Libbey Inc. Q2 2008 Earnings Call Transcript

| About: Libbey Inc. (LBY)

Libbey Inc. (NYSEMKT:LBY)

Q2 2008 Earnings Call

August 1, 2008 11:00 am ET

Executives

Ken Boerger - Vice President and Treasurer

John Meier - Chairman and Chief Executive Officer

Greg Geswein - Vice President and Chief Financial Officer

Scott Sellick - Vice President and Chief Accounting Officer

Analysts

Doug Lane - Jefferies & Company

[Karne Hock – Unidentified Company]

Jim Barrett - CL King & Associates

Bob Wettenhall – RBC

Greg Weiss – WPG

Arnold Ursaner – CJS Securities

Operator

Welcome to the Libbey Inc. second quarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Ken Boerger.

Ken Boerger

I’m Ken Boerger, Libbey’s Vice President and Treasurer and with me on today call are John Meier, Chairman and Chief Executive Officer, Greg Geswein, Vice President and Chief Financial Officer and Scott Sellick, Vice President and Chief Accounting Officer.

I will start by reading the cautionary statement and then I will turn the call over to John Meier for his comments on the quarter and Libbey’s overall business. 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 and 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, 2007. With that I’ll turn the call over to John Meier.

John Meier

Welcome to the Libbey Second Quarter Earnings Call. The company released earnings this morning with the following highlights. Sales were $224.8 million up 8.5%, operating income of $18.7 million compared to $20.5 million last year, EBITDA of $30.5 million within our guidance of $30 to $32 million.

We’re pleased to have reported this overall performance in the face of a sluggish US economy and the extreme spike in energy costs in the quarter. I believe Libbey’s performance to be testimony to the transformed business we have built with our broadened international footprint, our solid positions in North America and the continued positive impact in our operations of our company wide lien initiative.

As noted in the press release this was our second highest sales quarter ever, any quarter, any year and our best second quarter ever. The business we are building is performing. In North America our Glass business was led by continued solid performance by our Crisa business in Mexico. Crisa was up 11% for the quarter and Crisa is well positioned to have a good 2008.

Libbey’s US and Canadian retail business registered a 4% increase. Our third quarter retail business is expected to be solid and we look for continued good performance in retail. As noted throughout the year on these calls we continue to forecast a solid retail year in the US and Canada. We would define that to be high single digit increases over the prior year.

Libbey’s Foodservice business while off 2% for the quarter showed directional improvement from the deficit of 12% in Q1. Looking ahead as the year finishes our comparables are favorable in Foodservice as you would recall the softness exhibited in the fourth quarter of 2007.

The most challenging aspect of the quarter was the astonishing increase in energy costs in North America. The average [inaudible] close for Q2 of this year versus the same period last year showed natural gas up 45% and we faced the July comparable being up 89% month on month and full year projections up 65%. Electricity costs were also up substantially. Our electricity costs are about half of our natural gas costs. While our hedging policy for natural gas is meaningful it did not compensate for such staggering increases.

Accordingly the company had no choice other than to announce energy driven mid year increases in all of our businesses in North America. The effective date is August 18 for the vast majority of these with some slightly different timing in Mexico. The announced increases for glass are 8% with some variation on that number on other product categories. Increases in Mexico are slightly higher. The electricity in fact in Mexico is greater while natural gas is equally challenging.

As we speak, we are still working with our customers on implementation. These discussions are never easy but the energy challenge is well known, well documented and widely understood.

Turning to our International business we turned in another strong performance with sales up 29.6% net of currency benefits our increase was 14%. We continue to be pleased with our progress in our International markets but some softness is surfacing in pockets. Greg Geswein, our CFO will have further detail but given our transformed manufacturing footprint in these last five years and its competitive position I still expect opportunities for improvement for Libbey on the international front.

Comparatively speaking we are the new kid on the block and growth in International markets remains high on our agenda. For those on the call who are new to Libbey over 50% of our units are now manufactured in low cost countries. In 2002 that number was 15%. Our newest addition in 2007 was Libbey China. That business had an improved quarter exceeding budgeted expectations while significantly beating last year, our startup year.

