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Libbey (NYSEMKT:LBY)

Q4 2012 Earnings Call

February 21, 2013 11:00 am ET

Executives

Kenneth A. Boerger - Vice President and Treasurer

Stephanie A. Streeter - Chief Executive Officer and Director

Sherry Buck - Chief Financial Officer and Vice President

Analysts

Reza Vahabzadeh - Barclays Capital Inc.

Arnold Ursaner - CJS Securities, Inc.

James Fronda - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Four 2012 Libbey Earnings Conference Call. My name is Patrick, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ken Boerger, Vice President and Treasurer. Please proceed, sir.

Kenneth A. Boerger

Thank you, and good morning, everyone. Welcome to Libbey's Fourth Quarter and Full Year 2012 Earnings Conference Call. Our press release and supplemental financials were distributed this morning and are available on our website in the Investor Relations section. We are hosting a live webcast of today's call, which can be accessed on the same section of the website. The replay of today's call will be available on the website for 7 days. Before we get underway, I'd like to say that this conference call will contain forward-looking statements under the Securities Act of 1933 and other federal securities laws. These statements are based on current expectations, estimates and projections about the market in the industry in which Libbey operates in addition to management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to forward-looking statements noted included with our SEC filing.

I would now like to introduce the members of the management team here with me today: Stephanie Streeter, Chief Executive Officer; Sherry Buck, Vice President and Chief Financial Officer; and Ronnie Smith, Vice President and Corporate Controller.

I will now turn the call over to Stephanie.

Stephanie A. Streeter

Thanks very much, Ken, and good morning. And again, welcomes our fourth quarter and full year 2012 conference call.

Overall, we're pleased with the results we reported this quarter. Critical drivers to our performance were our increased focus on improving margins and defending and growing our key markets.

These strategies are central to Libbey 2015; the strategic plan we announced in 2012. Our cost improvements, coupled with solid sales increases in the U.S. and Canada sales region, led to exceptionally strong adjusted EBITDA for the quarter.

Among the financial highlights for the fourth quarter, we recorded sales of $219.1 million, a 2% increase from last year's fourth quarter. Income from operations improved 34.8% over Q4 2011 to $13.1 million.

Our adjusted EBITDA was $29.9 million, a 40.2% improvement over last year.

Sales in our largest segment, Glass Operations, were $201.3 million, an increase of 1.1%. Improved margins for the quarter were driven by increased revenue in food service and a better mix in the U.S. and Canada, as well as lower natural gas and utility cost, lower packaging costs and higher capacity utilization.

Now I'll switch to the full year highlights. On an annual basis, we delivered 4 strong quarters, which allowed us to realize company records in sale, income from operations and adjusted EBITDA.

Our commitment to improving our cost structure, while leveraging our advantage businesses and strengthening our balance sheet, is again reflected in these yearend results.

There is still progress to be made regarding our margins to enable us to compete effectively with an increasingly global set of competitors. Therefore, efforts to improve our cost structure will remain at the heart of our efforts in 2013. We believe these efforts, in combination with our overall productivity improvement, will enable strengthened financial and operational performance in the year ahead.

For the year, sales were $825.3 million compared to $817.1 million for 2011. Income from operations grew 28.1% to $81.3 million versus $63.5 million in the previous year. Adjusted EBITDA increased 17.1% to a record $132.4 million compared to $113.1 million for 2011.

Sales in Glass Operations were $753 million, an increase of 3.1%, excluding currency fluctuation.

This was by buoyed by a 24% increase in China sales and a 4.1% increase in the U.S.-Canadian region. Margin improvements for the year as a whole were supported by these sales increases, a better mix in most geographies, lower natural gas cost and lower packaging cost.

So let me move now to the balance sheet highlights and our announcement regarding our debt payment.

As I said before, near-term success is important, but we have a lot of work to do to sustain and further improve this performance to create additional shareholder value and secure our future.

Strengthening our balance sheet and continuing cost reduction remain critical imperatives for the company.

We ended 2012 with total debt of $466.5 million, and a debt net of cash to adjusted EBITDA ratio of 3x.

Today, we announced plan to buy back $45 million of our 6.78% (sic) [6.875%] bonds due in 2020 to eliminate part of our debt.

