Hello and welcome to today's O-I Glass Third Quarter 2024 Earnings Conference Call. My name is Bailey and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Chris Manuel of Investor Relations. Please go ahead.

Thank you, Baily, and welcome everyone to the O-I Glass third quarter 2024 conference call. Our discussion today will be led by CEO, Gordon Hardie and our CFO, John Haudrich. Following their prepared remarks, we will host a Q&A session. Presentation materials for today's 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 Gordon, who will begin on Page 4.

Good morning, everyone and thank you, Chris. Today, we will review our recent performance and the actions we have taken and will continue to take to grow the value of O-I. Last night, we reported an adjusted net loss of $0.04 per share for the third quarter of 2024, a decline from last year's strong performance. Our lower earnings primarily reflected curtailment of 18% of our production during the third quarter, as we took decisive action to reduce inflated inventory levels after several quarters of sluggish demand. Net price was also down, partially offset by higher shipment levels. We are rapidly implementing our Fit To Win program to improve performance. In addition to rightsizing inventories and making significant reductions in SG&A costs, we are working to drive productivity and close unprofitable redundant capacities to improve our economic profit. While these actions impact near-term earnings and cash flow, we believe they set the foundation for a solid recovery in 2025 and should enhance our long-term competitive position, which is key to future profitable growth. As we take these self-help actions to improve the company's value, we see that market conditions are slowly recovering. Our sales volumes were up modestly in the third quarter as shipments increased in nearly all geographies. Further, our MAGMA program achieved a key milestone as our first greenfield plant began operations in Bowling Green, Kentucky this past quarter. 2024 has been a challenging year. Our performance has been impacted by destocking in both the trade and in home, together with sluggish consumption given economic uncertainty. We have therefore adjusted our outlook to reflect a continued softer-than-expected marketplace. While this performance is well-below what the business can deliver, we expect significantly better results in 2025, as our Fit To Win measures improve our competitive position and markets gradually…

Thank you, Gordon, and good morning, everyone. Let's begin with our recent financial performance on Page 9. O-I reported an adjusted loss of $0.04 per share in the third quarter, a significant decline from historically high adjusted earnings of $0.80 per share last year. This decrease was particularly -- primarily due to higher operating costs as we curtailed 18% of our capacity to rebalance inventory levels in response to sluggish demand over the past several quarters. Downtime impacted year-over-year results by about $0.65 per share, partially offset by strong operating and cost performance. Net price was also down, partially offset by 2% sales volume growth. While sales volume was softer than anticipated, net price was consistent with our expectations heading in the quarter and reflected price adjustment established at the beginning of the year as well as cost inflation mostly in Latin America. The third quarter should be the lowest net price realization in 2024 and be less of a headwind in the fourth quarter. Non-operating items were a net headwind with higher interest expense and an elevated tax rate more than offsetting the benefits of lower corporate retain costs. Heading into the quarter, we expected flat to slightly positive earnings in the third quarter. Our operating performance was in line with these expectations as favorable cost performance mostly offset the impact of lower sales volume. Non-operating costs were about $0.05 higher than expected, primarily due to higher tax rate. Turning to page 10, let's discuss the performance across our two segments. The Americas posted a segment operating profit of $88 million, down from $116 million last year. Net price negatively impacted results mostly due to the cost inflation across Latin America, while sales volume increased by 7% as Gordon discussed. Additionally, we temporarily curtailed 15% of our capacity to…

To conclude, we are taking rapid decisive action to position the company for a solid recovery in 2025 and beyond. Our Fit To Win initiative is central to our strategy to improve our competitive position and enable future profitable growth. We are optimistic about the future and are determined to improve the value of O-I. Thank you, and we are now ready to take your questions.

[Operator Instructions] Our first question today comes from the line of Ghansham Panjabi from Baird.

I guess, first off on the working capital being a much bigger negative than you initially projected, I think you said roughly $100 million more. Is it likely that you'll still have too much inventory as we sort of cycle into 2025? I think you just said that volumes are tracking a little bit lower than you forecast for the back half of the year. And I'm also trying to reconcile why you're expecting 4Q volumes to be flat when October was up a little bit?