From a profit performance June was the best month this year for Libbey China. Our focus now is executing in the next 60 days in and around the Olympics. We have not been notified of any overall curtailment but some operational demands have been requested of us and we have complied. We are working daily with the authorities to keep abreast of the fluid situation.

Our very new, state of the art facility serves us well as they evaluate their options in trying to present the best environmental picture they can. To be clear, it is China, things can change quickly. We have multiple contingency plans prepared but our expectations are to run our factory and to make the best of the inconveniences in transportation issues among other things. We have stockpiled key raw materials to see us through the period.

Other areas, the recent bankruptcies announced this week in the US in both the Foodservice industry and retail industry did not have a material impact on Libbey. We sell Bennigan’s and Steak and Ale through our distribution network and at Mervyn’s we had very, very modest exposure.

On the international trade front the developments associated with the breakdown of the Doha realm were followed closely. Libbey will continue to push its international agenda and our continued efforts through our lean initiatives and associated productivity gains will be the best antidote to assure our long term competitiveness.

In conclusion, the velocity of change that industry in the US has faced the last six months has been challenging. The energy challenge in the second quarter was breathtaking. I could not be prouder of the men and women of the company to have delivered the second best sales quarter in the company’s history while hitting the EBITDA guidance given for the 10th consecutive quarter.

At the same time we have ratcheted up the low end of our guidance for the year and tightened the range as we approach these last six months. Our new EBITDA guidance is $114 to $118 million more so today’s guidance for the balance of the year raises our revenue projections. We now forecast in excess of $870 million. These overall projections will be met as the results of the rollup effect of our price increases, some good old fashioned belt tightening and cost controls and the all in pricing resulting from our natural gas hedging program.

In the face of everything else going on we are highly motivated and look forward to delivering on our expectations. I’ll now turn it over to Greg Geswein for further color on our quarter.

Greg Geswein

The solid second quarter results were in line with our previous guidance of $30 to $32 million of EBITDA. As noted, we had an all time record for second quarter sales of $224.8 million up 8.5% and exceeding our previous guidance of $215 to $220 million. As John mentioned this is the 10th quarter in a row of meeting or exceeding our guidance for the company.

I report a net loss of $2.1 million or $0.14 per diluted share for the second quarter ended June 30, 2008, compared to net income of $4 million or $0.27 diluted income per share in the prior year quarter as a result of an unusually high tax rate, higher energy costs and higher interest expense. The record sales were achieved with a 5.5% increase in North American Glass. Contributing to this increase is strong sales growth increase of more than 10% and more than 4% increase in retail glassware. These shipments were partially offset by lower shipments to US Foodservice customers of approximately 2%.

International sales increased by almost 30% as a result of increased shipments to customers in Libbey China and approximately 16% favorable currency impact. In addition, North American other sales declined 1.2% as shipments to Syracuse China customers were down approximately 14% and partially offset by an increase of 7% and sales in both tableware products had an increase of 5% per Traex.

Income from operations decreased 9% to $18.7 million from $20.5 million in the prior year and was 8.3% of sales compared to 9.9% in the prior year. This decrease was attributable to unfavorable mix as the result of our Foodservice sales and significant higher commodity costs including increases in natural gas and electricity costs partially offset by higher sales and slightly lower SG&A expenses. As a percent of sales SG&A decreased to 10.4% of sales from 11.4% in the prior year period.

Earnings before interest and taxes were $19.3 million compared to the $21.2 million in the year ago quarter and EBIT was $14.9 million for North American Glass compared to $16.5 million made in the second quarter 2007. The decrease was the result of lower production in Mexico due to a scheduled furnace rebuild, unfavorable sales mix and higher commodity costs. North American other reported EBIT for the second quarter of 2008 of $3.6 million which is down from the year ago quarter of $4.3 million. The decrease in EBIT is attributed to lower sales of Syracuse China offset in part by higher income at both World Tableware and Traex.

