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Edited Transcript of LBY earnings conference call or presentation 2-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Libbey Inc Earnings Call

TOLEDO May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Libbey Inc earnings conference call or presentation Tuesday, May 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Charles Burmeister

Libbey Inc. - CFO and VP

* Kim Hunter

* William A. Foley

Libbey Inc. - Chairman and CEO

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Conference Call Participants

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* Christopher McGinnis

Sidoti & Company, LLC - Research Analyst

* Jeremy Hamblin

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

* Lee M. Jagoda

CJS Securities, Inc. - Director

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Presentation

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Operator [1]

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Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Q1 2017 Libbey Earnings Conference Call. (Operator Instructions) Thank you. Kim Hunter, Treasurer and Vice President Investor Relations, you may begin your conference.

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Kim Hunter, [2]

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Good morning, everyone, and thank you for joining us for Libbey's First Quarter 2017 Earnings Conference Call. Libbey's press release and supplemental financials were distributed this morning and are available on the company's website in the Investor Relations section. We're hosting a live webcast of today's call, which can be accessed on the same section of the website. The replay of today's call will be available on our website for 7 days. Before we get underway, I'd like to say that today's call includes financial information with respect to 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, 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.

Also, the 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 introduce the members of the management team here with me today: Bill Foley, our Chief Executive Officer; Jim Burmeister, our Vice President and Chief Financial Officer; and Ronni Smith, our Vice President and Corporate Controller. I will now turn the call over to Bill.

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William A. Foley, Libbey Inc. - Chairman and CEO [3]

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Thanks, Kim. Hello, everyone, and thank you for joining us this morning. Before we get started with the review of our first quarter performance, I'd like to take a moment to formally welcome Jim Burmeister, our new Chief Financial Officer. Jim joined us at the end of March, and we're very excited to have him on our team. He is a graduate of the U.S. Naval Academy and spent 5 years as an officer of the Marine Corps. He has extensive operating and finance experience from significant companies including Rubbermaid, GE, Owens Corning, and most recently, the Andersons. And I can tell you that it's great to have him here, and he's getting up to speed very quickly.

I'll begin today with a review of our performance in the first quarter and then I'll hand the call off to Jim to discuss our detailed financials before I make some closing comments. A couple of weeks ago, when it became apparent that our profitability would be significantly lower than expectations, we announced preliminary first quarter results citing continued challenging market conditions that I discussed on our fourth quarter call. As we indicated in February, we were expecting lower profitability during our first half of 2017 as a result of reduced fixed cost absorption due to 2 planned furnace rebuilds, foreign currency impact, as well as the initiation of technology investments that are predominantly focused on the buildout of our e-commerce platform. These factors did negatively impact our first quarter performance and in this challenging competitive environment, we sold a less profitable product mix than planned. Additionally, we experienced negative impact from normal fluctuations in the value of our Mexico natural gas hedges, for which we do not elect cash flow hedge accounting treatment.

In the U.S. Foodservice business, first quarter net sales were down approximately 4%. Negative U.S. restaurant traffic trends have been impacting large [chain] restaurants for some time and are driving consolidation and a number of store closings. On a positive note, our sales volume to the channel increased slightly during the quarter, despite a decline in traffic as reported by Black Box.

First quarter volume benefited from growth in our dinnerware and flatware sales, the result of our ongoing efforts to increase share. However, profitability of these source product categories was negatively impacted in the first quarter by some short-term supply issues, which we're addressing. We continue to be encouraged by our growing traction in additional foodservice categories beyond restaurants and bars, like travel and tourism.

In our U.S. retail channel, market conditions remain very challenging as large retailers continue to react to the accelerated movement of consumer purchases to the Internet and delayed purchases to control inventory levels. According to NPD, we maintained our #1 position in the U.S. casual beverageware category during the quarter despite this lower store traffic.

We did achieve volume growth in the channel during the first quarter, although at an unfavorable price and product mix as we continue to operate in an environment of aggressive price competition, including that from foreign competitors. In the short term, these market conditions are impacting our profitability. We have the strongest balance sheet in our industry while many of our competitors are experiencing significant financial distress. It's hard to speculate whether the financial difficulties of competitors will result in permanent reductions to capacity, but as customers in our retail and foodservice channels seek to improve security in their supply chains, we are getting an increasing number of opportunities to replace products sold by troubled competitors. We're encouraged that the category -- while the category is under pressure, top retailers are increasingly looking to Libbey for differentiated products to help them stay relevant with consumers. We're fortunate to be competing from a position of strength, and we're taking advantage of that position by investing in new products and e-commerce capabilities to grow market share while others may not have that flexibility.

