O-I Glass, Inc. (OI) Q3 2012 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 2012 Earnings Call. [Operator Instructions] As a reminder, if you're having trouble viewing the slides and the webcast browser, please refresh your screen. I would now like to turn the call over to Mr. Dave Johnson, Vice President of Investor Relations. You may begin your conference.

Thank you, Angela. Good morning, and welcome, everyone, to O-I's Third Quarter 2012 Earnings Conference Call. I am joined today by Al Stroucken, our Chairman and CEO; and Steve Bramlage, 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 trends affecting our business in 2012. Following our prepared remarks, we'll host a question-and-answer session. Presentation materials for this earnings call are available on 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 Steve.

Thank you, Dave, and good morning. Let me begin by welcoming Dave to the O-I team. He brings a wealth of experience to O-I, and we look forward to his contributions and counsel in the future. Now, let's turn our attention to O-I's results for the third quarter, which were in line with our expectations. Adjusted earnings were $0.69 per share compared to $0.84 in the prior year. Our year-over-year operating profit expanded in 3 of our 4 regions: North and South America, as well as Asia Pacific. However, as expected, persistent sluggish macroeconomic conditions in Europe continue to impact sales. Our actions to balance production to slower demand there led to lower overall earnings for the company. Yet our strong focus on cash allowed us to generate higher free cash flow in the quarter compared to the same quarter in the prior year. Let's now review these third quarter reconciliations for sales, operating profit and earnings per share on Chart 2. In the first column, third quarter 2012 segment sales were nearly $1.75 billion. Price and mix in the quarter were up by $82 million or nearly 4.5% from the prior year. Lower sales volumes decreased the top line by $80 million this quarter, primarily due to lower shipments in Europe, which were partially offset by volume growth in North and South America. Finally, currency translation had the most significant impact on the top line in the quarter, reducing it by $110 million, primarily due to a 10% decline in the euro and a 22% decline in the Brazilian real from the same quarter in the prior year. Moving over to the second column. Segment operating profit in the third quarter was $245 million, down $23 million from the same period last year. Globally, price/mix improvement stayed ahead of inflation by $35 million this quarter. This has helped us to continue to recapture some of last year's unrecovered inflation. Lower sales volumes impacted segment profit by $23 million in the quarter. Manufacturing and delivery costs rose $32 million compared with the third quarter of last year. The increase was driven by higher unabsorbed fixed costs associated with production downtime taken in Europe. Operating and other costs were $2 million lower than the prior year as a result of global cost reductions. Finally, a stronger U.S. dollar reduced the operating profit by $5 million compared to the third quarter of the prior year. Moving to the last column on the chart. As I noted earlier, we achieved adjusted earnings of $0.69 per share in the quarter compared with $0.84 last year. Operating profit, driven by the items we just discussed, was down $0.12 from the prior year. Non-operational items were unfavorable by $0.03 a share. This was primarily due to a higher effective tax rate, which offset the positive impact of declining interest expense. Note, as previously communicated, there were several items during the quarter, totaling $23 million, that management considers not representative of ongoing operations and that were excluded from the adjusted earnings totals. These items include a furnace closure and additional restructuring activities in Australia, as well as a furnace closure in Europe. Now let's move to Chart 3 for some more detail on our balance sheet and free cash flow. At the end of the quarter, our net debt was $3.6 billion, which is down $275 million from a year ago. We made progress on several fronts. Our cash balance was higher, and we repaid gross debt. Exiting the quarter, our net debt-to-EBITDA ratio was 2.8x, an improvement over the third quarter of 2011 and within our target range of 2x to 3x EBITDA. Shifting to cash flow. We generated $171 million of free cash flow in the quarter. That is nearly 25% better than the prior year quarter. This improvement was driven by working capital, which was a greater source of cash in the quarter, largely due to production curtailments in Europe. As we have previously communicated, our capital allocation priorities are clear. Until we approach the lower end of our target leverage ratio range, we plan to allocate approximately 90% of our free cash flow towards debt reduction and the remainder towards share repurchases. Accordingly, we have already taken actions by repaying $189 million of debt and buying back $14 million of the company's shares during the third quarter. Let's now move to Chart 4 to review the third quarter operating profit. As previously mentioned, total operating profit was $245 million in the third quarter, down from $268 million last year. Excluding changes in foreign currency, our operating profit would have been $250 million. As you can see on the chart, the decrease in profit was driven by Europe, while all other regions generated higher operating profits. I will now turn the call over to Al, who will provide some additional perspective on our regional businesses.

