O-I Glass, Inc. (OI) Earnings Call Transcript

Hello, everybody, and welcome to the O-I Glass First Quarter 2025 Earnings Conference Call. My name is Elliot, and I'll be your coordinator today. [Operator Instructions] I'd now like to hand over to Chris Manuel, Vice President of Investor Relations. Please go ahead.

Thank you, Elliot, and welcome, everyone, to the O-I Glass first quarter 2025 earnings conference call. Our discussion today will be led by Gordon Hardie, our CEO; and John Haudrich, our CFO. Following prepared remarks, we will host a Q&A session. Presentation materials for today's call are available on the company's website. Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures, included in those materials. Now I'd like to turn the call over to Gordon, who will start on Slide 3.

Good morning, everyone, and thank you for your interest in O-I Glass. Today, we will walk you through our first quarter 2025 performance, key market trends and outlook for the rest of the year. First, I would like to take this opportunity to thank all my colleagues at O-I across the world for their efforts in this first quarter, and for their agility and focus on driving the changes needed to turn O-I around. Last night, we reported first quarter adjusted earnings of $0.40 per share. While down from last year, results significantly exceeded our plan due to stronger-than-anticipated sales volume and Fit to Win benefits. Market conditions have continued to gradually recover, and our shipments increased by more than 4% compared to last year. Additionally, our Fit to Win program generated savings of $61 million, which was a significant contributor to our better-than-expected results. Strong demand and initiative benefits helped offset expected headwinds, including lower net price and scheduled temporary production curtailments. Looking at our business units, segment operating profit improved significantly in the Americas, reflecting healthier fundamentals and benefits from strategic initiatives. In Europe, results trended down, giving lower net price and temporary production downtime, which was partially mitigated by solid Fit to Win benefits. Overall, we are off to a strong start this year and are successfully managing the elements within our control. As such, we are reaffirming our full year 2025 guidance and expect adjusted earnings to improve between 50% and 85% from 2024. John will discuss our outlook further, including an initial view on how changing global trade policies could affect the business. In summary then, we are pleased with our year-to-date performance trend, despite some anticipated lag in Europe, and we aim to deliver robust financial performance throughout the year. Let's now turn to Page 4 to discuss current market trends. Overall, conditions continued to gradually improve and our shipments were up 4.4% in the first quarter. Solid growth reflected some rebuilding of packaging inventories across the value chain, benefits from recent contract negotiations supported by multiyear cost improvement plans and likely some advance purchases ahead of new tariff policies. Shipments were up more than 4% across the Americas. Here, we see inventory normalization overall, as well as more structural demand improvement in Latin America, together with the positive impact of some expanded contracts in North America. Volumes increased in nearly all markets, driven by a strong rebound in beer and spirits with solid growth in food. Volumes grew nearly 4% in Europe, driven by customer inventory rebuilding, and some buying ahead of tariffs for export customers. As with the Americas, shipments increased in nearly all markets and categories, with most growth coming from beer, wine as well as food. Currently, we are addressing excess capacity in Europe through temporary curtailments, and we are in consultation with the European and local works councils regarding long-term restructuring actions. These efforts should improve our competitive position, and support profitable growth. Shipment activity has been encouraging, and our volumes are up about 3% year-to-date through April. Recently, we've seen some softer demand amid elevated uncertainty of new tariff policies, which may continue to impact near-term shipments. As such, we are maintaining a cautious commercial outlook as well as our original sales volume guidance. We will reassess our 2025 sales volume outlook midyear as trends evolve. Let's now turn to Page 5, and discuss progress on our Fit to Win program, which aims to radically reduce total enterprise cost as well as optimize our entire network and value chain to support future profitable growth. We generated $61 million in savings during the first quarter alone, which exceeded our initial plan. Momentum is building, and we are confident that we will achieve our targets of $250 million in 2025, and $650 million cumulatively by 2027. Phase A of our Fit to Win program is focused on reshaping our SG&A structure, and initial network realignment to meet current market needs. Phase B seeks to fundamentally transform costs across the value chain, including the implementation of our total organization effectiveness program to optimize capacity within the system. Regarding Phase A, we have now completed all actions required to secure our $100 million SG&A savings target in 2025. Initial network optimization actions are well underway, and we are confident that we will achieve our 2025 goal. Likewise, additional efforts are in progress to achieve our 2027 targets. We have also kicked off our Phase B initiatives. As we look to transform our cost base, the team has already made initial progress across several procurement programs as well as efforts to improve efficiency and reduce energy utilization. Finally, our total organization effectiveness program is ramping up nicely. We successfully completed the pilot and implementation at our Toano, Virginia plant, where we see significant performance improvements and lower inventory levels. Based on those results, we will begin the broader rollout starting in May 2025, which should be completed by the end of 2026. Importantly, many plants have initiated savings programs based on the TOE principles ahead of the formal rollout, generating early savings. In summary, our Fit to Win program is delivering strong benefits, and we are making solid progress towards our savings target. We are confident in our ability to achieve our goals, enhance operational performance, and are well positioned for continued success throughout the year. I will now turn it over to John, who will review our first quarter performance, and our 2025 outlook in more detail, starting on Page 6.

