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Edited Transcript of LBY earnings conference call or presentation 21-Feb-19 1:00pm GMT

Q4 2018 Libbey Inc Earnings Call

TOLEDO Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Libbey Inc earnings conference call or presentation Thursday, February 21, 2019 at 1:00:00pm 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

* William A. Foley

Libbey Inc. - Chairman of the Board & CEO

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Conference Call Participants

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* Jeremy Scott Hamblin

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail

* 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 day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the Libbey Fourth Quarter and Full Year 2018 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 last night and are available on the company's website in the Investor Relations section. A 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 Bill Foley, our Chairman and Chief Executive Officer; Jim Burmeister, our Chief Financial Officer; and Mike Lindsey, our VP and Corporate Controller. After our prepared remarks, we will turn the call over to the operator and take your questions.

Before we get under way, we would like to say that today's call includes financial information for which our independent auditors have not yet completed their audit. 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; 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. The 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 Chairman and Chief Executive Officer, Bill Foley, for his opening remarks. Bill?

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William A. Foley, Libbey Inc. - Chairman of the Board & CEO [3]

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Thanks, Chris. Good morning, everyone, and thank you for joining us. I'll begin today by providing our customary review of the fourth quarter and full year, then Jim will provide more detail about our financial results for both. As you may have seen in our press release issued last night, our Board of Directors has approved a plan to pursue strategic alternatives for our business in China. We'll explain this decision in greater during the call.

At the end of our prepared remarks, I'll cover our outlook for 2019 and then we'll be happy to answer your questions.

From a macro perspective, we saw a return to somewhat erratic foodservice market conditions and some irrational competitive behavior during the quarter. As a result, our net sales were down 5.5% compared to last year's fourth quarter or 4.4% after adjusting for currency impact. Our adjusted EBITDA came in at $16.2 million, which was down from $24.2 million achieved in the prior year.

As a reminder, in Q4 2017, we had a large product placement with one of our largest foodservice customers, which totaled around $7 million and was -- and accounted for around 70% of the net sales reduction when excluding currency. Jim will speak to some of the other drivers of our performance later, but one of the primary issues impacting the quarter was an unanticipated reluctance by many customers to take their normal year-end purchases into inventory as they have in the past. This was driven by customers concerned over the perceived economic uncertainty that occurred, especially in December. In addition, we experienced an unusual amount of competitive pricing pressure driven by a handful of competitors that sold product into the U.S. foodservice market at very significant discounts.

For those of you who have been following the press in our industry, you've likely see that the French tableware manufacturer, Arc International, our largest competitor, recently experienced labor unrest as they asked their employees in France to work more hours per week to avoid filing for bankruptcy. Additionally, The Oneida Group announced that it sold the majority of its foodservice business, which markets flatware, dinnerware and barware, to Crown Brands. We believe these developments led to very short-term buying opportunities for some of our customers, especially on the East Coast. This behavior was particularly evident in the month of December. It had an immediate impact on our results. But from a long-term perspective, we see these developments as positive for our competitive position and ability to grow share, as many of our peers continue to struggle and underinvest in their platforms.

This is happening at a time when we're continuing to execute against our Creating Momentum strategy, including investing in a strong portfolio of new products, expanding our e-commerce platform and its geographic end market reach, and continuing to expand our differentiating customer service and driving greater efficiencies through the investment in a new ERP system.

When we look at our annual results, we believe that our Creating Momentum strategy is working as we delivered $798 million in revenue in 2018, which was up 2.1% or 1.5% on a constant currency basis, and $71 million in adjusted EBITDA, which was up roughly 0.5 points -- 0.5 percentage points. We were on plan to deliver stronger results through most of the year and ultimately deliver growth in both metrics for the first time in 6 years even with the challenges that presented themselves in Q4.

In 2018, we continued to benefit from the strong contribution of our new product introductions as well as our e-commerce platform, as sales from these initiatives demonstrated their importance throughout the year. New products, which we define as products introduced within the previous 36 months, contributed 15.9% or 7.5% of net sales in the fourth quarter and over $54 million of sales for the full year. E-commerce sales in the U.S. and Canada region represented approximately 13% of retail sales, up 29.8% when compared to the fourth quarter of last year.

On last quarter's call, you may recall, we reviewed our launch into the health care market segment of the foodservice industry. This launch continues to gain interest of our customers, and we're expanding these products into an assortment of retail sets that are targeted at the in-home health care market. We will utilize our e-commerce platform to assist with the launch in the first quarter of 2019.

