Operator
Good morning. My name is Mike, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2015 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]
Thank you. I will now turn the call over to Libbey’s Vice President, Chief Financial Officer, Sherry Buck. You may begin your conference.
Sherry Buck
Thanks Mike. Good morning, everyone, and thank you for joining us for Libbey’s fourth quarter 2015 earnings conference call. Before we get kicked off, I would like to introduce you to Kim Hunter, our new Treasurer and Vice President of Investor Relations. As many of you know, we’ve been in the process of recruiting for this position since last year.
Today, we’re pleased to introduce you to Kim, who joined us from Ingredion, and has extensive treasury experience in both industry and banking. Kim has been supporting our treasury activities on an interim basis for the past several months. And we are very happy she is decided to make the move to Toledo from Chicago in order to join us full time.
With that, I’ll now hand the call over to Kim.
Kim Hunter
Thank you, Sherry, and good morning, everyone. I’m very happy to be part of the Libbey team and I’m looking forward to connecting with many of you during our engagements with the investment community in the coming quarters. 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 seven days. Before we get underway, I would like to say that this conference 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, 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 new Chief Executive Officer; Sherry Buck, 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.
Bill Foley
Thanks, Kim. Hello, everyone and thank you for joining us for review of our fourth quarter and full year 2015 operating and financial results. I’m pleased to be leading today’s call and looking forward to meeting with many of you in the months ahead.
In terms of the structure of today’s call, I’ll start by giving you all a better of sense of the things I focused on during my first few weeks in the job. And what our priorities will be in the year ahead. Sherry, will then walk us through our financial results for the quarter, and our 2016 expectations and then we’ll take your questions.
I’ve had a chance to speak with many of our shareholders over the last several weeks. For those of you I haven’t spoken with, I’ll take a few moments to quickly share my background. I’ve been in the Glass business for over 30 years and I’ve been on Libbey’s Board since 1994, serving as Independent Chairman since 2011.
In fact, one of my first management assignments of my career was developing new products for a competitor of Libbey’s, Anchor Hocking which is today part of everywhere globally. I have a significant foundation in the Glass business and have a thorough understanding of the markets, customers, channels and technologies in this industry.
After I joined Anchor, after I left Anchor I joined Rubbermaid before that was acquired by Newell, where I learned firsthand how to grow businesses and how to achieve customer standard product innovation. At that time, Rubbermaid was first on the Fortune most admired list, primarily because of the innovation it created and its consistent earnings performance.
As you can imagine, it’s been busy first few weeks. I had the opportunity to meet with many of our Libbey associates to gauge where we are and where we can improve and to talk to a significant number of our customers, as well as, visit several of our plants. We have a great team here and I’m looking forward to working together to drive positive change to the business.
A number of reasons, I’m excited about the opportunities we have. We’re committed to delivering greater shareholder value by improving our operating performance, driving profitable growth and innovation, and strengthening the financial position of the company.
Our strong market position in our businesses in the U.S., Canada and Latin America, particularly in our foodservice channels was a cornerstone of our Own the Moment strategy. We are committed to building and strengthening our retail business, retail and business-to-business channels. As we positioned Libbey as a stronger, branded consumer products company and customer facing company but we have a good bit of work to do.
While we clearly have opportunities to improve our business, we’ve got a great foundation and had a number of accomplishments over the last year that I’d like to take a moment and highlight. First I’ll start with our Own the Moment strategy. It is strategically the right long-term vision for the success of the business. Shifting to a faster moving, consumer and customer based company will help us expand our growth profile and offer greater margin expansion opportunities, which we believe will create stronger value for all of our stakeholders.
As you know, we’ve invested in recruiting strong talent in a number of critical roles throughout our organization. Adding and augmenting capabilities in a number of areas but with a focus on sales, marketing, and our supply chain. We have a committed team that’s energized where the opportunities ahead. You hear me talk about the need to develop new mindsets. So we can more effectively address the changes, the challenges facing our business. To do that, we’re going to need our entire organization to embrace this effort. And I think we have the right team in place to do that.
Third success story in 2015 was a strong and consistent results in our foodservice business. As most of you know, we’re the number one supplier of glass tableware and the number two supplier of dinnerware and flatware to the foodservice markets in the U.S. and Canada.
Despite, lackluster trends in restaurant traffic throughout 2015, we continue to outgrow our competitors in foodservice, achieving price realization and growing market share. Sherry, will talk about this in more detail. But growing 8% in constant currency terms, in our foodservice business in 2015 is an accomplishment about – which we feel very good. Importantly, our foodservice business will continue to be a critical focus of our efforts throughout 2016 and beyond.
Perhaps the biggest highlight of last year was the unveiling of the new glassware that we’re manufacturing in our facility in Shreveport, Louisiana, our Signature and Master’s Reserve product lines. Please note that we will begin to refer to the Perfect Signature lines, as the Signature lines. This new high brilliant, elegant glass collection uses the company’s proprietary ClearFire glass formula, which represents the combination of over two years of research and development.
This is the finest, beverageware made in America, and these new capabilities, and new product offerings complement our existing product portfolio with truly exceptional high-end stemware and drinkware, with characteristics more typical of traditional handmade crystal.
To extend our product and brand offering and will open opportunities across our customer base around the world. We’re seeing solid improvement in our production yields and will continue to focus on improving efficiencies throughout the year. As we run new products on this line.
