O-I Glass, Inc. (OI) Q4 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 Fourth Quarter and Full Year 2011 Earnings Conference Call. [Operator Instructions] I would like to turn the call over to Mr. Jason Bissell, Director of Investor Relations. You may begin your conference.

I am 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 fourth quarter, the full year 2011 and discuss future trends affecting our business in 2012. Following our prepared remarks, we will host a question-and-answer period. The presentation materials for this earnings call are also being simulcast from the company's website at o-i.com. Please review the Safe Harbor comments 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'll now turn the call over to Al, who will start on Chart 2.

Thank you, Jason, and good morning. Our fourth quarter adjusted earnings were $0.48 per share in line with our expectations. Shipments in the quarter were up more than 4% compared to the same period of last year. And importantly, free cash flow was strong in the fourth quarter. For full year 2011, adjusted earnings per share were $2.37, down from $2.60 in 2010. We were disappointed by the performance of our Asia Pacific and North American regions especially in the second quarter. On the other hand, our largest region, Europe, largely offset the impact of accelerating cost inflation through higher shipments and good operating performance. And South America had another strong year driven by organic growth and new business stemming from our 2010 acquisitions. Global volumes improved by more than 5% in 2011. Prior year acquisitions provided approximately 4 percentage points of this change, while organic growth provided more than 1 percentage point. Shipments increased across all key end-use categories, including beer, wine, spirits and fruit. As a result of low-cost inflation in 2010, our selling prices increased only slightly going into 2011. However, cost inflation increased significantly throughout the year and exceeded price recovery by approximately $150 million. This impacted our margins, of course, and we have been aggressively addressing this issue in recent months, and I will comment later on our progress. Despite high cost inflation and the performance issues we discussed earlier in the year, we generated $220 million of free cash flow in 2011. We used the cash to lower our net debt in the second half of the year. Looking to 2012, we expect improved operating results across the board. Higher pricing should offset the impact of prior year unrecovered cost inflation as well as some of the inflation anticipated in 2012. We assume global shipment levels will be flat year-over-year in 2012, which allows for an impact to volumes in Europe as a result of our pricing strategy. Macroeconomic developments in Europe may also impact volumes which creates, of course, some uncertainty in our forward-looking assumptions. We plan to complete most of our remaining price negotiations with European customers in February, and this will allow us then to have a better understanding of our volumes and any potential additional restructuring required in this region. Based on our present assumptions, we expect underlying free cash flow in 2012 to approximate $250 million. Underlying free cash flow is an expanded metric that we're introducing this year to segregate capital spending for replacement capacity in China that is being supported by the proceeds from our land sales in that country. And Ed will discuss this further in a few minutes. Now let's review the operating performance of our regional businesses starting with Europe on Chart 3. Europe generated operating profit of $41 million in the fourth quarter, compared with $50 million in the fourth quarter of 2010. Shipments were solid this quarter, up more than 5% with good performance in the beer and spirit end-use segments. We believe the small portion of this volume strength was likely related to customer purchases in advance of price increases and in France, ahead of tax increases scheduled to go into effect in 2012. Despite positive volume trends, we reduced our production levels in the fourth quarter to manage our inventories heading into 2012. As a result, the benefits of higher shipments and prices were offset by lower production levels, continued high cost inflation and unfavorable currency translation. Full year 2011 segment operating profit in Europe approximated prior year results. Shipment and production levels were each up about 4% this year. However, the benefit of stronger shipments and favorable currency translation were mostly offset by accelerating energy inflation, which cost margin compression in Europe. In response, we implemented an energy surcharge in Europe in the second half of the year. We also sought higher price levels in our 2012 contract negotiations to offset the balance of higher 2011 inflation and capture a portion of expected 2012 cost inflation. To date, we have concluded approximately 3/4 of our customer negotiations in Europe and have attained the targeted price increases that we were seeking. We expect to conclude most of the remaining annual customer agreements in February. And there will likely be some impact to volume in Europe this year as a result of our pricing strategy, but this is still in flux as negotiations are ongoing. At the end of 2011, we closed one furnace in southern Spain due to a low margin beer market and our inability to increase prices to meet our targeted profitability levels. This action will make the remaining cost structure in Spain more competitive. As you will note from my earlier comments, uncertainty regarding financial markets in Europe persists. Although we have not seen any major declines in consumer trends over the past couple of quarters, we will continue to cautiously view conditions in Europe throughout the year. This is consistent with our customers' approach as their visibility into the future demand is also clouded. And as a result, further capacity adjustments may be required in this region, but we need more clarity on the European market before we can make this assessment. Moving to Chart 4. Our North American region generated operating profit of $48 million in the fourth quarter, down from $53 million last year. Volumes were up about 5% this quarter with strong performance in the wine end-use category. Beer volumes were also up slightly in the fourth quarter, the first positive year-over-year trend we saw in 2011. As in Europe, higher shipment and price levels were more than offset by elevated cost inflation in the quarter. For the full year 2011, North American segment profit was $236 million, down from $39 million (sic) [$275 million] from 2010. Shipments were up slightly in North America as improved volumes in our wine, spirit and craft beer markets offset continued sluggish mega beer shipments. Cost inflation significantly offset the benefit from higher shipments and incremental price pass-throughs from low 2010 inflation. In addition, our results were impacted by