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WIKI ANALYSIS
Owens-Illinois (NYSE:OI) is the world's largest glass bottle manufacturer by revenue. OI's customers are primarily alcoholic beverage companies, although it also produces bottles for soft drink producers as well. Notable clients include Anheuser-Busch Companies (BUD) , H.J. Heinz Company (HNZ), and Pepsico (PEP).[1] The company earned $7.1 billion in revenue and $162 million in net income in 2009.[2]
Until the beginning of 2008, the company also had the dubious honor of being one of the worst performing bottle manufacturers, with operating margins consistently below its peers. A combination of debt, rising commodity prices and litigation, led to several years low operating margins and net earnings losses. The company conducted a strategic review of its global profitability and manufacturing footprint in 2007, and decided to close or cut back production at 26 furnaces and eliminating more than 3,000 jobs. By doing so, the company hopes to increase profit margins.[3]
Natural gas, used to fire glass making furnaces, represents between 15%-25% of OI's manufacturing costs.[4] Historically, glass bottle manufacturers have found it difficult to pass on price increases to their customers. OI, however, has made it a point to decrease the number of long-term contracts without provisions for price increases and grow the number of contracts with pass through provisions. While this has negatively impacted the company's volume, it has led to higher margins. OI also implemented a more aggressive hedging program (hedging approximately 50% of its expected natural gas consumption).
Company Overview
Owens-Illinois produces glass containers for beer, ready-to-drink low alcohol refreshers, spirits, wine, food, tea, juice and pharmaceuticals. The company also produces glass containers for soft drinks and other non-alcoholic beverages, principally outside the U.S. The company manufactures these products in a wide range of sizes, shapes and colors. Owens-Illinois sells its products to companies all over the world including to Anheuser-Busch InBev (EBR:ABI), H.J. Heinz Company (HNZ), and Pepsico (PEP).[5]
Geographic Regions[6]
- Europe - 41% of net sales
- North America - 29% of net sales
- South America - 16% of net sales
- Asia Pacific - 13% of net sales
- Other - 1% of net sales
Business Growth
FY 2009 (ended December 31, 2009)[2]
- Net sales fell 10% to $7.1 billion, which resulted from decreased shipments and the unfavorable effect of foreign currency exchange rates, partially offset by higher selling prices and improved mix.
- Net income fell 37% to $161 million.
Trends and Forces
Natural Gas Costs 15% to 20% of Production Costs
With energy costs ranging between 15% and 25% of total production costs, fluctuations affect the prices that OI charges customers in the short run significantly. Because fluctuations in energy prices affect the costs of manufacturing glass more than the costs of competing producers manufacturing aluminum substitutes, higher prices affect OI more than competitors producing substitute packaging.[4]
Asbestos Claims Reduce Earnings
From 1948 to 1958 OI included a division that produced asbestos based insulation, exposing many former employees to asbestos during the manufacturing process. Claims have been placed on the company by former employees exposed to the asbestos with and without asbestos related medical conditions, as well as by family members and relatives of deceased workers. Costs related to asbestos claims have been significant in the past and OI expects them to be both substantial and unpredictable in the future. It states that the use of mass litigation, as well as the claims made by parties exposed to asbestos but not suffering from related medical conditions are increasing. With new claims directed at other former asbestos manufacturers used as legal precedents, the scope of both eligible defendants and claim amounts have increased and affect earnings of OI directly.
Competition
Although OI maintains the greatest market share in glass bottle production worldwide, its competition is not limited to other glass packaging producers. As its clientele is primarily composed of beverage producers that also package beverages in plastic or aluminum containers, OI's competition includes manufacturers of these substitute goods. The capital intensive nature of the glass manufacturing industry restricts the entry of new firms into the industry; annual revenue per worker is approximately $200,000.
Glass Producers: These firms compete directly with Owens-Illinois.
- Saint-Gobain
- Weignad
- Ardagh
- Rexam (REXMY)
- Allied Glass
- Quinn
Substitute Material Producers: These firms produce materials needed for alternative beverage packaging such as aluminum cans, plastic bottles, or cartons.
- Alcoa (AA)
- AptarGroup (ATR)
- Crown Holdings
- Portola Packaging
- Erie Plastics
References
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