"In 2017, we delivered strong earnings and cash flow generation, in line with the commitments we made at Investor Day in early 2016. We have been building capabilities in the commercial, manufacturing and supply chain space that are demonstrably adding to the top line - through higher shipments year-on-year - and the bottom line - through the tangible benefits of our Total Systems Cost approach," said Andres Lopez, CEO. "We are working together in a new way, as one enterprise, enhancing the customer experience, executing on our initiatives and deleveraging the balance sheet that together support our conviction to deliver rising earnings and cash flow in 2018. Even as we continue to invest in new capabilities and explore non-organic growth opportunities in the industry, we have begun to pivot towards a more balanced approach to capital allocation that we anticipate will include share buybacks in 2018."
For the full year 2017, the Company recorded earnings from continuing operations of $1.11 per share (diluted), compared with $1.32 per share in 2016.
Excluding certain items management considers not representative of ongoing operations, adjusted earnings were $2.65 per share. This was up 15 percent compared with the prior year of $2.31 per share and at the high end of management guidance of $2.60 to $2.65 per share.
The Company generated strong cash flows, exceeding guidance. Cash provided by continuing operating activities for 2017 was $724 million compared with $758 million for 2016 which included a non-recurring value added tax refund of approximately $130 million. Adjusted free cash flow1 for 2017 was $393 million, which exceeded management guidance of $365 million.
Net sales were $6.9 billion, an increase of nearly 3 percent compared to the prior year, due to higher shipments, higher prices and favorable currency translation. Total glass container shipments increased approximately 1 percent on a global basis, compared with the prior year, led by gains in Europe and Latin America.
Earnings from continuing operations before income taxes were $275 million, which was $81 million lower than 2016 despite higher segment operating profit in 2017. The decline is driven by pension settlement charges of $218 million, as well as higher charges related to debt redeemed in 2017.
Segment operating profit of reportable segments for 2017 was $942 million, an increase of 7 percent compared with prior year. Gains were reported in Europe, North America and Latin America. As expected, segment operating profit was lower than 2016 in Asia Pacific, the Company's smallest region, mainly reflecting higher supply chain costs which are being addressed with asset improvements.
Strategic initiatives in commercial programs and end-to-end supply chain management generated benefits as planned. Total systems cost improvements generated approximately $39 million in cost savings during 2017.
Separately, the Company continues to focus on deleveraging the balance sheet. During 2017, the Company retired its highest cost debt - $250 million of its 7.80% Senior Debentures due 2018. The Company also continues to reduce its pension benefit obligations ("PBO"); in 2017, the Company executed a series of transactions that reduced its PBO by more than $500 million. Since 2012, the Company has reduced its outstanding PBO by approximately $1.8 billion.
In light of ongoing progress in reducing leverage, the Company has begun to shift to a balanced approach to capital allocation. The Board of Directors authorized a $400 million share repurchase program. The Company expects to repurchase about $100 million in shares in 2018.
In 2018, the Company expects to deliver higher earnings from continuing operations mainly driven by higher segment operating profit. Earnings from continuing operations, and adjusted earnings, are expected to be in the range of $2.75 to $2.85 per share, which compares favorably with adjusted earnings of $2.65 per share in 2017. Cash provided by continuing operating activities is expected to be approximately $800 million, whereas adjusted free cash flow for the year 2018 is expected to be approximately $400 million.
Full Year 2017 Results
Full year net sales were $6.9 billion, up $167 million from 2016, an increase of nearly 3 percent. Prices were 1 percent higher on a global basis, mainly due to price adjustments resulting from cost inflation. Global shipments increased approximately 1 percent in 2017. From a geographic perspective, key contributors to shipment growth were Italy, Mexico and Brazil. Favorable foreign currency translation also benefited net sales by $106 million.
Shipments in Europe increased 1 percent, primarily due to favorable beer, spirits and wine volumes. In North America, sales volumes declined 3 percent compared to the prior year period, mainly due to lower shipments of beer. Full year shipments for Latin America rose 4 percent, primarily due to higher shipments of beer and spirits. Overall, Asia Pacific shipments declined 1 percent as higher shipments to food customers were more than offset by lower shipments to beer and non-alcoholic beverage customers. In mature markets within Asia Pacific, sales volumes increased approximately 1 percent, primarily due to higher beer shipments. Sales volumes in China declined for the full year because, during the first half of 2017, domestic production was exported to support sales elsewhere in the region.
Segment operating profit was $942 million in 2017, compared with $882 million in the prior year, an improvement of 7 percent.
In Europe, segment operating profit was $263 million, an improvement of $26 million over the prior year period, or 11 percent. The region profited from improvements in Total Systems Costs, cost savings from the closure of a plant in the Netherlands, and higher sales volumes. These benefits were partially offset by lower average selling prices that were not fully offset by deflation.
North America's segment operating profit increased $19 million, or 6 percent. Higher equity earnings and benefits from Total Systems Cost initiatives provided the most significant improvement from prior year. The region also benefited from approximately $5 million in gains related to non-strategic asset sales. Partially offsetting these benefits, were lower sales volume and cost inflation that was not fully covered by price increases.
