Good morning, and welcome to the O-I Glass Second Quarter 2023 Earnings Conference Call. My name is Carla, and I'll be the operator for today’s call. [Operator Instructions] I'll now hand the call over to your host, Chris Manuel, Vice President of Investor Relations to begin. Please go ahead when you’re ready.

Thank you, Carla and welcome, everyone, to the O-I Glass second quarter 2023 earnings conference call. Our discussion today will be led by Andres Lopez, our CEO; and John Haudrich, our CFO. Today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for this 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 will start on Slide 3.

Good morning, everyone and thanks for your interest in O-I. We are pleased to announce a strong second quarter results despite more challenging macro conditions. Last night I reported adjusted earnings of $0.88 per share, which exceeded our guidance range and represented a 20% increase from prior year results. Adjusted earnings benefited from favorable net price as well as solid operating performance and our ongoing margin expansion initiatives. As expected, sales volume was down primarily, due to a slower consumer consumption and customer inventory stocking. Likewise, we did increase some additional costs for temporary downtime to balance supply with demand as well as planned asset project activity. In addition to the strong results, we continue to advance our strategy, despite more challenging macros. Our margin improvement efforts are well ahead of plan and all other initiatives remain on track, including our expansion plans, development of breakthrough technology and deleveraging efforts, reflecting very good year-to-date performance, we have provided our full year guidance and now expect adjusted earnings will range between $3.10 and 3.25 per share. We have also provided third quarter adjusted earnings guidance of $0.68 to $0.73 per share, which represents a solid increase from third quarter last year. John will expand on our financial performance and outlook a bit later. Let's move to Slide 4, and discuss recent sales strengths, starting with the chart on the left. O-I segment sales increased 7% from the prior year as the benefit of higher selling prices more than offset lower sales volume, which was consistent with our expectations heading into the quarter. Price was up 13% from last year, primarily reflecting structural increases like annual price adjustment formulas and contract renegotiations, as well as the annualized benefit of prior year pricing actions. Additionally, current year open market increases are offsetting the…

Thanks, Andres, and good morning, everyone. O-I reported second quarter adjusted earnings of $0.88 per share, which exceeded both prior year results and guidance. As noted on the left, we have posted year-over-year improvement across all key financial measures. Segment operating profit was up in Europe and about stable in the Americas as global segment operating profit totaled $326 million, representing a 27% improvement from last year. As Andres noted, margins approximated 17.5%, up 270 basis points from the prior year. As you can see in the right segment, operating profit benefited from structural price improvements, as well as very good operating performance and our margin expansion initiatives. These benefits more than offset lower sales volume and higher operating costs due to unfavorable inventory revaluation and planned asset project activity. Likewise, we did curtail some production to balance supply with lower demand. The Americas reported segment operating profit of $126 million, which was in line with the prior year. Earnings benefited from good commercial contract execution and solid operating performance, while sales volume was down, as Andres noted. Higher costs reflected planned project activity, temporary production curtailment and unfavorable inventory revaluation. In Europe, segment operating profit was $200 million, up significantly from the prior year. Higher earnings reflected favorable net price, which more than offset lower sales volume. Furthermore, solid operating performance and margin expansion initiatives substantially offset the impact of some temporary production curtailment. The chart provides additional details on non-operating items, which were pretty stable, except for higher interest expense. 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. We have tightened our 2023 full year guidance range, reflecting very good year-to-date performance. We now expect sales will be up substantially…

Thanks, John. In conclusion, we are pleased with our second quarter adjusted earnings, which were up 20% from last year and exceeded guidance despite a more challenging macro environment. We are delivering on our commitments, which demonstrate improved agility, resilience and strong execution. In addition to very good performance, we continue to advance our strategy with a strong first half many of the key initiatives are tracking favorably to plan. Likewise, we have tightened our full year guidance and expect adjusted earnings will be up a robust 35% to 40% this year. In fact, we are well on our way to delivering our best performance in the past 15 years. Importantly, we anticipate future earnings will continue to improve, as we leverage the strong foundation established over the past several years. Finally, I believe, O-I represents an attractive investment opportunity as we further strengthen our financial profile, successfully execute and leverage our transformation program, enable long-term profitable growth advanced breakthrough 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 and support future shareholder-friendly capital allocation. Thank you. And we're ready to address your questions.

