O-I Glass, Inc. (NYSE:OI) Q1 2024 Earnings Call Transcript

O-I Glass, Inc. (NYSE:OI) Q1 2024 Earnings Call Transcript May 1, 2024

O-I Glass, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone, and welcome to the O-I Glass First Quarter 2024 Earnings Conference Call. My name is Emily and I’ll be facilitating your call today. After the presentation, there will be the opportunity for you to ask any questions. [Operator Instructions] I will now turn the call over to our host, Chris Manuel, Vice President of Investor Relations to begin. Please go ahead.

Chris Manuel: Thank you, Emily, and welcome everyone to the O-I Glass first quarter 2024 conference call. Our discussion today will be led by Andres Lopez, our CEO and John Haudrich, our CFO. Today we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for this earnings 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 Andres, who will start on Slide 3.

Andres Lopez: Good morning, everyone, and thanks for your interest in O-I. Last night, we reported first quarter earnings of $0.45 per share. As expected, results were down from historically robust performance in the prior year period. Lower earnings primarily reflected softer demand due to a market downturn and temporary production containments to balance supply with lower shipments. While net price was down slightly, our margin expansion initiatives are off to a particularly good start this year. Although, slower than originally anticipated, consumer consumption patterns are gradually improving, and we are encouraged by the progress in our shipment trends since the fourth quarter of last year. As conditions gradually improve, we are focused on the factors within our control.

I am proud of the continued excellent operating performance across the enterprise and we have increased our full year margin expansion initiative target as we seek to optimize our 2024 results amid a slower demand. Importantly, we continue to advance MAGMA to create a long-term competitive advantage for the company and we are excited for the startup of our first MAGMA Greenfield plant in Bowling Green Kentucky this summer. As we look to the balance of the year, we are adjusting our full year 2024 outlook to reflect a slower market recovery, which John will review a bit later. Nevertheless, we remain confident about the long-term trajectory for glass demand, as well as stronger future earnings potential as markets recover over time. Let’s turn to Page 4 to discuss current market trends.

While it’s still soft, the commercial environment is gradually improving. As shown on the top chart, our shipments on a year-over-year basis were down 12.5% in the first quarter, compared to the 16% decline in the fourth quarter of 2023. Additionally, April shipment show gradual improvement as demand was down about 10% from prior year on a per day basis, when adjusting for the shift in the Easter holiday between 2023 and 2024. Consistent with discussions in previous calls, inventory destocking across the value chain has been a significant driver for lower shipments this past year. Destocking is in the later stages for products with a short cycle such as beer NABs and food, while activity will likely continue for a couple of quarters for longer cycle products including the spirits and wine.

Additionally, consumer patterns are improving better – at slower rate than expected as illustrated in the bottom chart. Trends improved consistently over the course of 2023, but were choppy during the first quarter this year and lagged our expectations. Softer consumption is attributed to the factors we hear about in the news every day, such as cost inflation on food and beverages products thriving price elasticity challenges, prolonged higher interest rates and consumer confidence that remains below pre-pandemic levels. Furthermore, we have seen a limited shared shift and some trade down, especially as our customers ramp up promotional activity, which tends to favor more value brands. As we look to the balance of the year, we expect shipments will improve as destocking activity drops off over the next several months.

However, we have revised our 2024 sales volume outlook to reflect a more gradual improvement in demand over the course of the year as we now project a slower rate of consumption recovery than originally anticipated, which is shown in the circle in the lower chart. Overall, we now expect our 2024 sales volume will be flat to up low-single-digits, compared to our prior outlook of low to mid-single-digit growth. As markets improve, we anticipate long-term glass demand will continue to benefit from key megatrends, such as premiumization health and wellness, as well as increased interest in sustainability. Overall, we expect glass demand will substantially recover to pre-pandemic levels over time. Importantly, we are well-positioned to take advantage of the rebound as it unfolds.

Now, I’ll turn it over to John, who will review our first quarter performance and updated 2024 outlook in more detail starting on Page 5.

