Libbey Inc. Q4 2007 Earnings Call Transcript

Feb.18.08 | About: Libbey Inc. (LBY)

Libbey Inc. (NYSEMKT:LBY)

Q4 2007 Earnings Call

February 14, 2008, 11:00 am ET

Executives

Brian Gately – Financial Relations Board

John Meier – Chairman and CEO

Gregory Geswein – CFO

Scott Sellick – VP and CAO

Kenneth Boerger – VP and Treasurer

Analysts

Scott Graham – Bear Stearns

Arnie Ursaner – CJS Securities, Inc.

Jim Barrett – CL King & Associates

Douglas Lane – Jeffries & Company, Inc.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Libbey Inc. Fourth Quarter 2007 Conference Call. (Operator’s instructions) I would now like to turn the conference over to Mr. Brian Gately from Financial Relations Board; please go ahead, sir.

Brian Gately

Thank you. Good morning. On behalf of Libbey, I’d like to welcome everyone to today’s Fourth Quarter Conference Call. I’d like to introduce the members of management that are on our call today. We have John Meier, who is Chairman and Chief Executive Officer; Greg Geswein, Vice President and Chief Financial Officer; Scott Sellick, Vice President and Chief Accounting Officer; and Ken Boerger, Vice President and Treasurer.

At this point, I’m going to turn the call over to Ken. He’ll go through the “safe harbor” statement, and then we’ll turn it over to management for a formal presentation. Ken, go ahead.

Ken Boerger

Thanks Brian. The material presented today includes forward-looking statements about Libbey Inc. These statements only reflect Libbey’s best assessment at this time and are subject to risks and uncertainties, including market conditions, competitive pressures, significant cost increases and currency fluctuations. Investors should not place undue reliance on such statements. For further information in important factors potentially affecting performance, please refer to today’s press release and/or the Company’s Form 10-K for the year ended December 31, 2006.

With that, I’ll turn the call over to John Meier.

John Meier

Thanks, Ken. Good morning and welcome, everyone, to our year-end earnings call reporting on the fourth quarter and 2007 in total. The Company released earnings this morning and some key highlights that I would like to focus on for the quarter and the year were.

First on the fourth quarter: Sales of $225.1 million, an all-time record quarter for the Company; income from operations $20.5 million, up more than doubled last year’s reported $9.5 million; an EBITDA of $35.1 million, more than $7 million over the upper end of guidance.

For the full year of 2007, sales were $814.2, up 18% over the prior year and 6.6% over pro forma 2006; income from operations $66.1 million, up considerably over 2006 reported IFO of $19.3 million and also up considerably over adjusted 2006 of $37.8 million; and finally, EBITDA of $116.5 million, up considerably over last year’s adjusted $72 million, and this performance in 2007 was an all-time record for the Company.

My comments will center around the drivers on these key results as well as focus on 2008 and our expectations. Greg Geswein, our CFO, will give more color to our other key and positive performance results as well as further insight to the valuation allowance we booked and the GAAP requirements that drove that.

The Company and the business: From a broad summary overview perspective, we’re very pleased with the results the Company generated in 2007. Libbey’s results were achieved in the midst of significant challenges internally that we chose to undertake and as the year finished, the newer external challenge of a USA economy that sputtered to a finish in the last three months.

To begin, a look at 2007 yields the following: For our shareholders, a 28.4% increase outpacing all relative indices; for the Company, a record sales year of 814.2 million and a record fourth quarter finish of $225.1, which came in the face of a tepid US economy.

Some key highlights: In our USA and Canadian retail business, it was up 9.5% for the quarter and 10% for the year. Our International sales were up 32% for the quarter and 28% for the year. Frankly, our European markets were exceptional. Offsetting was a slower U.S. food service finish hampered by a slowing economy. Crisa, in Mexico, was a key contributor to the year achieving its goals with Project Tiger and the attendant capacity consolidation and higher overall sales. In China, we finished construction and opened our state-of-the-art factory near Beijing; and in December, we turned in our first “in the black” month and finished the year with shipments to all 31 provinces in the country and we have now shipped to 26 countries around the world from China. On the manufacturing front, we improved nicely versus the prior year, but still fell short of our goals in the aggregate. This is looking at all facilities worldwide. Our Shreveport, USA, plant distinguished itself with the best all around performance; it also happens to be a leading facility in our lean manufacturing undertaking. Financially, good progress is made. In 2007, Libbey had its best income from operations performance in seven years. At $66.1 million, we were 77% ahead of the prior year and 30% ahead of the prior year pro forma. From an EBITDA perspective, our 116.5 is an all-time record, a fitting, timely and necessary performance for a highly leveraged company. Available capacity in our ABL of 89.7 million doubled that of the year-end 2006. In absent, the valuation adjustment booked net earnings on a fully diluted basis would have been $0.90 per share compared to a loss of $1.47 in 2006 or a swing of $2.37 per share in a positive direction. Finally, free cash flow for the year increased to $16.5 million compared to a use of cash of $97.2 in the prior year, and 2007 concluded our eight consecutive quarter of meeting or beating expectations in our ten period gain, as we call it internally, and as we march forward in our executing of transformation of this Company.

Looking ahead to 2008, Libbey’s not immune to the travails of the US. Economy. Admittedly, our core foodservice business has been touched. The necessary price increases implemented in 2007 will provide some respite. We will just have to fight even harder for any and all new installations that may be available to us and rely on our installed base for existing repeat orders. Our view of the economy is no clearer than yours, but our broadened International business model and diversified North American business will now serve us well. Our business, as it did in 2007, is showing resilience in strategic areas thanks to our increasing diversity, both from the perspective of client groupings and from geographic diversity.