Thank you. [Operator Instructions] Our first question comes from Ghansham Panjabi from Baird. Your line is now open. Please go ahead.

Yes. Hi good morning, everybody. Apart from…

Good morning.

… apart from inventory destocking, a lot of your major customers are calling out point-of-sale weakness on the volume side in a variety of categories, including Diageo earlier this week on Spirit side. Clearly, 2023 is a big reset year for you -- from a volume perspective as inventories adjust along the supply chain. But at this point, are you anticipating volume improvement in 2024? And if so, in which categories?

Yes, Ghansham, we share some details during the opening remarks about demand, but I would like to emphasize a couple of things. The first one is there is a general pattern across markets. with softer consumer consumption as well as supply chain destocking. So that applies everywhere. Now, I would like to highlight two markets. Southwest Europe is the one with the largest drop in volume year-on-year, but is driven primarily by low inventories in O-I, which last year, we had available to serve incremental demand and this year, we don't. So that creates some favorable year-on-year comparison. However, this market is quite healthy and why, which is a very important segment over there is quite strong. And the oil market is the Andean market as well as Brazil, where overall consumer consumption is good. The challenge there is that because of the supply chain constraints over the last two years, customers imported a large amount of empty glass and now they're using that glass, reusing the demand for the local supply, which is a very temporary situation. So, the market is good. In fact, just as an example, in Brazil, glass is growing year-to-date 4.4% and is ahead of every one of the substrate. So, a pretty healthy market. They're going just through a temporary adjustment. Now, the overall sales volume obviously is choppy. It's difficult to predict. However, we saw some improvement in July. Now, if we look at the best information available today, we're seeing improvement in the second half in 80% of the markets we serve. Now, some markets will improve along the second half, some will start improving in Q4 that this improvement is going to carry into 2024. So, I think we're going through a temporary adjustment but we're seeing some signs of starting some recovery and move up as we go later in the year and into 2024.

And building on that, Ghansham, is we do have our expansion programs coming online substantially next year. We have our first two projects this year, one in Colombia and one in Canada that are coming on and that will be in full swing next year. And then we have additional expansion underway in Peru and Brazil, Scotland, as well as in Kentucky with our first MAGMA facility mid-2024. So, all of those -- if you take a look at that, that's embedded probably about 3% plus or minus type of growth on a year-on-year basis of just additional volumes coming through them. And as we've said many times in the past, that brings in, once they're fully in scope on an annualized basis, about $115 million to $120 million of profit for the business. So, that will be a good shot in the arm on top of the recovery that Andres was talking about next year.

Okay. Terrific. And then in terms of the curtailment impact on operating profit, what was that number in 2Q? I'm sorry if I missed that if you gave that out. What are you also embedding for the back half of the year? And I'm just trying to get a sense as to why EPS just based on what you guided to would be the lowest since the mid-2000s?

Yes. Just -- so one thing just on that last part on the fourth quarter. Keep in mind, I put it in the prepared comments is we will have a fairly high tax rate in the fourth quarter in probably in the mid-30s. It's just a matter of the timing of various elements withholding taxes and regional earnings mix. So that's about an $0.08 impact on the fourth quarter. If you normalize for that operating profit, it's going to be pretty consistent with last year's just to give you a sense in that regard. So, keep in mind, there's a little bit of an aberration there. But if we take a look at the curtailment cost, we had about $25 million plus of curtailment costs in the second quarter. It was skewed to the Americas, and that's why you would see some of the higher operating costs hit there in the second quarter. Just as a sense of sensitivity on curtailment, every 1% that we adjust our production levels to correspond with sales volume adjustments is anywhere from $3 million to $7 million impact on EBIT on a quarterly basis, and it really depends whether you're taking lines down or cold furnaces and things like that. But as we take a look in the back half, you probably -- to rebalance the inventories from -- that started to build up to the first half of the year and also to address some of that sales volume pressure that we see in the back half of the year, you're looking at anywhere from, call it, $30 million in the third quarter that will be absorbed, and that is absorbed in our outlook. And then we might have a similar level in the fourth quarter, that's also absorbed in our outlook. But I'd say, again, there could be some swing factors as we get and get a better understanding of the sales volume in the back half of the year. So, despite obviously absorbing not the sales volume, as well as the curtailment cost, we're actually posting pretty good numbers in the back half of the year.

