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Edited Transcript of LBY earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q2 2019 Libbey Inc Earnings Call

TOLEDO Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Libbey Inc earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Noe

Libbey Inc. - Financial Planning & Analysis Manager

* James Charles Burmeister

Libbey Inc. - Senior VP & CFO

* Michael P. Bauer

Libbey Inc. - CEO & Director

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Conference Call Participants

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* Emily Cetlin;Eaton Vance;Associate Bank Loan Credit Analyst

* Lee M. Jagoda

CJS Securities, Inc. - Senior MD & Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Libbey Inc. Q2 2019 Financial Results Conference Call. (Operator Instructions)

Chris Noe, Financial Planning and Analysis Manager, you may begin your conference.

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Christopher Noe, Libbey Inc. - Financial Planning & Analysis Manager [2]

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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 be available for the next 7 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 and Chief Financial 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 for which our independent auditors have not yet completed their review. 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?

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Michael P. Bauer, Libbey Inc. - CEO & Director [3]

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Thank you, Chris. Good morning, everyone, and thank you for joining us. As many of you know, at the end of March, I joined the company as CEO, a role that I stepped into with excitement and enthusiasm for Libbey's future. In the past 4 months, I've enjoyed the opportunity to meet with several customers, investors and associates across the globe. I came to Libbey with eyes wide open, aware that the company faced a number of challenges implementing its strategy and delivering consistent, profitable growth. Now after leading the company for 4 months, I could say with confidence that I'm even more excited about the work we are doing, the opportunities that lie ahead and our ability to generate growth and deliver improved operating performance.

During today's call, I'm looking forward to sharing several meaningful observations regarding our go-to-market strategy as well as a high-level overview of our results for Q2. I will then turn the call over to Jim Burmeister, who will provide a more granular review of our second quarter financial results and key balance sheet metrics.

Over the past 100 days, I've been deeply involved with our leadership team, applying a fresh objective external lens to Libbey's go-to-market strategy and refining our key strategic priorities. We came out of this exercise with several insights and conclusions about what sets Libbey apart from our competitors, what our customers value and advantages we can leverage to drive profitable growth.

First is our brand reputation. In addition to consumer awareness, Libbey is known as a solutions provider for restaurant operators, distribution partners and B2B customers. This is something no one else has, and often takes years or decades to develop.

Second is our category expertise in omnichannel go-to-market capability, which is unmatched in the industry.

Third, is our deep end-user relationships, installed base and specifications that create demand and pull our products through all channels of distribution.

And last, but certainly not least, is our supply chain expertise, which balances service, quality and cost across several categories and does so better than anyone in the industry.

Like most companies, Libbey's business can be complex. Over the past 100 days and going forward, we are relentlessly driving segmentation and deeper end-user insights to help make the complex simple and ensure our limited and talented resources are focused on the largest, most profitable opportunities. To that end, we believe executing the following key priorities will maximize growth and operating performance over the next several years.

E-commerce. To date, we've done a great job focusing on the consumer. Going forward, I'm excited to broaden our focus to include partnering with food-service distributors as well as end users. This represents a significant opportunity to expand our reach and influence restaurant operators in a more economical and scalable model.

Food service. While this channel continues to adapt to the new norm of takeout and delivery, we've seen our focus on new products and differentiated service begin to pay dividends. In addition to these ongoing efforts, we are adapting our approach and resource deployment to expand into growing and/or underpenetrated segments of the channel, like health care and hospitality. As previously mentioned, we also see a significant opportunity to leverage digital tools to reach end users and further support our distribution partners.

ERP. This isn't just a new integrated cloud-based computer system. First and foremost, this is a long-overdue integration of businesses we acquired 10 to 20 years ago. Simply put, we never fully captured the supply chain or back-office synergies related to the Crisa, Syracuse, or World Tableware acquisitions. The impact of these integrations will result in a more agile organization that's easy to do business with. In addition, the new technology will enable us to transform how we plan, schedule, execute, report and measure performance across our plants, product lines and business segments.

Supply chain optimization. Last, but equally important and impactful is the untapped opportunity to leverage our supply chain globally versus the regional focus we've had to date. Our supply chain includes the largest asset base and operating cost in our business, and we believe a global structure and focus will better leverage this vital part of our business. Although we are only in the early phases of this transition, as seen in Q2, it is already yielding positive results.