Last quarter, we mentioned that we'd be launching a record number of new products this year. As planned, we launched over 200 new products at the International Housewares Show (sic) [International Home + Housewares Show] in March, and we plan to launch an additional 300 products targeted at the U.S. Foodservice market at the National Restaurant Association later this month. I'm pleased to report that customers were impressed by the quality and increased level of innovation displayed in our booth at the houseware show, and we look forward to sharing an even a larger number of new products at NRA. A majority of these products will be ready to ship both -- to both retail and foodservice customers in the third quarter of this year.

On our last call, we shared that our technology investments for e-commerce and ERP over the course of the year were expected to increase adjusted SG&A as a percent of net sales by about 2% as compared to 2016, with that spending increase primarily attributable to the e-commerce initiative.

We spent approximately $3 million initiating our e-commerce project in the first quarter. To respond more quickly to increased pace of change in the retail channel, we made a decision to start early on the project, which accelerated a portion of our planned spend in the first quarter that would've taken place later in the year. While our early start contributed to lower-than-expected profitability in the first quarter, the e-commerce project is tracking well, and we do not expect our full year investment to exceed our original estimates. It's important to clarify that we are not going at this e-commerce initiative alone. We've engaged an experienced consulting partner to help us get up to speed and become operational quickly. Our go-to market strategy in this initiative targets existing brick-and-mortar retailers as well as major web-based retailers, rather than direct sales to consumers. The investment is focused on creating a differentiated offering for retail e-commerce platforms and providing an opportunity for retailers to extend their isles.

We believe e-commerce represents a significant growth opportunity for Libbey over the long term. We believe releasing shelf space constraint should dramatically increase exposure for both existing products as well as new product launches. We also expect to gain access to some market sectors where we currently don't play.

We are currently scheduled to go live in late summer or early fall. As noted in our last call, the investment is part defensive and part offensive, but ultimately is an investment that we need to make to ensure the long-term health of our business. While our e-commerce initiative will allow us to be a better partner to both traditional and web-based retailers, we're also getting strong positive feedback on our efforts to become a better marketer by bringing differentiated new products from our enhanced new product development process. Innovation is more critical than ever in the retail environment to achieve better price points and improved margins when prices for existing products are hard to come by.

Turning to Latin America. Net sales and volumes were down in the quarter as Mexico's economy has been impacted by U.S. policy uncertainties and the fact that markets in South America remain slow, as they were throughout 2016. Mexico was also one of the locations where the 2 furnaces are currently being rebuilt, reducing profitability in the first quarter due to unabsorbed fixed costs in furnace downtime. That furnace is now back in full production. Our Latin American team is working to improve profitability with a focus on product mix and has already implemented pricing actions across all channels for improved margins.

As expected, our furnace consolidation project in EMEA is also contributing to lower margins in the first half due to manufacturing downtime. As we reported earlier, we made a strategic decision to walk away from lower-margin business there to improve our profitability.

In EMEA, this decision was facilitated by the intentional reduction in production capacity at our Netherlands facility. With the expected midyear completion of the project, our facility in the Netherlands will be sold out for the first time in 14 years that we've owned it. As a result of these actions, we expect noticeably improved operating results in the second half of the year. We're also continuing to analyze opportunities to better balance capacity with demand in our other geographies.

In response to disappointing performance in the first quarter, we're taking proactive measures to protect the strength of our business. We've already identified and begun to commit actions to reduce cost by approximately $5 million over the remainder of this year through a mix of SG&A and operating expense reductions. About half of these cost reductions represent current year cost controls, with the remainder contributing to lower base cost structure. We've also identified a number of capital projects that can be avoided or delayed, and we've reduced our 2017 capital plan to the low end of our previously guided range. We believe these actions will ensure our ability to make progress in our key strategic priorities; maintain our dividend, subject to the approval of our board; and continue to reduce our debt this year.

In conclusion, we're operating in a very challenging domestic -- in very challenging and domestic global market conditions. And we believe that the size and scale of our business and the strength of our balance sheet enables us to withstand current challenges while taking strategic actions to grow share. We believe our initiatives will help us respond and adapt to the challenges in our industry and to improve our long-term performance.

Now I'll turn the discussion over to Jim to detail our first quarter financial results and revised outlook, provide an update on our balance sheet and capital allocation. Jim?

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

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Thank you, Bill, and good morning, everyone. I'm very happy to be here at Libbey, and I look forward to meeting and speaking with many of you over the course of the next few months. While I am new to the company, I am very familiar with the company and its business. Growing up in Toledo, I have always recognized Libbey as a great brand with great products. As I worked throughout nearly 30 years around the country and around the globe and particularly, in the past decade, while I have been back in the Toledo business community, I've continued to see Libbey's progress and its growth as a global company. I'm grateful to join a company with such deep tradition and a strong legacy within the glass industry. During my discussions with Bill and other members of management as well as members of the board, I was very encouraged by the opportunities that we see in front of us and the resolve and support that we have to achieve them. I am eager to contribute the leadership skills and business insights that I have developed in my prior roles, and I'm here with a great team of finance professionals here at Libbey, and I'm eager to help lead in achieving our company's strategic objectives.