Our sell into new customers and foodservice distributors is progressing well. Over the coming months, we will expand our offering as we bring this new technology to market. We believe this product will be a big success and will contribute to our overall growth objectives. Importantly, it represents a technology platform that will support process innovation for years to come.
Lastly, during 2015 we maintained our strong balance sheet and returned more than 50% of our free cash flow to our shareholders. Our approach to capital allocation will remain the same, and will continue to balance investing in our business, reducing debt and returning to capital shareholders through dividends and share repurchases.
Those are some of the key successes in 2015. But, as an organization, as we look forward to 2016 and beyond, there are a number of things we can and need to do better. There are three areas where I intend to drive improvements in our results. First, we need to strengthen our organizational capability to develop new and innovative products. Second, we need to be – we must get much closer to our customers. And third, we need to simplify our business. None of these are easy fixes, but we need to drive, change and I’ll spend more time talking about why these three priorities are so critical to our long-term success.
First, as an organization, we simply are not as innovative as we need to be. We’ve had some great additions recently like our high quality plastic product line for travel and tourism. And the Signature and Master’s Reserve product lines but that’s not enough to drive the results, I believe we’re capable of achieving.
There are a number of exciting things we can do with glass, as well as other materials. There are other market segments and adjacent categories such as bakeware, storageware, and hydration where we need to develop a stronger presence. Some of these items, we started working on already, and some will need further development. We need to make faster decisions in product development and improve our product lifecycle process and be much more responsive to emerging trends.
To become an innovator, we have to listen more to the needs of our customers, as well as being responsive to changing consumer trends. One of the things that challenge our sales and marketing teams with is to build more frequent and consistent contact with our customers, that we better understand their businesses.
We need to listen better, and start finding more ways to respond to them with a yes, rather than it doesn’t fit the way we do our business. We’ve had some challenges, executing in the retail channel over the past year, and I expect us to begin to shift the trajectory of the results in that channel. As well as on our B2B business segment.
As many of you know, we’ve invested in marketing and branding efforts over the last year. It was clearly impacting our margins. Frankly, we didn’t execute this well. We didn’t have product on the shelves so consumers couldn’t find what we were advertising.
As a result, we were able to leverage the brand investment. Libbey brand is important, but we need to be certain that we have product placement with our customers first. And our 2016 plan, we will reduce and redirect some of the brand spending to focus on product development and innovation.
Another aspect of our business that we’ve been looking to address is more structural in nature. We’ve a complex supply chain network and portfolio of products that creates inefficiencies throughout our supply chain. So we’ll be attacking these aspects of our business throughout 2016, to begin to simplify our business.
I’ll conclude by saying, we want Libbey’s products to become integral components of the way consumers live their lives. We want to be there for customers at bars and restaurants on vacation at home. And with family and friends, where gift-giving holidays and other important life celebrations.
To make this to reality, we have to get close to our customers, to be more consistent and effective product innovators. And we need to simplify and move faster in today’s dynamic business environment. Fundamentally, we’ve started down the right strategic path in 2015, that we need to own the moment, we need to make own the moment of reality. We still have a lot of hard work to do. I’m looking forward to the challenge and have every confidence that we’ll progress against our core initiatives throughout 2016.
With that, I’d like to turn the discussion over to Sherry Buck, our Chief Financial Officer who will further detail our fourth quarter results and 2016 expectations. Sherry?
Sherry Buck
Thank you, Bill, and good morning everyone. I will review our fourth quarter financial results using our new reporting segment which has been modify to align with our operating structure. As a result of the hiring of our Chief Operating Officer.
The new segments are classified as U.S. and Canada, Latin America, EMEA and other. Of note, our U.S. and Canada segment now includes our U.S. and Canada Glass business and what we used to refer to as our U.S. sourcing segment and Latin America is now a separate segment. We will disclose 2015 quarterly results and three years of full year financial results, including the years 2013, 2014 and 2015 and our 10-K for the year ended December 31, 2015, which we plan to file on February 29, 2016.
We reported net sales for the fourth quarter 2015 up $219.1 million, compared to $231.4 million for the fourth quarter of 2014. This is a decrease of 5.3% year-over-year or a 0.9% decrease on a constant currency basis. For fiscal 2015, while net sales decreased 3.5% to $822.3 million, it represented 1.7% increase, excluding the impact of currency.
Most importantly, in the fourth quarter and throughout the year, we realized solid gains in the foodservice channel, despite weak traffic. For the year, our foodservice business grew 5.8% or 8%, excluding the impact of currency. And we achieved 11 consecutive quarters of volume growth. Net sales in our U.S. and Canada segment were $139.8 million, compared to $138.2 million in the fourth quarter of 2014, an increase of 1.1%.
On a constant currency basis, net sales were up 1.3%. Foodservice sales remained strong, growing 9% versus last year. Partially offset with reduction in net sales, primarily as a result of softness in the retail and business-to-business channels.
For a full year 2015, sales in the U.S. and Canada segment totaled $497.7 million, representing an increase of 3.2%, which was again driven by strong foodservice results. Due to the changes in our reporting segments, we will no longer be reporting U.S. sourcing on its own.
Just as a reminder during the first nine months of 2015, sales in the former U.S. sourcing segment were $67.5 million, representing growth of 13% year-over-year. Growth in that segment has been strong, as we had experienced 15 consecutive quarters of positive sales growth in the segment, to the end of the third quarter of 2015. We expect continued strong performance from that business in the future, but the growth rate should moderate in the near to mid-term.
