Xerium Technologies' (XRM) CEO Harold Bevis on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Xerium Technologies, (XRM)

Xerium Technologies (NYSE:XRM)

Q2 2014 Earnings Call

August 06, 2014 9:00 am ET

Executives

Clifford E. Pietrafitta - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Harold C. Bevis - Chief Executive Officer, President and Director

David Pretty - President of Xerium North America and Europe

Wern-Lirn Wang - President of Asia

Steve Johnston -

Analysts

Katja Jancic - Sidoti & Company, LLC

Melissa Tan - R.W. Pressprich & Co.

John Koerber

Adam Ritzer

Douglas Weiss

Operator

Ladies and gentlemen, welcome to the Xerium Technologies 2014 Second Quarter Financial Results Conference Call on August 6, 2014.

I will now turn the call over to Cliff Pietrafitta, EVP and Chief Financial Officer. Please go ahead, sir.

Clifford E. Pietrafitta

Thank you, Shantale, and welcome to the Xerium Technologies 2014 Second Quarter Financial Results Conference Call. Joining me this morning is Harold Bevis, CEO and President of Xerium Technologies; and the senior management team of the company. Harold will start the discussion this morning, and then we will provide further financial details with respect to the quarter results. Subsequently, we will open up the lines 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 closed on Tuesday, August 5, 2014, and were also announced in a press release issued after the filing of the 10-Q. Notification of this call was broadly disclosed and this conference call is being webcast using the link on the Investor Relations home page on our website, at www.xerium.com.

I would 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 into these [ph] press release and our SEC filings. These forward-looking statements represent our view as of today, August 6, 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. Reconciliations of these measures to the comparable GAAP numbers are available in our press release, in our earnings call presentation, and in the additional reconciliation schedule, which we encourage you to read. All of these materials are posted in the Investor Relations section of our website at www.xerium.com.

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

Harold C. Bevis

Thank you, Cliff, and good morning, ladies and gentlemen. Thank you for joining us this morning to review Xerium's second quarter results. I'd like to start off with several significant highlights. Our second quarter sales increased 0.4% over Q2 of 2013 and 4.1% over Q1 of 2014 on a constant currency comparable basis. The weak Q1 sales environment in North America related to containerboard production and the impact of the harsh winter relented and North America sales improved by 2.3%. Asia and South America sales both showed strong results, as Asia grew 3.5% and South America grew 7.3% compared to Q2 of 2013. European sales remain sluggish in the quarter and were up 5.3% compared to Q2 of 2013. Roll sales improved 2.1% over Q2 of 2013 and 12.9% over Q1 of 2014. While Machine Clothing sales were down 0.6% compared to the prior year second quarter and flat compared to Q1 of this year. Secondly, Q2 2014 adjusted EBITDA increased, as a result of improved sales and strong cost reductions. Q2 of 2014 adjusted EBITDA was $29.4 million. This is an increase of $2.5 million or 9.3% versus Q2 of last year, and is primarily driven by a steady market and strong cost reduction. Cost reduction added $6.7 million in year-over-year adjusted EBITDA in Q2 of 2014.

At this time, I'd like to refer you to our slide deck that was posted to our website for this call. Starting on Page 3 of the slide deck, we have summarized some key takeaways regarding the current state of our business. First, we saw the market rebound globally in Q2 versus Q1, particularly in North America. Our orders remained at healthy levels and have risen at a 3.3% compound annual growth rate, since the beginning of 2012, which is in line with our sales growth during that period and above overall market growth. We continue to see expansion in our gross margins and lower SG&A spending, as these measures have improved at 5.5% and 5.2% compound annual growth rate since the beginning of 2012. You can clearly see the impact of our restructuring that cost containment initiatives are having on our business. Ultimately, our cost-out actions have resulted in a 19.4% improvement in adjusted EBITDA since Q1 of 2012 when coupled with our sales growth results.

Looking forward, Xerium has also been busy investing in the future. While some of our investments had paid back fairly quickly, specifically in the cost-out area, we have also invested in long-term payback projects. And in fact, from 2013 to 2015, we expect to spend an approximately $68 million on 10 separate long lead time projects. The first of those projects is the installation of a DILO needling machine, which is a very special-purpose machine used for high-end press felt, and it will begin to pay back in the fourth quarter of 2014. Our longest and largest lead time investment is the construction of a greenfield new press felt plant in Ba Cheng, China, and it will begin production in the second half of next year.

At this time, I'd like to provide an overview of the current status of the markets and our plans for the future. Please turn to Page 4 of the slide deck. The global pulp paper and board growth has been in the range of 1% to 2% per year globally in recent years. According to RISI, which is the leading trade publication, 70% of the global industries growth will be in Asia over the next 5 years. Growth in developed markets of North America and Europe will be largely offset by weakness in printing and writing, and news print grades. Xerium has multiple initiatives underway to grow in Asia for rolls, clothing and service and become more competitive in Asia for all of its main product and service offerings. Xerium is expanding output capabilities in all 4 of its Asian plants and as mentioned, is building a fifth Asian plant located in Ba Cheng. The company is also adding sophisticated rolls and service engineers in China, and China is the largest trade market in the world for paper and board production.

Global paper production drives our business, and is presented on Page 5 of the slide deck. This chart indicates that global paper production is forecasted to grow by 1.3% from 2014 through 2022, as growth in pulp and packaging of tissue grades will be partially offset by reductions in printing, writing and news print grades of paper. Printing and writing and news print grades of paper continue to decline due to digital substitution. GDP grades of paper and board are increasing in all regions, in line with GDP, and emerging market wealth [ph] per capita, as well as industrial production. Xerium has multiple new products and new capacity initiatives underway to be able to fully participate in these growth areas.

