about the dramatic improvement to our plant, regional and segment reporting capabilities.

Harold Bevis

Thank you, Cliff. That concludes our prepared remarks and we are now ready for questions. Operator, may we please ask the first question?

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from the line of Melissa Tan representing R.W. Pressprich. Please proceed.

Melissa Tan - R.W. Pressprich

Good morning. Thanks for taking my questions.

Harold Bevis

Good morning, Melissa.

Melissa Tan - R.W. Pressprich

First question is if you can please just give little bit more color on your exposure to the containerboard market, I mean, you did mention it was quite weak in late 2013 and carry on into 2014. So if we can understand little bit more of your exposure to that and also how is that comparing to your exposure to, for example, paper, packaging, newsprint and tissue? That will be great. Thanks.

Harold Bevis

Okay. I am going to call on Dave Pretty, our President of North America to help answer that. If you look at how we did in the quarter now how our current momentum in our business is, we are doing fine in that grade in Asia, South America, and Europe. This is really a North American phenomenon right now this is going through our adjustment. And this market segment itself is very healthy, but a lot of production came online at the end of the year, over 1 million tons and then exceeded the need for extra production. And so there was an overproduction situation. We are (indiscernible), that’s a big segment for us. So we are impacted by it. And I’d like Dave to take over from here. Dave?

Dave Pretty

Thanks, Harold. In terms of the fourth quarter and then going into the first quarter, certainly our product portfolio in that segment is very strong and was clearly noted during the earnings releases by Rock-Tenn and International Paper that they did take machine slowdown or our economic market shutdowns to the tune between those two companies alone of almost 400,000 metric tons. Ultimately, that’s starting to improve and the outlook for that segment looks more positive coming out of the first quarter going into the remainder of the year. Certainly, we will follow that trend.

Melissa Tan - R.W. Pressprich

Okay, thank you. And secondly, you can talk a little bit about your progress at the new plant in China as how much money you have spent of that your projected $35 million to $40 million initial investments and how much more you plan to spend this year and will that be pretty much stage out evenly per quarter?

Harold Bevis

Okay. We have almost fully obligated ourselves to the full spend. We have been investing a little more than $35 million on plant property equipment, adding some additional dollars in there for working capital. And the cash profile of that, I am going to ask Cliff to help me so that, I think Melissa you are also asking where are we on cash outlays and I’d like to answer that part.

Cliff Pietrafitta

Through the end of 2013, we spent about $7.5 million on the program, about $7.5 million was for capital equipment, long lead time equipment that we needed for deposits.

Harold Bevis

And this year will be a big year.

Cliff Pietrafitta

And 2014 will be a big year. The primary amount of the remaining dollars, that Harold mentioned, will be spent in 2014. We probably have about $7 million or so that will flump into ‘15.

Melissa Tan - R.W. Pressprich

Okay, great. Thank you. And just lastly, if you can talk a little bit more about just in terms of how much growth cost you can take out in 2014 and 2015, 2016. Since you mentioned last year basically incremental EBITDA close to $24 million, because of that and just want to see what’s your potential over the coming years, especially with the China plant coming online?

Harold Bevis

Okay. You are right. In 2013, we did about $23.5 million thereabouts. Our plan for ‘14 is higher than that. We intend to take out more cost than that. We don’t have a budget for ‘15 or ‘16. We are going to get a carryover effect of the closures that we have underway and that are just starting. And the Bacheng plant is mostly a growth story for us and is it going to substitute production per se from other sites, we are going to continue to participate to market growth, but to point backward, it is going to blend our cost profile down, but the way that we are looking at that project is just on net EBITDA contribution to the company. It’s a little less than $10 million is what that is at full run rate. If you look at, but it’s not going to hit full run rate right away, we kind of go from one shift to two shift to three shift to four shifts.

