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

Thank you for standing by. My name is Jesse, and I will be your conference moderator today. At this time, I would like to welcome everyone to the O-I Glass Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Chris Manuel, Vice President of Investor Relations. Please go ahead.

Thank you, Jesse. Good morning, everyone, and welcome to O-I Glass Third Quarter 2026 Conference Call. Joining me today are Gordon Hardie, our CEO; and John Haudrich, our CFO. Following prepared remarks, we will open the line for questions. Our earnings release and presentation are available on the company's website. Please review the safe harbor comments and disclosures regarding use of our non-GAAP financial measures included in those materials. Today's remarks include forward-looking statements, and actual results may differ materially from current expectations. With that, I'll turn the call over to Gordon, who will start on Slide 3.

Thank you, Chris. Good morning, everyone. Today, we will review our third quarter results, update our 2026 outlook and share an initial view of the key business drivers for 2027. Before I begin, I want to thank all our O-I colleagues for their focus and commitment. Our teams acted with urgency to navigate a difficult environment, particularly in Europe, while continuing to serve customers across challenging markets. Our third quarter results reflected 3 key trends. Net sales were stable and year-over-year shipments continue to improve. Adjusted EBITDA declined from last year. Results were stable in the Americas, but significantly lower in Europe, where higher-than-anticipated energy and freight costs drove performance below our expectations entering the quarter. Adjusted EPS was down, reflecting lower operating margins and an unusually high tax rate. Europe remains our largest opportunity to improve financial performance, but progress has been slower than expected. These results are unacceptable, and we are acting with urgency to address the issues weighing on earnings. As I will discuss shortly, we have sharpened our focus on our 4 priorities to restore European margins to competitive levels. In the Americas, our team delivered another solid quarter, demonstrating the impact of disciplined execution, Fit to Win and close collaboration with customers. This performance also reflects the broader impact of Fit to Win, which continues to strengthen our cost base and has delivered $135 million of year-to-date benefits. At the same time, energy, freight and demand headwinds require us to update our 2026 guidance. While these pressures weigh on the near-term outlook, demand trends are gradually improving and actions underway should position us for improved adjusted earnings, cash flow and profitability in 2027. Against this backdrop, our priorities are clear: execute the Europe recovery plan, sustain momentum in the Americas and capture the remaining Fit to Win opportunity to strengthen performance and grow the value of O-I. Let's now turn to Slide 4 and discuss the top line. As noted, net sales were relatively stable at approximately $1.6 billion as favorable currency translation largely offset modest declines in selling prices and volume. While demand remains sluggish and uneven across markets and categories, year-over-year shipment comparisons continue to improve sequentially as shown on the chart. Third quarter volumes declined approximately 2% from the prior year. In the Americas, shipments were down approximately 1%, reflecting the earthquake in the Andean region and the onset of the U.S.-Canada trade dispute. Overall, solid growth in Latin America largely offset lower demand in North America. In Europe, shipments declined just under 4%. Demand increased in the U.K. and remained stable in Northern Europe, while Southern Europe remained under pressure, particularly in wine-related markets. For the fourth quarter, we expect enterprise shipments to range from flat to up low single digits, supported by new business wins and easier prior year comparisons. For the full year, we expect sales volume to decline 3% to 4% from 2025. Looking ahead, we expect gradual sequential improvement to continue, supported by new business wins representing approximately 4% of annual sales volume. Now let's turn to Slide 5. Fit to Win remains central to our strategy and continues to strengthen our competitive position as demonstrated by our new business wins. This program delivered approximately $50 million of benefits in the third quarter, bringing the year-to-date total of $135 million and cumulative benefits of $460 million since inception. The actions previously identified under Phase A are substantially complete. We also recently initiated a process with employee representatives regarding the proposed permanent closure of an additional European plant. Going forward, our focus is shifting to Phase B execution, including total organization effectiveness, procurement, energy and supply chain optimization. The Americas demonstrate how Fit to Win can strengthen competitiveness and resilience when paired with consistent execution even in a challenging macro environment. Europe is earlier in that progression. We intend to build on initial gains in plant efficiency and establish a stronger foundation for future benefits. We now expect $180 million of net benefits this year, reflecting the time required to address supply chain challenges in Europe. The deferred benefits will shift into next year, and we continue to target at least $650 million of cumulative Fit to Win benefits by the end of 2027. The remaining opportunity is substantial, particularly in Europe, where successful execution of the recovery plan should strengthen operating stability and contribute to higher adjusted earnings and free cash flow. I will return to this shortly. With that, I'll turn the call over to John on Slide 6.

