Xerium Technologies (XRM)
Q3 2011 Earnings Call
November 09, 2011 9:00 am ET
Clifford E. Pietrafitta - Chief Financial Officer and Executive Vice President
Stephen R. Light - Chairman, Chief Executive Officer and President
Kevin McDougall - Executive Vice President and General Counsel
Brian W. Post - Roth Capital Partners, LLC, Research Division
Richard Kus - Jefferies & Company, Inc., Research Division
Previous Statements by XRM
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Ladies and gentlemen, welcome to the Xerium Technologies Third Quarter 2011 Financial Results Conference Call on November 9, 2011. [Operator Instructions] I would now hand the call conference over to Kevin McDougall, Executive Vice President and General Counsel. Please go ahead, sir.
Thank you, and welcome to Xerium Technologies' Third Quarter 2011 Financial Results Conference Call. Joining me this morning are Stephen Light, the CEO, Chairman and President of Xerium Technologies; and Cliff Pietrafitta, Executive Vice President and Chief Financial Officer. Stephen will start the discussion this morning with an update on our progress, and then we'll provide further financial details with respect to the quarter. Subsequently, we will open the lines for questions.
Xerium Technologies' financial results for the quarter were announced in a press release after market closed on Tuesday, November 8, 2011. Notification of this call was broadly disclosed. And this conference call is being webcast using the link on the Investor Relations homepage on our website at www.xerium.com. We have also posted a slide presentation on our website, which we'll refer to during this conference call.
I'd also note that will make comments today about future expectations, plans and prospects of the company that constitute forward-looking statements for the purpose 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 n Monday's press release and in our SEC filings. The forward-looking statements represent our view as of today, November 9, 2011, and we specifically disclaim any obligation to update these forward-looking statements.
Lastly, on this call, we'd like -- we plan to discuss supplementary non-GAAP financial measures, such as adjusted EBITDA, that are key metrics for our credit facility covenants 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 on our press release and in our materials, which are each posted in the Investor Relations section of our website at www.xerium.com.
With that, I'd like to turn the call over to Stephen.
Stephen R. Light
Thanks, Kevin. Good morning, ladies and gentlemen. By now, you've had the chance to review our earnings release and our slides which we posted on the Xerium website last night, so I'm not going to walk you through the specifics of each chart. But Cliff and I will address any topics we missed in our remarks in the Q&A session in just a few minutes. Notwithstanding that we grew revenue by 9.1%, it should be obvious from our results that the quarter was quite challenging, as a global paper market has been unsettled for the past several months. By unsettled in our industry, I mean that mill managers are reluctant to place orders for rolls and clothing when they think there is a slowdown on the horizon. You can see this in our lower and essentially flat line bookings for both rolls and clothing.
Throughout the quarter, however, our backlogs remained robust even with the lower level of order we experienced. Our Paper Machine Clothing press felts backlog remains particularly strong as it has been for the past year. The overall paper market has been experiencing substantial downward pricing pressure with pulp in South America, which we used as a leading indicator, down approximately 20% from its peak last year. Prices for newsprint and printing and writing are feeling the same pressures in some regions.
You can see from our decline in margins that while we have continued to hammer away on our structure, actually increasing sales per employee by 6.6% in Q3 versus last year's Q3 and worked hard to pass along as much of our cost increases as we can, we've not been able to offset all of the pressures with either cost reductions or increased pricing. I expect this pressure will evade slightly, with decline in oil prices but the lag time between oil prices at the wellhead and the price of yarn seems to be about 9 months. Rubber, the other major commodity we purchased, has seen no decline in pricing and it is negatively impacting our roll cover businesses.
Our margins are also impacted by our increasing revenue derived from emerging markets such as Asia.
In 2005, only 12.6% of our revenue came from Asia. In contrast, through Q3, as you can see on Slide 6, 18.6% of our 2011 revenue has been derived from Asia. This growth is the result of our strategic initiative to increase our revenue in this fast growing market to increase customer engagement by expanding our sales and applications engineering resources resident in the region, while utilizing our existing factories to produce the products.
In 2005, most of our Asian revenue came from Japan, Korea and Australia. Now a meaningful percentage comes from China and Indonesia. Well, this is a great business and we're happy to have it as the developed markets remain in the doldrum. Because we import into the region from higher cost factories elsewhere in the world and have to absorb much of the freight and logistic expense, our margins are lower from these sales than our realized for the same or similar products in the mature markets.