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Libbey (NYSEMKT:LBY)

Q2 2013 Earnings Call

July 30, 2013 11:00 am ET

Executives

Kenneth A. Boerger - Vice President and Treasurer

Stephanie A. Streeter - Chief Executive Officer, Director and Member of Proxy Committee

Sherry L. Buck - Chief Financial Officer and Vice President

Analysts

Arnold Ursaner - CJS Securities, Inc.

Hale Holden

Jason Nacca - Sidoti & Company, LLC

Lance F. James - RBC Global Asset Management (U.S.) Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Libbey Earnings Conference Call. My name is Lisa, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Ken Boerger, Vice President and Treasurer. Please proceed, sir.

Kenneth A. Boerger

Thank you, Lisa. Good morning, everyone, and welcome to Libbey's Second Quarter 2013 Earnings Conference Call. Our press release and supplemental financials were distributed this morning and are available on our website, www.libbey.com 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 2 weeks.

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 the company 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 the forward-looking statement notice included within our SEC filings.

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 Ronni Smith, Vice President and Corporate Controller.

I will now turn the call over to Stephanie.

Stephanie A. Streeter

Thanks a lot, Ken. Good morning, and again, welcome to our second quarter 2013 conference call. Let me open our discussion with a note of congratulations to Sherry Buck, who on August 1, will complete her first year as Libbey's Chief Financial Officer. It's been a very busy 12 months, and we appreciate Sherry's leadership and strong contributions and look forward to many more years to come.

In addition, in June, we rang the closing bell on the New York Stock Exchange, celebrating 3 company milestones: The 20th anniversary of our original listing on the NYSE; our 125th year of continuous operations in Toledo, Ohio; and our 195th anniversary as a company. And finally, we were proud to recently be named a Supplier of Excellence by Sysco and to receive the Outstanding Supplier Award from the Edward Don Company. These are 2 of the largest Foodservice companies in North America. With the increasingly competitive pressures in the industry and the economic environment, this recognition confirms the strength of our brands and the quality of the service that we provide our customers.

A lot has happened in a year. During the second quarter earnings call in 2012, we reviewed with you the actions that we had taken in May 2012 to strengthen our balance sheet with a successful refinancing of our senior notes and fully funding our pension plan, saving over $5 million in interest and an average of approximately $15 million in cash, respectively, per year. We unveiled our strategic plan. What we called Libbey 2015, focused on improving margins, investing to grow in our advantage businesses, improving cash flow and continuing to strengthen our balance sheet. And we discussed the actions that we took as part of that plan to completely reorganize the company and then we took out 9% of our global managerial, professional and administrative workforce, and as you know, we have taken additional steps throughout the past year as we execute our plan.

To that end, I'm pleased to report that in the second quarter of 2013, we continued to make significant progress with respect to our Libbey 2015 objectives. We again set new performance records that positively distinguish results from all other quarters in the company's history. Adjusted gross profit increased 4% to $58.6 million, adjusted income from operations increased 8.6% to $31.5 million and adjusted EBITDA increased to $42 million, a 5.8% year-over-year improvement.

The second quarter of 2013 marked our sixth consecutive quarter of margin and adjusted EBITDA improvements. These results are key milestones relative to our objectives and they set new benchmarks against which we will measure our future progress. We are dedicated to continuous improvement throughout our global organization and are laser-focused on our performance objectives.

The sales environment in U.S. Retail market continues to be mixed at best. However, we're encouraged by our year-over-year growth in the U.S. Foodservice glassware channel of distribution, Mexico and Latin America, our EMEA segment and the double-digit growth of our Syracuse China and World Tableware products. Although growth in China continues to be modest relative to what we believe is its long term potential, our Asia Pacific region delivered an 8.1% increase in the second quarter compared to the same period last year. We remain confident that our emerging market strategies are positioning the company to successfully leverage our strengths in those growth markets.

The movement of equipment and capabilities from Shreveport to our facilities in Monterrey and Toledo got underway in earnest during the quarter, as we realigned our North American production capacity. We continue to expect annual savings from these changes in the range of $7 million to $9 million. We expect to begin seeing the benefits of these changes beginning very late in the fourth quarter of 2013 and the full annual savings are expected to be realized in 2014.

