O-I reported financial results for the full year and fourth quarter ending 31 December 2014, generating its second highest free cash flow in the company’s history.
Owens-Illinois, Inc. (O-I) reported financial results for the full year and fourth quarter ending 31 December 2014.
Full year 2014 earnings from continuing operations attributable to the company were USD 1.01 per share (diluted), compared with USD 1.22 per share in 2013. Excluding certain items management considers not representative of ongoing operations, adjusted earnings were USD 2.63 per share compared with USD 2.72 per share in the prior year.
Fourth quarter 2014 adjusted earnings were USD 0.46 per share, compared with USD 0.51 per share in the same period of 2013.
Global volumes for 2014 were flat compared to the prior year, excluding the deliberate retrenchment in China. Volume growth in Europe was 2%, and South America posted 4% growth for the year, led by broad-based gains in beer.
O-I positioned itself to benefit from fast-growing Mexican beer imports to the US through a joint venture with Constellation Brands, Inc. in Mexico, as well as a related long-term supply agreement with Constellation.
O-I generated USD 329 million of free cash flow for the full year 2014, the company’s second highest on record, despite an adverse currency impact of approximately USD 40 million.
The company continues to employ disciplined capital allocation. As committed, O-I used 10% of its free cash flow to repurchase shares and also funded non-organic growth opportunities and reduced net debt. O-I’s leverage ratio improved to 2.4 at year-end.
The Board of Directors authorized USD 500 million in share repurchases through 2017. The company expects to repurchase at least USD 125 million in shares in 2015.
In 2015, the company expects to generate USD 300 million of free cash flow for the third consecutive year, despite an expected USD 30 million headwind from currency exchange rates.
Commenting on the company’s 2014 results, Chairman and Chief Executive Officer Al Stroucken said, “We successfully generated significant free cash flow, despite strong currency headwinds that intensified in the fourth quarter. Our European asset optimization program has strengthened financial performance in our largest region, and volume growth in South America allowed us to reach our margin target of 20% in that region. We are confident that our concentrated efforts to optimize our operations will improve financial performance, particularly in North America and Asia Pacific, where we experienced challenges in 2014.
“We successfully drove financial improvement by reducing our pension obligations and refinancing USD 600 million in debt. We will distribute benefits derived from our value-added actions to our shareholders through a USD 500 million share repurchase program. O-I is the world’s leading glass container maker, and we are well-positioned to generate sustainable, long-term value for our shareholders.”
Net sales in the fourth quarter of 2014 were USD 1.6 billion, down 9% from the prior year fourth quarter. The company benefited from price gains of 1%. The stronger US dollar adversely impacted the value of sales by 6%.
Sales volume declined by 4%. Volume in Europe increased 1%, driven by higher beer sales. Shipments in South America were down 4%. Volume in the Andean countries was on par with the prior year, while shipments in Brazil were down mid-single digits, as expected.
Volume in North America fell approximately 4%. Whereas sales volumes in most categories in the region were flat with prior year, volumes in beer were lower, consistent with the ongoing decline in major domestic beer sales. Shipments in Asia Pacific declined nearly 20%, due primarily to the deliberate retrenchment in China and lower sales in Australia.
Fourth quarter segment operating profit was USD 180 million, down USD 15 million compared with the prior year fourth quarter. Europe reported a nearly 40% increase in operating profit, primarily due to benefits from the asset optimization program and cost containment measures. South America’s operating profit was on par with prior year, driven by improved productivity and a geographic sales mix that offset lower shipments and currency headwinds in the quarter. North America’s profit contracted significantly year on year, due to sales volume declines and deeper production curtailments to control inventory. Asia Pacific reported lower profit due to lower sales and production volumes.
Corporate and other costs improved by USD 6 million compared with prior year, primarily driven by lower pension expense.
In the fourth quarter of 2014, the company recorded several significant non-cash charges to reported results. Management considers these charges not representative of ongoing operations.
Full year net sales were USD 6.8 billion, down 3% from 2013. Price increased 1% on a global basis. Currency was a more than 2% headwind, primarily due to the Australian dollar, the Brazilian real and the Colombian peso.
