O-I Glass, Inc. (NYSE:OI) Q4 2023 Earnings Call Transcript February 7, 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).
Chris Manuel – Vice President of Investor Relations:
Andres Lopez – President and Chief Executive Officer:
John Haudrich – Senior Vice President and Chief Financial Officer:
Operator: Hello, everyone, and welcome to the O-I Glass Full Year and Fourth Quarter 2023 Earnings Conference Call. My name is Emily and I’ll be facilitating your call today. After the presentation, there will be the opportunity for any questions. [Operator Instructions] I’ll now turn the call over to Chris Manuel, Vice President of Investor Relations. Please go ahead.
Chris Manuel: Thank you, Emily, and welcome everyone to the O-I Glass year end and fourth quarter 2023 earnings conference call. Our discussion today will be led by Andres Lopez, our CEO and John Haudrich, our CFO. Today we’ll 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’ll start on Slide 3.
Andres Lopez: Good morning, everyone, and thanks for your interest in O-I. We are pleased to announce a strong 2023 results. Full year adjusted earnings were $3.09 per share as results improved significantly from the prior year and exceeded our most recent guidance. O-I is now a more disciplined and agile organization that is capable of navigating elevated market volatility. We again demonstrated our improved operating effectiveness, as we posted the highest adjusted earnings in the past 15 years and finished 2023, with the best balance sheet in nearly a decade. Likewise, we achieved a strong net price, record margin expansion initiative benefits and the best manufacturing trends in more than two decades. These efforts more than offset the impact of lower shipments as macro conditions softened over the course of the year.
We anticipate 2024 adjusted earnings would lag our historically high performance last year, given the continuation of softer macros into the first half of the year. However, we believe the most challenging market conditions are behind us, as we are beginning to see early signs of improvement. Importantly, we have already completed most of our annual price negotiations and we expect to retain the lion’s share of the strong net price achieved over the past few years on our strong track record, we are confident our 2024 margin expansion benefits will surpass last year’s record savings. Overall, we expect a stronger demand, significant initiative benefits and favorable operating performance will provide O-I good momentum as market strengthened over the course of the year.
Our business capabilities are strong. Our talent base is solid. Our culture is focused on agility, performance, and delivering on our commitments. Importantly, we anticipate a stronger future earnings as both sales and production volumes more fully recovered, which we will discuss a bit later in our remarks. We continue to consistently execute our strategy, which includes investing in long-term growth, and developing breakthrough technologies. After several years of R&D, we will ramp up our first MAGMA greenfield site in mid-2024 to serve the growing spirits business in the Kentucky area. Customers, investors, and employees will have the opportunity to see firsthand, the first benefits of this new technology. In parallel development of our Generation 3 MAGMA solution is going well and we expect to deploy our first Gen 3 site in 2025, with commercialization in early 2026.
We are very excited about the long-term future for O-I, as we aim to disrupt the glass industry. According to Page 4, less review of all the market trends, which are key to understanding our recent and future performance. As discussed last quarter, we faced a unique set of circumstances throughout 2023 leading to lower shipments of glass containers. Initially, this was driven by moderately lower consumer consumption followed by significant inventory of stocking across the food and beverage supply chains. We have updated the chart on the right with our shipment trends through the four quarter and the most current Nielsen retail data. It also includes our current expectations for future consumption and glass shipments in 2024. Looking at this past four quarter, we anticipated glass shipments will be down 12% to 15%, yet actual shipments were down 16%, reflecting some acceleration in the stocking activity across the value chain.
With that said I’m encouraged by early signs of recovery and believe the worst is behind us. Let me share a few of the reasons for this initial optimism. First, consumer consumption trends have a steadily improved over the course of 2023, as you can see with the green bars on the chart, while some categories still have challenges, consumption trends have turned positive in the year and NAB categories in many markets. Importantly, we have seen little change in market share or shift to other substrates except for some modest and temporary trade down limited to Beer in Eastern Europe. According to Nielsen data, Glass has actually gained share versus Cans in certain categories in Brazil, Colombia and the Netherlands. Next, we believe the worst of the stocking is done, especially in beer and NABs, while wine and spirits might linger into 2024.
