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. [Operator Instructions] I'll now hand over to your host, Chris Manuel, Vice President of Investor Relations. Please go ahead.

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.

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.…

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,…

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.

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

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

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.

And your customers would say that -- go ahead, John. Sorry about that.

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.

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

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.

Yes. In some cases, that growth is even more kind of which customer we're talking about.

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.

Thank you, so much.

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

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.

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.

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?

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…

Okay. That's helpful. I'll turn it over.

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

Thank you, operator. Good morning everybody.

Good morning.

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?

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.

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.

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?

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.

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.

Got it. Thanks so much.

Thanks.

Our next question comes from Gabe Hajde from Wells Fargo. Gabe, your line is now open, please go ahead.

Andres, John, Chris, good morning.

Good morning.

I was hoping maybe you can give us a little bit of clarity just, I guess, on the second quarter bridge. So I think, John, you mentioned $35 million of inventory revaluation benefit that occurred in Q1 that would not recur in Q2. And then I think you talked about elevated activity across the system being a headwind and then partially offset by seasonally higher volumes. But maybe if you can put a finer point on some of these other items and if I missed anything? Thank you.

Yes, yes. So, some of the bigger pieces, moving pieces there that will be sequential headwind, so to speak, if you want to call it that, it's probably a $0.25 to $0.30 change in inventory revaluation. So that's the biggest component that comes through. The elevated operating cost because of commissioning new capacity and also we have kind of a large wave of maintenance activity is probably $0.10 probably closer to $0.15 quarter-over-quarter headwind. And then as we look at interest expense, it's probably another time at least as we stand here today. So yes, we'll have a seasonally stronger sales volume that will partially offset that, but those are the big moving pieces.

Okay. And I guess just -- again, I appreciate April 2023, but you guys are talking about earnings being up next year. I'm interpreting that as EBITDA. And so I guess as we translate that down to cash this year, I think, was supposed to be peak for CapEx. So if I start with the $175 million and assume kind of EBITDA I don't know, up $20 million or $25 million, whatever the number is, CapEx being down, call it, $75 million to $100 million. Are there any other cash flow items that we should be mindful of? I mean is there anything with the working capital that will be required for the business?

Yes. And I mean, without getting into specific -- like I said, it's a little early to get into the numbers per se. If you take a look at some of the moving pieces, obviously, we've got to take a look at our capital plan and whether there's any adds or any adjustments, whether that's the level of maintenance spending or the strategic projects we have, that's has still a little bit in front of us. Now on the working capital side to the degree that you do have sales via growing, obviously, you will have to support that through receivables and inventory. So those are all moving parts, but I think it gave us a little early to give the texture of 2024 cash flows.

Fair enough. Thank you.

Thank you. [Operator Instructions] Our next question comes from Arun Viswanathan from RBC Capital Markets. Your line is now open. Please go ahead.

Good morning. Thanks for taking my question. Just curious on the volume outlook. So it does seem like the -- you guys are capacity constrained. We've been hearing actually that the consumer is kind of also a little bit weak in certain areas in certain regions. You described the potential for a snapback next year. Is that dependent on a better macro environment, or how are you thinking about the volume trajectory that you are seeing for the next little intermediate term, especially given your capacity additions? Thanks.

Yes. Yes. Just for clarity, I think our volumes will -- should be up next year, irrespective of macro snapback so to speak, because the majority benefit of our expansion program right now from adding capacity really comes through next year. If we have a snapback, that is a further boost to that outlook, but as the growth next year, we don't believe it's contingent on a snapback.

Okay. Thanks, John. And then just on the price cost side, you noted that a lot of the pricing actions are from prior year catch-up and you don't expect to maybe see some of that gain in the future. Is that accurate, or - and how much price should you potentially hold on to, given that we are kind of moving through a deflationary environment? Would you consider that Europe is still oversold. And again, these are structural price increases that we should kind of consider, put you at this earnings power level kind of on a go-forward basis?