This action will reduce our outstanding balance on the senior notes to $405 million and at that same 6.875% rate and should move us solidly into our target range of 2.5 to 3x net debt-to-adjusted EBITDA by the end of 2013.

Now I'll transition to a discussion of our strategic plan implementation and looking forward in 2013.

Libbey continues to successfully implement Libbey 2015, the comprehensive business strategy that we launched last year to improve our financial position and our ability to compete effectively in the market today and into the future.

Libbey 2015 is centered on reducing our cost and boosting efficiency across the company, reinforcing our leadership position in key segments, particularly the U.S. foodservice and Mexico foodservice and retail markets and accelerating growth in China and reducing our liabilities and the working capital required to operate our core business.

As we've previously stated, there are many proactive changes that must made to reduce cost and strengthen our overall financial position. To this end today, we also announced a tentative plan to exit sales of certain glassware items, realign production in North America and reduce manufacturing capacity at our Shreveport, Louisiana facility.

Some of that production would be relocated to our facilities in Toledo, Ohio and Monterrey, Mexico.

Existing staff would handle the relocated product in Mexico and in Toledo.

The vast majority of our customers would not be impacted. These changes would enable the company to reconfigure our manufacturing footprint and improve asset utilization across our North American facilities, while continuing to meet the needs of our customers worldwide.

The realignment, if implemented as currently contemplated, would unfortunately result in a reduction in Shreveport, affecting approximately 200 positions. The tentative plan will be further discussed through decision bargaining with United Steelworkers, which represents living production and maintenance employees in Shreveport.

We sincerely regret the impact these changes would have on the Shreveport associates who would be affected, but they are necessary to strengthen Libbey's financial and competitive position.

Now looking ahead to 2013. The implementation of the strategic plan is an ongoing process and our progress may come in a bit more lumpy at times than we would like.

An example of this is the first quarter of 2013. In the first quarter, we anticipate sales that will be consistent with or slightly less than the first quarter of 2012.

In addition, first quarter margins will be negatively impacted as a result of significant rebuilds and capacity expansion at our Mexico facilities, along with the associated underutilization of capacity.

This is expected to result in income from operation margins that are similar to Q1 2011 rather than Q1 2012.

However, for the full year 2013, we still expect to realize year-over-year revenue growth in the low- to mid-single digit range and EBITDA improvements that will reflect the benefits of the cost reductions that we put in place in the second half of 2012.

And now, I'd like to turn the call over to Sherry to provide more depth and breadth on the financial results. Sherry?

Sherry Buck

Thank you, Stephanie, and good morning, everyone. I'd like to review details on the fourth quarter and yearend financial.

Q4 brought continued growth for our Glass Operations in China and the U.S. and Canada sales region.

China sales increased 0.8%. U.S. and Canadian sales were up 5% with increases in all market channels. As Steph mentioned, both regions demonstrated strong year-over-year growth, with a 24% increase for China and a 4.1% increase for the U.S. and Canada.

While Mexico sales in Q4 were lower by 5.6% compared to the year ago quarter, this only represented a 1.6% decrease for the full year and actually showed a 3.1% year-over-year increase, excluding the currency impact.

Europe's economic challenges continue to have an impact on the business-to-business channel with distribution.

In Q4 2012, we saw a 3.1% decrease in sales within our European sales region, though that equated to a 0.8% increase when currency fluctuations were taken into account.

For the year, we saw an 8.3% decrease in sales within the region, which is only a 0.6% decrease, excluding currency fluctuations.

All of our market channels; foodservice, retail, and B2B in the U.S. in Canada showed continued sales growth in Q4. Sales to foodservice customers increased by 4%.

Retail customer sales increased 6.5%. Sales to business-to-business customers in the U.S. and Canada increased 3.7% for the quarter.

Sales in all 3 market channels demonstrated year-over-year growth as well with foodservice increasing 5.1%; retail sales up 3.6%; and business-to-business sales 3.1% higher.

For this past quarter, solid sales increases to both Syracuse China and world tableware customers bolstered the Other Operations segment to a 13.4% increase to $17.8 million compared to $15.7 million in the prior quarter.

For the year, sales in the Other Operations segment were $73 million compared to $71.2 million in the prior year.

