Owens-Illinois, Inc. has reported financial results for the full year and fourth quarter ended 31 December 2017.
“In 2017, we delivered strong earnings and cash flow generation, in line with the commitments we made at Investor Day in early 2016. We have been building capabilities in the commercial, manufacturing and supply chain space that are demonstrably adding to the top line - through higher shipments year-on-year - and the bottom line - through the tangible benefits of our Total Systems Cost approach,” said Andres Lopez, CEO.
“We are working together in a new way, as one enterprise, enhancing the customer experience, executing on our initiatives and deleveraging the balance sheet that together support our conviction to deliver rising earnings and cash flow in 2018. Even as we continue to invest in new capabilities and explore non-organic growth opportunities in the industry, we have begun to pivot towards a more balanced approach to capital allocation that we anticipate will include share buybacks in 2018.”
For the full year 2017, the company recorded earnings from continuing operations of USD 1.11 per share (diluted), compared with USD 1.32 per share in 2016. Excluding certain items management considers not representative of ongoing operations, adjusted earnings were USD 2.65 per share. This was up 15% compared with the prior year of USD 2.31 per share and at the high end of management guidance of USD 2.60 to USD 2.65 per share. The company generated strong cash flows, exceeding guidance.
Cash provided by continuing operating activities for 2017 was USD 724 million compared with USD 758 million for 2016 which included a non-recurring value added tax refund of approximately USD 130 million. Adjusted free cash flow for 2017 was USD 393 million, which exceeded management guidance of USD 365 million. Net sales were USD 6.9 billion, an increase of nearly 3% compared to the prior year, due to higher shipments, higher prices and favourable currency translation.
Total glass container shipments increased approximately 1% on a global basis, compared with the prior year, led by gains in Europe and Latin America. Earnings from continuing operations before income taxes were USD 275 million, which was USD 81 million lower than 2016 despite higher segment operating profit in 2017. The decline is driven by pension settlement charges of USD 218 million, as well as higher charges related to debt redeemed in 2017.
Segment operating profit of reportable segments for 2017 was USD 942 million, an increase of 7% compared with prior year. Gains were reported in Europe, North America and Latin America. As expected, segment operating profit was lower than 2016 in Asia Pacific, the company's smallest region, mainly reflecting higher supply chain costs which are being addressed with asset improvements.
Strategic initiatives in commercial programs and end-to-end supply chain management generated benefits as planned. Total systems cost improvements generated approximately USD 39 million in cost savings during 2017. Separately, the company continues to focus on deleveraging the balance sheet.
During 2017, the company retired its highest cost debt - USD 250 million of its 7.80% Senior Debentures due 2018. The company also continues to reduce its pension benefit obligations (“PBO”); in 2017, the company executed a series of transactions that reduced its PBO by more than USD 500 million. Since 2012, the company has reduced its outstanding PBO by approximately USD 1.8 billion. In light of ongoing progress in reducing leverage, the company has begun to shift to a balanced approach to capital allocation.
The Board of Directors authorized a USD 400 million share repurchase program. The company expects to repurchase about USD 100 million in shares in 2018. In 2018, the company expects to deliver higher earnings from continuing operations mainly driven by higher segment operating profit.
Earnings from continuing operations, and adjusted earnings, are expected to be in the range of USD 2.75 to USD 2.85 per share, which compares favourably with adjusted earnings of USD 2.65 per share in 2017. Cash provided by continuing operating activities is expected to be approximately USD 800 million, whereas adjusted free cash flow for the year 2018 is expected to be approximately USD 400 million.
Full year net sales were USD 6.9 billion, up USD 167 million from 2016, an increase of nearly 3%. Prices were 1% higher on a global basis, mainly due to price adjustments resulting from cost inflation.
Global shipments increased approximately 1% in 2017. From a geographic perspective, key contributors to shipment growth were Italy, Mexico and Brazil. Favourable foreign currency translation also benefited net sales by USD 106 million. Shipments in Europe increased 1%, primarily due to favourable beer, spirits and wine volumes. In North America, sales volumes declined 3% compared to the prior year period, mainly due to lower shipments of beer. Full year shipments for Latin America rose 4%, primarily due to higher shipments of beer and spirits. Overall, Asia Pacific shipments declined 1% as higher shipments to food customers were more than offset by lower shipments to beer and non-alcoholic beverage customers. In mature markets within Asia Pacific, sales volumes increased approximately 1%, primarily due to higher beer shipments. Sales volumes in China declined for the full year because, during the first half of 2017, domestic production was exported to support sales elsewhere in the region.
Segment operating profit was USD 942 million in 2017, compared with USD 882 million in the prior year, an improvement of 7%. In Europe, segment operating profit was USD 263 million, an improvement of USD 26 million over the prior year period, or 11%. The region profited from improvements in Total Systems Costs, cost savings from the closure of a plant in the Netherlands, and higher sales volumes. These benefits were partially offset by lower average selling prices that were not fully offset by deflation.