Thanks, Gordon, and good morning, everyone. O-I reported first quarter adjusted earnings of $0.40 per share. While down from last year, results surpassed management's expectations due to stronger-than-anticipated sales volume growth and higher Fit to Win benefits. As you can see on the left, adjusted earnings was down modestly from the prior year. Single-digit sales volume growth and significant Fit to Win benefits mostly offset anticipated headwinds, including lower net price and ongoing temporary production curtailments to reduce inventory. Looking to the right, segment operating profit was up in the Americas, but down in Europe. Results improved significantly in Americas, reflecting strong demand, stable net price amid tight capacity, and around $27 million of Fit to Win benefits. Consistent with our expectations, earnings were down in Europe. While sales volume was up nearly 4%, net price was ahead reflecting competitive pressures and excess capacity. We did incur about $58 million of unabsorbed fixed costs as we curtailed significant capacity to draw down inventories, which was partially offset by $20 million of Fit to Win benefits as well as other savings. Importantly, results should improve in the second half of the year, as inventory reduction activities moderate, and we generate greater initiative benefits, following current restructuring actions. As we focus on economic profit, we have made very good progress on reducing inventory across the enterprise, which is down around $225 million from the same time last year. Furthermore, we are on track to meet or be below our year-end 2025 target of less than 50 days IDS. In summary, we're off to a strong start this year. Despite some headwinds, results exceeded our expectations heading in the quarter, and we are well positioned for continued success throughout the year. Let's turn to Page 7, and discuss our business outlook. We are reaffirming our full year 2025 guidance. Adjusted earnings should range between $1.20 and $1.50 per share, which represents a 50% to 85% improvement from fiscal year 2024. Significantly higher adjusted earnings should reflect ongoing efforts to enhance our operational performance, reduce costs and capture market opportunities. Likewise, we expect a significant rebound in free cash flow, boosted by strong operating performance improvement and lower CapEx investment requirements. We have also provided a directional sense of how our annual earnings will unfold by quarter. Based on a strong start to the year, our full year performance is currently tracking towards the high end of our earnings guidance range. However, we are maintaining our original business outlook, given the uncertainty related to new tariff policies, which we will discuss further as we turn to Page 8. Changes in global trade policies will likely be disruptive in the short term, and may create both new challenges and opportunities, which cannot be fully determined at this stage. As illustrated in the chart, about 14% of our global sales volume crosses the border between the U.S. and other nations. This includes both empty and filled bottles. We estimate that only 4.5% is currently exposed to new tariffs. This primarily relates to imports of filled containers from Europe, while most cross-border sales between the U.S., Mexico and Canada are exempt under the USMCA treaty. As such, we face a limited direct tariff exposure so far. The bigger unknown is how elevated market uncertainty may impact the consumer and demand elasticity. While we face a few challenges, there are potential opportunities. Glass is a local business, and around 85% of the value chain is within 300 miles of the plant, so we do not rely on a global supply chain, which is more exposed to tariffs. Favorable substrate dynamics may emerge as there are currently sector-specific tariffs on aluminum. Likewise, domestic glass production is now significantly more competitive, compared to imports from China given new tariffs. Next, O-I has the largest glass network in the U.S., so we are well positioned to take advantage of opportunities that emerge, especially if consumption shifts to more domestic products over time. Finally, policy changes have already led to sizable shifts in currency exchange rates that are helping improve earnings translation. Naturally, we are working with our partners in the value chain to mitigate risk and capture opportunities. Overall, we continue to believe our best long-term strategy is to improve the competitive position of the company through Fit to Win. Now I'll turn it back to Gordon, who will conclude our discussion on Page 9.