And so if you look at our run rate, it will be – we will get a full year effect in 2017. And that’s going to be the net EBITDA contribution of that, but on top of that, our cost reduction programs continues cost improvements in the plant to all – every single one of our plant to the cost reduction program to offset their own inflation plus ads. We do have additional capital-based programs to reduce our cost further. We have just a couple plant left that we are looking at for restructuring, but I think right now you should expect our spending to come down in ‘15 and ‘16 as we have gotten on with the healthcare in both Bacheng and we all have, for instance, we are on the verge of announcing our sixth plant that we are closing. We don’t have six more to close. We have two ready. So the cost reduction, the cost restructuring spending is likely to come down. And then of course, the Bacheng plant, the spending on that will be over this year. So I think your – the cash flow for us are going to come down, but our cost reduction plan and EBITDA improvement from the cost reductions that we are going to get plus the sales growth activities.

If you look at it on our spending this year, excuse me, ‘13 we have done a lot of spending to debottleneck sales growth, fiber cement, products, non-woven products, mechanical services in Europe and in North America. We have put in our Smart Roll sales, now we have them everywhere globally. So we’ve expanded our ability to make pulp wire switch is a growing market. So we also have done you could call it original investing that where we intend to get top-line performance versus cost reduction. So we do have a business plan to growth action in the market and the markets that we’re in. So it’s based on our own actions that require some new investments. So our EBITDA growth expectations will continue to be strong, but it will blend more to sales performance than closing plants. We don’t have a 50 to 50 number, I’m not reporting a number from you, but it will be strong improvements.

Melissa Tan - R.W. Pressprich

Okay, great. Thank you so much for the color. That’s all from me.

Harold Bevis

You’re welcome. Thank you, Melissa.


Your next question comes from the line of Katja Jancic representing Sidoti & Company. Please proceed.

Katja Jancic - Sidoti & Company

Good morning guys.

Harold Bevis

Good morning.

Katja Jancic - Sidoti & Company

Just one quick question, you mentioned you’re going to be paying down debt in 2014, could you provide more color on that, how much of debt are you planning to repair?

Cliff Pietrafitta

Yes. In the release we mentioned that we would be generating $6 million to $8 million of cash flow in 2014 we expect to use that to pay-down debt.

Katja Jancic - Sidoti and Company

Okay. So the whole cash flow will be used for repayment of that $6 million to $8 million? Okay. That’s all from me. Thank you.

Cliff Pietrafitta

You’re welcome.


(Operator Instructions) Your next question comes from the line of Craig Hoagland representing Anderson Hoagland and Company. Please proceed.

Craig Hoagland - Anderson Hoagland and Company

Hi, two questions. The first is it was mentioned in the press release and in your prepared remarks of sales programs kicking in, in the second half of 2014. Could you just say a little bit more about what those are?

Harold Bevis

Yes. One of them is fiber cement products. If you look at how we participated in that market, historically we used swing looms and non-dedicated assets of swing loom is when you change the raw materials on the loom to make a product after you run out of the glass set-up. It makes us not that competitor and it makes us have the long lead-times when the loom has swung, make a different product. So we dedicated assets now. So that our ability to serve the market is not an impediment and we’ve ordered to dedicated special purpose loom that has the tension, the machine set-ups to make that. That’s a specific area for us.

We’re putting that extra production in Asia. And we have strong expectations on that. It’s a beautiful market for us. We’re a leader in it and if you look at the fiber cement products lead-times are important, those products only last about seven days on the machine, we’re pouring concrete directly on to them and concrete cost up the whole process and then do an organized cleanout of seven days. So very short life products and lead-times are important. So we can’t be that competitive the way that we produce our products. So we’re attacking that specifically. So we have – that’s an example of de-bottlenecking. So we have a set of these small activities to get after it. Our corporate accounts are really important to us. Our corporate accounts, as I mentioned, and they will have to be a full line supplier to them and we’re focused on that. And as I mentioned that we have irregular ability to achieve that outcome for them based on the fact who may have dryers of forming fabrics or shoe press felts.