Moving to our Latin America segment, as we shared last quarter we are seeing unfavorable macroeconomic indicators and an increase in competitive actions, particularly in the retail channel. These trends continued into the fourth quarter, as expected.
Net sales for the quarter in the segment were $40.2 million, compared to $48.5 million in 2014, a decrease of 17.1%. On a constant currency basis, net sales were down 5.8% during the fourth quarter. And on an annual basis, Latin America declined 1.3% on a constant currency basis, as it delivered $167.1 million in net sales.
Net sales in our EMEA segment decreased 13% to $31.5 million, compared to the prior year quarter. And excluding the impacts of currency, EMEA sales only declined 1.3%. For 2015, the EMEA segment delivered $122.7 million of net sales, which represented a decline of 1.4%, excluding currency, compared to fiscal 2014. These results were in line with our directional guidance and competitive conditions remain challenging in this segment.
Other net sales were $7.7 million during the quarter, compared to $8.5 million in the fourth quarter of last year, this reduction primarily the result of the decrease in sales in the Asia-Pacific region. On a constant currency basis, net sales decreased 5.7%, as a result of weaker sales in our foodservice channel in the Asia-Pacific region.
For fiscal 2015, sales in Asia-Pacific surpassed our expectations. Based on a solid first half of the year and delivered $34.9 million of net sales, which was an increase of 6.6% or 8.7% on a constant currency basis.
Adjusted gross profit as detailed in Table 1 of today’s press release decreased to $46.3 million, compared to $49.9 million in the prior year quarter. On last quarter’s call, we indicated that we expected an unfavorable impact on gross profit in the range of $3 million to $5 million during the fourth quarter related to lower production levels as a result of higher inventories.
Our adjusted gross margin was impacted at the low-end of that range from reduced production and currency continues to be a headwind in the quarter. These were partially offset by favorable price mix on our sales and lower input costs.
Adjusted gross profit as a percentage of net sales decreased 50 basis points from 21.6% in the prior year to 21.1% for the three months ended December 31, 2015. On an adjusted basis, fourth quarter selling, general and administrative expenses or adjusted SGA decreased $2.8 million or approximately 9% to $28.3 million, as compared to the fourth quarter of 2014, largely attributable to lower benefit costs. As a percent of sales, adjusted SGA improved 50 basis points to 12.9%, during the quarter, compared to 13.4% last year.
For the year, adjusted SGA increased $2.5 million, attributable to increased growth investments, partially offset by the lower benefit related costs. Adjusted EBITDA, as detailed in Table 3 of today’s press release was $31 million, compared to adjusted EBITDA of $30.7 million reported in the prior year quarter.
Our adjusted EBITDA margin for the quarter was 14.1%, which was slightly better than our expectations, driven by stronger sales. Adjusted EBITDA was unfavorably impacted by currency of $2.6 million, primarily related to the peso, which as many of you know has been under considerable pressure. Excluding that impact, our adjusted EBITDA margin would have been 15.3%.
For the full year 2015 adjusted EBITDA, as detailed in Table 3 of today’s press release was $116.1 million, compared to adjusted EBITDA of $123.4 million in 2014. Adjusted EBITDA margin for the year was 14.1% in line with our expectations. Currency headwinds totaling nearly $13 million were the most significant unfavorable impact on our margins. Lower production activity, along with investments in SGA was partially offset by favorable price mix and lower input costs. Excluding the currency impact, our adjusted EBITDA margin would have been 15.7% for the full year.
Interest expense was $4.7 million for the quarter, a slight decrease compared to last year of $4.9 million. We reported a tax benefit of $39.7 million for the quarter ended December 31, 2015, compared to a provision of $3.9 million for the quarter ended December 31, 2014. The benefit recorded for the quarter ended December 31, 2015 includes a tax benefit of $43.8 million, related to the reversal of substantially all of the remaining valuation allowance recorded against U.S. deferred tax assets.
In addition, the effective rate in both years was generally influenced by foreign earnings with differing statutory rates, bond withholding tax, accruals related to uncertain tax positions, non-taxable foreign translation gains and other activities and jurisdictions with recorded valuation allowances.
We had available capacity of $91 million under our ABL credit facility, as of December 31, 2015, with no loans outstanding. The company also had cash-on-hand of $49 million as of December31, 2015. During the quarter, we invested $6.7 million in CapEx, compared to $15.9 million in the fourth quarter of 2014. The reduction was a result of lower furnace repair costs and investments in new glass technology in Shreveport.
Depreciation and amortization amounted to $11.4 million in the fourth quarter of 2015, compared to $9.6 million in the fourth quarter of 2014. And finally working capital, which we define as inventories and accounts receivables less accounts payable as of December 31, 2015 was $200.8 million, which was $22.4 million higher than December 31, 2015. The increase was primarily a result of higher inventories, higher accounts payable, higher accounts receivable and lower accounts payable.
At this time, our inventories are still higher than we would like. They were planning for lower production during the course of 2016 at some of our facilities. The impact of reduced production is reflected in our 2016 full year outlook. On last quarter’s call, we shared that we will be recording a one-time pension settlement charge during the fourth quarter, treated as a special item, to remove our Dutch pension liability from our balance sheet.
As a reminder, the Dutch Central Bank, which governs pension administration in Holland, mandated companies across all industries to unwind direct ownership of company administered plans. We have liquidated the plan during the fourth quarter which resulted in a charge of $21.6 million of which $5.2 million was cash.
