O-I reports second quarter 2016 results

Owens-Illinois, Inc. (NYSE: OI) has reported financial results for the second quarter ended June 30, 2016.

Commenting on the Company’s second quarter results and outlook, CEO Andres Lopez stated, “We are very pleased with the solid progress on the execution of our strategy.  Our meaningful performance improvement is the result of significant focus on improving our efficiency, stabilizing both revenue and operating performance, and continued success with the integration of the Mexico acquisition.  In addition, we are gaining momentum by enhancing customer service, implementing a more robust end-to-end global supply chain and transforming our organization to deliver improved quality, agility, speed, flexibility and innovation – all at a competitive price. We have been delivering steady improvement, which has resulted in margin expansion and a year-over-year increase in earnings.  Looking ahead, we remain committed to our earnings and cash flow guidance.”
Second Quarter 2016 Results
Net sales in the second quarter of 2016 were $1.8 billion, up $217 million, or 14 percent, from the prior year second quarter. The Company’s investment in non-organic growth is driving the top line higher; the acquired business generated $234 million in net sales – 13 percent of global net sales – due to strong shipments within Mexico and to the United States. Price was up $18 million on a global basis, primarily driven by price adjustments that reflect cost inflation. Unfavorable currency translation adversely impacted net sales by $31 million, or 2 percent.
Management efforts to drive revenue stability are taking hold.  The 1 percent increase in legacy shipments on a global basis was in line with management expectations. Shipments in Europe increased 3 percent, driven by mid-single digit gains in beer and wine.  In North America, legacy volumes were on par with prior year, as higher spirits and non-alcoholic beverage shipments mostly offset the decline in beer. Second quarter shipments for legacy Latin America declined as weakness in Brazil was partially offset by double-digit increases in the rest of the region.  Asia Pacific reported a 2 percent increase in volumes, due to higher beer and wine shipments in the region’s mature markets.
Earnings from continuing operations before income taxes were $141 million in the quarter, an increase of $79 million compared with prior year. This was mainly driven by higher segment operating profit (+$46 million) and the change in items not considered representative of ongoing operations (+$33 million).
Segment operating profit was $233 million in the second quarter, $46 million higher than prior year second quarter. The substantial year-on-year improvement was primarily driven by the strong results of Europe and the acquired business. Legacy Latin America reported strong performance in light of the aforementioned decline in volume. Adverse currency translation, primarily in Europe and Latin America, impacted segment operating profit by $5 million compared with the second quarter of prior year.
•In the quarter, the acquired business contributed approximately $44 million to segment operating profit, continuing on the path to exceed management’s initial expectations of $140 – $145 million for the year. Strong domestic sales, the successful ramp up of the new furnace in Monterrey and cost synergies all contributed to its strong performance.
•Europe reported a $9 million improvement in segment operating profit compared to prior year. Operating performance significantly improved in the second quarter, buoyed by the efforts of the plant improvement teams in the region and more broad-based improvement in productivity and quality.  As expected, average selling prices in Europe were modestly lower than prior year. Price-cost spread was modestly negative, as lower selling prices were not fully offset by energy deflation.
•Segment operating profit for North America was $10 million higher than the prior year second quarter. The improvement was driven by the acquired business. The legacy business continued operating well and reported solid results in line with prior year.
•Latin America’s segment operating profit improved $30 million, more than doubling the prior year profit. This is due to the very successful integration of the acquired business, which contributed $33 million of segment operating profit. Currency translation was a $2 million headwind compared with the second quarter of prior year. The legacy business delivered a very solid performance despite the challenging economic situation in Brazil. The management team continues to focus on controlling costs. This combination of legacy and acquired business performance caused the 350 basis point expansion in segment operating profit margin for the region.
•In Asia Pacific, higher sales volume and price increases together contributed $5 million to segment operating profit. However, this was more than offset by higher planned production downtime. Modest year-on-year improvement in segment operating profit is expected in the second half of the year.
Retained corporate and other costs amounted to $25 million, an improvement sequentially from $32 million in the first quarter of 2016, and compares to $18 million in the prior year quarter. The effect of foreign currency hedges, which are mainly reflected in corporate costs, adversely impacted costs. Additionally, management incentive accruals, in line with better financial performance, also increased corporate costs.
Net interest expense in the quarter was $67 million, up $21 million from the second quarter of the prior year, entirely due to acquisition-related interest expense. The Company continues, however, to benefit from low variable interest rates.
The Company reported second quarter 2016 earnings of $0.65 per share (diluted). This is on the high end of management’s guidance of $0.60 to $0.65 per share.
Outlook
The Company continues to expect earnings from continuing operations attributable to the Company (diluted) for the full year 2016 to be in the range of $2.18 to $2.29 per share. Excluding certain items management considers not representative of ongoing operations, this equates to adjusted earnings per share for full year 2016 in the range of $2.25 to $2.35 which affirms prior guidance. The earnings guidance ranges reflect uncertainty in macroeconomic conditions and currency rates, among other factors. Reflecting the aforementioned assumptions, the Company expects cash provided by continuing operating activities for 2016 to be approximately $750 million. After deducting additions to property, plant and equipment of approximately $450 million, free cash flow for 2016 is expected to approximate $300 million, which is consistent with prior guidance.
More information is available on the company website.