O-I Glass, Inc. (OI) Q3 2011 Earnings Report, Transcript and Summary

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.

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.

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 offsets 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. Market trends vary by country depending on their exposure to Europe's financial challenges and demand trends also varied throughout the quarter partially due to poor weather. Selling prices in the third quarter were up about 2% from the prior year, mostly reflecting the impact of the energy surcharges that we implemented. Finally, we have started to negotiate our 2012 annual customer agreements, which cover a majority of our European business. As I mentioned, we expect to fully pass on the impact of unrecovered 2011 cost inflation, as well as 2012 estimated inflation. Our high operating rates and high inflation should enable us to be successful with our pricing strategy. Overall, we expect to increase our selling prices in Europe, on average, between high single or even double digits across our customer base in 2012. When possible, we intend to include a provision in future annual contracts permitting a timely pass-through of energy cost if actual prices vary significantly from agreed-upon rates. We will provide an update on the outcome of our contract negotiations on our next earnings call. Moving to Chart 4. Our South American operations performed well and generated operating profit of $67 million in the third quarter, up from $56 million last year. Volumes increased about 24% from the prior year. Organic growth accounted for about 15 percentage points of this improvement and was driven by strong sales in Brazil and Argentina. The balance of our growth was due to our acquisition of CIV in September of last year. As expected, segment profit in South America increased to nearly 22% in the third quarter. O-I's business in Brazil continues to lead the glass container industry and outperforms other packaging substance. Projected Brazilian growth trends are impressive. Euromonitor estimates 4% annual growth trends through the year 2015. Our customers look to O-I to provide innovative, high-quality glass containers for their products. Glass Smart, our go-to-market approach, continues to boost our growth by approximately 5 to 7 percentage points above the average market estimate. Now let me discuss our capacity-expansion plans in Brazil. We continue to expect robust growth in this country. In the short term, we plan to increase our capacity by adding a furnace at an existing plant to meet current volumes, but Brazil will remain dependent on sizable imports to continue to cover its existing and future demands. As we bring additional capacity online later in 2012, we will be able to reduce some of the incremental costs we have been incurring to import glass into the country. Finally, like in Europe, we expect high single-digit price improvement across South America in 2012 to offset inflation. Moving to North America on Chart 5. We made good progress this quarter improving operating performance in this region. As a result, we generated $73 million of operating profit in the third quarter, slightly up from $72 million in the prior year. Shipments in North America were up 2% from the third quarter of 2010. Better operating performance allowed the region to meet our customers' shipment requirements, and we continue to see fundamentals strength in the wine, spirits and craft beer end markets that we serve. While shipments for our mega beer customers declined from the prior year, total beer shipments in the region were flat due to the double-digit growth in craft beer. Year-over-year prices were slightly up due to the 2010 price adjustment formula. However, 2011 inflation for raw materials and other annual pass-through cost factors more than offset any pricing gains. To begin to remedy this margin impact, we implemented an average price increase of 6% earlier this month in our open market business in North America, which accounts for about 10% to 15% of our business. This price increase is less than in other regions due to the lower energy inflation in North America. Next year, the scheduled price adjustments in our existing