Thanks, Steve. Our European operating profit was $74 million in the third quarter, which was down significantly from the prior-year quarter, but in line with our expectations. That said, our focus on price and mix are yielding benefits. Higher prices this quarter more than covered inflation and allowed for the recovery of some of the margin erosion that we experienced last year. Offsetting these gains were lower shipment levels which were down 11% from the prior-year quarter, with most end markets impacted. As you recall, we experienced some share shift to smaller competitors earlier in the year. And since then, our European market share has remained steady. Steve already mentioned the fact that we temporarily curtailed production in Europe. The nearly 20% decline in production in the third quarter led to a higher unabsorbed fixed cost, which was the main driver for Europe's decline in operating profit. We also permanently closed the furnace in Germany at the end of the quarter. And in a moment, I will talk about our framework for further investments to improve profitability in Europe. In North America, operating profit was up more than 10% to $75 million, compared to $67 million in the prior year. Shipments were up again slightly in the quarter, led by growth in wine and food volumes. Price also more than covered inflation. Our operating rates in the third quarter were consistent with last year, reflecting continued improvements in our manufacturing and supply chain performance. In all, the North America business is performing well, with operating margins approaching 15%. Moving to Asia Pacific. Operating profit was $27 million, up from $23 million last year. As expected, shipment levels in this region remain sluggish, down about 7% year-over-year. Nevertheless, we improved our profitability by reducing our structural costs, particularly in Australia. In the third quarter, we announced several restructuring actions in that country, including the permanent closure of another furnace and additional productivity investments across the footprint. We continue to make steady progress. And by the end of 2012, we estimate that we will have spent all but $10 million of the funds allocated to the Australian restructuring program. Supply and demand trends, as well as the outcome of significant contract negotiations, will influence future restructuring activity. And finally, let's look at our South American region. Operating profit was $69 million, up modestly from $67 million in the prior-year third quarter. Shipments were up 9% for the region, with increases reported in all countries. To meet this growth, recall that we have been importing product into our sold out Brazilian market. Thus, higher transportation costs were a headwind this quarter, along with currency. We also incurred typical costs as we started up our newly-constructed furnace in Southern Brazil in mid-September. Production levels of this new furnace have been improving, and we expect to be running at high operating rates by the end of the fourth quarter. So once again, our overall third quarter performance was in line with our expectations. Let's move now to Chart #5 and our outlook for the fourth quarter. Overall, we expect to see mixed results from our segments. Starting with Europe. Business conditions will continue to be challenging. Sales volumes will likely maintain their pace and run about 10% below the prior-year fourth quarter. We will continue to tightly manage inventory, which should cause production volumes to decline more than sales. We expect that the price increases we have already achieved will more than cover inflation in the fourth quarter and will partially offset prior-year unrecovered inflation. On balance then, the expected year-over-year decline in Europe's operating profit in the fourth quarter should be moderately better than the $37 million contraction reported in the third quarter. In North America, we expect our underlying operations to continue to perform well. But keep in mind that we operated our assets at an abnormally high production rate in the fourth quarter of 2011 to replenish inventories. This led to a very favorable fixed cost recovery last year. Now that inventory levels have been rebuilt, we are planning to run this region at normal, lower operating rates in the fourth quarter this year. As a result, we do not project a repeat of last year's benefit from the fixed cost recovery. Also, we are planning several significant furnace rebuilds in the fourth quarter, timed to take place in this seasonally slower period. This will lead to higher downtime and project expense in the fourth quarter. Taken together, we expect operating profit to be down moderately versus the prior year fourth quarter. Moving to Asia Pacific. We expect to see continued sluggish sales volumes, particularly in Australia and New Zealand. However, we should also see continued benefits from the fixed cost savings measures mentioned earlier. Overall, we expect Asia Pacific's operating profit in the fourth quarter to be flat with the prior-year quarter. And finally, in South America, operating profit will likely be stronger in the fourth quarter compared to the prior-year period. Shipments should continue to be robust and are expected to be up by high single-digit percentage from the prior-year quarter. Also, as the newly constructed furnace in Southern Brazil continues to ramp up, we should see startup costs moderate as the fourth quarter progresses. This should allow for some margin expansion over the third quarter level. Overall, we see the percentage decline in fourth quarter year-over-year adjusted earnings as somewhat larger than the company experienced in the third quarter. Now let's move to Chart 6 and review our European asset optimization program. Europe is our largest and most complex market, and we are firmly committed to profitably serving our very important food and beverage customers there. Clearly, we need to better align our business and, more specifically, our assets with the needs of the marketplace. Our actions will significantly enhance O-I's competitiveness in the region by improving our cost base, quality, sustainability and capabilities. While we are addressing assets with higher cost structures in the region through asset rationalization, we also continue to invest in our footprint to increase our asset efficiency. Optimization work is already underway. And during the past year, we have closed 3 furnaces in Europe and have made investments to boost our productivity at several key sites to increase their furnace capacity and reduce cost per ton. In addition to ongoing CapEx in this region, we anticipate spending approximately $70 million on European asset optimization next year. Globally, we had significant spending in 2012 for several projects, such as the restructuring in Australia, new furnaces in Brazil and in China. Now that these projects are mostly complete, we are effectively reallocating our capital towards Europe in 2013. We will implement our changes in Europe to avoid disruption in the first half of the year, when seasonal production and shipments are higher. As a result, we will likely not see benefits from this program hit the bottom line until the back half of 2013, and they should gain momentum in 2014. We envision executing in phases over the next several years that progressively build upon one another. While the cash outlays for these activities are significant over that time period, perhaps $200 million to $250 million above our normal CapEx levels in Europe, we are absolutely committed to ensuring this program does not impede our ability to grow O-I's free cash flow. Clearly, this level of investment is significant and demonstrates our commitment to better position O-I in a market that requires its supply base to step up to ever-increasing demands for high-quality, sustainable and innovative products. That brings me to a few final remarks. Our third quarter results were in line with our expectations. Deliberate actions to balance supply with demand in Europe resulted in good free cash flow generation, and we will continue these actions in the fourth quarter. Despite challenging European market trends, stronger business performance in our other regions should result in higher full-year adjusted earnings than the prior year. We remain confident that we will generate at least $250 million of free cash flow for the full year, and we will continue to prioritize our capital to repay debt. Finally, asset optimization in Europe will improve efficiencies and capabilities for the long-term in a region that is critical to O-I. And we look forward to sharing more details with you regarding this program and the longer-term plans at our next Investor Day, which we have now scheduled for February 14, 2013 in New York City. Thank you. And now I will ask Angela open up the lines for your questions.

