By James R. Hagerty
PERRYSBURG, Ohio--Five years ago, Owens-Illinois Inc. seemed to
have found a winning formula. The world's largest maker of bottles
for beer, wine and liquor had cut costs, shed noncore businesses
and lodged itself into China's fast-growing market.
Then the bottle let Owens-Illinois down.
Mass-market brewers over the past few years have put more of
their beer in cans. As Europe's economy sputters and China slows,
global demand for glass beverage bottles, which account for about
85% of Owens-Illinois' annual revenue, is barely growing.
The company sold or closed about half its capacity in China
after finding stiff local competition. It also had to cut back in
Australia because more of that nation's wine is now exported in
bulk and bottled elsewhere. The strong dollar hurts the value of
the three-quarters of Owens-Illinois sales that come from outside
the U.S.
Sales have declined in each of the past four years, totaling
$6.78 billion in 2014, 8% below the 2011 level. In the five years
through March 31, Owens-Illinois shares fell 34%, while the S&P
500 surged 77%.
Faced with all these troubles, Chief Executive Albert Stroucken
urges patience. The Dutch-born Mr. Stroucken is pushing his
research team to find ways to drive down production costs and
design bottles with fancier shapes and colors that might command
premium pricing. Meanwhile, he said in an interview, the business
"continues to be a very solid cash generator," allowing
Owens-Illinois to pay down debt in recent years and in 2014
increased stock buybacks. Net profit in 2014 declined 59% to $75
million.
Others have run short of patience. The glass market "has moved
away from them," said Scott Gaffner, an analyst at Barclays. "They
need a new way of thinking."
Mr. Gaffner said it isn't obvious how Owens-Illinois can turn
itself around but that the company may need to be even more
aggressive about cutting costs and giving up volume where margins
are too low.
Mr. Stroucken, 67 years old, is due to step down by year-end.
The board has designated a likely successor: Andres Lopez, a
29-year company veteran and Colombia native who was promoted to
president and chief operating officer in December. Three of the
company's other officers have bolted to other companies in the past
nine months. Mr. Stroucken said such turnover tends to happen when
succession plans are made.
Despite the drooping share price, Mr. Stroucken's total
compensation climbed to $9 million last year from $7.8 million in
2010. Dave Johnson, the company's investor relations chief, said
one reason for that is improved free cash flow, or cash from
operations minus capital spending.
Owens-Illinois finally seems to be on the mend, said Alexander
Roepers, president of Atlantic Investment Management Inc., New
York, which owns a about 7.5% of the bottle maker. In a letter to
the board, Mr. Roepers late last year publicly criticized Mr.
Stroucken's management style as "reactive" and urged the board to
speed succession plans. In an interview, Mr. Roepers said he has a
"positive impression" of Mr. Lopez, the designated successor.
Owens-Illinois, founded in 1903 by Michael Owens, who invented
an automated bottle-making machine, faces one big rival in Europe
and the U.S., Ardagh Group of Ireland, which makes glass and metal
packaging and had a loss of EUR391 million ($423.5 million) on
sales of EUR4.73 billion in 2014.
Ardagh last year acquired the North American business of
Verallia, a bottle maker owned by France's Cie. de Saint-Gobain.
Saint-Gobain plans to sell Verallia's European business, and Ardagh
has said it is interested. Owens-Illinois is already so big in
Europe that it would run afoul of competition law if it tried to
buy Verallia.
Owens-Illinois and Ardagh are up against thousands of smaller
local and regional rivals, which tend to hold prices down. When
bottle makers go bust, Mr. Stroucken lamented, "the asset just gets
bought by somebody else, perhaps for a fraction of the value, so
they are good to operate again." The factories all use similar
technology to heat sand, soda ash and limestone to around 2,850
degrees Fahrenheit and drop yellow streaks of molten glass into
molds.
KPS Capital Partners LP, a New York private-equity firm, moved
into bottles last year, buying Anchor Glass Container Corp., which
owns six U.S. plants. Jay Bernstein, a KPS partner serving as
chairman of Anchor, said bottles are a very stable market and glass
still has "a certain elegance" that appeals to makers of premium
products.
In China, there are more than 1,000 bottle makers, Mr. Stroucken
said, and many sell at prices that didn't make economic sense to
Owens-Illinois. "We found it was very difficult to compete
profitably...with so many small players," he said, conceding that
the effort to produce on a large scale for domestic customers,
rather than multinationals with higher quality standards, was a
mistake.
Owens-Illinois is betting in part on the popularity of Mexican
lagers. Through a joint venture, it plans to invest about $275
million to expand a plant in Nava, Mexico, that makes bottles for
Corona Extra and related beers.
A stronger economy would help. In tough times, people buy more
cheap canned beer to drink at home. In better times, they drink in
bars and restaurants, where beer is more likely to be served in
bottles.
Bottle makers have heralded the craft beer boom as helpful
because most is bottled, but many craft brewers have started
canning some of their beer in the past few years. Bart Watson,
chief economist at the Brewers Association trade group, estimates
that at least 5% of U.S. craft beer is now sold in cans, compared
with a negligible amount a decade ago. Fullsteam Brewery LLC of
Durham, N.C., later this year plans to start selling its year-round
beers in 12-ounce cans instead of glass bottles. Customers like the
portability and no longer think cans hurt the taste, said Sean
Wilson, owner of Fullsteam.
Mr. Stroucken said bottles will remain the dominant package for
craft beer.
The CEO, who joined Owens-Illinois nearly 10 years ago after
stints at Bayer AG and H.B. Fuller Co., touts the company's
18-month-old research center in Perrysburg, where a miniature
bottle plant allows engineers to test ideas without disrupting
production elsewhere. One idea already being used in new plants is
to capture and reuse more heat, lowering energy costs. Another is
to increase automation. At the research center, robots dance behind
a black curtain designed to conceal exactly what the engineers are
trying out.
Mr. Stroucken also hopes a way can be found to build small
bottle plants that would be as efficient as big ones. That would
allow plants to be closer to customers, reducing transport costs.
His ideal is a bottle furnace that could fit on a truck; he isn't
sure whether that is doable.
In any case, "we need to change the game," said Ludovic Valette,
a Frenchman with a doctorate in chemistry recruited from Dow
Chemical Co. two years ago to head R&D at Owens-Illinois. "I
think we are just a very few years away. I cannot tell you if it's
two or five."
Write to James R. Hagerty at bob.hagerty@wsj.com
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