Thanks, Gordon, and good morning, everyone. Net sales were generally stable, but adjusted results declined from $0.48 per share of profit in the prior year to a loss of $0.09 per share. Lower net price was the primary headwind. Average selling prices declined just under 1% overall as improvement in the Americas was more than offset by declines in Europe. Cost inflation also remained elevated, particularly for energy in Europe, reflecting the onetime reset discussed previously and additional inflation related to the Middle East conflict. The impact of slightly lower sales volume was offset by favorable operating costs as Fit to Win benefits more than offset higher delivery and maintenance costs, lower joint venture performance and other onetime items. As in the prior quarter, adjusted earnings also reflected an unusually high tax rate, primarily due to lower earnings in Europe. Turning to the balance sheet. Net leverage increased modestly due to lower earnings. We continue to maintain ample headroom under our senior secured leverage covenant and liquidity remains strong at $1.5 billion. Let's turn to Slide 7 and review segment performance. As shown on the left, enterprise adjusted EBITDA and segment profit declined year-over-year. Performance continued to differ sharply by segment with solid results in the Americas and continued pressure in Europe. In the Americas, net sales increased more than 3% from the prior year period to $970 million. A volume decline of approximately 1% was more than offset by a selling price increase of just over 1.5% and favorable currency translation. Segment operating profit declined approximately 2% to $137 million. Favorable operating costs and currency translation largely offset slightly lower volume and net price. The year-over-year comparison did include a $6 million onetime insurance recovery in the prior year that did not repeat. In Europe, net sales were $634 million, down approximately 8% from the prior year period. Selling prices and sales volume each declined nearly 4% and currency translation was also unfavorable. Europe's earnings remained under significant pressure. Segment operating profit was $2 million compared to $95 million in the prior year period. Unfavorable net price was the largest driver, reflecting competitive pricing pressure. Elevated energy and freight costs were approximately $15 million above our expectations for the quarter. Lower volume was also a modest headwind, while operating costs benefited from greater plant efficiency following post-restructuring disruption in the first half. Now let's turn to Page 8. We are updating our 2026 outlook and providing an initial view of the key levers and business drivers for 2027. As shown on the left, we now expect 2026 adjusted EBITDA of $925 million to $950 million and free cash flow usage of approximately $300 million. We expect year-end leverage ratio will range from 4.5x to 5x. The revised earnings outlook reflects lower sales volume, including the estimated impact of the U.S.-Canada trade dispute, higher energy and freight costs and lower Fit to Win benefits, primarily due to the slower pace of Europe's recovery. Importantly, we have secured coverage for 100% of our fourth quarter European natural gas needs. Barring extreme price spikes or supply disruption, this coverage should significantly limit further changes in direct gas costs for the remainder of the year. In addition to lower operating income, free cash flow will be affected by higher inventories resulting from softer sales and cash used to strengthen our 2027 energy risk management position. We expect 2026 results in the Americas will be nearly 50% above 2024 levels, driven by record performance in Latin America. However, earnings in Europe will likely remain under pressure through the first quarter of 2027 due to peak energy inflation and normal seasonality. We believe this outlook appropriately reflects current operating conditions and our expectations for the remainder of the year. Turning to the right side of the slide, our initial view of 2027 calls for higher net sales and adjusted EBITDA, significantly improved free cash flow and lower net leverage. Although it is still early, we expect net price to improve through commercial actions, including commercial PAFs and procurement initiatives. We have covered more than 90% of our forecasted European natural gas needs for 2027, including 100% for the first quarter. Barring extreme market conditions or supply disruptions, this coverage should significantly reduce our exposure to gas price volatility. Although coverage will increase costs compared to 2026, our average prices remain well below the current TTF forward curve, and we retain flexibility to benefit if market prices decline. We expect stable sales volume with new business wins offsetting sluggish demand. Demand will likely remain subdued until affordability pressures ease. Operating costs should improve, supported by at least $170 million of Fit to Win benefits. This would enable us to meet or exceed our 3-year target of $650 million. The chart provides additional details. These are our current planning assumptions. We intend to provide 2027 guidance at our next earnings call. Now I'll turn it back to Gordon on Slide 9.