Now turning to our outlook for 2016, from a macro perspective, we are expecting a continued challenging economic environment, increasing competitive dynamics and currency headwinds. As a result, for the year we expect revenue growth of approximately 1% on a reported basis. We expect solid growth in our U.S. and Canada segment and foodservice channels.
Additionally, we announced a 5% price increase in U.S. foodservice glass in December that was effective February 15. Our segments outside the U.S. will be challenged on the top-line given the macroeconomic environment and currency headwinds.
In terms of our margin expectations, we expect full year adjusted EBITDA margins to be approximately 14%. We anticipate that the favorable impact of sales growth, improve production efficiencies and natural gas will be offset by rebuild of our variable compensation, other benefit related costs and currency.
As Bill discussed we see 2016 as a reset year for our retail business, which will offset some of the growth we expect to see in the U.S. and Canada segments for foodservice business.
Adjusted SGA as a percent of sales is expected to be in the low 15% range for the full year. We expect capital expenditures to be in the range of $50 million to $55 million, and we expect working capital to be flat with the prior year. Pension expense is expected to be approximately $9 million in 2016, with cash contributions of approximately $8 million.
We expect depreciation and amortization for the full year 2015 to be approximately $45 million. Cash interest should be in the range of $21 million to $22 million. As far as, cash taxes for 2016, we currently believe they’ll be around $5 million to $7 million, compared to $5.5 million in 2015.
As you look at how first quarter 2016 is shaping up. We expect reported net sales to be slightly below the prior year quarter, due to lower volume and currency headwinds particularly in Latin America. Adjusted EBITDA margin is expected to be approximately 10%, as a result of lower production and currency.
Now I’d like to spend a few minutes providing some additional context surrounding our capital allocation decisions over the course of the past couple of quarters. We remain committed to our capital allocation strategy that we shared last year, which is to return approximately 50% of our free cash flow to shareholders, through the end of 2017 and to repurchase the entirety of the remaining 1,50,000 shares of our outstanding authorization during that same timeframe.
During the course of 2015, we exceeded the 50% goal, a total capital return to shareholders through dividends and repurchases was $24.9 million. We repurchased 473,000 shares of our stock at an average price of $37.03 per share. For the year ended December 31, 2015 we paid nearly $10 million in dividends to our shareholders. Additionally, as most of you are aware, we recently announced a 5% increase to our annual dividends, from $0.44 to $0.46 per share annually. Our dividend policy reinforces our belief that the company will continue to generate strong predictable future cash flows and demonstrates our strength versus our competitors.
Our priorities for cash usage in 2016 remain the same. To fund and invest in our business, the second priority is to maintain a strong and flexible financial profile, which includes a goal to maintain net debt to adjusted EBITDA in the range of 2.5 times to 3 times over the long-term. Given the uncertain economic climate, we believe that it’s prudent to move this priority up in 2016. And that’s we have already made a debt payment of $5 million during the first quarter. And finally, we plan to return capital to shareholders through a combination of dividends and share repurchases.
I would now like to pass the call back to Bill, for some closing comments. Bill?
Bill Foley
Thanks, Sherry. The last thing I wanted to address specifically in today’s prepared remarks, the 2018 goals that we announced during our Investor Day last year. The world has changed fairly dramatically since those goals were set. And global economies have come under particular pressure over the last half of 2015. Our core foodservices business in the U.S. and Canada insulates us somewhat from some of these challenges, as we discussed today we have a number of key priorities to focus on the 2016, such that we can grow more aggressively in the future.
I have every belief that we will become $1 billion company with margins that can expand towards the 17% range. And we will deliver an industry-leading return on our investments. However, I’m not ready to predict a specific date today that we can accomplish these objectives. So for now, shifting these goals beyond 2018, and they will serve as a guide for all the decisions that we make.
In conclusion, we have a lot of important work cut out for us that we have a great – and we have a great brand, a solid foundation from which to build off of, and an excellent leadership team in place that I expected to drive real and meaningful change. I’m excited about leading this next step in our transformation, and look forward to reporting our successes in these initiatives over the course of the next year.
But now, I’d like to open the call for any questions you might have.
Question-and-Answer Session
Operator
[Operator Instructions] And your first question is from Lee Jagoda from CJS Securities.
Lee Jagoda
Hi, good morning.
Sherry Buck
Hi, Lee.
Bill Foley
Good morning.
Lee Jagoda
Can we start just on the retail side and maybe give us an update on the specific retail accounts that has caused the headwinds in the back half of 2016 and what’s being done at those customers to try to fix the problem and what are the timeline look like to try to get back on track?
Sherry Buck
Yes, sure. So we talked about some retail customers in the third quarter, a couple of those as you know were promotional activities in the third quarter for holiday season and as we talked about that would really kind of come around again in the third quarter next year. One of the accounts was a European account that was merchandising our product not in packaging and as we shared that decision has been changed and we’d expect that to come back, with not open stock in the second quarter. And I would say overall, as Bill mentioned in his prepared comments a real focus on reinvigorating customer contacts, understanding their business better and really focusing on how we’re executing and getting products in the retail channel
Lee Jagoda
Okay. And then just switching gears to your guidance of around 1% growth in 2016, what’s the underlying currency assumption you are making in that guidance?
Sherry Buck
Yes. So as you know our biggest impact of currency in 2015 has been the peso and to a lesser extent, the euro, so going into 2016 we looked at all the different bank rates and models and we have assumed a rate and 2016 for the full year related to the peso in the 17.5% range, the euro at 1.1%.