multiyear agreements will recapture the 2011 cost inflation. Let me now move to some of the key operational improvements we made in North America this quarter. First, our average operating rate across our manufacturing base was in the mid-90s, which was a clear improvement from the second quarter. Also, our 2 restarted furnaces ran at full capacity since the beginning of the quarter. To ensure that we mitigate the risk of future production issues, we are conducting operational audits of all our plants in North America, and we have identified and are beginning to implement a number of process improvements that will serve to increase our performance even more. The graph at the bottom of Chart 5 depicts 2 of the trends that we are monitoring as part of our remediation plan. The blue bars show our inventory levels, and you can see inventory rapidly decreasing in the first quarter as unplanned production interruptions coincided with stronger demand levels. We made good progress rebuilding inventory in the third quarter, and we expect to continue this improvement in the fourth quarter as supply and demand trends dictate. The red line on the graph shows average delivery distances for our customer shipment. As inventory levels decreased early in the year, we were required to reallocate production to other manufacturing networks in North America. As a result, we incurred higher freight costs as we shipped finished products much longer distances. We have made some progress reducing out-of-freight pattern -- out-of-pattern freight in the third quarter and should continue to see these costs come down further in the fourth quarter. Although I'm pleased with our initial progress, we have more work in front of us to improve operating performance in North America. Moving from North America to Asia-Pacific on Chart 6. We generated segment operating profit of $23 million in the third quarter, down from $37 million of the prior year. However, segment profit rebounded from the $9 million reported in the second quarter. Shipments in the region were up slightly from the prior year. As in the second quarter, all growth was attributable to our 2010 acquisitions in China. In Australia, market conditions have stabilized yet remain challenging, resulting in lower year-over-year sales and production levels. Shipments of wine and beer bottles in the country were down nearly 15% from the prior year. To address the challenges in this country, we finalized a significant phase of our Australian restructuring plan in the quarter, and we closed one furnace at the end of September. One additional furnace closure is planned by mid-2012. We recorded a $20 million charge primarily related to the furnace closures, and these actions will reduce fixed cost and will improve our capabilities and system flexibility. Additional restructuring activities will be determined after we assess supply and demand trends, as well as the outcome of significant contract negotiations by the mid of 2012. You may have heard about the landslide in New Zealand earlier this week that has interrupted the supply of natural gas to the upper North Island. As a result, our factory in Auckland, as well as many other customers' facilities, have temporarily ceased production until the pipeline is fixed. This may take a week or so, and we expect that this may have a modest impact on fourth quarter earnings. Moving to China. We continue to reorient our existing footprint within the dynamic business environment in the country. We do not foresee any new acquisitions in the short term. Our priorities are to optimize our existing assets and business performance, which includes integrating our 2010 acquisitions. During this quarter, we made solid progress on raising our prices in China. As we have mentioned in the past, several of our legacy facilities in China are fast becoming encroached by urban growth. This has put pressure on us to relocate some of our facilities but also provides the opportunity to move closer to our customers and improve our footprint. As a result of the urban encroachment, the land values of these properties have increased so significantly that they will allow us to fund the rebuild of these capacities at alternative sites. I will now turn the call over to Ed.