poor operating performance in the second quarter, which resulted from manufacturing and supply chain inefficiencies. We have made several improvements in North America in the second half of 2011 that gives us confidence for a better performance in 2012. First, we stabilized operations and restarted 2 furnaces, and we have been running them at full capacity since the beginning of the third quarter. We ended the year with North American inventories up nearly 6% from 2010 levels, bringing them in line with a higher level of demand. Next, process and organizational improvements are underway at all facilities to enhance operations. And finally, we have centralized the manufacturing and supply chain functions in North America under one integrated operations leader. This structure, which was previously implemented in the other regions, will help maximize operational efficiency and provide better visibility and control over production cost. Overall, I'm pleased with the progress we have made with regard to all of these improvements. For 2012, we expect our North American shipments to be consistent with 2011 levels largely due to continued projected challenges with mega beer brands. Prices will be higher in 2012 as we pass through the high cost inflation experienced in 2011. Importantly, we expect to see much improved supply chain efficiencies in North America this year. And to help drive further progress, we will implement our SAP system in this region next month. Moving to South America on Chart 5. Our operations in this region generated segment operating profit of $85 million in the fourth quarter, up from $82 million in the same quarter last year. On a year-over-year basis, our shipments in the fourth quarter of 2011 were flat compared to a very strong prior year fourth quarter. This can be attributed to the introduction in 2010 of a new returnable product in the beer market in Peru. This year also, shipments were lower in Peru in the fourth quarter of 2011 due to work stoppages at 2 of our major customers. Other countries in the region had higher year-over-year organic volumes in the quarter and offset the volume decline in Peru. We generated our strongest segment operating profit margin, nearly 25% for the year, in the fourth quarter. Overall, 2011 was a good year for our South American business with segment profit of $250 million, up $26 million from the prior year. Organic growth and incremental acquisition volumes resulted in a strong year for this region. Looking to 2012, prices should cover inflation in the region. We expect continued growth in South America with volumes up low- to mid-single digits on top of a strong 2011 performance. This growth is lighter than 2011 levels as our go-to-market strategy last March was driving above-market increases for our business in the region. glass smart is still an important fuel to drive sales, but future incremental volumes will likely be more consistent with the region's overall growth levels. Keep in mind, unfavorable macroeconomic developments in Europe could impact many global markets, including South America's. In the past, we have seen macro issues lead to capital constraints for our customers in this region as they extend the timeline of their purchases of refillable bottles. We will continue to monitor volume trends throughout 2012 and balance our production levels with changes in demand patterns. As has been the case in 2011, expected future volume growth in South America will be driven by Brazil. Because we are at maximum capacity in Brazil, this growth will need to be partially supplied by imports which will increase logistics costs. We are constructing a new furnace at an existing facility in Southern Brazil to meet this demand and reduce some of these incremental costs. This furnace should be operational in the fourth quarter of 2012. Moving from South America to Asia Pacific on Chart 6. We generated $27 million of segment operating profit in the quarter, down from $36 million in the fourth quarter of 2010. Shipments in the region were up about 2% in the quarter. A slight volume decline in Australia and New Zealand was more than offset by growth in the rest of the region. However, the regional margin generated outside of Australia and New Zealand is lower than in those countries. And this change in country profit mix contributed to lower overall earnings in the quarter. For full year 2011, segment operating profit for the region was $83 million. We are, of course, disappointed with the substantial decline in this region's profitability. In China, we have been building up our operational infrastructure with local and expatriate employees, particularly in our Shanghai central office. Costs for this new group should diminish over time as work is transferred to local employees. This year, our team in China has been integrating 3 new businesses that were acquired in 2010. Two of these businesses are on plan and progressing well, but the third operation has proven to be more of a challenge. And this integration issue, along with costs associated with the closure of our Guangzhou facility earlier in 2011, contributed to lower year-over-year results in China. But the more significant factor for this region's year-over-year decline was due to significant challenges from our 2 largest end-use markets in Australia: wine and beer. Beer bottle sales decreased as higher interest and savings rates led to lower consumer disposable income. Wine bottle sales were down principally due to Australian wine producers reducing in-country bottling given the dramatic increase in the value of the Australian dollar. And we view this to be a structural change in the wine market and has led to our goodwill impairment, which Ed will discuss in a moment. To address these issues, we will be implementing significant change in the Asia Pacific region in 2012. We will continue to carry out our Australian restructuring plan, and we shut down one furnace in late 2011. A second furnace will be shut down by the end of the first quarter of 2012 to further lower our costs. And we will continue to consider capacity requirements over the course of 2012, subject to market conditions and customer and labor negotiations. In China, we will complete the integration of our recently acquired facilities. Our primary focus will be on our business in northern China. We will also there continue to adjust our existing footprint. As we discussed last quarter, several of our older facilities in China are becoming encroached by urban growth and must be relocated. As a result, the land values of these properties have significantly increased, and we expect the proceeds from the sale of these facilities will allow us to fund the rebuild of these plants at alternative sites. We have now completed the sale of our former Guangzhou facility and will expand a nearby plant. Also we will begin construction of a new greenfield factory outside of Shanghai later in the year in anticipation of the sale of the old facility. I will now turn the call over to Ed.