As a result of the sale of substantially all of the assets of Traex in late April 2011, the prior year included net sales of $4.8 million of Traex products, which were no longer offered for sale by the company in 2012.

More than offsetting the absence of Traex product sale were increased sales to world tableware customers of 9% and an even stronger 12.6% increase in sales to Syracuse China customers.

SG&A was $31.5 million for the most recent quarter, up 11.8% compared to $28.2 million in the year ago period.

Year-over-year SG&A increased 7.9% to $113.9 million from $105.5 million in 2011, primarily as a result of pension settlement and severance charges.

As Stephanie noted, income from operations improved 34.8% over Q4 2011 and 28.1% to $81.3 million for the year.

After adjusting for special items in both years, income from operations increased from $11.8 million in Q4 2011 to $18.7 million in this year's fourth quarter.

For the year, adjusted income from operations increased from $70 million to $90.7 million. Primary drivers for the full year 2012 included higher margins on an improved mix of sales and reduced utility and packaging expenses, which were partially offset by higher SG&A expenses.

Natural gas prices were down in the U.S., Mexico and China for the quarter, though they were up in Europe. The net effect was $600,000 lower expense in Q4 and lower expense of $5.3 million year-to-date.

In Glass Operations, segment EBIT was $24.2 million in Q4 compared to $19.6 million in the year ago period.

For 2012, segment EBIT was $118.5 million compared to $96.7 million.

Other Operations reported segment EBIT for the fourth quarter of $3 million compared to $2.4 million in last year's quarter.

For the year, Other Operations segment EBIT totaled $14.1 million versus $12 million a year ago.

For the quarter, we realized a decrease in interest expense of $1.9 million to $8.6 million compared to $10.5 million in the year ago period, primarily driven by lower interest rates.

Annual interest expense decreased by $5.7 million to $37.7 million compared to $43.4 million in the prior year, again, as a result of lower interest rates in the last 7 months of the year.

Our effective tax rate was 67.7% for this past quarter compared to a benefit of 296.6% for the quarter ended December 31, 2011.

For 2012, our effective tax rate was 45% compared to 6.5% in 2011. The full year effective tax rate was influenced by nondeductible foreign exchange currency losses related to our Mexican operations and increased in form of withholding taxes and other activity and jurisdictions with recorded valuation allowances and change in the mix of earnings of different statutory rates.

We had available capacity of $68.6 million under our ABL credit facility as of 12/31/12 with no loans outstanding and cash on hand of $67.2 million.

Our investment in working capital was $172.7 million compared to $175.1 million at the end of 2011. This decrease in working capital was primarily the result of lower accounts receivable and higher accounts payable.

Working capital as a percentage of the last 12 months net sales was 20.9% compared to 21.4% in the prior year. This was a record working capital percentage for the company.

And finally, CapEx was $15.5 million in the fourth quarter of 2012 compared with $15 million in the year ago period.

Annually, CapEx was $32.7 million for 2012 compared with $41.4 million in 2011.

Depreciation and amortization amounted to $10.6 million in the fourth quarter of 2012 and $41.5 million for the year versus $9.9 million in Q4 2011 and $42.2 million for 2011, respectively.

As we explained in our third quarter earnings call, some of our projects were moved to 2013. CapEx will be higher than D&A in 2013 and will be in the range of $46 million to $50 million.

We would now like to open the call for any questions and Stephanie will have some brief summary comments at the end of the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Reza Vahabzadeh with Barclays.

Reza Vahabzadeh - Barclays Capital Inc.

Foodservice sales trends in North America have been, obviously, reasonably solid this year, including up 4% in this quarter. Do you think you are gaining share in foodservice, as well as North America retail, and then how do you reconcile your foodservice sales gains with more modest same-store sales trends that we see in the foodservice channel?

Stephanie A. Streeter

Well, I think we're probably -- overall, gaining on foodservice sales, some market share and some of that might be in glass, but we're definitely gaining share in our Other Operations segment as well. And as we said, when we announced our strategic plan, that was one of the focuses that we have was to, overall, grow our foodservice in a combined fashion, adding Spiegelau and Nachtmann is, again, part of that. So we could be gaining a little bit of share, we did see volume increases when, overall, I think, it's been sort of flat from external predictions. And then in retail, I think the whole retail business according to the external trackings that we look at through NPD, that whole market went down slightly in 2012. And I think share moved around 1 point or 2, but I think our share is relatively static there.