Thanks, Al. Let's move to Chart 7 and begin our financial review with the third quarter reconciliation for sales, operating profit and EPS. Third quarter 2011 segment sales increased approximately 10% to more than $1.8 billion. As Al mentioned, our volumes increased 4%. This boosted the top line by $64 million. Higher prices also increased the top line by $25 million in the quarter. Shifts in product mix offset approximately $8 million of the higher selling prices. You can also see that currency translation substantially increased the top line. Moving over to segment operating profit. The third quarter profit was $269 million, $10 million below the $279 million reported last year. Higher volumes added $16 million, largely driven by strong growth in South America. Higher pricing benefited segment operating profit by $25 million while the change in product mix that impacted the top line had a negligible profit impact. Manufacturing and delivery costs increased by $37 million. These higher costs were largely driven by $55 million of cost inflation. But favorable year-over-year production levels in all regions, except for Asia Pacific, partially offset inflation this quarter. This benefited a component of the positive operating leverage that we continue to see generated this year as we operate facilities at higher capacity utilization rates. Operating expenses increased by $9 million from the prior year, partially reflecting investments made to support sales and marketing initiatives. Our Glass is Life marketing campaign has been running for several months now. Our campaign features the premium image of O-I glass packaging by showcasing many of our customers' products. Early results show that we're receiving new business leads in many food and beverage companies around the world, several of whom do not currently package their products in glass containers. Other costs decreased operating profit by about $12 million, primarily due to lower equity earnings this quarter from our North American joint venture that underwent a furnace rebuild. Other costs were also impacted by the absence of several onetime items that benefited the prior year third quarter. And finally, currency translation provided a $7 million benefit to segment profit this quarter. Finishing with the EPS reconciliation, our adjusted net income was $0.84 per share in the quarter compared to $0.83 in the prior year. Operating profit components decreased earnings by $0.05 from the prior year while nonoperating items netted to a $0.06 benefit to the earnings in the quarter. This was largely driven by lower year-over-year effective tax rate caused by a change in the annual forecasted earnings mix by country. Finally, our only Note 1 item this quarter was a $20 million after-tax charge related to restructuring activity. Let's move to Chart 8 for more detail on our balance sheet, cash flow and capital structure. On September 30, 2011, cash was $256 million and gross debt was approximately $4.1 billion. So net debt was $3.8 billion, an increase of approximately $144 million from the prior year third quarter, reflecting financing for acquisitions made since the third quarter of last year. Our net debt to EBITDA ratio was 3.0x at the end of the third quarter, well below the bank covenant limit of 4 and improved from our second quarter ratio of 3.2x Free cash flow was $138 million in the quarter compared with $67 million in the third quarter of last year. CapEx was more than $100 million lower in the quarter, and this is consistent with our planned lower CapEx spending for the full year 2011. At the same time, the change in working capital was higher this year in the third quarter, driven by increased inventory and receivable levels to support sales growth. Now, let me shift to our capital allocation priorities for the near term. Debt reduction will continue to be our primary focus as we plan to further lower our leverage ratio to be comfortably within our target range of between 2 and 3x EBITDA. Also, we will fund our Australian restructuring, as well as some limited capacity expansion in South America. Finally, let me highlight several year-end items that we will discuss on our next earnings call in January. The annual review to update our asbestos liability will be conducted in the fourth quarter. In addition, we will conduct our annual evaluation of goodwill in the fourth quarter. The outcome of our Australian restructuring plans and business assessment may lead to a goodwill impairment in the Asia-Pacific region, which will then require a noncash charge to adjust that region's recorded goodwill. As of September 30, 2011, the Asia-Pacific segment had goodwill of approximately $640 million. Finally, we plan to go live with SAP in North America in the first quarter of next year. On Chart 9, we present our business outlook for the fourth quarter, including operating profit by segment, nonoperational costs and overall adjusted earnings. Of course, foreign currency rates have a significant impact on our reported earnings and can create uncertainty. To give additional clarity, we have provided a chart in the appendix to show our earning sensitivity to the major currencies that impact our operations. We expect our European fourth quarter segment profit will lag the prior year. With the macroeconomic volatility in Europe, it's a bit more difficult to gauge our sales volumes next quarter, but our current expectation is that volume will be flat with the prior year while cost inflation will remain elevated. In North America, we expect operating profit to approximate prior year fourth quarter levels. Operational and supply chain efficiency should continue to improve, however, sales volume will likely be flat to up slightly from prior year levels. Meanwhile, cost inflation will lay on margins in the fourth quarter. Our Asia-Pacific segment operating profit will remain below prior year levels given continued challenging market condition, especially in Australia. In South America, profit should improve from the prior year. We have now lapped the one-year anniversary of our acquisition in this region, so year-over-year volume growth will not be as high as the past few quarters. Overall, our segment margin percentage should be similar to third quarter level. Turning to nonoperational items. We expect corporate costs to be in the $25 million to $30 million range in the fourth quarter. Further details are provided on the chart. Overall, we expect fourth quarter adjusted earnings should approximate prior year fourth quarter levels. I will now turn the call back to Al for closing remarks on Chart 10.