Thanks, John. Europe remains our key focus and largest opportunity for value creation. The segment has significantly underperformed our expectations this year. Commercial pressures and elevated energy and freight costs created a difficult backdrop, while internal supply chain challenges amplified the impact. Our recovery plan focuses on 4 priorities within our control: strengthen commercial performance to improve net price, improve energy procurement, risk management and usage, drive profitable volume growth by strengthening competitiveness and deliver greater end-to-end supply chain productivity and performance. We advanced each priority during the third quarter. As noted earlier, we expanded our 2027 European energy coverage at rates favorable to current market prices and secured new business wins representing 4% of annual sales volume. We also improved plant pack to pull by 1% and identified significant additional opportunities to strengthen logistics performance. Our focus now is to translate this progress into stronger financial results. We expect these actions to deliver meaningful improvement and ultimately restore margins. We will continue to track and report our progress with more detail to come when we provide our 2027 guidance on our next earnings call. Let's now move to Slide 10. Before we close, I want to connect the near-term actions discussed today with our broader value creation opportunity. Our first priority is to improve materially business performance by executing Europe's recovery plan and capturing the remaining Fit to Win opportunity. Beyond that, we continue to pursue profitable growth opportunities that strengthen capacity utilization and earnings power across the portfolio. Finally, we are evaluating opportunities to create long-term shareholder value by optimizing our portfolio, strengthening our position in the value chain and expanding our strategic flexibility. Our near-term focus remains firmly on execution while we continue to advance initiatives that create value over the longer term. With that perspective, let's now turn to Slide 11 for concluding remarks. The Americas delivered another solid quarter, demonstrating the power of disciplined Fit to Win execution. Our immediate priorities are to execute Europe and the recovery plan, sustain momentum in the Americas and capture the remaining Fit to Win opportunity. Demand trends are gradually improving, and we expect shipments to be stable to modestly higher in the fourth quarter. While our revised 2026 outlook reflects incremental pressure, we expect stronger earnings and cash flow in 2027. Thank you for your time. We will now take your questions.

[Operator Instructions] Your first question comes from the line of Ghansham Panjabi with Baird.

This is actually Josh Vesely on for Ghansham. Maybe if we could just dig into the recovery plan in Europe a little bit and maybe specifically on the commercial performance aspect of it. I'm just curious if you could give us some specifics on how the commercial execution at O-I has underperformed over the last few years relative to your expectations, kind of what needs to be done to address these issues and how O-I expects to kind of target those going forward?

