Given Owens-Illinois' OI recent cut to its second-quarter 2011 earnings guidance, we believe the outlook for the global glass container market is getting more opaque. Only 50 days after the company reported first-quarter results and provided second-quarter guidance, Owens-Illinois has had to adjust market expectations downward as a result of demand declines in Australia and manufacturing hiccups in North America. Furthermore, even though there were only 15 days left in the second quarter when O-I management gave the update, operating margin guidance is spanning a whopping 300-basis-point range and shipment growth estimates are spanning a 500-basis-point range. These wide ranges make us increasingly uncertain on our own near-term estimates for the company. Additionally, on June 20, 2011, Saint-Gobain announced that it is postponing the IPO of Verallia, its glass container unit, citing "very adverse market conditions."
Owens-Illinois controls almost three quarters of the wine bottle market in Australia. As the Australian dollar has strengthened, the global demand for Australian wine has declined. We would not be surprised if these persistent currency issues result in O-I permanently shutting down a furnace or two in Australia.
Owens-Illinois was hit with a triple-whammy in North America. Unexpected maintenance issues on some furnaces, coupled with low inventory levels and unexpected customer orders, resulted in greater shipping costs as the company scrambled to manufacture products from beyond the natural 100- to 200-mile shipping radius. While increasing demand is certainly a high class problem to have, we are concerned about the recent spate of unplanned downtime at several of O-I's facilities and wonder if the firm should be concentrating more on scheduling additional rounds of preventative maintenance.