Yes. So I would say that we are confident in our price position. like you said, just to reiterate, the majority of what you saw in the first quarter pertained to price adjustment formulas or prior period activities and then really the incremental inflation -- I mean, incremental price increases that we did in the first quarter were all in response to incremental cost inflation. And don't forget that this is a world where we're still seeing inflation, right? It's still 7% or so and whether it is an open market or whether it is price adjustment formulas on a look-back basis going into next year, that should benefit us. And one thing I would also say is net price is not a luxury in our business. It's not only -- this doesn't tell the full picture. We also have to cover higher interest expense, inflation on SG&A, inflation on capital goods, so for our position, we really need to manage through the cash cycle and look at inflation through the cash cycle. And so we shouldn't look at just net price is what's going on competitively dynamic about being able to manage through the cycle. So I think, like I said, it's not a luxury is something that we need to be able to manage the cash cycle.

And just one more quick one, if I can. Just on the free cash flow, when do you expect your free cash flow will be closer to that adjusted number of $475 million, and so you just be providing one kind of guidance number.

So keep in mind, the adjusted free cash flow is to demonstrate what the underlying cash flow is of the business operationally, and it deducts the cost of maintenance capital. So I think yes, I'm sorry, it does not include the impact of expansion capital. Included in that is the netting of the maintenance capital. So that will always be there. So I think we'll always have some level of expansion growth-related IRR related investments in the business. So I don't know if you ever totally close that gap. But the important point is through the strategic projects that we're doing right now, they ultimately lift up the total EBITDA. And then the true free cash flow should actually surpass the level of adjusted free cash flow of the business eventually, right? So -- that's what we're trying to aspire to, and I don't want to get caught up in one bucket or another. But we believe that at the end of the day, all of this is creating a virtuous cash cycle for the business.

All right

Thank you. Our next question comes from Mike Roxland of Truist Securities. Mike, your line is now open. Please go ahead.

Thank you. Thank you. Andres, John. Chris, congrats on a very good quarter.

Thanks.

Just wanted to get your thoughts on glass fundamentals. I think in the last call, you mentioned the fundamentals were as strong as you've seen in 20 years. Obviously, there's a little bit of a break here, whether its due to destocking, slower consumer and whatnot. But you're still guiding to at least on a normalized basis, growing glass demand. So can you walk us through some of the things that you're doing internally, checks and balances, just to make sure the company is not getting ahead of its skis, given currently favorable industry dynamics?

Yeah. We think the glass fundamentals that we've been describing remain valid. Obviously, at this point in time, we're seeing these macro dynamics that will create a pass. We might see a little bit of trading down by consumers that is very typical of a recession. But once the economy bounce back then the consumers move up the ladder again. So what we see is a temporary pause. And then the fundamentals will kick in again because they've been responding to the evolution of the consumer taste, what their preferences are, and they will continue influencing our demand.

And one thing to add to that, Mike, is if you take a look at our capital expansion program that we have underway right now, the amount of growth of that enables is still, frankly, below our market share position of the expected market growth over the next few years under those set of assumptions. So as far as concerned about getting ahead of ourselves under skis, we're still -- our investment still is below our market share position of that growth.

[indiscernible] Sorry.

Go ahead, sorry.

No, please go ahead, Andres. My apologies.

Sorry, Mike, I think we lost you there didn't hear

Okay. I was -- I guess, the question is I mean anything that you're doing internally to stress test on the forecast. Your customers forecast and the like to make sure that what their forecast is actually going to material because some of your peers as you -- in different substrates, a little aggressive in their forecast. And I'm wondering, just given that you just so a turn in the dynamics here, whether you're doing anything internally to make sure that your forecasts are accurate and appropriately stress test.

I would say that we got a pretty advanced business intelligence capability where we were able to forecast and look at all the different many, many variables in the business. And that does point to, hey, if we wanted to understand the recessionary impact of our business, and I said this before in the past, it could be down 3% or so, that seems to be the sensitivity to it. But if we take a look at all of those fundamental dynamics, they still point to continued growth of our business in a more normalized environment. But I would also go back as what are we doing? Well, one of the things we did do is we secured this growth through long-term agreements. So in that sense, I don't think that we're going over our SKUs or going beyond what the customers are willing to commit to.

Got it. And just one quick follow-up. Just in terms of the MEI initiatives, obviously, you're targeting $100 million plus for this year, for the next couple of years. I believe in the last few years to focus on price and revenue optimization. Could you just expand on other opportunities that you're pursuing, whether we see like SG&A reduction lowering costs in the cloud. So some of those things you may have seen that is -- that will be responsible for getting you to that $100 million for the next few years?

