O-I´s Heart Of Glass: Focus Spawns Growth

Michael J. Owens revolutionized the container industry with his invention of the automatic glass-bottle-making machine in 1903. Suddenly, glass became a commodity instead of a luxury.

He founded Owens Bottle Co. in 1904, and in 1929 he merged the company with Illinois Glass to form Owens-Illinois OI, better known as O-I.

Today the Perrysburg, Ohio, company is the largest glass maker in the world. It churns out more than 50 billion bottles every year, says Paul Butts, the company´s director of investor relations.

Over the years, the company expanded into other materials such as plastics and paper products. But after selling its plastics business to British manufacturer Rexam for $1.83 billion last year, O-I´s sole focus has returned to glass.

With sales reaching $7.5 billion in 2007, the company is poised for another solid year of growth.

Butts spoke with IBD about the company´s approach and what´s in store for the industry.

IBD: What are O-I´s competitive strengths?

Butts: The fact that we have over a hundred years of experience, perfecting the process of manufacturing and selling glass containers and working with our customers to develop innovative packages.

Our global scale gives us an advantage of being able to supply global customers as well as being able to purchase and procure raw materials economically.

I´d also say our long-standing and strong relationships with our customers, which of course is a barrier to entry for anyone thinking about getting into the glass business.

IBD: Who are your customers?

Butts: We have a very broad base of customers with over 10,000 globally, but no single customer represents more than 10% of our total sales.

The beer, spirits and non-alcoholic beverages segment represents the largest percentage of our business, and food would be next.

In the U.S., the big ones are HJ Heinz HNZ, Anheuser-Busch BUD and SABMiller.

Europe has our broadest customer base with Diageo, Heineken, Scottish & New Castle and Cronenburg. Then there are hundreds of smaller wineries and food companies.

In South America, Venezuela´s Empresas Polar conglomerate is a big customer as well as (Brazil´s) Companhia de Bebidas das Americas ABV, or AmBev. In Asia-Pacific, there´s Fosters Group and Constellation Brands STZ.

IBD: How does the market today compare with past years? How competitive is it?

Butts: It´s in much better balance today between demand and supply, and there is a stronger mutual dependency between the global producers -- like Diageo, Heineken and Heinz -- and the global suppliers like Owens-Illinois.

The marketplace has been consolidating and improving over the past years, but there are some differences.

Europe is more fragmented than the U.S. market. There are close to over 100 glass manufacturers in Europe, while there are only about a dozen here in the U.S.

In the emerging markets, we are seeing the greatest growth in South America and China, where both the populations are growing and the economies are getting strong and consumers are getting increasingly more spending power.

We do see the consumption patterns changing in those emerging economies. There are opportunities, and we´re targeting those countries as places to grow.

We opened a new $40 million factory in Peru last fall to help meet the demand in that growing region.

In 2006, we acquired our fourth factory in China. So we have a growing presence in both regions.

IBD: How do rising energy and raw material costs affect O-I´s manufacturing?

Butts: Those costs have an impact on multiple dimensions and are important for us to try and manage.

Recently, rising oil and natural gas prices have had a significant impact on our cost to manufacture -- and not just from the standpoint 15f melting the glass, but also the impact energy has on transport costs to bring raw materials into the factory, and to ship the finished product to our customers.

IBD: How do you combat those higher costs?

Butts: We primarily recover our input cost inflation through raising prices to our customers. If we don´t do that, we won´t be in a position to reinvest in the business.

In addition to that, we´ve had great success historically being able to continue to improve factory efficiencies and productivity to try and keep our costs down. We´ve got active energy-savings programs in all our factories to try and conserve the amount of energy.

Our active R&D program has helped to improve furnace designs that can melt glass more efficiently with less energy.

IBD: With the U.S. at the edge of a recession, how much will that affect your business this year?

Butts: We´re fortunate that the markets we serve are primarily food and beverage, which are fairly stable products for people, who have to continue to eat and drink in good or bad economic times.

Historically, we have not seen any kind of strong correlation in our business, upturns or downturns, with the economic conditions, at least in the U.S.