Thanks, Al. Let's begin our financial review with the fourth quarter reconciliations for sales, operating profit and EPS on Chart 7. Please see the appendix for our full year 2011 reconciliations. Fourth quarter 2011 segment sales increased to nearly $1.8 billion. Volumes increased by more than 4%, and this improved the top line by $74 million. Higher prices also raised the top line by $15 million in the quarter, slightly offset by approximately $7 million from shifts in product mix. Finally, currency translation reduced our top line by $15 million. This impact was largely due to a weaker Brazilian real. Moving over to segment operating profit. The fourth quarter was $201 million compared to $221 million last year. Higher volumes added $16 million, mostly led by strong shipment in Europe in the quarter. Also higher pricing benefited segment operating profit by $15 million. However, the benefits of higher volume and prices were more than offset by $55 million of increased manufacturing and delivery costs. This was driven by cost inflation. Operating and other expenses were $5 million lower than the prior year, aided by global cost-cutting initiatives that will also benefit 2012 results. And finally, currency translation reduced earnings by only $1 million in the quarter. However, we saw a considerable exchange rate volatility during the quarter. Finishing with the EPS reconciliation, adjusted net income was $0.48 per share in the fourth quarter compared to $0.45 in the prior year quarter. Operating profit components decreased earnings by $0.07 from the prior year for all the reasons I just mentioned. However, non-operating items netted to a $0.10 benefit to these earnings. Lower corporate cost added $0.04 due in part to better results from sales in our global equipment sales business. In addition, a lower year-over-year annual effective tax rate, the ETR, resulted in a lower fourth quarter rate, which improved earnings by $0.02. Lower interest expense and noncontrolling interest also added $0.02 each. Let me conclude with several comments on GAAP EPS. As we have been discussing throughout the year and as Al just mentioned in his comments, the emerging structural change in the Australian wine industry has significantly reduced our outlook for this important market. This led to a detailed assessment of Asia Pacific's goodwill. Based on that evaluation, we wrote off the carrying value of this segment's goodwill by recording a non-cash charge of $640 million. Restructuring and asset impairment charges of approximately $63 million were recorded in the fourth quarter. This was primarily related to our furnace closure in Spain, further cost as part of our restructuring in Australian capacity and some adjustments to asset values in China. We also performed the annual evaluation of our asbestos-related liability and recorded a $165 million charge. I will review asbestos further in a minute. The after-tax impacts of these items are listed in the appendix to our presentation as well as in our earnings release. So let's move to Chart 8 for more detail on our balance sheet, cash flow and capital structure. On December 31, 2011, cash was $400 million, and gross debt was approximately $4 billion. So net debt was $3.6 billion, slightly down from the prior year. Our net debt-to-EBITDA leverage ratio was 2.9x at the end of the fourth quarter, which was lower than our third quarter, flat with year-end 2010 and well below the bank covenant limit of 4x. Free cash flow was $220 million for full year 2011, compared with $100 million for 2010. Capital spending was more than $200 million lower than prior year as we had less spending for expansion and restructuring than in 2010. At the same time, working capital was a use of cash in 2011, impacted by increased inventory and receivable levels to support higher sales. Now let me shift to several 2012 outlook topics, starting with our capital allocation priority. Debt reduction will continue to be our primary focus, and we plan to further lower our leverage ratio. You will see this impact from our second half free cash flow in 2012. Also we will continue to fund our Australian and Spanish restructuring activities with the potential for further capacity adjustments in Europe. And from the growth side, we have a planned capacity expansion in Brazil. Next, let me review the year-end valuation of our pension plans. Marginal asset returns and historical interest rates have combined in 2011 to increase our underfunded pension liability by more than $200 million. Accordingly, our 2012 cash funding requirements for pensions are expected to increase by approximately $35 million. With that said, our pension obligations are manageable. They're very long term in nature. On the other hand, the accounting treatment for non-cash pension expense is very complex. For example, in 2012, our pension expense will remain basically flat with 2011 levels even though contributions will increase. Therefore, in order to provide more clarity, we will be introducing 2 changes to our pension reporting starting in the first quarter of 2012. First, we will be changing the allocation of our pension cost, but this will not change our total company earnings. Our regional businesses going forward will only reflect the service costs related to their current employees. All non-service pension costs will be retained at the corporate level. This change will increase consistency between all regions and ensure each segment reflects only the costs associated with employee benefits earned during the current year. It will also ensure that non-service costs, which are primarily related to amortization of actuarial losses and tend to be volatile, are segregated from our regional results and do not impact strategic decisions at the business level. In the appendix of this presentation, we have revised prior period segment earnings to conform to this new reporting convention. The other change we are making involves an expansion to our cash flow statement since pension expense and funding are calculated using different methods. This expanded presentation is already included in the cash flow statement, in our year end 2011 earnings release and show separate lines to identify both the non-cash pension expense and the cash funding impact to our free cash flow. Turning to asbestos on Chart 9. Nothing has changed in the basic fact pattern. As illustrated, our full year 2011 asbestos payments declined to $170 million. This continues a 4-year trend of declining payments. As part of our normal practice, during the fourth quarter of 2011, we conducted the annual review of our asbestos-related liabilities and recorded a charge of $165 million. We also expect our 2012 asbestos-related payments to be approximately $165 million. Overall, our outlook remains consistent. Asbestos is a limited and declining liability for O-I. On Chart 10, we present our business outlook for both first quarter and full year 2012. Overall, we're looking forward to a solid year but we will also have challenges. My comments will start with the full year and then close with our view on first quarter trends. 2012 price/inflation spread. We expect higher selling prices this year, which will positively impact global sales by up to 5%. Prices should improve across all regions and be led by South America and Europe. We anticipate that 2012 inflation will approximate 2011 levels and range between $200 million and $230 million. Similar to 2011, the increase will come from higher soda ash prices and labor costs as well as generally higher energy prices at our international operation. Sales volume. We expect that shipment levels will vary by region in 2012 and be flat overall. South American volumes should be up- to low-mid-single digit, while flat volumes are expected in North America and Asia Pacific. We expect Europe volumes to be down, but they have the most uncertainty that this region will be entering into a recession, maybe entering into a recession. Also we do not know the full extent of the impact on our volume from the European pricing strategy. Other manufacturing and delivery costs. As mentioned, we will implement temporary production downtime to offset lower expected shipments in Europe and Australia to maintain tight working capital levels. This downtime is expected to lead to approximately $40 million of additional unabsorbed fixed costs in 2012. Other costs. Operating expenses across the regions, this is our global term for SG&A and engineering, should be approximately $15 million lower in 2012 due to cost-cutting initiatives. At the corporate level, we also have SG&A and R&D. We anticipate approximately $25 million of higher costs in 2012 to support increases in research and development and sales and marketing. The increase also reflects accruals for incentive compensation that were smaller in 2011. For 2012, pension costs are expected to be similar to 2011 as I mentioned earlier. Interest expense is expected to decrease approximately $20 million in 2012 as a result of the refinancing activities that we completed in 2011, and there's no expectation for interest rate movement. Our 2011 effective tax rate should increase to more normal levels and be approximately 25%. Regarding the impact of foreign currency translation, given the unfavorable exchange rate movement over the past few months, we expect that currencies will be a moderate headwind to U.S. dollar earnings in 2012. For example, if average 2012 exchange rates for the euro, the Brazilian real and the Australian dollar remain consistent with the year end levels, we would expect an approximate $45 million unfavorable year-over-year impact on segment operating profit in 2012, but our foreign debt will probably give us a $5 million tailwind on the interest line. Underlying free cash flow. As Al said, we will begin to report an expanded free cash flow metric in 2012. Underlying free cash flow. We define this metric as a traditional free cash flow, which is cash flow provided by operating activities less capital spending. Then we add back to this number the capital spending in China for a replacement of capacity lost due to land sales. As Al said in his comments, we are selling the land use rights for several of our older facilities in China, which are in urban areas. The proceeds from these sales should allow these replacement projects to have little or no impact on our net debt levels. Therefore, excluding approximately $50 million of China replacement CapEx, our capital spending outlook is $350 million for 2012. Next is working capital. Despite a likely increase in accounts receivable this year due to higher pricing, we plan to hold overall working capital flat with 2011 levels by using temporary downtime for inventory control. Of course, if we see improved shipment levels as the year progresses, we may need to build working capital levels to service this incremental business. Restructuring payments are expected to be at least $50 million in 2012. But our final plans around restructuring could change based on business conditions in Europe. Expected pension contributions and asbestos payments are also provided on Chart 10. Overall, based on our current expectation, underlying free cash flow should be approximately $250 million in 2012. Now looking at the first quarter arrows, you see that they are directionally the same as the full year. However, first quarter price increases will likely to be more moderate than in the later quarters as contracts get reset gradually as the year progresses. Globally, sales volumes are expected to be flat in the first quarter. We expect currency to be a moderate headwind in the quarter. Other manufacturing and delivery costs will be higher, and we expect lower production levels in Europe as they manage supply and demand with temporary downtime. And in South America, we expect lower year-over-year segment operating profit in the first quarter due to furnace rebuilds and project activity during this seasonally slower period. And similar to 2011, we expect our South American results to improve as the year progresses. In conclusion, as we announced yesterday, this will be my last year of earnings call with O-I. I will be turning 65 in June and will be retiring in mid-2012 after 38 years of service to the company and most recently, 7 years as CFO. I've been anticipating and preparing for this event for some time. With my successor, Steve Bramlage, we will ensure a smooth transition in the upcoming quarters. I have worked closely with Steve since he joined the company 7 years ago as Vice President and Treasurer. He has had a number of significant financial and operational positions within O-I, most recently, our President of the Asia Pacific region. This experience base will serve him very well as our next CFO. I would like to thank all of my friends and colleagues at the company and in the investor community for making my years at O-I both enjoyable and fulfilling. And now, I'll turn the call back to Al.

