Owens-Illinois Inc. (OI), the world’s biggest maker of glass bottles, fell the most in almost 11 months after lowering its second-quarter profit margin forecast because of higher costs and weaker demand in Australia.
Operating profit margins in the quarter ending June 30 will be 3 to 6 percentage points less than a year earlier, Chief Financial Officer Ed White said in an interview. The Perrysburg, Ohio-based company had predicted operating margins would match last year’s quarter. The shares dropped in early trading.
Sales of glass bottles have slumped in Australia and New Zealand because strong currencies have made wine exports less competitive and rising interest rates have damped consumer demand, hurting domestic beer consumption, White said.
“Wine exports out of Australia are exceeding their historic price points,” he said. “We sort of go up or down based on our customers’ success. They’re struggling and we’re struggling.”
Owens-Illinois is keeping its annual forecast of 5 percent to 10 percent growth in shipments and free cash flow of $300 million as growth in South America and the U.S. makes up for the slump in the Asia Pacific region, White said. The operating profit margin in the second quarter last year was about 16 percent, the company said.
Still, the cash forecast may have to be adjusted as the company contemplates idling a glass furnace in Australia to make up for lower demand, White said.
“If we’re going to do some capacity realignment, there could be some pressure on that,” he said, referring to the free cash flow forecast.
Restarting U.S. Plants
Owens-Illinois declined $2.57, or 8.7 percent, to $26.97 at 9:48 a.m. in New York Stock Exchange composite trading, after earlier falling as much as 10 percent for the biggest intraday drop since July 29. The shares had fallen 3.8 percent this year before today.
Higher demand in the U.S. is contributing to the lower profit margin, White said. Costs increased as Owens-Illinois restarted production at two idle glass furnaces, in Atlanta and Oakland, California, he said. Expenses also rose because the company had to ship products across regions to meet customers’ needs, he said.
“We’ve been hit with operating issues that are truly short-term but have suppressed our outlook in the quarter,” he said. “We saw the volume coming, but it was the ramp-up on the factory floor across our network that added extra cost.”
Restarting the two U.S. furnaces will add about 4 percent to the company’s domestic glass capacity, White said.
Owens-Illinois may decide to build a $70 million glass factory in Brazil that could begin operations by the end of next year to meet higher demand, he said.
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