The International segment reported EBITDA of $700,000 which was a $400,000 improvement compared to the year ago quarter. Improvement was primarily related to Libbey China being in full operation, higher international sales and improved margins partially offset by higher natural gas costs in Europe. As mentioned we reported EBITDA of $30.5 million in the second quarter of 2008 compared t the EBITDA of $31.9 million in the year ago quarter which was in the range of our previous guidance of $30 to $32 million. As a percent of sales EBITDA was 13.6% versus the 15.4% in the year ago quarter.

Interest expense was $17.6 million up $1.2 million from the prior year period as a result of higher debt levels primarily the result of additional PIK notes. The effective tax rate increased to 226% for the quarter compared to 16.4% in the year ago quarter. The company’s effective tax rate increased from the year ago quarter primarily due to the company’s provision for income taxes being significantly impacted by the recognition of valuation allowances in certain countries particularly the United States where we are no longer recording tax benefits on losses.

Further, changes in the mix of earnings in countries with different statutory tax rates, changes in accruals related to uncertain tax positions, tax plane structures and changes in tax laws have also impacted the effective tax rate.

Now looking at six month results, for the six months ended June 30, 2008, sales increased 6.6% to $412.1 million from the $386.6 million in the year ago period. North American Glass sales increased 4% to $282.5 million from the $271.7 million in the year ago period. The increase in sales was attributed to an approximate 11% increase in both Crisa sales and in shipments to retail glassware customers in the US and Canada.

Partially offsetting was a 6.4% decrease in US Foodservice glassware sales. In North American other sales decreased 2.1% as a result of lower Syracuse China sales. International sales increased 26% as a result of significantly increased shipments to customers of Libbey China and favorable currency impact on European sales. International sales increased approximately 11.3% excluding the currency impact.

We reported income from operations of $28.2 million during the first six months of 2008 compared to income from operations of $30.9 million in the year ago period. Factors contributing to the decrease in income from operations are lower Foodservice sales, lower production activity in Mexico as a result of the furnace rebuild and higher natural gas and electricity costs. Partially offsetting these increased costs were higher total sales.

EBIT was $29.5 million compared to the $33.4 million in the first six months of 2007 when EBIT was $22 million compared with $27.5 million in the first six months of 2007 for the North American Glass business as the result of higher sales which was more than offset by an unfavorable mix of sales, decreased operating activity, decrease of operations and higher natural gas and electricity costs.

North American Other reported EBIT for the first half of 2008 of $7.5 million compared to the $8 million in the year ago period primarily as the result of lower sales of Syracuse China. In the International segment EBIT of $100,000 compared to an EBIT loss of $2.1 million in the first six months of 2007. The improvement in EBIT was primarily related to Chinas increased sales and higher international sales partially offset by the higher natural gas costs in Europe.

We reported EBITDA of $52.1 million in the first six months of 2008 compared to EBITDA of $53.3 million in the year ago six month period as the result of higher debt to the PIK notes, interest expense increased $2.8 million compared to the first half of 2007. Effective tax rate increased to a -6.9% for the first six months of 2008 compared to -58% in the first half of 2007 and the same tax issues outlined for Q2 are also impacting first half effective rates as well.

Libbey reported a net loss of $5.6 million for the first six months of 2008 or a loss of $0.38 per diluted share compared to diluted earnings per share of $0.15 in the first half of 2007. As of June 30, 2008 working capital defined as inventory and accounts receivable less accounts payable increased by $30.3 million from the $213.8 million to $244.1 million for our December 31, 2007, due to seasonal working capital needs, the full impact of the China operations and the impact of currency.

Working capital as a percentage of net sales was 29.1% in the second quarter of 2008 which compares to working capital as a percentage of 2007 net sales of 29.6%. While a significant amount of the working capital bill was planned our current levels are higher than what we would like them to be. As we have indicated previously we expect to reduce working capital during the remainder of the year so that we end 2008 with working capital that is lower than our working capital at December 31, 2007.

Free cash flow was the use of $3.2 million in the second quarter 2008 as compared to the use of $8.6 million in the second quarter 2007. The improvement from the second quarter of last year was the result of improved working capital and lower capital expenditures. Net cash provided by operating activities was $5.1 million in the current quarter versus the $4.4 million in the prior year period.