Thanks, Ed. Overall, we made good progress during the third quarter, especially with the initial improvements in North America. And to address our market challenges in Australia, we closed capacity to reduce costs. These decisions do not come lightly since we know permanent closures impact many of our long-standing employees and their families, but we, unfortunately, have no other choice given the cost structure and changes in the Australian markets that we serve and of course, also, our responsibility to improve the financial condition of the Asia Pacific region. Also, we generated significant free cash flow in the quarter and allocated it towards debt reduction and further debt pay down remains top priority. And although I am pleased with our initial progress, we have more work to do to prove operating performance, profitability and cash generation. We must ensure that we keep up with inflation, which we expect next year will reach levels similar to this year. Several years ago, we initiated our value of a volume strategy to restore margins. Due to continued inflation, we are in a similar position again, and we must take decisive action to correct our margin decline. As a result, we will increase prices in 2012 as appropriate to repair our margins and improve shareholder value. And if required, we will make some capacity adjustments to align our operations to customer needs as we have done in the past. Thank you, and now I will ask Angela to open up the lines for your questions.

[Operator Instructions] And your first question is from the line of Tim Thein with Citigroup.

First -- 2 questions here. First is just on the volume pull-through. It looks, Ed, about 25% in the quarter but over 50% if you factor in the benefit from higher capacity utilization. So as we think about 2012, how should we be framing that in terms of the volume leverage based on the projected operating rates and then just as a follow-up, on the pricing opportunity, is it fair to think about in terms of the negotiated piece that every 100 basis points in price that you achieve is worth order magnitude, about $45 million?

Well, I think as far as the pull through is concerned, we have talked in the past about this that we typically see a -- for increased volume, we typically see about a 40% benefit of the margin flowing through because we not only then have the income swing from the sale, but we also have the operational efficiency that work their way through. With regard to the pricing and the flow-through of the pricing, that really depends on what the increase in inflation is going to be next year. And that's why we have to be fairly determined at this point in time as we go into next year because it looks like inflation is going to continue at about the same pace that we have seen, and if we were only to recover the inflation that we have experienced in 2011, our margins would really remain flat. So that's really, clearly a requirement and an absolute demand for us to make sure that we can pass through not only the inflation that we have incurred this year but also what we expect to see next year. Now fortunately, our utilization is at a very high rate, which gives us the confidence level that market demand seems to be supportive of that action and offset strategy, but really, we will have to see over the course of our negotiations, which will take place, most of them in this quarter, what the outcome is going to be. And in January, we'll hopefully be able to give you more perspective on that.

And your next question is from the line of George Staphos with Bank of America Merrill Lynch.

Al, quick question on pricing then. Can you discuss what you think your operating rate is in Europe and what you think the industry's operating rate is in Europe? And are you prepared to close capacity should pricing negotiations not go quite as favorably as you need to, to offset inflation?

Well, let me answer first the last part of your question. I mean whenever we embark on a strategy with regard to price increases, we, of course, have to consider the potential impact that's going to have on demand for our products. And so part of our strategy, of course, does include scenarios of looking at what we could do to either temporarily curtail productions or permanently curtail production, and that is part and parcel of the process as we go forward. Now with regard to capacity utilization, I think that was very clear when we talked about our demand profile in the last quarter that we were oversold in the high-peak areas of the second quarter, and we are now seeing the normal flow of the overall demand peak ebbing a little bit, but that does not really mean that the overall demand is any lower because we have to use these off quarters to prepare again for the high season. As far as the rest of the industry is concerned, I think some of our competitors have reported that their own run rates and their own capacity utilization rates, and I believe they're fairly much in line with what we have experienced.

And your next question is from the line of Alex Ovshey with Goldman Sachs.

Al, you mentioned that you expect inflation in '12 to be similar to '11 levels. But when you look at some of the key commodities that you buy. Energy, specifically, it's still elevated but the price increases there have leveled out. Can you just elaborate why you anticipate inflation in '12 to approach '11 levels?

Well I think first of all, as you really look at what we are seeing is that soda ash continues to be fairly tight from demand increases in the automotive and the flat glass, as well as in the container glass industry. And I think you may have read that, certainly, the suppliers there are looking for some fairly significant double-digit increases for the coming year. Also, overall sand demand is fairly high and particularly in the higher grades of sands, we're seeing some supply issues that depends, of course, from region to region. And then, of course, energy is the big open question but we still see significant increases in electricity, in particular, coming from Europe at this point in time. How natural gas and oil is going to behave, that's more reactive to certain market and political conditions. So we'll have to see how that's going to work out. But clearly, we've seen a dramatic increase in the course of 2011. And then, the other part that is going to play an important role in Australia, is that we're going to see a carbon tax increase or a carbon tax becoming effective in Australia in the middle of next year. And that too, of course, is something that we will have to pass on to our customer base.

And, Alex, virtually all of our workers in the factories are under collective bargaining agreements, and we will typically see about a 4% annual increase that comes through, that includes both wage rates and what's happening in the benefit side, pension.

Okay. But that 4% is, of course, on a global scale. Because of the emerging region increases, tends to be much higher.

In North America, the third quarter. Did you incur any incremental operational costs as you're optimizing your footprint? Or, essentially, all that was behind you and occurred in the second quarter and didn't really have any additional cost in the third quarter, just some optimization?