Thanks, Ed. Although our 2011 results were not up to our expectations or even our capabilities, I am pleased with the progress we made in the second half of the year. We refocused on our operations and expect better performance in 2012. We are also optimistic that we will improve profitability in 2012 because higher pricing should exceed cost inflation this year and allow for some margin repair. Overall, our business fundamentals were good, but continued uncertainty in the European financial markets requires a cautious outlook on this important region. As we have demonstrated in uncertain times in the past, we are prepared to be flexible and manage our capacity to preserve cash generation. Our continued focus on operational excellence should also yield higher free cash flow this year. Our priorities for this cash will continue to be to lower our leverage ratio, fund our Australian and European restructuring and proceed with an expansion in our growing business in Brazil. Well, before I open up the line for your questions, I'd like to take a minute to thank Ed for his contributions to O-I and to my global leadership team. He has been instrumental in strengthening the financial flexibility of our company in his 7 years as CFO. And beyond that, he has made enormous contributions to O-I in the 38 years he has worked here. Ed has been a great leader and has done an excellent job of preparing Steve for his new role. His profound knowledge and deep experience with the company has been invaluable throughout our transformation in recent years. Thank you, Ed, for your contribution and for all you've done for O-I and all that you're still going to do. We have known for quite some time now that Steve will take this role. He has obtained valuable operations experience in Asia Pacific over the last 2 years, and we look forward to welcoming him back to Perrysburg. And we're confident that he will help us continue on the path to strong financial flexibility. Thank you, and now I will ask Angela to open up the lines for your questions.