As an example, we have included a federal reserve chart in the appendix that illustrates the declining wholesale inventories for alcoholic beverages in the U.S. Overall, Glass entered the stocking phase behind many other industries, which have already started to see a rebound, which provides additional confidence. Glass will indeed improve this year. Demand for new product development has also surged over the past few months as many customers look to rock — jumpstart their brands. Currently, we are working from a backlog of over half a million tons of qualified MPD projects. Finally, glass demand trends improved in January as shipments were down about 10% compared to a 60% decline in the four quarter. In conclusion, these factors support our belief we have passed the bottoms and are increasingly confident in the low to meet single-digit volume growth in 2024, with additional improvement in 2025.
Now, I’ll turn it over to John, who will review our performance and 2024 outlook in more detail starting on Page 5.
John Haudrich: Thanks, Andres and good morning, everyone. Building off previous comments, O-I reported historically high earnings in 2023, with favorable performance across most financial measures. Sales improved to over $7.1 billion both EBITDA and segment operating profit increased more than 20%, while segment margins increased 280 basis points to over 17%. As noted, adjusted EPS exceeded our most recent guidance and represented the highest adjusted earnings since 2008. Free cash flow was $130 million, which slightly exceeded the midpoint of our guidance range. As expected, cash flow was down from 2022 levels, primarily due to elevated capital spending as part of our long-term expansion program. Finally, leverage ended the year at 2.8x, which was below our target.
Strong 2023 performance highlights the company’s improved agility and capability to manage through challenging market conditions. Our foundation is sound and we are well positioned to drive higher performance as demand improves over the course of 2024. Next, I’ll expand on our full year earnings performance starting on Slide 6. 2023 adjusted earnings totaled $3.09, which represented a 34% increase from the prior year results. As illustrated on the left higher segment profit boosted earnings, which was partially offset by non-operating items, principally higher interest expense. Segment operating profit totaled nearly $1.2 billion and increased more than $230 million from the prior year, as results improved in both the Americas and in Europe.
And the Americas segment profit was $511 million as earnings increased 8% from 2022. Strong net price boosted results, while earnings reflected 10% lower shipment levels as growth in NABs and RTDs mitigated softer demand in other categories. Operating costs were elevated as the benefit from our margin expansion initiatives partially offset the impact of higher production curtailment to balance supply with softer demand, as well as additional commissioning costs for expansion projects in Columbia and Canada. Europe posted a segment profit of $682 million, which was up 40% from last year. Strong net price in a slight FX tailwind more than offset the impact of 15% lower sales volume as shipments were down across nearly all markets given widespread macro pressures.
Likewise, operating costs were up due to elevated production curtailment to balance supply with softer demand. Overall, the company posted very strong 2023 results despite significant market volatility in challenging macro conditions that emerged over the course of the year. Let’s discuss fourth quarter results on Page 7. As expected, fourth quarter results were down from the prior year given market pressures that were most pronounced in the back half of the year. With that said, fourth quarter adjusted earnings of $0.12 per share exceeded our original guidance of approximately $0.03. While shipments were down 16% from 2022 levels, which was softer than expected. Cost and operating performance surpassed our expectations. Likewise, results did benefit $0.02 from a modestly lower tax rate.
As illustrated on the left earnings were down from $0.38 last year due to lower segment profit and unfavorable non-operating items, including elevated interest expense, which was partially offset by favorable FX. Overall segment profit declined $38 million as performance improved in the Americas while earnings were lower in Europe. In the Americas segment profit was $93 million, up 12% from the prior year, strong net price offset 12% lower sales volume, 10% lower sales volume and elevated operating costs linked to capacity curtailment efforts. In Europe segment profit was $75 million compared to $123 million in 2022. Strong net price partially mitigated 22% lower sales volume and significantly higher capacity of curtailment efforts, which were concentrated in the fourth quarter.