Yes. There may have been some small increases in M&E [ph] to get these 2 furnaces up and running but that was about it.

And your next question is from Phil Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: So just to be clear on the inflation front. I think, previously, you had said this year you had expected $200 million to $220 million of inflation headwind. Is that still the view for this year?

Pretty much in line. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay. So when we talk next year -- you're basically saying, similar $200 million to $220 million type of number?

That's about the range that we would expect. I mean, we'll get further clarity, of course, over the next 2 months. But at least, at this point in time, that's the way it looks. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay. And then, on the look-back agreements. Just kind of running the math on that. Is it fair to say that, for the regions where you have look-backs, that the price for next year would be somewhere in the $60 million to $80 million range if I kind of add up North America?

Looking at the math, that makes sense, yes. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Yes, okay. And then just on Europe. I think, last quarter, you were talking about some of these multiyear agreements where you were kind of going after mid- to high-single digit price increases for the ones that came due and now you're talking high-single to low-double for the annual contracts. And I guess, the macro environment, like you talked about, is a bit of softer now. So I guess, what gives you the confidence there, that you can get these even higher types of levels now?

Well, as I said before, it was quite obvious in the second quarter that we were oversold and so the somewhat reduced demand profile that we're seeing in the third quarter is really welcome. Because, otherwise, if we had seen continued growth, it would have been really difficult for us to achieve our customers' supply. So I would say, the high level demand -- so, I think, that the overall balance of supply and demand is still very favorable at this point in time, to achieve what we need to achieve. And you also know that, clearly, it's much more difficult to get your customers engaged in price discussions when inflation is very low or there's no inflation. Really, that's not the case, inflation has been very high. It's not only been high for us, it's been high for many of our customers and many other basic raw materials in categories that they buy. And that, I think is, too, helpful in this overall environment. Now, certainly, we will have to also understand that Europe is, even though we always talk about it as one homogenous region, we clearly have some differences in Europe. And we've also seen, in the past 2 years, some different competitive activities. So in some cases, we have to correct margins where we lost some feathers, 2 years ago, when supply was long, and we'll certainly going to try to recover that. In other markets, the increase will be more moderate, to be more in line with what we see in inflation. So I think it's going to be a mixed bag, and it will require a very high amount of interaction with our customer base to get to the numbers that I have mentioned. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay, very helpful. And now are there any specific contracts, you can point, that's kind of already negotiated at this stage or are you still kind of in the early stages of this?

I think, in the second and the third quarter, several larger contracts have come through and we were able to get increases in the high-single to double-digit regions for those contract negotiations. Which I think, of course, is also indicative that, apparently the market is supportive, on a broad base at least, for increases in that range. Now, still, it's going to be a part of the discussions over the next 3 or 4 months. What the market reaction is going to be and it's very difficult at this time to really be truly predictive with any specificity. So I'd rather give you some further information and details in January after we've had our hard work behind us. Phil M. Gresh - JP Morgan Chase & Co, Research Division: One last question just on free cash flow for this year. Is your CapEx here the same as it was before? Your CapEx is lower than I thought, in the quarter.

Well, in the quarter, it was low because last year, of course, we had restructuring in the third quarter. That's why the comparison from last year third quarter to this year third quarter is a bit skewed. But typically, we also find that the fourth quarter is pretty heavy and capital expenditures will definitely affect our downtime, and use that downtime to make the additions to our facilities or the corrections to or repairs to our facility. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay. So the CapEx is the same as it was before?

I would say it's, perhaps, a bit wider than what we had predicted but it's certainly in the range.

And your next question is from Alton Stump with Longbow Research.

Just to press in a bit further on the pricing, next year in Europe. How tight is capacity, do you know, for competition? It sounds like it's pretty tight on your end. Just want to get an idea if you know as to what your competitors are seeing. And then, also, has there been any early commentary yet, from your competition, as to how much they plan to raise pricing next year in Europe?

No. I have not heard anything from our competitors or, at least, they have not been in the marketplace with any specific ideas or numbers. As far as capacity utilization is concerned, I can only go from the published information that's available to all of you as well, from companies that are public and report. And what I typically see there they're fairly well utilized. So I think it would be surprising to me to see they were in any different position than we are with regard to utilization rates.