Segment operating profit in Latin America rose $27 million compared to prior year, an increase of 10 percent. Benefits from Total Systems Cost initiatives and higher sales volumes favorably impacted Latin America's segment operating profit. These benefits were partially offset by cost inflation that exceeded price increases.
Asia Pacific reported segment operating profit of $65 million which was $12 million below the prior year. Despite cost containment efforts, higher supply chain costs for intra-regional shipments and higher costs related to planned asset improvement projects negatively impacted results compared to the prior year. Asset investments in this region, taking place through mid-2018, are expected to improve the region's cost structure in the second half of 2018.
Retained corporate and other costs were $104 million in 2017 compared with $98 million for 2016. These corporate costs were higher in 2017 because equity earnings related to the Company's joint venture with Constellation Brands began to be reported in the North America region in 2017, whereas they were previously recorded in retained corporate.
The Company's effective tax rate from continuing operations for 2017 was approximately 25 percent, compared with approximately 33 percent for 2016. The lower rate in 2017 was primarily due to the resolution of a tax matter that resulted in approximately $26 million of tax accruals being reversed in 2017. The effective tax rate on adjusted earnings was approximately 21 percent for 2017 and 24 percent for 2016.
In both 2016 and 2017, 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. The most significant charges in 2017 include $218 million of non-cash pension settlement charges related to the continued de-risking of the Company's pension plans, as well as $77 million for restructuring, asset impairment, and other charges. Charges in 2016 included restructuring and impairment charges of $129 million, primarily driven by restructuring activity in Europe, Latin America and at corporate, as well as $98 million of non-cash pension settlement charges.
Cash provided by continuing operating activities was $724 million for 2017. After deducting cash payments for property, plant and equipment, and adding back asbestos-related payments, adjusted free cash flow was $393 million, exceeding management guidance of approximately $365 million.
Fourth Quarter 2017 Results
Net sales in the fourth quarter of 2017 were $1.7 billion, an increase of 4 percent compared to the prior year fourth quarter. On a global basis, the improvement in net sales was due to a 1 percent increase in price and favorable currency translation.
Global sales volumes were on par with the prior year fourth quarter. Shipments in Latin America increased 2 percent, mainly due to gains in beer and non-alcoholic beverages. The largest increase in Latin America's fourth quarter shipments was reported in Brazil, providing further evidence of recovery in that country. In Europe, shipments increased 1 percent, primarily in wine and beer. North America volumes were similar to the prior year with higher food shipments offsetting lower beer volumes. In Asia Pacific, shipments were 2 percent below the same period of 2016, with higher food volumes more than offset by lower shipments of beer.
The Company continues to realize benefits from successfully executing its strategic initiatives. The Company's focus on Total Systems Cost contributed approximately $13 million in cost savings in the fourth quarter, leading to a full year total of $39 million. The contribution of the total systems costs approach was partially masked by higher spending associated with higher asset repair and production downtime experienced in Asia Pacific, consistent with Company plans to revitalize and enhance production in the region.
In all, segment operating profit was $212 million in the fourth quarter, 5 percent higher than the prior year fourth quarter.
For the fourth quarter 2017, the Company recorded a loss from continuing operations of $0.81 per share (diluted), which compares with a loss from continuing operations of $0.43 per share (diluted) in the same period of 2016. Loss from continuing operations before income taxes was $121 million in the quarter, which was unfavorable by $82 million compared with the same period in prior year. These figures include significant items that management considers not representative of ongoing operations.
Excluding certain items management considers not representative of ongoing operations, adjusted earnings were $0.55 per share. Adjusted earnings increased 12 percent, or $10 million, compared with prior year primarily reflecting the benefits of the Company's global focus on reducing Total Systems Cost.
The Company expects earnings from continuing operations, and adjusted earnings, for the full year 2018 to be in the range of $2.75 to $2.85 per share, which compares favorably with adjusted earnings of $2.65 per share in 2017. The midpoint of this range represents more than a 10 percent compounded annual growth rate in adjusted earnings per share since 2015. The Company expects cash provided by continuing operating activities for 2018 to be approximately $800 million and adjusted free cash flow to be approximately $400 million.
The earnings and cash flow guidance ranges are consistent with targets conveyed by senior management during Investor Day in early 2016. The earnings and cash flow guidance ranges may not fully reflect uncertainty in macroeconomic conditions and currency rates, among other factors.
On December 22, 2017, the Tax Cuts and Jobs Act ("the Act") was enacted in the U.S. The Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Presently, no substantive impact on the Company's adjusted earnings or cash taxes is expected in 2018 as a result of the Act.
Conference Call Scheduled for Feb. 7, 2018
O-I CEO Andres Lopez and CFO Jan Bertsch will conduct a conference call to discuss the Company's latest results on Wednesday, Feb. 7, 2018, at 8:00 a.m. EST. A live webcast of the conference call, including presentation materials, will be available on the O-I website,
www.o-i.com/investors, in the Webcasts and Presentations section.
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. EST, on Feb. 7. 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
Kristin Kelley, 567-336-2395 - O-I Corporate Communications
O-I news releases are available on the O-I website at www.o-i.com.
O-I's first quarter 2018 earnings conference call is currently scheduled for Tuesday, April 24, 2018, at 8:00 a.m. EST.
09.02.2018, Owens-Illinois, Inc.
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