EveryWare Global's (EVRY) CEO Samie Solomon on Q2 2014 Results - Earnings Call Transcript

Aug.15.14 | About: EveryWare Global, (EVRY)

EveryWare Global Inc. (NASDAQ:EVRY)

Q2 2014 Earnings Conference Call

August 15, 2014 8:30 AM ET

Executives

Samie A. Solomon – President and Chief Executive Officer

Bernard Peters – Executive Vice President and Chief Financial Officer

Analysts

Cristina Fernandez – Telsey Advisory Group LLC

Jeremy Hamblin – Sidoti & Company, LLC

Operator

Good day and welcome to EveryWare Global’s Conference Call to discuss the Company’s Second Quarter 2014 Earnings. Our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 included among these forward-looking will be any comments concerning our expectations as to the Company’s measures to improve operating and financial performance, the duration of its facility shutdown, future revenues, cash flow, margins, EBITDA, debt, covenant, compliance or liquidity. Please note that our actual results may differ materially from what is contained in any forward-looking statements provided during this call.

Information concerning factors that could cause such material differences and results is contained in our reports on Form 10-Q, except as required by law, the Company disclaims any obligation to update any forward-looking statements to reflect future developments or events. To the extent that we refer to material information that includes non-GAAP financial measures, the reconciliation information required by Regulation G is available on the Company's website at everywareglobal.com.

I would now like to turn the call over to our host EveryWare Global’s Chief Executive Officer Sam Solomon. Mr. Solomon, please go ahead.

Samie A. Solomon

Thank you, operator. Good morning everyone. Joining me today is Bernard Peters, EveryWare’s Chief Financial Officer. I will keep my comments brief and turn the call over to Bernard who will provide a more detailed look at Q2 financials. We will leave time for your questions at the end of the call. My second 90-days have been as busy the first 90. The team and I continue to focus on three areas; one liquidity and capital structure, two operational initiatives and three creating customer value.

With respect to liquidity and capital structure we amended our Term Loan Agreement and ABL Facility. We also received a $20 million equity infusion. While Bernard will provide you with more details I want to thank all of our lenders and shareholders for their continued support. That support provides the financial flexibility we need to focus on our operations and customers.

Regarding operational initiatives, we continue to work with our employees and business partners to implement cost reductions that enhance our competitive position. We are also right sizing capacity, we idled our Monaca and Lancaster facilities in the quarter. Both plants have restarted production after achieving their intended effects; one reduced inventory levels, two align supply and demand and three increased cash generation. We generated $14 million in cash from operation in the quarter.

As we look to the marketplace, we continue to work to reassure our customer that we are and will continue to be a partner of choice. And the world class organization they have come to expect. I can tell you that my team and I have had good open and honest conversation with our customers and will continue to ensure they are satisfied with our partnership.

While the steps we are taking will take time to yield their intended dividends, I am confident that we have the right initiatives in place to not only stabilize the company, but also build a profitable foundation for its future. I look forward to the results we can achieve with disciplined operations and the very best brands in the industry. Meanwhile feel free to reach out to me or Bernard with questions or thoughts.

With that I turn the call over to Bernard.

Bernard Peters

Thank you, Sam. I will cover a few key items and we’ll then open up the call to questions. With respect to the topline performance, second quarter revenue decreased 1% to $99.8 million. Note, currency fluctuation had negative impact on revenue during the quarter.

The decrease in revenue was driven by lower sales in our consumer and food service segments, partially offset by growth in our specialty and international segments.

Q2 EBITDA decrease $31 million to a loss of $17.3 million. The decrease in EBITDA reflects lower production levels and cost absorptions, higher factory costs, lower margin product mix and higher SG&A and restructuring expenses.

First, there was a lower factory overhead cost absorption, due to our decision to idle our plants, which increased costs of good sold by $9.1 million year-over-year. Second, our factory costs were higher by $2.5 million, driven by higher E&O inventory reserve and higher medical costs.

Third, we experienced lower food service sales and higher international distressed inventory sales, which negatively impacted EBITDA by $4 million. Fourth, operating expenses for the quarter increased $16.1 million primarily due to $6.4 million of legal and consulting fees linked to restructuring initiatives, $4.9 million of asset impairment charges related to intangible assets and the former Oneida corporate building and one $1.4 million from Metalrax, which was acquired in June last year.