Today, I'll begin by reviewing our first quarter financial results in each of our reporting segments, which are the U.S. and Canada, Latin America, EMEA and other. We recorded net sales for the first quarter of 2017 of $173 million compared to $182.8 million for the first quarter of last year, a decrease of 5.4% year-over-year. Excluding $3.8 million of currency impacts, net sales were down 3.3%. In the U.S. and Canada segment, first quarter net sales were $109.3 million compared to $112.1 million in the first quarter of 2016, a decrease of 2.4%. Net sales in the retail channel decreased 7.1% or $2.1 million, primarily due to unfavorable product mix and partially offset by higher volume. Foodservice net sales were also lower than prior year, decreasing 4.1% or $2.5 million due to an unfavorable price and product mix. The decline in both our retail and foodservice channels were driven by a competitive pricing environment and some supply-chain issues. Partially offsetting these declines was a 9.7% increase or $2 million in business-to-business net sales, primarily driven by higher volume.

First quarter net sales in Latin America were $30.7 million compared to $34.2 million in the first quarter of 2016, a decrease of 10.2%. Excluding $2.6 million of negative currency impact, net sales declined by 2.7% year-over-year. Reported net sales in our business-to-business channel decreased 12.5% or $2 million, driven by lower volume and unfavorable currency, partially offset by favorable mix of products sold.

Region's retail channels of sales were also lower than the prior year by 10.2% or $1.6 million due to lower volume and unfavorable currency, also partially offset by favorable pricing mix of products sold. Foodservice net sales were flat in comparison to the first quarter of 2016.

In the EMEA segment, net sales were $25.3 million in the quarter compared to $27.9 million in the first quarter of 2016, a decrease of 9.1%. Excluding currency impacts of $1.6 million, EMEA net sales decreased 3.3%, primarily due to softness in the retail channel, resulting from increased competition and our strategic decision to exit lower-margin business in that region.

In Other, which is -- primarily represents our operations in Asia-Pacific, net sales were down $1.1 million in the quarter or 12.4% compared to this prior quarter -- prior-year quarter. Excluding currency impacts, net sales declined 9.9%.

Returning to the consolidated income statement, our gross profit during the first quarter was $30.3 million compared to $40 million in the same quarter last year. Gross profit as a percentage of net sales was 17.5% in the first quarter compared to 21.9% last year. The primary drivers of the year-over-year difference in gross profit were a $5.9 million impact of downtime from the 2 planned furnace rebuilds; $3.4 million from sales, primarily from unfavorable price and product mix; and the negative currency impact of $1.3 million, primarily related to the Mexican peso.

First quarter adjusted sales, general and administrative expense was $33 million, up $3.8 million or approximately 13%, driven primarily by our technology investments and increased marketing expense. The prior year first quarter SG&A figure included a $4.9 million charge related to executive termination cost, which is excluded from adjusted selling, general and administrative expenses as a special item.

Interest expense for the quarter was $4.9 million compared to $5.2 million in the same quarter last year. Also, the company recorded an income tax benefit of $3.2 million for the first quarter compared to a benefit of approximately $100,000 in the same period in 2016. The company's effective tax rate was 32.9% for the first quarter compared to a negative -- 23.8% in the same quarter last year. The change in effective tax rate was driven by a swing from a large Mexican peso transition losses that affected the tax position in our first quarter 2017 compared to a large translation of gains for the same period in 2016, as well as charges -- changes to the mix of pretax income generated in tax jurisdictions with varying tax rates.

For the quarter, we recorded a net loss of $6.6 million compared to net income from approximately -- of approximately $700,000 for the first quarter of 2016. As a result of these factors, first quarter adjusted EBITDA, as detailed in Table 1 of today's press release, was $6.2 million compared to $22.9 million in the first quarter of 2016. Our adjusted EBITDA margin was 3.6% for the first quarter of 2017 compared to 12.5% in the first quarter of last year. The primary drivers of the reduction in adjusted EBITDA compared to last year are those previously discussed for gross profit and adjusted selling, general and administrative expenses.

We are prudently managing trade working capital, which we defined as inventories and accounts receivable, less accounts payable. And we're able to reduce it by $28.4 million to $188.3 million from March 31, 2016. The decrease was a result of positive impacts of lower accounts receivable and inventories, as well as increases to accounts payable.

We had available capacity of $89 million under our ABL credit facility as of March 31, 2017, with no loans outstanding. We had cash on hand of $33.7 million, reflecting our focus on ensuring that we maintain ample liquidity and a strong balance sheet.