[Operator Instructions] Your first question is from the line of Phil Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Ed, best of luck on the retirement. I certainly wish I was retiring after one more earnings season as well. So just a couple of questions on the guidance. The first one is with the first quarter. Do you expect -- with the pricing being more moderate, does that mean price cost is actually negative in the first quarter? And so I guess, given the other moving pieces, it sounds like maybe earnings will be kind of more flat to down, is that fair?

I think what you have to keep in mind is that as we go into the first quarter, we still have cost structures in our inventory from last year, so you will not immediately see the inflation. And inflation typically works its way gradually throughout the course of the year. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay, so I mean, is there any -- can you give any more color as to whether it will be up or down in terms of earnings?

We would expect our margins to improve. The question really is going to be what is the volume impact going to be. As we said, we're still negotiating about 25% of our pricing volumes with customers in Europe, which I hope will conclude within the next 2 weeks, and then we'll have a much clearer picture. So it's really a trade-off between volume and thereby production utilization as well as actual price increases that will determine the margin. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay. And then, just on the operating expense or, I guess, maybe it's the manufacturing and delivery cost, I should say. For the full year, I understand the underproduction you're going to do. But there were some other items last year. Obviously, the North American issues, the floods, you had the facility closures, so there should be some benefits there. So I guess, I was expecting to see a little bit more benefit from those things in the guidance for this year. So is that factored in there somewhere, or can you give a little color around that?

Yes, let me try to answer that. We're not expecting the returns of the $20 million penalty that impacted North America in the second quarter. With regard to Australia, I think we should see some fixed cost savings after the furnace closings. But there will be offsetting costs to reorient the existing business. And business conditions, as we mentioned in our comments, remain fluid in Australia at this point in time. We do not yet know exactly on how the decrease and bottled wine production in Australia will continue to develop. So you will not necessarily see a full compensation for the unusual events that we had in the first quarter of last year. With regard to operating expenses, our operating expenses in the line where you see that primarily comprise of salaries and other SG&A costs within the regions. They do not really contain manufacturing or operation costs in the plants. And our recent cost-cutting measures will drive some of our savings in 2012, I think, to the extent of about $10 million, $50 million or so. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay. And just before I turn over, can you give me what the D&A is expected to be in 2012, is that lower?

