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Alexander-Roepers on Owens Illinois
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h6th Annual Value Investing Congress
The Atlantic Approach:Clear Value Today
Title
Date
Alexander J. RoepersOctober 13, 2010
Date
Introduction
Overview:
• $1.5 billion value‐oriented equity investment firm• Founded in 1988 by Alexander RoepersFounded in 1988 by Alexander Roepers• SEC registered since 2005• New York and Tokyo offices with 27 employees; 13 senior equity analysts
Approach
• Concentrated on highest conviction ideash d d d l• Bottom‐up, hands‐on due diligence
• Focus on predictability of cashflows
Funds
• U.S. Funds ‐ $1.0 billion• International Funds ‐ $0.5 billion
2
$
Cambrian Fund Performance – (US Long Only)
3
Note: Figures are through September 30, 2010. Cambrian Fund returns are net of all fees and represent class A Series 1 shares of the offshore funds. S&P 500 Index includes the reinvestment of dividends. Inception of Cambrian Fund is October 1992. Prior to June 1, 1996, performance is based on the audited record of a managed account with a similar strategy and fee structure as Cambrian Fund. Information has been prepared solely for informational purposes and does not constitute an offer or solicitation. Any such offer will be made only by means of Private Placement Memorandum. Past performance may not be indicative of future results.
Agenda
Atlantic’s Approach to Stock Selection 5Atlantic s Approach to Stock Selection
Clear Value Today 9
5
y
Case Study: Owens Illinois 10
Q & A
4
Atlantic’s Investment Universe
5
As of April 30,2010
Additional Selection Criteria
I t t d b l h tInvestment‐ grade balance sheet
• Interest expense less than 25% of gross cashflows (EBITDA)
Avoid commodity pricing dependent firms
• Always EBIT profitable companies through economic cycles• Avoid deep cyclical firmsp y
Recurring and predictable revenues and cashflows
• Function of nature of business diversity of customers suppliers products• Function of nature of business, diversity of customers, suppliers, products, and regions served
• High barriers to entry• Prefer consumable and maintenance/repair/overhaul (MRO) businesses• Prefer consumable and maintenance/repair/overhaul (MRO) businesses
over capital spending‐related businesses
Low insider ownership
6
Low insider ownership
• Need vulnerability to takeover bids
Long Buy/Sell Discipline
7
Constructive Shareholder Engagement
Obj tiObjectives
• Create unique due diligence opportunities at the CEO/CFO level as well as the operational level through constructive engagement
• Enhance and accelerate the process of shareholder value creation
• Maintain liquidity as well as ability to continue dialogue with top management (i.e. avoid proxy battles and board seats)
Process
• Build strong rapport with CEO/CFO through multiple on‐site and face‐to‐face g pp / g pmeetings
• Craft and discuss win‐win proposals for management and shareholders, including corporate development, corporate governance, operational restructurings and use of free cash
• Submit these proposals in writing to CEO and, as needed, to the Board of Directors
• As appropriate, broaden discussion of proposals to include other large
8
s app op ate, b oade d scuss o o p oposa s to c ude ot e a geshareholders, financial media and private equity groups
Clear Value Today
Company Ticker BusinessMarket
Cap($mln)
EV/EBIT P/E Catalysts
OWENS ILLINOIS OI Glass Containers $4,701 8.8x 8.4xVolume recovery and acquisitions, emerging market growth
XEROX XRX IT Services $14,202 8.7x 10.0xContinued strong earnings growth, share repurchases earlier than expected
ITT ITT Defense/Flow Control $8 650 7 0x 10 5xAcquisitions and reorganization build a “fourth leg” in the ITT portfolio reducing exposure toITT ITT Defense/Flow Control $8,650 7.0x 10.5x leg in the ITT portfolio, reducing exposure to defense, takeover candidate, share repurchases
RHEINMETALL RHM GY Auto/Defense $2,528 9.1x 9.9xDefense orders, margin leverage in auto business, group split‐up
Restructuring growth in e‐payments GDP
ATOS ORIGIN ATO FP IT Services $3,129 8.6x 11.7x
Restructuring, growth in e‐payments, GDP, rebound in IT spending, increased corporate cost awareness to drive outsourcing, possible IPO of HTTS/Worldline division, takeover candidate
MIRACA 4544 JTClinical Reagents /
$2 061 6 4x 12 4x
Global expansion via acquisitions, margin progress by better mix, continued EPS growth,
MIRACA 4544 JTg
Testing Services$2,061 6.4x 12.4x
p g y ginternational growth both organic and via M&A, dividend increase/share repurchases
KURITA WATER 6370 JTWater Treatment
Systems / Consumables
$3,571 7.2x 14.8x
Global expansion, growth of high margin chemical consumables and maintenance work, strong growth in China, takeover candidate, share
9
Consumablesrepurchases
Note: Data as of September 30, 2010. All earnings estimates are based on following fiscal year.