In an industry where our competitors continue to face financial challenges and struggle with operational issues, we focused our energy on providing our customers with exceptional service. It has proven to be a key differentiator when customers make purchasing decisions. Our goal has been to deliver outstanding service every day. We measure ourselves against shipping a perfect order or what we call on-time and in-full, or OTIF. As a result of our focus on service, we're consistently delivering perfect orders at a 90% level.

As we focus on growing our e-commerce presence, it's also critical that we not lose sight of the important -- importance of customer service for our digital customers. We've developed our e-commerce platform to provide 2 days' fulfillment service to all retail customers. And as a result, our endless aisle capability is being aggressively adopted by major retailers. This is based on our strong belief that consumers expect to receive their orders within 48 hours, with great customer service backing it up. We've made best-in-class service a key pillar of our digital strategy. And during the quarter, we met customers' expectations over 99% of the time.

We believe superior service is helping us accelerate our growth, achieve higher branded price points and brand recognition, gain stronger placement of products with our brick-and-mortar customers as well as pure-play e-tailers. It's giving us more flexibility in terms of how we package, price and market product assortments, and we believe the platform will help us enhance margins longer term.

Turning to Slide 5, I'm going to spend a few minutes the Ambiente show, which was held 2 weeks ago. For those of you who aren't familiar with the show, Ambiente is a global consumer products trade show held annually in Frankfurt, Germany. This show provides Libbey the opportunity to showcase its best portfolio of brands and new products developed by our marketing teams around the world.

Over the last 2 years, like our work in the U.S., we've been developing the organizational capability to identify and launch new products for regional markets and, where it makes sense, to launch these products globally. From our EMEA team, approximately 200 new items of drinkware, barware and stemware were featured this year. This is a record number of new products from this team. The customer reaction to these launches was very positive.

From our LATAM design lab, we launched a new line of hydration products that will be introduced into the U.S. market in 2 weeks. We also launched an exciting line of baby bottle and baby food storage products in addition to indoor gardening containers. Over 70 new products were shown from LATAM, and one major U.S. retailer has already expressed an interest in buying this new line for the baby market.

In the U.S., we'll be launching 257 new products at this year's IHA in 2 weeks. Similar to customer sentiment in the U.S., our European and American customers are concerned about political and economic instability. The pending decision on Brexit looming over the market, with its unknown economic impact on performance of major economies in Western Europe, is of major concern. In Latin America, the political instability of Brazil, Argentina and Venezuela also have customers concerned.

The feedback from the show was our customers are pleased to see our new products and our commitment to innovation because many of our competitors are not investing in their businesses at the same level.

Moving to Slide 6, I'll provide a little more detail on the performance of our e-commerce platform last quarter. E-commerce continues to be the fastest-growing channel in the retail market. And by the end of the fourth quarter, we had over 460 items in our e-commerce assortment. As I said earlier, this drove a nearly 30% increase in U.S. and Canada e-commerce sales as compared to the fourth quarter of 2017 and is offsetting the declines we continue to see in brick-and-mortar retail sales.

Our direct-fulfillment capability is supporting our brick-and-mortar customers with the ability to add our products to their websites, offering an endless aisle and delivering the same lead time and service provided by large e-commerce retailers. We're now operating 3 distribution locations across the country and expect to add 2 additional nodes in the U.S. and 1 in eastern Canada to expand our presence across North America. This allows us to reduce the last-mile freight cost and will improve profitability as we continue to gain scale.

In 2017, we shipped 7,000 packages through our e-commerce fulfillment platform. In 2018, we shipped 200,000 packages, and we expect to ship over 350,000 packages this year through our 3PL platform. We remain well on track to achieve our long-term target of 20% of retail sales from the e-commerce channel, and we're looking forward to seeing how this business accelerates in 2019.

This year, we also expect to launch our digital capability in Western Europe, starting in the U.K. and Germany, as well as expanding our content library to support the foodservice customer base.

Now I'll hand the call to Jim for a detailed review of our fourth quarter financials. Jim?

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

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Thank you, Bill. Good morning, everyone. Turning to Slide 7, I will begin with a review of our fourth quarter results and our consolidated statement of operations.

Net sales came in at $211.6 million compared to $224 million for the fourth quarter of last year, a decrease of 5.5% year-over-year. Excluding $2.6 million of negative currency impacts, net sales were down 4.4%. Net sales for the full year of 2018 were $797.9 million compared to $781.8 million in 2017, an increase of 2.1%. Excluding $4.3 million of favorable currency impacts for the full year, net sales were up 1.5%.

Gross profit during the fourth quarter was $37.5 million compared to the $43.4 million in the prior year. Gross profit as a percentage of net sales was 17.7% in the fourth quarter of 2018 compared to 19.4% last year.

Furnace downtime, unfavorable price and product mix, higher electricity costs in our LATAM and EMEA regions, and negative currency impacts, mainly relating to the peso, led to the decline in our gross margins year-over-year.

