Xerium Technologies' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Xerium Technologies (XRM)

Q1 2012 Earnings Call

May 09, 2012 9:00 am ET

Executives

Kevin McDougall - Executive Vice President and General Counsel

Stephen R. Light - Chairman, Chief Executive Officer, President and Member of Executive Committee

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

Analysts

Talal R. Dimechkie - Sidoti & Company, LLC

Kevin J. Cohen - Imperial Capital, LLC, Research Division

Matt Sherwood

Mark Tobin - Roth Capital Partners, LLC, Research Division

Gary Madia - Gleacher & Company, Inc., Research Division

Richard Kus - Jefferies & Company, Inc., Research Division

John Pace

Richard C. Yu - Citigroup Inc, Research Division

Presentation

Operator

Ladies and gentlemen, welcome to the Xerium Technologies First Quarter 2012 Financial Results Conference Call on May 9, 2012.

[Operator Instructions]

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

Kevin McDougall

Thank you, and welcome to the Xerium Technologies first quarter 2012 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 line for questions. The Xerium Technologies financial results for the quarter were announced in the press release after market closed on Tuesday, May 8, 2012. 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 will refer to during this conference call.

I'd also note that we'll make comments today about future expectations, plans and prospects of the company such as our general expectations for 2012. 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, in our slide presentation and in our SEC filings. The forward-looking statements represents our view as of today, May 9, 2012, 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 covenants and that we use internally to assess liquidity and financial performance, and therefore, we believe will assist you in better understanding our company. Reconciliations of these measures to the comparable GAAP numbers are available in 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. Thanks for joining us this morning. Generally, little has changed since our 2011 annual earnings call just 8 weeks ago as conditions in the global paper industry continue to be significantly differentiated by region and paper grade. Our chief concern continues to be our largest market, Europe, where paper production remains depressed as a result of the region's overall poor economic health. The most recent paper producer association data from the Confederation of European Paper Industries, or CEPI, report in February shows cumulative production tonnage to be about 3.6% below last year and 3.7% below January of 2012. The hardest hit segment of the European market has been graphic upgrades, where year-to-date production is 6.3% below last year's cumulative output, while the best area, sanitary products, or what we would typically call the tissue segment in North America, experienced growth of just 2.7%. However, in what we consider a positive turn as the first quarter developed, our European customers increased orders steadily throughout the quarter to a level substantially above the end of 2011.

We view this pattern as indicative of their slowly increasing optimism about the future. Each month of the quarter showed sequential increases in orders and while it is obviously too early to declare that the European market has turned, we're more optimistic than we were just 3 months ago.

Meanwhile, paper production tonnage in North America decreased just slightly, but our orders remain well ahead of a good 2011 fourth quarter for both Rolled and Paper Machine Clothing. In North America, PMC orders increased more than 30% and roll orders increased 14.5% from the fourth quarter of 2011.

In South America, our deliveries remain subdued due to low backlogs for domestic consumption. However, once again, new orders for Paper Machine Clothing improved more than 20% from the fourth quarter of 2011 while Rolls remained flat. We believe this market behavior is consistent with our internal outlook for the second half of 2012 being much better than the first half of the year.

Sales continue to be solid in Asia. Rolls were strong, but PMC was a little softer than expected as China's slowing growth rate made itself evident. This actually helped our margins as we earn more on Asian rolls produced and sold than Asian PMC. Meanwhile, Asian PMC orders increased month-over-month throughout the quarter. Of course, orders were also slowed in the first quarter of 2012 as China celebrated its New Year's holiday. And also as a consequence of our major Japanese customers who pre-ordered in last year's fourth quarter for the resumption of production in mills damaged by the tsunami last year.

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