“O-I’s 2019 earnings were in line with our most recent guidance and cash flows exceeded expectations. We made significant progress during the second half of the year, ending on a positive note despite a very challenging start to 2019,” said Andres Lopez, CEO at O-I Glass.
“As we enter 2020, we are taking bold structural actions to improve O-I’s business fundamentals. We are optimizing the company’s business portfolio and capital structure through accretive acquisitions and divestitures of assets that are not core to our strategy. Likewise, our recent corporate modernization effort, which rebranded the company as O-I Glass, supported January’s actions to establish a final, certain and equitable resolution of our legacy asbestos-related claims liabilities. We are focused on improving our operating performance with key turnaround initiatives including revenue optimization, factory performance and cost transformation. Furthermore, we intend to revolutionize glass, supported by our new MAGMA technology and leveraging glass’s clear advantages as a highly sustainable packaging choice. The combination of these efforts will drive improved operating performance and cash flow generation in 2020 and beyond,” continued Lopez.
Comments
- For the full year 2019, the company recorded a loss from continuing operations of 2.56 USD per share, compared with earnings of 0.89 USD per share (diluted) in 2018. Both periods included items management considers not representative of ongoing operations.
- Excluding certain items management considers not representative of ongoing operations, 2019 adjusted earnings were 2.24 USD per share, compared with the prior year of 2.72 USD per share. Current year results were in line with the company’s guidance of 2.20 USD to 2.25 USD per share.
- Cash provided by continuing operating activities for 2019 was 408 million USD, compared with 793 million USD for 2018. Adjusted free cash flow for 2019 was 133 million USD, which solidly exceeded the company’s expectation of approximately 100 million USD, compared with 362 million USD for 2018
2019 Key Accomplishments:
- O-I continued to optimize its business portfolio and capital structure. The addition of Nueva Fanal further aligned O-I to the growing premium beer category in Mexico. As part of the company’s ongoing tactical divestiture program, O-I sold its interest in a soda ash joint venture with proceeds used to reduce debt. O-I also advanced its strategic portfolio review to improve the company’s competitive position and create shareholder value. This review includes the evaluation of alternatives for O-I’s Australia and New Zealand operations which the company expects to resolve by mid-2020. Following refinancing activities, including the first high-yield industrial Green Bond by a U.S. issuer, the company has significantly improved liquidity, reduced interest costs and extended near term maturities.
- In December 2019, the company completed a corporate modernization effort which resulted in the creation of O-I Glass, the new public company. In January 2020, Paddock Enterprises, LLC, a new subsidiary containing all of the company’s legacy asbestos-related claims liabilities, voluntarily filed for Chapter 11 relief with the aim of establishing a final, certain and equitable resolution for the company’s asbestos-related claims liabilities. This action does not include O-I Glass or any of its operating subsidiaries which continue to operate business as usual.
- O-I is driving profitable growth with key strategic customers supported by capacity expansion initiatives across South America and Europe.
- The company has initiated several turnaround portfolio initiatives to improve operating performance. The company has identified over 150 million USD of benefits over the next 3 years, and is targeting between 35 and 50 million USD of net benefits in 2020.
- The first commercial products were delivered utilizing the company’s new MAGMA technology. Building from this important milestone, the company announced the deployment of MAGMA to its second location at Holzminden, Germany which should start production in the second half of 2020.
- On February 4, 2020, the company’s Board of Directors declared a quarterly cash dividend of 0.05 USD per share, payable on March 16, 2020, to stockholders of record as of the close of business on February 28, 2020.
- O-I expects full year 2020 adjusted earnings will be approximately 2.10 – 2.25 USD per share. Cash provided by continuing operating activities is expected to exceed 650 million USD and free cash flow should approximate or exceed 300 million USD.
Full Year 2019 Results
Full year net sales were 6.7 billion USD compared to 6.9 billion USD in 2018. Higher selling prices increased revenue 176 million USD reflecting a 2.6 percent increase in average selling prices on a global basis. However lower shipments negatively impacted sales by 96 million USD as sales volume in tonnes declined 0.6 percent. Sales volumes reflected the net effect of a 1.7 percent decline in organic sales volumes and the benefit of Nueva Fanal. Unfavorable foreign currency translation reduced net sales by 239 million USD compared to 2018.
Segment operating profit was 841 million USD in 2019, compared with 945 million USD in the prior year.