Free cash flow for the first six months of 2008 was the use of $40.6 million as compared to use of $16.3 million in the first half of 2007. The primary contributors were a $19.6 million payment to VitroSA made in the current year related to the purchase of Crisa in 2006 and increased working capital of $7.8 million at Libbey China where production did not begin until late in the first quarter of 2007.

We had available capacity of $71.1 million under ABL Credit Facility as of June 30, 2008, this compares to availability of $82.3 million at March 31, 2008. The decrease was the result of a higher outstanding balance under the ABL due to the cash interest payments in June and seasonal working capital build.

CapEx was $8.3 million in the second quarter 2008 compared to $12.8 million in the year ago period. For the first six months 2008 CapEx was $17.6 million versus a $22.6 million in the prior year period. Depreciation and amortization was $11.2 million in the second quarter 2008 versus the $10.7 million in the prior year. The increase is principally the result of the prior capital expenditures related to the new China facility.

Total debt was $542 million at June 30, 2008, compared to $500 million in the prior year period and $503 million at the end of 2007. The increase in the prior was the result of additional PIK notes issued of $19.7 million and the payment to Vitro related to Crisa acquisition of $19.6 million in January this year. The increase in year end was the result of the Vitro payment, additional PIK notes issued of $10.2 million and higher working capital levels.

Total debt to EBITDA was approximately 4.7 times at the end of the second quarter versus the 6 plus times when we completed the refinancing in 2006. Our total debt outstanding approximately 37% is floating and therefore subject to fluctuation interest rates. Included in the 63% that is fixed $200 million has been fixed with interest rate swap which converted this amount of comparable debt to fixed rate debt when we originally issued those notes back in 2006.

Refinancing the current debt structure continues to be a major focus and we continue to have dialogue with various advisors on the opportunity. Obviously market conditions will dictate the timing. As many of you know the current debt doesn’t start maturing until late 2010 and as already noted we have significant liquidity in place. However, we are undertaking the appropriate preparations including the filing and the self registration on June 13 so that we can be ready when that window does open.

Just to reiterate the guidance for the third quarter, we expect sales in the range of $220 to $225 million which would represent and increase of 8.7% to 11.2% over the prior year period. EBITDA is expected to be between $27 and $29 million in the quarter. In addition, as John mentioned we are narrowing the range for EBITDA guidance for the full year to $114 to $118 million. We also expect sales for the full year to be approximately $870 million which would represent an increase of approximately 7% over 2007.

All in all, another solid quarter, in spite of the headwinds associated with the weak economy and higher energy costs we were able to deliver results within our previous guidance. As we continue to manage through a difficult economic environment this year we remain focused on executing long term transformation of Libbey. We continue to benefit from a series of strategic initiatives that have significantly improved our focus and market position.

With that we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Doug Lane - Jefferies & Company.

Doug Lane - Jefferies & Company

Starting with the rate, what tax rate should we look for the full year?

Greg Geswein

That’s a good question, it’s obviously very volatile but we expect it to be high for the second half of the year because of some of the issues we experienced in the first half of the year.

Doug Lane - Jefferies & Company

Is this all cash taxes?

Greg Geswein

No, in the second quarter we actually paid no cash taxes. In fact we had a $400,000 credit. We don’t expect to pay any cash taxes in the third quarter as well.

Doug Lane - Jefferies & Company

On energy, how much of the ’08 and ’09 energy needs are hedged at this point?

Ken Boerger

For the balance of 2008 we’ve taken advantage of recent market opportunities and we now have close to 80%, between 75% and 80% hedged for the balance of 2008 and we’re in the low 30’s.

Greg Geswein

For 2009 we’re in the high 20’s overall. We’ve actually taken the opportunity to hedge a little bit of 2010 as well.

Doug Lane - Jefferies & Company

Is there a way that you can give us a lay of the land within Foodservice by your end user, I don’t know how much contact you have with the end users on a day to day basis but give us any kind of characterization between chain restaurants, upscale restaurants, casinos, hotels, something like that just if there’s any particular strengths or weaknesses within your end users.