North America's segment operating profit increased USD 19 million, or 6%. Higher equity earnings and benefits from Total Systems Cost initiatives provided the most significant improvement from prior year. The region also benefited from approximately USD 5 million in gains related to non-strategic asset sales. Partially offsetting these benefits, were lower sales volume and cost inflation that was not fully covered by price increases.
Segment operating profit in Latin America rose USD 27 million compared to prior year, an increase of 10%. Benefits from Total Systems Cost initiatives and higher sales volumes favourably impacted Latin America's segment operating profit. These benefits were partially offset by cost inflation that exceeded price increases.
Asia Pacific reported segment operating profit of USD 65 million which was USD 12 million below the prior year. Despite cost containment efforts, higher supply chain costs for intra-regional shipments and higher costs related to planned asset improvement projects negatively impacted results compared to the prior year. Asset investments in this region, taking place through mid-2018, are expected to improve the region's cost structure in the second half of 2018.
Retained corporate and other costs were USD 104 million in 2017 compared with USD 98 million for 2016. These corporate costs were higher in 2017 because equity earnings related to the company's joint venture with Constellation Brands began to be reported in the North America region in 2017, whereas they were previously recorded in retained corporate.
The company's effective tax rate from continuing operations for 2017 was approximately 25%, compared with approximately 33% for 2016. The lower rate in 2017 was primarily due to the resolution of a tax matter that resulted in approximately USD 26 million of tax accruals being reversed in 2017. The effective tax rate on adjusted earnings was approximately 21% for 2017 and 24% for 2016.
In both 2016 and 2017, the company recorded several significant items impacting reported results as presented in the table entitled Reconciliation to Adjusted Earnings and Constant Currency. Management considers these items not representative of ongoing operations. The most significant charges in 2017 include USD 218 million of non-cash pension settlement charges related to the continued de-risking of the company's pension plans, as well as USD 77 million for restructuring, asset impairment, and other charges. Charges in 2016 included restructuring and impairment charges of USD 129 million, primarily driven by restructuring activity in Europe, Latin America and at corporate, as well as USD 98 million of non-cash pension settlement charges.
Cash provided by continuing operating activities was USD 724 million for 2017. After deducting cash payments for property, plant and equipment, and adding back asbestos-related payments, adjusted free cash flow was USD 393 million, exceeding management guidance of approximately USD 365 million.
Net sales in the fourth quarter of 2017 were USD 1.7 billion, an increase of 4% compared to the prior year fourth quarter. On a global basis, the improvement in net sales was due to a 1% increase in price and favourable currency translation.
Global sales volumes were on par with the prior year fourth quarter. Shipments in Latin America increased 2%, mainly due to gains in beer and non-alcoholic beverages. The largest increase in Latin America's fourth quarter shipments was reported in Brazil, providing further evidence of recovery in that country. In Europe, shipments increased 1%, primarily in wine and beer. North America volumes were similar to the prior year with higher food shipments offsetting lower beer volumes. In Asia Pacific, shipments were 2% below the same period of 2016, with higher food volumes more than offset by lower shipments of beer.
The company continues to realize benefits from successfully executing its strategic initiatives. The company's focus on Total Systems Cost contributed approximately USD 13 million in cost savings in the fourth quarter, leading to a full year total of USD 39 million. The contribution of the total systems costs approach was partially masked by higher spending associated with higher asset repair and production downtime experienced in Asia Pacific, consistent with company plans to revitalize and enhance production in the region.
In all, segment operating profit was USD 212 million in the fourth quarter, 5% higher than the prior year fourth quarter.
For the fourth quarter 2017, the company recorded a loss from continuing operations of USD 0.81 per share (diluted), which compares with a loss from continuing operations of USD 0.43 per share (diluted) in the same period of 2016. Loss from continuing operations before income taxes was USD 121 million in the quarter, which was unfavourable by USD 82 million compared with the same period in prior year. These figures include significant items that management considers not representative of ongoing operations.
Excluding certain items management considers not representative of ongoing operations, adjusted earnings were USD 0.55 per share. Adjusted earnings increased 12%, or USD 10 million, compared with prior year primarily reflecting the benefits of the company's global focus on reducing Total Systems Cost.
The company expects earnings from continuing operations, and adjusted earnings, for the full year 2018 to be in the range of USD 2.75 to USD 2.85 per share, which compares favourably with adjusted earnings of USD 2.65 per share in 2017. The midpoint of this range represents more than a 10% compounded annual growth rate in adjusted earnings per share since 2015. The company expects cash provided by continuing operating activities for 2018 to be approximately USD 800 million and adjusted free cash flow to be approximately USD 400 million.
The earnings and cash flow guidance ranges are consistent with targets conveyed by senior management during Investor Day in early 2016. The earnings and cash flow guidance ranges may not fully reflect uncertainty in macroeconomic conditions and currency rates, among other factors.
On 22 December 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted in the US. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Presently, no substantive impact on the company's adjusted earnings or cash taxes is expected in 2018 as a result of the Act.
Owens-Illinois, Inc. is the world's largest glass container manufacturer and preferred partner for many of the world's leading food and beverage brands. The company had revenues of USD 6.9 billion in 2017 and employs more than 26,500 people at 78 plants in 23 countries.