John Haudrich: Thanks Anders, and good morning, everyone. OI reported first quarter earnings of $0.45 per share. Consistent with our expectation, results were down from historically higher earnings of $1.29 per share of last year. As illustrated, earnings primarily reflected a decline in segment operating profit, while slightly higher non-operating expense was mostly offset by some favorable effects. Additional details on non-operating items are included in this slide. Let’s turn to Page 6 and discuss recent performance across our two segments. The Americas posted segment operating profit of $102 million, which was down from $176 million last year. Net price was a slight headwind and sales volume was down 15%. Elevated operating cost reflected significant temporary production curtailment to balance supply with demand, which was partially offset by favorable margin expansion initiative benefits.

In Europe, segment operating profit totaled $133 million, down from $222 million last year. Like the Americas, net price was a modest headwind and sales volumes were down 10%. Higher operating cost reflected the impact of elevated temporary production curtailments, lower JV performance, and prior year energy credits that did not repeat. These headwinds were partially offset by benefits from our margin expansion initiative program. Let’s turn to Page 7 to discuss our updated 2024 business outlook. As noted on the left, we have adjusted our full year earnings guidance for few factors. Net price was stable, yet we have reduced our sales growth expectations, reflecting a longer destocking process in a more gradual improvement in consumer consumption patterns than originally anticipated.

Given softer demand, we intend to take incremental production curtailments to ensure inventories remain in check. Importantly, we are accelerating our curtailment activity in the second quarter, following the softer start of the year. To help mitigate slower sales growth, we have increased our full year initiative benefit target to at least $175 million. Finally, our outlook has been impacted by unfavorable FX trends, higher interest rates, given the change in the forward curve and a higher tax rate. As a result, we now expect adjusted earnings should approximate $1.50 to $2 per share, compared to our prior outlook of $2.25 to $2.65 per share, and we have updated our view of quarterly earnings allocation. Free cash flow should range between $100 million to $150 million, reflecting lower earnings, partially offset by other favorable cash levers, including moderately lower CapEx. We intend to maintain a healthy balance sheet position and expect to end the year with leveragable in the low threes, which will naturally decrease, as volumes and earnings recover.

As Andres discussed, we believe current marketing conditions are temporary, while it will likely take longer than originally anticipated, earnings should rebound when sales and production volumes substantially return to pre-pandemic levels. Now, I’ll turn it back to Andres, who will provide an update on our key strategic objectives on Page 8.

Andres Lopez : Thanks, John. Despite the market downturn, we continue to execute on the five key priorities we established this year to enable our long-term strategy. We are off to a good start with our margin expansion initiatives, which are helping offset some of the current market pressures. As noted, we have increased our full year target, which includes planned restructuring activities in 2024 that are now substantially complete. We will continue to evaluate our network requirements as future market trends unfold. At the same time, we are expanding our business to enable profitable growth. As I will discuss further on the next page, our MAGMA Greenfield project remains on schedule and we continue to advance attractive expansion projects, while others remain on hold pending further market recovery.

All MAGMA R&D is advancing well and we remain on track for our first Gen 3 deployment in 2026. Likewise, we recently approved two new Ultra lines in Europe to support increasing customer interest in lighter weight packaging. Our ESG efforts are progressing well and our 2024 capital plan includes all key projects that enable our long-term sustainability roadmap. Furthermore, we are excited that the US Department of Energy has selected OI to receive up to $125 million in funding over the next few years to accelerate deployment of industrial decarbonization technologies. Finally, we intend to maintain a healthy balance sheet, as John discussed. Overall, we are off to a good start this year as we advance our long-term strategy. More on MAGMA on Page 9.

Our heritage network is a great feed for many of the categories that we have served for decades and will continue to serve into the future. However, markets have evolved and we now see greater brand proliferation and increased product fragmentation. MAGMA reimagines the entire glass making process to serve a more differentiated market. MAGMA is more flexible, scalable and can be more rapidly deployed. It is a smaller and will feed into an industrial warehouse, which lowers future capital intensity on operating cost. Furthermore, MAGMA can be near located or co-located to reduce logistics cost and is designed around sustainability from the ground up. In short, MAGMA is designed to meet the market requirements for today and into the future. We are nearing an important milestone and we expect to start up our first MAGMA Greenfield in the year late July or early August.