[Operator Instructions] And your first question is from Anthony Pettinari with Citi.

You indicated that you would reallocate some of the capital spending from 2012 global projects to the European restructuring in 2013. Should we interpret that as total CapEx for 2013 should be kind of roughly flattish with 2012?

Yes. I think when we look at our overall capital spend, I don't think we will see much variation.

Okay, okay. And then I think earlier you had indicated that total scope of European restructuring could be 5% to 7% of capacity, and I was wondering if you could just kind of give us your latest thoughts on that? And then also, does the restructuring potentially change your footprint within Europe in terms of exposure to southern Europe versus northern Europe? And any thoughts there?

Yes, I would say the overall percentage impact on capacity over that entire period of time over the next 3 years is about right. What we are particularly focusing on is facilities that we acquired through our various acquisitions and that are no longer located in geographic locations that have a strong industry because the industry moved away, are the ones that are predominantly going to be impacted. And so that will require us to invest in other facilities that are closer to these markets to pick up that volume. And so we get a significant benefit from logistic cost savings as well. So it's not just manufacturing cost that we're looking at, we're looking at total cost to serve the customer. That's important for us in the future to position ourselves more competitively.

And your next question is from Philip Ng with Jefferies. Philip Ng - Jefferies & Company, Inc., Research Division: When you look at your North American business, obviously you had some setbacks in the past. Restructuring has obviously done -- you've done a pretty good job. Overall, margins are quite nice. Assuming if volumes do stabilize a little bit here in raw materials, not a real big drag going forward, how should we be thinking about normalized operating margins going forward in both Europe and Asia Pac?

Well, Philip, if you recall, we have said earlier that our target long term is to be in the mid-teens or slightly above the mid-teens with regard to our overall margins that we expect to achieve in our businesses. Now clearly, there are some variations from region to region. But I believe that for North America, we're getting closer to that objective and to that target point. The steps that we're taking in Europe with regard to improving our operations and efficiencies there are also geared to get to that point. And I believe with the steps that we already have taken in Australia and the additional steps that we're still working on at this point in time also in that region, I think we should come close to that range that we have indicated. And Latin America, of course, stands out a little bit by itself, given the fact that it still has a very high proportion of returnable bottles, which typically tend to have a better competitive position compared to alternative packaging and, therefore, allow for a higher margin. Philip Ng - Jefferies & Company, Inc., Research Division: Okay. And you gave some highlight on the restructuring for Europe and Asia Pac. When should we expect Asia Pac to be complete? And I guess for Europe, should we be complete by end of 2014, mid-2014?

