Will FX Woes Continue to Torment Owens-Illinois in 2015?

On Nov 10, we issued an updated research report on Owens-Illinois, Inc. OI, the largest manufacturer of glass containers in the world.

Looking back at Owens-Illinois’ third-quarter 2015 performance, adjusted earnings per share of 57 cents beat the Zacks Consensus Estimate of 55 cents but were down 24% year over year. Owens-Illinois’ net sales declined 10% year over year to $1,566 million falling short of the Zacks Consensus Estimate of $1,571 million. Currency headwinds had a negative impact of approximately $240 million on sales. Higher prices in Latin America were largely offset by lower prices in North America and Europe, resulting in flat global pricing. The newly acquired food and beverage business contributed $61 million to sales.

Owens-Illinois expects current economic and industry trends, including currency headwinds, to hamper fourth-quarter results. In North America, the company expects its fourth-quarter financial performance to improve substantially against an easy comparison with the prior-year quarter helped by modestly higher sales volume, higher production volume since the company does not plan to curtail production like last year, improved productivity, continued cost improvements in the end-to-end supply chain, and a full quarter contribution from OI Packaging Solutions. Results are also expected to be favorable in Asia Pacific.

However, in Europe, fourth-quarter profits will be affected by flat volumes and ongoing price declines. In Latin America, while the Vitro acquisition will provide significant benefits to segment profit in the fourth quarter, the legacy business will see some continued pressure, especially given macro challenges. In Brazil, the company anticipates modestly lower production volume. Moreover, price increases may not completely cover persistently high cost of inflation linked to the strong US dollar.

Owens-Illinois reduced its adjusted earnings per share guidance for 2015 to $2.00 from the prior range of $2.00 to $2.20 due to unfavorable foreign exchange rates. The company expects to generate free cash flow of approximately $200 million. As majority of the company’s free cash flow is generated in the fourth quarter, the amount will be heavily influenced by year-end currency rates.  

On Sep 1, 2015, Owens-Illinois completed the Vitro acquisition for approximately $2.15 billion in cash.  The Vitro Business is the largest supplier of glass containers in Mexico manufacturing glass containers across multiple end uses, including food, soft drinks, beer, wine and spirits. The acquisition will provide the company a competitive edge in the attractive and growing glass segment of the packaging market in Mexico. This will further solidify the company’s position as the world's leading glass container producer. The acquisition should contribute about 30 cents in earnings per share in 2016 and 50 cents per share in 2018. It should generate at least $100 million in free cash flow by 2018.

Owens-Illinois faces intense competition from other well-established glass container manufacturers such as Compagnie de Saint-Gobain, Anchor Glass Container Corp. and Ardagh Plc. Moreover, pressure of competition from manufacturers of alternative forms of packaging, such as Ball Corporation BLL, Sealed Air Corporation SEE and Crown Holdings Inc. CCK, persists. Advantages in price, quality, and functional attributes of these alternative containers may lead customers to consider changing suppliers or the form of packaging, which could affect Owens-Illinois.