O-I Glass, Inc. (NYSE:OI) Q1 2023 Earnings Call Transcript

O-I Glass, Inc. (NYSE:OI) Q1 2023 Earnings Call Transcript April 26, 2023

O-I Glass, Inc. beats earnings expectations. Reported EPS is $1.29, expectations were $0.85.

Operator: Hello, and welcome to the O-I Glass First Quarter 2023 Earnings Conference Call. My name is Alex, I’ll be coordinating your call today. I’ll now hand over to your host, Chris Manuel, Vice President of Investor Relations. Please go ahead.

Chris Manuel: Thank you, Alex and welcome, everyone, to the O-I Glass first quarter 2023 earnings 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 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. I’d now 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. We are very pleased to announce exceptionally strong first quarter earnings, which significantly exceeded prior year results as well as guidance. Last night, O-I reported adjusted earnings of $1.29 per share, which was more than our prior year performance and represents record first quarter results. Adjusted earnings benefited from very strong net price realization across the enterprise as well as from our margin expansion initiatives. Likewise, operating performance exceeded our expectations despite disruption from a number of external events. As expected, sales volume was down given challenging prior year comparisons among other factors. In addition to very strong results, we continue to advance our strategy and efforts to improve margins are all ahead of plan.

Importantly, our capacity expansion plans, the technology developments for MAGMA and ULTRA and our deleveraging actions all remain on track. Given very strong first quarter results, we have increased our full year 2023 business outlook and now expect adjusted earnings will range between $3.05 and $3.25 per share. We are also providing second quarter guidance and expect adjusted earnings will range between $0.80 and $0.85, which is a solid increase from last year. John will expand on our financial performance and outlook a bit later. Let’s move to Page 4 and discuss recent sales volume trends. Entering the year, we expect that first quarter shipments will be down some, even a very challenging prior year comparison. As you can see on the left, volumes were up a robust 6.4% in the first quarter of 2022.

During that period, shipments increased as we recovered from prior year global supply chain challenges. O-I’s, customer secure glass inventory at the onset of the Russia-Ukraine war, and we ship out of inventory in some markets, given very strong demand. During the first quarter of 2023, actual shipments were down about 8% from last year, which was softer than we originally anticipated. We expect that volume will be around 3% to 4% phase with a challenging prior year comparison amid record low inventory levels, especially in Southern Europe. In addition, shipments were impacted by temporary events such as general strikes in France, civil unrest in Peru and flooding in Northern California, which we believe represented around 2% of our decline.

Volume was further impacted by some customer destocking across the supply chain as well as softer consumer demand in a few markets, which, together, we estimate accounted for an additional 2% to 3% of our lower shipments. These trends were most notable across the mainstream Beer, Food and NAB categories in North Central Europe and Mexico. While there are many moving pieces here, we believe underlying demand was down about 2% to 3% during the first quarter. Looking at the segments, volume was down about 5% in the Americas, compared to 3% growth in the prior year quarter as civil unrest in Peru and flooding in Northern California contributed to lower volumes. In Europe, shipments were down 12% compared to 10% growth last year. Importantly, we remain oversold in the wine category across Southern Europe, yet the social situation in France, un-traded by weekly strikes on pension reform since January has strongly penalized our results in that market.

Overall, we now expect sales volume will be down low-to-mid-single digits in 2023. While we will contact with modestly lower shipments this year, given macro pressures, we expect long-term glass demand will continue to benefit from key megatrends such as premiumization, health and wellness and increased interest in sustainability. As we look to the future, we believe glass demand should grow between 2% and 3% a year across the key markets that we serve as illustrated on the right. We have established another set of ambitions and achievable objectives to advance O-I’s strategy in 2023, and we are off to a faster start, as shown on page 5. First quarter segment profit margins topped 22% and benefited from $180 million of net price realization and $37 million of margin expansion initiative benefits, which included very good progress in North America.