I'll remind you that when we first laid out our strategic plan, we shared our objectives, many of which we are well on our way to achieving and indicated that it would likely not be a straight line. I think the upcoming third quarter is likely to be one of those small little bumps in our journey. As you saw in today's earnings release, we expect lower capacity utilization in the third quarter to have an impact on our third quarter results. This lower capacity utilization is all planned and is all related to our ongoing efforts in the realignment of equipment that I just spoke of from our Shreveport, Louisiana facility to others in North America.

In spite of the impact on our third quarter EBITDA, we expect to see continued improvement in adjusted EBITDA and margins for the full-year 2013 as capacity utilization greatly improves in the fourth quarter. This improved capacity utilization in the fourth quarter will drive a strong EBITDA performance that should allow us to finish the year with full-year adjusted EBITDA margin somewhere between the 16%, which we achieved in 2012, and the upper end of our established goal of 15% to 18% adjusted EBITDA margins, which would result in our highest in the last decade.

We're making significant progress with respect to our Libbey 2015 plan as we continue to realign the company's operations to best leverage our capital assets and our global sales, product development and manufacturing talent to best position the company for the future. The effort is a daily one, with a laser-focus on improving our cost structure, boosting efficiency across the global organization, reinforcing our leadership position in key market segments, preparing the business for accelerating our growth and reducing our liabilities and working capital required to operate the core business. These key drivers are understood across the entire organization. Each individual's contribution rolls up into improving overall performance, which positions us to set new records in the future. It's very clear that Libbey 2015 is delivering.

Now I'd like to turn the call over to Sherry to provide more depth and breadth on the Q2 2013 financial results. Sherry?

Sherry L. Buck

Thank you, Stephanie, and good morning, everyone. As a reminder, during the call last quarter, we announced that we will report segment results using the categories: Americas; Europe, Middle East and Africa, or EMEA; and Other, which includes both our Asia Pacific regional businesses and our sourced tableware business. Sales and segment EBIT are generally based on the geographic destination of the sale, and the segment reporting approach enables you to more clearly understand and monitor our success as we move forward.

I'll now go over our second quarter 2013 financial results. We recorded sales of $209.9 million, a modest increase of 0.3% compared to the second quarter of 2012. Sales in our Americas segment were $141.8 million compared to $148.6 million in the second quarter of 2012, a decrease of 4.6%. Overall sales performance includes a 3.5% increase in sales within our Mexico and Latin America end markets, or a 1.7% decrease excluding the currency impact. Additionally, the quarter results include a 1.8% increase in our U.S. and Canada Foodservice glassware channel. However, we had an overall 7.8% decrease within our U.S. and Canada end markets, as retail and business-to-business sales were soft during the quarter.

Our EMEA segment increased 12.6% in the quarter or a 10.9% increase excluding the currency impact. The sales for Other, which includes Asia Pacific, as well as our sales of sourced ceramic dinnerware, metal tableware, hollowware and serveware, increased 11.8% as compared to the second quarter last year. The Asia Pacific end market grew by 8.1% or 6.3% excluding the currency impact. The results of Other were bolstered by a 13.4% increase in sales to Syracuse China and World Tableware customers.

Selling, general and administrative expenses were 8.2% or $2.3 million higher than the second quarter of 2012. These higher expenses were driven in large part by a $1.8 million special charge related to an abandoned property audit that was concluded during the quarter and $700,000 in pension settlement charges. Excluding these special charges, selling, general and administrative expenses were $200,000 lower than the second quarter of 2012.

As Stephanie mentioned, adjusted income from operations increased to a record $31.5 million from $29 million in the year ago quarter. This represented an improvement of more than 100 basis points in the adjusted income from operations margin compared to the prior year second quarter. The primary drivers, with approximately equal impacts on the continued margin improvement, were the realization of productivity and cost reductions and favorable currency, partially offset by reduced production.

For the quarter, we realized a decrease in interest expense of $1.8 million to $8.1 million in the second quarter compared to $9.9 million in the year-ago period, primarily driven by lower interest rates, as well as the initial benefits of retiring $45 million of our outstanding senior notes in May, 2013. This May action reflected a meaningful net reduction in debt outstanding, over $35 million in the quarter, and a major step in our progress towards reaching our goal of 2.5x to 3x net debt to adjusted EBITDA.