Finally, as we continue to hone and narrow the organization's focus, all assets and investments need to align with our strategic priorities and/or provide adequate financial returns. In the second quarter, we demonstrated this discipline by better managing costs and driving improved adjusted income from operations. In addition to the progress noted in Q2, we are in the process of taking more meaningful costs out of the business. As a result, we expect to finish the year with reduced run rate costs that will improve our ability to drive cash generation while maintaining critical focus on the areas I spoke to earlier.

Now I'd like to shift to the second quarter. Overall, I'm pleased to report that Libbey delivered a solid second quarter performance with operating results and free cash flow that outpaced our expectations. Net sales for the quarter were $206.2 million, down slightly versus the prior year. We noted modest sales growth in our USC segment that was offset by declines and soft market conditions in both EMEA and Latin America. New products drove $14.3 million of net sales during the quarter and represented 6.9% of our global net sales. In addition, e-commerce sales continued to provide a much needed tailwind and represented approximately 13% of retail sales in the USC.

Gross profit for the quarter was $46.7 million, a 90 basis point margin improvement versus the prior year. Despite the softer sales volumes and unfavorable mix in EMEA and Latin America, we were able to drive price in all regions in most channels. Our plants also ran very well in the quarter, a testament to the operational excellence efforts that we have spoken about in prior quarters.

During Q2, we also remained disciplined with our spending, as demonstrated by our year-over-year SG&A reduction of 8.1%. Income from operations in the second quarter was impacted by noncash impairment charges of approximately $47 million. Jim will discuss the details later in his prepared remarks. Excluding these noncash impairment charges, our adjusted income from operations increased more than 22% versus last year.

Adjusted EBITDA of $25.3 million for the quarter was down versus last -- versus last year's results of 26.8%. However, it's worth noting that last year's second quarter benefited from a meaningful, favorable currency impact. Excluding the impact of currency, adjusted EBITDA improved approximately 4.5% in Q2. I'm pleased with this improvement, but we still have a lot of work to do to return margins to the levels that we believe this business can deliver.

Finally, during the call for Q1, we communicated our intention to focus on cash generation during 2019. This focus and the operational performance noted above, drove a $12.9 million improvement in free cash flow versus Q2 of last year. All in, we delivered a solid second quarter with strong operational focus and disciplined spending, offsetting disappointing top line sales and driving improved margins and cash flow. I'm proud of the organization's effort. Our associates across the globe remain committed to sharpening our focus to better leverage Libbey's market-leading position and competitive advantages to drive positive results in the face of continued market-driven headwinds.

I would now like to turn the call over to Jim Burmeister, who will provide a deeper review of our second quarter results. Jim?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [4]

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Thanks, Mike. Turning to Slide 6, I will begin with a review of our second quarter results. Net sales came in at $206.2 million compared to $213.5 million in the second quarter of last year, a decrease of 3.5% year-over-year. Excluding $2.1 million of negative currency impacts, net sales were down 2.5%.

Gross profit increased during the second quarter to $46.7 million compared to $46.5 million in the prior year. Gross profit as a percentage of net sales improved year-over-year for the second straight quarter by about 90 basis points to 22.7%. Improved operating efficiencies as well as lower depreciation and amortization that led by extension of asset lives, drove the improvements versus prior year. This was partially offset by lower sales results.

Second quarter selling, general and administration expenses were $30.8 million compared to $33.5 million in the prior year. This represents an 8% decrease and was driven by lower consulting costs and reductions in other discretionary spending. We will continue to take a disciplined approach to our spending, while continuing to fund critical projects like ERP initiatives.

As Mike mentioned earlier, our income from operations in the second quarter was impacted by a noncash goodwill impairment charge of $46 million in our Latin American segment and a $900,000 charge for noncash impairment to trade names in EMEA. As part of our ongoing assessment of goodwill at the end of the quarter, we noted that as a result of a significant decline in the company's share price throughout the quarter, the company's market capitalization was less than our book value. As a result, we determined that a triggering event had occurred and performed an interim impairment test. The impairment testing indicated that the carrying value of the Mexico reporting unit exceeded the fair value, and we recorded the impairment charge. As a result, there is no remaining goodwill on the balance sheet related to the Mexico acquisition. The $900,000 impairment charge in EMEA is primarily a result of lower sales and sales forecast for the Royal Leerdam branded products. The lower sales are being caused by a decline in performance in mid-tier retailers, where the Royal Leerdam brand has a stronger presence.