Yeah. Yeah. I would say the benefits this year are pretty balanced. We've got revenue optimization, which is more contract compliance and value-based pricing, factory performance, which is looking for productivity. And our cost transformation program is SG&A type of reduction that we've been doing for a few years. What I would say is that if you take a look at this year, we got a really good, as we said, on the front end here, very good operating performance of the business. So we're looking for good benefits out of that. I mean, we did some restructuring that -- we took out two underperforming furnaces last year that we're getting the benefit on, and we've got a pretty comprehensive program around things like labor, energy reduction, automation, logistics and network optimization, and working on PTP and speed improvements. And finally, maybe the most incremental important part is what we're doing in North America right now, and that is -- that's very holistic too. As I mentioned before, we got a very good start to our contract renegotiations there, and that was a clear benefit in the first quarter, as well as a wide spectrum of operating elements and other factors within that business.

Got it. Thanks very much and good luck for the balance of the year.

Thanks.

Thank you.

Thank you. Our next question comes from Mike Leithead of Barclays. Mike, your line is now open. Please go ahead.

Great. Thank you. Good morning and congrats on nice start to the year. So my first question is just on European EBIT margins. They were 28% this quarter, I'm assuming inventory reval added a few points there. But just -- how sustainable do you think underlying margins are in say, this mid-20% range or so, sort of, double what you historically ran at before last year. But, obviously, you're taking cost out as well. So just how sustainable do you think these current margin levels are?

Yeah. Well, clearly, let me first take a crack at that one. Clearly, the first quarter was very strong. Let me just step back and talk about margins overall where we think this year and where we think that they're going to go as a company in the major segments. So this year, we would expect our overall segment profit margins to be in the mid-teens, which should be pretty much in line with pre-pandemic basis if you go back to 2017 and 2018, that's exactly where the margins were. In the Americas, it's probably going to be in the lower teens, and Europe, it should crack 20%. So -- but if we take a look a little bit further into the future with some of the things that we've been talking about during this call and the activities we're doing, we think overall segment profit margins in the next year or two should be more like in the mid to high teens. And so that would bring the Americas up from potentially low up to mid-teens, especially with the margin recovery in North America, and then continue something 20% or higher over in Europe. And, of course, then we continue to build from there. So hopefully, that gives you some insights on a more normalized view and we're trying to take the company.

Yeah. And I would like to highlight that the margin improvement in Europe has been a multiyear dynamic. We started to improve back in 2016, and we've been improving year after year since then.

Great. Thank you. And then second, just a little housekeeping. I think you bumped full year EBITDA by about $100 million, free cash flow moved higher by about $25 million. So is there a working capital offset, or John, maybe you can just help parse out any other moving pieces there?

Yeah, indeed. To your point, EBITDA is up more than $100 million in free cash flow, up more than $25 million. So, obviously, there's a difference there. One thing to keep in mind is our free cash flow outlook is a floor. And so we anticipate to hit that or like probably do better, that's our intent. To your point, working capital performance will reflect what we think is the shape of the sales volume curve and trend. So that's going to play out through accounts receivable and inventory through the balance of the year. We think it's prudent right now to keep a conservative approach on how that plays out and taking the most conservative view on that, which is that, hey, things continue to be softer towards the -- over the balance of the year. But the actual demand picks up in the back half of the fourth quarter, where you're actually rebuilding receivables, for example, and things like that. So, ideally, we bounce back sooner than that. But I think at this point in time, it is best to take a conservative approach and probably working capital is probably a $50 million swing factor in our business right now. And as we said in the prepared comments, we'll keep you updated as we see a better sense of what that curve looks like.

Okay. Thank you so much.

Thank you.

Thank you. We currently have no further questions. So I'll hand back to Chris Manuel for any further remarks.

Thanks, Alex. That concludes our earnings call. Please note that, our second quarter call is currently scheduled for August 2, and remember making a memorable moment by choosing safe, sustainable glass. Thank you for your interest.

Thank you for joining today's call. You may now disconnect your lines.