John Meier

I think the principal area of softness would be the chain restaurants while some of them are doing fine and Dardin’s as an example I saw about three weeks ago had a pretty positive outlook on the balance of the year. Obviously there are others that are struggling. That would be the segment that is most challenged. The Northeast corridor is still a very good market for us the Texas market is very strong. The West Coast is good; the heartland of this country is struggling.

We are seeing directional improvement, our numbers in July in the context that as you know most of our investors also know we run incentive programs that the deadline is June 30 and not as many Foodservice customers went for the payout as perhaps in prior year. Therefore, there was less overhang into July; therefore our July business is quite satisfactory.

Furthermore, we expect in mid August prior to the August 18 cutoff date from our Foodservice customers unlike retail customers who don’t load up with a price by, some of our Foodservice distributors we expect will. The offshoot of that is September will probably be a little softer but in the aggregate we’re looking for a reasonable quarter in our Foodservice business.

For the balance of the year as I touched on in my comments the investment community would recall the third quarter last year was very good. Things hit the wall in October, November and December so we have comparatively speaking, easier comparables in the fourth quarter. It’s still soft, but we were pleased that it’s obviously not as soft as it was in Q1 directionally to be off only 2% versus 12% and how we see the balance of the year.

I’m not here to say we’re out of the woods or the industry is but directionally we like some aspects of what we’re seeing.

Doug Lane - Jefferies & Company

Any commentary on Florida, you’ve got couple cross currents there with particularly weak housing market but probably a fairly good travel and tourism business there.

John Meier

I’ve got to be honest with you I don’t have personally on the Florida market enough satisfactory information to give you the answer you’d like. I just don’t have good clarity on that one.

Operator

Your next question comes from [Karne Hocks – Unidentified Company].

[Karne Hocks – Unidentified Company]

I want to talk about the debt level given your forecast for working capital for the year and the fact there will be a source of cash going forward. I want to confirm that it’s fair to assume that your debt is peaked at the end of the second quarter and that your leverage ratios given your guidance for EBITDA should move back down towards where they were at the beginning of the year by the end of the year.

Greg Geswein

You’re correct, in June was the peak.

[Karne Hocks – Unidentified Company]

The guidance you’ve already given I’m trying to make sure there’s no other sort of cash flow exodus that I’m missing that should be able to return pretty close to where it was at the end of ’07.

Greg Geswein

No, there’s nothing you’re missing there.

[Karne Hocks – Unidentified Company]

Are there any other earn out payments you have for Crisa, or anything else, so you’re totally done.

Greg Geswein

No, that $19.6 was agreed upon when we originally did the transaction in 2006 and that was the scheduled payment date in January.

[Karne Hock – Unidentified Company]

Going forward beyond this year is the CapEx you’re doing right now really the run rate CapEx this business or are there still aspects of growth in it?

Greg Geswein

No, I think what we’ve talked about is kind of in the mid 40s would be similar to depreciation and amortization and we continue to expect that.

Operator

Your next question comes from Jim Barrett - CL King & Associates.

Jim Barrett - CL King & Associates

Could you talk a bit about the competitive response to your price increases? I assume everyone took prices up is that a fair statement?

John Meier

Yes, they have announced price increases that is our understanding. They’re slightly under our level of price increases but we are excelling through that. It is what it is but they did take it up and almost at the exact same time.

Jim Barrett - CL King & Associates

Should I view the termination of the world trade discussions as a positive for the company, does that remove a lingering concern?

John Meier

Yes, I think that’s an appropriate way. To be clear, I don’t want anyone to think that we are anti-international trade agreements, we have always expressed as you know our interest is fair trade. Clearly the fact that this thing is on the side burner for an indefinite period once again has to be interpreted as a positive for Libbey. We follow this very closely; one of our Board members is directly involved in these matters and is in Geneva when these things take place. We have a very good lens to view this. Yes, we’d have to view it as a positive.

Jim Barrett - CL King & Associates

You obviously are selling product in a lot of different foreign currencies, yet I would have thought the currency impact would have been larger than it is. It appears as if it was a negative $93,000 on cash flow in the quarter. Can you explain the working components of that?

Greg Geswein

Are you talking about just the cash flow?

Jim Barrett - CL King & Associates

Right, I was referring to the cash flow.

