O-I third quarter sees good results in Asia Pacific, Latin America

Chairman and Chief Executive Officer Al Stroucken said, “We had good underlying performance in the quarter, with increased profitability in Asia Pacific and Latin America in constant currency. Operating results in Europe were in line with expectations, but impacted by the delay of a substantial energy credit. We accelerated engineering activity in North America to reduce long term costs, setting the stage for increased profitability in the future. We are pleased to have completed the acquisition of Vitro’s food and beverage business earlier than expected and are making excellent progress with the integration.”

Net sales in the third quarter of 2015 were $1.6 billion, down $179 million from the prior year third quarter. Price was essentially flat on a global basis, with higher prices in Latin America largely offset by lower prices in North America and Europe. Adverse currency translation due to the stronger U.S. dollar caused an approximate $240 million decline in net sales. The Company benefited from the addition of $61 million in sales from the newly acquired food and beverage business.

Global sales volume increased by nearly 4 percent year over year. Excluding the acquired business, global shipments were on par with prior year. Shipments in Europe increased 2 percent, driven by higher beer sales, and Asia Pacific shipments were equal to the prior year quarter.

Including the newly acquired business, volume in Latin America increased nearly 16 percent, and shipments in North America improved by 2 percent. Excluding the acquisition, Latin America sales volume declined 4 percent, primarily due to the decline reported in Brazil.  Excluding beer, shipments in Brazil were flat compared to prior year. Ongoing weak megabeer trends brought North America sales volume down 1 percent, excluding the acquisition.

Segment operating profit was $199 million in the third quarter, $49 million lower than prior year, primarily due to the strength of the U.S. dollar compared with the Euro, the Brazilian real and the Colombian peso. On a constant currency basis, segment operating profit was down $9 million as earnings improved in Asia Pacific and Latin America, yet declined in Europe and North America. The acquisition contributed $14 million of segment operating profit, reflected in Latin America and North America.

Excluding the impact of foreign currency, Asia Pacific’s operating profit increased more than 35 percent compared to the prior year third quarter due to cost reduction efforts and the favorable impact of prior restructuring actions.

On a constant currency basis, Latin America’s operating profit increased $9 million compared with prior year third quarter. The contribution of the acquired business in Mexico and Bolivia more than offset the adverse impact of lower shipments elsewhere in the region.

Europe’s operating profit declined $36 million, with nearly half of the decrease caused by devaluation of the Euro. Similar to the trend experienced in the first half of 2015, average selling prices in Europe were approximately 1 percent lower year on year due to competitive pressures, primarily in the south. Europe reported more production downtime as compared to the prior year due to engineering activities associated with ongoing asset optimization. These investments also drove a year-on-year increase in depreciation. Due to legislative delays, Europe did not receive an $8 million energy credit expected in the quarter.
Despite continued productivity gains, North America reported a $5 million decline in operating profit. Results were impacted by planned furnace rebuild activity, incremental investments the Company made to improve its cost structure and a weaker Canadian dollar.

Net interest expense[2] in the quarter was consistent with the same period of 2014. The positive impacts of debt refinancing and the currency impact on Euro-denominated debt were offset by acquisition-related interest expense.

The effective tax rate on adjusted earnings was 27 percent. The tax rate was higher than prior year, reflecting timing issues associated with the set-up of the optimal legal structure for the acquired operations in Mexico.

In the quarter, the acquisition reduced adjusted earnings per share by approximately $0.03. This was modestly better than expectations. The acquisition’s contribution to segment operating profit was more than offset by incremental interest and tax expense. The acquisition is expected to be neutral to earnings in the fourth quarter, and then to become accretive in 2016.

Earlier this month, the Company announced that COO Andres Lopez has been named CEO effective Jan. 1, 2016.  Commenting on the Company’s outlook for the fourth quarter, Lopez said, “While we expect current economic and industry trends, including currency headwinds, to continue in the fourth quarter, we anticipate gains in sales and production volume. We will continue to integrate Vitro’s former food and beverage business, and work on stabilizing and improving business performance.”

Due to additional currency impact, the Company now expects adjusted EPS for full year 2015 to be approximately $2.00. The Company expects free cash flow to be approximately $200 million for the year, based on currency rates at the end of the third quarter. Because the majority of the Company’s free cash flow is generated in the fourth quarter, the amount will be heavily influenced by year-end currency rates.