O-I Glass, Inc. (NYSE:OI) Q3 2023 Earnings Call Transcript

O-I Glass, Inc. (NYSE:OI) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Hello everyone, and welcome to the O-I Glass Third Quarter 2023 Earnings Conference Call. My name is Nadia and I will be called late in the call today. [Operator Instructions] I will now hand over to your host Chris Manuel, Vice President of Investor Relations to begin. Chris, please go ahead.

Chris Manuel: Thank you, Nadia, and welcome everyone to the OI-Glass third quarter 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 would 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 OI. We are pleased to announce a stronger third quarter results as the company continues to execute well in a challenging macroenvironment. OI reported adjusted earnings of $0.80 per share, which exceeded our expectations and represented a 27% increase from the prior year. The company benefited from a strong net price realization and solid operating performance amidst softer than expected demand. As a result, the top line was up as we improve our segment operating profit, our margins, and our adjusted earnings. In addition to solid results, we continue to advance our strategy. Our margin expansion efforts are well ahead of target and our first magma Greenfield plant in Bowling Green Kentucky remains on track for a mid 2024 ramp up.

Likewise, we achieved our full-year balance sheet objective ahead of plan. We expect a strong 2023 results with adjusted earnings up 30% from the prior year, which will represent the best performance in the past 15-years. We will share our view on recent market trends. Shipments have been softer and anticipated as demand has temporarily the coupled from consumer consumption due to significant inventory of stocking across the value chain. While we are not immune to the broader microdynamics, we are executing effectively and taking a number of actions to drive a strong performance as conditions recover. We will conclude with our initial thoughts on key business drivers for 2024. Now I will turn it over to John, who will review our recent performance and 2023 outlook in greater detail starting on Slide 4.

John Haudrich: Thanks Anders, and good morning everyone. Building off our earlier comments, OI delivered strong third quarter results. The top line was up, we generated double digit improvement across adjusted EBITDA, segment operating profit and adjusted earnings while margins were up 160 basis points. Likewise, free cash flow increased nicely from the third quarter last year. And finally, our balance sheet position improved with net debt leverage down to 2.8 times, which is now better than our full-year target of three times. Overall, we posted significant year over year improvement across our key financial measures, despite difficult market conditions. In addition to strong results, we continue to advance our long-term strategy and the appendix includes our current scorecard on key 2023 strategic objectives.

Next, I will expand on our strong third quarter performance starting on Slide 5. Both the top line and bottom line improved in the third quarter. Net sales increased and earnings improved 27% as strong net price realization and solid operating performance offset softer demand. Revenue increased to $1.74 billion as the combination of higher average selling prices and favorable FX more than offset softer sales volume. Third quarter adjusted earnings of $0.80 per share was up nicely from the prior year, mainly reflecting higher segment operating profit. Non-operating items were a modest benefit as lower corporate costs and tax rate more than offset elevated interest expense. The lower tax rate included the resolution of a tax matter in Europe that added about $0.04 versus our guidance.

FX was a modest tailwind and consistent with our outlook. Let’s turn to Slide 6 where we discussed recent performance trends across our two business segments. Segment operating profit exceeded $300 million, which represented a 13% increase from last year as margins improved 160 basis points. Results were down in the Americas while up significantly across Europe, in the Americas segment operating profit was $116 million compared to $130 million in the prior year. The benefit of higher net price and a slight FX advantage partially offset the impact of lower sales volume and higher operating costs. Shipments were down 15% and we noted double digit volume declines across nearly all markets and geographies reflecting significant destocking activity with more pronounced pressure in wine spirits as well as beer.

Andres will discuss market trends further in a few minutes. Costs increased around $40 million due to temporary production curtailment to balance supply with lower demand, and we incurred additional expense due to elevated planned maintenance activity. Europe posted segment operating profit of $185 million, which was up 36% from last year. Strong net price and a slight FX tailwind more than offset the impact of lower sales volume and moderately higher operating costs. As with the Americas shipments were down 15% and we noted double digit declines across nearly all markets and geographies, reflecting significant destocking activity. Likewise, we saw more pronounced pressure in wine and food. Higher cost reflected last year’s $13 million benefit from Italian energy credits, which did not repeat in 2023.