Reported net loss for the second quarter was $26.9 million compared to a net loss of $2.2 million in the prior year, primarily driven by the plant shutdown and higher operating expenses previously mentioned. EPS was a loss of $1.31 per share for the quarter. For the quarter the weighted average share count for EPS computational purposes was 20.6 million shares. For EPS purposes the share count excludes 1.5 million of earn-out shares and older warrants as they were not deemed dilutive at the end of the first quarter on a GAAP basis.

Let me now run through our performance by segments. In the food service segments, Q2 revenue decreased 14.3% or $4.9 million to $29.4 million. This was primarily driven by a decrease in sales from lower order fulfillment rate resulting from gaps in our sourcing pipeline due to liquidity constraints and general uncertainty surrounding the company, while we were negotiating with our lenders.

In our specialty segments, Q2 revenue increased approximately 12% or $3.1 million to $28.5 million, primarily due to higher candle and floral sales and growth in our specialty storage products. This segment was also impacted by an acceleration of certain customer orders that were filled with available inventory.

In the consumer segments, Q2 revenue declined 8.1% or $2.5 million to $27.9 million. The decrease was driven by our decision to move away from lower margin business and the impact of the factory shutdown on customer orders. In our International segments revenue increased by approximately 35% or $3.3 million to $12.4 million. The increase was driven by the impact of our U.K. Metalrax acquisition, which took place in June of 2013.

Turning to liquidity, at the end of the second quarter cash generated from operations was $13.9 million compare to $16.2 million of cash used in operations in the prior year. The $30 million improvements was driven by idling the plants and aggressively managing working capital. Our net debt balance at the end of the quarter was $276 million a $12 million decrease compared to the prior quarter.

Interest expense decrease $7 million in the second quarter to $5.6 million when compared to the previous year. The decrease in interest expenses was driven by the write-off of deferred financing and refinancing cost that took place as part of last year’s refinancing. CapEx was $1.1 million for the quarter down $1.8 million year-over-year. Depreciation and amortization expenses amounted to $4.9 million in the second quarter compared to $4 million in 2013.

Now I would like to turn our attention to the initiatives we worked on over the past several months to improve operations and liquidity. As Sam mentioned earlier on the call, we’ve received an equity infusion from Monomoy funds and amended our Term Loan Agreements and ABL Facility. Under the purchase agreements Monomoy invested $20 million for redeemable preferred stock with an initial liquidation value of $21.2 million.

In addition, Monomoy received warrants to purchase approximately 4.4 million shares representing 15% of the company’s outstanding common stock immediately following the transaction. As a result of the term loan amendments we secured a default waiver with respect to the leverage and interest coverage covenants for the quarters ended March 31, 2014 and June 30, 2014.

We also revised the financial covenant to include a convents holiday until the first quarter of 2015 and reset the leverage and interest coverage covenants for the remainder of the loan. As part of the transaction, there was a 50 basis point amendment fee and an increase in the term loan interest rates by 200 basis points, 25 basis points payable in cash and the balance payable in time on a quarterly basis.

The term loan lenders were also issued warrants to purchase approximately $2.9 million shares representing 10% of the outstanding shares immediately following the transaction. We also amended our ABL Facility which increased the maximum revolver amount available from $55 million to $60 million. On July 31, 2014 write-off due to new equity investments and the credit agreement amendments we had borrowings of $14.6 million and availability of $22.3 million under the ABL Facility.

From an operational perspective, we have done to following, first we are existing lower margin business. While we have made significant progress in that area we continuously look for opportunities to focus on products that create the most value for us and our customers.

Second we’ve reduced our inventory by $32 million year-over-year by shutting down our facilities for an extended period of time. Specifically our plants were down by approximately 43 production equivalent days from the middle of May until the third week of July; because a portion of the plant shutdown took place in July there will be a negative EBITDA impact in Q3.

Third, we lowered our cost structure by reducing our workforce adjusting employee’s salaries and benefits and decreasing facility expenses. The annual savings of these initiatives amount to approximately $8.5 million and we will see their full impact starting in Q4 because there were recently put in place. And speaking of cost reductions, we are in the process of winding down consulting expenses and expect them to become negligible by the end of the year.