Thanks, Ghansham. Our next question comes from George Staphos from Bank of America. Your line is now open. Please go ahead.

Hi. Thanks for the details and hope you're all having a good morning. I guess, if we go to slide 4. And Andres, you talked about some of the curtailments -- excuse me, some of the constraints that you had, is there a way -- within wine in Europe, and you mentioned also in South America, what the effect of constraints were in some of your most important markets? You had it in total for example, the 2% you said overall, but how did that break down in terms of some of your more important categories. And again, to Ghansham's question, should we expect that, that reverses next year?

Yes. So the -- you know that the Andean market, as well as Brazil are very important for us. And what we're seeing in both markets is a pretty healthy demand. So, now you would imagine the imports of empty glass were quite substantial because of how tight the supply chain was over the last two years. So that data we consume, and it's been consumed at this point. Now, we're seeing some recovery, for example, in the Andean countries coming back to supply the key products that are growing that market in the premium segment, again, and we expect this to normalize over the next two, three months. So, that market should contribute well. Brazil to Southwest Europe once we get into more favorable comps, we won't see this drop that we're seeing at this point in time. The North America market has been doing fairly well. And I think in part because we've been diversifying away from beer into growth categories. And even the mega year, it's been flat. It's been lower off premise and higher in on-premise fully offsetting each order. So, we see a strength in the markets. I think we are in a transition point right now. And as we go into the second half, we should start seeing these important markets starting to rebound and then continue all that into the fourth quarter and 2024.

And the build out on that…

I guess, John, I would say the 2% negative from capacity and inventory constraints for total, can you give us a number for some of the bigger end markets or regions? That's kind of what I was getting at there.

Yeah. It was almost all wine in Southwest and Southeast Europe, okay, basically Southern Europe. That's where we had our constraints. It was a record low inventory specifically in those markets. If you go back to the first quarter, we had issues in the West Coast of the US because of weather and strikes down and civil and rest on and Peru and things like that. That did not translate over into the second quarter. So our issue from a constraint standpoint was specifically in wine in Europe.

Okay.

And what I would say with some of the softness that we're seeing right now, we are able to catch up on some of the lower inventories. And as a result, I think that we're being in a much better position in the second half of the year to serve wine. And into your other question in to next year, I think we, again, should be in a much better position.

Thanks, George. Our next question comes from Anthony Pettinari from Citi. Please go ahead.

Good morning.

Good morning.

Just following up on – Hey, just following up on Ghansham's question, and I guess, George’s, just a little bit. On the previous earnings call, you talked about continued improvement in '24 in earnings and free cash flow. I guess three months later, some things have changed and there's some puts and takes. I'm just wondering if you can talk about level of confidence about year-over-year earnings growth in 2024 and maybe what could get you to sort of a higher end of earnings growth or what could cause earnings to maybe not grow next year?