While we expect that performance will be front-loaded in 2023, we are ahead of pace for these key efforts and expect upside benefits. Our plans for profitable growth also remain on target. The new line in Canada is now operational and our Colombia brownfield should be online late in the second quarter. Likewise, we have kicked off our next expansion projects in Brazil, Peru and in Scotland, which should be operational next year. Finally, our first MAGMA greenfield in Bowling Green also remains on track and should be commissioned around mid-2024. Importantly, MAGMA development is proceeding well and our first ULTRA barrels are undergoing market testing with final qualifications expected in the second quarter. Finally, our ESG and glass advocacy efforts are progressing well, and net debt leverage should end the year comfortably below three times levered.

I’m highly confident that these efforts will advance our strategy as we continue to transform O-I. Let’s turn to page 6. Certainly, we are happy to report a strong performance and solid progress advancing our strategy. We are also proud of how our transformation is having a big positive impact on O-I and the communities in which we serve. As you can see in the middle, we recently celebrated the official groundbreaking for our first MAGNA Greenfield plant in Bowling Green, Kentucky which will serve the growing spirits category as well as our O-I sales and distribution business. In France, we completed a sizable investment at our beer plant that will significantly reduce our CO2 emissions. Likewise, we are partnering with many customers and communities to increase glass recycling across the U.S., and our progress in ESG has been recognized by EcoVadis, Sustainalytics and Newsweek Magazine.

Finally, we have launched a number of award-winning and disruptive offerings as part of our expanding new product development effort. These are just a few success stories that we continue to transform O-I and benefit the communities in which we serve. Now I’ll turn it over to John to review financial matters starting on page 7. Speaker 3

John Haudrich: Thanks, Andres, and good morning, everyone. O-I reported first quarter adjusted earnings of $1.29 per share, which has significantly exceeded both prior year results and guidance. As noted on the left, we posted significant year-over-year improvement across a wide range of financial measures. Earnings increased in both the Americas and Europe as segment operating profit improved at $398 million compared to $231 million in the prior year. Higher results primarily reflected strong net price, which is consistent with broader market dynamics, given unprecedented cost inflation over the past few years. Around 70% of this improvement related to recovery of prior period inflation. This includes contracted price increases this year on long-term agreements that recover inflation on a lagging basis, as well as the annualized effect of last year’s price increases and the benefit from recently renegotiated long-term contracts in North America.

The remaining 30% of our higher prices pertain to new increases on open market sales this year, which offset the incremental inflation we incurred in the first quarter. Strong net price also reflected our favorable long-term energy contracts in Europe. Additionally, segment profit reflected favorable operating costs as earnings benefited from very good factory performance and our margin expansion initiatives. In fact, the first quarter was the second best manufacturing performance over the past five years. Furthermore, inventory revaluation contributed $35 million or $0.15 per share, which offset the impact of elevated project activity. As Andres discussed, sales volume was down from the prior year. The Americas reported segment operating profit of $176 million, which was up nicely from the prior year.

Earnings benefited from good commercial contract execution, while sales volume was down. Solid operating results mostly offset higher costs due to elevated planned project activity in Colombia and Canada. In Europe, segment operating profit was $222 million, up significantly from the prior year. Higher selling prices, favorable operating performance and inventory revaluation boosted earnings while sales volume was down. The chart provides additional details of non-operating items. Actual first quarter performance significantly exceeded our outlook. To better understand these dynamics, we have provided a high-level reconciliation between actual results and guidance. As you can see, solid commercial execution drove most of the upside. Actual gross price realization exceeded our original estimate, while elevated cost inflation moderated some.

As noted, better than expected operating performance boosted earnings along with a lower tax rate, given stronger earnings and favorable regional earnings mix. These benefits were partially offset by softer-than-expected sales volume, given macro pressures. Yet again, the company delivered strong earnings and margin improvement despite a highly volatile macro environment. Let’s move to page 8 and discuss our business outlook, and we have updated our full year guidance given very strong first quarter results. We now expect adjusted earnings will approximate $3.05 to $3.25 per share, up from our prior outlook of at least $2.50 per share. Likewise, our adjusted EBITDA guidance has increased to more than $1.47 billion. Overall, we anticipate continued strong net price as well as good operating and cost performance while sales volume will be down modestly this year.