For the full year, gross profit was $154.9 million compared to $154 million in the prior year. Gross profit as a percentage of net sales for 2018 was 19.4% compared to 19.7% in the prior year. The primary drivers of the full year-over-year difference in gross profit were a favorable sales impact, which was more than offset by lower operating activity, which included incremental furnace downtime of $7.5 million and higher electricity cost of $2.8 million.

Fourth quarter selling, general and administrative expense was $29.5 million compared to $29.3 million in the prior year. Full year reported SG&A increased $1.6 million or 1.3% to $127.9 million compared to last year. The increase in SG&A for the full year resulted primarily from legal and professional fees of $2.3 million associated with the strategic initiative that we terminated during the third quarter of 2018. Increased expenses associated with our European initiative, higher incentive compensation expenses and unfavorable currency impacts were $600,000. Partially offsetting these increases was a lower e-commerce initiative spend in 2018. Additionally, 2017 SG&A included reorganization charges of $2 million that did not repeat in 2018.

Interest expense for the quarter was $5.8 million, an increase of $510,000 compared to last year. For the full year, interest expense was $22 million compared to $20.4 million in the prior year. Both fourth quarter and full year increases were driven by higher variable rates and increased utilization of our ABL facility. The impact on the company from a rising interest rates in 2019 was muted due to the interest rate swap that keeps a little over half of our term loan B debt fixed at a rate of 4.85%.

The company recorded tax expense of $4.5 million in the fourth quarter compared to tax expense of $14.1 million in the same period in 2017. For the full year, the company recorded tax expense of $10.3 million compared to tax expense of $15.8 million in 2017. Cash taxes paid for 2018 and 2017 were approximately $8.5 million and $3.4 million, respectively, with the increase principally attributable to higher pretax income in Mexico.

For the quarter, we recorded a net loss of $4 million compared to a net loss of approximately $7.2 million in the fourth quarter of 2017. For the full year, our net loss was $8 million compared to a net loss of $93.4 million in 2017. As a reminder, our results in 2017 were affected by a $79.7 million noncash goodwill impairment associated with our Mexico reporting unit.

Fourth quarter adjusted EBITDA, as detailed in Table 1 of the press release, was $16.2 million compared to $24.2 million in the fourth quarter of 2017. Our adjusted EBITDA margin for the quarter was 7.7% compared to 10.8% for the fourth quarter last year. For the full year 2018, adjusted EBITDA was $71 million compared to EBITDA of $70.6 million in 2017. Our adjusted EBITDA margin for the year was 8.9% compared to 9% last year.

We have been actively managing our trade working capital, which we define as inventories and accounts receivable less accounts payable. During the fourth quarter, we reduced trade working capital by $27.5 million to a year-end balance of $201.2 million. This compares to $199.5 million in the prior year-end. Higher inventories and lower accounts payable were partially offset by lower accounts receivable. As we continue to balance inventory with the improved service levels that were achieved in 2018, we expect to lower our finished goods inventory in 2019, while maintaining our improved service standard.

Depreciation and amortization amounted to $9.9 million in the quarter, which was a decrease of $2 million from the $11.9 million during the fourth quarter of last year.

For the full year 2018, capital expenditures were $45.1 million compared to $47.6 million in 2017. For the full year, depreciation and amortization was $44.3 million compared to $45.5 million in 2017.

We had available capacity of $71.6 million under our ABL credit facility as of December 31, 2018, with $19.9 million drawn in loans outstanding and cash on hand of $25.1 million. In 2018, we paid down $4.4 million of our term loan B debt and $3.1 million of an external debt held in Portugal. The business environment we experienced in the latter part of 2018 was a perfect illustration of the importance of our balance sheet strength in our industry, reinforcing our focus on reducing debt, as our balance sheet strengthens -- strength remains an important competitive differentiator within the industry.

The decision we announced today regarding our operations in China is yet another example of how we approach our business and our capital stewardship. It continues to differentiate us from our competitors, with our customers and with our investors. As noted in our press release, we are commencing a process to evaluate our strategic options for our business assets in China. This is a continuation of our ongoing exercise to optimize our manufacturing and supply network to deliver customer value and achieve our strategic objectives, including deployment of capital to better drive shareholder value.

In 2017, we consolidated our furnaces in Holland and intentionally walked away from some sales that were driving negative margins. In 2018, we replaced equipment in one of our U.S. factories that had been cost-disadvantaged with new equipment that produces largeware products for our growing business-to-business channel.