Tissue and personal care products continue to grow globally, and the company has strong products in these grades of paper production. Xerium is also a participant in 2 smaller but growing markets. Fiber cement, as shown on Page 6 of the slide deck, is one of those, and is expected to grow at a compound annual growth rate of 8.5% through 2017. Fiber cement is, of course, tied to the global housing industry and Xerium is a participant in these markets and it's strengthening its product portfolio to better compete.

Likewise, on Page 7 is the Nonwoven market, and it is expected to grow at a compound annual growth rate of 8.5% through 2017. The -- excuse me, I was referring to fiber cement. Nonwovens are growing at 5.4%, as you can see on the chart. And nonwoven fabrics continue to gain share against woven fabrics. And once again, Xerium is introducing new nonwoven fabric products into this growing market.

Turning to Page 8. We get into a little bit more detail here on how growth varies by grade within each of our regions over the last 5-year period. Each geography has grown, with Asia being both the largest market in the world and the market with the highest growth rate.

Page 9 is a different look at the market, which presents paper production for the year-to-date period through April. So now we're turning to the 2014 update on our markets. It is important to note that while the overall market grew 1.2% in Q1 '14 versus Q1 '13, there is real diversions in regional and grades specific growth rates. In addition, quarter-to-quarter production amongst our customers can vary, which drives quarter-to-quarter sales volatility on our end and the sales of paper machine clothing and roll covers.

Page 10 is a further breakdown of some detail that shows year-to-date growth on April year-to-date versus April 2013 by region and by grade. The North America region is having a tough year and we can see this on this chart. But having said that, it's also evident that large segments of the paper market, such as containerboard, are quite healthy and are growing. Xerium is well positioned to navigate changing market demand, both regionally and by paper grade. Over a shorter horizon, the macro environment has improved from Q1 2014, as the weakness in North America Containerboard, the largest market segment in the global market, has abated. Q1 2014 was also negatively impacted by the harsh winter season in North America, and our paper producers experienced it. These downstream issues hampered our sales in Q1, and their absence in Q2 contribute to a rebound that we have experienced in Q2. Order patterns have improved in all regions since the end of Q3 2013. At the current time, we believe that third quarter sales outlook for 2014 will be comparable to the second quarter of 2014.

Asian market growth and Asia sales continue to be a bright spot for the industry and for the company. Q2 Asia sales grew 3.5% on a constant currency basis compared to the same quarter of last year, which we believe is in line with market growth in the region, as you can see from this data. The company is building a new plant in Ba Cheng, China to make high-end press felt, as mentioned, to continue this growth vector. Construction is well underway, and the plant is expected to hit run rate by -- full run rate by the first quarter of 2016. So we have a multi-quarter ramp-up for that plant. In addition, capacity in our China rolls plant have been expanded in this quarter, with the arrival of equipment that was transferred from a previously closed rolls plant in Europe.

Now I'll turn the call over to Cliff for his insights and comments into our financial performance. Cliff?

Clifford E. Pietrafitta

Thank you, Harold. Our order pattern, as presented on Slide 11, remained strong, and the company has a large backlog going into Q3 2014. It is customary in the industry to receive blanket order commitments for specific machine positions during the year, but particularly at year end. While orders are a good leading indicator of sales, actual production hours by our customers will be the best indicator of future sales. At this time, we believe that paper production in Q3 will continue to provide a stable sales base. However, the outlook for Q4 is less clear and is a risk to our sales and adjusted EBITDA guidance.

Next, I would like to direct you to Slide 12. Constant currency net sales have grown approximately 3% over the last 2.5 years, in line with the growth rate we have experienced in our orders. This growth rate is above market growth of 1% to 2%, and we expect that to continue as our growth initiatives play out over time. Constant currency rolls net sales increased by 2.1% in Q2, primarily -- Q2 of the prior year, primarily driven by an increase of 8% in North America and 5% in South America. These increases were partially offset by a decline of 7% in Europe. Constant currency machine clothing sales decreased slightly by 0.6% from Q2 2013, primarily driven by a decrease of 4% in Europe and a decrease of 2.8% in North America. These decreases were partially offset by increases of 7.7% in South America and 3.6% in Asia.

Moving to Slide 13. We continue to see improvements in our gross margins. Largely as a result of our cost-out initiatives and operational excellence programs, our gross margins have improved 5.5% compounded annually over the last 2.5 years. In our clothing segment, gross margins increased 210 basis points to 41.2% in the current quarter compared to 39.1% in the second quarter of 2013 as a result of restructuring savings, operational efficiencies, and favorable absorption in North America and South America due to increased production levels. In our Roll Covers segment, gross margin increased by 30 basis points to 36.4% for the 3 months ended June 30, 2014, and 36.1% in the second quarter of 2013. The increase is primarily due to favorable labor costs in North America and restructuring savings and operational efficiencies, partially offset by decreased gross margins as a result of higher sales of products and services with lower gross margins.

SG&A expenses, presented on Slide 14, have improved 5.2% annually over the last 2.5 years, primarily as a result of actions taken to rightsize the company's cost structure. For the 3 months ended June 30, 2014, SG&A expenses have decreased $0.3 million or 0.8% to $35.4 million in Q2 2014 from $35.7 million in Q2 2013, primarily as a result of headcount reductions and restructuring savings and decreased management incentive compensation of $0.7 million. These decreases were partially offset by increased selling commissions on the increase in sales volume and inflationary increases in salaries in Q2 2014 over the prior year. SG&A expenses increased $0.5 million or 1.4% compared to the first quarter of 2014, primarily as a result of increased selling commissions on the increase in sales volume and the inflationary increases in salaries in Q2 2014, partially offset by headcount reductions and restructuring savings.

