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Owens-Illinois (OI)

Q4 2010 Earnings Call

January 27, 2011 8:30 am ET


Albert Stroucken - Executive Chairman, Chief Executive Officer, President and Member of Risk Management Committee

John Haudrich - Vice President of Investor Relations

Edward White - Chief Financial Officer and Senior Vice President



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Previous Statements by OI
» Owens-Illinois, Inc. Q2 2010 Earnings Call Transcript
» Owens-Illinois, Inc. Q4 2009 Earnings Call Transcript
» Owen-Illinois, Inc. Q3 2009 Earnings Call Transcript

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the O-I Fourth Quarter and Full Year 2010 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. John Haudrich, Vice President of Finance. You may go ahead, sir.

John Haudrich

Thank you, Angela. Good morning, and welcome, everyone, to O-I's full year and fourth quarter 2010 earnings conference call. I'm joined today by Al Stroucken, our Chairman and CEO; Ed White, our Chief Financial Officer; and several other members of our senior management team.

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Today, we will discuss key business developments, review our financial results for the fourth quarter as well as the full year and discuss future trends affecting our business in 2011. Following our prepared remarks, we'll host a question-and-answer session. Presentation materials for this earnings call are also being simulcast on the company's website at Please review Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Unless otherwise noted, the financial results we are presenting today relate to adjusted net earnings, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the appendix to this presentation. Note that our financial reporting now treats our Venezuela business as a discontinued operation. Therefore, our current and prior-period financial results exclude Venezuela. More details are included in the appendix.

I will now turn the call over to Al, who will start on Chart 2.

Albert Stroucken

Thank you, John, and good morning. 2010 was a year of transition for O-I as we completed our multiyear program to repair margins and shifted our focus to expansion in fast-growing emerging market. You can see the impact of this strategic shift in our financial results.

Segment operating profit increased more than 8% from the prior year. This increase reflected both our margin repair efforts as we completed our 2010 North American restructuring program as well as emerging market growth, particularly in South America. Higher operating profit was offset by additional non-operating costs including pension and interest expense. As a result, O-I reported full-year 2010 adjusted net income of $2.60 per share compared to $2.61 in 2009.

Volumes improved in most of the markets that we serve in 2010, especially South America. Shipments also increased across nearly all end-use categories including wine, spirits and food. Here in the mature markets was the notable exception as consumption was down primarily due to continued high unemployment. In total, shipments from continuing operations were down about 1%. Our shipment trends reflect additional volume from acquisitions and volume loss tied to customer contract renegotiations that supported our margin restoration efforts. Excluding these factors, our underlying shipments were up 2% from 2009, which was in line with gradually improving consumption trend. Globally, lower manufacturing and delivery costs reflected the improved operating rate and footprint savings from restructuring activities, which more than offset cost inflation.

The expropriation of our two plants in Venezuela was unexpected and unfortunate development. However, we are optimistic about the future contributions of our 10 newly acquired plants and the three new furnaces we built this year to serve fast-growing markets in South America and Asia.

Most of the developments I discussed regarding full year 2010 also apply to the fourth quarter. Fourth quarter 2010 adjusted earnings were $0.45 per share compared to $0.43 in 2009. Segment operating profit increased more than 25% over fourth quarter 2009. This improvement was mostly due to higher capacity utilization as the inventory correction we conducted in late 2009 did not repeat, given our positive growth outlook for this year.

Overall, our average fourth quarter selling price was consistent with prior year. Globally, our total shipments were flat with the fourth quarter 2009, while underlying shipments were up 2%, similar to our full year trends.

In the fourth quarter, we completed the acquisition of three plants in China, including one in Guangdong and two near Beijing. We also opened a newly constructed furnace in Auckland, New Zealand.

Looking to 2011, we expect higher shipment and production level. This reflects strong growth and expansion in the emerging market. Sales will benefit from organic growth as markets continue to recover. We are also investing in our own sales and marketing innovation capabilities. Part of the strong growth we experienced in our South American region this past year was attributable to a new robust sales and marketing program. We are now implementing this leading practice across all regions in 2011. Further, higher selling prices will partially offset additional cost inflation.

Free cash flow should improve significantly in 2011. We expect lower restructuring charges and capital expenditures now that we have completed our recent footprint initiatives and invested in new capacity during 2010 for future growth. Overall, 2011 free cash flow should approximate $300 million. Expansion in the high-growth markets will remain our top use of free cash flow.

Now let's review our operating performance on Chart 3. Here, we show segment operating profit and margins for the company, as well as for each of our four regions. Full year profits are on the left and fourth quarter results are on the right. Our full year 2010 segment operating profit was $964 million, up $73 million from last year. Margins improved to 14.6% from around 13.5% in 2009. Favorable foreign currency translation represented $60 million of the year-over-year profit improvement. Most currencies strengthened against the dollar, which helped offset the impact of a weaker euro. Segment operating profit was comparable with the prior year for most regions with the exception of South America, which posted a significant improvement from 2009.

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