Despite the challenging conditions, the company yet again significantly improved its segment performance. Let’s discuss our updated full-year 2023 business outlook. Please move to Slide 7. We now expect adjusted earnings will approximate $3 per share, which represents a 30% increase from last year. Free cash flow should range between $100 million and $150 million, and as noted leverage should end the year below our annual target. We have revised our full-year and fourth quarter outlook primarily due to lower than expected sales and production levels. With our strong performance this year, we have decided to accelerate temporary production curtailment activity given softer demand. As a result, we intend to curtail about 20% of our global capacity in the fourth quarter, which will impact earnings by approximately $0.30 per share more than previously planned.

At the same time, we have accelerated a number of margin expansion initiatives to partially mitigate lower sales and production volumes. Despite these adjustments, we expect a historically strong 2023 performance. Now, I will turn it back to Anders, who will share our view on recent market trends, review the actions we are taking to drive strong performance as volumes begin to recover and discuss our initial view on 2024 business drivers. Please turn to page eight.

Andres Lopez: Thanks, John. Let me start by sharing our view on recent market trends. We are facing a unique set of conditions that have led to a temporary decoupling of consumer consumption patterns and demand for glass containers. Overall, our shipments are down primarily due to a significant inventory, the stock modestly softer consumer consumption. While we have seen some temporary trade down in certain markets, especially in beer, we anticipate little share shift through the cycle. The chart on the right illustrates Nielsen retail consumer consumption trends for the categories that we serve and ice glass shipments since mid-2022. We also include our current view of future patterns through 2024. As you can see, consumer consumption is down to meet, down low to meet single digits across the categories that we serve.

Yet, glass shipments has been measurably below this level. We have noted widespread inventory is stocking across the value chain as our customers, distributors, and retailers adjust their inventory management practices. We believe this change is adjusting for high initial inventories in the supply chain as well as current as slowish consumption. Likewise, supply chains are recalibrated for more moderate future growth and higher interest rates, which push up the current cost of inventory. While October volume trends remain down, we are seeing some sequential improvement compared to trends in August and September. The rate of decline has started to reverse in segments like food and NAB in North America and in certain segments in Southern Europe, including beer and NAB.

Furthermore, the Andean market has already transitioned from decline to a strong growth supported by our recent expansion initiatives. Again, we believe the current situation is temporary and we expect demand will rebound as we go into 2024. In summary, we expect low to mid-single digit sales volume growth in 2024. Let’s move to a Slide 9. O-I is a much more agile and capable organization than in the past. This reflects significant structural changes embedded in our transformation journey, which is illustrated in the top chart. As a result, we have executed well to overcome each challenge over the past several years and have consistently improved our performance, as noted in the bottom chart. In fact, this quarter marks the 13 consecutive quarter.

We have either met or exceeded our expectations. We are again acting with agility to navigate the current market situation and taking for specific steps. First, we are curtailing capacity given software demand to adjust inventory levels as we head into 2024. Second, we are accelerating plan network optimization actions across North America where the past year or so we have eliminated four high-cost furnaces, including the recently announced Waco plant closure. We continue to evaluate further optimization opportunities to further boost earnings and ROIC. Ultimately, we aim to reposition our North America business towards more profitable, fragmented categories, which are a great fit for MAGMA in the future. Our first MAGMA Greenfield will serve key spirits customers, the craft distillers along the Kentucky Volvo Trail, as well as our OIPS distribution unit, and it is a great example of the future direction of this business.

