Higher results for O-I in Europe and Latin America lead to double-digit increase in earnings per share
O-I’s third quarter 2017 results show increases and higher results, especially in Europe and Latin America.
Owens-Illinois, Inc. (O-I) has reported financial results for the third quarter ended 30 September 2017. For the third quarter, earnings from continuing operations were USD 0.77 per share (diluted), up 13% compared with USD 0.68 per share in 2016, primarily driven by improved segment operating profit in Europe and Latin America, and lower interest and tax expense.
Net sales were USD 1.8 billion, an increase of almost 5% compared to the prior year third quarter, primarily due to favourable currency translation. Price increased 1% on a global basis, while shipments were on par with the prior year. Earnings from continuing operations before income taxes were USD 172 million, an increase of 12% compared with the same period in 2016. Segment operating profit of reportable segments for the third quarter of 2017 was USD 260 million, an increase of 10% compared with prior year. Notable gains were reported in Europe and Latin America, which more than compensated for external weakness in North America.
Europe benefited from a favourable sales mix, a currency tailwind and the receipt of an energy credit, as expected. The increase in Latin America was driven by a 7% increase in shipments including double-digit gains in Brazil and a reduction in total systems cost. Strategic initiatives in commercial programs and end-to-end supply chain management continue to generate benefits as planned.
Total systems cost improvements generated approximately USD 8 million in cost savings during the third quarter. With respect to full year guidance, the Company is narrowing its range for earnings and reaffirming its target for cash flow. The Company agreed to expand its 50-50 joint venture with Constellation Brands. The joint venture operates a glass container production plant in Nava, Mexico that provides bottles exclusively for Constellation’s adjacent brewery. The newly-expanded relationship provides for the addition of a fifth furnace at the plant and extends the term of the joint venture agreement ten years, to 2034.
“We are seeing significant progress on O-I’s transformation to deliver increased sustainable shareholder value as we continue to execute on our strategy with focus, discipline and accountability” said Andres Lopez, CEO. “Our rigorous approach is implemented by an entire organization focused on maximizing performance at the enterprise level and incentivized under a single set of metrics. In the quarter, O-I demonstrated its resiliency in the face of well-known, challenging external conditions in the Americas by delivering a seventh consecutive quarter of earnings results in line with, or exceeding, our guidance.” Commenting on the strategic partnership with Constellation, Andres Lopez continued, “We are excited about the growth that will be enabled through our continued and expanded relationship with Constellation. This investment will allow both companies to realize additional attractive opportunities in Mexican beer exports to the US, leveraging the success at the joint venture’s highly-efficient factory in Nava, while bolstering O-I’s relationship with a key strategic customer.”
Net sales in the third quarter of 2017 were USD 1.8 billion, an increase of almost 5% compared to the prior year third quarter. On a global basis, the improvement in net sales was due to a 1% increase in price and favourable currency translation. In the third quarter, in Latin America, sales volumes increased 5% from the prior year mainly due to higher beer and spirits shipments. Shipments in Mexico continue to increase at mid-single digit rates and shipments in Brazil are up markedly, providing further evidence of recovery. Sales volume in Asia Pacific increased 5% in the third quarter, primarily due to higher beer shipments in Australia.
In Europe, sales volumes increased 1% mainly due to favourable product mix as shipments were flat. Consistent with ongoing trends, North America sales volume declined due to lower shipments, primarily in beer. The Company continues to mitigate the impact of the ongoing decline in mega-beer in the US by positioning itself to benefit from the growing market of US beer imports through its joint venture with Constellation Brands and long-term sales contracts in Mexico. This position has been strengthened through today’s announcement regarding the extension and further expansion of this joint venture. The Company continues to make solid progress on executing its strategic initiatives. The Company’s focus on total systems cost contributed approximately USD 8 million in cost savings in the third quarter, leading to a year-to-date total of USD 26 million. Segment operating profit was USD 260 million in the third quarter, 10% higher than the prior year third quarter.