So I'll try that. On the Asia Pacific projects, which are generally focused on Australia, as Al mentioned in his prepared comments, we've spent -- by the end of this year, we will have spent all but about $10 million of that program. I believe we had announced approximately a $50 million targeted cash spend associated with that. So we are -- we would be about 80% of the way through that. And the remainder of that will largely be contingent upon what happens with some significant contract renegotiations over the course of the next year. We will be at the end of this year roughly balanced from a supply-demand standpoint with the market in Australia and New Zealand. I'm not finished with that. The European program that we referenced, that's a 3-year program for us. So the $70 million that we indicated is the beginning of that in the 2013 timeframe. But as Al mentioned, it's potentially $200 million to $250 million in total. But that would be over a 3-year time frame, so think through 2015. Philip Ng - Jefferies & Company, Inc., Research Division: Okay. And I guess, can you give us an early read on inflation for 2013? I mean, I know your cost, from an inflation standpoint, certainly agrees on the stuff that you have in Europe is locked up at the beginning of the year. Energy is obviously down quite a bit. So how should we be thinking about inflation for 2013? And if inflation is less of a tailwind, is there an opportunity for you guys to pick up some market share in Europe, potentially exceeding some price for 2013?

Well, I would say overall with regard to inflation, as you know, we're coming in a little bit lighter than we had initially anticipated at the beginning of the year, I think about $10 million or $20 million lighter. I would expect, based on what we're seeing at this point in time, that inflation next year is going to be at a similar level on a global scale, perhaps a little bit lighter than this. That really depends a bit on what energy is going to do, and that is, of course, notoriously unpredictable. We have seen considerable increased demands, at least based on what CMAI reports on soda ash, and we'll have to see how that works out. Our expectation continues to be that we will pass through inflation into the marketplace. We clearly have lost some feathers in Europe in the first quarter of this year to smaller competitors who used the umbrella to grab some volume in a weak market that they were seeing in their own markets. We will certainly take a look at that and see which one are the profitable ones that we may want to make sure we recover. And you've heard me say in the past that Europe has this cadence of basically having 70% of our volume renegotiated every year, so we can reset every year.

And your next question is from Adam Josephson with KeyBanc.

Sorry if I missed this. Have your CapEx plans changed since last quarter? And for that matter, any other component of your free cash flow guidance?

No. I'll do the second one first. Free cash flow guidance is unchanged. We anticipate being able to come in above $250 million for the calendar year of 2012. And we had last guided in the third quarter to a CapEx number of approximately $350 million for the year. We are still working very hard to be able to execute $350 million worth of projects over the course of the year. Obviously, it's back-end-loaded. Some of that is because of the lower seasonal demand that we normally get at the end of the year. Some of that is just because of the capacity reductions we're currently doing to control working capital and provide more of an opportunity to take advantage on the project side. But we are working to execute towards that $350 million this year for CapEx.

Thanks, Steve. And just on Europe, I know you expect volume to be down by 10% in the fourth quarter. Can you break down northern versus southern? And in southern, specifically, what exactly the source of the volume weakness is? Is it domestic wine consumption? Is it exports? What exactly is it?

Yes, I would say, and again, you also have to look at different time periods. So I would say in the first half of the year, beer was particularly unaffected by the economy because, in anticipation of the Olympic Games and the soccer championship in Europe, there was a lot of beer manufactured and put into the channel. That saw some reduction and some correction in the third quarter. So I would say in the third quarter, it was more balanced as far as overall reduction in demand is concerned. But throughout the year, wine in particular has been weak. And that's mainly due to Italy, Spain and Portugal as the main areas that really have been affected by consumption patterns that were quite different from what we've seen in the past. And since those are areas where we have a heavy representation, perhaps more than at least 1 or 2 of our other competitors, we are more affected by this geographic impact that we have been seeing throughout the year. I would expect clearly that, given the overall macroeconomic conditions, next year is not going to create a lot of buoyancy in demand, either. But also, I would assume that we are at a fairly low level at this point in time, so I don't see a real potential for further declines.

Just to clarify, when you're talking about the wine weakness, is it more domestic consumption or export?

No, it's basically domestic consumption. And export is still holding up pretty well. And in fact, China is now I think the biggest export market for France.

And your next question is from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: On your slide deck, when you talk about $70 million in cash spending for Europe, how is that split between the productivity projects and then just regular cash restructuring as you rationalize capacity there?

Ghansham, it will be a combination of the 2, as you would expect. We don't have it broken out specifically right now to exactly how much would be what we would call restructuring versus traditional capital spending. I would expect we will have that over the course of the next month, and we will provide that level of detail to people. But think of the $70 million, which is how we've asked our European business to think of it as, it's the budget in terms of the incremental investment that we feel comfortable we can make and manage to the cash flow targets that we have, and they will bring forward the appropriate mix of projects within that $70 million to get us the best results. But I would hope, certainly before the end of the year, we'll have a better idea on exactly what the split will be. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: And second, if I could, on the $70 million and your aggregate cash spending, how are you getting the organization to think about the payback period for all this capital that you're allocating towards -- it seems to make a lot of sense in terms of the structural changes that you're undergoing there. But I'm curious on the payback. And also, Al, if you could just comment on the last question on Southern Europe. The grape harvest in the trade publications have been reported as very, very poor. And just I'm kind of curious on what your thoughts are there as it reflects -- as it relates to your business.