Located in Kentucky, which includes nearly 100 whiskey distilleries, this new plant is an example of how MAGMA can enable profitable growth in attractive fragmented markets. Let’s turn to Page 10. We believe MAGMA and Ultra will increase OI’s right to win in the marketplace. In particular, increased flexibility and scalability and rapid deployment will create key benefits for OI across attractive differentiated markets and categories. Overall, MAGMA and Ultra together represent a major leap forward and should expand OI’s total addressable market by over 30%. We look forward to hosting investors and customers at our new Greenfield facility in the future, which will demonstrate all our innovative technologies that will create a new competitive advantage for OI, and enable glass to win in the marketplace.

Please move to Page 11 for some final remarks. OI continues to navigate well through challenging macro conditions and delivered solid first quarter results, despite softer than expected shipment levels. While we have revised our current year outlook to reflect a slower than anticipated market recovery, we are taking the right steps to position the company for future success. We are properly aligning supply with lower demand and we have increased our already record high targets for margin expansion initiative benefits. Despite the short-term challenges, we remain confident in the long-term positive trajectory of glass packaging and we are well-positioned for the rebound, which should significantly improve future earnings over time. Importantly, we are excited for the startup of our first MAGMA Greenfield plant this summer, as we align our business to the future of glass packaging.

Before we take your questions, I would like to end with a few reflections on my time as CEO. Over the past several years, we have significantly transformed the company and we are now a much more disciplined, agile, and capable organization. After stabilizing our operations, the team significantly enhanced our ability to execute and we have consistently delivered on our commitments. We rebalanced our network, expanding our Americas footprint and diversity in non-core for assets. We have reduced risk and improved our cash flow profile with a fair and final resolution of our legacy asbestos liabilities, and we have the best balance sheet in nearly a decade. While improving core performance and optimizing our business structure, we also developed new breakthrough technologies that will create a new competitive advantage for years to come.

I’m proud of what we have accomplished and would like to thank the OI family for all that we have accomplished together. I will also like to thank each of you in the investment community for the interest in OI over the years. The rest is just to come. Speaking on behalf of Gordon Hardie, our incoming CEO, he is actively engaged in the transition. He is looking forward to joining the OI team in mid-May and meeting with the investment community in the near future. Gordon has served on the OI Board for over eight years and knows the company well. With his years of experience working in the food & beverages industry, including some of our customers is well-positioned to lead the company into the future, Thank you. And we’re now ready to address your questions.

Operator: [Operator Instructions] Our first question today comes from the line of Ghansham Panjabi with Baird. Please go ahead. Your line is now open.

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Q&A Session

Ghansham Panjabi: Thank you. Good morning, everybody. And hey Anders, congrats on your retirement and also on your very impressive legacy you are leaving behind. Wish you well for the future.

Andres Lopez: Thank you.

Ghansham Panjabi: Yeah. And so, I guess, first off, in terms of the volume adjustments relative to prior guidance, are there any notable categories that are driving that sort of de-rating if you will or is it just broad based at this point?

Andres Lopez: I think it is broad based with the exception of the onion countries, which is the place where we invested on expansion that is performing quite well. And in fact, the Colombia specifically is growing year-on-year in the mid-teens. Every other market is experiencing this slowdown, which some markets having more destocking impact. For example, the spirits in North America or the spirits in Mexico, because of tequila. But for the most part, it is everywhere with exception of the onion countries and specifically, Colombia.

John Haudrich : Hey, Ghansham I would add, if you take a look on a category basis consistent with Andres said is, that we’re seeing the best recovery and improvement in the beer category. And but it is choppy across the different markets as Anders mentioned on in Colombia, for example is doing quite well and some other markets, it’s still kind of flattish to down a little bit. But overall, we’ve seen the most improvement in beer, which again is one of your shorter cycle areas that as we mentioned that we see, the destocking is substantially complete and we’re seeing that improve. Yet you’re still seeing that wine and spirits category stocks still kind of down in that low to mid-single-digit and with the expectation it might drag on a little bit longer given the consumer consumption in that area is softer. It might take a little bit longer for that area to destock.