Lee Jagoda
At 1.1%, okay. And then one more from me and I’ll hope in the queue. Just looking at your CapEx in 2015 it was around $48 million, your guidance for this year is $50 million to $55 million versus the original guidance you had over the two-year period of somewhere between $55 million and $60 million a year. So I guess the two-part question is, what areas are you decreasing the spend versus your original expectations and are there any areas that despite your reduction you are actually refocusing and spending at a higher level?
Sherry Buck
Yes, so, I’ll first address the two-part first for 2015. So we came in a little bit lower than what we guided to and that was really a matter of timing of projects and being able to get those completed and somewhat of delay and push-out into this year, into 2016. Then overall, your second question of lowering for 2016, as we just did a real step-back, kind of given our business performance and really prioritized what projects were most critical to us for 2016 to get us positioned right and to moving forward. There is built into our 2016 CapEx, I won’t say we re-directed it but we do have some furnace rebuilds during 2016. So that was the reason why we are guiding higher than depreciation just our normal furnace repair cycle. And then I’d say yes, some dollars that if you want to say we’re focusing on, our growth opportunities, so being able to make investments and moulds or some machines that would support our growth objectives.
Lee Jagoda
Are those – I assume those are going to be primarily the U.S. and Latin America?
Sherry Buck
That would be a fair assumption.
Lee Jagoda
Okay. Thanks.
Sherry Buck
Thanks, Lee.
Operator
Your next question is from Kevin Ziets from Citi.
Sherry Buck
Hi, Kevin.
Kevin Ziets
Hi, thanks for taking my – hi, how are you Sherry? Just wanted to ask about the Latin American outlook, I know there was some commentary about competition. I think, in the third call you have said that – the gorilla [ph] was big – becoming more aggressive and I just – I was wondering, beyond the macro, whether you are seeing any changes in the competitive environment or anything to be optimistic about in the near-term?
Bill Foley
Kevin, this is Bill. I think that we are seeing that our efforts to go back and reengage with our customers is helping we think it’s going to help on the top-line. I would say that gorilla [ph] is every bit as competitive as it was last year and perhaps a little bit more so this year. But we have taken steps both with our product line offering, our new product offering, and we have made some changes internally in our sales organization to get closer to a couple of critical customers and we think that’s beginning to have positive benefit. So, we continue to put more pressure on ourselves to do better in that marketplace. I think there’s upside there. But we still have some work to do, but the current information we’re getting from Mexico is, I think pretty encouraging.
Kevin Ziets
Okay, that’s great. And then, on the U.S. sourcing businesses, is that less of a priority going forward? I wasn’t – maybe hear the comments very clearly but it sounded like maybe you are expecting less – lower growth out of that going forward. Is that a strategic change or is that just sort of, tough comps given the performance of the business for some of the – for such a long period of time?
Sherry Buck
Yes, Kevin, so, I’ll put a little umbrella around it. So, part of aligning that into the whole U.S. business is really to align our organization with our operating models as we broaden the U.S. kind of glass and sourcing together. There is no change in our strategic direction. In fact, it’s a very important part. It has been a big growth area for us with 13% growth in 15 consecutive quarters, so it will continue to be an area that will help deliver on the top-line and growth objectives. So it’s more a matter of continuing to comp at that kind of a level.
Kevin Ziets
Right, I guess I was wondering whether you are going to look for new licensing arrangements or and sourcing arrangements or if it’s just growth of existing licenses that you have?
Bill Foley
I think you should expect us well, I can tell you that we’re planning on increasing the scale of this part of the business and looking beyond – certainly beyond glass and ceramic into other materials. As we look at the new categories and as we look to taking on other segments of the identified opportunities that we’ve developed at this point in time, we’re going to be – need to looking at different kinds of materials from different producers from all over the world and we’re getting ourselves prepared to do that in a more aggressive way, as we speak.
Kevin Ziets
Okay. That makes sense. And then, I heard you talk about maybe shifting away from some of the branding initiatives of last year. Is that just a temporary issue until you can sort of get the production of, the Signature lines up to where you think they should be? And then therefore, you will be – the product will sort of be in the – or be available to meet customers’ needs or is it long-term decision to kind of move away from advertising?
Bill Foley
That’s a good question. I think the challenge for a company our size when you start spending advertising dollars at retail you have to have scale, and you have to have frequency to really impact and move a needle. So there’s that issue and then there’s – the second issue is making certainly you have product in place, so that when you advertise a product the consumer can go into the store and find it.
And that really requires that you have broad cross sections of distribution with particular product lines and so until we get ourselves positioned with that kind of distribution with some innovative new product across the market and across the different customer sets, I think we’ll be more inclined to re-direct those dollars towards innovation, to do the right kind of market research, to do the right kind of development and design. And then once we get those kind of products in the marketplace, then we can think about it.
I think the question we probably haven’t resolved yet is, what’s the balance between direct advertising and more Internet based usage of social media. But I can tell you that until we get ourselves in a position we have distribution, we’ll be putting dollars towards creating new product opportunities that we can get better placement and higher margins before we go start advertising.
Kevin Ziets
Okay. And but you are pleased with the other investments, I guess the other sort of sales and marketing investments that were made last year over the last 18 months or so?