Yes, I would say, as far as the payback is concerned, typically when we make these investments, we really are looking for a fairly high return. And you'll recall from the restructuring that we did in North America, I think we're looking at a 2-year payback period. And we're following the same guidelines here as we go into Europe. So it's a fairly high-return investment that we're making and that we expect to generate with the money that we're spending there. Now with regard to the overall reports on the wine harvest, I would say Europe has traditionally had a very well developed supply chain. So there are a lot of imports also in the wine industry that really at times augment the overall harvest. So I really don't think that the report of the harvest per se is going to significantly affect the bottling of wine in the course of next year. The wine may come from different providences, but that really, I think, is not going to have a huge impact on the overall consumption of glass. Typically, also what you would find, if the market is tight and if the harvest has been tight, there is a tendency on the part of the vendors to go to higher-priced wines and that gives you higher price points, and that typically also gives you a higher quality and also a higher priced bottle.

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

My 2 questions are these: First of all, as we think about Europe, and I realize that you can't comment too much on a broader form like this, Al. Historically, O-I has had a great position in southern Europe than Eastern Europe for that matter, through the AVIR acquisition way back when. Certainly, Southern Europe isn't doing terribly well right now for the macro reasons, but it's historically it's been a very good market, because of the end markets and glasses mix within these markets versus other packaging substrates. Do you think, if in fact you need to reduce production in places like Italy and Spain and Portugal that you might be able to serve those, economically speaking, from places like Eastern Europe? Or can you give us a little bit more color in terms of how that footprint might evolve? The second question is, going into this year, if I recall, the view was that you wanted to produce more evenly over the course of the year to take out the fluctuations in your business, perhaps smooth out the absorption, certainly this year perhaps demand wasn't as much as you'd expected, so you have this inventory reduction in the second half. Do you expect to produce at a more even level again next year? Or do you think you'd be producing more in line with the seasonal demand swings?

All right, let me start out with question #2. I think the curve next year will develop a little bit differently than we saw this year, because we will approach it a bit differently. So I think we'll most probably not see the strength in our earnings in the first half we've seen this year. We will have a more balanced approach as we go into the year to even out some of these variations because I'm sure they create consternation on the part of investors. And we can most probably manage that a bit better than we have done. The other part, with regard to shipping from other locations, I think it really varies from segment to segment. I would say we have seen a clear tendency over the past decade or so for food products to move more East because of the competitive nature of that business, and that volume has then eventually disappeared from, let's say, France or from the Netherlands or from Germany. And today, those markets can well be served from the Eastern regions at a very economical basis. When you talk about Italy, when you talk about France or Spain, it's really the wine industry that is affected there. And as you know, they're very small customers. They very often do not have long lead times. They do not have great visibility about their supply chain. So it really requires a very interactive process with their suppliers, and I would be reluctant to move that volume out of that region. Now we still have within the countries, opportunities to optimize our footprint, like Italy, as you can imagine, has a very long geography. And so clearly, there are opportunities to get closer to the wine regions with some of the capacity we presently have in place. And also in France, there are opportunities to move closer to some of the wine regions. So I think it's really a mix of making sure that we understand where the benefits are going to be from a cost structure, and the second point is, where the benefits are going to be from a logistics and service structure.

And your next question is from Scott Gaffner with Barclays.

Just following up on that question on a more level production schedule going forward. Do you see any structural impediments, whether it's in Europe, North America, even in Asia Pacific or South America, around moving to a more level production strategy in the longer-term? And do you think there's any way that you can more efficiently and expeditiously pull back on production or capacity when you do see lower demands that you don't have this under-absorption issue?

Well, Scott, one of the big issues, of course, for us is we're a highly fixed-cost-based operation, and we have to run our facilities basically 24 hours, 365 days to really optimize the asset. We already do have an issue in that there is in all regions a seasonality involved. So we in fact do have, at certain periods of time, let's say, in the fourth quarter, towards the end of the quarter and in the beginning of the first quarter, we do have overcapacity. And so it's for us a trade-off between how are we going to utilize capacity and how much working capital can we load ourselves up with to anticipate demand going into the year. And sometimes, that can backfire, as we saw this year. We thought that we were going to have a more stable environment in Europe. We were wrong, and we had to make a correction then, and it was a significant correction. So unlike the aluminum industry or the plastic packaging industry, that really is only a conversion industry and is really only at the front end of the entire supply chain, we are the supply chain, and that makes it a lot more difficult to adjust. So we are, of course, spending quite a bit of effort than time in having a better S&OP process in our operations to get to the greatest efficiency we can achieve, given the fundamentals of our business.