Thanks, John. In conclusion, O-I is well positioned for a strong year ahead. We are off to a fast start. We expect our performance and earnings in 2025 will rebound from prior year levels, as we implement our Fit to Win initiatives. While changes in the global trade policies create uncertainties, we are executing our long-term value creation road map as illustrated on the right, and discussed at length during last month's Investor Day. Importantly, these actions are largely within our control. We are confident in our ability to achieve our goals, deliver strong future financial performance, and create shareholder value. Thank you for your attention, and we look forward to taking your questions.

[Operator Instructions] Our first question comes from George Staphos with Bank of America.

I guess the question I have to start is, can you talk a bit about any prebuy effects you've sort of touched on within Europe, what kind of volume effect might that be that has to reverse itself in the back half of the year or whenever? And then overall, can you talk a little bit about some of the work you're doing on TOE, in Toano and elsewhere, and why that supports your overall Fit to Win goals? So prebuy, and then TOE and what you're seeing in Toano.

Yes, George, thanks for the question. I'll kick things off. This is John. On the prebuy point, as included in our comments, sales volume was up 4.4% in the first quarter. We actually saw probably a fairly limited amount of that. It was not the driver of the stronger volume in the quarter. And in fact, what we had seen is that our sales volumes were actually stronger in January and February, but they were still up in March. So we believe that maybe some of the strength in March was there. So in other words, if volume was a $0.06 or so benefit in the quarter, maybe there was a $0.01 or $0.02 in there associated with prebuying, but it was not the driver of the stronger volume in the quarter.

Hi, Gordon. Just quickly, April, you said softened. So are we looking at negative volumes to get to a year-to-date growth rate of 3% from up 4%? Or just maybe another kind of detail there.

What I would say is, while that's not our base case view, we are remaining cautious in the commercial outlook. So we are maintaining our full-year view of stable volume over for the year -- on a year-over-year basis, so kind of flattish overall for the year. But again, that's out of an abundance of caution on just the uncertainty on tariffs. It's certainly not the direction we hope things go. And in April, just to give you a little bit of color, adjusted for Easter, volumes were down about 1% or 2%. It wasn't a significant decline. Volumes were up in the Americas, low single digit. Again, that remains healthy. And our business really isn't exposed to tariffs there, but we did see a little bit of decline in Europe, and it was primarily in use categories and markets that we know are exposed to exports, considering that about 40% of what we make in Europe ultimately gets exported. It was kind of the wines and the spirits categories that we saw a little bit of softness in April.

[indiscernible]

[indiscernible] as we get more visibility in this quarter, and we'll update in -- at the half year. With regards to the second part of your question, TOE and Toano, as we outlined, in July and October, there is a process that we put each of the plants through, in that there are performance opportunities identified, and then we go and execute against those opportunities. In Toano, we have a very clear line of sight to 100% of the opportunities we identified. And we've established the metrics, the operating system, validated some of our hypothesis, which have come out strongly. And now we will begin the rollout across the whole fleet in waves. And that's a very structured kind of disciplined approach over the next 15 to 18 months. So we're very happy with the outcome of Toano, and we expect similar results as we roll out the program across the whole fleet.

I just mentioned because Toano is one of your better plants over the years.

We now turn to Michael Roxland with Truist Securities.

My first question is just on a follow-up to what George was asking about with respect to volumes. Can you give us a sense, just in terms of the volume progress that you're seeing by end market, whether it be wine, spirits, beer, NAB, just want to get a sense of the growth or the headwinds that you may be encountering in some of those end markets? And where do order book stand currently? So any outlook you can share with respect to how early read on May, for instance?