As noted in our press release, O-I did take a sizable goodwill impairment charge in its North America operation during the fourth quarter. While we saw solid operating improvement in 2023 this adjustment primarily reflected changes in macro conditions, resulting in lower sales volume and a smaller operating base following recent restructuring activities. Likewise, valuation was negatively impacted by higher weighted average cost of capital, given elevated interest rates. We remain highly confident in our current plans to further boost operating performance in North America that will generate significant future value. In addition to generating strong earnings, the company continued to advance its long-term strategy over the past year. On Page 8, you can see how 2023 results compared to the key strategic objectives we set at the beginning of the year.
We significantly exceeded our margin expansion objectives due to very strong net price realization and initiative benefits. We continue to position the company for long-term profitable growth. Our expansion projects in Canada and Colombia were completed both on time and under budget. As Andres highlighted, our first MAGMA greenfield line remains on target for mid-2024. As noted, we have deferred a few expansion projects a couple of quarters to better align with the timing of the expected market recovery. All MAGMA and Ultra development efforts remain on track, and we successfully qualified our first Ultra bottles in Colombia in the past year, which paves the way for future Ultra deployment. We also updated our long-term ESG plan, which is aligned with our science-based targets and is now fully incorporated into our business strategy and into our future capital allocation plans.
Consistent with prior comments, the capital structure is sound with elevated — with leverage ending below our 2023 target. Overall, we posted solid progress in 2023, which will provide tangible benefits in the future. Let’s discuss our 2024 business outlook starting on Page 9. Revenue should be up modestly as low to mid-single digit volume growth more than offsets a slight decrease in average selling prices. We anticipate adjusted earnings should range between $2.25 and $2.65 per share. Importantly, earnings should meet or exceed the 2024 goal established at our last I day, reflecting significant operating progress and earnings improvement over the past three years. Our guidance range is wider than normal, reflecting the potential rate of market improvement and we intend to tighten the range over time.
As you can see, results will likely be down from historically high earnings in 2023, while free cash flow should improve from the prior year. I will discuss earnings and cash flow trends more on the next page. Having significantly improved our balance sheet over the past few years, we intend to maintain a healthy leverage ratio of between 2.5x and 3x. As we look to 2024, we expect macro conditions will strengthen over the course of the year. Importantly, we have significant future earnings upside as both sales and production volumes will fully recover. This recovery will provide additional sales contribution and boost asset utilization rates, as we eliminate the overhang of very expensive temporary production curtailments. Over the course of 2023 and 2024, we are navigating many market forces that are affecting the evolution of selling prices, sales volumes, and production volumes.
As such, it can be difficult to assess financial performance in any given quarter or fiscal year. However, we are confident in earnings will ultimately rebound to over $3 per share, as macros normalize in sales and production recover to pre-pandemic levels in the future. Turning to Page 10, we have provided more details on the key business drivers for both earnings and cash flow. As illustrate on the left, we expect 2024 earnings will approximate $2.25 to $2.65 per share. The impact of lower net price and higher interest expense will be partially offset by low to mid-single digit sales volume growth and the benefits from our robust $150 million margin expansion initiative program. Lower net price will likely reflect about a 1% decline in average gross selling price amid a more normal 3% cost inflation environment.
Yet we do anticipate retaining about 75% of the very favorable net price realized over the previous two years. Going forward, we intend to provide only annual guidance given elevated short-term market volatility and preference to focus on long-term performance. With that said, we have included our current view on expected quarterly earnings distribution over the course of the year, and we’ll update this view if conditions materially shift over time. On the right, we reconcile our EBITDA and free cash flow outlook. EBITDA should range between $1.325 billion and $1.4 billion. Currently, it is unclear if working capital will be a modest source or use of cash, as this will depend heavily on the rate of sales volume recovery over the course of the year, and reduction in currently elevated inventory levels.
CapEx spending will be down from elevated levels in 2023, yet we do anticipate tax and interest payments will increase by $120 million combined. Higher tax payments follow strong earnings in 2023, as well as a one-time tax claim settlement in one jurisdiction. Higher interest reflects the forward curve and current payment schedules following recent refinancing activities. Other uses of cash are pretty consistent with historic trends. Overall, we expect free cash flow will range between $150 million and $200 million in 2024. As with earnings, there is significant operating leverage upside as volumes recovered that should generate higher future cash flows. Let me wrap up with the key strategic objectives that we have set for 2024. Long-term margin improvement remains a top priority and we intend to stay agile as the company navigates changing market conditions.