Okay. And then just looking at the share that you -- that some of your competitors took early on in the year, maybe take advantage of price gain, do you think that you'll actually be able to get some of that share back in 2013, or is that incorporated in your capacity reduction targets for 2012?

Well we've seen similar situations. When I go back to 2007, and we saw a gradual recovery of those things over the next 2 or 3 years. So I'm sure, there's going to be some give and take in the marketplace. We'll see on what really is going to happen in Italy, what's going to happen in Spain because the whole market demand is most probably going to influence significantly the behavior of our local competitors there.

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

On total capital spend this year, you said CapEx is $350 million and then the incremental cost for the footprint is $50 million. Is that right?

Alex, can you say that again? The incremental cost for the footprint?

For the footprint savings that you guys are doing in Australia and Europe is $50 million.

No, no, no. The total size -- the total capital spending target for 2012 is $350 million, and that encompasses all spending.

That encompasses all spending?

Yes. The $50 million that we had referred to when we announced the Australian program 15, 18 months ago, we anticipated over the life of that program that the total spending would be about $50 million in cash. So the component of that spending that is reflected in 2012 is a part of the $350 million.

Okay. Got it. That's helpful, Stephen. So I'm looking forward to '13. The goal is to hold the line in that $350 million, so the spend for footprint goes to $70 million then. The core number, the core CapEx number then has to go down by about $20 million.

The component -- conceptually, we're still in the middle of the budgeting progress, obviously. So we will have to work through the mechanics of it, but we would certainly anticipate managing total capital plus total restructuring spending in such a way, obviously, that we can meet the cash flow target for 2013. But in general, the sum of those 2 should be roughly comparable on a year-over-year basis, again, because we don't exactly know the split of the $70 million between restructuring and capital at this point. But the sum of the 2 will be roughly comparable.

Got it, helpful. And just the last question. What is the low end of your target leverage?

It's 2x. We use a 2x to 3x net debt-to-EBITDA range.

Got it. So you'll continue to pay down debt until you get to about 2x?

Yes, something close to it. Correct.

And your next question is from the line of Al Kabili with Crédit Suisse. Albert T. Kabili - Crédit Suisse AG, Research Division: Just on South America, you mentioned some of the headwinds on transportation and related to that the new furnace in Brazil. I was wondering if you could help us quantify what those headwinds are. We're in the third quarter. How much of that spills into the fourth quarter?

Well, I think as we look at the fourth quarter, we will, of course, see relief with regard to transportation costs because we've can now produce out of the facility in Southern Brazil. But that is tampered with startup cost that we are still going to see and perhaps some production inefficiencies as we are in a startup phase. So it's very difficult to quantify specifically to that location and to that country. What we are seeing is that Brazil continues to have a fairly high demand at this point in time, so it may very well be depending on what the programs are going to be that the brewers put in place for the market share and for the market preparation for next year. We may also see some higher demand again, which would force us to continue to do some imports during that period of time. So that's at this point in time the uncertainty. But as I said in my comments, the fourth quarter EBIT margin for Latin America should exceed the third quarter level. Albert T. Kabili - Crédit Suisse AG, Research Division: Okay. Okay. And then hopefully go up next year as these sort of headwinds abate?

Yes, I mean, Brazil, as I said, will continue to be a significant driver of growth in Latin America also next year. And we have clearly defined our target that we should always have a lower capacity in Brazil than the market demand is, because Brazil is a very high-cost country. And if I have unutilized capacity in Brazil, I cannot ship it anywhere else economically. So I've got to make sure that we balance it correctly so I do not have underutilized asset in a fairly high-cost market. Albert T. Kabili - Crédit Suisse AG, Research Division: Got it. Okay. And then a follow-up is just on under-production. Can you just help us with sort of where you see the fourth quarter as far as the headwind on under-production. And will your inventories -- I assume your inventories at that point will be where you want them, so as we think to next year, we wouldn't expect a headwind on under-production. And is there a potential tailwind in that regard?

Let me answer the second part of that first. We certainly anticipate our year-end inventory levels will be at a level that matches market demand by that point in time. That's absolutely what we're aiming for. In terms of the negative impact of the production curtailment, we would expect the fourth quarter to be roughly comparable to what we saw in the third quarter, the regional mix will change a little bit. Europe gets a little bit better, North America gets a little bit worse us because we're taking some more seasonal downtime in North America. But the total will be roughly the same.

