6 th Annual Value Investing Congress

Transcription

1 6 th Annual Value Investing Congress The Atlantic Approach: Clear Value Today Title Alexander J. Roepers October 13, 2010 Date

2 Introduction Overview: $1.5 billion value oriented equity investment firm Founded 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 ideas Bottom up, hands on due dl diligence Focus on predictability of cashflows Funds U.S. Funds $1.0 billion International Funds $0.5 billion 2

3 Cambrian Fund Performance (US Long Only) Note: Figures are through September 30, 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 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. 3

4 Agenda Atlantic s Approach to Stock Selection 5 Clear Value Today 9 Case Study: Owens Illinois 10 Q & A 4

5 Atlantic s Investment Universe As of April 30,2010 5

6 Additional Selection Criteria Investment t grade balance bl 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 firms Recurring and predictable revenues and cashflows 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 over capital spending related businesses Low insider ownership Need vulnerability to takeover bids 6

7 Long Buy/Sell Discipline 7

8 Constructive Shareholder Engagement Objectives 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 meetings 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, ate, broaden discussion of proposals sto include other large shareholders, financial media and private equity groups 8

9 Clear Value Today Company Ticker Business Market Cap ($mln) EV/EBIT P/E Catalysts OWENS ILLINOIS OI Glass Containers $4, x 8.4x XEROX XRX IT Services $14, x 10.0x Volume recovery and acquisitions, emerging market growth Continued strong earnings growth, share repurchases earlier than expected Acquisitions and reorganization build a fourth ITT ITT Defense/Flow Control $8,650 70x 7.0x 10.5x leg in the ITT portfolio, reducing exposure to defense, takeover candidate, share repurchases RHEINMETALL RHM GY Auto/Defense $2, x 9.9x Defense orders, margin leverage in auto business, group split up ATOS ORIGIN ATO FP IT Services $3, x 11.7x MIRACA 4544 JT Clinical Reagents / Testing Services $2,061 64x 6.4x 12.4x Water Treatment KURITA WATER 6370 JT Systems / $3, x 14.8x Consumables Restructuring, growthin e payments, GDP, rebound in IT spending, increased corporate cost awareness to drive outsourcing, possible IPO of HTTS/Worldline division, takeover candidate Global expansion via acquisitions, margin progress by better mix, continued EPS growth, international growth both organic and via M&A, dividend increase/share repurchases Global expansion, growth of high margin chemical consumables and maintenance work, strong growth in China, takeover candidate, share repurchases Note: Data as of September 30, All earnings estimates are based on following fiscal year. 9

10 Value as Clear as Glass

11 Share price $26.80*, Market Cap $4.4 4billi billion* World s largest maker of glass bottles, the preferred packaging of consumers globally $7.0 billioninsaleswith81 plantsin22 countries Founded 1903 in Toledo, Ohio OI is a fortress with a massive moat: High barriers to entry o Typically a local monopoly o Global scale and scope o Long term customer relationships lti o 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 ygrowinggemerging gmarkets exposure, already athirdof total revenues * As of Oct 8,

12 OI s shares are compelling as the market appears to misperceive or ignore several key attributes: Glass packaging is a growing not shrinking market globally 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 for 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

13 Glass packaging serves consumable end markets of limited cyclicality Global l Glass Container Usage by End Use Market Spirits 8% Wine 6% Food, etc. 13% Beer 49% Non Alcoholic Beverage 24% Source: Euromonitor (units of product sold in glass containers), China Daily Glass Association, OI 13

14 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 Anchor Glass 18% Others 8% Owens Illinois 43% Saint Gobain 31% Sources: OI, Jefferies & Co. 14

15 Scale and scope are competitive advantages and barriers to entry In mature markets, shipping glass containers more than 300 miles is generally not profitable Prohibitive costs to enter markets due to capital expense and development of engineering expertise Environmental permitsfor new plants are difficultto obtain Global beverage makers prefer global suppliers who provide consistent, high quality service OI s North American Manufacturing Footprint Source: OI 15

16 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 manufacturer OI is the technology and innovation leader, with more than 1,900 patents globally OI 2009 Global Glass Profile Source: OI 16

17 OI is positioned to expand in emerging markets, kt where glass packaging growth rates are much higher By year end, OI will have a third of pro forma sales and about half of profits coming from Asia Pacificand 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) Source: Euromonitor, China Daily Glass Association, OI 17

18 OI has sustainable profitability in all economic environments Glass Manufacturing EBIT and Margin $1,400 $1,200 $1,000 $800 $600 $400 $200 $ * Est Est. Glass Manufacturing EBIT EBIT Margin 18.0% 16.0% 14.0% 12.0% 10.0% 80% 8.0% 6.0% 4.0% 2.0% 0.0% Sources: Company reports, Atlantic Investment estimates *OI divested the last of its plastic packaging businesses in

19 What has happened post 2008 crisis A 10% decline in OI volumes due to: A decline in total alcohol sales, particularly in restaurants, a major glass packaging channel Temporary trade down from bottles to cans 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 US A strong USD and the Venezuelan currency devaluation have also hurt profits Shipments of U.S. Glass Beer Bottles Sources: U.S. Census Bureau, GPI, CMI Euromonitor 19

20 OI also has reduced debt OINetDebt* and Net Debt*/EBITDA 6.0 $8 $7 Net Debt/EBITDA $6 $5 $4 $3 $2 $1 Net Debt in Billions Est Est. $0 Net debt/ebitda Net debt * Net debt includes book debt, preferred shares, after tax pension liabilities and asbestos liabilities 20

21 and improved its free cash flow $500 OI Free Cash Flow $400 $300 $200 $100 $0 $ Est Est. $200 Sources: Company reports, Atlantic Investment estimates Free cash flow = cash from operations less capital expenditures 21

22 $60 Five Year Price Chart and EPS $50 12 month target of $45/share at 12x 2011e EBIT $40 $30 $20 $10 $ * E 2011E $1.27 $0.83 $2.92 $3.76 $2.93 $2.75 $3.10 Mar-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 Dec-11 Sources: Bloomberg, OI, Atlantic Investment estimates * 2006 EPS hurt by divested plastics business and unfavorable glass contracts, which have since been renegotiated.

23 Our 12 month price target of $45/share is based on 12x est EBIT Stock is currently trading at 9x Est EBIT EPS power of $5 in 2013 based on a rebound in mature market volumes, recent acquisitions and emerging market growth 16.0 OI Historical High and Low EV/EBIT Multiples EV/EBIT Implied 2011 Share Price Range $45 $ Est Est. Sources: OI, Bloomberg, Atlantic Investment estimates EV includes equity market cap, net debt, preferred shares, after tax underfunded pension liabilities, and asbestos liabilities 23