It's $425 million.

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

Al or Ed, I wondered if you could put a little more kind of color on what you're expecting in price just going from region to region. I'm particularly wondering here in North America. Will price actually go down as it kind of reflects lower natural gas costs?

No, we would see that the natural gas prices already in the course of last year were trending downward, so I don't see a big drop off in natural price going into next year. And as you know, in North America, it was really one of the first regions where we had almost complete pass-through provision, so it's really not going to impact our margins. And with regard to the other components though that we were not recovering last year, which were related to labor costs, which were related to asbestos costs -- I'm sorry, to soda ash costs, they are now being passed through to the contract. So I would expect a price movement in North America around 3.5% to 4%. In Latin America, inflation, especially projected inflation for this coming year, tends to be a bit higher than last year because many of the countries in Latin America have really increased their energy cost contracts significantly. So our price increase movement in Latin America was from -- in between, I would say, about 6% to 8%. In Europe, I would expect to come in around between 5% and 6% in actuality. But there have been some significant differences in Europe based on a regional basis because inflation rates tend to vary significantly within the European countries and so our range of increases from our customers, and that's really what matters to our customers because it's really an individual negotiation, have been in the double digits to mid-single digits range. So there have been significant variations in the increases that we needed and we've been very successful. And then in Asia Pacific, our pricing is mainly going to come from China. And since China is fairly small in volume in the region, it's not yet really going to move the needle significantly. I would say Asia Pacific, maybe 2% or 3%.

Okay. And then if I could, this is to follow on, Al. Just when we think about the negotiations that are still taking place over in Europe, can you just help us understand how that volume could change for you as you move through the year, depending on whether you hold on to business or you don't hold on to business? And also, is there a lot of slack because I talked with one of your other competitors, and it didn't sound like they really had much incremental capacity. So I'm just curious about how much ability there is for volume to move around in Europe right now from a capacity standpoint.

Okay. Well, I mean, as we said in our statement, about 75% of our contracts have been negotiated, and we have achieved our targeted level. So that would reflect that level of confidence. So the issue in the remaining part of the market in the 25% that's not yet settled, you're really talking about very small customers. Those are the customers that have the greatest opportunity to place their 200,000 bottles or 500,000 bottles easily with another competitor and even many of the small competitors that we have in Europe. And that's where we still have the greatest uncertainty because there the customer base is still looking around for some slots that they can find where they can place their volumes and not willing yet to make a commitment with us. Now depending on how successful some of those customers are going to be, and as that may impact our overall volume expectations. That's really what we're talking about at this point in time. And we already have made an adjustment in our capacity as we said in our statement by shutting down a furnace in Spain, which will really help us to absorb some of the fixed cost that basically we might not see as volume in this coming year. And then, of course, the big issue surrounding all of this is the macro uncertainty. That's a big driver at this point as well. I would say in all the European papers that I read on a regular basis, I don't see any positive comments at this point in time. And so we've got to make sure that we keep in mind this uncertainty. And if the year progresses better, then we expect at this point in time we'll be happy to adjust our outlook.

All right. Would you say, Al, at this point that volume in Europe has held up better or worse than you would have expected given those newspapers?

Yes, that's clearly the reflection of our sales volume. It is not a reflection of the headline.

And your next question is from Al Kabili with Credit Suisse. Albert T. Kabili - Crédit Suisse AG, Research Division: All right. I guess, Al, a question on strategy around hedging on energy in Europe. Could you talk about what you're hedged right now in the energy this year? And if I remember right, it's about 50% you typically do. And have you thought about changing that?

Yes, and as you know, hedging requires some intense thought processes. And we are at this point in time approximately 60% hedged. Our long-term contracts secured. We will most probably increase that number because we now have clarity about our price structures that we have. So it only makes sense to secure that position as we go forward. Overall on a global scale, I would say we're -- about 70% of our energy costs are either covered by fixed price contracts with very often government controlled entities, either -- or are hedged, or are covered by pass-through provisions. So 70% of the volatility of the energy is really at this point in time secured by offsetting contracts or provisions. Albert T. Kabili - Crédit Suisse AG, Research Division: Okay, and in terms of taking up the 50% here, is that up meaningfully, like 75%, 80%? Can you kind of bracket what we should be thinking about as you conclude these negotiations?

What 50% are you referring to? Albert T. Kabili - Crédit Suisse AG, Research Division: The energy hedges, I'm sorry. In terms of you mentioned that you're looking -- look to take that up as you've got clarity, is there something you can help us bracket that in terms of how high you're looking to take that?