And your next question is from Mark Wilde with Deutsche Bank.

Al, I understand you don't really want to negotiate on a public conference call. But can you give us some perspective of kind of what's in the, that you're aware of, from kind of the '08, '09 price over volume negotiations? Things that you might be doing differently at this time around.

While I think the starting position is different. You know that when we embarked on this in 2010 and 2008. I believe, that it was, clearly, for many years, if not for decades, a significant amount of capacity that was not fully utilized around. A lot of that has been taken out over the last couple of years. And I believe the band [ph] between supply and demand to be long and/or supply being short, insured has become much narrower over the last couple of years. And so even if we are going into a situation where it's difficult to get the targeted increases that we have for our customers, we still have the leverage and the ability then, to adjust our cost structure, by taking temporary shutdowns or taking capacity out but I don't think it's going to have to be of any category or size we saw in 2007 and 2008.

Okay. And will I recall, a year or 2 ago. You were talking about trying to get customers to pay for sort of incremental demand during peak periods because that imposes a lot of extra cost on you. Did you get any real traction with that?

No, we really did not. And as you from the second quarter conference call, it certainly still is a problematic situation for us because demand out there tends to peak in those periods. And then on top of that, we also have a very low reliability on forecast that we get, then the problem is even greater. So one of our focus areas, again, is going to be going to try this again just like what I said 2 years, is in contracts with our larger customers because that's really where a lot of this impact comes from. To see whether we can either get to a greater predictability with regard to forecast accuracy on an SKU level, or potentially, come to some kind of understanding that, if additional costs are being created by those changes in demand, that some way then, there has be a pass-through provision of that additional cost that's being generated by that imposition in their forecasting. But as you can very well imagine, that really has to be negotiated on a contract-by-contract basis, and it's mostly guaranteed, year out, until we get to the point where we need to be.

Okay. And last question I had. Some other packagers have noted kind of slowing in Brazil in recent months and I noticed that you did not say anything about having seen on any of that. Can you just comment on kind of your read on the Brazilian economy and how it's affecting our business right now?

Well, I think a lot of the projections that are being made are based on aluminum cans and the aluminum situation, which has really swung fairly widely. And I believe one of our competitors in the aluminum business, this morning they reported that, certainly, in the third quarter volumes picked up again. So I think this was more of an issue of either currency rates in Brazil fluctuating significantly. The market being underpowered, as far as installed capacity is concerned, so the market became dependent on imports. And that, of course, that put a fairly high demand initially because customers try to cover their bets, and then when, suddenly demand was perhaps weakening a bit, they immediately then went to taking the supply chain down, with regard to what's in the pipeline, and then you get these wide swings in demand. We certainly, in the glass industry, didn't see that. We saw continued strength in the Brazilian market, as was reflected in our sales numbers. Even though, I must say, that perhaps 1 or 2 percentage points of more billion growth rates were taking off or were shaved off but it's still attractive growth rate overall.

And your next question is from Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: The magnitude of price increases, Al, you're guiding towards, particularly in Europe. These would certainly be record levels, at least from our memory. Assuming success with these initiatives, why should we expect a pre-buy, in the fourth quarter, ahead of these price increases? Because from the guidance it doesn't sound like you're assuming seeing anything.

Well a pre-buy requires, also, a willing supplier or an able supplier that has the ability to do this. And so we said, typically, in the fourth quarter, we're taking down capacity to make sure that we can make these capital investments, to keep the operations going and get them prepared for the following year. And so there will be limited availability as to what we can do because, otherwise, then we'd miss out on the maintenance and on the repair or on the replacement of certain assets that we typically do in the fourth quarter. So there's going to be limited impact as to what we can really ship early. And then, I do not know, of course, how tightly our customers are controlling their balance sheets either, so they're going to have to look at that as well. And in the past couple of years, we've seen our customers to be very conservative with regards to inventories because of balance sheet and cash flow requirements that they have within their own companies. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. That's helpful. And also on the pricing parameters. You’ve been -- obviously, we've talked about Europe and North America also. What about South America and Asia-Pac?