During the quarter, we invested $12 million in capital expenditures compared to $9.9 million in the first quarter of 2016. Depreciation and amortization amounted to $11.2 million in the quarter compared to $12.1 million in the first quarter of last year.

During the first quarter, we repaid $6.1 million of our term loan B debt as we are prioritizing debt reduction in order to get closer to our targeted leverage ratio of 2.5 to 3x debt of net cash adjusted EBITDA.

Now turning to our outlook for 2017. We have made some revisions to reflect our continuing macroeconomic and competitive challenges, the lower-than-expected profitability in the first quarter, as well as some additional cost reductions and changes to capital spending that we are taking in response to these conditions. For the first half of 2017, we now expect net sales to be down in the mid-single digits compared to the first half of 2016 and adjusted EBITDA margin to be in the high single-digit percent level. For the full year, we now expect net sales to be down by mid- to low-single digits compared to the full year 2016 on a reported basis, with continued currency headwinds. Adjusted EBITDA margin is expected to be in the 11% to 13% range. We have reduced planned capital expenditures to approximately $50 million, the low end of our previously guided range. Also, we now expect adjusted sales -- selling, general and administrative expenses as a percentage of net sales to be near to or below 17%. With these changes to our profit outlook, we now expect cash taxes to be around $4 million to $6 million.

As we consider the revised ranges for our full year outlook, there are a few key assumptions that we believe will contribute to seeing either the higher or lower end of that scenario. To achieve or receive the high end of the range, we would need to see signs of a rebound in the retail channel; our European segment will need to turn profitable; and our new product initiatives will need to gain substantial traction within the marketplace. The lower end of the guidance assumes that many of the challenges we are facing in the first half continue to impact us in the second half of the year, partially offset by recent cost controls and other strategic initiatives.

Even at the low end of the range, we would expect to drive cash flow to continue paying down debt and to execute on our capital allocation priorities. We continue to expect for the full year 2017 that trade working capital landed at year-end to be approximately flat to last year; pension expense of approximately $8 million, with cash contributions of approximately same amount; depreciation and amortization of approximately $45 million; and cash interest in the range of $18 million to $19 million. Our liquidity outlook continues to be strong. And subject to the approval of our Board of Directors, we remain committed to returning value to our shareholders in the form of a dividend. Also, in the current environment, we believe it remains prudent for us to continue to prioritize debt reductions as we focus on maintaining the strength of our balance sheet.

I would now like to pass the call back to Bill for some closing comments. Bill?

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William A. Foley, Libbey Inc. - Chairman and CEO [5]

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Thanks, Jim. While we do not foresee any improvement of the competitive environment in the near term, we're adapting to structural shifts occurring in our markets and we're making the appropriate operational and organizational improvements to help us reach our full potential. We're implementing strong cost controls, taking pricing actions in both the U.S. and Mexico to improve margins, continuing to enrich our product mix with new product launches, and the accelerated development of our e-commerce platform will help improve sales. We're confident in the strength of our market position, and we're seeing indications of increasing market share in several regions where customers are seeking to carry a supply as the health of several of our competitors remains uncertain. We have a great team in place, working to secure a successful future. And we believe Libbey will emerge from this environment as an even stronger leader in the industry. We look forward to providing updates in the progress of the business as the year progresses.

We'd now like to open the call for any 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 Lee Jagoda with CJS Securities.

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Lee M. Jagoda, CJS Securities, Inc. - Director [2]

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So can we start with foodservice. And I think I heard you say foodservice was down about 4% in Q1, but volume at foodservice increased slightly. So can you talk a little bit about the problems you're facing on the pricing side at foodservice in Q1 and maybe give a little more detail around the pricing actions you're taking in North America and Mexico, and how that might compare to what you normally take this time of year every year?

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William A. Foley, Libbey Inc. - Chairman and CEO [3]

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Okay. Foodservice is really -- it's seeing a little bit of softness on the dinnerware side. We have just raised prices, as you would expect. It was about a 3% increase. We expected to realize about 1.5% of that, pretty normal. On the Mexico side, we have raised prices in every single channel, and in some cases, in a range between 3% and 10%, depending upon the category. And in one particular category where our prices were particularly depressed, we are in the middle of trying to implement a second price increase that we expect to know a little bit more about over the next couple of weeks.

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Lee M. Jagoda, CJS Securities, Inc. - Director [4]

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And does the price increase in Mexico offset the currency negative on a year-over-year basis?

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William A. Foley, Libbey Inc. - Chairman and CEO [5]

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I doubt it, no, no. The currency fluctuations are still kind of a wild card for us just because of the -- when the election, as you know, when the election happened in November, the peso went from about MXN 18.50 to MXN 21.50 the next day. It's improved a little bit, but the Mexican economy really got spooked by the -- by not exactly certain what was going to happen with the wall, and that's created some issues. And then the South American market, primarily Venezuela, Argentina and Chile, still remain kind of in a general funk. I mean, that market has been pretty tough for a while.