Yes, Ghansham, I can talk about the working capital. Yes, as I mentioned in the prepared comments, we were targeting kind of mid-year that we would get our IDS down to the mid-40s, which is at a historically low level for the business. Based upon what we're seeing with sales volumes being a bit softer and the fact that it's challenging to move our network that quickly, we're probably going to be in the low-50s. So, a little bit of a delta there, and that's resulting in higher inventory at the end of the year, higher working capital as you referenced. As we stand here right now, there's about $125 million of debt we're incurring in expense as we draw down inventories this year, meaning extra expense that we're taking because production is lower than the sales activity. We think that at least half of that or more will come back next year as we -- as the worst of the inventory destocking activity, internal destocking is done, but we will continue in all likelihood to do some drawdown of inventory. So, the remaining component of that $125 million will be in a future period.

Okay, got it. And then, as it relates to pricing in Europe for 2025, what is the base case at this point? And I'm just asking because obviously you're doing a lot in terms of cost outs and so on and so forth. But if you look at European margins for 2024, just assuming just sort of your estimates for the fourth quarter implied estimates for the fourth quarter, margins are basically back to pre-COVID levels. And so, are you assuming that you're going to get cost savings next year and that offsets incremental pricing on the downside or should we expect margins to build up of ‘24 specific to Europe?

I can take the last question first and then turn it over to Gordon on the volume and other questions. Certainly, our margins right now are in a suppressed level. Even as we mentioned before, we're at about 18% curtailment level in the third quarter. We'll probably be in that 16%, 17% still in the fourth quarter, okay. So, we're going to be incurring an earnings penalty that's pretty consistent with what we saw here in the third quarter. That in effect is suppressing the margins. We do believe that a more normalized segment profit margin of the mid-teens is probably a good next step for the business to tear up to. It will obviously be a little bit higher in Europe and a little bit lower in the Americas given the mix of business.

When we look at volume, I think we're sort of calling flat and it's almost a view of the two hemispheres. So if you look in the Americas, I would say that we were looking at flat to increases driven and then in Europe, I would say would be flat to slightly down on volume driven by the wine situation and also as big export markets like China and the U.S. are suffering some softness, you could see spirits volumes maybe coming off a bit there. With regard to pricing. Again, I think we are looking at a sort of flat situation, mainly probably in Europe, a bit of price pressure as there is probably more capacity there in the market, less pricing pressure I would imagine in the Americas given particularly in places like Brazil, where the capacity is fairly full across the region. We've got tighter capacity in North America, a bit more kind of free capacity in Europe, which may put pressure on some pricing. We're looking as we look forward on flat. And then, as we've laid out, we are taking very rapid action around the cost base of the business. And the net of all that is we see an improved outcome for the business going forward.

The next question today comes from the line of George Staphos from Bank of America.

This is actually [Tash] on for George this morning. So I guess with the capacity closures that you've done so far and those that you're considering for next year, I guess, where do you think you will be running in terms of utilization rate by the end of next year? And then, what can be the potential benefit from better operating leverage as a result of that?

We included in the slide, so right now, at least in across the year in 2024, we're looking at about 13% capacity curtailment -- temporary capacity curtailment to deal with, one, the softer sales volume that also bringing down the inventories, okay? And so, if you take a look at that more than half of that will be dealt with through permanent capacity closures, and that will give us $80 million next year, $100 million on a run rate basis. The remaining balance is due to continued temporary curtailment of which that remaining balance about half of it or more probably comes back to the business next year, because we exit the worst of the destocking. While we still continue to anticipate some level of destocking but that also gives us flexibility in the marketplace, depending on how volumes trend and allows us to take advantage, if there's a little bit better recovery. So, 75% of it is going to be dealt with between capacity closures and some level of inventory management normalization.

Appreciate that. And then I guess in terms of the initial 2027 targets you put out in terms of EBITDA, I guess what sort of volume growth are you underwriting for that? And I guess, what is the potential long-term volume growth of the business moving forward? And what gives you confidence in that regard?