We have also increased our cash flow outlook, and we anticipate our net debt leverage ratio will end the year comfortably below three times, as Andres mentioned. Looking at the second quarter, we expect adjusted earnings will approximate $0.80 to $0.85 per share, results should be up from the prior year due to favorable net price yet sales volume will be down modestly. Likewise, operating costs will be elevated as we commission new capacity, and we will see unfavorable inventory revaluation as the prior year benefit will not repeat. Furthermore, results will reflect higher interest expense. While second quarter results will be up on a year-over-year basis, we do expect earnings will be down some sequentially, given record first quarter results.

This is due to a few key elements. First, the benefit of inventory revaluation will not repeat in the second quarter. Next, we expect incrementally higher operating costs as we commission new capacity in Colombia. And finally, interest expense will be up reflecting the progression of higher rates. These elements will be partially offset by seasonally stronger sales volume. We are taking all the steps necessary to drive upside performance across the operating leverage we can control. Yet our outlook is intentionally conservative on the balance of the year given elevated macroeconomic uncertainty, especially in the second half of the year. As a result, we intend to provide regular updates on our business outlook especially, our cash flow guidance as we gain more clarity on volume and working capital levels.

Overall, we remain optimistic and expect strong performance in 2023 and continued improvement in 2024. Moving to Page 9. Certainly, first quarter results were exceptionally strong. While this past quarter was unique in some ways, we have been hard at work over the past several years building the engine for sustained earnings and cash flow improvement. We established a simple, agile and effective organization supported by advanced capabilities and new operating systems like integrated business planning. We improved our business mix and structure. O-I exited non-strategic operations and shifted away from low profit categories. Furthermore, we reduced risk by resolving legacy asbestos liabilities and lowering debt and pension obligations. Our margin expansion initiatives have delivered over $350 million in net benefits since 2017, and we expect continued benefits for years to come, including improvements in North America.

Likewise, our margins in Europe have improved consistently since 2015. For the first time in decades, we are investing in profitable growth that we expect will boost future earnings by more than $100 million once fully implemented. After several years of meaningful R&D investment, we are now at the forefront of deploying breakthrough innovations such as MAGMA and Ultra that we believe will reduce our operating costs and support future profitable growth at lower capital intensity. Over the long run, we expect continued earnings improvement driven by profitable growth, generally favorable net price realization and continued margin expansion initiatives. Likewise, we expect stronger cash flow due to the combination of higher EBITDA and expansion at lower capital intensity supported by MAGMA.

Turning to Page 10. This engine is solidly in place and generating value. As you can see, we have delivered consistent performance improvement over the last several years. Adjusted earnings is up, and we have meaningfully improved the balance sheet and capital structure. This favorable trend reflects a comprehensive approach to enable sustained earnings and cash flow performance across all key operating levels. As a result, we have either met or exceeded Street expectations for 13 consecutive quarters. Importantly, we are confident our efforts will enable sustained earnings and cash flow improvement in 2024 and into the future. Let me wrap up by covering our capital allocation priorities. I’m on Page 11. Improving our capital structure remains our top priority.

As noted, we expect leverage will end the year below three times, and we will continue to reduce leverage consistent with our glide path to 2.5 times leverage over the next few years. Our second priority is to fund profitable growth, including our current $630 million expansion program. Returning value to our shareholders is our final priority. In addition to our ongoing anti-dilutive share repurchase program, we may consider reinstating a dividend or additional share repurchases as we get close to our capital structure objectives. Now back to Andres for concluding remarks on Page 12.

Andres Lopez: Thanks, John. In summary, we are very pleased with our first quarter performance as adjusted earning’s was more than double prior year results. In addition to very good performance, we continue to advance our strategy, with a strong start to the year many of our key initiatives are tracking favorable to plan. We have increased our full year business outlook, reflecting excellent first quarter results. Likewise, we expect continued earnings improvement in future years, as we leverage the strong foundation established over the past several years. Finally, I believe, O-I represent’s an attractive investment opportunity as we strengthened our financial profile, successfully execute and leverage our transformation program, enable long-term profitable growth, advanced rate through technology and innovations like MAGMA and ULTRA and further leverage our sustainability position to win in the new green economy.