Sure, Michael. I'll take that question. So in both the Americas and Europe, we saw strong volumes in the first quarter. And literally, it was across most categories in each of the regions. So we -- in the Americas, for example, beer up close to 4%; food performing strongly, high single digits; spirits in the Americas has actually had a very strong quarter, up double digits for us, as had RTDs; so overall, strong volume growth in the Americas, strong demand, tight capacity. In Europe, beer performed very strongly in the quarter. Nonalcoholic beverages also performed strongly, up high single digits for us; food, up mid-single digits; wine, a bit of a comeback in low-single digits in Europe. Spirits were off in Europe, off mid-single digits; and RTDs, which is a much smaller category in Europe, was also slightly off. So all in all, there's -- we see kind of green shoots in a lot of the categories, in a lot of the geographies coming back. So order books at this stage are good. There's certainly uncertainty out there regarding where all this tariff discussions are going to play out, and that is causing consumer uncertainty as well. So I think this quarter will be telling to see where everything lands. And yes, that's our view at the moment. As I said, as we look to the end of the year, we're sticking with our initial thinking at the start that it will be stable over the year. There may be a few bumps here and there, but overall, off to a strong start.

That's great, Gordon. And just one quick follow-up. You're looking to streamline your French operations, given the slowdown in wine. Now is that a structural issue, just related to French wines? Is that a structural issue for all wines? Does it relate to more mainstream wine brands versus, let's say, premium products in terms of -- when I say premium products, it would be like top regions, top brands. So just wanting to get a sense of what you're trying to do with your French operations and really what the driver is there in terms of your realignment?

Yes. Look, overall, it's fitting assets to market opportunities. As I said, we're looking now at the portfolio in terms of 2 streams, mainstream and premium. We see tremendous opportunities in premium across wine, and across spirits in France. And so some of this is the realignment of these footprints to get ourselves ready to expand into premium as we go forward. And of course, we continue to invest strongly in France. We have a big investment in [ Gironcourt ], which has gone live and is delivering to expectations. We're very happy with it. And we will continue to invest in France, which is a key market for wines and spirits, particularly wines and spirits. Longer term, wine, particularly economy wines have suffered some impact across the whole market. But I think if you look through the cycle over the long term, premium and super premium wine, premium spirits, super-premium spirits will continue to perform strongly. And that really is looking at the footprint and making sure we're set up properly for that, as we execute on what we laid out in our I-Day, our best of both strategy being the lowest cost producer in mainstream, and best cost producer in premium. So that really is the context for the operations review across Europe.

Our next question comes from Joshua Spector with UBS.

It's Anojja Shah, sitting in for Josh. On Slide 8, you mentioned tariffs on aluminum as an opportunity, one of the opportunities of tariffs. Have you seen signs of this yet with customers, where this could potentially be of benefit, like maybe you're having introductory conversations about substrates? Or just any color on what you're seeing there and how you think it might benefit you?

Yes. Just for some clarity there, if you go back to our Investor Day, we did profile that overall glass containers in North America are at a higher cost than aluminum. That's 25% to 30% kind of differential. And we believe if that goes to 15% or lower historically, we've seen shifts over to glass. And we believe that the difference on the aluminum tariff side could impact that, call it, 5%, 10% percentage points against that 25% to 30% premium. So it could help. I think it's a little early. Some of these things are supply-chain related, they're filling related. They are contractually related. So I would say just as we look at the -- back to the prepared comments, the challenges -- we'll probably see some of the broader market-related areas probably over the shorter to medium term. And the opportunity section that we show on Page 8 is probably something that unfolds a little bit more over time than what we're seeing in the way.

Yes. Just -- and I'll add to that. Obviously, if there's increases in prices in aluminum that helps close the gap a bit. But that's not a controllable for us. And so what we're focused on is getting our cost base into a position that we close the gap very significantly to cans and become more competitive to cans, particularly in North America, driving those elements that are within our control. And that really is our primary focus. Tariffs for us is an noncontrollable. And while it may help us over a short-, medium-term period, it's not something we wish to rely on as we get fit.

We now turn to Anthony Pettinari with Citi.