O-I cuts Q2 forecast on weak Australasian data and high US shipping costs

O-I had previously forecast that earnings would be flat for the period but the company now expects profits to be down on last year. And operating profit margins are expected to decline by between 3 and 6 percentage points from Q2 2010.

Supply chain problems in North America ​

Significant cost inflation had been expected but O-I said manufacturing and delivery costs in North America were higher than anticipated.

Low inventory levels and difficulties increasing output from a smaller number of sites meant that O-I struggled to meet higher demand in some locations.

“As a result we have had to ship glass long distances to meet customer demand – this has led to higher transportation costs which was further exacerbated by the recent run up of fuel prices,”​ explained CFO Ed White yesterday at the Deutsche Bank Global Industries and Basic Materials Conference.

Australasian weakness​

In addition, O-I has run into problems in Australia and New Zealand where the strength of the local currencies has hit wine exports. As a key supplier of glass packaging for wine that is shipped for export, O-I has struggled in the region.

Compounding the difficulties in the wine industry, O-I said beer consumption in Australia was down as high interest rates have eaten into disposable incomes.

Weakness in the region had been anticipated but O-I said demand has deteriorated over the quarter more than expected resulting in “unabsorbed manufacturing costs” not forecast at the start of the period.

Outside of Australasia the company said demand remains strong and global shipment levels are still expected to increase by between 5 and 10 per cent in the second quarter. Several acquisitions made in 2010 are expected to drive this growth.

Further details of the second quarter performance will be revealed at a quarterly earnings conference call scheduled for 28 July.