Let me walk you through our view on that comment. First let’s start with our US and Canadian retail business that had a good year, up 10% and a fourth quarter finish up 9.5%. We have started out very strong in 2008 in our retail business. While one month does not make a quarter, I’m happy to share that January was up in retail solid double digits and we are cautiously optimistic for the year in total. To that end, just last week we learned that we increased our USA market share in retail for the year in 2007 by over six market share points. On a reported basis, based on outside industry research, we now hold 34.7% of the casual beverageware market in this country, up from 28.3% reported the same time last year. This six-point-plus gain in market share is huge if not unprecedented. While we have consistently led in this retail market, now the lead is commanding. This result is based on checkout sales and those sales derived from commanding and growing shelf space for Libbey-branded products. The closest branded competitor has an 11.1% market share. This market share increase driven by increased shelf space that our products command will service well in 2008. Additionally, we look for a rebound year in our industrial segment in North America and continued good performance in Mexico from Crisa. New products and programs in both give us reason for optimism and the disruptions of Project Tiger in Mexico are behind us.

On the International front, I just returned four days ago from the Frankfurt Fair in Germany, Libbey’s most important international tradeshow of the year. We found the reception to our projects and programs to be strong and the general business climate far more favorable than what the 6:30 news in America might lead you to believe. We’re benefiting from the following: The integrated programs of all of our glass facilities now offered in Europe under one singular sales organization, the continuing strength of emerging markets in Eastern Europe, a European customer-base looking for leadership while it’s glass industry is undergoing continued consolidation, price increases that are meaningful and holding, and the programs from our Libbey China facility targeted to key international markets heretofore not available to Libbey, and the benefits of weak North American currencies in the USA and Mexico that augment our programs throughout the 27 country European Union.

Concerning Frankfort and this show, I’ve been attending this show since 1974. In my 34 years of participation, this would rank as Libbey’s finest showing by far. Of course, the proof is in the pudding and the talk and optimism shown must be converted into orders and shipments. But frankly, I like the cards that we are holding.

Finally, Libbey China is expected to be a modest contributor in 2008 as opposed to the cost drain of a start-up year in 2007. Challenges in the local Chinese marketplace are real and the opportunities are there. A broader product line offering and continued progress in the manufacturing performance in the factory will be the drivers. The heaviest lifting in China is behind us. The factory is built and its performance is improving. Now it is the day in and day out battle in the marketplace where we must focus.

To begin to summarize our 2008 guidance released today suggests a sales increase for the year of 5.6% at the midpoint of the guidance and an EBITDA increase for the year of 6.3% comparing the midpoint of our guidance to the normalized EBITDA of 2007. We made be viewed as cautious and we accept that. But given the uncertainties of the US economy, we’ve chosen the route as shared today. Our focus is on the year. While the quarterly guidance can also be discussed, I remind all that Q1 by far is our smallest quarter. Also, the Q12007 EBITDA did include a $1.1 million gain in the sale of excess land in Syracuse, New York.

Finally, we continue to ready this Company for a refinancing. We have generally commented on this in recent past calls and we believe the strength of our last eight consecutive quarters will bode well for us the next time out. Naturally the condition of financial markets and their recent activity are key to us. Our view is that should opportunistic windows present in the last half of the year, we want to be ready. But we will only go when we are sure of a good execution. Much remains to be accomplished at Libbey worldwide, not the least of which is the continued acceleration of our lean initiative worldwide. The USA and Europe are immersed in lean. Mexico is expected to yield benefits this year following their Herculean execution last year of Project Tiger. China is still in the future relative to meaningful lean contributions. As a small- to mid-cap stock, we differentiate meaningful from most with our diversified business platform and a geographic worldwide presence. Close to 40% of our business is now outside the USA; 50% of our glass is manufactured in low cost countries of China, Mexico and Portugal, and 60% of our 7,300 associates reside and work outside the USA. This balance will serve us in 2008 and beyond. The decisions and actions of the last two to three years were difficult and challenging to be sure. But as planned, they have delivered and now stand as a solid part of the new foundation of this Company. We’re not finished executing a transformation. It continues at Libbey, but we are well on our way.

For more in depth commentary on our financials, I’ll now turn it over to Greg Geswein, our CFO. Greg.

Gregory Geswein

Thanks, John; and good morning, everyone. The exceptional performance in the fourth quarter marked the eighth straight quarter of improved results; and as noted, we had an all-time record for quarterly sales of $225.1 million, up 5.5%, and exceeding our previous guidance of $218 to $223 million. We also reported a net loss of $5 million, or $0.34 per diluted share, for the fourth quarter ended December 31, 2007, compared to a net loss of $8.5 million or $0.60 diluted loss per share in the prior year quarter. Net income was impacted by the establishment of a non-cash tax charge of $15.3 million to establish a full valuation allowance against the net deferred tax assets in the United States. Excluding this charge, net income would’ve been $10.3 million and diluted earnings per share would’ve been $0.71 for the fourth quarter of 2007. Now FAS 109 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence used in a more likely than not standard. In making such judgments, significant weight is given to evidence that can be objectively verified. The Company’s current or previous losses are given more weight than its future outlook and a recent three-year historical cumulative loss is considered a significant factor that’s difficult to overcome in this analysis. The establishment of a valuation allowance does not have any impact on cash, nor does it preclude us from using our loss carry-forwards in the future. It should also be noted that the valuation allowance does not reflect a change in our long-term financial outlook.