While local sales in China have been softening in recent years, Libbey was able to leverage the plant in 2018 to support the U.S. demand, while we are rebuilding 2 of our largest furnaces. Now as our assets in China are approaching the next major investment cycle, we believe it is the right time to reevaluate their future prospects to drive shareholder value versus other uses of our vital capital.

Moving to Slides 8 and 9, I will provide a more detailed review of each of our reporting segments, which are the U.S. & Canada; Latin America; Europe, Middle East and Africa, or EMEA; and Other.

In the U.S. & Canada segment, fourth quarter net sales were $132 million compared to $138 million in the fourth quarter of 2017, a decrease of 4.6%. While the decrease versus prior year can be accounted for when you back out the large new restaurants' (inaudible) that we noted in Q4 2017, this result was well below our expectations at the start of the quarter.

As Bill mentioned earlier, we experienced a drop-off in sales in our foodservice channel late in the quarter caused by a combination of lower-than-normal year-end purchases by some distributors and isolated discounts -- deep discounts from -- offered by some of our struggling competitors, which both consumed our customers' buying budgets and drove margins temporarily lower.

Net sales for the full year of 2018 in USC were $483.7 million compared to $481.8 million for the full year of 2017, an increase of 0.4%. Our B2B business helped drive overall growth in the year and offset the lower sales in the foodservice channel.

Fourth quarter net sales in Latin America were $38.1 million compared to $41.8 million in the fourth quarter of 2017, a decrease of 8.9%, or a decrease of 6% excluding currency fluctuations, as a result of lower volume and business-to-business channel as well as unfavorable product mix in the retail channel. Net sales for the full year of 2018 were $148.1 million compared to $144.3 million for the full year of 2017, an increase of 2.6%. Our B2B business in Latin America showed signs of continued improvement during the first 3 quarters of 2018, as we continued to gain traction. However, in the fourth quarter, results in this business declined by $3.5 million year-over-year. This decline during the quarter was partially a result of the timing associated with specific programs that were moved earlier in the year and partially a result of our decision to discontinue selling an OEM product that was delivering unfavorable margins. Additionally, sales to certain South American countries were impacted by the economic and geopolitical turmoil in those regions.

In our Europe, Middle East and Africa segment, net sales were $34.7 million in the quarter compared to $36.8 million in the fourth quarter of 2017, a decrease of 5.7%. Excluding the impact of currency, net sales decreased 2.8%. Net sales in the quarter were lower primarily as a result of lower volumes in the foodservice and business-to-business channels.

Net sales for the full year 2018 were $138.4 million compared to $126.9 million for the full year of 2017, an increase of 9%. Excluding the impacts of currency, sales in the region grew 5%. The full year results underscore the improvement and continued progress in the EMEA region.

In Other, which primarily represents our operations in Asia Pacific, net sales were down roughly $200,000 or 3.1% in the quarter. Currency had a substantial impact during the quarter as sales were up 1% when excluding the impacts of foreign exchange. Net sales for the full year of 2018 were $27.6 million compared to $28.8 million for the full year of 2017, a decrease of 4%.

Turning back to the consolidated company results. Slide 10 walks through the adjusted EBITDA performance impacts in the fourth quarter and full year 2018. In the fourth quarter, adjusted EBITDA was $16.2 million compared to $24.2 million in the same quarter last year. Our fourth quarter 2018 results were negatively impacted by $1.8 million of currency as well as $1.7 million of higher utility costs. Operating results and margins in the fourth quarter were negatively impacted on a number of fronts and underabsorption -- as the underabsorption of overhead cost, product mix shifts in the U.S. and Canada region and pricing pressures weighed on our results.

Full year adjusted EBITDA was $71 million compared to $70.6 million last year. The sales impact on earnings improved by $14.5 million, but was offset by lower operating activity, including $7.5 million of furnace downtime and $6.6 million of higher shipping and storage costs, in addition to increased benefits costs and higher utility cost.

In the fourth quarter, we continued to invest in important strategic areas of our business while maintaining a competitive strength to our balance sheet, ending the year with CapEx at -- of $45.1 million, a bit under our guidance, demonstrating that we did, as with SG&A, proactively respond when the market conditions became challenging.

In 2019, we are committed to continued discipline with our capital investments, with particular focus on cash flow generation. Our plan includes a meaningful reduction of the CapEx expectations we set at last summer's Investor Day. We continue to treat every dollar as an investment. And as noted earlier, this includes the news that we communicated last night that we are beginning a strategic review of alternatives for our business in China, as we approach the end of that furnace's life. However, planned investments in our critical growth areas, such as new product innovation, expanded digital capabilities and our ERP initiatives, will continue. We have made great initial strides in our ERP implementation, making good progress on our foundational work, on master data management and developing a fulsome scope and approach with our partners at Microsoft.