The earnings quarterly adjusted EBITDA trend, as presented on Slides 15 and 16, evidences the impact of our restructuring efforts. On a quarterly basis, we have seen a 19% improvement over the last 2.5 years on a trailing -- and on a trailing 12-month basis, we have seen nearly an 11% increase since the end of 2012. Adjusted EBITDA in Q2 2014 was $29.4 million or 21.1% of net sales, and was 9.3% above Q2 2013 adjusted EBITDA of $26.9 million or 19.4% of net sales. These improvements, once again, are primarily driven by increased net sales in gross margins and our cost-out and restructuring initiatives.

Our adjusted earnings per share presented on Slide 17, which is defined as earnings per share, adjusted for restructuring charges, loss on debt extinguishments, inventory writeoffs, currency loses, and other nonrecurring items such as our former CEO retirement expenses, was $0.43 per share in Q2 of 2014, up 16% from $0.37 per share in Q2 2013. On a trailing 12-month basis, at June 30, 2014, our adjusted earnings per share was $1.75 per share, an increase of 54% over $1.14 per share at June 30, 2013. These improvements are primarily driven by increased net sales in gross margins and our cost-out and restructuring initiatives.

We have invested heavily to enable future growth. In fact, we will spend approximately $68 million from 2013 through 2015 on committed projects implemented to drive revenue and earnings growth. While this spending will have a minimal benefit in 2014, it sets the company up to continue the recent trends of improvements in adjusted EBITDA. Our spending has touched all regions. However, we have focused on those markets and products where the largest opportunity for growth exists.

Specifically as presented on Slide 18, our investment is target at a number of areas, including: a China Press Felt production to service current and future customers in the region; expanded high press felt capacity to service growing global market demand; expanded mechanical services capability to service this growing need in the North American market; and finally, expanding capacity in fiber cement, nonwoven and drier fabrics.

Moving onto Slide 19, we are also filling in legacy products for guests. Here are a few examples from our 17 programs in process. First, the TAD Tissue Product is nearing completion, with market introduction in the second half of 2014. This product will complete the machine clothing product portfolio with a growing tissue market. Next, the shoe press belt is slated to launch in early 2015, and is a special high-end belt for press rolls on high-demand press configurations. And finally, a Xerium exclusive, the SMART Roll for Suction Press Applications enables paper and tissue makers to view and manage nip conditions and suction roll applications. This project is expected to launch in Q4 of 2014. In 2013, we spent $22 million on restructuring activities, to take out over $23 million of cost. In 2014, we plan to take out over another $25 million in costs and are developing additional cost savings plans for 2015 and 2016.

Slide 20 includes a few examples of our improvements to our cost and operational structure. These include: first, the upgrade of our rolls and mechanical services facility in Duren, Germany. This facility will now handle the production from our closed facility in Heidenheim, Germany. We expect an improvement in quality and lower costs as a result of this consolidation. Second project includes the consolidation of production from our Buenos Aires, Argentina facility to our Piracicaba, Brazil facility. This, we expect, will also improve quality and lower cost.

Next, we would like to provide an update on our Brazilian tax litigation matter that we have previously disclosed in our financial statements. This update is provided on Slide 21. We have been actively litigating this case for some time now, and we analyzed but did not change our ASC 740-10 position at June 30, 2014. However, we are currently evaluating the cost and benefits of participating in the Tax Amnesty Program offered by the Brazilian Revenue Department. This Amnesty Program is open to tax payers during a short window until August 25, 2014, and represents a settlement opportunity. The rules for participation were finalized and only issued on August 1, 2014. This amnesty program offers significant reductions on the penalties and interests that have been assessed against us, depending on how quickly the agreed amount is paid. At this time, there can be no assurance that we will or will not participate in this amnesty program. If we choose to participate, we are -- and are able to secure in this necessary financing and are accepted into the amnesty program, then we would take -- then we would anticipate taking a charge against net income in the third quarter of 2014 in the range of approximately $26 million to $29 million, subject to currency exchange rates. This charge will not affect adjusted EBITDA and will close out and settle a matter that relates back to a 2005 transaction.

In summary, as presented on Slide 22, our markets are large, and despite pockets of weakness, are growing. Our orders and sales have grown faster than the underlying market over the last 2.5 years. However, our markets have shown pronounced volatility from quarter-to-quarter and will likely continue to do so. The interim's results are trending up in sales, gross margins and earnings, and we expect to achieve our adjusted EBITDA guidance of $116 million to $120 million in 2014, with the major risk being quarterly sales volatility. We were also investing in the future growth of our business by introducing new products and investing capital on assets to increase capacity and fuel sales growth.

Harold C. Bevis

;

Thank you, Cliff. And that concludes our prepared remarks and the overview of our slide deck, and we're now ready for questions. Shantale, may we have the first question, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Katja Jancic of Sidoti & Company.

Katja Jancic - Sidoti & Company, LLC

In the second quarter, how much of sales were non-paper related?

Harold C. Bevis

Non-paper related?

Katja Jancic - Sidoti & Company, LLC

Yes, from...

Harold C. Bevis

Cliff, we have that handy? The percentage has been steady. Looking backwards, it's around 10%. A lot of the investments that we've made, the foreign investments that Cliff alluded to, are in the non-paper area, and we do anticipate that becoming a bigger number, and we have plans to grow that number.

Katja Jancic - Sidoti & Company, LLC

But we will see -- as I understand, we will see this more in 2015 than this year.

Harold C. Bevis

Correct. We have explicit plans to grow on the non-paper arena.

Katja Jancic - Sidoti & Company, LLC

You also mentioned that the third quarter will be comparable to the second quarter. Can you elaborate on that? Do you expect same sales or growth?

Harold C. Bevis

Yes, we have a very strong order book, the 3% growth rate that we've alluded to has continued. We have strong order patterns in the second quarter and in July. And we did have a good July. And we don't have any line of sight or any forward indications right now for any disruptive ordering patterns from our customers globally in Q3. And so we are anticipating a strong third quarter on the top line and the bottom line. We have incremental cost out actions that are kicking in on the top of the Q2 actions, so we do expect incremental improvement in the bottom line as well.