Ghansham Panjabi: Got it. Thank you. And then, in terms of the destocking specific to wine and spirits, what sort of timeline as real estate does related to the destocking component? And then also just given the weakness you are seeing across the board, I know, you have a lot of contracted business, but just touch on, maybe the competitive activity across the different regions, just given sort of a lower for longer volume dynamic. Thank you.

Andres Lopez: So, with regards to the destocking, we’re seeing some interesting evolution lately. Demand trends are changing as we speak. So, we’re seeing some interesting evolution. With regards to the spirits and wine, we expect this to continue through the second half improving along the way, but it should be recurring in the second half overall.

John Haudrich : As far as the competitive environment, the only thing I think we can add is, is that we are managing our businesses as we have over the last several years to really balance supply with demand. It can be very, very, very crisped on our inventory levels. So that we maintain their proper balance within our system. Really can’t really comment too much on the competitors.

Ghansham Panjabi: Thank you.

Operator: The next question comes from Mike Roxland with Truist Securities. Please go ahead, Mike.

Mike Roxland : Thank you, Andres, John and Chris for taking my questions. And Andres, congratulations and best of luck in your retirement.

Andres Lopez: Thank you.

Mike Roxland : Just on my first question, in terms of the accelerated curtailment activity, is that mostly occurring in the Americas? Is there something that specifically happened, because you are always having little more confidence last quarter, you also were at a conference in late February where you reiterated your guidance. So I’m wondering if something happened between the conference or both of those quarters that where you become more cautious and I understand that the backdrop is volatile with consumers bottle, but has something really happened more recently to increase your cautiousness and maybe we expect your outlook.

Andres Lopez: So curtailments have been more pronounced in the Americas as you mentioned. Now, as we entered the year, we had an expectation with regards to the base of destocking, as well as the consumer consumption leverage. Now Q4, with all the data we have was the lowest point in the year-on-year comps for us. Q1 showed an improvement versus Q4 and April is showing an improvement versus Q1. Now, we had a pretty slow March and that’s what made the Q1 so low. Now, with all that in mind and with the latest information at hand, we see destocking is taking a little longer than we originally anticipated. So we are correcting that. And consumer consumption is recovering, but it’s recovering at a slower pace. Now, there are some encouraging signs.

For example, when we look at the wine in Europe, wine out of Italy, the experts are growing year-on-year in the latest data that we have, for example. But then we got to see that to continue for the balance of the year. There is some positive evolution in beer and wine inside Italy. At this point, there is improved performance of beer in North Central Europe. So, all of this is unfolding as we speak and that makes it a little bit more challenging. But we believe we now corrected that volume based on the latest information we have and more in line with the actual destocking pace, as well as the level of consumer consumption.

John Haudrich : Yeah, Mike, what I would add is, if you take a look at the curtailment activity, we had about 8% curtailment in the first quarter, which was kind of aligned maybe a little higher than the sales volume decline that we were expecting in the first quarter going into the period. Obviously, the actual decline was bigger than that. So we are stepping up the curtailment activity. It’ll probably beat anywhere between 10% to 12% level of our curtailment over the balance of the year with probably the peak being in the second quarter here as we catch up for, adjusting for a little bit of the slowness in the first quarter. As we look to where, as Anders mentioned, we have been most active in our curtailment in the Americas. And so, probably incrementally more curtailment will be occurring in Europe as we look to rebalance everything over the course of the year.

Mike Roxland : Got it. Thank you for that color. And then just for my follow-up, can you mention or comment on any additional opportunities you have in MAGMA that probably offset this additional demand in consumers I imagine reaching a target of total $175 million for the year, you are return with any accomplishment number of projects to achieve that target thus far. But what else can be – what above and beyond the $150 million or $135 million, do you have at your disposal to help offset some of this persistent demand weakness? Thank you.