Reza Vahabzadeh - Barclays Capital Inc.

Right. So you don't see any inventory build in the channel especially in foodservice?

Stephanie A. Streeter

No, we don't see any inventory build there.

Reza Vahabzadeh - Barclays Capital Inc.

Okay. And then can you just comment, if you don't mind, on the Mexico sales decline x-currency, as well as the China sales being relatively flattish x-currency?

Stephanie A. Streeter

Sure. I think especially in the fourth quarter, B2B was slow in Mexico. Foodservice sales were pretty strong. Retail was sluggish and that was primarily because of promotional activity from some of our larger retailers. We had very strong incentive sales to catalog companies and our outlook is that retail will be getting stronger in 2013. We're seeing better promotional activity, we're seeing a pickup in B2B and we're seeing continued strong incentive sales to catalog companies. In China, it was very weak in terms of retail sales in the second half of the year, especially. Inventory in the channel, in the retail channel is very high. As we talked in the third quarter, there's monetary policy. Our customers there are more traders and need access to short-term loans that, frankly, have really dried up in the second half of the year. And so we're looking to see China to ease their monetary policy in order to stimulate growth in 2013. Our foodservice sales were strong in domestic China. And we continue to expand there and I'd just say we remain convinced that China is still going to be a growth engine for the company and believe that the economy will pick up and as we continue to build our manufacturing, marketing and selling capabilities there, that we'll reap the benefits.

Reza Vahabzadeh - Barclays Capital Inc.

Got it. And one quick financial question. What is the effective date of the redemption of the bonds?

Kenneth A. Boerger

Reza, we have not announced that yet. We will do it sometime during the second quarter and the actual date will be announced 45 days in advance.

Reza Vahabzadeh - Barclays Capital Inc.

Right. Is this first available date sometime in mid-May?

Kenneth A. Boerger

No, we can do it anytime.

Operator

Your next question comes from the line of Arnold Ursaner with CJS Securities.

Arnold Ursaner - CJS Securities, Inc.

I want to focus first on Shreveport. You mentioned you're going to be reducing manufacturing capacity and exiting some sales. Can you quantify the amount of sales you plan to exit?

Stephanie A. Streeter

Arnie, at this point, we're entering into decision bargaining. And so it's premature to talk about any of the financial or other impacts on that move until we finish the decision bargaining with the union.

Arnold Ursaner - CJS Securities, Inc.

Okay. So in your prepared remarks, you indicated you thought sales would be, at least for the year, you thought would be up low- to mid-single digits so 2 questions related to that. I assume it does embed in that some exited sales?

Stephanie A. Streeter

Yes, you could assume that all of the plans would be included in that.

Arnold Ursaner - CJS Securities, Inc.

Okay. Is there any price increase embedded in the guidance that you just provided or comment you provided?

Stephanie A. Streeter

There is not. We are still examining whether we want to increase prices and as you know, we announced those 60 days in advance.

Arnold Ursaner - CJS Securities, Inc.

But in theory, if you had to pick a number, 3%, 4% price increase, that would be incremental to the revenue growth you're expecting. Is that correct?

Stephanie A. Streeter

It would be, yes, you could see it as incremental.

Arnold Ursaner - CJS Securities, Inc.

Okay. Another question I have is maybe for Sherry. Could you comment -- obviously, you changed your pension plan when you redid your debt. Can you remind us of the total impact the pension expense had in 2012 and how we should think about the delta in 2013 on both your income statement and on cash flow?

Sherry Buck

Yes, sure, Arnie. Our pension expense for 2012 was $27 million and in that, also include the $4.4 million of the pension settlement and curtailment charges we had here in the fourth quarter. I'd say for 2013, you should think about pension expense to be around the $19 million range.

Arnold Ursaner - CJS Securities, Inc.

Okay. And that would -- I guess, I thought that you had kind of taken the $80 million hit and had eliminated the $19 million. I guess, I'm not thinking about it the right way?