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Lee M. Jagoda, CJS Securities, Inc. - Director [6]

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So just to go back on the foodservice pricing, did you have to cut price because competition was coming at these other -- at your customers? Or was there just a mix issue, what was the issue?

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William A. Foley, Libbey Inc. - Chairman and CEO [7]

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No. It was more mix, it was more mix. Having -- in fact, it was mix. I would tell you, having said that, we have seen some really irrational, insane moves in the last 10 days. One of our largest -- this will sort of give you a picture of sort of what the world's like, one of our largest, in fact, our largest competitor just lowered their price on business that they already have, which simply makes no sense whatsoever. I mean, it's hard to fathom frankly.

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Lee M. Jagoda, CJS Securities, Inc. - Director [8]

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Okay. And then can you spend a minute or 2 on the sourcing issues you encountered in Q1, and whether those are behind you and what you're doing to fix them?

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William A. Foley, Libbey Inc. - Chairman and CEO [9]

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Yes. It was essentially -- we -- demand was greater than supply. We had more takeaway of a couple of patterns and so we got behind. Supply chain didn't keep up with the increase in demand because it's essentially 120-day retail rate. So to meet some customer expectations, which we had committed to for a major chain, we had to dispense some extra money flying some inventory in, because we made a decision that it was more important to take care of the customer. And that's sort of the way we view that commitment. So it was expensive, it was the right thing to do, but so from a planning perspective, yes, we've taken the steps to solve it. But when we -- this doesn't happen very often, but when it does, we're always committed to customer service first. It happened a couple of times last year where a pattern gets sort of swept out in a hurry and the supply chain can't keep up, so that's all it was.

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Lee M. Jagoda, CJS Securities, Inc. - Director [10]

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One more for me, and I'll hop back in the queue. On the e-commerce initiative, you sort of outlined the amount of spending you plan to do this year. Can you break out that spending between sort of consulting stuff you're doing in house to either fix the packaging or get your IT up to speed? And then I guess, part of the process is you probably have to buy ad placement and get a more prominent position on places like Amazon's website.

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William A. Foley, Libbey Inc. - Chairman and CEO [11]

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Yes. Lee, I don't have that number here in terms of how much is consulting. I've got a gross number, but I don't have that number here. Suffice to say, we've sort of given you the benchmark around it and the cost for packaging and advertising and all that stuff is included in that total so far. I just don't have the detail.

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Operator [12]

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Your next question comes from Chris McGinnis with Sidoti & Company.

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Christopher McGinnis, Sidoti & Company, LLC - Research Analyst [13]

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So I guess just following up on the pricing. In the comments, you talked about raising price in some lines of business. Can you maybe just walk with the competitive landscape, walk us through the higher implement price increases when you've mentioned different parts are really unsustainable in pricing. Can you just maybe talk about anything in terms of the competitive landscape improving at any point? Or how long do you think that this stays kind of in this irrational zone?

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William A. Foley, Libbey Inc. - Chairman and CEO [14]

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Yes. It's a good question, and it's a complex answer. When we go through -- when we go through a price increase, we look at each category, each channel, each customer, each price, each product, and we take them one at a time by market around the world. There are some segments we can't -- we don't -- we get where things are too competitive and we can't get a price increase. In our core foodservice business, we'd once again gotten a price increase and I think this is 43 or 44 years out of 47 or 48 years, so that business continues to do well. In the retail environment, as competitive as it is, it's pretty tough to get a price increase, which was part of the reason why we wanted to bring out some innovative products that we could sell in the higher prices. Same thing in Mexico, we went sort of category by category. In Europe, the first thing we did was we got rid of probably 35 million units of demand that was incredibly unprofitable, and that was really sort of how we began to rebuild the profitability of that business. And we brought out a new product, several new product lines that we call the Value Line, which is really positioning higher value, better design, better packaging at the retail market in Europe. And that's raising our margins. It's just hard to see right now because there's so much noise in EMEA's income statement because of all the reconstruction going on. But that's just -- we expect that to ameliorate itself by the end of this quarter. So the thing that's I think most surprising to us is that our -- we know that in Europe, I don't know of any competitor in Europe today, not either in significant financial distress or has -- and has already filed for bankruptcy. We watch that like a hawk, frankly. We know what's going on with [Defrila] in Spain, we know what's going on with [Theravore], we know what's -- we've seen a recent article about ARC. And the published comments that we're seeing are that these businesses are either about to depend on the government to bail them out, they're short in cash, they don't know if they're going to be able to pay their salaries, I mean these businesses are really, really in trouble. But the thing that I think befuddles us is that in spite of all that, they're taking their prices down even further. And it mean it's just a race to the bottom, it makes no sense whatsoever. Now we just -- we saw a promotion at Walmart a couple of weeks ago, where an 18-piece set was retailing for $9.99. I'm not going to tell you what our cost was, but that's a price that makes absolutely no sense whatsoever. And the other thing is that where we -- I was talking to our guy this morning and the GM from the USC told me, I said, "Are you losing business anywhere?" He says, "I can't name one piece of business that we've lost that we wanted." Now we've walked away from some really ugly business, but -- and we're not interested in chasing everything for obvious reasons. But we've just seen some really, really ridiculous prices come out of the marketplace.

