Owens-Illinois, Inc. (OI)

Q2 2010 Earnings Call Transcript

July 29, 2010 8:30 am ET


Ed White – SVP and CFO

Al Stroucken – Chairman and CEO

John Haudrich – VP, IR


Ghansham Panjabi – Robert W. Baird

Al Kabili – Macquarie

Tim Thein – Citigroup

George Staphos – Bank of America/Merrill Lynch

Rick Skidmore – Goldman Sachs

Claudia Hueston – J.P. Morgan

Chris Manuel – KeyBanc

Peter Ruschmeier – Barclays

Mark Wilde – Deutsche Bank



Good morning. My name is Angela and I will be your conference operator. At this time, I would like to welcome everyone to the O-I second quarter 2010 earnings 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 would now like to turn the call over to Mr. Ed White, senior vice president and chief financial officer. You may begin your conference.

Ed White

Thank you, Angela. Good morning, and welcome everyone to O-I's second quarter 2010 earnings conference call. I'm joined today by Al Stroucken, our chairman and CEO; John Haudrich, vice president of investor relations; and, several other members of our senior management team.

Today, we will discuss key business developments in the quarter, review our financial results, and discuss future trends affecting our business. Following our prepared remarks, we'll host a question-and-answer session. Presentation materials for this earnings call are also being simulcast in the company's Web site at o-i.com.

Please review the Safe Harbor comment 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.

I will now turn the call over to Al, who will start on chart two.

Al Stroucken

Thank you, Ed, and good morning. In the second quarter, we saw a number of encouraging developments, including accelerated growth in emerging markets, improved regional mix, and a number of strategic activities that will benefit future earnings and cash flow. We did, however, also faced challenges in the quarter, such as weaker demand in Eastern Europe, sluggish beer consumption in the developed markets, and unfavorable fluctuations in foreign currency.

Adjusted earnings were $0.90 per share in the second quarter, down from last year. Excluding the impact of currency changes, O-I's second quarter earnings were $0.98 per share, up slightly from the prior year. This reflected solid underlying operating performance.

Price and product mix added more than 1% to sales, which is consistent with the improvement we saw in the first quarter. The benefit of higher prices more than offset (inaudible) cost inflation.

Globally, shipments were down slightly from the prior year. North America's volumes were lowered primarily due to the impact of e-contracts that were renegotiated late last year and went into effect in 2010. Excluding this impact, our global shipments were actually up 1.7% from last year, pointing to a modest overall economic improvement.

As the global recession abates, the rate of recovery has varied widely. For example, shipments were up at the mid-teens in South America, while volumes were up more than 10% at Eastern Europe during the second quarter. And I'll comment further on regional trends in a few minutes.

The impact of overall lower shipments on our earnings was offset by a favorable regional mix from a rapidly growing higher margin business in South America. As planned, we completed the final capacity adjustments under the strategic footprint initiative that we launched in 2007. Going forward, we will keep our asset base aligned with market demands.

We generated positive – excuse me, positive free cash flow despite the fact that higher seasonal demand typically results in the use of cash in the second quarter. And we successfully implemented several of our strategic plans in the second quarter. We expanded our preference in fast-growing emerging markets through the acquisition of a plant in China and through our new Southeast Asia joint venture operating in Malaysia and Vietnam.

In another move, we repurchased 1.6 million shares of company stock and refinanced our highest cost debt to improve our capital structure.

Moving to the third quarter, we will continue to manage prices to reflect input costs and demand trend. Volumes will likely be consistent with prior years as strong growth in emerging markets offset the impact of sluggish beer demand in North America and Europe. Earnings will benefit from improved capacity utilization and our footprint initiative. Yet, currency trends will likely remain a headwind for O-I in the second half of this year.

Now, let's review our operating performance on chart three. This chart shows segment operating profit and margins for the company as well as for each of our four regions. Overall, segment operating profit was $287 million, down from the second quarter of 2009; while profit margins improved to almost 17% of sales.

We have also included the second quarter of 2010 profits adjusted to reflect prior year currency's rate for easier year-over-year comparisons and to highlight the underlying operating performance of the company. Adjusted for currency, operating profit was $305 million, a modest increase from the prior year. Operationally, higher prices and favorable mix more than offset the impact of lower volumes.

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