Sure. Let me take that, Josh. So as I outlined in previous earnings calls, we have reconfigured or reorganized how we're going to market in each market in Europe. So how we structure the sales force behind the different categories, different groups of customers and also how that sales force is managed on a daily, weekly, monthly basis. And we're starting to see that come through in terms of forward visibility, where the leakages on performance or price, for example. So we've made a lot of progress in this quarter tightening up and executing the system that we had envisaged. There's no doubt that there's opportunity for us to execute commercially more effectively to negotiate our PAFs in a way that capture the cost in a more timely fashion. We have a number of PAFs that are annualized, which means you don't pick them up until the following year, and that's something we're looking at addressing, given the excessive cost and inflation environment that's out there. We've also brought in some new talent, and we've structured the teams in a way that there's much more focus on commercial improvement. And we see that coming through in a number of wins, both in Europe and also in the Americas. And those wins are now totaling up to 4% of our annual volume. If I give you some detail, for example, where we're most ahead in Europe, for example, in our Northern region, our beer sales were up almost 4.5% in the quarter, while the beer category, we estimate in that region was probably flat. So we outperformed. Our food business in that Northern region was up 36% -- I beg your pardon, up 9%. So we're seeing the benefits of both the stability of the supply chain platform, coupled with the improved commercial execution, pay dividends. Now the Northern region is where we're furthest ahead on that. We still have work to do in the Southern regions. So we're -- as I said, it's a major area of focus for us, and we see improvements coming through, and we see it coming through in the business wins, Josh.

Great. That's awesome, Gordon. Yeah, and maybe just another one and sticking on Europe here. I just wanted to quickly ask on the competitive intensity in the region. And obviously, that's been a call out for the broader industry this year. Just maybe kind of what are you seeing now if it's kind of troughing, if it's getting worse? And how do you think about that dynamic into 2027, just given what's going on from a geopolitical point of view and consumers just continuing to stress from affordability issues?

Are you talking across the entire fleet or just Europe, Josh?

I was talking specifically about Europe, but both would be great.

Yeah. Okay. So yes, in Europe, as we came into this year, we estimated that the industry capacity utilization was in the low 90s, and in fact, in wine, probably in the high 80s. So quite a significant amount of spare capacity. That drove competitive intensity and impacted pricing, I think, as the year rolled through and the ability to recapture some of the excessive inflation that's been there due to the energy spike. As we've moved through the year, we've obviously resized and reshaped our own network. And from what we hear and from what we see on other announcements, as we move through the end of the year and into next year, we see the capacity utilization probably pulsing up to mid-90s, maybe a little higher. However, there is still significant overcapacity in wine in Southern Europe, and that continues to drive competitive intensity in that region. We've driven a lot of productivity to cover a lot of the costs. But I think as we look forward, it's going to be important that we pull all the commercial levers at our disposal, PAFs, procurement initiatives and so on to recover what is excessive cost increases this year. If we look to the Americas, capacity is tight throughout Latin America, maybe, I would say, touching in the mid- to high 90s. If I look at Central America and particularly Mexico, probably mid-90s. And then in North America, capacities are pretty tight. So that's kind of a capacity overview, but happy to take any follow-on on that.

Your next question comes from the line of George Staphos with Bank of America.

So I want to peer a bit more into '27, if possible. And if you can, even though you don't have a '27 target currently, could you give us at least directionally which way the target would have gone relative to what you previously had? And what the -- we have Fit to Win what you're looking for, I guess, the $180 million, but what the other buckets look like, such that you're still looking to an up year in EBITDA. The related question, you talk about being hedged right now on energy in Europe, and that's terrific. Can you give us some way of dimensionalizing what the cost increase is, '26 to '27, on energy based on your hedge position?