The record sales were led by a 32% increase in the International segment. Royal Leerdam and Crisal increased by strong double digits. We had a full quarter of shipments from Libbey China and a 10.8% favorable currency impact. In addition, North American other sales grew almost 9% on strong sales by Syracuse China, which were up over 25%. Shipments from World Tableware and Traex were down less than 2%. Sales of the North American Glass segment were flat at $155.8 million versus $156 million in the fourth quarter of 2006. Sales of Crisal product were up approximately 5%, while shipments to retail glassware customers, which had a record quarter, were up 9.5%. Foodservice and industrial glassware customers experienced an approximate 5% reduction in sales.

Income from operations increased 60% to $20.5 million from $12.8 million, excluding special charges in the prior year, and was 9.1% of sales compared to 5.8% in the prior year. The increase was attributable to the higher sales, lower SG&A expenses and a settlement of prior litigation of $1.8 million. As a percent of sales, SG&A decreased to 9.1% of sales from 13.1% in the prior year.

Other income was $4.7 million in the quarter due mainly to the gain on a land sale at Royal Leerdam.

EBITDA was a very strong $35.1 million in the quarter and exceeded our previous guidance of $25 to $28 million. This compares to EBITDA of $20.4 million in the year ago period, an increase of 72%. As a percent of sales, EBITDA was 15.5% versus the 9.5% in the year ago period. Excluding the one-time items in the quarter, EBITDA would’ve been $29 million.

Interest expense was $16.9 million, down $300,000 from the prior year period, about 17.2 million. The decrease was a result of lower average revolving debt. Cash flow from operations was $35.8 million in the fourth quarter of 2007, up $12.5 million from the same period in 2006 and free cash flow was $30.2 million in the fourth quarter of 2007 versus $3.8 million in the fourth quarter of 2006.

For the 12 months ended December 31, 2007, sales increased 18.1% to $814.2 million from $689.5 million in 2006. North American Glass sales increased 19.3% to $568.5 million. The increase in sales was primarily attributable to the full-year consolidation of the sales in Crisa and an increase of more than 11% in shipments to retail glass for customers. North American Other sales increased 5.8% as shipments of World Tableware products increased 9%. Shipments at Syracuse China products were up 5% and Traex sales increased less than 1%. International sales increased 28% to $136.7 million on the strength of increased shipments of both Royal Leerdam and Crisal products, the addition of shipments from Libbey China and a favorable currency impact of 8.3%. On a pro forma basis giving the fact to the consolidation of Crisa as of January 1, 2006, sales were up 6.6%. Income from operations totaled $66.1 million for the full 12 months of the year compared to income from operations of $19.3 million in the prior year. Excluding special charges, income from operations would’ve been $37.8 million for the full year 2006. The increases attribute to the consolidation of Crisa as well as higher sales and improved margins. EBITDA was a record $116.5 million for the full year 2007 compared to the adjusted EBITDA of $72 million during 2006, an increase of 62%. Interest expense increased $19.3 million to $65.9 million for the full year 2007 as a result of higher debt and higher average interest rates from the refinancing completed in June of 2006. We recorded a net loss of $2.3 million or $0.16 per diluted share for 2007 compared to a net loss of $20.9 million, or $1.47 per diluted share, in the year ago period. The effective tax rate increased to 125.7% in 2007 compared to 27.1% in 2006. The increase was a result of non-cash tax charge of $15.3 million recorded in the fourth quarter to establish the valuation allowance against deferred tax assets in the US. Excluding the valuation allowance net income per diluted share would’ve been $0.90 per share.

As of December 31, 2007, working capital defined as inventories and accounts receivable, less accounts payable, increased by $12.5 million from $188.4 million to $200.9 million compared to December 31, 2006, primarily as a result of the working capital investment at the new production facility in China and higher inventories in the United States and Portugal.

Working capital as a percentage of net sales was 24.7% in 2007 which compares to working capital in the percentage of 2006 pro forma net sales of 24.7%.

Cash flow from operations in 2007 was $51.5 million, that’s compared to 54.9 million in the year ago period and free cash flow increased to $16.5 million from a use of cash of $97.2 million in 2006. Lower capital expenditures, the absence of an acquisition and related costs 2007 and proceeds from assets sales all contributed to the improvement in 2007. Capex was $11.1 million in the fourth quarter of 2007 compared to $19 million in the year ago period. The year ago period included capital related to the new facility in China. For the year, capex was $43.1 million compared to $73.6 million in 2006. Again, the year ago period included spending on the new China facility.

Total debt at the end of 2007 was $503.1 million, up $3.6 million from the prior year-end. The increase resulted accretion of the pic* interest of approximately $18.2 million, mostly offset by higher cash flows. We had available capacity of $89.7 million under the ABL credit facility as of December 31, 2007, compared to $44.7 million at December 31, 2006. Total debt and EBITDA ended the year 4.3 times versus the 6-plus times when we completed the refinancing in 2006. Of our total debt outstanding, approximately 34% is floating and therefore subject to fluctuations and interest rates. Of the remaining fixed amount, $200 million has been fixed with interest rate swats which conferred to this amount from variable debt to fixed rate debt when we originally issued the notes back in 2006.