So what the price level is going to be. I would say underlying all of this is clearly the uncertainty with regard to the closure of the Strait of Hormuz which may have a dramatic impact especially on European prices. Also costs for liquid natural gas is having a significant impact on Europe. So I would say given the significant uncertainty that we're facing and the success that we're seeing in our pricing strategy, we most probably would go up to cover about 1/2 of the stuff that's not covered at this point in time. Albert T. Kabili - Crédit Suisse AG, Research Division: Okay. I guess, with what's going on in Australia, is there -- help us with the -- if you have a view of what your long-term margin target would be in the Asia Pacific region.

I think it's too early to really look at this and come to a conclusive statement that we can take to the bank. It's quite obvious that with the dramatic increase in the Australian currency, we see a huge impact on a lot of manufacturing areas in Australia. For instance, you can at this point in time buy premium beer, imported beer from Europe or from Mexico cheaper than you can buy standard local beer in Australia. And the channels to market are clearly using that and putting a lot of pressure on the brewers, which may have an impact on volume and continue to impact on volume as we go forward. On top of that, we are going to see some negotiations for contracts, which are expiring I believe in 2013 and 2015 over the next year or so. And that will also give us greater visibility of what we are going to see with regard to volume requirements as we go forward. We are clearly seeing a much greater activity with regard to growth in Southeast Asia as well as in China, than in Australia and New Zealand. So I would say, overall, our margins, as the volumes in those other countries where margins tend to be lower will increase the overall margins for Asia Pacific, will most probably compact further than what we are seeing so far.

Okay, we have some time constraints, so we'll need to move on to Phil Ng from Jefferies. [Operator Instructions] Thanks. Phil?

And your next question is from the line of Philip Ng. Philip Ng - Jefferies & Company, Inc., Research Division: Congrats on the retirement. Ed, it's been a pleasure working with you. Just had a quick question, it sounds like you're cautious about the demand picture, but I just want to get a sense of how this industry is set up. I know the last time when you guys raised price pretty aggressively, the inventory might not have been as lean, and supply wasn't as tight. I just want to get some color around that.

Yes, I think the main difference is that when we went into this last time, there was considerable and long-term overcapacity still in the marketplace. From our own activities during that phase, I think we closed about 20 to 25 furnaces. Many of our competitors also reduced capacity. And certainly as we are coming out of this economic recession, we're reaching the balance point between supply and demand much faster. So I think the base underlying conditions of supply and demand are quite different from what we saw in 2007, and that gives us confidence and as we are also seeing in the success of some of our pricing actions that the market is much more balanced than it was at that point in time. We will certainly expect to see that continued productivity improvements not only with us but also with our competitors. We'll continue to add output capabilities, but that should be more in line with the overall market growth that we expect to see in a more traditional market. Philip Ng - Jefferies & Company, Inc., Research Division: Okay. And correct me if I'm wrong, historically, smaller customers you've been able to get a little more pricing in the past. Is that fair, or this is more of a commodity customer you're still trying to lock up?

No, but the point is the competitive level. If the market is not in balance, it's just much greater at that smaller customer because the ability of suppliers to cover large mega beer customers or large volume buyers is much more restricted. So we tend to typically have much more flexibility and variability in that part of the customer base, but that's ultimately -- the results ultimately are going to be driven by overall supply and demand. And that's -- at this point in time, we're going to have to see, and we will have the answer most probably in the next couple of weeks, whether we really are going to see an impact there or whether there's just still a lot of stuff in flux, and people just are not willing to make any commitments yet.

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

My call -- and Steve, congratulations. And Ed, looking forward to working with you next couple of quarters. Anyway, thanks for all your help over the years. My question is around cash flow and capital allocation. On the one hand, you're in some regions where there's still some growth, clearly South America, clearly Southeast Asia. But you have some other regions like Europe, like North American that are mature or declining to some degree. You outlined for this coming year, roughly about $50 million of restructuring cash that you'll lay out perhaps a bit more. Without being able to identify specifically, which plants or regions for the future, Al, what do you think the cumulative amount of restructuring cash might look like if we look at, say, 3 years as we think about what your normalized free cash flow should be?

Once again, it's very difficult to say because we need to know what ultimately the demand picture is going to look like and particularly with regard to Australia and Europe. But if you look back over what we have done over the last couple of years, it may perhaps lead to an average of around $70 million or so in the foreseeable future. But the way we approach this, George, is we're also looking then at facilities that would otherwise require cash for rebuild or refurbishing, so there is going to be a trade-off most probably as well in the capital requirement that we would normally have for maintenance. So it's not really just one level that you have to look at. There are a variety of factors that may impact in the cash flow.

Okay. And Al, these weren't necessarily on your watch, they weren't. But when you look at where the big charges were even in this quarter, in Australia and Spain, these are areas where O-I a decade ago made some large acquisitions, BTR, AVIR. Does that suggest that for the future O-I will probably less likely to do acquisitions and rather where it does apply capital for growth do it more organically.