Bill Foley
Yes. We’ve really I think stepped up our game on a number of fronts. We have a couple of positions that we’re trying to fill right now to round out our ability to do the right kind of market research, for example. We don’t have a person on staff to who does market research and we’re trying to find someone. And a lot of that gets outsourced but we still need somebody to help us figure out little bit differences between customer and consumer needs. So we have a couple of places to fill. Those expenses are in our 2016 plan. And they are pretty critical. We’re in the early stages of interviewing for that talent but we’re pretty close to where we need to be and the new folks we put in both in sales and marketing and in supply chain are beginning to make a real difference.
Kevin Ziets
Okay, great. Thanks for taking all my questions and good luck.
Bill Foley
Sure.
Operator
The next question is from Jeremy Hamblin from Dougherty.
Jeremy Hamblin
Good morning. Sherry, I wanted to start by asking a balance sheet question and get to this underlying issue that’s come up with working capital. $22 million drag this year, and the problem really started to crop up a year ago. I’m wondering, it sounded like from your guidance that you didn’t expect a lot of change on working capital to become kind of favorable and get back some of that $22 million. Why is it going to take so long to get this problem matured from an inventory standpoint, but not just inventory it’s also the payables and receivables? Can you just help me understand that?
Sherry Buck
Sure, Jeremy. Just to provide a little bit of context, so as we look at our working capital levels, there’s really two things that are driving them higher is we had unexpected softness in the second half of last year. And then as you know, we’re building a lot of new products so our Signature line, Master’s Reserve, all the sourcing products we’re doing with the artistry people – collection with our partners, we were expecting to increase our working capital on our inventory in 2015.
Since September 30, we did reduced inventory about $21 million and that was a combination of sell-through and lower production and if you remember the guidance that we given is that we were expecting to end up $10 million to $15 million higher, so we are about $7 million higher than what we were expecting, and that was largely due to really at the end of the year higher sales in December that’s driving our accounts receivable up, so that was a component of working capital that came in higher for us and we feel very good about our receivables. The next component of it is accounts payable. If you look at our comps year-over-year, I would say last year we had higher accounts payables, largely because of a lot of the CapEx spending happened at the end of the year, and the investments we’re making in Shreveport. So I would say that level was probably higher than what it normally is.
As far as, the next part of your question, Jeremy, for 2016, and what we’re looking at for working capital dollars basically to be flat, we are, as we said in our remarks, we are scheduling some downtime to help lower inventories. But at the same time, we have a couple of furnace rebuilds that we’re planning for, and when you have that, you got to have the inventory that you need to be able to fill service customers and managing those furnace up and down times. So that’s the rationale for why the working capital is essentially going to be flat in dollars in 2016. But inventory is an area that we’re focused on and if we can do better, we will, but that’s what our current thinking is.
Jeremy Hamblin
Okay, and then just want to clarify on guidance. I think you’ve said that your SGA rate, you’re expecting to be in the low 15s, did I hear that correctly?
Sherry Buck
Yes. That’s right.
Jeremy Hamblin
And in terms of gross margin performance in the flow throughout the year, would I expect that you are going to see drag at the first half of the year as we’re working through these inventory issues in terms of, when you had the furnace rebuilds are happening and expect to get some leverage in the back half of the year?
Sherry Buck
So at this point in time, really given feedback for our direction for the first quarter. If you think about the SGA component, typically because our sales are lower in the first quarter, seasonality-wise, the first quarter is the always lowest quarter. So your SGA as a percent of sales would be higher. But that’s really kind of all the comments I’ll make right now as far as seasonality and quarters for the year.
Jeremy Hamblin
Okay. In your first quarter, the guidance was 10% EBITDA margin, roughly?
Sherry Buck
Yes. Approximately 10%, right.
Jeremy Hamblin
Right. Okay, and then, Bill, just wanted to come back to, from a strategy perspective, it sounds like, the challenge the company has had it’s really been twofold, one, the retail segment has dramatically underperformed, as has the Latin American segments and it sounds like while you are seeing incredible growth on the foodservice side that most of the efforts are going to be fighting to recapture on the retail side and making some adjustments there. I think you have mentioned getting closer to customers.
Can you just elaborate a little bit more on how operationally we’re going to be able to see that in terms of – the Libbey won’t transform into a consumer good brand really any time soon. It’s not, people aren’t running into Best Buy, I mean, Bed Bath Beyond to, necessarily to buy Libbey’s specific glasses. But you are seeing success on the foodservice side. Is the focus in terms of thinking about those new lines or Signature’s line, the Master’s line, isn’t that really going to have a bigger impact more on the foodservice than on your retail segment?
Bill Foley
Yes, good question. I think it’s important to understand that – what do you say, U.S. as a proxy, although we have the same segments throughout the company. The foodservice retail and B2B and I think you should expect us to continue to drive very hard to attempt to gain share in foodservice business. We have a team of people looking very hard at that, a Master’s Reserve product line both in stemware and drinkware is beginning to get some real traction with a number of our distributors.
So I think, you should continue to expect us to push hard on foodservice where we have – let’s switch to B2B because that’s a second component. I think we have not resourced our B2B organization particularly on the sales side to the degree that we can. I would tell you that we have made changes organizationally there and they are focused aggressively on opportunities not only here and in Latin America, but also in Europe, so that team is working hard and we’re beginning to see some signs of opportunities developing there so we’re kind of excited about that.
