Owens-Illinois (O-I) recently reported financial results for the third quarter ending September 30, 2014. Third quarter earnings from continuing operations attributable to the company were $0.37 per share (diluted), compared with $0.79 per share in the same period of 2013. Excluding certain items management considers not representative of ongoing operations, adjusted earnings were $0.75 per share compared with $0.79 per share in the same period of 2013.
Volumes declined approximately 3% on a global basis year-over-year. Double-digit volume growth in South America was more than offset by declines in Europe, North America and Asia-Pacific. South America and Europe continue to generate year-on-year gains in operating profit. North America and Asia Pacific reported lower operating profit, primarily due to lower sales and production volume.
“South America performed well in the quarter on higher sales and better productivity, leading to a 45% increase in profitability year-over-year,” said Al Stroucken, chairman and CEO. “Europe also turned in strong results, despite a decline in shipments. This can be attributed largely to savings generated through our European asset optimization program. In Asia-Pacific, we adjusted our capacity in Australia to better match reduced levels of wine exports. North America was clearly impacted by the continued volume decline of major domestic beer brands. This was exacerbated by lower productivity at our North American facilities, which we are addressing with great focus.”
Net sales in the third quarter of 2014 were $1.7 billion, down 2% from the prior year’s third quarter. Price was up approximately 1% on a global basis. The company realized price increases in all regions except Europe, which was expected given competitive pressures. Unfavorable foreign exchange rates weighed on reported sales, especially in South America and Europe.
Sales volume, in terms of tons shipped, declined in three of the company’s four regions, leading to a global volume decrease of 3%. Volume in South America increased 15%, driven by gains in all countries, with beer outpacing other categories. Shipments in Europe were down 1%, reflecting market weakness across all segments. Volume in North America fell 3%, primarily due to continued declines in the major domestic beer brands. Volume in Asia-Pacific contracted 24%, due primarily to the company’s smaller footprint in China, as well as ongoing weak beer and wine demand in Australia.
Segment operating profit was $248 million, down $11 million compared with the prior year’s third quarter. Europe recorded a $7 million increase in operating profit, as the benefit from its improving cost position fully offset lower sales volume. South America’s operating profit increased 45%. Higher sales and production volumes, coupled with the lack of unfavorable events that occurred in 2013, contributed to the region’s improved performance.
Asia-Pacific and North America reported lower operating profit in the quarter. In Australia, continued weak demand in domestic beer and in wine exports suppressed sales and production volume. The company responded by modestly reducing capacity to improve financial returns. In North America, operating profit was dampened by lower sales and production volumes, as well as lower productivity. Corporate and other costs improved by $7 million compared with prior year, primarily driven by lower pension expense. Net interest expense in the quarter decreased by $1 million compared with the same period of 2013, primarily due to deleveraging efforts.
“There are strong indications of market uncertainty across the globe,” said Stroucken. “Despite this, we expect higher operating profit in Europe and South America, driven by increased productivity and cost savings in the quarter. Profitability in Asia-Pacific and North America, however, will remain muted in the face of lower sales and production volume. We remain confident in our ability to improve our operations, increase profitability and generate cash flow. As we approach an inflection point in our capital allocation priorities, we intend to commit a larger share of capital to our shareholders. In 2015, we will repurchase at least $100 million in shares. This is part of a three-year $500 million share repurchase program recently authorized by our Board of Directors.”
Based on the fourth quarter outlook, the company now expects adjusted EPS for full year 2014 to be in the range of $2.62 to $2.72 per share. Due to the seasonality of its business, the company generates most of its free cash flow (FCF) in the fourth quarter of the year. The strength of the U.S. dollar is presently expected to reduce FCF, which is reported in U.S. dollars, by approximately $30 million. As such, the company expects FCF for 2014 to be approximately $320 million.