Other products we have – we have a couple of holes in our product line, shoe press felts are one of them. Our shoe press position is very specific. We have the product line there its cost a firm for us. We have the product line underway now. We have initial orders underway now. We know how to make that product. We just had – haven’t been doing it. And also brown paper initiatives in Europe is important as that market shifts from premium writing grade to brown paper grades. It causes a product change for us and a need for us to change machinery over to making those products. So we started that in ‘13. We are finishing in ‘14.

And then as I mentioned, the Ruston service expansion is really big for Southeast United States –southern part of the United States, excuse me. And we were limited with our ability to do suction box repair, cylinder honing, a lot of a complicated services that we perform that take a lot of floor space, so we had to expand the building to put cranes and workstations, so that we can accommodate more work. It’s already taken off for us. We have another plant in Griffin, Georgia, where we are looking to do the same thing if this continues. On the Southeast United States, we are very competitive in the global markets due to low cost energy access to fiber, this is ours in clinical water. So that part of the industry is very good.

We have taken a lot of actions to reduce lead times for certain products. If you look at all urethane roll covers for Asia, we have been servicing that market historically by exporting rolls from Europe and Asia when needed. That’s not very competitive. And this year, we installed a polyurethane unit into our rolls plant in China, a dramatic improvement in lead times and cost to make us more important and we already have started production and produced our first order. So, we have had a lot of those type of activities to debottleneck historical problems that we worked around and took a clean look at what possible if we had the ability to produce differently. So we have a list of about 20. So I would say that we don’t have one like one big thing that we are trying to do and if it works, Xerium is going to be great. And if it doesn’t, we are going to not be great. We are doing a series of them across regions and across products, because for sure, a couple, I am not going to work out right. So we place multiple bets here along the way to grow and outperform the industry growth.

Craig Hoagland - Anderson Hoagland and Company

Yes. So if your backlog adjusted growth last year was half of 1%, do all these programs add up to a meaningful lift in that growth rate?

Harold Bevis

Yes. We are trying to double or triple that this year. Our internal plans are way more than that.

Craig Hoagland - Anderson Hoagland and Company

So that would be – a triple will be 1.5% growth?

Harold Bevis

Right. So, we are trying – we are aiming between 1% and 1.5% exactly.

Craig Hoagland - Anderson Hoagland and Company

Okay, okay. My other question was around the interaction of the expected cost saves in gross margin improvement and the inflation mix issues, which are it sounds like holding back EBITDA growth a little bit. Can you just explain how you can have 20 plus million of cost saves in an expanded gross margin and mix and inflation hold back EBITDA growth?

Harold Bevis

Yes. We have price mix as an important one, because that the highest priced products that we make in the industry mix are printing and writing forming fabrics. If you look at price per kg, if you look at the downtrend in that product and the increase in brown paper grades, the brown paper grades have been less priced. And that shows up as the price mix item for us. We still own the machines. We are still making money, but we are getting less price per kilogram, less price per machine now. On the – we expect that to continue. So, we have a trend that we have seen as that happens, it’s not a surprise to us, it’s a trend. And we have trended that right in ‘14 and continuation of that. If you look at our inflation, it’s primarily statutory wage and benefit increases in Europe and in South America, where our business are, but if you look at our business profile, it’s Europe. We have a lot of Europeans on the payroll here and they get statutory increases. Lot of the increases that we have in North America are statutory in that their union, maybe not work for us – work forces and we have obligated ourselves to certain increases in wages and benefits. So most of our costs are in our labor pool and have to do with wages and benefits and then it adds up to be, again, about $6 million number per year. So, as I mentioned earlier, our plants have offsetting cost reduction plans to deal with our own inflation.

Craig Hoagland - Anderson Hoagland and Company

Okay. So we have higher margins, but lower average selling prices effectively?

Harold Bevis

That’s right.

Craig Hoagland - Anderson Hoagland and Company

Thank you.

Harold Bevis

You are welcome.


With no further questions at this time, I would now like to hand the call back to Mr. Harold Bevis for any closing remarks.

Harold Bevis

Thank you everyone for calling in. We appreciate your support of our company and in fact the questions that you asked. And with that, we will end the call for today. Thank you.


Thank you, sir. And ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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