Greg Geswein

We’re pretty well matched up on a local currency basis. We have European revenue and Euro costs, the same thing in Pesos, and the same thing in China. That’s not surprising.

Operator

Your next question comes from Bob Wettenhall – RBC.

Bob Wettenhall – RBC

What was the impact on EBITDA of the furnace rebuild in Mexico?

Greg Geswein

That’s something we don’t break out.

Bob Wettenhall – RBC

Could I assume it was not too material?

Greg Geswein

We have furnace rebuilds on an ongoing basis.

John Meier

No, it’s not a small number. To be clear these are planned and scheduled rebuilds. Our engineers can tell you 10 years from now literally in what month in the year 2018 what furnace in any of our glass locations is going down for a scheduled rebuild. This was one of those events in Mexico, it was one of our bigger furnaces, it was a big number.

Bob Wettenhall – RBC

On an apples to apples basis if that had been operating this quarter you actually would have had year over year EBITDA growth correct?

Greg Geswein

That is correct but we’re going to have furnace rebuilds on an ongoing basis and those expenses are built into our guidance as this one was.

Bob Wettenhall – RBC

To clarify, you don’t have any exposure to Bennigan’s because your distributors hold those receivables?

Greg Geswein

That’s correct.

Bob Wettenhall – RBC

Can you talk about your market share position on the retail glass in North America?

Greg Geswein

Yes, it’s 35% in 2007 that’s up from 28% in 2006. It is the number one market share position by far. The next closest competitor has I believe 18% to 19%.

Bob Wettenhall – RBC

Do you feel you’re still continuing to gain market share?

Greg Geswein

No question. We grew 11% in the first half of the year so there’s no question that we gained market share. There’s no way the retail market in the United States is growing 11%.

Operator

Your next question comes from Greg Weiss – WPG.

Greg Weiss – WPG

I was wondering if you could comment at all about as many further changes in the supply demand picture in Europe, some guys have gone out of business and there’s been some changes has any changes there?

John Meier

There was one development, the number two producer in France, Duralex was on the bubble in the midst of a Chapter 11 proceeding and towards the end of July a group of new investors, brand new to the industry plugged in some money and now own that business, it’s much too early to tell where they will take it. That’s the only development. I would not characterize it as material to our opportunities and/or challenges.

Greg Weiss – WPG

Have you ever said when you look at your US Foodservice business have you ever given any color on how it breaks up between different verticals whether its hotel versus chain versus whatever.

John Meier

No we haven’t.

Operator

Your next question comes from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

We were wondering if you could give us a sense for July trends to extent you have any information on that that you can share with us.

John Meier

In the context that we did share similar things on the last call when we talked about April we’re pleased with some aspects of our business particularly here in North America and how they’re shaping up. The fact that I commented as strongly as I did about our future prospects in retail is indicative of what we continue to see upside in this quarter in retail. We are looking at a good performance, to say the least, directionally an improved performance in our Foodservice business. One months doesn’t make a quarter but knock on wood, we like what we see.

Operator

Your next question comes from Bob Wettenhall – RBC.

Bob Wettenhall – RBC

To touch on your stated intent to refinance, if the market opens before the end of the year you would definitely refinance if that were possible.

Greg Geswein

If the market opens before the end of the year we would definitely refinance all things being equal. If it makes sense after making the call premium then we’re going to jump through that window.

Bob Wettenhall – RBC

So it’s strictly a function of the price on the new debt.

Greg Geswein

Yes, right now we would not do much better than what we have in flight. While there are transactions being completed in our credit rating space they’re not yet where we need them to be, they have a ways to go. As I mentioned, we’re in a position to take advantage of it when it happens.

Bob Wettenhall – RBC

It sounds like you stockpiled a bunch of inventory in China so will you get an additional working capital decline at year end once you blow that out.

John Meier

No, the comment I made was we did stockpile some raw materials. It’s not going to be a huge amount.

Operator

There are no further questions.

John Meier

Thanks everybody for your continued support. We will be on the road at various conferences in the third quarter and we would look forward to visiting with any and all of you as we do that and we thank you for your continued support.

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