Europe reported segment operating profit of USD 81 million, which was USD 17 million, or 27%, higher than the prior year quarter. Much of the increase was due to the receipt of an energy credit in third quarter of 2017, as expected, whereas Europe received a similar energy credit in the fourth quarter of the prior year. Setting aside the energy credit, Europe is performing well, driven by a favourable sales mix, the benefits of strategic initiatives and the positive impact of currency translation. Segment operating profit for North America was USD 75 million in the quarter, a decline of USD 4 million compared with the third quarter of 2016. Cost inflation was essentially offset by price in the quarter. Lower sales volume, primarily in beer, reduced segment operating profit by USD 9 million compared to the prior year. Joint venture equity earnings and benefits from total system costs initiatives favourably impacted third quarter performance. Latin America reported segment operating profit of USD 84 million, exceeding the prior year quarter by USD 10 million or almost 14%. The region benefitted by USD 5 million from the increase in sales volumes, primarily in Brazil and Mexico. Favourable currency translation added USD 3 million compared to the prior year quarter. Inflation in the quarter was essentially recovered by price. The region continues to benefit from successfully addressing total systems costs. Segment operating profit in Asia Pacific was USD 20 million, similar to the third quarter of the prior year. Asia Pacific benefited from increased sales volumes, while higher prices compensated for inflation in the quarter. To meet customers’ evolving demand, the region has been undertaking more intra-regional and cross-regional shipments, leading to higher supply chain costs. Corporate and other costs were USD 25 million in the third quarter, in line with amounts reported in the first half of the year. Deleveraging and refinancing actions over the past 12 months are yielding tangible benefits to the bottom line. Net interest expense in the quarter was USD 63 million, down USD 3 million from the third quarter of 2016. The Company reported third quarter 2017 earnings of USD 0.77 per share (diluted), exceeding management’s guidance of USD 0.70 to USD 0.75 per share, and 13% higher than in the third quarter of 2016.
The Company has agreed to expand its 50-50 joint venture with Constellation Brands, Inc. The joint venture, established in 2014, operates a glass container production plant in Nava, Mexico. The plant provides bottles exclusively for Constellation’s adjacent brewery, which brews a leading portfolio of Mexican beer brands for export to the United States, the fastest growing category in beer in the U.S. The original joint venture agreement included the expansion of the glass production plant from one furnace to four furnaces by 2018. The initial expansion plans have been progressing as scheduled, with three furnaces currently in operation. The fourth furnace is expected to be operational in the first half of 2018. To meet rising demand from Constellation’s adjacent brewery, the newly-expanded relationship provides for the addition of a fifth furnace, which is expected to be operational by the end of 2019. Following the installation of the fifth furnace, the Nava plant will be the largest, most modern glass container factory in the world. This capacity expansion, which is estimated to cost approximately USD 140 million, will be financed by equal contributions from both partners. In recognition of the strong, value-add contributions from both partners, the term of the joint venture agreement was extended for ten additional years, to 2034.
The Company continues to de-risk its pension plans. In the fourth quarter of 2017, the Company intends to annuitize more of its pension plans in North America, which is expected to result in non-cash charges in excess of USD 100 million. The Company expects reported earnings from continuing operations attributable to the company (diluted) for the full year 2017 to be in the range of USD 0.90 to USD 1.86 per share, which largely reflects variability with respect to the aforementioned pension settlement charges. Excluding certain items that management considers not representative of ongoing operations, adjusted earnings per share for full year 2017 are expected to be in the range of USD 2.60 to USD 2.65, which narrows prior guidance, while modestly increasing the midpoint. The Company continues to expect cash provided by continuing operating activities for 2017 to be approximately USD 750 million and adjusted free cash flow to be approximately USD 365 million. The earnings and cash flow guidance ranges reflect uncertainty in macroeconomic conditions and currency rates, among other external factors.