Just to reiterate the guidance for the first quarter and full year, we expect sales in the range of $185 to $190 million, which would represent an increase of 3.1% to 5.9% over the prior year period. EBITDA is expected to be between $20 and $22 million. As a reminder, last year’s first quarter results included the $1.1 million gain on the sale of land in our Syracuse China unit. EBITDA guidance for the full year is expected to be in the range of $113 million to $123 million. We also expect sales for the full year to be in the range of $850 to $870 million which would represent an increase of 4.4% to 6.9% over 2007.

All and all, an exceptional end to an outstanding year with good sales momentum and improving margins in liquidity. We’re executing on the strategies and the transformation we outlined last year delivering record results, taking share and positioning the Company for global growth.

With that, we’ll open it up to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Doug Lane from Jefferies & Company; please go ahead with your question.

Douglas Lane – Jefferies & Company, Inc.

Yes, hi. Good morning, everybody.

John Meier

Morning, Doug.

Douglas Lane – Jefferies & Company, Inc.

Follow-up with some of the mundane items here, trying to get my arms around the one-time items. You mentioned $4.3 million in other income from a gain on land sale in the Netherlands. That’s a pretax number. What kind of tax rate should we put on that?

Gregory Geswein

Well that’s a good question, Doug. I think going forward our effective tax rate as we’ve talked about will probably be around 30%.

Douglas Lane – Jefferies & Company, Inc.

30%?

Gregory Geswein

Right.

Douglas Lane – Jefferies & Company, Inc.

Then you mentioned later that you had $5.5 million in the year on gains on land sales. Where was the other $1.3 million?

Kenneth Boerger

Actually it’s $1.1, Doug. It was at Syracuse in the first quarter of 2007.

Douglas Lane – Jefferies & Company, Inc.

Syracuse in the 1Q.

Kenneth Boerger

Right.

Douglas Lane – Jefferies & Company, Inc.

Then lastly, the $1.8 million in litigation gain, is that a reduction of SG&A?

Gregory Geswein

No, that was up in the cost of goods sold.

Douglas Lane – Jefferies & Company, Inc.

In cost of goods sold.

Gregory Geswein

Right.

Douglas Lane – Jefferies & Company, Inc.

Just briefly, what does that relate to?

John Meier

It related to a problem we had with an outside vendor who had sold us some lubricating oil that we did not believe met the spec which caused some of our machines in prior years to grind to a halt. We had downtime in our factories because of the improper lubricant and in the end we settled with the insurance companies principally that were involved and of the bad guys so to speak.

Douglas Lane – Jefferies & Company, Inc.

Gotcha. So that was just in the fourth quarter. There wasn’t any other litigation gains in the year was there?

Gregory Geswein

No there was not.

Douglas Lane – Jefferies & Company, Inc.

Then lastly, of the interest expense of $65.9 million, how much of that was cash interest?

Gregory Geswein

All but $18.2 million.

Douglas Lane – Jefferies & Company, Inc.

All but the $18.2, okay.

Gregory Geswein

Yeah, $47.7.

Douglas Lane – Jefferies & Company, Inc.

No operationally in China, 2007 was the first full year of sales in China, correct?

John Meier

Actually it was the first year of sales. We didn’t start shipping product to China until the end of the, the very end of March was our very first shipment. The first three months was on the job training, getting people acquainted with how to run machines in a glass factory.

Douglas Lane – Jefferies & Company, Inc.

Now some of the sales that the China factory supplied were previously being supplied by the US, correct? So we can’t view China as 100% incremental, right?

John Meier

That’s a correct observation.

Douglas Lane – Jefferies & Company, Inc.

Did China meet expectations or exceed expectations for the full year?

John Meier

They get close to meeting expectations in terms of revenue. We had… Candidly, it took longer to hit the sweet spot in the factory to make the product in enough quantity and a broader, the broad enough product line to get into stocks. So the reason, to the extent we fell modestly short of our sales expectations was a function of it took us longer to get in stock on the breadth of items that we were reducing. We’re very pleased with where we are at this stage.

Douglas Lane – Jefferies & Company, Inc.

So currently you’re running how you’d like to be running in China?

John Meier

We’re running as planned.

Douglas Lane – Jefferies & Company, Inc.

I’m sorry if I missed it, but I think you mentioned China will either breakeven or make money in 2008.

John Meier

Modest money.

Douglas Lane – Jefferies & Company, Inc.

Modest money. Then getting back to the US, can you give us a rundown on the foodservice market, John; give us an update. I mean you had mentioned weakness in the fall, certainly started to see it then. What additional kind of viewpoint can you give us on the US foodservice market?

John Meier

Well, I can tell you, some of the references that we look at, Doug, we look at what NRA, the National Restaurant Association, has to say, and we look at what Technomics, which is a foodservice think tank that the industry reflects upon and a lot of us use them as a basis for how we look at the market. They’re both saying flat. This is going to be clearly for the first six months and perhaps some pickup late in the year. So think of it in terms of flattish or even a little bit less than that in terms of real growth.

Douglas Lane – Jefferies & Company, Inc.

How about as far as your end-user, do you have any feel for where it’s particularly weak and where it’s particularly strong within your (inaudible)…

John Meier

It’s still reasonably good in the major metropolitan markets. But in the hardcore Midwest, it’s probably weakest. Within the sectors, there’s a mixed situation relative to chain restraints. As you would know, some recently reported some encouraging news while others are still suggesting a little bit of turbulence out there. So it’s a mixed bag when you talk in terms of the chain restaurants.