In a pilot project, we went live with a portion of our ERP that supports the U.S. e-commerce platform. We have continued to build out our detailed project plans and fully evaluated what the improvement of the systems will do for our company. We firmly believe that we will drive significant efficiencies allowing us to deliver sustained improvement of our long-term operating performance.

Our ERP initiative will move into higher gear in 2019 as we get into larger scope areas. This investment is critical to driving top line growth and margin improvement going forward. We anticipate that once fully implemented, our ERP will help us achieve a run rate benefit of $15 million to $20 million annually, as we are more responsive to customers, streamlining our back offices and manage our operations more effectively.

Now I will turn the call back over to Bill to discuss our outlook for next year and provide some concluding remarks. Bill?

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William A. Foley, Libbey Inc. - Chairman of the Board & CEO [5]

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Thanks, Jim. 2018, despite a particularly difficult December, was a year in which we made important progress on strategic initiatives toward maintaining and growing our position as one of the strongest players in the global glass tableware industry. This progress, however, was somewhat overshadowed at the end of the year due to the turbulence we and others experienced as macroeconomic uncertainties buffeted our business channels. The reality is that this uncertainty reinforced every aspect of our strategic plan and the steps we are taking on the commercial and manufacturing sides of our business. We do not get to choose the economic circumstances that we go to market in, nor can we affect the macro factors that will shape this landscape, but we can drive the opportunities that are within our control and drive strategies that will ensure our long-term performance of the company.

We expect the uncertain political and global economic conditions that affected our business at the end of 2018 to remain present in the first half of 2019. We anticipate a possible slower economic environment overall for the year as compared to 2018. We'll respond to -- we're responding with an outlook that reflects this environment and are committing resources on only the most important actions required to continue our long-term vision, while ensuring that we stay focused on delivering cash generation.

Our outlook for the full year 2019 includes the following: net sales increase in the low single digits on a U.S. GAAP basis compared to full year 2018; adjusted EBITDA margins between 8.5% and 10%; capital expenditures in the range of $35 million to $40 million; and SG&A as a percent of sales expected to be approximately 16%, including our continued investments in e-commerce and our ERP implementation.

At the beginning of this presentation and in our press release, we announced that our Board of Directors has approved a plan to pursue strategic initiatives with respect to our business in China. We'll now immediately begin a review of strategic alternatives with respect to this business, including a potential sale or closure. When we opened our manufacturing plant in China 12 years ago, operating conditions in the Chinese market were quite different. Many of the assumptions on which our strategy was based have changed. Market conditions for our products are not the same and the operating environment is more challenging. Our plants require intense focus and hard work from our associates and over time, they require significant capital investments to maintain effective operating conditions.

Furnaces, when they reach the end of their useful lives, require a significant capital to replace them. We undertake these large investments regularly as a part of the management of our global network of facilities with the assumption that market conditions will generate an adequate return over the life of the furnace. The decision to rebuild our assets must always be weighed against the market conditions to which these plants are dedicated. These investments are weighed against other opportunities the company has to profitably deploy capital and drive shareholder value. The furnace at our Chinese facility is approaching the end of its useful life. As we consider current operating conditions and the uncertain future for the next 8 to 10 years, we believe it makes sense to consider our alternatives very closely.

In closing, we remain committed to our Creating Momentum strategy with continued commitment to drive innovation and growth through new product development. Our success in 2019 will be predicated upon our ability to consistently adapt and develop differentiated products to our customers, while improving our operating and plant performance to support improved margins. We're constantly evaluating our business deploying energy and resources into new markets and business opportunities. We expect that achieving this goal will allow us to appropriately position our product lines and margin mix and effectively move away from highly commoditized product platforms.

We made considerable strives as a company in 2018 during a turbulent time in our competitive environment, and we'll continue to execute on our strategy dedicated to improvement of our operating performance throughout 2019. We're ending the year well positioned in the marketplace, and we expect to stay on track with our long-term financial and operational goals.

With that, we'll now turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Lee Jagoda with CJ Securities.

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

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So just starting with the issues that impacted foodservice in Q4. Can you talk about how much of that was transitory versus structural? And assuming switches don't just flip back to where they were before, how long do you expect these issues to persist?

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William A. Foley, Libbey Inc. - Chairman of the Board & CEO [3]

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Of course. Actually, we began to see a little bit of choppy water sort of the week after Thanksgiving and it exacerbated itself. We had planned programs in place with a number of customers. Shortly into the beginning in the month of December, they began to pull back the commitments they'd made. So this hit us very quickly and really to the point where we didn't have a lot of time to react.