Katja Jancic - Sidoti & Company, LLC

I think, in the prepared remarks, you mentioned that you're going to be spending around $70 million in capital expenditures and restructuring charges in 2014. How much of this is CapEx? And how much is restructuring?

Clifford E. Pietrafitta

Katja, approximately $50 million will be CapEx and the remainder of $20 million being in restructuring area.

Operator

Your next question comes from the line of Melissa Tan of R.W. Pressprich.

Melissa Tan - R.W. Pressprich & Co.

If you can, please elaborate a little bit more on the Brazilian tax litigation issue? Is that related to the recent plant closures? And also, for the $26 million to $29 million, would that be a cash charge? And I don't quite understand the part of where you talk about, if you need to secure necessary financing.

Harold C. Bevis

Okay. The matter has been covered in our filing documents. And it goes back to 2005, actions taken by the company at that time with regards to the tax strategies. And all of those -- all of the things the company did were allowed and appropriate at that time. And the laws have changed in Brazil since then, and some of these matters have become disputed amongst tax payers, and we are part of that. It is a big topic in that country. And it is an old matter. It is not in any way, shape or form related to any of our restructuring activities. It created this entire management team. And it's -- there's an opportunity available in Brazil right now to settle the matter versus disputing it in court, which has been our path. And the resolution, if taken, if we decide as a board, that would be a board decision of course, and if we did decide to do it, if we would prefer to borrow on a specific manner, in a tax-advantaged manner to pay that bill, and it would be to be paid in cash, the cash does not need to be lump sum. There's various payment options, including down payments and payments over time. There is a lump sum opportunity, but there's a scale and set payment options. And our board is discussing these, as you can guess from these comments on what should we do in regards to this matter. And if we do it, how would it be financed, what type of financing should we secure. And then of course, we need to apply and be accepted. So the plant closure is independent of that. It's being funded from ongoing cash flow. It will not see any timing pushes or pulls at all from this matter. This is a separate administrative matter that corporate -- that your corporate has been engaged in for some time.

Melissa Tan - R.W. Pressprich & Co.

Okay. And if you guys do not -- if you do not reach agreement, then, would there be a second option?

Harold C. Bevis

Yes, there is actually a wide range of legal options. But most likely, we will continue to -- along the path we've been on, which is to argue our case in court. And that's most likely will continue on for a couple of years.

Melissa Tan - R.W. Pressprich & Co.

Okay. And is it the second option, then there's no additional payment for the meantime.

Harold C. Bevis

Except for the expenses of the legal battle. And there are specific rules for how to contest and argue our case. And they have some financial implications, and we would be obliged to follow those, and they're not negotiable. So I would say, Melissa, that the ability to contest this matter and not incur expenses is coming to an end. And so going forward, whatever path we take does have financial consequences.

Melissa Tan - R.W. Pressprich & Co.

Okay, great. And the second question has to do with your restructuring costs. You mentioned $68 million from 2013 to 2016. Can you talk about how much of that has been spent already, and how much of that is the cash restructuring? Because in the second quarter, I think, in your income statement, it's a $7 million number. And then in the press release, you mentioned a cash number of $4 million.

Harold C. Bevis

Okay, there's 2 things mentioned there, commingled a little bit. First, our overall cash flow model in the company, we've been into a heavy spending mode the last 2 years by plan, and we have invested heavily into cash restructuring, which has primarily been severance. And the capital spending, which is the $68 million referred to here, has primarily been based upon sales growth on a go-forward basis. And by plan, we've been free cash flow neutral in the last couple of years. We've been using our free cash flow and reinvesting it with a small amount of debt paid down in there. And going forward, we have a business cash flow model that's very cash generative and has good debt paid down in the outyears. So the $68 million has already been put into all of our guidance we've given. The cash flow timing of the payment streams on equipment are very specific to the machines. I would say, Cliff, the majority has been spent, but we have more spending to happen in that $68 million.

Clifford E. Pietrafitta

Yes, there's that $15 million that goes into 2015. $15 million of the $68 million approximately.

Harold C. Bevis

Carryover.

Clifford E. Pietrafitta

It goes into 2015.

Harold C. Bevis

So the -- our cash flow story is, the CapEx part of the company's strategy will continue, more or less within that band, as our current plans over a multiyear period. The cash restructuring is going to significantly come down because we've gone through the majority of the severance actions that have been needed to be taken. And that incorporate -- my comment incorporates the yet to come severance associated with the Brazil action. And we're at a higher level of EBITDA now. And so if you couple the facts together of a higher level of EBITDA less spending, we're going to be very cash generative. And so that is our cash flow model, that is our business model. And we're pretty much on track with it.

Melissa Tan - R.W. Pressprich & Co.

Okay. So it's fair to assume that after that last $15 million in 2015, the numbers in 2016 should be like minimis?

Harold C. Bevis

Well, CapEx, as I mentioned, CapEx, this year on a GAAP reported basis will be around 50, and that includes construction and progress on Ba Cheng and a couple of other projects. So there's cash here, which is less than the GAAP accounting due to construction and process. And in go forward -- our go forward plan now has a similar level of CapEx but much less cash restructuring. But CapEx, we still have work to do. So we feel customer pull to be a bigger company than we are, and we have ordered the pace and actions to achieve those outcomes, and they include growing in nonwovens, fiber cement, mechanical services, our SMART Roll automation technology, and the product line portfolio programs that we're leading. So we foresee a multiyear need to continue the program and have plans to do that, but it has required cash flow neutrality up to this point due to the level of EBITDA we started at. And we're through the majority of the fix there which was cost take out. So we're going to spend the same amount of money going forward, but be cash generative on the base model on CapEx.

Operator

Your next question comes from the line of John Koerber of Bennett.