I'll address the first part of that is our assumptions right now are volume neutral, okay. Right now, when we take a look at bridging from where we are today to where we think is the $1.45 billion, that does not volume contingent at all. It assumes volume neutrality.

And then, with regard to sort of how the markets are going to evolve from a volume perspective, over the medium-term and through the cycle, as we've seen in the charts there, we see mainstream glass stabilizing, while premium glass will continue to grow consistently. We see many of our major customers driving this portfolio approach and investing behind it. If we look at our own portfolio, it's split really between 80% commodity to mid premium and 20% premium. And to play in that midstream more effectively, we need to get our cost base down. We need to be more competitive and not just against glass. We need to close the gaps to cans as well. As I said on our previous outing, the current gap between glass and cans is about 35% and that's just too high. You will lose share. We are losing share to cans and all the data we have suggests if we can get that cost premium between 15% and 17%, then you see a reverse flow from cans to glass. So, that's the reality and we need to face up to that and we need to get into it and that's exactly what we're doing in terms of driving the competitiveness of the business across both the organizational structure and particularly across the total supply chain. And so as you get that cost base down, be more competitive, not just against other glass competitors but against cans that then underpins our cost base that also allows you to leverage into premium and so take advantage of that continued and consistent premium growth as we go forward. And so that's our approach. I think all the data supports that the customer strategies, the customer investments behind premium and then the opportunities we see to really get after a much lower cost base in the business underpins that approach and that we feel will give us a better portfolio mix, a richer portfolio of mix with higher margins and better ROIC as we go forward.

The next question today comes from the line of Arun Viswanathan from RBC Capital Markets.

I guess first question would be, when you think about some of your bridge items, it looks like for EBITDA, would it be possible to potentially add in the $175 million Fit To Win benefits for ‘25 on top of, say, the lower end of your guidance, maybe $1.1 million? And so the starting point could be kind of in that $1.25 to $1.75 range. What are some of the headwinds to that kind of math when you think about ‘25?

Yes, Arun, yes, I think you're thinking about it right. I mean, we got a base this year that we shared. The $175 million is meant to be additive to it as well as some value, as I mentioned earlier, the normalization of production because we're exiting the worst of the inventory destocking. On Page 12 of the materials, we have some of the puts and takes. You'll still do better and some of the interest will start to come down a little bit. You see normalization of tax rate as earnings get better. Of course, we have the commercial elements that we identified there, either neutral to some slight headwind in sales volume and then the negative net price that we flagged there. We don't believe it will repeat of 2024, but there might be some pressure there. So hopefully, that gives you some of the moving parts. And certainly, while we're not looking to quantify all these levers today because it's too early, we certainly will fill in the blanks at the next year in earnings call.

And similarly on the free cash flow bridge, so, you went from a source of $75 million at the midpoint down to a use of $150 million, so kind of a $225 million swing there. When you think about a free cash flow going forward, should you be free cash flow positive in '25 or does this kind of slower inventory depletion push that out a year or two into '26 or '27? How are you thinking about that as well?

Just to be clear again on Page 12, we are indicating that we expect to be better free cash flow, cash flow positive next year, earnings improving as we just kind of talked about a lower CapEx level as we come off of some of the peak strategic spending that we've done over the last few years and take a more economic profit approach to how we look at some even the maintenance spending in the business. This whole working capital will normalize. Obviously, it's been a challenge with the level of production downtime and how that affects accounts payable, for example, even if we're making progress on the inventory levels. So, as production normalizes next year a little bit, you'll get an AP boost and you'll also have some inventory coming -- continue to coming out of the system even if we're carrying a little temporary downtime.

And sorry, one more if I could. On just CapEx, are you still pursuing -- what kind of MAGMA spending do you have in that CapEx number? Is there a way to potentially bring that CapEx down even further? Does that encapsulate both MAGMA and any capital projects you have?