We have established a very robust margin expansion program to help mitigate most of the expected net price headwind. As noted, we are targeting at least $150 million of benefits, which represents the highest objective in the eight year history of this program. As a reminder, the three buckets for this program are revenue optimization, factor performance and cost transformation. Importantly, efforts include accelerating the ongoing network optimization across North America. As already noted, 2024 will be a hallmark year as we commission our first MAGMA greenfield site and advanced development of our future Gen 3 solution. We also expect to enable other expansion programs in attractive geographies and markets over time, as they recover. Likewise, we intend to deploy our ultra lightweighting solution at a couple of our sites in Europe this year.
In addition to lightweighting, we will enable our ESG footprint by accelerating deployment of low carbon solutions such as gas oxy fueled furnaces and increased renewable energy and call it utilization rates. It’ll be another active year as — on the glass efficacy front as we focus more on B2B connections. After significantly reducing our leverage over the past several years, we intend to maintain a healthy balance sheet with leverage between 2.5x and 3x. As you can see, we have established another set of aggressive but achievable key objectives in 2024, as we advance our long-term strategy. Importantly, our capital allocation priorities are well aligned with the strategy as we continue to improve our capital structure, fund profitable growth, and return value to our shareholders over time.
Now, I’ll turn it back to Andres for final remarks starting on Page 12.
Andres Lopez: Thanks, John. Over the past several years, we have significantly transformed the company and we’re now a much more disciplined, agile and capable organization. As a result, we have significantly improved performance and delivered on our commitments quarter after quarter. We again demonstrated our improved operating effectiveness in 2023, as we successfully weathered difficult macro conditions that developed over the course of the year, reporting the highest adjusted earnings since 2008 and finished the year with the best balance sheet in nearly a decade. As a result, we are entering 2024 with a solid foundation and are well positioned to capitalize as markets recovered over the course of the year. We have completed more than 80% of our annual price agreements and expect to retain approximately 75% of the very favorable net price achieved over the past few years supporting adequate returns.
Consumer demand is trending in the right direction and our customers are increasingly more constructive on their business outlook. We are seeing early signs of improvement with good sequential volume improvement in January. Likewise, we are working with the strongest MPD pipeline I can remember to help drive future growth. As discussed, we expect demand will recover over the balance of the year, and O-I has a significant operating levers as sales volume normalized to pre-pandemic levels. Importantly, execution is already underway on our aggressive but achievable margin expansion initiative target, which is the highest in the programs a year history. We are confident we will deliver on this target given the capabilities we have built over the years and the maturity of our program.
Our balance sheet is the healthiest in years, reflecting very good capital allocation discipline. And finally, 2024 will be a key milestone for O-I as we commission our first MAGMA greenfield site later this year and continue to advance the R&D efforts for MAGMA Gen 3, as well as developing Ultra. Business conditions are beginning to turn in our favor, and I’m confident our earnings should bound to greater than $3 per share as volumes normalize to pre-pandemic levels over time. Thank you, and we’re now ready to address your questions.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from Ghansham Panjabi with Baird.
Ghansham Panjabi : I guess, first off on Slide 10, where you have the EPS waterfall ‘23 versus ‘24, net price looks like about a $0.85 or so negative on an EPS basis. Just wondering, how set that number is, is there short variability associated with it? And also will this be a multi-year issue? And then maybe you could just give us a sense as to the big question, right, which is supply demand on a global basis. The industry obviously had some disruptions in Europe, new capacity started coming in, where we are on supply demands and how that relates to pricing on a multi-year basis.
John Haudrich: Maybe I can kick that off and address the first two elements of that. As you take a look at the net price, you know, texture for 2024, what you have in there is the combination — we got two books of business. We got our long-term contracted business a little bit more than half of our business, that’s pretty much the pricing that is secure and in place. The other call it 45% of our business tends to be open market contracts. And as Andres mentioned in his prepared remarks, we’re about 80% plus compete and negotiating in that environment. So Ghansham, I would say that we’re getting written very close to being in the position on the gross price situation. And as we mentioned in the prepared remarks, gross price is probably off 1% this year after a strong double-digit improvement over the last few years.