So the third segment then is what about retail? As I look at retail, I see probably six or eight different segments that we need to attend to, and if I look at them on a good, better, best basis, there are probably 18 different product categories that we are to be good at, and I think we are good at two. To the degree that we can begin to change and redirect our efforts there, those six or eight different segments are places where we naturally can play every day with the technology we have or with our own ability to design and develop new product. So I think, a long story short, is we unwittingly, probably commoditized our approach to this segment of our business by not being as innovative as we could be with enhanced design and better development and, just better product development and innovation in general, I think we’ll do much, much better at retail.
I think you should expect us to be able to drive all three segments around the globe all at the same time and I think that’s part of what is happened. We probably haven’t had sort of a balanced focus on each of those elements of our business in this directly efforts, we just didn’t get kind of results we need.
So we’re going to be pushing really hard on all three, not just one. But foodservice, it’s important to remember acquisition in foodservice is a core, critical strength to this company, and we’re not going to stop developing or driving that business, as hard as we possibly can.
Jeremy Hamblin
Okay. Just as a quick follow-up on that, and in terms of thinking about 2016 specifically and, getting to that 1% growth net of currency impact, are we likely to see more of that growth or are you expecting to see more of that growth coming from foodservice or retail this year.
Bill Foley
This year I think it will come from foodservice. The problem with retail, as I think you know is, you’ve got to get into the retailer’s buying cycle and, they make their decisions sometimes 9 to 12 months in advance when they go out and change the listing, so that’s going to take a little bit longer for us to get there. To be totally candid we’ve had a pretty empty wagon on the retail side from the development perspective.
So we’ve got some holes to fill there, which we’re working on. And – but our foodservice business we’ve got a little bit bigger team in that part of the company and they are working there as well. So we may do some sharing of products where we can plans translate things that might have worked in foodservice over the retail and then we’re working on new segments on retail, as well, so it’s a push across the number of fronts.
Jeremy Hamblin
Great. Thanks for taking my questions. Best of luck this year.
Bill Foley
Great.
Sherry Buck
Thanks, Jeremy.
Operator
The next question is from Steph Wissink from Piper Jaffray.
Steph Wissink
Thanks. Good morning, everyone. We’ve handful of questions. Bill, for you, first to start and then a couple of housekeeping for you, Sherry, if we can. Just first, I think Bill on your prepared remarks you talked about a change in the mindset or the logic of the organization regarding speed and simplification. Can you just talk a little bit more about how you expect to execute that and kind of over what timeframe? What are some of the internal initiatives you are starting to do, whether incentive models or training modules that would help to really drive some of that improvements?
And then second, if you could just help us qualify kind of the retail environment, frame up your results in that segment relative to the broader category performance, just on because a lot of noise in the category right now and I’m wondering if you can just help us navigate some of the overall category performance versus what you reported. Thank you.
Bill Foley
Sure. In terms of the things we’re looking at internally to drive these results, in some cases it’s as basic as re-designing the sales compensation system for our USC organization, which we’re in the midst of doing. Specifically, what we’re doing is making their goals and their compensation more directly aligned with their own results, rather than have some of the additional modifiers that sort of take their eye off the ball. That work is being done now and I expect to see the review of that next week actually. So it’s that and when we talk about simplification of the business, we have a pretty complex product line. We have a very complex product line, and there’s opportunity to simplify our business, to improve our service, to reduce the size and scale of our product line, which will reduce complexity throughout the operation, actually throughout the entire system. The minute you take – you begin to take some products out that are performing where you’d like for them to be, of course you have to manage down the inventory, but the important thing is it takes cost out throughout the entire system.
So we’re looking at what we can do there to simplify the business. And so we’re looking at that and I think those are probably two examples of one on the revenue generation side and one on the operations side, what we’re working on, and that work is underway as we speak. The noise at retail, I think is a pretty interesting set of phenomena. If you look at what happened in retail last year you see, sort of the translocation of demands from bricks and motor to the Internet.
And while we do a lot of business in terms of e-commerce, we don’t do as much as, I think we will over time so you have retailers fighting hard for consumer traffic, for share of mind as a retailer, and they are going through, I think a significant amount of flux, which is creating a lot of noise in terms of their planning. Below all that, there is – if you walk through what I would consider the houseware section of retail, there’s a lot of private brand products and there’s a lot of branded product. We really sort of lost our – a portion of our branded share at retail and it’s moved to private label brands where we compete more on price rather than the value we create for the consumer.
What our attentions are going to be – will be to create branded Libbey products that can go into retail and solve problems of consumers that are more innovative, and to do that I think we can get – we have to bring better design, better packaging, better positioning et cetera, to the table. So we can take space away from products that aren’t performing. If you look at the section in housewares kind of in general, it’s not very exciting. It’s not very innovative and it’s sort of been stuck in neutral for a long. I think we’re trying to build the ability to change the pace of change there and to bring new opportunities to the marketplace and that’s where we’re going to get higher margins, better placement, more distribution and hopefully drive some shares result, hopefully that makes some sense.
Steph Wissink
That’s really helpful. Thank you. And then Sherry just – for you, first as on constant sales I think this was asked earlier, but maybe asking you a little differently how should we think about mix and input costs in 2016 relative to 2015. And then secondly on inventory quality, I know you talked a lot about the hang over or carry-over effect but can you just give us a sense of quality of the inventory that’s on the balance sheet? And then lastly, the capacity absorption, if you could help and qualify what that might been to the EBITDA hit in the first quarter? Thank you.