Fourth we have put a plan in place to focus on our core North American business. Accordingly, we are in the process of winding down our operations in Brazil and are looking into strategic options with respect to our business in the UK including the sale of all other business.

With that, let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from the line of Cristina Fernandez with Telsey Advisory Group.

Cristina Fernandez – Telsey Advisory Group LLC

Hi, good morning. I have couple of questions. The first one, can you talk about the growth initiatives you are going to be focused on over the next six to nine months, you spoke a lot today about costs reductions, could we get color on how you can grow the top line from here?

Samie A. Solomon

I'm not prepared to give you an awful lot of details on our growth plans over the coming six to nine months. I can tell you seasonally we are approaching our peak season and we are working to fulfill the normal course of business that we have and return our service levels to the world class levels our customers expect.

Cristina Fernandez – Telsey Advisory Group LLC

And then I have few questions for Bernard. Bernard can you talk about what the pro forma capital structure is after the equity infusion and the debt and then what is the leverage ratio currently and is it fair to assume that the warrants are not dilutive to the share count at this point?

Bernard Peters

Let me take them one at a time. In terms of the capital structure as I mentioned, our debt level has come down, it’s about $276 million as of the end of the quarter, and it’s down sequentially from Q1 overall. In terms of the ownership structure of the company, in terms of the primary owners, if you take into account the effect of the warrants Monomoy owns about 60% of the company the public owns about 30% of the company and the lenders own about 10% of the company. And I forgot what the other part of your question was? I'm sorry.

Cristina Fernandez – Telsey Advisory Group LLC

The leverage ratio and the share count that we should be assuming going forward?

Bernard Peters

Yes. In terms of the share count to assume going forward, if you take into account the earn-out shares which have not yet vested, you can use about 29.5 million and if you exclude those you will be about to 28 million shares not dollars, sorry 29.5 million shares or 28 million shares excluding those earn-out shares that have not yet vested. You can pick whichever methodology you would like.

Cristina Fernandez – Telsey Advisory Group LLC

And then one more. With the restart of the furnaces and production facilities I mean we should be assuming that overhead absorption will be much better in the third quarter correct, but then you also mentioned that they would also have negative impact. How should we think about that at first?

Bernard Peters

Yes, basically so as I mentioned in term of equivalent production days, we were down by about 43-days that stilled over into Q3, so just that we saw a year-over-year negative variance in Q2, you can expect some of that towards also impact Q3. Again, we are not going to dimensionalize that at this point in time, but there will an impact into Q3 just like we saw in Q2.

Cristina Fernandez – Telsey Advisory Group LLC

But to a lesser extent, correct?

Bernard Peters

That’s correct.

Cristina Fernandez – Telsey Advisory Group LLC

Or similar magnitude? Okay.

Bernard Peters

No I would say to a lesser extent, because if you look at those 43-days, I would say about two third took place or two third took place in Q2 and then the balance took place in Q3.

Cristina Fernandez – Telsey Advisory Group LLC

And then just one more. On the food service side you mentioned that some of the decline end the sales was driven by customer not placing fulfillment orders into concerning around liquidity of the company, have that started to improve, I know its only been two weeks but have you seen any turn in that perception?

Samie A. Solomon

I'm sorry you were breaking up a little bit there, can you repeat the question for us?

Cristina Fernandez – Telsey Advisory Group LLC

Sure yes, on the food service side Bernard mentioned that there was – some of the sales decline was due to customers not placing fulfillment orders due to concern around the liquidity of the company, with the liquidity being addressed have you seen customers place larger orders or seeing some turn in that the action by your customers?

Samie A. Solomon

I think from my customers perspective, we are having a number of conversion with them to some sort of ease their concerns about our financial position, as we have those conversations I can tell you they are going extremely well, customer are returning to normal order levels the only challenge that we have is on the supply side, during the same period some of our manufactures got a bit concerned in delayed shipment so us. So we do have a couple of bubbles in the supply chain. That said, we were working through those and expect those to be resolved shortly.

Cristina Fernandez – Telsey Advisory Group LLC

Thank you that’s all I have.

Operator

(Operator Instructions) Our next question comes from the line of Jeremy Hamblin with Sidoti & Company.