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

This is actually Debbie Jones for Mark Wilde. My question is, if we could go back to China, kind of excluding New Zealand and Australia, what kind of trends you're seeing in that region? I think that a lot of your competitors reported some slowing in the region, and I know a few years ago you had a few more robust expansion plans for that region which really haven't played out. So I'm just kind of curious, if you think about this region over the next 1 to 3 years, what your strategy is, what your goals might be and how this will support your mid-teens EBIT target.

Yes, Debbie. I mean clearly as you indicated, China overall growth is slowing a bit, so we're deferring some investments in China for the time being, just like other companies are doing. We still see China as an important market for O-I to have a presence in, and we believe at this point in time it's prudent to slow further expansions for a while until we can get a better understanding of the underlying growth rates. Now still at this point in time, of course, we remain focused on integrating recent acquisitions, especially in the north of China. But I also want to make sure we keep it in perspective, keep China in perspective. I mean, whether we look at share of asset base, share of company sales, or share of company volumes, China only represents 2% to 4% of the company in any of those categories. So whatever the developments in China are going to be, we will be able to adjust our operations, we'll be able to adjust our approach, and make sure it does not really impact the overall performance of the company.

Okay. And do you see any change in your customer mix in that region over the next 2 years?

What we are seeing is a demand for higher quality and for lighter-weight containers, which clearly require technology that's not yet readily available in the China market. But China, as you know, is very competitive. So even though there is the desire to get to a higher quality, there is a much less level of willingness to pay for new technology in the marketplace. And I think that will have to work its way through over the next couple of years.

And you're next question is from Chris Manuel with Wells Fargo.

Just 2 real quick questions and then one bigger picture question. The 2 quick questions, the first is, Steve, a couple of times you've alluded to a target for 2013 free cash flow. Can you expand on that and tell us what it is?

Partially, we're -- again -- we're still in the budget process and so we don't have a specific number yet. But we're certainly working with the expectation that we need to deliver a higher free cash flow number than what the 2012 ultimate deliverable will be. So we can tell you the direction is higher, the specifics, we're probably a month or so away from getting through that process.

Okay. The other -- well, the bigger picture question I wanted to ask is, Al, as you think about -- I look back over the last, let's call it, 8 years, since you bought BSN in 2004 and put the European business together and did some -- obviously, some optimization as you put the business together at that time, some reorganization as you put those together. I think back to 2007, 2008 as you went from the dozen-or-so operating entities into one O-I in Europe for further kind of refining, restructuring, reorganization, if you will. And then I think about further reorganization, restructuring that you did through the downturn. So this will represent what your -- the program you're undertaking or beginning here or have begun will kind of represent the forth and the last, let's call it 8, 9, 10 years. But yet over this timeframe, margins have, with a couple of exceptions, pretty consistently been in that 11-ish percent range. What gives you confidence or is there something structurally -- first of all, there's something structurally different in the European market that makes this so difficult that you kind of consistently burn a lot of calories working on the business there, number one. And number 2, maybe what gives you comfort of confidence that the efficacy of this program will in fact improve our profitability or margins in that region, or is this just kind of an ongoing every few years type of an event?

Okay. Let me try to address it. That's a very wide question, of course. But let me try to touch on some of the key components. I think Europe is fundamentally a different market than North America and that we have in North America a concentration of suppliers and a concentration of customers. In Europe, we have a very broad distribution of suppliers. I think they're 50 competitors in Europe compared to, what, 3 or 4 or 5 here in the United States. And also the customer base in Europe is a much broader dispersed customer base with a lot of customers with an agricultural background, whether it's [indiscernible] or whether it's food customers and so on. And so, much more dispersed. So that makes it a much more difficult market, even though the 3 largest suppliers in Europe may account for 60 or close to 70% market share. The dynamics are quite different. Also, many of these small manufacturers operate with a different scenario. Basically, their market is defined as to what they see around their church tower. And if that market is not doing well, then they place some volumes somewhere else and really don't worry too much about the impact that may have on overall market tendencies or market behavior. And so we will constantly have incursions into existing positions in case some of the demand profile of these customers in their own home market, so to speak, varies and disappears. And that creates competitive pressures that we do not necessarily see reflected in North America. The other part, and it ties into the same issue, is that we did make significant acquisitions over the last couple of years and -- or the last decade. And we basically said we're consolidating. While we basically did agglomerate, we did not necessarily consolidate. The process that we're going through now is really the consolidation process. And what we typically find is that only the large suppliers are really the consolidators. Many of the small suppliers will not, cannot consolidate because there is nothing to consolidate. They're either in business or they're out of business. So typically what we find is, these manufacturing facilities stay around forever. Companies may go bankrupt. Companies may lose their license for success and give up, but eventually, the asset gets picked up by somebody else. So the market is quite different. I feel that what we're trying to do and what we're putting in place and have been put in place is get to a competitive position that allows us to deal with people that may have a different fundamental approach to the business, and that gives me the confidence that we're going to be able to succeed with this. Also, I recall that when I joined in 2006, our margin in Europe was 8%. And today, as you said, over the last couple of years, it's been around 11% to 12% or so. And I would say, given the macroeconomic conditions around the world during that period of time, I think it is a reasonable performance. It's certainly not what I expected. I expected it to be higher. But I would hope that with the steps that we're taking, we're certainly going to get closer to this mid-teen range that I had indicated.

