Libbey, Inc. (NYSEMKT:LBY) Q3 2019 Earnings Conference Call October 28, 2019 11:00 AM ET
Chris Noe - Senior Manager Financial Planning & Analysis
Mike Bauer - Chief Executive Officer
Jim Burmeister - Senior Vice President, Chief Financial Officer & Chief Operating Officer
Conference Call Participants
Lee Jagoda - CJS Securities
Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Libbey Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Chris Noe, Senior Manager Financial Planning and Analysis. Thank you. Please go ahead sir.
Good morning everyone and thank you for joining us. Libbey's press release and supplemental financials were distributed this morning and are available on the company's website in the Investor Relations section. The replay of today's live call will be provided on our website later today and will available for the next seven days. We have also provided a set of slides which will enhance our talking points and those may be found on our website at libbey.com.
On the call with me today are Mike Bauer, our Chief Executive Officer; Jim Burmeister, our Senior Vice President Chief Financial Officer and Chief Operating Officer; and Mike Lindsey, our Vice President Corporate Controller. After our prepared remarks, we will turn the call over to the operator and take your questions.
Before we get underway, we would like to say that today's call includes financial information that remains under review by our independent auditors. Although we believe that the assumptions upon which the financial information and its forward-looking statements are based are reasonable, we can give no assurance that these assumptions will prove to be accurate.
Also, today's conference call will contain non-GAAP financial measures including adjusted EBITDA; adjusted EBITDA margin; adjusted selling, general, and administrative expense; adjusted selling, general, and administrative margin; adjusted income from operations; free cash flow; trade working capital; debt net of cash to adjusted EBITDA ratio; and constant currency. Reconciliations to the nearest U.S. GAAP measures or definitions are available in our press release and supplemental financials.
Today's call will contain forward-looking statements under the Securities Act of 1933 and other federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which the company operates, in addition to management's beliefs and assumptions.
Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statement notice included within our SEC filings.
I would now like to turn the call over to our Chief Executive Officer, Mike Bauer for his opening remarks. Mike?
Thank you, Chris. Good morning everyone and thank you for joining us. During today's call, I will share with you my observations regarding our business and strategic direction in addition to providing a high-level overview of third quarter performance. After that I will turn the call over to Jim Burmeister, who will provide a more detailed review of our quarterly financial performance and balance sheet metrics. Afterwards, we will turn the call over to the operator for Q&A.
Overall, we delivered a solid third quarter. Our performance was driven by growth in net sales and free cash flow despite several external market conditions that created headwinds during the quarter.
In U.S. foodservice, restaurant traffic for Q3 as reported by Black Box was down 3.6% compared to down 1.3% in Q3 of 2018. In Latin America, environmental issues along the Mexico's Caribbean coast contributed to a 30% drop in tourism in this vital segment of their economy. And finally, EMEA continues to be impacted by soft economic conditions and uncertainty related to Brexit.
I'm pleased to report that despite these challenging external environment, net sales for the quarter were $192.4 million, clearly outperforming the market by delivering consolidated constant currency net sales growth of 2.0%. Leading our consolidated performance was an impressive 3.5% growth in our core USC segment including growth across our retail, B2B and foodservice channels. On a constant currency basis, Latin America net sales increased 1.2% and EMEA net sales were down 0.4%.
I'm also pleased to report our strategic investments continue to drive favorable performance in line with our expectations. During the quarter, e-commerce sales accounted for nearly 14% of USC retail sales. And sales from new products contributed 7.6% of consolidated net sales.
Gross profit for the quarter was down $2.8 million versus Q3 of 2018. Favorable manufacturing and operating performance across our global network was more than offset by the nearly $7 million unfavorable impact from taking discretionary downtime in order to reduce inventories and drive cash flow. While downtime is a near-term temporary drag on our gross profit and EBITDA performance, free cash flow improved $10.3 million versus Q3 of 2018.
Overall, I'm pleased with our operating performance in Q3. The focus on manufacturing and operating performance we communicated in Q2 is clearly paying off. The absence of downtime referred to above gross profit margins for Q3 would have improved nearly 200 basis points versus the prior year. This gives me confident that our core operating results continue to improve.
Adjusted income from operations of $6.4 million for the quarter improved 2.8% versus the prior year. This is the continuation of an encouraging trend as our year-to-date IFO performance improved 11.1% versus last year. During the quarter, we also remained disciplined with our spending as demonstrated by our year-over-year SG&A reduction of 7%.
Adjusted EBITDA of $16.3 million for the quarter was above last year's performance on both a dollar and rate basis. Finally, as previously noted, third quarter free cash flow improved $10.3 million compared to last year. This performance reflects the hard work and commitment we've taken to dramatically improve this vital metric in fiscal 2019.
I'm proud of the effort and discipline displayed by our organization during Q3 and throughout the first nine months of 2019. Our teams across the globe continue to sharpen our strategic and operational focus to better leverage the competitive advantages we have as a market leader to drive growth and improved performance.
Before turning the call over to Jim, I'd like to take a moment to provide additional context to the organizational realignment that we announced in August. From my standpoint, the realignment was a natural and thoughtful outcome of the strategic work we did over the summer.