Jeremy Hamblin – Sidoti & Company, LLC

Hi, good morning. And I wanted to ask a couple of question about future productive capacity, you’ve talked about right sizing where the company is and in terms of thinking about the number of production lines that you have at your two primary U.S. manufacturing facilities. Do you anticipate having one or multiple lines that you had previously used, continue idle potentially going forward to match current levels of sales with demand and productive capacity?

Bernard Peters

Yes, thanks for the question. This is Bernard. Yes, in terms of our capacity currently we have one our tanks in Lancaster plant that is down, and we expect it to be down in the foreseeable future until we see that we can actually maximize margin and go-after volume that makes sense economically.

Jeremy Hamblin – Sidoti & Company, LLC

Okay, and then in your Pennsylvania plant you currently have all of your lines up in running?

Bernard Peters

Yes they are, they are all running.

Jeremy Hamblin – Sidoti & Company, LLC

Okay, and then thinking about some of the key relationships you have, particularly in your consumer segment have you seen any changes in the number of SKU distribution that you would be planning for some of your key retail partners as you think about kind of late 2014, early 2015 given some of the challenges and concerns that customers have had. Have you seen any kind of shift in SKUs, I mean in terms of what we should be thinking about on the sale side of things, is the opportunity at least in the near-term a little bit lower because of the concerns that some customers had?

Samie A. Solomon

Well, there is an awful lot of meet in that question, so let me try to address it this way. I think the primary guidance I would give you is as it relates to promotional volume, obviously we suffered our economic challenges during the period, the many of our customers to make decisions about promotional activity for Q3 and Q4, I think it’s reasonable to expect that we may not win as much of that activity in 2014 as we might ordinarily win. That said, none of that precludes us from going forward in 2015 and beyond to recapture our fair share of that volume.

At this juncture, I can’t points you any specific losses of desirable customer SKUs that we would like to have as Bernard mentioned we have opted out of some product, but in term of products that we would like to have, there is a not material changes in what our facing should look this year.

Jeremy Hamblin – Sidoti & Company, LLC

Okay great, and then as I think about just the longer term opportunity from a financial perspective, let’s say on gross margins for the company. Do you think that they still are what they had historically been, do you think there is a potentially more permanent shift in term of gross margin opportunity or does the reduction and exposure to some of the lower margin product make up for that that you would think that there maybe even more higher gross margin opportunity longer term?

Bernard Peters

Yes, this is Bernard thanks. Yes, in terms of gross margin going forward, I mean obviously our objective is to get them back to what is closer to historical levels, keep in mind, as we continue to look at our product mix and attempt to maximize margins and remove the lower margin type products in addition to combined with our cost reduction initiatives, we would hope that at some point in time we would be able to actually exceed those historical gross margin levels, but at this point in time, its too early to tell.

Jeremy Hamblin – Sidoti & Company, LLC

And then just one last question, in term of the food service sector and specifically thinking about restaurants, casual dining et cetera, kind of heard some maybe surprisingly weak results of lot of public companies thus far. In term of thinking about trends within that segment of your business moving forward, is there any noticeable real shift in term of opportunities, is there maybe traffic is down so much for these guys that the this is going to become a tougher segment to actually grow top line going forward? Any commentary on that?

Samie A. Solomon

Another difficult question too answer when we think about that back marketplace overall, casual dining and fresh casual dining seem to be growing faster than the overall market place. That said, we've seen some challenges in the food service industry over the course of really the last year, starting back in Q3 and Q4 with consumer confidence. So are those challenges going to be greater this year than last? I don’t know yet.

Jeremy Hamblin – Sidoti & Company, LLC

Thanks so much for taking my questions.

Operator

It appears there we have no further questions at this time. I would now like to turn the floor back over to Mr. Solomon for any additional or closing remarks.

Samie A. Solomon

Well, thank you all for joining us on the call this morning. I trust you will have a great Friday and we’ll talk to you again soon.

Operator

Thank you this concludes today’s conference call. You may now disconnect.

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EveryWare Global (NASDAQ:EVRY): Q2 EPS of -$0.95 misses by $0.64. Revenue of $99.8M (-1.0% Y/Y) misses by $0.4M.