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Christopher McGinnis, Sidoti & Company, LLC - Research Analyst [15]

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I guess just to follow up on that and the change in the Europe -- European operations that you have, I think projected for the back half here to show some great improvement. What are you taking from that and maybe thinking about it for the rest of your kind of operations, are there significant opportunities to kind of restructure in terms of the plans and the furnaces to drive better profitability? Can you maybe just talk us through that?

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William A. Foley, Libbey Inc. - Chairman and CEO [16]

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Yes, it's a great question. What we've learned, obviously, was that if we could get our capacity in balance, I mean, first of all, it's important, if I try to frame up a reference for you, the business in EMEA, whether it's either the Netherlands or Portugal, has not been full out and has not been profitable since we owned it. So for the first time, we now have the Netherlands business sold out. And that's putting incremental interest in the part of our sales organization to sell the demand in Portugal. And so that business is also filling up. So what we've learned is to get rid of the low-value business, get our capacity in balance, raise -- change the mix, so we're selling a richer mix and all -- and as you'll -- I think you'll see, certainly in the back half of this year and clearly into 2018, a significantly improved business model. And I will tell you that we focused very hard on EMEA last year to try to get the SG&A right, to get all of our cost right, to get the product line right. We spent a lot of time trying to get our arms around that business because it was simply not performing, and we had a choice to make. We had to fix it or we had to do something else. And we knew that. So the other question is this, are there other opportunities where we might apply the same logic to our operations, and the answer to that is yes. And I will tell you that, that is something that we're taking a peek at, more than a peek, we're looking at right now.

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Operator [17]

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

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

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Actually, just wanted to start by making sure I understood the guidance for the first half of the year. And in context of Q2 in particular, I think that the guidance provided for the first half was sales down mid-single digit with adjusted EBITDA margins of high-single digit. I think that implies that Q2 sales would be in the, let's call it, $195 million to $200 million range. Did I catch that correct in terms of the first half of the year guidance?

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

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Jeremy, this is Jim. I think you're in the right ballpark. Obviously, as we sit here today with April just closing up right behind us and a lot of those challenges in the first quarter still persisted on into April, we're cautiously lining up the full second quarter, but that's what we put out there.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [20]

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Okay. And then in terms of thinking about the back half of the year because I think the high-end of your guidance, if I include Q2 and the remaining quarters, implies like a 15.5% EBITDA margin for the remaining 3 quarters, just based on the sales guidance, which again, we're interpreting as $750 million to $785 million for the year. It seems like getting even to that high end is a stretch unless some really great things are happening maybe in the U.S. and Canada, as well in Mexico. But what type of gross margins would you need to get to the high end of that guidance just in the second half of the year? Like 20%, 25.5%, 26%, what kind of gross margins would we need in the second half of the year to get there?

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James Charles Burmeister, Libbey Inc. - CFO and VP [21]

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Jeremy, I think you're in the right ballpark, and obviously, we've kind of outlined some of the things that we would need to see to get towards the upper end of the range. I mean, definitely some kind of [order churn] in the retail space. We would have to have currency behave a little bit better. And then also we need to start seeing the fruits of some of the key things we're pushing. Unlike prior years, we definitely have positions, new product introductions to have inventory available to ship in the back half of the year. So some of those launches from the houseware show is starting to get traction late in the third and into the fourth quarter. So I think some of those things are teeing up where we could see that but we are very cautious on that towards the lower end of that guidance, like I said in my prepared remarks, a continuation of just this long slog down, and the competitive pressures that Bill talked about across the broader economic environment for our main customer channels could be challenging, and we're doing things within our control to offset that but that gives you kind of the spectrum of the up and the down.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [22]

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Okay. It's not the first time in this industry that we've had financial distress. How long has it typically taken for these types of environment to kind of clear the decks and reset? I'd say, again, there have been many, many bankruptcies in this industry over the last 25 years, I think maybe what's slightly unusual about now is the number of companies that are in serious financial trouble. But historically, how long has it taken to clear the decks in terms of getting some rationality? I mean, is this something that could persist into 2018?

