O-I Glass, Inc. reported financial results for the third quarter ended September 30, 2020.
“After a very challenging second quarter due to the pandemic, earnings rebounded strongly during the third quarter. Sales volumes recovered very well reflecting consumers’ affinity for healthy and sustainable glass packaging. Likewise, continued strong operating performance substantially offset the impact of lower production levels as capacity was gradually restarted following a disruptive second quarter. Despite the ongoing pandemic, the company generated strong operating results and continued favorable cash flow,” said Andres Lopez, O-I CEO.
“O-I continued to advance its strategy to create long-term value. The turnaround initiatives gained momentum and contributed to the company’s strong operating performance during the quarter. The company completed the sale of its Australia and New Zealand (“ANZ”) operations to optimize its structure, and the net proceeds were used to reduce debt and improve O-I’s financial flexibility. Paddock’s Chapter 11 filing is proceeding as expected as Paddock seeks a final resolution of its asbestos-related liabilities. Additionally, the company remains on track with the MAGMA Generation 1 installation in early 2021 that will pave the way for broader deployment starting in 2022 as we seek to revolutionize the business model for glass,” added Lopez.
Summary Comments for Third Quarter 2020
- Reported Earnings: For the third quarter 2020, earnings from continuing operations were 2.06 USD per share (diluted) compared with a loss of 3.69 USD per share in the third quarter of 2019. Current year earnings from continuing operations before income taxes were 376 million USD, compared to a loss of 536 million USD in the prior year. 2020 results included an approximately 280 million net gain on the sale of O-I’s ANZ business unit. 2019 results included a 595 million USD non-cash impairment charge to reduce the carrying value of goodwill for the company’s North America business unit. Cash provided by continuing operating activities in the third quarter 2020 was 262 million USD compared to $416 million in the prior year. Cash payments for property, plant and equipment were $57 million in the third quarter of 2020 compared to 100 million USD last year.
- Adjusted Earnings: Excluding certain items management considers not representative of ongoing operations, adjusted earnings1 were 0.41 USD per share in the third quarter of 2020, compared with 0.54 USD per share in the third quarter of 2019. While operating performance was consistent with the prior year, lower adjusted earnings per share primarily reflected the unfavorable impact of an elevated tax rate, higher retained corporate and other costs as well as recent divestitures.
- Stable Segment Operating Profit: Segment operating profit1 was 204 million USD compared to 206 million USD in the prior year. Higher selling prices mostly offset cost inflation. Adjusted for the sale of ANZ, third quarter 2020 shipments in tons increased 1.7 percent compared to 2019 as markets stabilized following a double digit decline in the second quarter. As expected, production volume was down 9.7 percent in tons from last year adjusted for the sale of ANZ due to capacity management earlier in the quarter and subsequent production ramp up later in the quarter. All plants returned to normal operating levels prior to quarter end. Operating performance remained strong and the company’s turnaround initiatives and cost control measures substantially offset the impact of lower production levels.
- Favourable Cash Flows: O-I reported 205 million USD of free cash flow1 in the third quarter of 2020 compared to 316 million USD in 2019. Adjusted for changes in accounts receivable factoring levels, free cash flow was 96 million USD favourable compared to the prior year.
- Lower Debt: Total debt was 5.4 billion USD at September 30, 2020 compared to 6.5 billion USD at June 30, 2020 and 5.9 billion USD at September 30, 2019. Net debt was 4.8 billion USD at September 30, 2020 which was down from 5.4 billion USD at June 30, 2020 and 5.6 billion USD at September 30, 2019. Lower debt levels reflected favourable cash flow and use of proceeds from divestitures.
- Strong Liquidity: As a result of favourable cash flows, committed liquidity improved over the course of the quarter. At the end of the third quarter 2020, O-I maintained in excess of 2 billion USD in total committed liquidity including cash-on-hand as well as undrawn availability on committed lines of credit.
- Business Outlook: O-I expects fourth quarter 2020 adjusted earnings will approximate 0.30 USD to 0.35 USD per share.
Third Quarter 2020 Results
Net sales in the third quarter of 2020 were 1.6 billion USD compared to 1.7 billion USD in the prior year as net sales declined $76 million attributed to the divestment of ANZ. After adjusting for the sale of ANZ, average selling prices improved nearly 1 percent and increased revenue 12 million USD. Shipments increased 1.7 percent in tons, or 24 million USD, while unfavourable foreign currency translation reduced net sales by 11 million USD.
Segment operating profit1 was 204 million USD in the third quarter of 2020 compared to 206 million USD in the prior year. Higher shipments benefited segment operating profit by 10 million USD. Cost inflation, which was elevated due to foreign currency pressures, more than offset the benefit of higher selling prices by 4 million USD. Operating costs were 6 million USD higher than the prior year as improved operating performance and cost control efforts substantially offset the impact of lower production levels. Current year profits were unfavourably impacted by the net effect of favourable foreign currency translation and the sale of ANZ.