Yes, George, this is John. I will start with that -- those questions. So we take a look at 2027. Obviously, we had a target out there before, and we pulled that for now and going to replace it with year-end guidance in the next call as we indicated. The key challenge is that the base for 2026 has softened, right? And so instead of believing that -- before it was about $1 billion, we're looking at the $925 million to $950 million. So that made those previous targets particularly challenging in that regard. And so the first piece there is the base is softer by that, call it, $50 million to $75 million, and that's a challenge. So now if we look at the various different pieces of the pie, and I'm looking at Page 8 here, and just thinking first on -- more focusing on the EBITDA, we do indicate net price is going to be up. That's the hardest one to get a particular beat on. We understand our inflationary view right now. But of course, with most -- 2/3 of our business being open market, it's harder to get a read on that. Of course, as we indicated, we expect positive net price against an inflation environment that is clearly going to be still elevated, but not what we experienced this last year, right? So we were coming off of a crest of cost inflation, we're behind a big bubble of cost inflation. And we believe that, that cost inflation environment peaks, especially on the energy side in the first quarter then starts to comp and move in the right direction. And I'll touch base on your other one here in a moment. But then you have the stable net sales. You have about $170 million or more of Fit to Win benefits. We do believe that there will be some cost offsets to that, other cats and dogs we're working through like maintenance and things like that, that we're still refining through the budgeting process. But those are the big pieces, the big open element, obviously, being the commercial element, as you know, it's in front of us at this point in time. When it comes to -- on the energy side, we have revamped our energy management practices, okay? As you know, we benefited from a 5-year contract, very favorable rates that expired at the end of 2025, then we kind of have a bit of a mark-to-market this year, a big bubble there. Now we take a 5-year approach instead of a 3-year approach on energy management. And in the past, where we would look to be substantially hedged going into the next year, for example, we look to be 100% covered on a rolling 12-month basis. And then obviously, it stair-steps down as you look into the future. So we're trying to take that approach to minimize the volatility that we see. And we also use various tools that allow us to either have, for example, traditional fixed forwards, but other tools that kind of act like caps and collars where you can be protected within a range or a cap, but allow you to benefit if prices come down off peak levels. So as I indicated, the rates at which we have right now are definitely favorable to the forward curve that you see in the TTF right out there. George, I can't give you specifics on this because it's a competitive element going into the next year. But we believe our energy cost inflation will have crested and then we will be getting back into what we believe would be very competitive and relative to the marketplace of energy costs going forward.

Okay. John, just one follow-on there. Just since so much rides on, and we understand we've covered the industry a long time, on the pricing and the commercial development from November through February, what gives you the confidence that you'll be up next year in total, given how significant it is?

Yes. I'll just build on the comment that Gordon said is if you compare last year's market conditions and the pricing environment at that time relative to what we believe is shaping up, last year, we had low capacity utilization. And obviously, we internally had some struggles with some of the execution elements that was talked about earlier. Going forward here, we believe the utilization levels and the backdrop of supply-demand is a lot more -- is a lot better, and given the level of inflation that we've seen, we have mechanisms through the PAFs, at least it covers part of our business that pass that along on arrears, right? We're going to work on those, but they do recapture on the back end. And then there's just a lot of pressure in the marketplace with the energy. And there's no reason that we, O-I, should sit on those energy costs. It should be shared within the supply chain, and that's what we're looking to accomplish.

Your next question comes from the line of Anthony Pettinari with Citi.

This is Bryan Burgmeier on for Anthony. Just in the press release, you pointed to free cash flow being up in '27 relative to '26. So I was just wondering if you can try to put a finer point on that. Just curious if you expect positive free cash flow next year? And if you can maybe try to size some of the impact from things like cash restructuring costs or you said cash to secure your energy position, working capital, anything like that?

Yes, sure. Thanks for the question. So yes, we intend to drive to positive free cash flow next year. Obviously, we are looking at the major drivers of the business, we are looking for higher EBITDA. We can't quantify that just yet because of the last discussion we had on the commercial aspect of the business, but we're looking to drive the various different levers of the EBITDA in the right direction. CapEx should be a little bit lower. We got $400 million there, and we intend to be very, very conscious and with a lot of capital discipline. We want to make sure that we're maintaining our operations, but we want to be lean on the capital side. We are looking at lower restructuring costs. The restructuring costs are going to be north of $150 million -- close to $160 million this year. A normal year for us is $25 million to $50 million, but we did include it in the announcement, we did indicate that we are looking to -- we're working through the process of another furnace closure, and there would be some additional cash being built on top of that, but significantly down on a year-on-year basis. One of the challenges we have in the back half of this year with the sales volume being softer in the back half than anticipated is the inventories are higher than we anticipated. So that has been an element working against us on cash flow next year. We'll look to address that in next year to be able to get to a neutral positive working capital. But we're still working through all those details. Those are the biggest moving pieces right now.