Looking at our capital priorities, we have a disciplined approach to how we allocate capital. This approach includes balancing our 2 priorities, including continued strengthening of our balance sheet through debt repayments and reinvesting in the growth of our business, whether through investments in new technology or in financially-attractive acquisitions that support our strategy.

Moving down the income statement, our effective tax rate was an expense of 28.2% for the quarter ended June 30, 2013, compared to a benefit of 12.8% for the quarter ended June 30, 2012. The effective tax rate was influenced by jurisdictions with recorded valuation allowances and a change in the mix of earnings with different statutory rates.

We had available capacity of $68 million under our ABL credit facility as of June 30, 2013, with $9.8 million in loans outstanding. The company also had cash on hand of $10.5 million at June 30, 2013. And finally, we invested $10.9 million in CapEx during the second quarter compared with $5.4 million in the year-ago period. We still expect CapEx for the full-year 2013 to be in the range of $46 million to $50 million.

Depreciation and amortization amounted to $11.6 million in the second quarter of 2013 versus $10.3 million in Q2 2012.

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 Arnie Ursaner from CJS Securities.

Arnold Ursaner - CJS Securities, Inc.

Could you speak to the factors that impacted the pretty substantial decline you had in North American Retail and business-to-business?

Stephanie A. Streeter

Sure. Well, first, up in U.S. Foodservice, we were up in volume in Mexico, EMEA, China and sourcing. In U.S., we were down in Retail and B2B. Based on POS, so point of sale, which is mixed -- has been mixed really throughout the first half of the year, we have discontinued production of certain items as we move our Shreveport facility, as we move that production to Toledo and move some of that production from Toledo to Toledo and Mexico. And then we have had a small loss of volume at a couple of discounters. And that would explain the dip that we've had.

Arnold Ursaner - CJS Securities, Inc.

Okay. And my second question, obviously, the capacity utilization and -- the underutilized capacity is having an impact on you. You mentioned it in Q2. And clearly, went out of your way to highlight that Q3 could see an even greater impact. Can you try to quantify the impact on EBITDA that we're likely to see in Q3 from the capacity realignment?

Stephanie A. Streeter

Yes. So let me just make sure that everybody understands it. Arnie, you followed our company for long time, so this is probably easy for you. But as we're moving the machinery around from Shreveport to Toledo and Mexico, obviously, those machines aren't used to make product. And we think that the impact on that will be about $3 million in the third quarter. And then we believe that, that will rebound -- that will be able to rebound in the fourth quarter, so that we'll be able to achieve the full-year EBITDA margins above the 16% that we had in 2012. And again, towards the top end of the 15% to 18% goal that we had set. Does that help you?

Arnold Ursaner - CJS Securities, Inc.

That's tremendous helpful. And again, I know you're not over followed by too many analysts on the Street, I've had $41.5 million or so for EBITDA in Q3. To the extent I take out $3 million or so, you'd be pretty flat with last year's Q3 EBITDA. I know you don't want to get into specific guidance, but is that the right way to think about Q3?

Stephanie A. Streeter

For that component, yes, it's the right way to think about it.

Operator

The next question comes from Hale Holden from Barclays.

Hale Holden

I had 2. So you’re reaffirming your EBITDA guidance for the year, but are you still expecting revenue to be up this year?

Stephanie A. Streeter

Yes, we're still expecting revenue to be up in the low single digits for the full year.

Hale Holden

Great. And the second one, on the 7% decline that you've -- were just talking about, so it sounds like that was sort of all voluntarily business that you walked away from versus sort of end market weakness or, I guess, what we should think about is a little bit of share shifts, a voluntary share shift?

Stephanie A. Streeter

There's 3 components that I mentioned. So the first was just point-of-sale weakness or, I'll call, it mixed at best. Then the second would be, we're down on -- because we have voluntarily left some business. And then, as I said, there has been a little bit of, you called it share shift, I'll just use those words, at a couple of discounters.

Operator

The next question comes from Jason Nacca from Sidoti.

Jason Nacca - Sidoti & Company, LLC

First question is regarding China. Just provide me some color on the traction that you're seeing in China as in representatives, as well as what lines are really kind of catching fire there and how many reps we now have on the ground?

