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Owens-Illinois, Inc.’s (OI) first-quarter 2012 adjusted earnings per share (EPS) of 60 cents were down 18% from the year-ago earnings of 73 cents per share, but up 7% from the Zacks Consensus Estimate of 56 cents. Weak economic conditions in Europe mainly hurt the quarterly results, which offset improved operating profits in South America and Asia-Pacific.

On a reported basis, including onetime items such as restructuring, asset impairment and related charges and charges for note repurchase premiums and financial fees write-off related to debt that was repaid prior to its maturity, earnings stood at 48 cents per share down 34% from the year-ago quarter’s earnings of 73 cents.

Net sales dipped 6% to $1.641 billion in the quarter, falling short of the Zacks Consensus Estimate of $1.698 billion. Volume dipped 7% mainly due to lower demand in Europe. It offset strong growth in South America, driven by food packaging. Currency translation had an unfavorable impact of 2% while prices were up 2%, with successful price initiatives reported across all regions.

Operational Update

Manufacturing, shipping and delivery expense decreased 3% year over year to $1.32 billion in the quarter. Selling and administrative expenses decreased 8% to $129 million. Segment operating profit dropped 13% year over year to $226 million. Owens-Illinois’ decision to curtail production, particularly in Europe, as part of an initiative to reduce production volatility over the course of the year led to lower profitability.

Financial Update

Cash and cash equivalents were $359 million as of Mar 31, 2013 compared with $431 million as of Dec 31, 2012 and $299 million as of Mar 31, 2012. Long-term debt was $3.55 billion as of March 31, 2013 compared with $3.45 billion as Dec 31, 2012 and $3.72 billion as of Mar 31, 2012. Cash utilized in operating activities was $136 million during the quarter compared with $95 million in the prior year quarter.

Owens-Illinois expects free cash flow to increase to $300 million in 2013, driven by improved operating results, benefiting from cost efficiency and restructuring programs, particularly in the second half of the year.

Guidance

The company expects strong contribution from the emerging regions and stable market conditions in North America to support growth while macroeconomic uncertainty in Europe will remain a deterring factor. The company expects overall modest volume growth in 2013, and higher prices that keep pace with higher materials costs. Its global cost reduction initiatives and European asset optimization program is expected to benefit free cash flow and earnings. Adjusted earnings are expected in the range of $2.60 to $3.00 per share.

Our Take

Owens-Illinois will benefit from the restructuring actions undertaken in North American and Asia-Pacific regions in 2012, global structural cost reductions as well as its growth strategy in South America. A new furnace in Brazil in late 2012 will lead to volume growth and logistics savings in the region.

However, since about 40% of its business is in Europe, Owens-Illinois will remain impacted by the soft European economy till conditions improve. In response to slowing sales, Owens-Illinois curtailed production in several locations in Europe. Owens-Illinois has embarked on a multi-year asset optimization program in Europe, which includes elimination of underperforming assets, reduction of idle capacity and outlines investments in low cost additional capacity and enhancements in quality, speed and flexibility. This is expected to lead to improvements in profits in Europe in the second half of 2013. Owens-Illinois currently retains a Zacks Rank #3 (Hold).

Owens-Illinois Inc., through its subsidiaries, manufactures and sells glass container products to food and beverage manufacturers in Europe, North America, South America, and the Asia Pacific.

Peer Performance & Expectations

An Owens-Illinois’ peer, Crown Holdings Inc. (CCK) reported first-quarter adjusted earnings per share of 50 cents, up 9% from 46 cents in the year-ago quarter and ahead of the Zacks Consensus Estimate of 48 cents. Silgan Holdings Inc. (SLGN) and Ball Corporation (BLL) are yet to announce their first-quarter results. The Zacks Consensus Estimate for Silgan is at 47 cents, projecting a 6% year-over-year decline, while for Ball is at 65 cents, an estimated 3.46% annual growth.