Owens-Illinois Inc. (OI) has reported a fourth-quarter loss of $71 million, after reporting a profit in the same period a year earlier, however according to the company these figures include significant items that management considers not representative of ongoing operations.
CEO Andres Lopez stated, “Our multi-year transformation is off to a strong start – we achieved the key financial targets that we outlined at investor day in early 2016. Margins expanded more than 100 basis points, due to the benefits of our strategic initiatives and the acquired business. We are executing on our strategy, overcoming visible external challenges from Brazil macros, the Brexit vote and the strengthening U.S. dollar.
“Looking ahead, we expect continued improvement in our top-line and bottom-line results as we advance to the next stage in our transformational journey – from stability to agility. We will augment our ability to adapt to market changes and invest in new capabilities. In all, we are one enterprise solely executing on one plan with focus, rigor and discipline everywhere to further enhance shareholder value.”
Fourth Quarter 2016 Results
For the fourth quarter 2016, the Company recorded a loss from continuing operations of $0.43 per share (diluted), which compares with earnings from continuing operations (diluted) of $0.04 per share in the same period of 2015. Loss from continuing operations before income taxes was $39 million in the quarter, which was unfavorable by $87 million compared with the same period in prior year. These figures include significant items that management considers not representative of ongoing operations. In the fourth quarter, the Company incurred restructuring and impairment charges of $110 million, primarily driven by anticipated restructuring activity in Europe, Latin America and at corporate, as well as a settlement charge of $98 million related to actions to de-risk pension liabilities.
Excluding certain items management considers not representative of ongoing operations, adjusted earnings were $0.50 per share. Adjusted earnings increased 25 percent, or $17 million compared with prior year, a great achievement in light of ongoing currency headwinds and recognizing that both periods reflected results from the acquired business.
Net sales in the fourth quarter of 2016 were $1.6 billion, up 1 percent from the prior year fourth quarter. Price was up $27 million on a global basis, primarily driven by price adjustments that reflect cost inflation. Currency translation adversely impacted net sales by $16 million, or 1 percent.
Global sales volumes increased 1 percent compared to the fourth quarter of 2015. Shipments in Europe increased 3 percent, mainly due to gains in beer and food shipments. In Latin America, shipments increased nearly 3 percent with higher shipments in all product categories except wine, which was down slightly. North America volumes were similar to the prior year with higher non-alcoholic beverage and spirits shipments offsetting lower food and beer shipments. Fourth quarter shipments in Asia Pacific were 6 percent below the same period of 2015. In the mature markets of Asia Pacific, sales volumes were similar to prior year, despite lower in-country production volumes due to planned engineering activity. Sales volumes in mature markets in Asia Pacific were supported by shipments from China; in turn, domestic sales there declined.
Segment operating profit was $201 million in the fourth quarter, 8 percent higher than prior year fourth quarter.
Europe reported segment operating profit of $45 million, which was $17 million, or 61 percent higher than the prior year quarter. The gain in sales volume and benefits from manufacturing initiatives more than offset price-cost pressure in the region. Europe received an energy credit in the quarter that had been delayed for legislative reasons since 2015. Excluding the energy credit, Europe posted approximately 25 percent higher segment operating profit than the fourth quarter of 2015.
Segment operating profit for North America was $52 million in the quarter. This was $1 million higher than fourth quarter of 2015. The business benefited from further contributions from strategic initiatives.
Latin America’s segment operating profit of $75 million was on par with the prior year quarter. Strong shipments by the Mexican business more than offset lower shipments in Brazil and Ecuador related to the challenging economic situation in those countries. The management team continues to successfully control costs.
Asia Pacific reported segment operating profit of $29 million, down $3 million compared with the prior year. This was mainly due to the aforementioned lower sales volumes and the costs for higher intra-regional shipments. The region is in a strong position exiting 2016, due to the high number of furnace rebuilds during the year.