As I've seen many times in my career, once we honed our go-to-market strategies, it became obvious that our organizational structure was not optimized or aligned with our top strategic priorities, nor did we have the best talent focused on our most important initiatives.
The resulting transition to a global functionally aligned organization with fewer layers and greater spans of control will allow our teams to better leverage Libbey's scale and expertise across our $800 million enterprise. As noted in the announcement, the realignment is expected to drive run rate savings before tax of $9 million to $11 million starting in 2020.
I would now like to turn the call over to Jim Burmeister who will provide a deeper review of our third quarter results. Jim?
Thanks Mike. Turning to slide 5, I will begin with a review of our third quarter results. Net sales came in at $192.4 million compared to $190.8 million in the third quarter of last year, about a 1% increase year-over-year. Excluding $2.1 million of unfavorable currency, net sales were up 2%.
Gross profit declined during the third quarter by $2.8 million year-over-year with Q3 coming in at $34.4 million compared to $37.2 million in the prior year. Gross profit margin was 17.9% in the third quarter compared to 19.5% last year. Improvements in sales margins were masked by the $6.9 million of negative impact of discretionary downtime which Mike spoke about earlier.
As Mike mentioned, our focus on operating our assets for cash generation causes a natural headwind to gross profit dollars in the short term. It's important to note that this action is a deliberate decision by Libbey designed to free up capital from the balance sheet, while also creating a better alignment of our working capital needs relative to the anticipated demand levels going forward.
Excluding the discretionary downtime impact, our gross profit margins improved by nearly 200 basis points versus Q3 of 2018. Third quarter selling general and administrative expense was $31 million compared to $33.3 million in the prior year. This represents a 7% decrease and was driven primarily by lower amortization and consulting cost in addition to other discretionary spending reductions.
In the third quarter of 2019, we recorded a $1.8 million charge related to the organizational realignment. In Q3 of 2018, we’ve had a $2.3 million charge related to a strategic initiative that was terminated in Q3 of last year. Both of these items were treated as special items and are excluded from our adjusted results.
We will continue to take a disciplined approach to our spending for the remainder of the year, while continuing to fund the critical projects like our ERP and e-commerce initiatives that are driving a long-term value for the business.
Moving down the income statement, interest expense was virtually flat year-over-year reporting at $5.7 million for the quarter. Cash taxes paid during the third quarter of both 2019 and 2018 were approximately $1.9 million.
For the quarter, we recorded a net loss of $3.5 million compared to a net loss of approximately $5 million in the third quarter of 2018. Third quarter adjusted EBITDA as detailed in table 1 of today's press release was $16.3 million compared to $16.1 million in the third quarter of 2018.
Our adjusted EBITDA margin for the quarter was 8.5% compared to 8.4% in the third quarter of last year. Improved year-over-year EBITDA performance was driven by better net sales and margin results, primarily in our USC region and a positive currency impact in our Latin American business.
Partially offsetting these positive impacts was the $6.9 million unfavorable effect of discretionary downtime. We have been actively managing our trade working capital which we defined as inventories and accounts receivable, plus accounts payable.
During the third quarter of this year, trade working capital decreased by approximately $4 million on a quarter end balance of $211.5 million. Inventories came down $6.9 million during Q3 of 2019 and we expect our 2019 year-end inventories to be around $10 million lower than year-end 2018.
Through the first nine months of the year, capital expenditures and ERP capital as seen in table 9 of today's press release were $25.5 million. For the same period depreciation and amortization were $29.5 million, compared to $34.4 million last year. As of September 30th, we had an available capacity of $49.4 million under our ABL credit facility with $41 million drawn in loans outstanding and cash on hand with $27.7 million.
Slide 6 and 7 provide a detailed sales review of our reporting segments. I will go through slide 6 at this time. In the U.S. and Canada segment, third quarter net sales were $119.4 million, compared to $115.3 million in the third quarter of 2018, an increase of 3.5%. The increase was driven by favorable price and mix of products sold in the foodservice and retail channels as well as improved unit volumes in the business-to-business channel. This was partially offset by unfavorable channel mix as well as a decline in foodservice volumes.
We continue to see negative impact from restaurant traffic in the quarter as shown by the more than 3% year-over-year decline as reported by Black Box. However, our foodservice sales were up 1.4% during the quarter, an encouraging sign amid a period of wider restaurant traffic.
As we spoke in our last quarter's call, our omni-channel approach in retail is more than offsetting the headwinds created by traffic declines in traditional brick-and-mortar outlets.
For the quarter, USC retail sales were up approximately 5%. And for the first nine months they were up nearly 7%. This growth demonstrates the value of the investments we have made in the past two years to build out the infrastructure to support our e-commerce platform. We anticipate that our e-commerce business will maintain its growth trajectory and the results begin to contribute to earnings on a run rate basis during the fourth quarter.
Third quarter net sales in Latin America were $35.3 million compared to $35.4 million in the third quarter of 2018, a decrease of 0.3%. However, excluding the impact of currency, sales increased by 1.2% versus last year's comparable quarter.