John Koerber

I have about 3 questions. The first is I didn't specifically hear the answer this way. If you were going to go down the route of settlement in Brazil, is it a $26 million to $29 million charge of cash, cash out the door?

Harold C. Bevis

That's our current outlook, yes.

John Koerber

Okay. The next question is following up on a question about how non-paper is basically about 10% of the business now, but you expect it to get bigger. Is it -- you have a couple of slides that indicate, hey, growth in one of the segments is 5.4, growth in another of the segments is 8.5, but because you're going to get bigger in them, is it reasonable to assume that what you're really targeting, because you're going to be taking share, I imagine, is a double-digit growth, if in 2015, on those segments?

Harold C. Bevis

Okay. John, I first want to clarify the question one that I answered. The numbers that you stated were numbers if we took a lump sum. But we haven't made that decision at all. And the numbers vary, if you look at the statute, which just came out last Friday, so it's fresh for us too, and the payment options. If you take a down payment and pay later, the total cash out would accumulate to a higher number. And we're looking at [indiscernible] and cash flows over time, but your comment was right on the money, if it's lump sum, out of the program.

John Koerber

Okay, I want to clarify that. If I read correctly the 10-Q, right now -- the Brazilians are appealing. But right now, the amount out the door, that's due -- and you're saying "Hey, we're challenging too, but it's 31.5 [ph]." Is that correct? Is that -- that's the disclosure in the Q, is the way I read it?

Harold C. Bevis

That's the current matter from the Brazilian point of view, yes.

John Koerber

Okay. And they're appealing that number upward. So you're faced with the decision of just putting the whole thing behind you, no more legal fees, which will be real for the next 2 years. And taking a bit of a discount off that, if you go that way, or spreading out a little, but probably not being greater in the down payment and stream, up being 31.5 [ph] over the next several years. Is that the way you're doing it?

Harold C. Bevis

I think, in layman's terms, you have it right on the money. We're -- the penalties and interest on top of the claim could be a higher number. There's a chance in the amnesty program to handle this matter in a certain manner. It's all in writing. And the net effect of our specific matter in that program would give you a current amount due in the range of 25% to 29%. How we finance it could vary, the cash flow and NPV of it. And we just -- we have to decide upon that, and to be honest, we love to accept it, and the application into the program, as do other contesting taxpayers. So we wanted to bring it forth, because it's going to play out before we speak again. And we just wanted everyone to know we're looking at it, just be transparent. But you have it right from a layman's perspective, John.

John Koerber

Okay. Then let's go to the targeted growth in non-paper whereas, the slides show nice growth, better than paper growth, but the reality of it is, if you target these areas, you're expecting greater growth than the jagra [ph] that's on the slide, simply because you're going to be taking share.

Harold C. Bevis

Right. So the question could be, "Hey, the market's growing 0% to 1%, you're growing at 3%, what's happening already?" So in this tough market that we've been in, our customers have really desired the solutions that we offer, which is an engineered nip. And so fundamentally, what we do with the SMART Roll technology, which is the automation and sensor software program, we match the clothing, the roll covering, and we have diagnostic information for the paper makers to optimize the cost and quality of the paper. The SMART Roll becomes the first sensor in the machine. And so what the SMART Roll offers the papermaker is the ability to optimize their cost and quality to achieve competitive outcomes. So this tough market has been favorable to the solution provider, to us. So we've grown at 3x the market here during this environment. The investments that Cliff alluded to in non-paper and in other geographic regions where we have been weak, are yet to help us. So you're correct in your assessment that, "Hey, you're already growing at 3%, doing what you're doing with no benefit from the spending and you're doing extra things, are you going to have a higher number than 3%?"

John Koerber

Well, that's -- I was actually going to do it in 2 parts. One is just on the non-paper side, but then -- but also, you just tackled the other part, which I saw on the slide. You're shifting your footprint enough that, hey, you're probably going to be growing faster because Asia is growing faster. Is that also a fair assessment?

Harold C. Bevis

Yes, Asia is...

John Koerber

Your product is better, you're targeting a new thing and you're shifting your geographic. All of that, take those 3 things together, and one can assume that the maybe that 3% number in growth, internally, is a higher number, internally. You might not guide to it right now, but internally, you might have a higher number.

Harold C. Bevis

Right. So our global revenue model is for revenue growth in the Americas, revenue growth in Asia, revenue stability in Europe. If you look at our mix of products, and that being roll covering technology, machine clothing, mechanical services. And that mix of products is going to -- we have plans to achieve those outcomes in those geographies. With regards to non-paper, it is a part of our story. But certainly, our combination of our 3%, and then being able to engineer a nip, it's very attractive, it's catching on with the global market share leader. It's machine automation. It's not clothing, it's not rolls. It's rolls and clothing optimized together. And the papermakers desire that. And they're really looking for solutions to be competitive and lower their cost per ton and have better service property, in 2 side businesses. So that, we have a strategy globally. And so we have a revenue growth corporate model based upon that. And our customers really want 2 -- at least 2 strong suppliers in each of these core product categories. And we're the #2 guy in all of them, more or less. And so we have a natural pull to be bigger. So yes, I think, you can say it's share gain, if you will, because we have been growing faster than the market. And it's primarily expense of small niche players who can't offer total solutions. So we do expect that to continue. Yes, you're correct, that we committed to these projects internally with IRRs and paybacks. And if you add those onto what we've done, yes, you could come up with a stretch figure. Your logic is correct.

John Koerber

Okay. The final question I have, again, it shows perhaps -- you do it on a different slide, but I think it shows best on 8 because there are various growth rates for containerboard, linerboard, medium, box board. Is there any particular hole in your product offerings that you want to fill, such that you can participate in the greater growth segments?