We've seen -- as the quarter has opened up, we've seen that business continue to come back. Our margins are strong. We've implemented our price increases. We're getting our price increases in. So we think it was a short period of time. It was exacerbated by a very large order that went to one of our large distributor customers in the Northeast of significant consequence. We know where it came from, what it was, but it was something that the competitor had a particular business reason for making that decision. The pricing on that product was very low. We didn't offer the same thing, and we didn't get that business. So we think it was a short period of time. It was -- we're not seeing any decline in demand at this point in time that we're concerned about. So it was just a very, very unusual set of circumstances in the month of December at this point in time.

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

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Okay. And then if I look at Slide 10 of your slide show where you do the EBITDA walk from 2017 to 2018, there's a couple of negative items, specifically the downtime of $7.5 million and the ship to store (sic) [ship and store] of $6.6 million on a year-over-year basis. If I look at 2019, are either of those expected to turn into positives 2019 over 2018?

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

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Lee, it's Jim. I think if you look at year-over-year and I break those two down separately, downtime from a furnace rebuild standpoint will, obviously, be lower. I caveat that with, we are going to drive through this year and ensure that we focus on cash generation. So we're going to -- as we maintain our service levels, we're going to work to bring down inventories. So we will be taking some discretionary downtime, especially as I look into the first half to see how the year starts to play out, which is not tied to furnace rebuilds, but will offset some of that downtime pickup you'd expect.

From a ship and store standpoint, the big drivers looking at are couple of things. Some of that was the internal transfer freight that -- as you might expect, we used a lot of the capacity last year in China to offset the furnaces being down in the U.S. As you recall, we've rebuilt 2 of our largest furnaces in the U.S., 1 in Toledo and 1 in Shreveport. And rather than build big inventories ahead of that, we were able to use excess capacity we had in China to support it, but we obviously had a lot more shipping and handling cost to manage those influxes of inventory and move them around the globe. That will come down.

The increasing ship and storage cost that we have inside retail in our e-commerce business, though, is increasing some and that's a good thing. In many of our other channels, customers pickup, so we don't see a lot of outbound freight; whereas in our 3PL model, in some cases, we pay external freights and in some places we don't. So it's a mix, but I would expect to see that ship and store come down year-over-year.

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

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Got it. And if I could sneak one more in. As it sits here today, obviously, working capital didn't change a whole lot going from 2017 to 2018. Do you have a view on changes in working capital in 2019 that you hope to achieve?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [7]

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We are working to bring it down in the neighborhood of approaching $10 million from a guidance standpoint. And again, we worked really hard. And as we talked throughout the year, last year, we invested both in process and in inventory to ensure that we can differentiate ourselves with service. As we're getting into a better cadence in those processes, we're going to maintain that same service level, but bring inventories down.

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Operator [8]

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

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [9]

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I wanted to just come back to a comment that Bill made. You talked about margins being strong, bouncing back. And I wanted to see if you could provide some color on that because the guidance for the year of 8.5% to 10% adjusted EBITDA margins is lower than the guidance that you provided for fiscal '18 at the end of November, which was the lower end of 10% to 11%. So I'm having a hard time reconciling what you might be seeing today with what you're guiding to if you're feeling like we're seeing the business bounce back. And so what does that mean that we saw in December? I mean, was December just an absolutely severe compression of margin, and now we've seen things bounce back, so they look better on a relative basis? But I'm also having a hard time reconciling the guidance from November to the guidance today for 2019 if we've seen a bounce back.

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [10]

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Sure thing. Jeremy, this is Jim. Let me start off and then maybe Bill can clean up a little bit. So a couple of things. One, as you noted, we widened the range of guidance just because quite, frankly, as you saw in Q4, our business is becoming a little bit more unpredictable. And being responsible, I think, that was prudent. That said, I think to your point, we saw compressions in margins in the fourth quarter, especially in the last part of the fourth quarter that were deeper than we expected. But as Bill noted, the market, I think, is giving us value for the service levels we're providing. We are seeing our price increases go through as smooth as or better than they did in previous years, meaning we're getting less pushback. So we're expecting to improve margins.

So I think what you're reacting to on the guidance is, we're just being a little more cautious because, quite frankly, we've disappointed you very much recently and we're trying to allow for the choppiness that we're seeing in the market.

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William A. Foley, Libbey Inc. - Chairman of the Board & CEO [11]

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Yes. I would echo Jim's comment. We did a review of the -- we do a review of the business every Tuesday morning. And one of the things we talked about yesterday was, where is the -- where are we be globally on price increases sort of around the globe. And at this point in time, every business unit has their price increases in place. They vary by region, as you might expect. Latin America's, for example, are higher because they're dealing with more inflationary pressure there. But in the U.S., in particular, frankly, I was a little bit surprised that they've gone in as well as they have. Typically, that's a war, and they've been relatively well accepted.