Full Year 2016 Results
Full year net sales were $6.7 billion, up $546 million from 2015. The acquired business contributed $608 million in incremental sales (excluding organic growth from September through December 2016) which was partially offset by $108 million in adverse currency translation. Prices were 1 percent higher on a global basis, mainly due to price adjustments resulting from cost inflation. Global shipments increased 9 percent in 2016. Key contributors to growth were the acquired business, Europe, legacy North America, as well as Australia and New Zealand.
Shipments in Europe increased nearly 2 percent, primarily due to favorable beer and wine volumes. In North America, sales volumes improved nearly 7 percent compared to the prior year period, mainly due to the acquired business, and higher shipments in all major end uses except beer which was on par with the prior year. Full year shipments for Latin America rose 41 percent, primarily due to the acquired business and growth in Colombia and Peru which was partially offset by the negative impact of economic weakness in Brazil and Ecuador. Overall, Asia Pacific shipments declined low single digits. In mature markets in Asia Pacific, sales volumes increased approximately 3 percent, primarily due to beer and wine. Sales volumes in China declined as domestic production was exported to support sales elsewhere in the region.
Segment operating profit was $882 million in 2016, compared with $740 million in the prior year, an improvement of 19 percent.
In Europe, segment operating profit was $237 million, an improvement of $28 million over the prior year period, or 13 percent. The region profited from higher sales volumes and improvements in operating performance. These benefits were partially offset by lower average selling prices that were not fully offset by energy deflation. Europe received an energy credit in the fourth quarter that had been delayed for legislative reasons since 2015, which essentially offsets the adverse impact of the Brexit vote for the year.
North America’s segment operating profit increased $34 million, or 13 percent. Approximately 80 percent of the increase was due to the acquired business. The legacy business also benefited from contributions from strategic initiatives and from higher sales shipments.
Segment operating profit in Latin America rose $86 million compared to prior year, an increase of 47 percent. The acquired business provided an incremental $94 million of segment operating profit for the region. Unfavorable currency translation and lower sales volumes in Brazil and Ecuador negatively impacted Latin America’s segment operating profit.
Asia Pacific reported segment operating profit of $77 million which was $6 million below the prior year. The favorable impact from currency was more than offset by the costs for higher intra-regional shipments and lower production volume resulting from planned engineering activity, similar to the situation noted in the fourth quarter.
Retained corporate and other costs were $98 million in 2016, which is in line with the past five-year average.
Net interest expense in 2016 was $272 million, higher than the prior year primarily due to acquisition-related interest expense.
The Company’s effective tax rate from continuing operations for 2016 was approximately 33 percent, compared with almost 40 percent for 2015. The effective tax rate on adjusted earnings was approximately 24 percent for 2016 which is similar to approximately 25 percent in 2015.
In 2016 and 2015, 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. Charges in 2016 include restructuring and impairment charges of $129 million, primarily driven by restructuring activity in Europe, Latin America and at corporate.
Cash provided by continuing operating activities was $758 million for 2016. After deducting additions to property, plant and equipment of $454 million, and adding back asbestos-related payments of $125 million, adjusted free cash flow was $429 million, in line with management guidance of $425 million.
The Company expects earnings from continuing operations, and adjusted earnings, for the full year 2017 to be in the range of $2.40 to $2.50 per share. The midpoint of this range represents a 10 percent compounded annual growth rate in adjusted earnings per share since 2015. The Company expects cash provided by continuing operating activities for 2017 to be approximately $730 million and adjusted free cash flow to be approximately $365 million. As previously communicated, the decline in adjusted free cash flow from 2016 is mainly related to the non-recurrence of a VAT refund of approximately $130 million, partially offset by higher segment operating profit and stronger contributions from working capital.
Despite the significant strengthening of the U.S. dollar, the earnings and cash flow guidance ranges are entirely consistent with targets conveyed by senior management during investor day in early 2016. The earnings and cash flow guidance ranges reflect uncertainty in macroeconomic conditions and currency rates, among other factors.