Case Study: Owens Illinois (OI)
Value asValue as
Clear as
lGlass
Case Study: Owens Illinois (OI)
Sh i $26 80* M k C $4 4 billi *
World’s largest maker of glass bottles, the preferred packaging of consumers globally
$7 0 billion in sales with 81 plants in 22 countries
Share price $26.80*, Market Cap $4.4 billion*
$7.0 billion in sales with 81 plants in 22 countries
Founded 1903 in Toledo, Ohio
OI is a fortress with a massive moat:
High barriers to entryo Typically a local monopolyo Global scale and scope
L t t l ti hio Long term customer relationshipso Prohibitive costs to enter market due to capital expense, environmental
permits and development of engineering expertise Stable end markets Proven sustainability of profit No bad debt issues No technological obsolescence risk Rapidly growing emerging markets exposure, already a third of total revenues
11
p y g g g g p , y
* As of Oct 8, 2010
Case Study: Owens Illinois (OI)
• Glass packaging is a growing ‐ not shrinking ‐market globally
OI’s shares are compelling as the market appears to misperceive or ignore several key attributes:
• Global glass container shipments grew 3.1% annually from 1999 to 2009• Glass, not other materials, is the preferred packaging of consumers• The glass industry has consolidated, favoring strong pricing and returns
f th l t lfor the largest players
Consumer Preference for Food and Beverage Packaging
12*Source: Euromonitor (units of product sold in glass containers), China Daily Glass Association, OI
Case Study: Owens Illinois (OI)
Glass packaging serves consumable end markets of limited cyclicality…
Gl b l Gl C t i U b E d U M k t
Spirits
Wine6%
Global Glass Container Usage by End‐Use Market
Beer
Food, etc.13%
Spirits8%
Beer49%
Non Alcoholic BeverageBeverage
24%
13
Source: Euromonitor (units of product sold in glass containers), China Daily Glass Association, OI
Case Study: Owens Illinois (OI)
After years of consolidating, local markets are generally duopolies or monopolies…
• Consolidation has benefitted pricing, returns and margins
No. of US Glass Container Manufacturers US Market Shares 2009
20
25
30
Owens Anchor Glass
Others8%
5
10
15
20 Illinois43%
Saint Gobain
18%
0
5
1980 2010
31%
14
Sources: OI, Jefferies & Co.
Case Study: Owens Illinois (OI)
S l d titi d t d b i t tScale and scope are competitive advantages and barriers to entry…
• In mature markets, shipping glass containers more than 300 miles isgenerally not profitable
• Prohibitive costs to enter markets due to capital expense anddevelopment of engineering expertise
• Environmental permits for new plants are difficult to obtainEnvironmental permits for new plants are difficult to obtain
• Global beverage makers prefer global suppliers who provide consistent,high quality service
OI’s North American Manufacturing FootprintOI s North American Manufacturing Footprint
15
Source: OI
Case Study: Owens Illinois (OI)
OI is dominant in most regions of the world…
• OI has a 30% global market share
• In Colombia, Ecuador, Peru and New Zealand, OI is the sole manufacturerIn Colombia, Ecuador, Peru and New Zealand, OI is the sole manufacturer
• OI is the technology and innovation leader, with more than 1,900 patents globally
OI 2009 Global Glass Profile
16
Source: OI
Case Study: Owens Illinois (OI)
OI i iti d t d i i k t h l k i thOI is positioned to expand in emerging markets, where glass packaging growth rates are much higher
• By year end, OI will have a third of pro forma sales and about half of profitscoming from Asia‐Pacific and Latin America
• OI has made three acquisitions this year, which added capacity in Argentina,Vietnam, Malaysia, Thailand, China and Brazil
• The recent Brazilian acquisition gives OI a 50% market share in that country
Forecasted Growth (2013 vs. 2008)
17
Source: Euromonitor, China Daily Glass Association, OI
Case Study: Owens Illinois (OI)
OI has sustainable profitability in all economic environments
16.0%
18.0%
$1,200
$1,400
Glass Manufacturing EBIT and Margin
8 0%
10.0%
12.0%
14.0%
$800
$1,000
,
2.0%
4.0%
6.0%
8.0%
$200
$400
$600
0.0%$0
2004 2005 2006 2007 2008 2009 2010 Est. 2011 Est.