Douglas Lane – Jefferies & Company, Inc.

Right. Thank you.

Operator

Our next question comes from Scott Graham from Bear Stearns; please go ahead with your question.

Scott Graham – Bear Stearns & Co., Inc.

Yes, good morning.

John Meier

Good morning, Scott.

Scott Graham – Bear Stearns & Co., Inc.

I have a question about the $4.3 million gain as well. Was that number in other income or in operating income?

Gregory Geswein

Other income, Scott.

Scott Graham – Bear Stearns & Co., Inc.

Right. So I thought… So now if I had to look at the SG&A number that you reported, it looks like it’s 9.9% of sales which would be something like 300 basis points down year-over-year. So I’m wondering, what was in that number that maybe you didn’t pull out on the press release?

John Meier

Well, I think the overarching thing is in the prior year we achieved a stronger basis payout than what we will achieve for this year, so that is the biggest delta.

Scott Graham – Bear Stearns & Co., Inc.

That’s it, 300 basis points?

John Meier

Well, I’m saying that that is a key component; I’m not saying that’s all of it. In the prior year, we also had considerably more let’s say shuttling of engineers, etcetera, in the building of the factory in China than what we currently do. I mean in the year 2007, we were operating the thing with Chinese guys and a group of Americans. In the prior year, we had a ton of them going back and forth, etcetera. That also contributed to it.

Scott Graham – Bear Stearns & Co., Inc.

I guess where I’m going with this, of course, John, is the sustainability factor. My question is here is that, okay, China flipped positive earnings-wise, and we’ll see some of that obviously in the SG&A number. But if we look at the 2007 kind of progression of SG&A, we had essentially $22 million of SG&A in the first quarter on $180 million of sales and now we have $22 million of SG&A on $226 million of sales. It just strikes me, John, I guess all I’m saying is: Is it at all possible that there’s something else in here, some reserve or something that flipped positive that maybe helped SG&A in addition to what you’re talking about?

Gregory Geswein

No, not really, Scott. Last year, as John mentioned, we had actually to accrue a little bit more in the fourth quarter because, as he mentioned, we were hitting the targets that were set. This year we did not hit those aggressive targets that were set and so therefore you didn’t have quite a bonus number in that SG&A number. That delta is the biggest piece of that, so there’s no accruals or reserves going through that.

Scott Graham – Bear Stearns & Co., Inc.

So then by further extension, it would seem that you guys are being potentially being ultraconservative with this EBITDA guidance because if you’re able to lower SG&A, if you’re in and around the 10% to 11% of sales on SG&A, which is essentially what your answers are implying that you are, then the EBITDA guidance is low; or do you expect to have to add SG&A in 2008 relative…

John Meier

No, I would say this, Doug, or excuse me, Scott, SG&A is not going to get us to the promise land. It’s revenue performance, and the United States economy is still a question mark for we at Libbey and while I would not characterize our EBITDA guidance as being ultraconservative. We did acknowledge in my prepared remarks, “Some may think it is cautious,” but I don’t think it’s ultraconservative. I mean the economy is still a question mark and in the face of a question mark economy, we believe the positive direction and the degree of increased EBITDA that we have projected says volumes about the resilience of our total business worldwide and the growth and strength we have in our retail business in North America.

Gregory Geswein

Scott, you should expect for 2008 that SG&A will be north of 11%.

Scott Graham – Bear Stearns & Co., Inc.

I thought so, okay. Are we going to… You guys are like a modeling nightmare, no offense, but (inaudible)…

Gregory Geswein

None taken.

Scott Graham – Bear Stearns & Co., Inc.

..and everything that goes in and out here. Should we see the tax rate at 30% in the first quarter or is that a situation where we might not see it because of more ins and outs and sourcing of earnings and what have you?

Gregory Geswein

Yeah, you will not see a 30% tax rate in the first quarter. You will continue to see a little bit more ins and outs as we work through some things, Scott. When I talk about 30%, that is our projected long-term effective tax rate once we get this thing at a steady state.

Scott Graham – Bear Stearns & Co., Inc.

Right, okay. Last question for me: If I look at your cash from operations performance in 2007, recognizing of course that you had to add some working capital for the new operations and market expansion, nevertheless, even if you were to adjust for however you want to adjust for that, it seems to me that cash from operations is still tracking fairly close on a run rate basis to capital expenditures implying that the debt balance is really just not going to come down in ’08 either. Is that a reasonable expectation or am I being too conservative there?

Gregory Geswein

No, I think that’s a reasonable expectation. I think we’ve said, actually you might remember the last call, our debt balances are actually less than what we had projected for the end of the fourth quarter, so that’s the first part. Second part of that is that, again, I think for the year when we end ’08, it’ll be, the balance will be slightly higher and part of the issue there is in fact we don’t refinance in the second half of the year, you still have that (inaudible) of the pit that’s going on. So if you take that out from last year, Scott, we usually made a substantial impact into that debt balance.

Scott Graham – Bear Stearns & Co., Inc.

All right. Thank you.

Operator

Thank you. Our next question comes from Matthew Goloski* from Monarch; please go ahead with your question.

Patrick Bartels* – Monarch

Hi, it’s Patrick Bartels from Monarch. How’s everybody today?

John Meier

Good. How are you, Patrick.

Patrick Bartels – Monarch

One question is that you just touched on the debt balance, so I’ll move on from there. How do you feel about your inventory levels at the end of the year moving on into 2008 specifically on the foodservice side?