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

Can you just talk a little bit about contract pricing for next year? Obviously, it's still early, so I'm sure negotiations have just gotten underway. But is there any read on if we could see pricing go higher again in Europe? Or is there a concern on obviously that we see weak demand this year, is there a concern on that you may not get more pricing next year?

Alton, when I look at what the companies that typically will report their results have been saying in Europe is that I would say most of our competitors, perhaps with one exception or so, have said they have not been able to recover inflation. So given the ongoing inflation, there most probably is some pent-up demand for additional pricing that they were not able to get this year. We are still very early in the game at this point in time. We have seen some action from smaller competitors that are out there in the mid-single digits as far as demand is concerned. We really have to see over the next 2 months on how that is going to evolve. I believe we're in a fairly good position as we go into those negotiations because we have really not wavered from our approach over the past couple of years. So our customer base knows what the approach will be. And I believe we will be at a very good position to make sure that we stay ahead or par with inflation as we go forward.

Okay. And then one quick follow-up to that. Is it safe to say that you plan to continue to put pricing ahead of volume in Europe next year?

Clearly, I think that what ultimately counts is the profitability of the business. And that is the issue that we're going to look at, as we do every year. Now pricing is, of course, one component. Cost is another component. So it's really within the force field of those 2 components that we have to operate.

And your next question is from Todd Wenning with MorningStar.

Have you seen any initial effects in your North American business from the recent merger elsewhere in the U.S. glass industry?

No, we really have not. I believe when I read the report that was issued when the acquisition took place was that the company was running at a fairly high utilization rate. And I think that's also reflective of what we're seeing overall in the market. The market is pretty well balanced at this point in time, with periods of tightness during the summer month. But I have not seen any significant shifts in either demand or in supply, in the region and I don't expect there will be.

Okay. And then in Europe, should we think about the drivers there sort of being 40% macro, 40% pricing and 20% competition? Or is the ratio somewhat different?

No. What we saw this year, that's about right.

And your last question is from the line of Chip Dillon with Vertical Research. Chip A. Dillon - Crédit Suisse AG, Research Division: One thing I wanted to ask you is what is the rough breakout in Europe of your customer demand for beer versus wine and spirits? And maybe other in food?

I may ask somebody to help me. But I believe beer is around 20% to 25%, wine is around 35% to 40%, then food is around 15% to 20%, and then the rest is non-alcoholic beverages and water and spirits.

Got you. And one thing I wanted to ask you as a follow-up is in September, when I was over in Europe, there's a company, Smurfit Kappa, that is adding capacity in Spain for a concept that they described as wine in a bag, I guess, where you have some kind of a plastic bag in a corrugated box. And it sounds quite odd to us here in America, but they claim that they're a major share, like north of 20% of the wine sold in France, which surprised me is sold in such a way in more than, I guess, a 1-liter configuration like you have -- or I'm sorry, in bigger quantities than you have in bottles. And is that a source of significant competition, as you see -- as your customers might be substituting into this other concept?

Well, bag-in-box, as it is called, has been around for quite a number of years. And in fact, when we go back to Australia, for instance, a significant portion of the Australian wine business was bag-in-box for many decades, and has gradually moved away more into glass. Similarly, in Argentina, we have seen Tetra Pak as well as bag-in-box as a large volume of wine, and it tends to now move back to glass. I would say there is a spot for this business. Very often, big boxes are trying to promote bag-in-box because it requires less shelf space and it sells large volume because typically, it's a gallon of wine or so that's in there. But it's a very low-price product typically, and so there may be a place for it. And particularly, I would say during economic hard times, the consumer would typically buy 4 bottles or 5 bottles, may try to say, "Okay, I will not give up on my wine, but I want to buy it more inexpensively." And he would tend to go and possibly look for a bag-in-box alternative. But we have not seen a really dramatic or significant shifts in market share around the world, because it's not just in Europe. The phenomenon is virtually present everywhere to some degree.

Thank you, everyone. That concludes our third quarter earnings conference call. Please note that our next earnings call is currently scheduled for Thursday, January 31, 2013 at 8:30 a.m. Eastern time. We appreciate your interest in O-I. Again, thank you. And don't forget that glass is the most sustainable packaging choice.

Thank you for participating in today's conference call. You may now disconnect.