And then what you’re left with then is inflation. And so inflation we’ve been seeing coming down, I mean, last year was kind of mid-single digits, we’re targeting about 3% this year, so that kind of gives you something in $125 million to $150 million range on cost inflation. We see the majority of our cost inflation now being labor related inflation, which I think is pretty set, given contracts and unions and things like that. But you could see some variation in the remaining component. So hopefully that gives you a little bit of texture about the solidity of the net price, which we think is fairly solid in that regard.
Andres Lopez: Yes, the pricing evolution has been quite positive and in line with our expectations with slightly more than 80% of the open market agreements already negotiated. We are retaining about 70% –75% of the benefits that we accumulated over the last couple of years. Now, we’re doing that at the lowest point in volume, from this point on through 2024 and into ’25 volumes will go up, which we believe will support price even better. When we look at supply and demand in a global basis, first, O-I is balanced. And at this point in time, we’re taking all the measures to be able to achieve our inventory targets in 2024, taking into consideration the demand projections that we have. If there is need for more action, we’ll adjust, but we believe we are in a good place.
When we look at the global landscape, we are seeing lots of curtailments taking place around the world. In Europe in particular, where they — it is required the most we’re seeing a lot of actions in that regard. So the balance is going to depend on how quickly that demand, that capacity comes back to support demand. But at this point in time, with the amount of curtailments we see, we’re seeing a trend towards balance of supply and demand in Europe and globally.
John Haudrich: Just to build maybe one comment on top of that is if you look back at the history of this company, we have actually very good pricing power. If you look in the previous six years, five of the six years, we had achieved positive net price. And so, we believe that as volumes as Andres talked about normalize, we will go back into that consistent history then of being able to price through inflation going forward.
Ghansham Panjabi: Okay. Very comprehensive. Thank you for that. And then your comments on January, down 10%. I mean, would be — that would be an improvement. But here we are. Maybe just give us a sense as to your own inventory levels and then as you kind of think about the customer’s inventory pods, if you will, are there any particular categories that are still going through an aggressive destocking cycle relative to the down 10% that you’re seeing? Is it — is it high-end liquor Cognac et cetera? Just any color there would be helpful.
Andres Lopez : Yes, so we’re seeing the stocking activity pretty much done in beer and NAB and food. The categories that are still to complete that cycle are spirits and wine, which we expect will improve over the course of the second quarter and should be more normalized by the middle of the year. Our inventories obviously increased last year, and as I mentioned before, we are taking all the actions to bring those inventories back down as per our current business plan for ’24.
John Haudrich : Yes, maybe just to build off that, and building on some details for Andre’s comments there. If as we entered the softness that really was — that occurred for us kind of January, February of ’23, our inventories were probably too low. We had low 40s IDS on and we were stocking on, as you recall, back then we weren’t able to serve a number of different markets. Our inventories ended 2023 at about 60 days IDS, which is a little higher than we would like. Over the course of 2024, we’re managing our system to get back into the low 50s, which we believe is a pretty healthy place for the business.
Operator: The next question comes from George Staphos with Bank of America.
George Staphos: Thanks for the details. Maybe my two questions. First, we’ll segue on the inventory comment that was brought up earlier. So when you say you expect to be done on wine and spirit inventory destock, or at least your customers will be done. So to what degree do you expect that having built up inventories to too high of a level within the supply chain that your customers will actually destock below what would be normal, below what would be sort of appropriate, but nonetheless means a another layer of volume decline or progression that you need to manage through? So that’s question number one. What’s baked in to your goals and forecast relative to customer’s willingness or potential to have inventories lower than normal?
The second thing on the $150 million of margin enhancement that you’re projecting for this year, can you talk to what the buckets are in that 150 and what is sustainable on a going forward basis? In other words, how much longer can you keep putting up a $100 million or better types of margin enhancement over the next few years? Thank you guys and good luck in the quarter.