Glass Manufacturing EBIT EBIT Margin
*
18
Sources: Company reports, Atlantic Investment estimates*OI divested the last of its plastic packaging businesses in 2007
Case Study: Owens Illinois (OI)
What has happened post‐2008 crisis…
A 10% decline in OI volumes due to:
A decline in total alcohol sales particularly in Shipments of U.S. Glass Beer Bottles A decline in total alcohol sales, particularly in restaurants, a major glass packaging channel
Temporary trade down from bottles to cans
Shipments of U.S. Glass Beer Bottles
A global inventory destocking
OI giving up unprofitable business
Mature market beer volumes have been softer than expected in 2010
Earnings have been hurt by expenses from rationalizing manufacturing in Latin America and the USmanufacturing in Latin America and the US
A strong USD and the Venezuelan currency devaluation have also hurt profits
19
Sources: U.S. Census Bureau, GPI, CMIEuromonitor
Case Study: Owens Illinois (OI)
OI also has reduced debt …
OI Net Debt* and Net Debt*/EBITDA
$6
$7
$8
5.0
6.0
OI Net Debt and Net Debt /EBITDA
$3
$4
$5
4.0
Net Deb
t in Billion
s
Net Deb
t/EB
ITDA
$0
$1
$2
2.0
3.0
2004 2005 2006 2007 2008 2009 2010 Est 2011 Est
N
2004 2005 2006 2007 2008 2009 2010 Est. 2011 Est.
Net debt/EBITDA Net debt
20
* Net debt includes book debt, preferred shares, after tax pension liabilities and asbestos liabilities
Case Study: Owens Illinois (OI)
…and improved its free cash flow…
OI Free Cash Flow
$400
$500
OI Free Cash Flow
$100
$200
$300
‐$100
$0
$100
2004 2005 2006 2007 2008 2009 2010 Est. 2011 Est.
‐$200
21
Sources: Company reports, Atlantic Investment estimatesFree cash flow = cash from operations less capital expenditures
Case Study: Owens Illinois (OI)Five Year Price Chart and EPS
$60
Five Year Price Chart and EPS
12‐month target of $45/share at 12x 2011e EBIT
$40
$5012x 2011e EBIT
$30
$20
$0
$10
2005 2006 * 2007 2008 2009 2010E 2011E
$1.27 $0.83 $2.92 $3.76 $2.93 $2.75 $3.10
22
$0Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11
Sources: Bloomberg, OI, Atlantic Investment estimates* 2006 EPS hurt by divested plastics business and unfavorable glass contracts, which have since been renegotiated.
Dec-11
Case Study: Owens Illinois (OI)
• Our 12‐month price target of $45/share is based on 12x est. 2011 EBIT
• Stock is currently trading at 9x Est. 2011 EBIT
• EPS power of $5 in 2013 based on a rebound in mature market volumes recent
16.0OI Historical High and Low EV/EBIT Multiples
• EPS power of $5 in 2013 based on a rebound in mature market volumes, recent acquisitions and emerging market growth
12.5
13.3
14.113.8
13.5 13.5
12 012.7
12 012.3912 0
13.0
14.0
15.0 Implied 2011 Share Price
Range
$4512.0 12.0
11.0 10.8
11.9
10.2
9.09.0
10.0
11.0
12.0
EV/EBIT
$45
$27
8.0
6.6 6.3
5.0
6.0
7.0
8.0
23
2003 2004 2005 2006 2007 2008 2009 2010 Est. 2011 Est.
Sources: OI, Bloomberg, Atlantic Investment estimatesEV includes equity market cap, net debt, preferred shares, after tax underfunded pension liabilities, and asbestos liabilities