Third, OI is expanding and accelerating our margin expansion initiatives. This includes numerous automation and productivity projects, as well as additional organization restructuring actions. Fourth, we are reducing our capital expenditures. We remain focused on completing our MAGMA Greenfield plan by mid 2024. Yet, we have extended the timeline of our expansion projects in Brazil, Peru, and Scotland by six to 12-months to better align with the market recovery. While we most contend with the macros, we are again taking proactive measures to drive improvement across the business levers that we control as we aim to deliver a strong performance next year. This leads to our initial discussion on 2024. I’m now on Slide 10. Consistent with prior years, we will provide our 2024 financial outlook during our four quarter call.

However, we are sharing our preliminary view on the five key levers that drive our business performance. Keep in mind, we have good line of sight on the levers that we can control, such as cost management and CapEx, while it will take some time to gain clarity on certain market driven factors. As discussed, we expect low to mid single digit sage volume growth next year. Following aggressive efforts to reduce inventories in the fourth quarter, we anticipate some temporary production containment in 2024 to maintain inventory levels, but it is too early to be precise here. It will likely take more time to get a clear view on net price. Importantly, net price realization should be favorable on the 55% of our business covered by long-term contracts, which include price adjustment formulas that record inflation on a lagging basis.

Yet net price realization on the remaining 45% of our business covered by annual price agreements will be subject to future market dynamics, especially the rate of demand improvement. Importantly, Europe represents one half of our open market agreements, and we expect to negotiate most terms starting later this month and extending into early next year. Operating costs are expected to be down, reflecting our enhanced margin expansion initiatives and accelerated restructuring actions, while on favorable inventory evaluation and lacking one-time, energy credits are known headwinds. Our initial CapEx plan approximates $550 million to $575 million, which is down substantially from around $700 million this year as we proceed with the MAGMA Greenfield and adjusted timing of a few expansion projects until markets recover.

Finally, interest expense should be consistent with prevailing rates. As you can see, we are taking active measures to drive performance across several business layers. We expect to provide full-year 2024 guidance during our yearend earnings call. Let’s turn to Slide 11. As we take a longer term view, I firmly believe our strategy will create significant shareholder value as we further strengthen our financial profile. Successfully execute, and leverage our transformation program enable long-term profitable growth, advance breakthrough innovations like MAGMA and Ultra and execute our enterprise sustainability roadmap, which is now fully integrated into our overall business plan. Our capital allocation priorities are well aligned with this strategy as we continue to improve our capital structure, fund profit our growth and return value to our shareholders over time.

Let me conclude on Slide 12. OI continues to execute well in a challenging environment. We are pleased with our third quarter performance, which exceeded both our expectations and prior year results as we continue to advance key strategic objectives. We expect a strong 2023 results with adjusted earnings up about 30% from the prior years, representing the best performance in the past 15 years. While we contend with elevated market uncertainty, we are taking action to drive a strong performance as markets recover. Finally, we remain highly focused on executing our compelling strategy to create long-term shareholder value. Thank you and we are ready to address your questions.

Operator: Thank you. [Operator Instructions] And our first question go to Ghansham Panjabi of Baird. Please go ahead. Your line is open.

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Q&A Session

Ghansham Panjabi: Hey guys, good morning. I guess first off, you know, can you just give us a bit more color on the sequencing of volumes throughout the third quarter, you know, down 9%, how had that played out? I mean was there any sort of dislocation in particular during the quarter? Anything from a regional standpoint that you might want to call out as the quarter sort of unfolded and then as it relates to production curtailment specific to in the back half of the year, including 3Q, how did that play out geographically? I know I heard, I heard the comment about 20% in the fourth quarter globally, but what was there anything unique with 3Q? I’m just trying to understand the margin divergence between the segments.

Andres Lopez: Thanks, Ghansham. So we saw improvement, sequential improvement during October, as we look back to the quarter, it was increasingly lower volume as we went through the quarter. So August was higher than July as well as September higher than August. But October showed an improvement in certain regions. And if we look at this regionally, in Europe, we saw some normalization in beer and NAB when we compare to 2022 levels. And in North America we saw some stability in food and NAB. And as we described in the opening remarks in the Andean, we moved from a strong decline to a strong growth. And that is now leveraging the investment that we made in that region which was substantial. And that investment is in full operation and with full utilization at this point. Cortavin is pretty much evenly distributed across all our geographies in the fourth quarter.

