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|O-I REPORTS FULL YEAR AND FOURTH QUARTER 2015 RESULTS; Improving operations on stable volumes plus acquisition benefits drive strong 2015 free cash flow generation and earnings in constant currency|
FOR IMMEDIATE RELEASE
O-I REPORTS FULL YEAR AND FOURTH QUARTER 2015 RESULTS
PERRYSBURG, Ohio (Feb. 8, 2016) - Owens-Illinois, Inc. (NYSE: OI) today reported financial results for the full year and fourth quarter ending December 31, 2015.
"Looking ahead, we expect that trends in the majority of our end markets will remain stable in 2016 and O-I will increasingly benefit from our growing exposure to U.S. beer imports and the Mexican domestic market," Lopez added. "While we recognize continued external uncertainties, such as economic conditions in Brazil and price dynamics in Europe, we are pressing hard on key initiatives that will increase profitability in 2016, including: maximizing the value of the acquired business; improving our end-to-end supply chain performance; and reducing costs through increasing organizational effectiveness and spending discipline. We expect to deliver higher earnings and cash flow in 2016 while continuing to prioritize deleveraging our balance sheet."
Fourth Quarter 2015
Global sales volume increased by nearly 14 percent compared to prior year fourth quarter. Excluding the acquired business, global shipments were 2 percent higher year over year. Shipments in Asia Pacific increased 7 percent driven by improving wine exports from Australia. Europe sales volume was on par with the prior year quarter as lower beer shipments were offset by higher shipments in all other categories.
North America sales volume, excluding the acquired business, improved more than 2 percent year over year led by stronger wine, spirits and beer shipments. Latin America sales volume, excluding the acquired business, was flat to prior year as strong sales volume in the Andean region offset continued weakness in Brazil. Including the acquired business, fourth quarter sales volumes improved in North America by 11 percent and in Latin America by 55 percent.
Segment operating profit was $186 million in the fourth quarter, $6 million higher than prior year. On a constant currency basis, segment operating profit was up $40 million. The acquired business contributed $32 million of segment operating profit. Excluding the acquired business, improved segment operating profit in North America and Asia Pacific were mostly offset by lower operating profit in Europe and the Latin America legacy business.
Segment operating profit in North America improved $25 million, almost doubling the profit of the prior year fourth quarter. North America benefited from higher production volumes and much more integrated end-to-end supply chain management. In the prior year fourth quarter, profitability suffered from sub-optimal sales planning and supply chain management which caused the region to significantly curtail production. The acquired business boosted North America profits by $3 million in the quarter.
In Asia Pacific, segment operating profit, excluding the impact of foreign currency, increased $7 million, or about 28 percent year over year. This was mainly due to higher sales and production volume, as well as the benefit of insurance proceeds related to storm damage in Australia that occurred in 2014.
Latin America's segment operating profit increased $3 million, or $23 million on a constant currency basis, compared with the prior year fourth quarter. The acquired business provided $29 million of segment operating profit. This is more than the unfavorable currency translation effect, the key headwind impacting Latin America.
Europe reported a $25 million decline in segment operating profit, with more than 35 percent of the decrease caused by devaluation of the Euro. Average selling prices in Europe were approximately 1 percent lower year over year, similar to the trend of the full year. Europe had higher operating costs in the quarter, primarily due to lower productivity. Exiting the year 2015, productivity had begun to improve.
The acquired business' underlying operations continue to perform well in terms of sales, margin and operating profit. The construction of the new furnace in Monterrey - built primarily to supply beer bottles to Constellation Brands, Inc. - was complete by the end of 2015 and is expected to be at full output by the end of the first quarter of 2016. The integration team is on track to deliver on the Company's synergy target; early gains are being realized in raw material cost savings.
The preliminary valuation of tangible and intangible assets related to the acquired business is higher than original estimates, which were based on benchmarks of rigid packaging transactions. The impact of incremental depreciation and amortization to annual earnings is approximately 8 cents per share; as a non-cash charge, it will have no impact on cash flow generation.
In the fourth quarter, the Company conducted its annual comprehensive legal review of asbestos-related liabilities. Based on this review, the Company has determined that it was able to reasonably estimate probable losses for asbestos claims not yet asserted against the Company for a period of four years versus the previous three year estimate. Therefore, the Company's charge for 2015 is for a period one year longer than the accrual period determined as reasonably estimable in the annual comprehensive legal reviews conducted since 2003.
In the fourth quarter, the Company recorded a charge of $225 million to increase its accrued liability for asbestos-related costs. This charge is equivalent to an average annual charge of $112.5 million, which is substantially lower than the $135 million charge recorded in 2014.
Full Year 2015
Full year net sales were $6.2 billion, down $628 million from 2014. Adverse currency translation due to the stronger U.S. dollar caused an $881 million decline in net sales of reportable segments, or 13 percent. The acquired business contributed $258 million in sales.
Prices were slightly higher on a global basis. In Latin America, price gains largely reflected cost inflation in the region. Prices were lower in North America due to energy-pass-throughs and modest concessions to secure long-term contracts. In Europe, prices were impacted by competitive pricing dynamics in Southern Europe as well as the impact of modest concessions to secure long-term contracts.