I already said that, as far as South America is concerned, those increases are going to be in the high-single digits as well. And in Asia-Pac, of course China, as I mentioned in my comments, we have been very successful in the third quarter, to raise our prices and we will continue to see increases in China. Australia and New Zealand, of course, given the overall demand profile and what we have to do to make sure that we adjust our capacity and our cost structures to that demand is a more tenuous proposition at this point in time. But I believe that, you will recall also, that in Australia and New Zealand the market is much more like North America. So a very high percentage of long-term contracts where we have automatic pass-through provisions. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just one final clarification question. On the North American inventory situation, in your press release, you commented on importing some products from South America. Can you, first of all, quantify that? And does that mean that operating margin in South America were higher than they normally would have been in the quarter?

I don't think it had a dramatic impact, because what we have done is we had to take care of Brazil for the high season going, into the high season. And, therefore, there's inventory already either in Brazil or en route to Brazil. And then we used that period until demand is picking up in some of the supplier countries out of Latin America. And so they get into their absolute high season in November and December to use that spot availability then to supply volumes in North America. And I think, overall, they may have added about 1% or 2% to our inventory volumes.

And your next question is from the line of Philip Ng with Jefferies. Philip Ng - Jefferies & Company, Inc., Research Division: First I like most of the opportunities coming from Europe, on the pricing side. But can you just help me quantify what percentage your business has got tied to contracts where there's an opportunity for this upside on the pricing side?

Well our long-term contracts in Europe are about 15% of the total volume. And then, of the remaining 85%, I would say about 10% are contracts -- or 10% to 15% maybe contracts with large multinational accounts, and then you have many, many smaller midsized customers that account for about 70% on the volume. And all of these are basically annual negotiations or annual agreements. Philip Ng - Jefferies & Company, Inc., Research Division: And North America is about 10% to 15% and then Asia-Pac, I guess, outside of Australia is a copy.

Outside of Australia, and New Zealand, and Asia, it's basically just like in Latin America, because we, typically then, operate in fairly inflationary environments and so it's a much more proactive and reactive process throughout the year. Philip Ng - Jefferies & Company, Inc., Research Division: Okay. And that's very helpful. I just want to get a sense from you, Al, just the environmental in general. It seems like it's a little more disciplined, especially in Europe. And certainly, you commented earlier, operates a lot more tighter. And if I remember last time, there's a lot of volume leakage because the issue was a little different, you had a lead on pricing. It sounds like everyone else, certainly the big guys, are looking to follow or, actually, lead as well. I just want to get a sense, basically, on what you're seeing. Do you expect the volume leakage to be more modest? Or how should we think about it?

Like I said earlier, certainly, as we went into our strategy 2 years ago, the supply demand picture was -- the difference, I think, overall supply was much greater than demand was in the market and that needed some basic correction anyway. I think those corrections have taken place, so I would say the margin out between a balanced supply demand and shortage, or long, has become a much shorter range of overall demand fluctuation. Now, with regard to the viewpoint that we have with what's the impact going to be, if I look back at 2007 and 2008, we saw some pretty good profitability improvements in Europe, despite the fact that we had volume leakage. And so, in this environment and especially with our focus on cash flow and cash generation, I think it's a trade-off that we have to make. And, of course, that is going to be part and partial of the negotiation process over the next 3 months. Philip Ng - Jefferies & Company, Inc., Research Division: Okay, very helpful. And then just switching gears a little bit, on Asia-Pac and South America. At least for Asia-Pac, certainly, Australia has gotten worse and you're doing a lot of restructuring efforts there. Can you give me a sense of what kind of profitability we should be expecting for 2012 once those initiatives have been taken place? And for South America. First half you guys got hit with kind of shipping cost and whatnot and, certainly, you guys are adding capacity. Will the headwinds that we saw in the first half recur next year?