Harold C. Bevis

Yes. We have not had a very high market share in Tissue globally, looking backwards. And we had a key product efficiency there in the eyes of some of our customers, with regards to having a TAD product. And TAD stands for through-air-drying, and it really has to do with the high-bolt high-caliber tissue product that has -- that are at the high end and the most profitable segment in the tissue maker, amongst the tissue makers: the towels, paper tissues, napkins, sanitary products. And we have a great product, and we've been working on it for 2 years. It's better than is available in the current market. Our same strength is tests out higher than others. We're just rolling out that product now. That is an enabling event. That is an enabling event because many of our tissue customers are very focused on that specific topic. And for them, to be able to have a excellent TAD product, really, they're substituting air for fiber, it's the ultimate payback. And we have had a product that wasn't so good and we had a focused effort on it. Bill Butterfield, our head of R&D, has been very focused on it personally. We've been through trials. We're rolling it out now. We have a great product there and we expect a much stronger presence, globally, in tissue from that product. Secondarily, Asia, in general, has been an area where we struggled in press felts because we've supplied the market outside-in, predominantly for the high-end products. So Ba Cheng is more important than just the economics of the plant. It is an enabler and it allows us to get that high service requirement for the mill in China and Asia, to be able to be competitive on a day-to-day basis. If there's an emergency requirement today on some of the high-end press felts, we're not the best, we're not the best choice. So that feeling of that capability as a supplier is an enabling event for us. So I'd say, press felts, or high-end press felts are a big deal for us in Tissue, globally. And with me in the room here, I have my -- I have my presidents and I have my staff. If you wouldn't mind, I'd get some flavor also, I have my president with me of Europe and North America, Dave Pretty. Dave, would you add any comments there?

David Pretty

Yes, thank you, Harold. Harold highlighted the TAD application in the growing segment globally on Tissue. But more importantly, in the packaging grades, in the GDP grades, we've also launched a product for shoe press applications. This is another key advantage that gives us a complete portfolio of products to service the Packaging segment. We've also got a new product that's launched, and we've actually got a trial running right now on a key Tissue machine here in North America. But we've got SMART Roll technology embedded in suction roll applications, which will really change the way that our papermakers, our tissue makers, our packaging grade manufacturer can manage their machines and improve their output and optimization of those machines through automation of the rolls. So we're doing a lot on that front. It's a very exciting moment for us, and then finally, from the standpoint of mechanical services, we continue to invest and upgrade in that, so that our customer base has a one-stop-shop opportunity for servicing of rolls, roll services, metal work, mechanical service work, and overall work. So those are some exciting areas for us that completes -- those are just a few of the many products that are completing the segment. To the right to me, I have Paul Wang, who's the new president of Asia. And, I think, he'll add some further color to it as well.

Wern-Lirn Wang

Thank you, Dave. In Asia, we are fortunately in the largest and the production, and as well as consumption and market. Just to give you the number, the RESI's, the most recent update for the 2014, Asia is projected to grow to 3.5%, China is project to grow to 4.5%. And Europe-Asia, is of course, growing with the market. But we are not stopping there. As Harold and Cliff had just mentioned, we are putting the money into our existing full plant to expand the throughput, as well as the other capability to more diversify the product. And most important is that we are putting money into a greenfield plant, the Ba Cheng, that enable us to -- the more robust supply chain, as well as the value creation to the high-end, the press felts, the product and the customers. Internal management, probably worthwhile to mention that I and the whole management team in Asia, right now, are in Asia. We are working with our Asian team every day. We speak the same language, and we are there, feeling the pulse of the market, as well as the need of the customer. So that enable us to work with the customers intimately [ph] to understand what they need and to devise a solution. So with all this, particularly, just trying to elaborate what Harold just said, we're trying to grow Asia, but it's not just growing on volume. What do we have approach to our customer in Asia, it provides focus and value proposition to the target customer in Asia, to help them win in the increase competitive market. And thanks to the Xerium multiple platforms, the roll products, the service, as well as the machine clothing, we're enable to design the solution to the customer to make them win.

And with that, I will forward to our president for the fiber cement and nonwoven, Steve Johnson.

Steve Johnston

Yes, thank you, Paul. John, Steve Johnston here, General Manager and Vice President for Specialty Products, and that is defined as our revenue diversification. Specific to a couple of questions you had regarding fiber cement, which falls in the building products category, and also nonwovens, we're extremely bullish on these 2 markets. And I'll tell you why. Number one, we offer the complete complimentary of products, which are rolls to the fabrics. These are not necessarily new markets for us, but they're trending markets for us. And we're going to continue to gain market share through the competition, and we're also going to continue to gain market share through the growth rates. And these are projected growth rates that are very strong. Obviously, we mentioned, 5.4% in nonwovens globally. That's great news for the market, but it's better news for us because we have what I call bearing market share within all 4 regions, meaning, North America; South America; Europe, Middle East, and Africa, which is what we call the EMEA region; and in Asia. If you look at the projected growth within nonwovens, Asia accounts for 41% of the opportunity; followed by Europe, Middle East, Africa, 31%; and then followed by North America, 21%; and then followed by South America, 7%. Again, as I mentioned, we have varying levels of market share. And the good news is we're attacking this front and we have nowhere to go but up. So we feel like we have the right products, we have the right resources, we're going to continue to add capacity, expansion, we already produce in South America, Europe, North America. We're going to continue to expand that. Obviously, our sights were set on Asia, long term. We look to have this market fortified with the resources, the products, and again, the right attitude going forward. So nonwovens is very, very high on our list. So we expect, and in a very aggressive plan, I don't know if I can share the exact numbers, but as we're budgeting for the next 5, 6 years, is going to well exceed the 5.4%. And yes, we are talking double-digit numbers. On fiber cement, which falls in building products, there's also things like glass mat, again, a product mix that we have been involved in for a number of years. And we have some very strong market share today. But we're still bullish on that. And the reason we're bullish on that is because as you look at it again, as we mentioned, the Asia front, there are markets that we've tackled that were very mature, North America, Europe, there's still room for growth there. South America is an emerging market in fiber cement that's actually quite large. And the Asia market is wide open. We are attacking that. Just in the last 3 years, we gained significant market share. So worldwide, we are very confident in our approach, but we're also bullish in the market because there's upside. Why? Fiber cement is a great option, the final products, the stucco, the brick, obviously, for many number of attributes. So we see that market gaining share and not just in North America, but in all regions. So again, these are part of the revenue diversification that we are very high on. So...