Stephanie A. Streeter

Okay, we finished the -- we finished last year with -- or we started the year, I'll say, we started last year with about 12 sales and marketing people and we have roughly 40 at this time this year. I would say there's nothing really that's catching fire in China. Those -- that business there is being strongly impacted by a number of things that are happening with the government. There is -- the whole Foodservice industry is being impacted by some government policies on travel and entertainment. Also, there's been a slowdown and tight credit for small businesses. And then we talked last time additionally about a very big surge in cheap local glass capacity and a lot of design copies. We feel very good that we were able to increase our sales by 8% in China with those things happening, with the slowdown in the economy. It's still not a consumer economy there, it's all largely infrastructure based. And we feel that the long-term capabilities are still a growth vehicle for us. But I'm not sure I would call it catching on fire.

Jason Nacca - Sidoti & Company, LLC

Okay. Fair enough. And also in Portugal and Netherlands, I know we spoke about possibly implementing some LEAN manufacturing business techniques that we do here in the states. Can you kind of provide me some color on where we are, what inning necessarily are in looking at those cost reduction strategies?

Stephanie A. Streeter

The cost reduction strategies -- we've had LEAN manufacturing in the Netherlands and Portugal for a number of years. But that's an area that I would say is, to use your term catching on fire. And while I think we're probably in the second or third inning, we've definitely started to look at our business in a much more holistic way and are starting to take some real costs out of that business and really look towards being much more productive and have a lot less waste. What we're -- our strategy in EMEA is, first, to get more cash flow out of that area. So we want to increase the volume and we've done that successfully over the first half of this year. And then we're going to work on productivity and cost savings, because if you work on productivity and you don't fill your machines, then that doesn't buy you anything. So that's our EMEA strategy.

Jason Nacca - Sidoti & Company, LLC

And my last question is regarding the partnership with Spiegelau and Nachtmann can you kind of just update us on how it's going in the penetration into some of these relationships?

Stephanie A. Streeter

So the Spiegelau and Nachtmann is essentially going according to plan. I'll remind everybody that it's not a huge needle mover in terms of sales. What it does though is helps us at the top end and it definitely opens doors for our whole offerings on the high end. So whether that's boutique hotels or cruise lines or high-end casinos, we are starting to see those doors open and are definitely making a lot of progress in that regard.

Operator

[Operator Instructions] The next question comes from the line of Lance James from RBC Global Asset Management.

Lance F. James - RBC Global Asset Management (U.S.) Inc.

I had 2 questions. One is, I do see that your inventories and accounts receivable are up somewhat in a relatively flat environment. Are both of those about where you want them to be at this point?

Sherry L. Buck

This is Sherry. I'd say it's pretty typical in our business that we build inventory in the first half. I'd say the other factor that's playing in here is, as we've talked about all of our production moves, we've been building inventory to be able to still sell through to the customers and service our customers as we go through those moves. And then the third part is, as we're continuing to focus on growing our sourced business, we're carrying additional inventory as planned. So kind of for the first half, I'd say we're where we'd likely to be, and I'd expect by the end of the year, we'd have kind of a net 0 effect on working capital.

Lance F. James - RBC Global Asset Management (U.S.) Inc.

Perfect. If I could ask one more question. With regard to your credit facility, how much more capacity do you have on that and how much is used at this point?

Kenneth A. Boerger

Yes, this is Ken. We have about $69 million of capacity available at the end of the quarter. We had about $10 million drawn on the ABL, and that availability bounces up and down because there's also some usage for letters of credit and then the borrowing base is going to change based on inventory levels and receivable levels.

Operator

Sir, at this time, there are no further questions.

Stephanie A. Streeter

Well, great. Thank you very much, Lisa. And everybody on the call, what I'd like you to take away from the call is, first, we had a record quarter; second, we will have a slight bump in the third quarter, that's all planned and all explained by the realignment of our North American production; and third is that the year should be very good and should be on track with the goals and expectations that we've set. In fact, I'd say we're doing exactly what we said we would, and frankly, overall, we're a bit ahead of schedule. Our global operations are becoming increasingly efficient, we're fortifying our position in the marketplace, our financial results reflect an improving cost structure, productivity improvements, better leveraging of our advanced businesses and the strengthening of our balance sheet. And I'll assure you that each day we march to the consistent drumbeat of reaching our objectives. Each step in the process further enhances our ability to compete in the global marketplace and deliver near and long-term financial and operational progress. I thank all of you for your support of Libbey, and I hope you have a terrific day. Thanks very much.

Operator

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

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