Well as far as Asia-Pacific is concerned, it's really -- a lot of that is driven by what's happening in Australia and you've seen what happened in the second quarter, what dismal performance we had. Fortunately, we have corrected part of this, already, in the third quarter and saw an improvement. I would say our first objective and target in Australia, New Zealand or in Asia-Pacific, to get back to double-digit margins. And then we'll see, and the course of next year as we go through our contract negotiations, what additional steps we can take and what additional improvements over margins we can achieve. With regards to the situation in Latin America. I think that the overall situation there continues to have a strong demand profile, that's the reason why we're building or contemplating on building the traditional furnace in Brazil. So that we are not going to have that extremely high peak of imported products pushing down the margins that we saw in the first quarter of this year. And I believe that a lot of the work has already been done to make sure that our supply chain is filled, so that we can take care of the peak demand, now over the next 3 to 4 months in Latin America. And then, typically, we would see LA -- I'm sorry, Latin America, to drop off in its demand sometime in February, March with the total peak of slower months. And, hopefully, then we would be ready by the second half of the year, with the additional capacity that was put in place. So I think, overall, results probably will not see the same margin pressure in the first quarter or in the first half of next year, that we saw in the first half of this year in Latin America. Because I think we're better prepared for the supply chain issues that we have to manage because of the higher demand in the market place.

And your next question is from the line of Chip Dillon with Vertical Research Partners.

This is James for Chip. The first question I have is, is there any sign that the weaker Australian dollar could create a rebound in 2012 in the Australian wine business?

Well, what we're looking at is that it's really a combination of overall currency rates have increased in value, as related to other currencies, so dramatically. As I recall, 2 years ago we were about $0.65 or $0.70 to the Aussie dollar, now it's about a $1.10. So even if it were going to go back to $0.90 or so, I don't think it's going to fundamentally change the way that the wineries are looking at this situation. On top of that, some of the larger wineries also have made significant investments in the receiving countries to be able to do the filling in those countries. So they're not just going to walk away from that investment. So I would say, most probably broke through a significant decision barrier over the last year or so, where people are on the fence, but I think have jumped off the fence and I don't believe they're going to go back again. So I would say what we're dealing, in Australia in particular, but I think it's actually also in New Zealand, is a more fundamental issue of people having the decision they want and then basically living with that decision for a long time and not jumping back and forth. Because the requirements for them to be able to have made that decision did also require investments in the receiving countries, and I don't think they're rapidly going to walk away from those.

Okay. That helps. And switching gears a little bit. Going to China, in your opinion, are aluminum cans taking enough share in China to stem the growth in glass in that region?

I would say, with the share -- I believe, aluminum cans have a 5% share or so at this point in time, of the beer market in China. So I think, given that proportionality, it's going to be a long time before it really will have a noticeable impact on the overall opportunity for glass, because the basic demand is growing so rapidly. I talked to a mega beer brand owner 2 or 3 months ago and they said their growth this year was 20%. So you can very well imagine that even if there is going to eventually be some shift of share, based on the just the 5% share of the market, that would be a long time before you would see any noticeable impact on the growth opportunity for glass.

And our final question is a follow-up from George Staphos with Bank of America Merrill Lynch.

It's actually Benjamin Wong filling in for George who's on another call. Two very quick ones. Just going back to pricing in Europe for next year. I think this year there's been some market share risk from cheap imports which have maybe handicapped pricing initiatives this year. I guess, what gives you confidence you'd be successful in 2012? And then I had a very quick question about CapEx in 2012, if there is any delayed CapEx in 2011 that gets pushed into next year.

And With regard to the European situation. I think the cheap imports that you were referring to were predominantly an issue in the course of 2010. That was still influenced influencing some of the negotiations and the discussion as we go into 2011. We have seen much less of that in the course of the last 8 months or 9 months. And so I don't really think that's a significant factor at this point in time. With regard to the 2012 CapEx, as you can imagine, we're constantly going through our budgeting process, and with all the moving parts and the uncertainty, around the world, with regard to economic outlooks and financial stability, it's very difficult, at this point in time, to really already have a conclusive view of what 2012 is going to be like. And that will determine, of course, also what we're going to do with regard to CapEx. So we'll come back to that during our call in January, where we have, most probably, much greater clarity around those issues for 2012.

Well, thank you, everyone. That concludes our third quarter earnings conference call. Please note that our fourth quarter 2011 conference call is currently scheduled for Thursday, January 26, 2012, at 8:30 a.m. Eastern Time. We appreciate your interest in O-I. We appreciate your interest in O-I and again thank you [indiscernible].

This does conclude today's conference. You may now disconnect.