Much like we have seen in the U.S. markets in recent years, consumers in EMEA are moving more towards discounters and online retailers. While we are disappointed in the impairments, we continue to view these operations as assets that can contribute to our improved business performance going forward.

Moving on, interest expense in the quarter was $5.9 million, an increase from $5.5 million in the same period last year. The increase was attributed to higher variable interest rates and increased utilization of our ABL credit facility.

Cash taxes paid during the second quarter of 2019 and 2018 were approximately $4.1 million and $2.5 million, respectively. We expect that the full year cash taxes this year will be in the range of $8 million to $9 million.

For the quarter, we recorded a net loss of $43.8 million compared to net income of approximately $4 million in the second quarter of 2018. Our current year results were impacted by the noncash goodwill and trade name impairment charges previously mentioned.

Second quarter adjusted EBITDA, as detailed in Table 1 of today's press release, was $25.3 million compared to $26.8 million in the second quarter of 2018. Our adjusted EBITDA margin for the quarter was 12.3% compared to 12.5% in the second quarter of last year. Excluding the impacts of currency, adjusted EBITDA was $28 million, up 4.4% versus last year.

We have been actively managing our trade working capital, which we defined as inventories in accounts receivable less accounts payable. During the second quarter of this year, trade working capital decreased by $0.5 million to a quarter end balance of $215.9 million. This is favorable by $5.2 million compared to a working capital balance of $221 million at the end of Q2 2018. Inventories came down $7.3 million during Q2 2019, and we are committed to lowering our finished goods inventory throughout the remainder of the year.

Capital expenditures were $7.9 million in the quarter compared to $10.1 million in the prior year. Depreciation and amortization were $10 million in the quarter compared to $11.2 million in the same period of last year. We had available capacity of $43.7 million under our ABL credit facility as of June 30, 2019, with $47.7 million drawn in loans outstanding and cash on hand of $32.3 million.

Slide 7 and 8 provide detailed sales reviews of our reporting segments. I'll go through Slide 7 at this time.

In the U.S. and Canada segment, second quarter net sales were $128.9 million compared to $128.5 million in the second quarter of 2018, an increase of 0.3%. The increase was driven by improved unit volumes in the business-to-business and retail channels and favorable pricing. This was partially offset by unfavorable channel mix as well as unfavorable mix of products sold in our B2B channel. Our food service sales were down $4.4 million during the quarter. We continue to see a negative impact from restaurant traffic in the quarter, as shown by an almost 3% year-over-year decline as reported by Black Box.

Also, we expect our sales and distribution this year to progress with a more normal quarterly cadence as some of our rebate programs that were historically annual programs ending in June have been moved to a calendar year-end and some of the quarterly gates.

In retail, our omnichannel approach 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 4%, and for the first half of the year, up nearly 8%. This growth demonstrates the value of the investments we have made over the past 2 years to build out the infrastructure to support our e-commerce platform. Also, as we progress, we expect to see our e-commerce business continue to grow and begin to contribute to earnings on a run rate basis by year-end.

Second quarter net sales in Latin America were $38.2 million compared to $40.3 million in the second quarter of 2018, a decrease of 5.2%. Excluding the impact of currency, sales decreased by 5.7%. Results in the quarter were driven primarily by weaker sales in business-to-business, as we experienced an unfavorable product mix on sales within the channel. Part of the negative impact was offset by price realization and favorable currency impacts from within the segment.

In our Europe, Middle East and Africa segment, net sales were $32.7 million in the quarter compared to $38.2 million in the second quarter of 2018, a decrease of 14.4%. Excluding the impact of currency, net sales decreased 9.4%. Outside of currency, net sales in the quarter were lower primarily as a result of reduced sales volume in all 3 channels in the region.

In other, which primarily represents our operations in Asia Pacific, net sales were down roughly $200,000 or 3.3% in the quarter. On a constant currency basis, sales were up 2.8%.

Turning back to the consolidated company results. Slide 9 walks through the adjusted EBITDA impacts for second quarter and year-to-date 2019. I will spend a few moments to walk through the second quarter impacts.

