Owens-Illinois (OI)

Q3 2011 Earnings Call

October 27, 2011 8:30 am ET

Executives

Albert P. L. Stroucken - Executive Chairman, Chief Executive Officer, President and Member of Risk Oversight Committee

Edward C. White - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

John Haudrich - Vice President of Investor Relations

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Timothy Thein - Citigroup Inc, Research Division

Benjamin Wong

James Armstrong - Vertical Research Partners Inc.

Philip Ng - Jefferies & Company, Inc., Research Division

Alton K. Stump - Longbow Research LLC

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Presentation

Operator

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 Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. John Haudrich, Vice President of Finance. Sir, you may begin your conference.

John Haudrich

Angela. Good morning, and welcome, everyone, to O-I's Third Quarter 2011 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.

Today, we will discuss key business developments, review our financial results for the third quarter 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 in the company's website at o-i.com. Please review the Safe Harbor comments and the 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'll now turn the call over to Al, who will start on Chart 2.

Albert P. L. Stroucken

Thank you, John and good morning. Overall, we made good progress during the third quarter, especially following a challenging second quarter as operating performance improved in North America and Asia Pacific. Our third quarter 2011 adjusted earnings were $0.84 per share, up considerably from $0.59 in the second quarter and in line with the $0.83 reported in the prior year.

On a year-over-year basis, earnings benefited from higher glass volumes, selling prices and production levels, as well as lower effective tax rate. Yet unrecovered inflation remained a significant headwind and essentially offset these favorable trends.

Shipments in the third quarter were up 4% compared to the same quarter last year. This increase was driven primarily by our 2010 acquisitions. Our global organic growth was around 2% after excluding the impact of unfavorable volume trends in Australia.

Selling prices were up about 1.5 percent this quarter and included the additional energy surcharges that we've successfully implemented in Europe. All regions reported higher production levels. Importantly, North America ran at high operating rates throughout the quarter, and the region further benefited from the restart of 2 previously idle premises.

In Australia, market conditions stabilized at lower levels. To address the challenges in this country, we closed a furnace at the end of the third quarter. Additional restructuring actions will be required in Australia, and one additional furnace closure is planned by mid-2012. As I said before, the benefits of favorable volume, price and production trends a global basis were offset again this quarter by as yet unrecovered cost inflation. Higher selling prices will be required in 2012 to recover inflation from this year, as well as additional inflation expected next year.

We generated $130 million of free cash flow in the third quarter and allocated nearly all of it to pay down debt. Our leverage ratio is now just within our target range, but we will continue to focus on further debt reduction to enhance our financial flexibility.

Reflecting uncertain macroeconomic conditions, we expect that our fourth global shipment levels will be flat to slightly up compared to the prior year. At the same time, high cost inflation will persist and exceed the benefit of higher prices. Currency exchange rates have been volatile in recent months, and this could negatively impact fourth quarter earnings. Also, as part of our normal fourth quarter review, we will adjust production to ensure working capital levels are appropriate heading into 2012.

Overall, fourth quarter earnings should approximate the prior year, and we still expect full year free cash flow to range between $200 million and $250 million, which is unchanged from our most recent guidance.

Now I will review each of our segments, and I'll start with Europe, our largest region on Chart 3. Europe generated operating profit of $106 million in the third quarter compared to $114 million in the third quarter of 2010. The benefits of higher shipments, prices and favorable currency translation were again offset by continued high cost inflation. Shipments were up slightly in Europe during the quarter with higher volumes across several key end-use segments such as beer and spirit. Macroeconomic news out of Europe has been volatile in the past few months due to uncertainty related to sovereign debt and the banking sector, and although our European shipment growth trends moderated compared to earlier this year, we have not seen any major decline in the consumer trends in the end markets that we serve.

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