John Meier

I don’t think they’re out of hand at all. I think, actually we had some machines down in the fourth quarter by design to prudently manage our inventories, but we are committed to keeping our distributors in stock at extremely high levels. When you got 1,000 different items here in the United States that we go to market with, getting around the horn on all of that is a bit of challenge; but we’re committed to that. But we’re not out of line.

Patrick Bartels – Monarch

The last question I had is now that you have Crisa fully up and running down in Mexico, what is the capacity utilization look like on that plant right now, and how much availability do you have?

John Meier

As we’ve shared with the investment community, Patrick, it’s not unique to Libbey. Every glass company in the world has planned furnace rebuilds from time-to-time and we never expect or plan to run it 100%. We try to run in the mid 80s to the high 80s and that’s where Crisa is, and they are on plan.

Patrick Bartels – Monarch

How about adding capacity there?

John Meier

We clearly have the geography. I believe you were there. You saw it didn’t you?

Patrick Bartels – Monarch

I did see it.

John Meier

As you recall, it’s a big campus, so to speak, so there’s plenty of geography. It means knocking a wall out and things like that, but we are not landlocked at all as we are in some other locations in other parts of the world, including Toledo, Ohio.

Patrick Bartels – Monarch

The question on ability and want to actually move capacity there in over the next year to three years?

John Meier

I’d say the ability is there and the want is there given where business conditions will take us. We believe that we still have opportunity in North America to grow share in all of our businesses, including our foodservice USA business. We believe in Mexico that our friends at Crisa can grow share particularly in the foodservice component. Frankly, in the northern parts of South America, we clearly have an opportunity to grow. Finally, with Europe continuing to mushroom for us as a fine marketplace, Mexico, as a country, does have a free trade agreement with the European Union and all products from Mexico going into Europe go in duty free, so Europe will continue to be. So those are the things that are underlining the desire to do it and we think as we move forward we will face that business challenge.

Patrick Bartels – Monarch

Perfect. Appreciate it guys.

Gregory Geswein

Thanks, Patrick.

Operator

Thank you. Our next question come from Kevin Casey from Casey Capital; please go ahead with your question.

Kevin Casey - Casey Capital

Hi guys. Nice quarter. Question about, first, can you talk about the competitive landscape and focus on Europe kind of how’s that changed over the last year and kind of how you think about it going forward; and if there’s any major changes in the other parts of the world, can you talk about those?

John Meier

Well the principal change in Europe in the last 12 months was the Chapter 7 filing and the disassembly, if you will, of a major competitor in Germany which opened up, that was almost like the straw that broke the camel’s back. In prior years, some Tier 2 players had also fallen on hard times, Chapter 11 and/or Chapter 7. So that was the driver principally in Europe in the year 2007. Relative to 2008, we have yet to see how this will manifest, but we did see that our major competitor from France just two days ago a retrenchment program taking out some further capacity and getting out of a particular line of business. So said another way, the industry continues to consolidate. I believe based on the four days I was in the Frankfort just this past weekend, long weekend, customers, common customers that we all attempt to sell to continue to look for who’s the best resource that they can place their bets on long-term and there’s three really major players of substance over there. There is ourselves; there is the French competitor, and there’s the competitor from Turkey that we have talked about. Those are the choices that are common key customers need to evaluate and based on the activity that we saw and the commentary and the orders that we see being placed. As I said in my prepared comments, Kevin, I like the cards that we’re holding.

Kevin Casey - Casey Capital

Any chance you know the capacity that was taken out?

John Meier

No, we don’t because to their credit, our friends in France have been very, very good over the years of being quite secretive as to how much they’re really talking about. But it’s a sizeable…

Kevin Casey - Casey Capital

What about the German facility?

John Meier

Oh in that, yeah, it was: How do you want me to express it as a percent of the total?

Kevin Casey - Casey Capital

Yeah, that’d be great.

John Meier

It’s at the back of the envelope, but I say their revenues based on what we believe the total market to be was in the vicinity of 5% to 7% of the total European market.

Kevin Casey - Casey Capital

Then a couple quick finance questions. How much was the non-interest or non-cash interest for the year, the pick?

Gregory Geswein

Yeah, it was over $18 million.

Kenneth Boerger

Plus the amortization. So it’s probably actually the non-cash. I’m going to correct what I said earlier, it’s probably $23 million of the $69 was non-cash.

Kevin Casey - Casey Capital

Thanks. Then have you started talking to bankers about refinancing, kind of where is your bonds trading at currently?

Gregory Geswein

Yeah, haven’t seen them trade. I haven’t seen them trade recently, Kevin. But yeah, I mean this is top of mind; we think about it every day; although, the market is not cooperating. But we’ll be ready when it opens.

Kevin Casey - Casey Capital

So you have no idea what kind of range we’re talking about for the new financing?

Gregory Geswein

I’d be speculating until you actually get out in the market and really get serious about.

Kevin Casey - Casey Capital

Great. Thanks.

Gregory Geswein

Thank you.

Operator

Our next question comes from Jim Barrett from CL King & Associates; please go ahead with your question.

Jim Barrett – CL King & Associates

Good morning, everyone.

John Meier

Morning.

Jim Barrett – CL King & Associates

John, could you start off by talking about your retail in the US, Anchor Hocking went Chapter 11. I assume you may be gaining some share from them and both foodservice and retail, but who are you gaining share from specifically in retail in the US?