- Americas: Segment operating profit in the Americas was 495 million USD in 2019 compared with 585 million USD in 2018. Lower earnings primarily reflected incremental operating costs which more than offset the benefit from higher selling prices (net of cost inflation) and higher sales volumes. Total sales volumes in tonnes improved 0.4 percent as additional shipments attributed to the Nueva Fanal acquisition in mid-2019 more than offset a modest decline in organic sales volumes primarily due to lower demand in the North American beer category. Operating costs were unfavourably impacted by increased operating complexity following mix changes in North America, incremental costs to commission new capacity and market-related production downtime to balance supply with lower organic sales volumes. Earnings were also unfavourably impacted by foreign currency translation and temporary items that benefited 2018 but did not repeat in 2019, including a favorable resolution on indirect tax matters in Brazil.
- Europe: Segment operating profit in Europe was 317 million USD in 2019 compared with 316 million USD in 2018. Reflecting Europe’s focus on improving mix, sales benefited from higher selling prices (net of cost inflation), which more than offset the unfavourable impact of lower sales volume and slightly higher operating costs. Sales volumes in tonnes declined 1.8 percent and were negatively impacted by weather-related factors in mid-2019 as well as capacity constraints across the network. Earnings were also unfavourably impacted by foreign currency translation and temporary items that benefited 2018, but did not repeat in 2019, including CO2 credit sales.
- Asia Pacific: Segment operating profit in Asia Pacific was 29 million USD in 2019 compared with 44 million USD in 2018. Lower earnings primarily reflected a decline in selling prices, cost inflation and slightly lower shipments. Sales volume in tonnes declined 0.4 percent. Earnings also reflected unfavourable foreign currency translation.
Retained corporate and other costs were 97 million USD in 2019 compared with 106 million USD for 2018, reflecting efforts to mitigate costs and lower management incentive expense. Interest expense was 311 million USD in 2019 or 246 million USD after excluding 65 million USD of charges for note repurchase premiums, write-off of finance fees and third party fees, compared to interest expense of 261 million USD in 2018 or 250 million USD after excluding 11 million USD of charges for note repurchase premiums, write-off of finance fees and third party fees. The company’s effective tax rate was negative 45.2 percent in 2019 compared to 39.0 percent in 2018. Excluding items that management does not consider representative of ongoing operations, the effective tax rate was 25.7 percent in 2019, which was higher than 20.8 percent in 2018 primarily due to changes in regional earnings mix.
Cash provided by continuing operating activities was 408 million USD for 2019 and 793 million USD in 2018. After deducting cash payments for property, plant and equipment, and adding back asbestos-related payments, adjusted free cash flow was 133 million USD in 2019 and 362 million USD in 2018. Lower adjusted free cash flow reflected a decline in operating profit, unfavourable foreign currency translation and higher working capital levels which was partially offset by lower capital expenditures. 133 million USD of adjusted free cash flow in 2019 was favourable to O-I’s most recent guidance of approximately 100 million USD reflecting working capital management efforts in the second half of the year. Importantly, 2019 results were net of a 61 million USD decrease in accounts receivable factoring levels as the company rebalanced its overall liquidity position.
Total debt was 5.6 billion USD at the end of 2019 compared to 5.3 billion USD in 2018. Net debt was 5.0 billion USD compared to 4.8 billion USD in the prior year and was favourable to the company’s most recent guidance of approximately 5.1 billion USD. At year-end 2019, O-I maintained approximately 2.0 billion USD in liquidity including cash and lines of credit.
In both 2019 and 2018, the company recorded several significant items impacting reported results as presented in the table entitled Reconciliation to Adjusted Earnings. Management considers these items not representative of ongoing operations and they are excluded from adjusted earnings. In 2019, the most significant items excluded from adjusted earnings were a 595 million USD non-cash charge for goodwill impairment of the North America reporting unit, 113 million USD for restructuring, asset impairment and other costs and 65 million USD of debt refinancing expense. Also excluded were 93 million USD of charges for a number of other items including corporate modernization expense, non-cash pension settlement charges and adjustments for asbestos-related liabilities. Asset sales resulted in 107 million USD of gains that were also excluded from 2019 adjusted earnings. In 2018, charges excluded from adjusted earnings reflected 125 million USD for asbestos-related liabilities, 74 million USD of non-cash pension settlement charges, and 102 million USD for restructuring, asset impairment and other charges, primarily related to the Americas region.