As we look to MAGMA, I mean, obviously, we've just started, as Gordon mentioned, just started production at the new Bowling Green facility. It's an important stage gate for us. I don't anticipate a lot or any MAGMA spending on CapEx next year, until we get through that stage gate and understand next steps with that new technology. So, yes, as we're signaling there, CapEx will come down. It will probably -- it will be below the $500 million level.

The next question today comes from the line of Gabe Hajde from Wells Fargo.

This is actually Richard Carlson in for Gabe. It's a very useful slide on Slide 12. So I just want to ask a couple of questions there. So first on sales volume, it sounds like you talked about seeing some green shoots and maybe seeing some more signs of being positive, but you're cautious going into next year. So just want to get some of the puts and takes, what areas are you actually feeling more cautious about and what areas are you starting to get confident and what could the shape of that look like for next year? And then my second question is going to be on net price, because also I guess it looks like you're cautious going into the year. At this point, what is your visibility into pricing for 2025? And what percentage of your contracts are already signed and what could move that number a little bit as we get into the year?

Yes. With regard to sales volume, as I said earlier, as we look at the Americas, we look at demand particularly in Latin America strong. And also in North America, we see the trend probably flat to slightly up. With regard to Europe, obviously, spirits is a potential issue, as you see softening markets in China, which is a big off-take market for European spirits brands and also wine. And so, we're -- as we look at those categories, we're cautious on the outlook in Europe. There is also some spirits pressure obviously in North America. So spirits, I think and wine as they have been year-to-date, will continue to be something we keep a watchful eye on and that really is guiding our thinking around sales volume. With regard to net price, again, as I said, capacities are pretty tight in Latin America and in North America. In Europe, with the softening volumes bit more capacity available in the market, our assumption is that there would be some sort of pricing pressure there and that -- there are the two main sort of drivers guiding our thinking on how we're looking about 2025.

And maybe just to add on to that, you had Mitch asked about kind of how our contracts are positioned. About 55% of our business globally is under long-term agreements. That's about a third when you take a look over in Europe in the rest of our open market and it's about 70% when you take a look at the Americas. So, those are all fairly stable. They will -- they all have price adjustment formulas, albeit there hasn't been a lot of inflation this year. So, we're looking stable to a little bit of improvement there. And you talk about the timing and the visibility is the biggest open market negotiations we have are over in Europe, two-thirds of our business over there. That usually commences in the November timeframe. So, it's still early. And we'll keep you up to date as we understand the layout there.

The next question today comes from the line of Josh Spector from UBS.

I wanted to kind of follow-up on the net price, but maybe think a little bit more medium to longer term. So, I guess as you look at your Fit To Win and your longer term goals of generating $300 million higher EBITDA from savings, how does net pricing play into that? Understanding that there's some hedges that roll off in Europe and when you talk about glass price competitiveness, like, how does all this square together, prices coming down to become more competitive and you guys growing EBITDA at the same time and your costs going up? So any thoughts there would be helpful.

Yes. As I said, we have a fairly focused program both on reshaping the organization structure and the cost of doing business and then how we operate across the value chain. And as we pointed out in the past, this is an end to end review of our value chain with a focus on squeezing out the waste and inefficiencies that are there. And then using that to increase earnings, increase cash flow and be more competitive where we need to be on price in the market and gives -- that then gives us that flexibility and that will depend on a number of different dynamics in the market at any given time. But our main focus, as we say, over the next three year period will be to really drive productivity and reshape the cost structure of the business that gets us into a much more competitive position. There is growth in the market. We just haven't been able to access some of that growth because our cost base was too high. We're facing that reality and we are taking all and every measure that we need to make sure we are in a competitive position to take advantage of that growth. If we look at our top 20, 25 customers around the world, all of them have growth plans, all of them. And so, we need to position ourselves and be competitive that we can ride with our large customers, as they develop their businesses and be the supplier of choice.

Josh, I would add that, if you go back to what Gordon was talking about during the prepared remarks, with Fit To Win, we have Phase A there, which is looking at $300 million of savings. That in and of itself, all else being equal would bridge where we are right now to the range that we're talking about in 2027. But we also did indicate there's Phase B, which has more savings and opportunity associated with it. And if we do run into some headwinds, net price or energy et cetera, we're targeting more savings. So, we feel confident about the ability to achieve our target.