In the second quarter, adjusted EBITDA was $25.3 million compared to $26.8 million in the same quarter last year, which benefited from a favorable currency impact that did not repeat this year, driving a negative year-over-year impact of $2.7 million on our adjusted EBITDA results. On a constant currency basis, our adjusted EBITDA for Q2 was up 4.4% versus last year. In addition, our disciplined approach to SG&A and improved operating performance offset the unfavorable top line results we experienced in our Latin America and EMEA regions. As we have said previously, we took selective downtime to manage inventories in the quarter. The impact of downtime on our operating performance was similar year-over-year, as operational downtime to control inventories this year replaced furnace repair downtime we had in Q2 of 2018. Strong performance in plant productivity and cost management drove the $3.5 million positive impact from manufacturing versus last year.

As we have communicated throughout the year, cash generation is one of our top priorities in 2019. We are pleased to deliver a solid improvement during the quarter on gross margin and SG&A spending. We are working on further initiatives that we expect will further reduce our run rate cost by the year-end.

We would like to note that we have begun a process in discussions with our banks and advisers regarding our refinancing options. The previously noted improvements in cash flow will help support a successful refinancing and any future changes in our cash interest. As previously announced, we are in the midst of a strategic review of our Chinese operations. We have a number of active processes in flight right now. However, we do not have anything specific to share at this time. We are proceeding as expected, and will continue to update you as we have more details to share.

Finally, turning to Slide 10. Given the steps we have taken to better manage our costs and the addition of improved contributions from e-commerce platform, we are reaffirming our full year outlook at this time.

With that, we'll now open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Lee Jagoda of CJS Securities.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [2]

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So just starting with your guidance and looking at, particularly, the low end of the top line guidance, it would imply roughly 6% growth in the back half of the year. If I was trying to figure out the cadence there, how should I think about a Q3 and Q4?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [3]

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We don't typically guide specific quarters, Lee, I know as you love that so much. But I think it's more of a metered gear this year than the drastic ones we saw last year. Again, we're expecting as we're anniversarying some pretty easy comps in the back half versus the tough comps in the front half. You'll see for the year, it'd be more.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [4]

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And is it fair to say the Q4 comp should be easier than the Q3 comp just given the puts and takes around some of the food service orders you saw?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [5]

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That's very fair to say, Lee.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [6]

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Okay. And then if I look at the end market sales, particularly in food service, what would you say are the primary contributors to the foodservice declines we saw in the first half? And how should we view the general macro trends in the back half of the year as it relates to food service?

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Michael P. Bauer, Libbey Inc. - CEO & Director [7]

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Yes. I guess a couple of things went into the second quarter. First of all, from a traffic perspective, I think Jim referred to the published data from Black Box would indicate that traffic in restaurants was down slightly in Q2 of this year versus last year. So we weren't getting any favors from the market. Secondly, we did have a fairly strong Q2 last year. So a little tougher comp for us. And then thirdly, we have changed some of our customer programming to move from mid-year or quarterly incentives to try to push them into an annual program. And so there's less quarter end behavior in '19 versus '18. So those are all factors in Q2. As we look forward, we're not banking on the market changing significantly in the back half of the year. So our performance, I don't think will necessarily be impacted by that perspective. So it'll come down to our ability to execute the programs that we have in place.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [8]

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Got it. And I guess, the change to an annual program probably also makes the Q4 comp even easier.

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Michael P. Bauer, Libbey Inc. - CEO & Director [9]

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We're going to do our best not to let that behavior influence our results. I'm not a big fan of buying forward on incentives and creating a spike in our supply chain and our customers. So there is a factor there, but we're going to do our best not to lean into that.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [10]

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Okay. And then switching gears to SG&A. Can you talk about where some of the SG&A reductions are coming from? And how much is left to reduce to get to where you want to be on a run rate basis?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [11]

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Sure, Lee. I think it's important to note, as I did in my prepared remarks, a lot of this is us carving out everything except for those core strategic priorities that we put in front of the company. The company is trying to do better at being selective about what we spend our time on and invest our resources in and really honing in on those critical few. We saw the results of that in Q2, down 8.1% versus prior year. ERP is still running, digital is still running. So we're still doing the things around our strategic priorities that we expected to push forward. But there is more cost we need to take out of the operation. As we look in the long term for our planning purposes and things we want to make sure we can demonstrate, as we just did in second quarter in advance of a refinancing, that we're going to get much more aggressive on cost. And then there's more to come on that. So...