Sherry Buck
So taking your first question starting with 2016 and some of the drivers for us as we look at our – the growth that we have there and the EBITDA margins of about 14%, so we’re expecting to see I would say a positive from sales growth and price mix. We’d also expect to have some positive impact from production efficiencies and also positive from that gas. We will see offsets from that in the SGA line as we rebuild our variable comp and some other benefit costs and currency will still be a headwind for us during 2016. As far as Q1 and fixed cost absorption, I think that all that’s reflected in our direction at about 10% EBITDA margin for the first quarter, as reflected in there.
And then as far as inventory, we have inventories that we have are to service our customers and everything has – is it able to be sold and to sell to our customers, so we’ll be looking at our product portfolio, and could be making changes throughout the year, but, you know, it’s inventory that is saleable.
Steph Wissink
Okay. Thank you.
Operator
Your next question is from Chris McGinnis from Sidoti Company.
Chris McGinnis
Good morning. Thanks for taking my questions.
Sherry Buck
Hi, Chris.
Chris McGinnis
Bill, just quickly, it sounds like, at least on the retail sale, obviously little bit of attention today that I think you mentioned the 18 categories and two of them you do well but you also mentioned, maybe moving into other adjacencies, you just – and it sounds like putting a lot on the plate for the retail side. Can you may be just walk us through, you know, maybe some of those adjacencies and how they fit in and how much of that change, I guess the retooling of the machines or, you know, how difficult will that be to get into the new adjacencies?
Bill Foley
Absolutely – I think it will be a blend of things that we – buy on the outside and things that we can manufacture. I don’t think you should expect to see huge changes in our machine footprint. I don’t think it’s going to require other than moulds, and time and development costs, I don’t think it’s going to have a huge impact on CapEx, this is really about, I’ll pick serveware as an example or storageware as an example. If you look at what’s been done on and what exists on shelves today. Some of the products have been there for 15 or more years. They don’t reflect how the Millennials buys and shops, they don’t reflect how the Millennials lives and that group of the population, which is now I think the largest segment of the population in the country, views lives differently and we need to create products that responds to those choices.
So, if you look at that, you look at bakeware, you look at storage and serveware, the floral category, which is a category that we do a lot of business, we simply need to have – developed product offerings that bring the capability of improved design and better looks and better performance to the table. That could be innovation caused by combining silicon and glass for thermal resistance, so it could be more tempered products for better performance in cooking. It could be a combination of plastic and glass or stainless and plastic.
If you talk about the hydration category, that’s a category that is reflective of the way people’s lives have changed. We make glass beverageware, and that’s certainly a category of business, but if you really think about the way young people and in fact people in my age and everybody in this room’s age, we have our favorite mug that we put in, you know, the holder of our car and that gets taken everywhere all day long, and we don’t play in that business. So when we sell – a gift box of drinkware at 12.99 for eight, we could sell one insulated mug or one insulated glass for $12 or $19, there are even some that are in the market today for $39 from – rid get of the [indiscernible].
So their categories, that we need to bring some innovation, w can develop it, we can source it, we don’t have to –definitely have to all be glass the month that changes, really, what a consumers want and how do they use it and how can we use our marketing and distribution capability to get it to retail. We can’t be hung up on the material anymore. Having said that, we’ve got glass plants to fill so we’re always be leaning towards glass. But we certainly need to think about others materials, and other combination materials and we’re working down that road as we speak.
Chris McGinnis
Great. Thanks for the color.
Operator
Your next question is from [indiscernible].
Unidentified Analyst
Hello, there. I’ve just noticed that all the commodities movement in 2015, with natural gas had the worst performance. And I mean, I guess, I have two questions. One is I assume that there is only limited stickiness to that. And the second is, does it make sense for you to lot of stuff in the futures’ market?
Sherry Buck
Yes, it’s Sherry. We have a natural gas hedging program, where we hedge 40% to 70% of our nat gas requirements out to 18 months out, and we really do that to have predictability and less risk in our business, to be most predict our natural gas and in fact there in 2015, nat gas pricing was favorable to us as a company. In 2016, with the hedging program we have in place, we are hedged about 50% of our needs already and we expect that to be a favorable input cost for us for 2016.
Unidentified Analyst
I mean, how much do your customers follow this, so that it can stick very much. I mean, and how much you rollout just take advantage of that?
Sherry Buck
So I’m sure our customers are aware of macro markets and things that are going on, so as we look at our overall business model, other costs that go up during the course of the year and we use this to contain our costs and we make decisions about pricing and other things given our whole cost and product portfolio.
Unidentified Analyst
And just remind me – I’m sorry.
Bill Foley
I would add to that, so we have customers who are very aware of it and they certainly share their points of view and then we have some customers that don’t pay any attention to it at all, so it’s a case-by-case basis
Unidentified Analyst
Just remind me, what percentage are cost of goods, natural gas is?
Sherry Buck
It’s about 8%.
Unidentified Analyst
Okay. Well, enough to make a little difference. Thanks.
Operator
The next question is from Lee Jagoda from CJS Securities.
Lee Jagoda
Just a couple of follow-ups, first on – in terms of U.S. sourcing, because I would imagine that where a lot of this, new category growth will come from, you know, prior to re-segmenting, about 9% piece of your business as a percent of sales. If you look out two, three, five years, how big do you think the sourcing component of this company will be in that time frame?
Bill Foley
Boy, that’s hard to predict. I’m frank really, I’m not sure sitting here today that I can predict what it’s going to be in three to five years, I can tell you that we’ll use it as a tool to improve the breath and quality of our offerings. And it just – it really depends on how