Well, George, I think it's very difficult to reconstruct what people were thinking and what the decision levers were 15 years and 20 years ago. But clearly, Australia has done very well for us over many years with an expanding wine market, with an expanding beer market, expanding economies. We also at the time, we're still buying plastic businesses, which were part of the acquisitions, so certainly things have changed dramatically. And I would say given the increase in the value of the currency in Australia as well as the specific reaction of markets, our customers' markets to this, that of course is very difficult to foresee, and we'll just have to make sure that we adjust appropriately and quickly enough to those changing conditions. And I would look at our Spain activity much more as a point issue given the location of that facility. I think overall the acquisitions that we made with regard to BSN and AVIR in a holistic picture were very successful for us.

And your next question is from Chris Manuel with Wells Fargo.

Just a quick question for Ed. Really, what I want to try to turn around, and I know this is very much a moving target is when we look at Europe if I go back and sort of imply given the ranges for volume that you gave us in other regions of the world, suggesting that you're kind of thinking Europe might be down low single digits over the whole year. And what I'm trying to balance is during the last recession, European volumes declined double-digit levels. I think, they were down about 9%, 10%, 2008; 12%, 13%, 2009. Does it feel like that in some ways that potential -- we have a potential for a pretty big downdraft from a recession-oriented component there? I do appreciate the markets are much tighter. But I just wanted to get a feel between that and the pre-buy, what you think the potential for downside could be in Europe on a volume perspective.

Okay. Well, let me first address the issue of pre-buy. When I look at Europe, of the 5% growth that we saw in the quarter, we may perhaps have seen 1 percentage point of that has really been pre-buy, so it's really not that dramatic a component of what we saw. Supply demand is clearly in a different place than it was 3 or 4 years ago. And also I would say one of the effects that you saw in that time period that you referred to was that the pipelines from European products that were identified with a location, like scotch or champagne or Bordeaux, are very long into the rest of the world, and we were pretty full. We certainly have not seen that pipeline filled up that much over the last couple of years. So I would expect a volume impact to be relatively mild with regards to -- or in comparison to what we saw a couple of years ago.

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

I guess, just quickly on the pricing front in Europe, I think you mentioned, Al, that there's a pretty wide range. And if you confer that there may be potentially be some upside when all is said and done to the 5% to 6% range? Or did I not read those comments correctly?

No, I said the price is likely to be in that 5% to 6% range and its overall impact. As I said earlier, we have had significant variation customer from customer what the price correction needed to be. And even in those cases where we had double-digit negotiations, we have been successful, which gives me some confidence that really we're on good path, and that we will be able to drive those increases throughout the year. I would expect though that I will certainly be able to talk with an even greater level of conviction at the end of the first quarter after we have everything wrapped up.

Okay, great. And then just one quick follow-up on Europe. On the demand front, I think you also mentioned that you're not necessarily actually seeing any at this point underlying demand softness, but it's just more speculation with the economy being weak. Is that true that you haven't actually seen this demand?

Yes, let me talk about where the uncertainty comes from. I mean, we all are basically influenced by what we read in the newspaper, what we hear in the news. And so what is happening is with all the negative news, it's very difficult for leaders of companies, and it doesn't matter whether it's beverage or food companies or basically construction companies, to really sound very confident and optimistic going forward. So there is a general feeling of tentativeness, and people are just not willing to make commitments to launch big programs or new product introductions with the same level of speed and conviction that they have in the past. And then, of course, eventually, that trades down into the organization. However, that is quite independent from what actually the pull of the market is for consumables. And what we're seeing at this point in time, the pull for consumables in the market is pretty solid.

Angela, we're running close to the end of the hour, so we have time for only one more question. And I'll apologize that we couldn't get everyone on the call today.

And your last question for today is Alex Ovshey with Goldman Sachs.

Guys, Ed, congrats on the retirement and best wishes. Question on Europe, what is the level of conviction that you have that you can in fact maintain the pricing, even the pricing that's been already contractually negotiated in Europe, if you see a material weakness in the volume trend into the year if the economy were to weaken there significantly?

As we have experienced in the past, typically, the commitment in Europe is more strongly from the supplier side than from the customer side to any contractual obligation, and that's very often also supported by the courts. So I would say, we're going to see a significant imbalance in supply and demand sometime in the course of this year. That's clearly going to put pressure on pricing. Now how quickly that is then going to manifest itself in volume loss is a little bit dependent because, again, I would expect that most probably we would see the first impacts in the smaller accounts that have the ability to quickly fill their needs from another supplier, and then we would have still time to react as we go into next year to position ourselves and to react to those changing market conditions.

Thank you, everyone. That concludes our full year and fourth quarter earnings conference call. Please note that our first quarter 2012 conference call is currently scheduled for Thursday, April 25, 2012, at 8:30 am Eastern Time. We appreciate your interest in O-I. Again, thank you, and don't forget to choose glass.

This does conclude today's fourth quarter and full year 2011 earnings call. You may now disconnect.