I guess, if I could just follow-up on SG&A. I mean, it's a pretty big target in terms of what you're hoping to save overall. I mean, it looks like maybe a 20% reduction. I guess, if you look at benchmarking yourself versus peers, does that put you closer to peers? Would you be best-in-class? So I guess, how do you determine that that's the right level that you should be operating with?

Yes. As we mentioned in July, our SG&A to revenue was running at about 8%. Many of our competitors are at 5% or below. That obviously is an immediate benchmark and that's one lens we took on it. The other lens we've taken it is, looking at the portfolio, we have an 80% commodity to mid premium portfolio. Therefore, we need a cost base that reflects that reality and reflects that world. And so, we looked at all of the activity and we asked ourselves how does that support that or how does it subtract from it. And through that lens, we have made the adjustments that we feel are necessary to right size the cost base to support the strategy we have going forward. And really, there is anything we can't connect to a health and safety result, anything we can't connect to a customer and innovation result and anything we can't connect to a better cost outcome and capability outcome is going to get challenged on whether it needs to exist in our business or not. So very clear framework and a very clear set of benchmarks that have guided the decisions and we're very comfortable with the decisions where we've made, and we're very comfortable with the speed at which we're taking action to reduce that cost base.

One thing I would add there, we've taken action already that accounts for about $120 million of the $200 million target on a run rate basis. That's 60% of the target. Calendar wise, we expect to get $100 million out of that next year because of the phase in and things like that. So, we're already more than halfway auctioned on the elements that drive that reduction. More work will be done over the course of 2025, as we look to have an exit run rate from 2025 of the total $200 million that will fully benefit 2026.

Our next question today comes from the line of Anthony Pettinari from Citi.

I was wondering if you could talk about maybe at a high level the improvement in forecasting that you're looking to drive, what enables that and what gives you confidence you can kind of improve forecasting?

Yes. So, obviously, during the whole COVID period saw a huge disruption in normal patterns of purchasing consumer behavior. And as we saw the sales lift through '21 and '22, nobody wanted to miss sales. So there were big sell ins through the chain. I think what's as you come out the other side of that and customers and down through the chain distribution partners take a look at their or took a look at their inventories and saw that they were very high, then you have the destocking period. And we're really kind of coming to the end of that sort of cycle. I think the big unknown is what is still in the pantries and particularly around spirits. If you bring beer, wine and spirits home, beer is consumed faster than wine, is consumed faster than spirits, yes. And I think what has become clear is how do you get line of sight all the way through to what's happening in the consumer sort of pantry. And I think it's just sharpened everybody's focus on how do you get visibility through what are very long distribution chains. I mean, if you take a look in the U.S, there's three levels for the chain before you get to the consumer. You take a look at travel retail, it's a massively long train that typically has been kind of hard to get visibility on where all the stock is in different parts of the world. So, we've had those discussions with many of our major customers. We all recognize there's a way for us to share information, share data, share insights in a much more effective way and we've agreed to do that with many customers. And also, we're investing in upskilling our own people and also investing in some AI capability around forecasting, which when coupled with the insights our own people bring, actually is giving us a much better result, yes. So, I think it's sharpened everybody's focus around it. And yes, I see improvements going forward for sure. And we're starting to see it in our own business. Our forecasts are getting tighter, not where we want them to be yet but we're getting there. And certainly, when you and I've been with many, many customers over the last 100 days, it's a real focus for everybody.

And then just one quick follow-up. You talked about evaluating closure of I think 7% plus of capacity by middle of next year. I guess at first glance, 7% plus looks like 7% or 8% or maybe 9%. But is I mean, is there a possibility that you could have to close or a meaningfully larger percentage, 10%, 15%? Just trying to frame that 7% or more, and then just kind of the contingency planning around that?