- Americas: Segment operating profit in the Americas was 113 million USD compared to 123 million USD in the third quarter of 2019. Shipments increased 2.0 percent in tons. Cost inflation was elevated due to foreign currency pressure and was partially mitigated by the benefit of favourable selling prices. Savings from the company’s turnaround initiatives and cost reduction efforts partially offset the impact of lower production levels. Results were unfavourably impacted 1 million USD by foreign currency translation.
- Europe: Segment operating profit in Europe was $88 million compared to 79 million USD in the third quarter 2019. Segment operating profit benefited from 0.3 percent higher sales volume in tons, favourable mix and higher selling prices, which more than compensated for incremental cost inflation. Operating costs were elevated due to lower production levels and startup costs at the new brownfield plant at Gironcourt France. Higher costs were partially offset by favourable operating performance driven by the company’s turnaround initiatives and cost control measures. Results benefited 4 million USD from favourable foreign currency translation.
- Asia Pacific: Segment operating profit in Asia Pacific was 3 million USD compared to 4 million USD in the third quarter 2019 which included 5 million USD of dilution attributed to the ANZ sale. Favourable operating performance reflected the company’s turnaround initiatives and cost control measures. For the third quarter 2020, the results for the Asia Pacific segment reflect only one month of the results of the ANZ businesses. For the third quarter of 2019, the results of the Asia Pacific segment have been recast to reflect only the results of its ANZ businesses. The sales and operating results of the other businesses that historically comprised the Asia Pacific segment and were retained by the Company, have been reclassified to Other sales and Retained corporate costs and other, respectively.
Retained corporate and other costs were $35 million compared to 21 million USD in the prior year. Higher costs reflect the sale of the company’s interest in a soda ash joint venture during 2019 and higher operating expenses including additional costs for MAGMA, partially offset by efforts to reduce costs.
Net interest expense was 61 million USD, down from 83 million USD in the prior year. Net interest expense included 6 million USD and 24 million USD in the third quarter of 2020 and 2019, respectively, for note repurchase premiums, third party fees and the write-off of deferred finance fees that were related to debt that was repaid prior to its maturity. Exclusive of these items, adjusted net interest expense1 decreased 4 million USD in the third quarter of 2020 compared to the prior year quarter due to debt reduction and refinancing activities.
The company’s effective tax rate was approximately 11 percent compared to negative 6 percent last year. Excluding certain items management does not consider representative of ongoing operations, the adjusted effective tax rate1 was approximately 37 percent compared to 28 percent in the prior year period.
In both the third quarter of 2020 and 2019, the company recorded several significant items impacting reported results as presented in the table entitled Reconciliation to Adjusted Earnings. Management considers these items not representative of ongoing operations and they are excluded from adjusted earnings. In the third quarter of 2020, these items include approximately 280 million USD for the gain on the sale of the ANZ businesses, 9 million USD for restructuring, asset impairment and other costs, 6 million USD of debt refinancing expense and 3 million USD in strategic transaction costs. In the third quarter of 2019, charges excluded from adjusted earnings reflected approximately 595 million USD of goodwill impairment charge, 32 million USD for restructuring, asset impairment and other charges, 24 million USD of debt refinancing expense and 11 million USD in pension settlement charges.
Business Outlook
O-I expects fourth quarter 2020 adjusted earnings1 will be in the range of 0.30 to 0.35 USD per share which includes the dilution on recent divestitures. This outlook assumes higher selling prices will mostly offset cost inflation. The company expects fourth quarter sales and production volumes will be flat or slightly up compared to prior year levels but could vary depending on the course of the pandemic (full year 2020 sales volume outlook has improved to a 3 to 5 percent decline from the prior year compared to the previous outlook of a 4 to 7 percent decline). Furthermore, earnings should benefit from continued favourable operating performance and cost reduction efforts. The adjusted effective tax rate in 2020 should approximate 30 to 35 percent.
The company expects its full year 2020 EBITDA to free cash flow conversion1 will exceed 10 percent in 2020 and should exceed 18 percent adjusted for the impact of the ANZ divestiture.
The company is actively monitoring the impact of the COVID-19 pandemic, which will negatively impact its business and results of operations in 2020 and potentially beyond. The extent to which the company’s operations will be impacted by the pandemic may depend on future developments, which are uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by governmental authorities to contain the outbreak or treat its impact among other things.
Conference Call Scheduled for October 28, 2020
O-I CEO Andres Lopez and CFO John Haudrich will conduct a conference call to discuss the Company’s latest results on Wednesday, October 28, 2020, at 8:00 a.m. EDT. A live webcast of the conference call, including presentation materials, will be available on the O-I website, in the Webcasts and Presentations section.
The conference call also may be accessed by dialling 888-733-1701 (U.S. and Canada) or 706-634-4943 (international) by 7:50 a.m. EDT, on October 28, 2020. Ask for the O-I conference call. A replay of the call will be available on the O-I website, for a year following the call.