We are confident this strategy will create value for all stakeholders. Thank you. And we’re ready to address your questions.

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Q&A Session

Operator: Thank you. Our first question for today comes from George Staphos of Bank of America. George, your line is now open. Please go ahead.

George Staphos: Thanks. Hi, everyone. Good morning. Thanks for the details Andres and team. I guess, my question to start is given the volume that we’ve seen this year and understanding that there are lots of things that have contributed to the weaker-than-expected volume does it change at all your outlook for your deployment of capacity into 2024, if at all? And relatedly, you show Euromonitor data, which shows various growth outlooks and shipment statistics to-date. But if I had your top 5 or 10 customers, on the line right now, would they also agree that their use of glass would be growing 2% to 3% Andres, how would you think about that? Thank you

Andres Lopez: Thank you. Thank you, George. So — we don’t have any concern about the utilization of the capacity that we are building at this point, and we’ll be going into next year. There are multiple reasons for that. For example, if we look at the new capacity in Canada, that is to support localization of global brands, which are already there in terms of volume. So we don’t need to create a new volume in that area. When we look at the Andean countries, we’ve been importing a lot of were to be able to sustain those markets. So for all purposes, the slowdown that we’re seeing at this point in time, which is temporary, will only offset those imports, but the volume remains very strong — and as we go into the future quarters and these records, we’re going to be able to utilize that capacity in full.

The same happens in Brazil. In fact, Brazil continues to be very strong for glass at this point, and imports are very high by — primarily by multiple players. We are reporting very little in that market that, the market itself is missing a lot of capacity to supply the demand. When we look at Scotland, it is to serve a growing segment of high-end spirits. So we feel very comfortable. Well, and the new MAGMA line is going to serve the spirits business in the United States also, which is growing quite well. So we’re very comfortable, we’re going to be able to utilize this capacity going forward. With regards to the Euromonitor and the projections, we talked before about the glass demand fundamentals. They’re very solid. They’re very different than they used to be and the consumer preference is favored glass consumption.

So, we feel comfortable with those projections having been a third presentation of the market.

George Staphos: And your customers would say that — go ahead, John. Sorry about that.

John Haudrich: Yeah. Just to add a little bit there is, keep in mind that for the expansion that we have is substantially covered by long-term agreements. So, I think that that backstops the expansion programs.

Andres Lopez: And these expansions are responding to the requirements of those customers.

George Staphos: Okay. And so just clarification and a quick follow-on, and I’ll get off the line here. So your customers would say, they expect their usage to be growing 2% to 3% in the relevant categories. And then, John, what do you think, you can do on an ongoing basis in terms of operational cost outs for the next few years, again, on an annual basis? Thanks guys. Good luck in the quarter.

Andres Lopez: Yes. In some cases, that growth is even more kind of which customer we’re talking about.

John Haudrich: Yes. Just to be on the last point, as George — just through looking at our capital allocation and the amount of CapEx and things like that, we’re still having to say note a number of expansion project opportunities with customers over the long term here. So, I think that there’s still pent-up demand on the ability and desire for us to grow capacity with them to support their growth. So I think that underscores other support of the substrate. As far as the cost at goes, as you look over the last several years, we’ve averaged $50 million to $75 million, I would say, in just our margin expansion initiatives. We bumped that up to $100 million this year because of the added focus in North America that covers a wide range of elements.

I think that for the next few years, we probably should be on the north end of that range too, because the improvement — the fundamental improvement of the cost takeout margin expansion initiatives has legs for many years, as I mentioned in the prepared comments. And I think the opportunity for continued margin improvement in Americas is a multiyear process. So, I think we got a few years here of very strong cost and margin improvement opportunities.

George Staphos: Thank you, so much.

Operator: Thank you. Our next question comes from Anthony Pettinari from Citi. Anthony, your line is now open. Please go ahead.