Harold C. Bevis

Okay. John, we gave you kind of a rundown there in all your questions, and hopefully, that added in some...

Operator

Your next question comes from the line of Adam Ritzer of Pressprich.

Adam Ritzer

I don't know if I could ask as many questions as John, but I just had one big picture type question, maybe you could help us understand. You gave a lot of growth opportunities over the next few years. I know you guys are spending a lot of money to grow and invest in China, et cetera. Can you give us some kind of idea over the next 2 to 3, 4 years, what you think you can do in terms of EBITDA?

Harold C. Bevis

Well, we do have a base business model that is EBITDA growth. So we are intending to continue growing our top line above the market and growing our bottom line faster than that, with -- coupled with additional cost-out actions. We have a few big, big cost-out actions we haven't tackled yet. I think, at this point in time, if you look at our trends as a team, it's now muscle, we know how to do it. And so our handicap and our risk management, internally, gets around ordering intakes of activities. And we haven't committed to a long-term plan publicly yet. We're working towards that. We do have a big conference coming up at Jefferies. We're in the Jefferies Global Conference coming up, and we're preparing our comments for that. But I would just say, Adam, right now, we can't be numerical. I can just tell you that we do have plans to grow that top line, at least as well as we have been, and we think gets higher. And then also the bottom line will grow faster than that due to that flow through, which is very good. Our variable contribution margins are over 50% in the company. So, we get a very nice flow through. We've put in place capacity to grow sales that will cover multiple years. So we placed our bets now. These programs that Cliff covered, we've placed our bets. And so now the monkey is on our back, if you will, to go through and fill great commercial pipelines we need and fill up that capacity over a multiyear period. And so we have enabled ourselves to grow faster, and that will last several periods. So we don't need to spend that amount of money every year. We put in more than one year's worth of extra capacity. The bottom line, we want to continue along the trend path we've been on, you can look at the percentages. So we're not done yet. You should expect strong bottom line performance from this team.

Operator

Your next question comes from the line of Doug Weiss of DSW Investment.

Douglas Weiss

Just a couple of quick questions. On your last conference call, you mentioned that the declining segment of the industry was about 23%. I guess, that would be the news print, and printing and writing papers settlement was 23%.

Harold C. Bevis

Correct.

Douglas Weiss

I was just wondering if you could say where you are relative to that overall market?

Harold C. Bevis

In terms of what share we have of those segments?

Douglas Weiss

In terms of what percentages of your revenue?

Harold C. Bevis

Do we have it, Cliff? It got to be similar. I mean, we're pretty even handed market participant globally. I have my team with me here, as you can hear. Dave, I don't think we would depart from that. We don't track that data, internally, crisply. I would just say, within our range, we're going to be very close to that.

David Pretty

We have our fair share globally. But ...

Harold C. Bevis

We haven't had a skewed strategy into it or out of it looking back.

Douglas Weiss

Okay. And then, you gave the number of $25 million in cost savings based on the restructuring initiatives this year. So I assume that would be realized in full in 2015. And I guess my question then is, how much -- what's the offset on that in terms of cost inflation on SG&A, and I know you have...

Clifford E. Pietrafitta

The biggest component of our inflation would be in salaries and overall, it's about a $6 million increase year-over-year for inflation that we track. So that's been the experience the last few years. About a $6 million inflation bill.

Harold C. Bevis

And I would add onto that, that primarily, our inflation is by contract. Most of our workforces are unionized, and we entered into contract bargaining agreements with them. So it's largely nondiscretionary.

Douglas Weiss

Now does that mean that of that $25 million, you actually get to keep $18 million, something in that area, or is there some additional cost inflation?

Harold C. Bevis

Yes, that's right. I mean, we're aiming at a net improvement. With that, and we obviously, have medical contemplations and other things we're taking into account here. But we're looking at a net number like that, yes.

Douglas Weiss

Okay. So it's a pretty substantial EBITDA improvement. And then, on your pension, is there any thoughts to freezing your pension at this point.

Clifford E. Pietrafitta

Our -- not at this point. We've terminated some of the plans, but at this point in time, we don't have any expectations of doing anything, as far as doing, paying those pensions off. We're focused on debt reduction.

Harold C. Bevis

And our North American pensions are part of our collective bargaining agreements.

Clifford E. Pietrafitta

Adam, I'm sorry, one another point. The North American plants are frozen at this point, but terminating them is something that we look at as we go forward with glide path forming obligations. And we also measure that against paying down the traditional bank debt and bonds. So it's part of our overall cash flow management plan as we go forward.

Douglas Weiss

Sorry, the North American are frozen, but the European plants are not, is that the status?

Harold C. Bevis

Europe? Yes, yes.

Douglas Weiss

And what -- I don't think you break them out in the Ks. What's the relative size of the 2 plans if you could say?

Harold C. Bevis

U.S. and Canada is about 1/2 and European plans are about the other half of the obligations.

Operator

[Operator Instructions] Your next question comes from the line of Bobby Jones, individual investor.

Unknown Shareholder

I think you've provided a lot of detail. I just had a couple of clean-up questions. Can you just expand on your CapEx investment framework in terms of IRR and payback? I heard you mentioned that you view investments through those lenses. So it might help to give us a sense for where you're ahead that in terms of what your hurdle rates are?