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William A. Foley, Libbey Inc. - Chairman and CEO [23]

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Yes. Let me tell you a little bit about what we know and what of course we don't know. I know, I can tell you that I know of 3 companies that are either waiting to find out whether or not they can get financing from the government before they close. I can think of 2 companies in Europe right now in that situation. I know of another company, a very large company, that has said publicly that they are short in cash now, may not have enough cash through the summer. We know that the other companies in Europe are either in financial distress or have been through bankruptcy. And your question is this, how many of them are going to go down. I think there's a chance that one or 2 might go this year. But that's pure speculation at this point in time, just given what they've been through. As you know, it is tough to kill a business, and there's always somebody who employs the greater fool theory and thinks they can go $5 million and run a glass plant and make it work. And that -- this industry seems to have been filled with those kinds of activities over a long period of time. I can't sit here and tell you, I mean, what's actually going to happen. Obviously, we know where these companies are, we know how distressed they are. It would appear as though some of them are getting it close to the end of their rope. But going to 2018, sitting here today, yes, of course, it could. But we'll know more. There's some of these things that are sort of bubbling up to their apparent conclusion over the next 90 days, at least based on what we've seen published. We'll know more in the next 2 quarters, I think, probably it's a fair way to understand it at this point in time.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [24]

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Great, that's some helpful context. I wanted to just shift gears and ask a couple of more questions on e-commerce. So I think what you've basically implied is the cost this year in kind of mid-teens, $15 million, $16 million, something like that in terms of the investments that you're making, running through SG&A. Wanted to get a sense of what the ongoing costs would be in running that business.

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William A. Foley, Libbey Inc. - Chairman and CEO [25]

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Yes. We're obviously still working through that. I can't give you an exact number yet, but it will be dramatically lower than what we're doing to invest to get this business started up.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [26]

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Okay. And then just as a follow-up, but related to e-commerce. One of the things that I worry about or have some concerns is generally speaking, when businesses move online and e-commerce, it's kind of the great platform for pricing transparency and price discovery. Ultimately, customers end up paying exactly what people are willing to pay for and not a whole lot more than that. Is there a concern that, even though I agree that you have to do this, you have to make the investments, is there concern that part of what's happening on the e-commerce side is part of what's driving prices down, because it allows more people all over the globe to get their goods into their customers’ hands? Any comments you can help me on that?

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William A. Foley, Libbey Inc. - Chairman and CEO [27]

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Yes. I have not seen that be the case at all. In fact, if anything, I've seen prices product at higher price points than you might find even at a retail in brick-and-mortar today. If you were to shop some of the more well-known and larger sites today, you see price points that are couple of times higher than the product might retail for. So we're not seeing what you're speaking about, although I mean, we're certainly aware of the problem and aware of the challenge, so part of our work as we've done this is to really study a pricing environment and pricing models. Some of the choices of the products we're bringing to market are intentionally going to have a higher price point, so that we can make sure we're dealing with all the costs associated with distribution. And so we're using the -- one of the great things about our product line is that it has the ability to put things together that have higher perceived value and a higher ticket. So we have 320-some SKUs that are going to come up first through our enhanced content campaign, and those are being selected and put together. It's a combination of existing SKUs and SKUs that we've introduced at the housewares show, they're going to be chosen for a richer mix. So we're careful about it, we're being where we need to be, we're doing differentiated configurations so that you can't do direct comparisons. Because you're right, I mean, the pricing is still the Wild West, and there are tools that you can use and ways you can construct your mix to protect your margin. But -- and the other thing we know, and in fact we've been talking about a lot over the last couple of days, is that we've got to get this part right because once you get your prices set, it's hard to move them around when you get them there even though there's the chance to do a lot more experimentation with pricing with the web than there is at retail. So we're clearly alert to the issue, we are clearly planning for it and our product mix is intended to protect the margins so we come out of the gate effectively. There's a lot of ways to do that.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [28]

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Great. One last one here, you have a couple of things going on, the first rebuilds you mentioned in Mexico and EMEA. It sounds like Mexico is done and you're just about finished in EMEA. Can you just give me kind of more color on the time lines of completion on that? And then also, you mentioned on the last call, the ERP system implementation. Could you get us an update on progress on that and kind of time to completion?

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William A. Foley, Libbey Inc. - Chairman and CEO [29]

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Of course. The Mexico furnace is up, operational, making good glass and all the 5 lines that are on it are fully operational. We reviewed the EMEA start up this morning. Right now, it's forecasted to start up a couple of weeks early. So we expect it to be operational yet this quarter, I think is the best way to describe it at this point in time. So those 2 have been -- those are 2 very large furnaces. They've been down a while, so we get them back up. And it will certainly drive up factor utilization. We're going to need the inventory for the fall, so we've got to get going. What's the other question?