John Haudrich: Ghansham, I can add on that. And the third quarter, most of our curtailment activity was focused in the Americas. As you may recall, earlier in the year, we had seen very low inventory levels in Europe and we were stocking out across Southern Europe. So more of that curtailment activity started to kick in more like in the September window. But as we go in the fourth quarter and we look at 20% curtailment, we are going to see it pretty equally spread between the Americas and Europe.

Ghansham Panjabi: Okay, great. Thanks for that. And then in terms of your current curtail inventory reduction if you will for the fourth quarter, do you anticipate that will be enough as it relates to realigning supply and demand by the end of the year, or will it be any slower into the first quarter of next year as well?

Andres Lopez: Well, what we are doing in the fourth quarter is, we made the decision to curtail adjust inventory forecast and better position the company to go into 2024. How far do we need to go with curtailments in 2024 will depend on how demand evolves as we go into a year. But what we are doing in Q4 is a significant adjustment. That is why it adds up to $0.37 impact — $0.30 impact which is pretty much what is changed the performance of the quarter versus our regional guides.

John Haudrich: Yes, I would add there Ghansham, if we look at the end of 2022, the IDS in our business was in the low 40s and which is probably too low. And as I mentioned before, we were seeing some stock outs when we were at that type of level. Probably the more effective level for us is about 45 to 50 days. We will probably end the year plus or minus that 50 zip code. It really, there is — it is hard to be super precise in this regard. But that level I think is an effective position for the company. And as we go forward from that, if we are able to achieve that in the fourth quarter, we should be able to keep curtailments kind of in line to maintain inventory levels rather than having to take another slug down. But it is a little too early to be super precise given the level of variability out there.

And what I would say overall is entering the year, we thought working capital would be about a 50 million or so use of cash, it will probably be closer to a $100 million use of cash again, because the inventories might be a little higher on that range than the midpoint or lower of the targeted IDS point.

Operator: Thank you. Our next question goes to George Staphos of Bank of America.

George Staphos: I recognize we will get more color as the year goes on in February when you do your fourth quarter. But is there a way — it is a figure that you say you have a better line of sight on if I’m on Slide 10 in terms of operating costs. So at this juncture, what do you think you should be able to drive in terms of margin enhancement that is within O-I’s control for 2024? And then I had a quick follow on.

John Haudrich: Yes, George. While I’m not going to provide a specific dollar, I can give you kind of a sense of the magnitude as on historic years, our margin expansion initiatives, we were targeting about 50 million a year and generally did better than that. This year we are targeting a $100 million and again, doing better than that with a lot of improvement coming out of North America. As we said in prepared comments, we are looking to accelerate that. So I think another strong year, stronger year in 2024 on operating costs is very likely. And as alluded to in the comments, we continue to take an aggressive position on the costs, on the margin expansion initiatives and accelerating the restructuring activities. As there is a handful of our plants that we have closed some plants already that we are actually in negative earnings territory, and then we close those out.

That will provide a nice boost in the next year in addition to whatever additional restructuring activities that we do going forward. So it should be a robust year in operating cost improvement.

George Staphos: Thanks, John. And maybe related to that, and then quick follow-up, and I will turn it over. So again, I recognize it is going to have to wait until February, but you mentioned we have the margin expansion, you have some curtailments perhaps that will linger into next year. You are still working through net price, but for 55% of your business, it should be a positive. At this juncture, would you expect 2024 is a better year than 2023, or is it more likely that it would be down? And then just taking a step back, the volume trends for OI, yes, we have heard about the stocking throughout the packaging and, and PaperPort sector for the last several quarters, but your numbers have been seemingly a bit worse in that regard. So why do you think last and you are going through a greater amount of destocking versus other substrates if you have been able to analyze it or maybe disagree with the premise of the question? And if so, explain why.