It's -- given what happened in December, I mean, I would be less than candid if I didn't tell you, I was surprised by it, Jim was surprised by it. We did not see this coming. And there were just -- there just weren't any signs that we could react to, and by the time it hit us, we were out of response time. But it was big, but it was transitory. Our margins in foodservice as of yesterday have -- are about at the normal levels we would expect them to be, within the 0.5 points one way or the other. I don't remember the exact number. Our B2B margins are up. Our retail margins are improving. So that looks good so far.

So getting price to hold is very important. I think the thing that we're seeing as a result of all the competitive noise in the marketplace is that as this occurs in the marketplace, their customers are now coming to us. And we have a very long list of new business opportunities that we're trying to tackle right now that we think are going to provide growth for us this year. Obviously, can't get into any of the details, but it's -- it comes to us -- we typically see it first in B2B because that's the shortest development cycle. And we have a very long list of new products, new product that's in B2B. We've picked up some significant gains in retail already this year that we had anticipated that were takeaways on a competitive basis. And we're also -- we also have a number of programs going on in foodservice that we think are going to be significant shifts. And there's a -- the reason for that is two, essentially; one, our customers view the supply chain of our competitors to be very unstable. Several of them have asked us, are we going to be on your priority list when if we go into allocation? That's sort of what's in their mindset at this point in time.

So there are -- there's a lot of shifting going on. There's a lot of noise in the marketplace right now. But what we're hearing is, is that people are coming to us for the service performance we've provided. They can count on it. Our order fill -- our OTIF is 90%. Our order fill rates are in the 96% to 98% on case fills. So they're getting great service from us. That is making a difference.

So we've got to work through all this. We're in a war. This is not an easy war, and we've got to sort of stay the course, continue to invest, be conservative in our commitments, control our capital like crazy, which we're doing, and be very mindful about the things that we're investing in. And it's essentially, if you were to talk to anybody in the company now, they tell you there are 2 things: continue to drive the digital growth of the business; and implement ERP, because we've got a huge savings attached to ERP. It's the most important single product -- project for our operating improvement and cost reduction. And the world is moving to a digital environment at an ever faster pace, and we're moving to be on the front end to that, not being reactionary, as we've been thus far.

Our e-commerce work in retail is making a difference with new customers. We had a strategic review of digital yesterday. And we're told that, by a very large customer, we're the only company they have been exposed to who can deliver to them all of the services they require to get product to their customers. That's giving us advantage. This commitment to prime badge, 48-hour service, the content we provide, all the things we've done have made a huge difference or are making a difference in how we're able to get volume in the marketplace. We've just got to slug through this war. It's not -- it's challenging, but people are focused against it. We're doing the right things with the business to be conservative. I think we have to do all those things and keep going the way we're going because we think -- we believe, based on what we're seeing in the marketplace, it's working.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [12]

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Okay. Let me shift gears here and talk about the strategic review in your Chinese operations. One, can you give us a sense of time frame for when the Board expects you to have that resolved? And two, have you had any interest in selling the facility, the plant or operations at this point?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [13]

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Jeremy, it's Jim. So a couple of things. As we noted in the press release, we noted a period of 12 to 18 months as kind of -- as the time frame for the review. And again, as we mentioned previously, getting this done as we go through the last parts of that furnace's life to either make decisions on a sale or closing it or reinvesting in it has to happen in that window before we have to commit capital again. So that kind of the time bound nature of it. Obviously, we can't comment on any market processes we might be in around the asset, though.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [14]

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Is there any concern about -- it generates about $7 million a quarter in sales? Is there any concern that that -- those sales levels could be impacted for the same reasons that you're talking about uncertainty with some competitors benefiting your business, [is] there a risk about uncertainty on the continuation of operations to sales?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [15]

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I think there is, obviously, a concern. And we're focused, though, on supporting all of our customers, to include our customers in China and in Greater Asia. I think that the process still has to go through its course. So our team in Asia is working through that right now.

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William A. Foley, Libbey Inc. - Chairman of the Board & CEO [16]

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I would add, I just think it's too early. We didn't announce it in China until last night. So we know how that -- the initial communication take place -- took place. The sales teams are working with our customers now. We know that that's already started. So it's just a little bit premature to give you a lot of detail here.