Results in the quarter were driven primarily by increased volumes in the retail channel offset by unfavorable price and product mix within the same channel, as well as unfavorable currency impacts within the segment overall.
In our Europe, Middle East and Africa segment, net sales were $31.7 million in the quarter compared to $33 million -- $33.3 million in the third quarter of 2018, a decrease of 4.7%. Excluding the impact of currency, net sales saw a marginal decrease of 0.4%.
Outside of currency, net sales in the quarter were lower primarily as a result of reduced sales volumes in the business-to-business channel, partially offset by favorable price and product mix across the segment.
In other, which primarily represents our operations in Asia Pacific, net sales were down roughly $800000 or 11.1% in the quarter. On a constant currency basis sale were down 8.5%.
Turning back to the consolidated company results. Slide 8 walks through the adjusted EBITDA impacts for the third quarter and year-to-date in 2019. I will spend a few moments walking through the third quarter impacts.
In the quarter, adjusted EBITDA was $16.3 million compared to $16.1 million in the same period of last year. Improved sales margins and favorable currency were offset by production downtime as we took selective downtime to manage inventories in working capital in the quarter.
The impact of downtime on our operating performance had a negative year-over-year impact of $6.9 million, but helped drive a $10.3 million free cash flow improvement. As previously announced, we are conducting a strategic view of our Chinese operations. We have a number of active processes in progress, right now. However, we do not have anything that we can report at this time. We are proceeding as expected and will continue to update as well as we have -- once we have more details to share.
Finally, turning to Slide 9. We are providing an update to our full year outlook. Our performance in the core U.S. and Canada market is improving. However, given the headwinds in our European and Latin American markets, in addition to the potential for continued negative currency impacts, 2019 full year net sales are now expected to be flat to slightly down from prior year.
The company continues to focus on cash flow performance and is managing inventories down versus prior year by approximately $10 million. This focus which includes taking discretionary downtime is expected to result in overall adjusted EBITDA margins between 8.5% and 9%.
Capital expenditures and ERP capital are expected to be near $35 million at the low end of our previously guided range. And the company projects further spending discipline, leading to adjusted selling and general administrative margins of approximately 15.5%, down from the previously guided 16%.
With that we'll now open the call for questions. Operator?
Thank you. [Operator Instructions] And your first question comes from the line of Lee Jagoda from CJS Securities. Your line is open.
Hi, good morning.
Good morning, Lee.
So just to start, the $6.9 million downtime impact, is that the level that we would have basically kept inventories flat if we had that back?
That's the right way to think about it Lee.
Okay. And then as I look out to Q4, as it relates to downtime, is the year-over-year change greater than or less than the $6.9 million that we saw in Q3?
We haven't given specifics by quarter. We have said that we're going to take some additional downtime to continue to manage inventories but I think, if you back that into what we've guided this morning, you kind of get to the right zone.
Okay. And then as it relates to the $3 million charge that you added back to EBITDA, I think you called that $1.8 million of that was in SG&A as the remainder in COGS?
All right. And how much you think that the foodservice strength relates to the changing incentive structure that you made versus overall demand? And are there any competitive dynamics either on foodservice or retail that are worth highlighting that could change demand either to the positive or negative for you guys?
Lee, this is Mike. I'll take a shot at that. I guess, it's really difficult to attribute performance in a quarter to any one initiative. I think the -- we continue to work with our sales team and our customers to align incentives towards growth. And so I'm pleased with the progress we're making but I wouldn't highlight that as the number one driver.
I do think, we continue to hone our approach in foodservice, as we focus our efforts on end users and pulling demand through I think that's been helpful. I think our focus on underpenetrated segments like health care and hospitality that we've been talking about, I think we see traction there. And that's driving the performance as well. And I think it's the combination of those things that is overcoming, what was a rather soft quarter externally as it relates to the traffic metrics that we had talked about.
Okay. Couple more if I can. So, if I look at your guidance and then I try to extrapolate that out to free cash flow, it looks like I'm coming out somewhere in that $15 million to $20 million of free cash flow for the year, which if I take the EBITDA margin guidance you gave us, gets you to roughly about five times trailing EBITDA year end, maybe a little bit less than that. Is there anything in that math that -- different than your assumption?
No. You're in the right ballpark, Lee.
Okay. And then the last one for me and I'll hop back in. And I have to try, any potential refinancing commentary?
I think, some of it we've commented in the past Lee, we're actively working on that process right now with our advisers. And as soon as we have something buttoned up, we'll be very happy to share it.
Okay. Thanks very much.
[Operator Instructions] And we have no further questions at this time. I'll turn the call back over to our presenters.
This is Mike. I just wanted to say, thank you for joining us today. As indicated in my opening remarks, I'm pleased with the effort and the results that our teams achieved in the third quarter. I think, it's great to see our focus on leveraging our marketing-leading position and competitive advantages continue to drive positive results. Well, thank you again for your time this morning. And have a great day.
This concludes today's conference call. Thank you for joining. You may now disconnect.