John Meier

I think, yes, they want through a Chapter 11 proceeding. They’ve come out of it, as you know, Jim, and they’re now privately owned by a small private equity firm. We probably did take a little bit of market share from them. I believe we took out from virtually must of our competitors. Let’s face it, a weak US dollar, does make it a little more challenging for anybody from outside, in the rest of the world to participate. So we probably took some from what’s left of the European competitors who ship into the United States and also included our, perhaps our friends from Turkey; number two, so the Anchor thing, those people; number three, imports in general. I think increasing a number of our retailers are taking a real hard look at some fine lines that are 3,000 to 5,000 miles away, freight surcharges and fuel charges on the 24-foot containers and 40-foot containers; and finally there’s this new phenomena which is plagued all of us called “Social Compliance” where retailers of all shapes and sizes are very committed to enforcing and pushing companies to be responsive to their needs of what they expect of their vendors and what they expect of their vendors is among other things that we’re not employing children, that we’re paying overtime properly. I can go through a litany of things. If you’re the retailer and you have a question mark about how is not going to embarrass you on the 6:00 news because of failure to be compliant, the odds are in New York Stock Exchange listed company like Libbey with it’s headquarters in Toledo and its various facilities around the world are a little more attuned to that than what Glass Company XYZ may be in a third world country who may have the best price but does things that our good customers would not be pleased with. I honestly believe that some incremental additional businesses come are way because we have more than satisfied our key customers of our commitment along the line. That is an underlying thing that we all live with in all sectors of the retail business. This is not unique to the glass industry. Anybody who’s supplying the retail community has had their bell rung with this thing called “Social Compliance’ and failure to comply is punitive in many respects, i.e. dollar and cents.

Jim Barrett – CL King & Associates

Can you refresh my memory on the, I thought you’d taken pricing on the retail product. To what degree did that stick if you did take it?

John Meier

It has stuck, but some of our retailers are on slightly different schedules and obviously we do not price increases in November and December in the midst of the holiday selling season, but it’s in the low single digits in the aggregate where we see our price increases in retail. As we’ve said before on the call, our ability to increasingly expand our margin and retail is perhaps more driven by successful introduction of good new products. Retailers our opportunistic when they see a good SKU or a collection or a look that they believe and their trend people believe will sell into the market. Getting them to accept those products and the programs which we believe have fair margins for us is a heck a lot of more realistic than trying to hammer through a price increase at any of their headquarters where they have to have 15 people sign off on it and it’s like pulling teeth from a hen. But we do get through, we do achieve increases. But where the margin expansion comes for us and for our competitors is the ongoing thrust with new products and placement of those.

Jim Barrett – CL King & Associates

John, International and specifically Europe, your margins there I assume are muddled by the startup in China. What are you, especially given the fact you appear to have the wind at your back and you had the show that you did in Frankfort, what would be your longer term expectations of operating margins of your European facilities and of course I assume you need to include the Mexican imports into Europe as well. How should we look at that?

John Meier

We believe that our European business should aspire to have operating margins in the out year of this decade that approaches 7% to 8%.

Jim Barrett – CL King & Associates

So obviously that’s 2009/2010?

John Meier

2010.

Jim Barrett – CL King & Associates

Greg, for you, just a question on a working capital. What are your expectations going into ’08 and ’09, they were what 24.7% of net sales in ’07?

Gregory Geswein

Yeah, that was at the end of the year, right. Well obviously it’d come down from that. We talked about I think on calls before that by 2010 we want to get into the low 20s, percent, as a percent of revenue.

Jim Barrett – CL King & Associates

Do you envision that being a steady progression over the next several years?

Gregory Geswein

We obviously had some programs related to that. We had some incentives related to that and so I suspect we’ll start to see some good progress on it.

Jim Barrett – CL King & Associates

Last and probably least, I noticed depreciation declined sequentially in Q4. What would your expectations be for depreciation and amortization in 2008?

Gregory Geswein

I think it will track pretty close to capex, so into the low to mid 40s.

Jim Barrett – CL King & Associates

Thank you both very much.

Gregory Geswein

Thanks Jim.

Operator

Thank you. Our next question comes from Nick Germasuit from Linden Advisors; please go ahead with your question.

Nick Germasuit - Linden Advsiors

Hi guys. I had a couple of questions on the retail sector. Given the current news that’s coming out with same store sales, have you guys had any current discussions regarding 2008 price increases?

John Meier

No, our increases for 2008 are largely in place with those major retailers that drive our business. The discussions are behind us.

Nick Germasuit - Linden Advsiors

Who are your top retail customers?

John Meier

Well given that all of our competitors are on this call, we don’t get into those kinds of details; I’m sorry.

Nick Germasuit - Linden Advsiors

We can probably guess, some of the large (inaudible).

(Cross talk)

John Meier

Exactly. Exactly.

Nick Germasuit - Linden Advsiors

Are you guys anticipating that you may see some pushback with them say, “Look, our margins are under pressure, we’re going to have to have a little help here”?

John Meier

I wouldn’t rule that out, but that has not manifested itself as we speak.

Gregory Geswein

As John mentioned in his comments, we had a very strong January.

Nick Germasuit - Linden Advsiors

In terms of ’08 price increases, what quarter does that usually occur in?

John Meier

Traditionally, historically our increases are in the fourth quarter.

Nick Germasuit - Linden Advsiors

So for the first three quarters of ’08, prices are set?

John Meier

Yes, largely speaking, yes.

Nick Germasuit - Linden Advsiors

You haven’t had any discussions with current purchasing managers regarding the current pricing levels?