Harold C. Bevis

Very good. So thank you, it's a good question. We have a maintenance CapEx spend, right -- maintenance of business and maintenance of plant. We do have aged [ph] assets amongst our 27 plants. And that varies a little bit due to fix and break. It's going to range between $12 million and $15 million a year. And that's just part of this company. We have a maintenance number. Then beyond that, it's totally discretionary. And then, it's a balance between how much you want to spend growing and repositioning into growth markets and how much do you want to spend on non-revenue cost take out kind of actions. And we've tried to remain balanced. You can see that the numbers are skewed a little bit towards growth here when we've given them because it's been size of building -- size and amount of dollars required to build a retail plan. With state-of-the-art machinery in the right spot. So the Ba Cheng investment was definitely a strategic decision, to put the right plant at the rights spot. It could've been done cheaper and at a cheaper place, but it's the right plant, right spot, right equipment, and right people. So that is a very specific thing, right? So we don't have a lot of those because we don't do those every year. And the capacity we're bringing on will last several years if you look at our plants. And we're -- as Paul said in his comments when he was answering the questions from John, we have a targeted program, and we're targeting customers who value what we do. So we're not indiscriminate with what we're going after. We're going for high-fee machines, get value what we're offering and it takes back as our customers to engage with us and implement our solutions. So on a go forward basis, I've mentioned a couple of times to Melissa earlier in this talk when she was asking kind of on a go forward CapEx amount. We do foresee some lumpiness, the same kind of level of spending because we're not done yet. There's areas of the world that are growing within Asia, there's parts of Asia growing in addition to China. There is parts of emerging Europe that are growing, and there's parts of emerging Latin and South America that's growing. So if you stand back from the picture and look at what part of world is growing, there's a couple of spots in the world where we don't have pins on the map. And so as a team, strategically, we've debated through the ordering of these things and where do we have natural path, customer pull, where do we have references, in essence, where are we wanted, where it will be hard, where it will be difficult. So we've ordered and take these activities. And so I really think you should expect us to spend around what we're doing this year, $45 million, $50 million with $10 million to $15 million being largely just maintenance and nondiscretionary, and the rest being discretionary and balance between growth, pins on the map and cost-out activities in some of the mature markets that are under pressure.

Unknown Shareholder

And is there any kind of targeted return on investment that as shareholders, we should expect or just kind of wrap our heads around?

Harold C. Bevis

I think, you could -- it's safe to say that we are -- we have signed up for contemporary paybacks, and we know where our cost of capital is, and we know what's not dilutive, and we know what's accretive. And overall, obviously, we're trying to increase the return on invested capital here.

Clifford E. Pietrafitta

And I would add that we -- as we go through the process, we compare various projects and, obviously, we're choosing those projects that position us best and have the greatest return to the company.

Harold C. Bevis

We don't really want to give a specific number, Bobby.

Unknown Shareholder

I very much appreciate that. And then in terms of the debt structure, in light of your operational performance, which has been great in the interest rate environment, which is pretty accommodative, any plans on attacking some cost savings in terms of the debt structure?

Harold C. Bevis

Well, our -- we do have debt that is callable, but they're significant premiums. And if you look at the reality of that, our overall debt model and cash flow model has been based upon heavy upfront investments to reposition our plants, our people, our activities into forward-looking growth opportunities to consolidate some of the legacy positions that we've had. We've consolidated almost half of our plants in North America. We've consolidated 30% of our plants in South America. We consolidated 30% of our plants in Europe. And we're adding to our productive capacity in plants in Asia. And so that has cost money to do. The industry has needed to reposition itself. We have -- some of our peers have done that, some haven't. We've done our fair part to consolidate the industry. Our customers are consolidating in certain areas. And we have to do that with them. And our customers are expanding and growing in certain areas, and we have to do that, too. So we -- on repricing our bank debt or calling our bonds and putting them out very specific things that you're alluding to, they're not on our radar screen right now. Cliff and his team monitor these at all times, it costs money to do them. It hasn't hit our radar screen to spend the amount of money that it takes to do that in lieu of the value creating EBITDA sales growth opportunities that we have in front of us. And we've chosen to just kind of run at free cash flow mutual and not run off debt as we've repositioned. Going forward, we'll have more flexibility. And so we have significant pay-down -- debt pay-down in there and if it was a different time and set of circumstances, we might be attacking our capital structure right now. But it would require us to kind of go under water, if you will, on debt and cash flow and accounting, we're just -- we have a self-imposed rule not to do that, so we're just choosing not to do that, Bobby.

Unknown Shareholder

Okay. I appreciate that. And then, I guess last question I have, just because nobody else asked or maybe I just don't know. But what was with the pre-announcement? I mean, I very much appreciated it when it's good news, it's great to see it early. I wonder if there's any rationale behind that?

Harold C. Bevis

We were just trying to be more proactive with investor relations. We are trying to put helpful information out there. We also knew we wanted to get people to read the announcement because we were going to put out a slide show and we wanted to get people to make sure they had to come to our website and look at it and be ready. So no particular reason. We just decided we're trying to be more proactive. We're not covered much by sell-side analysts, and so we're trying to do our own in investment relations. So we feel we've had a great quarter, and we've had a great couple of years of trend. And there is really no specific reason.

Operator

At this time, there are no additional questions in the queue. And I would like to turn the call back over for closing remarks. Please proceed.

Harold C. Bevis

Very good. Thank you. For those of you who are still on the phone, we appreciate your calling in this morning and ask us a lot of questions about the company. We're proud of what we've done and we're excited about our future. And we're very confident about the second half of this year. And we're confident with the programs we have. If you have any further questions or inputs regarding the slides, please send them in to Cliff. We'll try to listen and accommodate and give you the insight you need to be a fan of our company, invest and understand what we're doing. So with that, operator, I'd like to end the call for this session. Thank you.

Operator

Thank you. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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