Fourth Quarter 2019 Results
Net sales in the fourth quarter of 2019 were 1.6 billion USD, flat to the prior year period. Higher selling prices increased revenue 42 million USD, reflecting a 2.6 percent increase in average selling prices on a global basis. However the net effect of shipments and mix changes negatively impacted sales by 5 million USD, as sales volume in tonnes increased 1.1 percent. Sales volumes reflected the benefit of Nueva Fanal which was partially offset by a 0.8 percent decline in organic sales volumes. Unfavourable foreign currency translation reduced net sales by 20 million USD compared to 2018.
For the fourth quarter 2019, the company recorded earnings from continuing operations of 0.20 USD per share (diluted), which compares with a loss from continuing operations of 0.79 USD per share (diluted) in the same period of 2018. Earnings from continuing operations before income taxes was 65 million USD in the quarter, compared with a loss of 105 million USD in the same period in the 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 0.50 USD per share in the fourth quarter of 2019 compared to 0.61 USD per share in the prior year period. These results were at the high-end of the company’s most recent guidance range of 0.45 USD to 0.50 USD. Compared to the prior year, earnings reflected higher selling prices (net of cost inflation) and higher shipments which more than offset elevated operating costs. However, results were negatively impacted by a number of other factors. Temporary items that benefited 2018 did not repeat in 2019. Likewise, the fourth quarter tax rate was elevated compared to the prior year due to a change in regional earnings mix and discrete tax items that benefited 2018 but did not repeat in 2019.
Segment operating profit was 200 million USD in the fourth quarter, compared to 211 million USD in the prior year fourth quarter.
- Americas: Segment profit in the Americas was 115 million USD in 2019 compared to 127 million USD in the prior year. The benefit from higher selling prices (net of cost inflation) and higher sales volumes partially offset the impact of elevated operating costs. Total shipments in tonnes were up approximately 3.5 percent as organic volumes were about flat net of Nueva Fanal. Operating costs were elevated reflecting market-related downtime to rebalance supply with lower demand earlier in the year including two furnaces stopped during the fourth quarter. Earnings benefited from favourable foreign currency translation which mostly offset the unfavourable impact of temporary items that benefited 2018 but did not repeat in 2019.
- Europe: Segment profit in Europe was 69 million USD in 2019 compared to 56 million USD in the prior year. Higher earnings reflected improved selling prices (net of cost inflation) which more than offset a modest decline in shipments. Sales volume in tonnes declined 1.8 percent as the region continued to focus on mix improvement. Earnings were also unfavourably impacted by foreign currency translation and temporary items that benefited 2018 but did not repeat in 2019.
- Asia Pacific: Segment profit in Asia Pacific was 16 million USD in 2019 compared to 28 million USD in the prior year. Lower earnings reflected elevated operating costs and incremental cost inflation while selling prices remained flat. These factors were partially offset by a slight increase in shipments. Sales volume in tonnes increased 1.1 percent and elevated costs reflected market-related downtime to align supply with weaker than expected demand in China linked to macroeconomic pressures. Earnings also reflected unfavourable foreign currency translation.
2020 Outlook
O-I expects full year 2020 adjusted earnings will be in the range of 2.10 USD to 2.25 USD per share. This outlook assumes higher selling prices (net of cost inflation) as well as sales volumes that will be flat to up 2 percent supported by capacity expansion initiatives and a full year of Nueva Fanal. Likewise, the company expects improved operating costs reflecting several turnaround initiatives as well as footprint adjustments in North America that were taken in 2019 to address unfavourable trends in the beer category. While these factors should boost results in 2020, comparisons to 2019 will be impacted by temporary items that benefited 2019 but will not repeat in 2020, resetting management incentives and the loss of income from the recently divested soda ash joint venture.
Cash provided by continuing operating activities is expected to exceed 650 million USD in 2020. The outlook assumes capital expenditures of approximately 350 to 375 million USD and the suspension of all asbestos-related claims payments, pending final resolution. The Company anticipates 2020 free cash flow of approximately 300 million USD or higher.
This outlook assumes foreign currency rates as of the end of January 2020. The earnings and cash flow guidance ranges may not fully reflect uncertainty in macroeconomic conditions and currency rates, among other factors.
The company routinely posts important information on its website – www.o-i.com/investors.