John Meier

No.

Nick Germasuit - Linden Advsiors

Then in terms of the market gain that you guys have realized, are you seeing any competitive response? Are you guys… Was that drive driven primarily by the effects gains or by the weak dollar or are you guys doing something different in style?

Gregory Geswein

The retail piece wouldn’t be driven by effects gains. Now the weak dollar may be helping us.

John Meier

Again, our retail programs, as those of our competitors, are largely put in place 7, 9, 12 months in advance. So the success that we enjoy in 2007 are a product of a programs and commitments that major retailers placed with us in early 2007, late 2006. What we like about how we see 2008 is the commitments and programs that they’ have put in place in the last three to six months looking at 2008. As I touched on in my remarks, one month obviously doesn’t make a quarter or a year, but we were very, very pleased with our January performance. So again, these are things that are 6, 9, 12 months out in advance.

Nick Germasuit - Linden Advsiors

Then in terms of your North American sales, what percent of that is retail?

John Meier

We don’t break that out.

Nick Germasuit - Linden Advsiors

That’s all I had. Thank you.

Operator

Our next question comes from Gary Lehnoff with Iron Work Capital; please go ahead with your question.

Gary Lehnoff – Iron Work Capital

Thank you. You’ve answered most of them. Greg, can you tell me what you expect pension expense to be in ’08 and remind us what it was in ’07?

Greg Geswein

In ’07, pension and post retirement was just a little over a 14%, $14 million and in ’08, I believe it’s $15 million.

Gary Lehnoff – Iron Work Capital

Do you anticipate making any contributions to the plan in ’08?

Greg Geswein

We do.

Gary Lehnoff – Iron Work Capital

How much?

Greg Geswein

I think it’s going to be $26 million.

Kenneth Boerger

Yeah, it’ll be in excess of the expense number by $10 to $12 million.

Gary Lehnoff – Iron Work Capital

Great. Thanks guys.

John Meier

You’re welcome.

Operator

Our next question comes from Arnie Ursaner from CJS Securities; please go ahead with your question.

Fred Bonacore - CJS Securities, Inc.

Yes, good morning. This is Fred Bonacore calling in on behalf of Arnie. Most of my questions have been answered. Just touching back on Europe, however, speaking kind of broadly you’ve talked about a lot of the structural factors of play that have been helping to strengthen your sales there. As you look out through ’08, does your guidance assume, what does your guidance assume relative to this year with respect to growth in Europe?

John Meier

Well I think we haven’t stipulated per se breaking it down by that segment. But I would leave you with this, Fred, we’re benefiting from a) the consolidation of the industry that has gone on and it continues to go on; and secondly, we are also benefiting from the emerging markets, as I’ve touched on in my comments, particularly the Eastern European countries. While in any singular way, that’s not to say that each country is large for us, but a piece here and a piece there and a piece there and as these markets continue to have their disposable income grow, we have put in place distribution that we are comfortable with. I don’t know how else to say it to you.

Fred Bonacore - CJS Securities, Inc.

Very good. Thank you.

Operator

(Operating instructions) Our next question is a follow-up question from Doug Lane from Jefferies & Company, Inc; please go ahead sir.

Doug Lane – Jefferies & Company, Inc.

Ken, what was the natural gas cost in ’07 versus ’06, and what’s kind of the outlook for ’08 here?

Kenneth Boerger

Our total spend on natural gas in 2007 was just a little over $60 million, between $60 and $61 million; and I don’t have the ’06 numbers...

Doug Lane – Jefferies & Company, Inc.

.

That’s okay, I can get that.

Kenneth Boerger

…at my fingertips.

Doug Lane – Jefferies & Company, Inc.

What do you think that’ll be in ’08? The commodity’s come back a little bit, hasn’t here?

Gregory Geswein

Well it’s coming back a little bit and now it’s popped up a little bit here over the last couple weeks.

Doug Lane – Jefferies & Company, Inc.

Well based on… I mean how are you hedged for ’08 and what do you think that expense will be even if it’s just kind of a range?

Kenneth Boerger

I did put my fingers on the ’06 number. It was a little over $53 million ’06 versus the $60 million this year. We would expect it to be slightly higher than ’07 and ’08 but not the kind of variance we saw from ’06 to ’07.

Doug Lane – Jefferies & Company, Inc.

Fair enough. Lastly, I think, John, you touched on a better outlook for the industrial business. Can you give us what the drivers are for your industrial business and the outlook there?

John Meier

We’ve picked up a few new customers, Doug, that previously had not done business with us, and they’ve put some projects and programs together. So it’s new business from new customers, most of which are in the candle industry; and that’s as much as I can say on that.

Doug Lane – Jefferies & Company, Inc.

No, that’s helpful. Thank you very much.

Operator

Thank you. Management, at this time, there are no further questions. Please continue with any further remarks that you would like to make.

Greg Geswein

Yeah, I just want to circle back on the debt comment as well. One of the things, too, that is driving the increase in debt in 2008 is the final payment to Vetro* that we made in January, so now that’s behind us, this $19 million. So that’s another impact that just to make sure that you understand.

John Meier

That’s it, operator. So I would like to close on behalf of the Company by saying, “Thanks to all of our investors and thanks for your continued confidence in the Company. We look forward to reporting on a quarterly basis as we go through 2008, and thanks for attending our call today.

Operator

Ladies and gentlemen, this concludes the Libbey Inc. Fourth Quarter 2007 Conference Call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!