The management of Owens-Illinois, Inc. (NYSE: OI) intends to update the Company´s second quarter business outlook today at the Deutsche Bank Global Industries and Basic Materials Conference. Entering the period, the Company anticipated second quarter results would be in line with the prior year, but O-I now expects second quarter adjusted net earnings will be down from the prior year period. Segment operating profit margins in the second quarter of 2011 will likely decline between 3 and 6 percentage points from second quarter 2010 levels.
O-I continues to expect global shipment levels will increase between 5 and 10 percent in the second quarter, compared to the prior year, driven primarily by several acquisitions made in 2010. Demand remains strong across most markets and end-use categories, with the notable exceptions of Australia and New Zealand and beer in North America. Yet, higher than expected costs will more than offset the benefit of stronger global shipments. While significant cost inflation was already anticipated heading into the second quarter, O-I also has incurred additional manufacturing and delivery costs. As a result, O-I will not fully realize the operating leverage expected from higher production levels in the second quarter of 2011.
O-I´s Asia Pacific region continues to face challenging market conditions in Australia and New Zealand. The currencies in those countries have continued to appreciate, reaching record levels against the U.S. dollar in the second quarter. Stronger currencies have negatively impacted exports, including wine, which is one of O-I´s key end-use categories in those two countries. Beer consumption in Australia also is down as consumer sentiment is extremely conservative due to high interest rates leading to lower disposable incomes. While O-I anticipated lower wine and beer bottle shipments, demand trends have deteriorated further over the course of the quarter. In response, the region has temporarily curtailed production to balance supply with lower demand. This curtailment has resulted in unabsorbed manufacturing costs that were not anticipated entering the second quarter.
O-I´s North American region is experiencing supply chain challenges in the second quarter resulting in higher than expected manufacturing and delivery costs. The region´s inventory levels were tight heading into the seasonally stronger second quarter. Furthermore, the region has experienced lower than anticipated production efficiencies during the quarter. As a result, inventory levels were too low at certain locations and O-I has incurred additional delivery costs to meet higher customer demand. Freight costs have been further impacted by elevated fuel prices. While shipments to beer customers have been lower than anticipated due to a continued sluggish U.S. beer market, demand for the wine, spirits and food segments remains strong. Given strength in these end markets, O-I is restarting two idled furnaces, as previously announced. This additional capacity also will help alleviate supply chain issues.
While O-I will contend with challenging market conditions in Australia and New Zealand beyond the second quarter, the Company expects to resolve its North American supply chain and production issues in a timely manner. In addition, the Company has been making progress with its European customers on the implementation of previously announced energy surcharges. Subject to the outcome of an ongoing review of long-term capacity requirements in Australia, the Company continues to expect free cash flow generation of approximately $300 million in 2011, compared to $100 million in 2010. The Company will provide further details on its second quarter performance and business outlook at its quarterly earnings conference call scheduled for July 28, 2011 .
O-I Senior Vice President and CFO Ed White will present at the Deutsche Bank Global Industries and Basic Materials Conference at 8:00 a.m., Central Time on Wednesday, June 15, 2011.
A live Webcast of the presentation will be available at www.corporate-ir.net/ireye/confLobby.zhtml?ticker=OI&item_id=4065803 . The replay will be posted within 24 hours of the presentation and will be archived through this link for 90 days. Slides for the O-I presentation will be available through the Company´s website: www.o-i.com/investorrelations .
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