Although sales volume fell nearly 2% for the year, shipments were on par with prior year when excluding the company’s planned retrenchment in China. South America reported strong sales volumes on growth of 4%, led by record volumes in Brazil and recovery in the Andean region. Shipments in Europe increased 2%, driven by wine and beer gains.
Volume in North America was dampened by the ongoing decline in major domestic beer brands. Shipments in Asia Pacific were down 20%, primarily due to China, as well as the decline in beer and wine demand in Australia.
Segment operating profit was USD 908 million in 2014, compared with USD 947 million in the prior year. In Europe, operating profit increased 16%, driven by the asset optimization program, as well as sales volume gains. South America also achieved a double-digit expansion in operating profit due to productivity improvement and higher sales volumes.
North America and Asia Pacific reported lower operating profit in 2014. In North America, operating profit was dampened by reduced sales and production volumes, as well as lower productivity. In Asia Pacific, the company responded to lower wine volumes in Australia by modestly reducing capacity to improve financial returns.
The company entered into two promising agreements with Constellation Brands to supply glass containers for CBI’s growing Mexican beer export business to the United States. O-I and Constellation Brands created a joint venture to operate and expand a glass container plant adjacent to CBI’s brewery in Nava, Mexico. Separately, O-I will supply additional containers from North America under a long-term supply contract with Constellation Brands. These transactions are expected to be accretive to earnings in 2016 and allow the Company to benefit from the fast-growing Mexican beer import market in the United States.
Full year 2014 earnings from continuing operations attributable to the company were USD 1.01 per share (diluted), compared with USD 1.22 per share in full year 2013. Excluding certain items management considers not representative of ongoing operations, adjusted earnings were USD 2.63 per share compared with USD 2.72 per share in the prior year.
Cash payments and new claims filed related to asbestos continued to decline. In 2014, payments were USD 148 million, down USD 10 million from 2013. In the fourth quarter, the company conducted its annual comprehensive review of asbestos-related liabilities and recorded a charge of USD 135 million, as presented in the table entitled Reconciliation to Adjusted Earnings.
The company continued its strong focus on cash generation in 2014. Despite lower segment operating profits, cash provided by continuing operations in 2014 was USD 698 million, similar to the strong performance in the prior year. The company generated USD 329 million of free cash flow in 2014, the second highest in the company’s history. This includes the nearly USD 40 million adverse impact of currency exchange rates.
The company successfully refinanced USD 600 million in debt in the fourth quarter as part of its ongoing efforts to enhance financial flexibility. The new bonds extended the company’s debt maturity profile. Net debt declined by USD 236 million for the year, aided by foreign exchange rates, resulting in an improved leverage ratio of 2.4 at year end 2014.
The company’s ongoing efforts to reduce the cost and risk associated with its pension plans has resulted in a reduction of approximately USD 600 million in pension obligations in 2014.
In line with stated capital allocation priorities for free cash flow in 2014, the company repurchased 1.1 million shares worth USD 32 million, funded the initial USD 115 million investment in the joint venture with Constellation Brands, and reduced net debt.
Commenting on the company’s outlook for 2015, Stroucken said, “While we are not projecting much change in local market conditions, we are expecting solid improvement in our operations due to our strong manufacturing and technology expertise and our concentrated focus on optimizing our manufacturing process. In addition, we will see some benefit from our re-financing activities, and we will adjust our approach to capital allocation by returning at least USD 125 million to our shareholders through share repurchases. In all, we expect to generate USD 300 million in free cash flow, despite a strong US dollar causing an expected USD 30 million translation headwind.”
Reflecting unfavourable currency translation, O-I expects adjusted earnings for full year 2015 to be in the range of USD 2.20 to USD 2.60. Assuming constant currency (at 2014 currency rates), comparable adjusted earnings for full year 2015 are expected to be in the range of USD 2.60 to USD 3.00. The midpoint of the range using constant currency is higher than prior year adjusted earnings due to an anticipated improvement in operating results.