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Michael P. Bauer, Libbey Inc. - CEO & Director [12]

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Yes. From my standpoint, 100 days in give or take, we've certainly found some areas that the organization was putting a solid effort into that isn't as closely aligned with the pillars of our strategy that we've outlined. I don't think we've seen all of that yet. So I think there's more for us to go impact in the organization. And to Jim's point, putting everything through the lens of our strategic priorities and how they align from that perspective, that'll be the primary filter that we use.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [13]

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Okay. And then just one last one for me. I think, Jim, you mentioned the e-commerce business is expected to be earnings accretive by year-end. Is there a way for you to quantify the headwind in terms of how much you've been losing either this year or last year to kind of help people understand that once you get to breakeven on a run rate basis, you eliminate X amount of losses or expense?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [14]

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Sure. I mean the way I would probably paint the picture for you, Lee, is as you well know, back in 2017, when we first started on this journey, retail sales were in a pretty steep decline. And we made a conscious decision to change that trajectory. We talked in '17 quite frequently about the fact we spent over $10 million in that year alone driving strategy and starting to establish infrastructure before we even started seeing sales. Now those costs are coming down, obviously, as you get into a run mode. And as we continue to update you throughout the past 2 years about our sales growth in that channel, and as we've learned a lot more about what works best for our categories and how we change and optimize the contribution margin that, that business delivers to absorb and then cover the SG&A cost associated with it, and then contribute to the broader company. We're going to use that run rate breakeven point here in the fourth quarter, which we're glad to see. We're already demonstrating, I think, as you heard from us both in the first quarter and the second quarter, how we're up versus prior year on retail channel sales in the U.S., which is a good marker of -- we said we're going to go to this for this reason and it's demonstrating it, and by the end of the year, it's also going to be getting into the bottom line which is also constructive.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [15]

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So versus the run rate breakeven expected in Q4. How much did you lose in Q2?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [16]

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Well, we haven't split it out at that level of detail, Lee.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [17]

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I'd figure I try.

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [18]

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I know.

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Operator [19]

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(Operator Instructions) And your next question comes from the line of Emily Cetlin of Eaton Vance.

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Emily Cetlin;Eaton Vance;Associate Bank Loan Credit Analyst, [20]

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Just -- I was wondering if you guys could give a quick update if you've heard anything on Durobor. I know last time they were planning to file for bankruptcy, and then there were maybe a couple of bidders on the business. I think I saw an article that one of them has dropped out, and they may be shutting down the facility. Have you guys heard anything more about that?

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Michael P. Bauer, Libbey Inc. - CEO & Director [21]

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Yes. We have actually. As Durobor's gone through a number of these cycles, we always watched it intently. But this time, we know that the employees have been all let go and that furnace has been shut down, it is cold. So we believe it is gone for good.

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Emily Cetlin;Eaton Vance;Associate Bank Loan Credit Analyst, [22]

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Okay. And have you guys seen -- was there a benefit in Q2 for you guys there? I know it's 1 furnace and a pretty small part of the market. But I know you compete kind of head-to-head with them on a few things.

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [23]

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We see some opportunities. I mean their sales, obviously, were fairly small as they were kind of dwindling at the end there. And their products that they primarily played in are things that we do very well in out of our Portugal facility in the B2B sector. The softness we've seen in Europe, although we've seen it across the platform is also pretty heavy in retail as well. But we do see some opportunities coming through. It's not a massive step change, but again, it's good to see some capacity coming out of the European market, which still feels a little over capacity right now.

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Emily Cetlin;Eaton Vance;Associate Bank Loan Credit Analyst, [24]

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Okay. And any other updates with competitors regarding capacity?

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Michael P. Bauer, Libbey Inc. - CEO & Director [25]

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Not much on capacity changes. We have seen some M&A activity in the channel, but nothing from a capacity being added or dropped. We continue to shape our assets to better conform to our opportunities as we've talked about for the last few years. And we're going to continue to do so going forward.

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Operator [26]

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There are no further questions in the queue. I will turn the call back over to Mike Bauer, CEO, for closing remarks.

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Michael P. Bauer, Libbey Inc. - CEO & Director [27]

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Great. Thank you. I want to start by just saying thank you -- thanks to everyone for joining us today. As I indicated in my opening remarks, I'm pleased with the effort, progress and results that our teams achieved in the second quarter. While it's clear we have more work to do, I'm confident in our leadership team, and I'm optimistic about what this business can deliver and the opportunities that lie ahead. Thank you again for your time this morning, and I look forward to the opportunity to meet those of you that I have not met. Have a great day.

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Operator [28]

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This concludes today's conference call. You may now disconnect.