Yes. So, Anthony, I'll touch base on that. So, keep in mind, we're looking at Phase A and Phase B. Phase A, the 7% plus that's primarily looking at how we align supply with demand and deal with the overhang that we've been talking about, that's going to be partly closures and partly rebalancing against the inventory. But with that, we're taking the opportunity as we look at economic profit to find those handfuls of furnaces and plants in the network that are low on their economic profit -- negative on the economic profit and try to align both of those together to be able to take out low profitability capacity with shoring up the supply and demand. But that's just Phase A. And that's really when we're talking about this kind of 7% plus. But Phase B is more to what Gordon was talking about, where if we can find more productivity and unlock capacity within our network, we can then shift our books of business into the best higher-performing plants. And that will either allow us to grow or more likely just take out that remaining lower profit redundant capacity. So, there's two missions here. And I think there will probably be more as we get into Phase B, but that's not necessarily the same mission as we're doing on Phase A.

Just as a bit on that, we mentioned in July that we had run some pilots on reasonably fit plants and we've seen the opportunity to improve efficiency by anywhere between 10% and 15% and we're getting after that. And so, as we go through each plant and we find ways to make it more efficient, then that gives us kind of optionality on whether we are then more competitive to go after growth volume or if there is -- if the volume is there, but it's not economically profitable then we would take that capacity down. So the fitter we get, the more optionality we have to play, as we go forward. But certainly, we -- any place we can't get a return, we will not be warehousing capacity.

[Operator Instructions] Our next question today comes from the line of Mike Roxland from Truist Securities.

This is actually Nicco Piccini on for Mike Roxland. I guess just starting out back to the margin discussion, I think you mentioned mid-teens in total -- the total company with obviously higher Europe, lower Americas as a normalized as a next step. I'm just curious is that next step like '25 or after 2027? And the reason I ask is, I wanted to post this to your team peers posted at 24% EBITDA margin, while you were lower than that. And I just was wondering why there's such a big delta and if that can be overcome through Q1?

Yes. For one thing, when I was referring to the percentages I was referring to segment profit, EBITDA is probably close to the high teens 20% as far as what where we should achieve. I would say that is a medium-term target, whether that's achieved next year or not. I think we really will get to that when we get into the numbers at the end of the year. Looking at what we could achieve by 2027, I think it would point to the higher end of that range and kind of more of a return to where we were at last year, which is, some of the highest levels of margins that we've seen in a number of years. And I think Gordon already hit on a couple of the differentials of a couple of 100 basis points is just in SG&A alone. So not to mention a number of the competitiveness opportunities that we referred to throughout the discussion. So, it's really a combination of both of those to try to move from where we are right now into a number in margins that are very competitive for the industry.

Within the business, from this plan, we've got very clear lines of sight on the productivity measures, where they are, how we get at them and what they'll yield. So and there's a very disciplined program behind that to deliver on the numbers we set out from here between now and 2027.

I guess just and switching gears to curtailments and closures, does retrofitting MAGMA at the end of life for some of these furnaces either now or in the future, does that come into play when deciding where your closures are?

It can give us flexibility. Our focus on MAGMA at the moment is, as we've mentioned, we've just gone live in Bowling Green in Kentucky and making sure that we deliver on the ability to deliver industrial scale. There's two hypotheses when you bring a new technology to market. One, does it work at industrial scale and two can you make the right return on it. So that's the real focus for MAGMA at the moment and both the technical engineering and commercial teams. Even in the first few weeks, we're learning a lot and as that plays through and we run that plant at industrial scale, there will be learnings for where best we can then leverage MAGMA going forward. So yes, it will be part of our arsenal as we look at how we configure the chain to best fit to the market to ensure we get the best returns. That's how we're thinking about it.

Thank you. There are no additional questions waiting at this time. So I would like to pass it back to the management team for any closing remarks.

Thanks, Bailey. Please note that this ends our traditional quarter call. Just two housekeeping items. First, please note that our year end fourth quarter call is scheduled for February 5, 2025. And then second, please mark your calendar for our Investor Day that's planned for March 14 at The Exchange in New York City. Remember make it a safe memorable moment by choosing Glass. Thank you.

Thank you.

This concludes today's call. Thank you all for your participation. You may now disconnect your lines.