Segment operating profit was $740 million in 2015, compared with $908 million in the prior year. More than 80 percent of the decline was due to unfavorable currency translation. On a constant currency basis, segment operating profit declined $27 million yet improved in all regions except Europe. The acquired business contributed $46 million of segment operating profit.
In North America, segment operating profit increased $25 million, or 10 percent, mainly as a result of improved supply chain management. The region benefited from $4 million of segment operating profit from the acquired business. Excluding the impact of foreign currency, Asia Pacific's segment operating profit increased $12 million, or 17 percent, compared to the prior year primarily due to the favorable impact of prior restructuring actions and the aforementioned insurance proceeds.
On a constant currency basis, Latin America's segment operating profit improved $14 million compared to 2014. The acquired business contributed $42 million. Lower sales volumes in Brazil, compared to record sales volumes in 2014, and higher operating costs, primarily due to energy and soda ash inflation in Brazil, contributed to lower segment operating profit. The prior year benefited from approximately $6 million of non-strategic asset sales, which did not repeat in the current year.
Europe's segment operating profit declined $144 million, with $63 million, or nearly 45 percent, of the decrease related to the strengthening U.S. dollar. Average selling prices in Europe fell approximately 1 percent for reasons mentioned above. Lower operational performance in Europe drove higher costs for the year.
Net interest expense in 2015 was $209 million, similar to 2014 net interest expense of $210 million. The positive impacts of debt refinancing and the currency impact on Euro-denominated debt were offset by acquisition-related interest expense.
The effective tax rate on adjusted earnings was 25 percent. The tax rate was higher than 2014, mainly reflecting the geographic mix of earnings and timing associated with the set-up of the legal structure for the acquired business in Mexico, the latter of which was completed by year end 2015.
In 2015, the Company recorded several significant non-cash charges to reported results as presented in the table entitled Reconciliation to Adjusted Earnings and Constant Currency. Management considers these charges not representative of ongoing operations.
The Company generated $210 million of free cash flow in 2015. This is comparable to the very strong free cash flow generated in 2014, excluding the adverse currency translation of the stronger U.S. dollar in 2015. At 2015 exchange rates, the prior year free cash flow of $329 million would have been approximately $212 million.
The acquired business was modestly accretive to free cash flow in 2015, despite planned higher-than-average capital expenditures required to build the new furnace in Monterrey, Mexico.
Company cash flows continue to benefit from positive developments in legacy liabilities.
During 2015, the Company repaid all senior notes that were due in 2016. The Company entered into a new senior secured credit facility that matures in April 2020. To finance the acquired business, the facility was then amended to borrow an incremental $1.25 billion. The Company also issued $1 billion of senior notes due 2023 and 2025.
The Company recognized that volatile exchange rates may put upward pressure on the leverage ratio. As such, on February 3, 2016, the financial covenant in the bank credit agreement was amended to allow a maximum leverage ratio of 5.0 times net debt to EBITDA through September 30, 2016, then 4.5 times through September 30, 2017, then remaining at 4.0 times.
The Company repurchased $100 million of shares of common stock during the first half of 2015. For the next several years, the Company plans to prudently invest in the business and focus on debt repayment to improve the Company's net debt to EBITDA leverage ratio.
The Company expects free cash flow to be approximately $280 million for the year, based on currency rates at the end of the year 2015. The projected year over year increase is primarily driven by the expected improvement in earnings.
The Company routinely posts important information on its website - www.o-i.com/investors.
Conference call scheduled for February 9, 2016
The conference call also may be accessed by dialing 888-733-1701 (U.S. and Canada) or 706-634-4943 (international) by 7:50 a.m., Eastern Time, on February 9. Ask for the O-I conference call. A replay of the call will be available on the O-I website, www.o-i.com/investors, for a year following the call.
Contact: Sasha Sekpeh, 567-336-5128 - O-I Investor Relations
O-I news releases are available on the O-I website at www.o-i.com.
O-I's first quarter 2016 earnings conference call is currently scheduled for Tuesday, May 3, 2016, at 8:00 a.m., Eastern Time.
 Adjusted earnings refers to earnings from continuing operations attributable to the Company, excluding items management does not consider representative of ongoing operations. In constant currency terms, the prior year amount reflects 2015 exchange rates. See the table entitled Reconciliation to Adjusted Earnings and Constant Currency in this release.
 The Company's asbestos charge is an item that management considers not representative of ongoing operations. See the table entitled Reconciliation to Adjusted Earnings and Constant Currency in this release.
 Free cash flow is calculated as cash provided by continuing operating activities less additions to property, plant and equipment as presented in the appendix of the Company's fourth quarter and full year 2015 earnings presentation.
 Excluding charges of $42 million during 2015 for note repurchase premiums and the write-off of finance fees related to debt that was repaid prior to its maturity.
 Excluding charges of $20 million during 2014 for note repurchase premiums and the write-off of finance fees related to debt that was repaid prior to its maturity.
 EBITDA as defined in the Company's bank credit agreement.