Anthony Pettinari: Hey good morning. Just following up on George’s question. I think in the past, you’ve talked about being around 5% over sold globally. I’m wondering, where that stands now following the 1Q maybe slight slowdown? And then separately, I think you’ve talked about maybe around 5% of European capacity being removed last year. I’m wondering, where that stands now.

Andres Lopez: Yes. So let me talk about the capacity in Europe. So, capacity was removed. Some of it is coming back. Now, the European market has been growing steadily year after year at a pace that can consume the capacity, not only that one that is coming back, which is we just partial comeback, but all the new capacity that has been implemented.

Anthony Pettinari: Okay. And then in terms of your oversold position globally, I mean, is that sort of in balance now with the updated volume forecast, or just how should we think about that?

Andres Lopez: Yes. So the rep — were seeing is a temporary our projections that we shared in I-day remained valid. At this point in time, we’re going to go to this temporary pause what we’re building, and then it will come back because the fundamentals remain the same. So, we feel our projections are accurate and there will be a…

Anthony Pettinari: Okay. That’s helpful. I’ll turn it over.

Operator: Thank you. Our next question comes from Ghansham Panjabi from Baird. Your line is now open, please go ahead.

Ghansham Panjabi: Thank you, operator. Good morning everybody.

Andres Lopez: Good morning.

Ghansham Panjabi: Some of the big beverage and food companies that reported thus far have pointed towards the consumer in Europe starting to exhibit elasticity and also trade down dynamics in purchase patterns. Are you seeing something similar at this point? And just more broadly, how do you think your portfolio is positioned against a lower consumer spending dynamic globally?

Andres Lopez: Yes. So, the — we’re seeing mixed signals as we listen to the earnings releases or on conference calls from multiple companies. From our perspective, the underlying demand is going down at this point in time, primarily because of supply chain destocking. I think it’s early to determine what consumers are doing. At some point, they might slow down. We’ll see what that is. But so far for this quarter, we’ve seen a pretty drastic supply chain destocking that — and that’s what’s driving the underlying demand.

John Haudrich: Yes. I would add there, Ghansham, not having a crystal ball on that as we indicated in our prepared remarks, we’ve just taken a conservative view of the back half of the year in the financial performance side. So, in the event things prove slower. I think we’re covered in the event things bounce back because this is an inventory destocking and things normalize, I think we could benefit on the upside.

Ghansham Panjabi: Got it. And then as we think about earnings for 2023 being almost $1 higher than in 2022, I know it’s very early, but as we update our models for 2024, what do you think we should keep in mind as it relates to potential headwinds on a year-over-year basis? And then then related basis, at this point, do you see a path for earnings in 2024 for OI to be higher than what we — what you currently see for 2023?

John Haudrich: So yes, yes, for clarity, I think at this point in time, Ghansham and consistent with their comments just a few minutes ago, we do expect 2020 to be higher than 2023, even against our updated guidance there. So, while sales volume right now is clearly a headwind due to the macro pressures, we would anticipate good volumes next year. There could be a bounce-back effect, let’s see what happens there. But even without that, we are adding much needed new capacity, as we mentioned before, and that should provide good accretive growth for the company. Likewise, again, back to the previous comments, we do — we’re confident on margin expansion initiatives, especially considered the tailwinds on the recovery in North America.

And while we’re not counting on continued strong net price, we’ve had the last seven years, we’ve had to pay favorable net price six out of those seven years. But even with that said, we’re still facing call it, 7% or so cost inflation this year. And as you know, 55% of our business is under long-term agreements with price adjustment formulas that we’ll kick in to cover that next year. So, that’s a good boost also. Now, we don’t know what inflation looks like we expect it to moderate and we don’t know whether other commercial activities could be. But overall, with those elements, we’re pretty confident that 2024 will be higher than 2023.

Andres Lopez: And I will add to that, that the operational performance continues to improve. And as John described in the opening remarks, this has been one of the best performance, the second one in the last five years. And this is responding to all the capabilities that we built and — that is expected to continue delivering improved performance over time, which will impact 2024.

Ghansham Panjabi: Got it. Thanks so much.