Owens-Illinois, Inc. (OI) reported fourth-quarter 2014 adjusted earnings of 46 cents per share, down 9.8% year over year. The results, however, were in line with the Zacks Consensus Estimate.
Including one-time items, Owens-Illinois reported a loss of 79 cents per share, which narrowed from a loss of 88 cents in the year-ago quarter.
Operational Update
Owens-Illinois’ net sales declined 9% year over year to $1.6 billion and closely missed the Zacks Consensus Estimate of $1.65 billion. Benefit of 1% from price gains was offset by the stronger U.S. dollar that adversely impacted sales by 6%.
The company reported a 4% decline in sales volume during the quarter. Though volume in Europe increased 1%, driven by higher beer sales, volume in North America declined approximately 4%. Whereas sales volumes in most categories in North America were flat with the prior year, volumes in beer were lower, consistent with the ongoing decline in major domestic beer sales.
Shipments in South America fell 4%. Asia Pacific shipments declined nearly 20%, primarily due to the deliberate retrenchment in China and lower sales in Australia. Volume in the Andean countries was flat with the prior year, while shipments in Brazil were down to mid-single digits.
Cost of sales declined 7% to $1.4 billion in the quarter. Gross profit declined 18.6% to $237 million from $291 million in the prior-year quarter. Selling and administrative expenses increased 9% to $141 million.
Segment operating profit decreased 7.7% year over year to $180 million. Europe reported an increase of nearly 40% in operating profit, mainly owing to benefits from the asset optimization program and cost containment measures. South America’s operating profit was flat with the prior year on the back of 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 reduced sales and production volumes.
Financial Update
Owens-Illinois had cash and cash equivalents of $512 million at the end of 2014, up from $383 million at 2013-end. The company generated cash flow from operations of $698 million in 2014 compared with $700 million in 2013. Owens-Illinois successfully refinanced $600 million debt in the fourth quarter as part of its ongoing efforts to enhance financial flexibility. The company’s long-term debt decreased to $2.97 billion as of Dec 31, 2014 from $3.24 billion as of Dec 31, 2013.
Owens-Illinois repurchased 1.1 million shares worth $32 million in 2014, utilized to fund the initial $115 million investment in the joint venture with Constellation Brands and reduced net debt.
Owens-Illinois generated $329 million of free cash flow for 2014, compared with $339 million in 2013. The company used 10% of its free cash flow to repurchase shares and also funded non-organic growth opportunities and reduced net debt.
Full Year 2014 Performance
Owens-Illinois posted adjusted earnings of $2.63 per share for 2014, which decreased 3.3% from $2.72 a share in 2013. Earnings beat the Zacks Consensus Estimate by a penny and came in line with management’s guidance range of $2.62 to $2.72 per share. Including special items, earnings were $1.01 per share for the year, compared with $1.22 in 2013.
Revenues for the full year decreased 3% year over year to $6.8 billion from $7 billion in 2013. Revenues came in line with the Zacks Consensus Estimate. 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.
Segment operating profit was $908 million in 2014, compared with $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.
However, 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.
Guidance
Owens-Illinois guided adjusted earnings per share for 2015 in the range of $2.20 to $2.60. On a constant currency basis, adjusted earnings for 2015 are expected to be in the range of $2.60 to $3.00.
The company expects free cash flow generation to be around $300 million for the full year. Owens-Illinois is poised to benefit from strong manufacturing and technology expertise and concentrated focus on optimizing its manufacturing process. Its re-financing and capital allocation activities will also drive growth.
Owens-Illinois entered into two promising agreements with Constellation Brands Inc. (STZ) to supply glass containers for Constellation’s growing Mexican beer export business to the U.S. Owens-Illinois and Constellation Brands created a joint venture to operate and expand a glass container plant adjacent to Constellation’s brewery in Nava, Mexico. Moreover, Owens-Illinois will supply additional containers from North America under a long-term supply contract with Constellation Brands. These transactions are expected to be accretive to the company’s earnings in 2016 and allow it to benefit from the fast-growing Mexican beer import market in the U.S.
This manufacturer of glass containers is optimistic about a strong balance sheet and generation of positive cash flow. However, foreign exchange volatility as well as political, social and economic instability remain headwinds.
Owens-Illinois currently holds a Zacks Rank #3 (Hold). Some other stocks worth considering in the packaging sector include Abengoa SA (ABGB) and Adept Technology Inc. (ADEP), both carrying a Zacks Rank #1 (Strong Buy).
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