Got it. Got it. And just one follow-up. I appreciate the headwinds you cited around the earthquake in South America, North American trade dispute. Just curious if there's any impact in France from some of the social unrest in the country. Broadly, it maybe seems like European demand wasn't too far off from what you were expecting, but any details there would be great.

Yes. And with regard to the Americas, despite those headwinds in the Andean, for example, and the energy issue in the Andean, that business performed very strongly with nonalcoholic beverages up about 18% and beer up about 11% and I think demonstrating the power of execution around Fit to Win and working closely with the customer across the chain. And likewise, in Brazil, we had a standout performance where beer was up nearly 30% for us, about 3x the market growth. And our NAB nonalcoholic beverages was up about 18%, where the market we estimate was up about 12%. So again, I think we're demonstrating the power of Fit to Win when it's properly executed despite tough macro environment. With regard to France, a lot of our reorganization this year was in that region, and it proved more difficult than we had planned. Anything like social unrest, while it's not good for society in general, it also makes doing business tougher, and it also impacts consumer sentiment. So I would say, overall, it's a negative, but hopefully, we'll get through it and things will settle. But yes, it's not a positive, obviously, very hard to quantify, and it depends how long it goes on. But our job is to overcome that. And we are very focused with a lot of our best resources focused on Europe to improve the results there, which I said are unacceptable to us.

I can build on a few specifics here. If you take a look at our outlook, we did adjust the commercial outlook for the business. We did incorporate about a $10 million impact on the tariff element between the U.S. and Canada. We have about 2% of our volume move across the border. And so who knows how long that will endure, but that's probably the impact from a little bit in the third quarter to the fourth quarter of the year. I did check that we do not have any operational impact as a result of the France upset. But we have tapped down, as Gordon said, the commercial outlook for the business because of factors like the tariffs and also the social unrest.

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets.

I guess maybe I could try the '27 initial framework again. So it sounds like you have a little bit more than $170 million coming from Fit to Win, and you've kind of framed out positive net price and stable volume. I guess what's kind of getting you to that stable volume outlook? Because it seems like there's continued pressure from inflation. I think China is also consuming less wine and maybe spirits as well. There's some headwinds there as well as potentially some headwinds in Latin America. Maybe you can just kind of frame that out a little bit for us. So do you expect kind of that to offset most of the $170 million of Fit to Win benefits? Or would you still expect to be up next year? And if you could put a finer point on price as well because you've been giving back price now for a couple of years. So that'd help out, too.

Yes, sure. So on the stable sales volume, our base case, to your point, is that you're probably looking at a softer, probably core negative demand a little bit. But as -- back to what Gordon spoke to on the call, we got about 4% of new sales volume that we've landed through working through the pipeline. So at this point in time, we believe that the benefit of those new wins will essentially offset probably the core soft consumer. And even in our prepared remarks, I indicated until the affordability issues change, that you're alluding to, you're probably looking at core softer demand. But overall, we think that, that sales volume is kind of a neutral on a year-over-year basis. So I don't think that there's something necessarily working against it. And of course, we continue to fine-tune this through the year and when we give guidance. On the net price, to your point, yes, if you look over the last several years, there was a period of significant price increases in glass in Europe, in particular. And then there's been some adjustments to that over the last few years. That was kind of a super cycle moving through the beginning of the Ukraine war and the energy at that time and then normalization. So that's probably played its course. But now we have another bubble of cost inflation. And as we've experienced this year and as you know, and we talked about a little earlier here, we recover our costs on arrears through other mechanisms and stuff like that. So that's the process that we're working through. This is a historic process that we go through. And with an improving backdrop of supply and demand, we feel confident that, that will drive into a positive net price environment, and we'll get more specific here.