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James Charles Burmeister, Libbey Inc. - CFO and VP [30]

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ERP.

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Jeremy Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [31]

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ERP.

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James Charles Burmeister, Libbey Inc. - CFO and VP [32]

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Yes, this is Jim, Jeremy. On the ERP, obviously we're in the planning phase this year and expect to start the project up in fall in 2018. As you can imagine, we're also trying to choreograph the demand on our broader resources, which a lot of them are similar to figuring out the e-commerce strategy, so those -- some of those efforts combined around, for example, data and how we interact with customers. But I'd expect to see those, as I know Bill has mentioned in prior calls, we've selected products, we have a good view towards a very standard, out-of-the-box deployment. In my prior lives I've seen quite a number of different platforms just deployed in many countries, and I definitely understand your concern about how long it takes to what the cost is, especially if we go into something highly custom. We are a great basic business, we make great products, we put it on a truck and we sell it to people. We don't have to make it more complicated than that. So with myself being a full 4.5 weeks into the job and our new CIO just starting full-time, it's top of his mind agenda.

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William A. Foley, Libbey Inc. - Chairman and CEO [33]

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Yes. The implementation is simply going to be a plain vanilla implementation. We're not going to do much customization, which is what drives up cost complexity and delays implementation. That's just going to be a -- this is going to be the KISS philosophy applied to ERP.

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Operator [34]

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Your next question comes from Lee Jagoda with CJS Securities.

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Lee M. Jagoda, CJS Securities, Inc. - Director [35]

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Bill, just one more question on e-commerce. And it's really around sort of when you joined the company, the strategy of retail was to drive innovation and new products to try to decommoditize the retail channel. And as you shift towards e-commerce and customers can't go and touch and feel the product, it just seems difficult that, that's going to end up being successful. So I'm wondering if the strategy is going to change at all, or how you expect to compete with some of the things you find online these days?

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William A. Foley, Libbey Inc. - Chairman and CEO [36]

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Good question. Key part of the work that we've been doing is sort of figuring out, okay, given what's being done from a content perspective, what do we do differently that creates a differential advantage. And there's a lot of things you can do, there's a lot of things that we currently do. I mean, today, our sales organization uses clip art to get our stuff up. I mean it's very rudimentary and it's not as well done as it needs to be. So what we are planning on doing is for -- we have a new category we launched at the houseware show called Urban Story. And it's a product line that's positioned to the way millennials live and entertain, and there's a lot of consumer research behind it. And there are different configurations, different sets for entertainment, for home use, for everyday use, for cooking, et cetera. So on that particular product, a, it's a higher price point, which we think will give us higher margins, but we're also going to be doing individual beauty shots, which you've seen on the web but for that particular category, we're also going to do video. And it's the combination of static images plus video where we need to tell a broader story that's built into our programming, built into our cost of implementation, and so we'll be doing that as we bring up this new content. And then along with that is a much more, I guess, intelligent, informed and practiced approach to the contents of the verbiage itself so that we tuck-in the right kind of search engine optimization, the right kind of words, so that people can find the products easier than they are today. So I don't expect these products, for example, will be we believe that they're going to be able to find homes in major mass merchandisers but we'll also be able to do them on the web. And in this case, the product line is broad enough with enough SKUs that we can mix up the assortment. So that gives us some flexibility that we wouldn't have had otherwise. We can do that with Urban Story, we think we can do that with ovenware, which were 2 major launches we had at the houseware show. But we need that flexibility to be able to do that. I mean that's really the secret, one of the secrets in growing brick-and-mortar, and also growing on the web is being able to differentiate what you have so that you can put different pricing strategies in place. And that's where we really sort of started off with those programs, and there'll be different configurations that will support both.

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Operator [37]

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And there are no further questions at this time. I'll turn the call back over to Bill Foley for closing remarks.

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William A. Foley, Libbey Inc. - Chairman and CEO [38]

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Okay. Thanks, everybody. We appreciate the time and the quality of questions, and we understand what our challenges are. We know what's ahead. We know we're operating in a tough environment. But as Jim has said to me, we're the best house in a bad neighborhood. We've got some pretty tough competitive situations, frankly, nothing like I've ever seen in terms of the irrational nature of what's going on. It's very, very unusual. So for us, we're staying focused, we're staying on our -- staying on strategy. We're going to expand our ability to launch new products and implement e-commerce to be very mindful of cost, to continue to pay down debt and to do what we do well. And I think that has proven well for us over time, and I think it will in the future. So we appreciate your support through this really tough time. I assure you the lights are burning late in Toledo, Ohio, as we work to get this business where we want it to be, where we all want it to be. Thanks very much.

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James Charles Burmeister, Libbey Inc. - CFO and VP [39]

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Thanks.

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Operator [40]

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