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [17]

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And our team in China does a great job. I mean, they operate -- the plant operates very well. It's just at this point in time, when we look at the utilization of that asset, we have to think really hard about it, as you'd expect us to do.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [18]

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Okay. And then I wanted to come to -- I don't think you provided specific cash flow guidance for the year. But in terms of thinking about free cash flow, I know you provided some CapEx guidance. As we think about the last couple of years, cash flow has been a little bit negative in both of those years. Can you give me a sense, Jim, for your cash flow projections, kind of the range of cash flow outcomes this year assuming that the CapEx guidance comes in and sales and margin guidance comes in line with expectations?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [19]

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Sure. I think if you look at how we've shaped the plan, which, as I noted in my prepared remarks, was tighter than we had talked about over the summer, both on CapEx and a bit on SG&A as well as we continue to trim what we can and still make sure we're delivering on the things that really make a difference. So with CapEx coming down, as we noted, between $35 million and $40 million versus the $40 million to $50 million range we had been looking at originally, and in my earlier note to the prior question around working capital, we're operating at a better process now. We believe it will run through the year and continue to serve at high OTIF levels, but at the same time drive a reduction in inventories and trade working capital in the neighborhood of $10 million.

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Operator [20]

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Your next question comes from the line of Lee Jagoda with CJS Securities.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [21]

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One day, they'll get it right. So just going back to the questions on China, is there any way you can give us sort of a sense of how much sales that -- how much sales were generated globally from product you manufactured in China in either 2018 or a run rate basis, or some sense of how much product is actually made in China?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [22]

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Sure. I mean probably the markers I pointed to are -- I mean, the sales in our Other segment are predominantly what we see coming out of our China facility. There's a little bit of import coming in from other regions. The 2018 results, as we discussed earlier, were dramatically impacted by us leveraging that asset, so that we didn't have to build large inventories in advance of the furnace rebuilds in the U.S. As it calms down to a more normal level, you would see the sales we see in Other as more of a run rate.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [23]

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So again, the sales in Other are sales that are sold in China, but how much of the -- how much revenue was generated by exporting product from the China facility that hit other revenue lines?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [24]

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Some, but not a great deal. I mean, that plant and its operations is designed to serve Asia as a local market. From time to time, we do use it as a low-cost manufacturing asset for some products. The issue right now is that there's those sales that have been getting a little more tight, to delever that asset to a point where we have to really look at the reinvestment thesis.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [25]

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Okay. And then just switching gears to the lower CapEx guidance. Can you give us some examples of the discretionary CapEx that you're choosing not to do, just so we have an idea that it's not harming the medium- or long-term overall business by kind of skimping today?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [26]

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No, sure. Let me talk about some of the things that are definitely in there. We always have some furnace work, and we will have that work and we'll continue to do it. We just don't have the very large furnaces this year. We are still investing, obviously, in ERP. We are investing in a few discrete projects, which are targeted to give us long-term productivity improvements in some of our processes, and where we have anything related to safety or when things -- very important things to plant maintenance, obviously, those are being funded. There are some projects where we look at it from a developmental standpoint on long-term capabilities, on capacity, which right now is not a problem, or on redeploying assets that we would look at better timing for.

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William A. Foley, Libbey Inc. - Chairman of the Board & CEO [27]

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I think you should know that there are -- there's still plenty of capital for new product development. There's plenty of capital -- the capital needed to get ERP implemented, is in there. There's some additional dollars for a little bit for digital, not a lot of capital, because most of that's not capital -- capitalized. So we don't think we're cutting back and taking muscle here. We're just spreading out, if anything, and being more judicious.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [28]

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Okay. And then last one from me. I know electricity and gas look like a headwind this year. Can you talk about like the hedges you have in place and your expectation for those costs in 2019?

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James Charles Burmeister, Libbey Inc. - Senior VP & CFO [29]

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In general, our hedging process is mostly around natural gas. What we do is, we layer them in, so a higher percentage up close and the lower percentage further out, more to dampen the spikes to allow us to get pricing in the market. We don't take very large positions on a long-term basis to make a bet, because, obviously, I guarantee we'd probably be wrong. But what we do do is put shock absorbers in place to make sure we dampen spikes and allow us to react to the market. Electricity for us in many of our markets is harder to look at and hedge. And as you look globally, I think over the last 5 years we've seen a decent improvement in natural gas, especially in the U.S. Some regions like Europe still tends to be challenged. Electricity has come up and offset that almost 1-for-1 if you look at it on a 5-year basis. So we watch both closely.

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Operator [30]

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This ends the Q&A session -- portion of the call. I would now like to turn it back over to Bill Foley for closing remarks.

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William A. Foley, Libbey Inc. - Chairman of the Board & CEO [31]

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Okay, everybody. Thanks for your time today. We'll look forward to talking to you individually throughout the next couple of days. Thanks, everyone.

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Operator [32]

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This concludes the Fourth Quarter and Full Year 2018 Results Conference Call. We thank you for your participation. You may now disconnect.