Kenneth A. Boerger

No, that's the cash contributions, Arnie. The pension expense we had talked about being down in the neighborhood of $2 million per year and if you backed out the $4.4 million for the curtailment charges, then you're looking at more like a $3.5 million decrease.

Arnold Ursaner - CJS Securities, Inc.

But on the other hand, you'd have a incremental $16 million of cash that could be used to pay down debt or other uses. Is that correct?

Kenneth A. Boerger

Yes.

Stephanie A. Streeter

Yes.

Arnold Ursaner - CJS Securities, Inc.

Okay. My final question is follow-up to Reza's broad question about the trends in retailing. Walmart, there's there been talk about how soft their first quarter has been. They're obviously, a key player in the mass market. Restaurant trends in early 2013 are being impacted by higher tax rates and general softness in the economy. How do you see that or are you seeing it impact the North American retail piece of the business and foodservice piece at this point?

Stephanie A. Streeter

Well, at this point, so same-store sales in the fourth quarter were strong and so we certainly benefited from that. In the first quarter of 2013, we said that we anticipate sales that will be consistent with or slightly less in the first quarter of 2012. I'll remind everybody on the call the first quarter is the smallest in -- certainly in retail. And as you said, the impact of lower paychecks and higher gas prices, we think, is affecting some of our foodservice, as well as our retail business. So we've already baked in what we think will be any sort of negative impact from what we see going on in the marketplace and I'll just remind you that we said in 2013, for the full year, we expect to see revenue growth in the low- to mid-single digits and then EBITDA improvements that would reflect what we did last year in the second half in all those cost reductions.

Arnold Ursaner - CJS Securities, Inc.

Okay. And just again, to get to clarify this, the EBITDA improvement you're speaking about would not be dependent on the successful completion of the transaction in Shreveport. Is that correct?

Stephanie A. Streeter

That is correct.

Arnold Ursaner - CJS Securities, Inc.

So that would be incremental if, in fact, you do -- are able to accomplish it?

Stephanie A. Streeter

We don't know what the timing will be, so I wouldn't expect any incremental or anything in this year, I think, just go with what we've announced and when we finish decision bargaining, we'll give you some more flavor on how that will impact the year.

Operator

[Operator Instructions] Your next question comes from the line of James Fronda with Sidoti & Company.

James Fronda - Sidoti & Company, LLC

Both of my questions were answered already, but could you just repeat what the CapEx spending will be for 2013?

Sherry Buck

Yes. So we had indicated that we'd be higher in 2013 because we had pushed some projects out. The range we have is $46 million to $50 million.

Stephanie A. Streeter

And that's over a 2-year period right at D&A.

Operator

At this time, there are no additional audio questions in queue. I would now like to turn the call back over to management.

Stephanie A. Streeter

Well, thanks very much, Patrick. And thanks, everybody, again, for joining us on the call today. And I just -- I want to point out and summarize the key messages from today. First, over the past year, our goal was to lay the foundation for future growth by making our business more sustainable, leveraging our advantage markets and strengthening our balance sheet and we did that in 2012 and delivered very good financial results in the fourth quarter and for the whole year and we're rewarded with our stock price appreciating 52%.

Second, our actions in 2012 made our business healthier and more efficient and allowing us to both better serve our customers and create shareholder value, but as events of today show, we're not stopping and we're not shifting our focus. We've announced our intent to further reduce our debt by taking advantage of the $45 million call provision in our senior notes and we expect this to move our net debt-to-adjusted-EBITDA ratio to well within our target range of 2.5 to 3x by the end of 2013, and we've announced the tentative plan, which will be discussed further with the Steelworkers, to exit sales of certain glassware items and realign production in North America, reducing manufacturing capacity at our Shreveport, Louisiana facility so that we can further reduce our cost and improve our competitive position by rightsizing our North American manufacturing footprint.

And then, in spite of the impact of the rebuild activity in Mexico on our first quarter margins, we fully expect to grow our full year 2013 revenue more than we did in 2012 and to increase EBITDA in 2013.

We're very confident that continuing to focus on executing our strategic plan will position us for continued profitable growth and growth in shareholder value in the future.

We thank you very much for your support of Libbey, and I hope everybody has a great day.

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