Yes. Yes, sure, Anthony. I think there's three primary levers as we look into next year, two of which I think that we believe are more or less in our control and we have good confidence around the other one is a little bit more macro. The first one is on sales volume back to our expectation next year, we feel pretty confident about the growth of the new expansion capital, which let's say, plus or minus 3%. So that's something in our control. It's contracted business with our customers and things like that. Not to mention what is the shape of the recovery, right? I mean, at this point in time, we don't know whether it will be, as we said in the comments, a V-shape recovery, which would have a robust recovery in the overall volumes next year because of the expansion plus the recovery or whether it would be more moderate with the expansion of -- driven by the expansion of our business in a slower macro recovery. So that's a little bit of a swing factor, I think, between whether it is a moderate or a robust benefit to the performance next year. The next area, again, within our control is our margin expansion initiatives. We've done really good on those. As you know, in the past, we were targeting about $50 million a year. We're targeting $100 million this year and should exceed that with a lot of focus on North America. We believe that that program has legs and including more progress in North America that we're doing this year and next year, which gives us a good annualized benefits, so I think that, that's a good shot in the arm too. And then when it comes -- the third variable is kind of what happens with net price. At this point in time, we are just anticipating neutral net price. If you look at how that works in our business, 55% of our business is under long-term agreements with price adjustment formulas. And we are still incurring 6% to 7% inflation this year, which will be substantially recovered in that book of business next year. So that's a pretty substantial amount of net price against probably what is a declining inflationary environment over time, which ultimately would suggest maybe higher net price, but let's just call it even because there might be some softness in the open market business with the softer volumes. Again, it's too early to tell that. That comes together more later in the year. But those are the three variables we look at two in our control, and we're pretty confident about being able to deliver those in the next year and the other one a little bit more macro driven.

Okay. That's very helpful. And then maybe just one quick follow-up. The 2% to 3% headwind from customer destocking, is it possible to give a sense of how much inventories do you think customers may be carrying? Is this sort of like a one quarter impact or a two-quarter impact. I'm just trying to get a sense of customer inventory levels. A – John Haudrich: Anthony, what I'd say is, that we serve many different end-use categories, all of which have different approaches on inventory. You go to beer and there's only a few weeks, generally speaking, of finished goods in the chain, and that tends to correct pretty quickly. You're talking into food may be a little bit more moderate spirits and other categories a little bit longer, right? So and some of the ones that ship internationally end up having much longer value chains and different levels of inventory. So I don't know if there's a simple answer to that. But we believe that at this point in time, we're starting to see a transition kind of shifting out of the destocking phase and translating into what probably is much more associated with fundamental consumer consumption patterns, which we think, as you see with the Nielsen data and whatever is down a few percent fundamentally. A – Andres Lopez: Yes. And looking at the Andean countries, that inventory has been pretty much consumed -- when we look at Brazil, we should have finalized consuming that in the third quarter, seeing a positive impact in the quarter.

Thanks, Anthony. Our next question comes from Mike Roxland from Truist Securities. Your line is now open. Please go ahead.

Thank you. Andres, John, Chris. Congrats on a good quarter despite the backdrop A – John Haudrich: Thanks, Mike A – Andres Lopez: Thanks, Mike

Just want to get to follow up on some of the questions about the destocking. Can you talk about the cadence of destocking in 2Q? Sounds like it started in January, volumes declined sequentially through April. I think you saw some improvement in May if I recall correctly from your last call and then started to soften again in June. So can you talk about what happened during Q2 itself and you mentioned July has improved. How much is -- what can you quantify that improvement in terms of destocking on a sequential basis as well? A – John Haudrich: One thing I would say it's difficult for us to quantify in a month-to-month the destocking cadence per se I mean what we saw in our overall volumes, is that April was a tough month, probably down low double digits. We saw May kind of bounce back to kind of minus 6%, minus 7%. And then you saw June down that high single digits and things like that. So it's been really choppy, and that's what makes it a little bit difficult to read through everything. But I'll tell you what, destocking tends to be a pretty choppy environment, especially when it's at the tail end and people are starting to calibrate from destocking over to fundamental demand patterns. So that kind of gives us some sense that we're probably in the later stages of the destocking phase. A – Andres Lopez: Yes. And as we mentioned before, we're seeing about 80% of the markets we serve, showing some form of improvement at this point. Some of them started in Q3, some of them in Q4 and for sure going into 2024.

Got it. Thank you for that. And just one quick follow-up on the 2024 outlook. John, I appreciate the color you gave in terms of things in your control and your control -- if I try to quantify, so price cost possibly we assume nature, maybe plus some tailwinds there. You get incremental EBITDA growth through your expansion projects, call it $115 million to $120 million and then you get the MEI benefits of $100 million. Is that the right way to be thinking about sequential or year-over-year improvement in EBITDA on a quantitative basis?

Yeah, I don't want to get into specific numbers. We haven't really provided 2024 guidance per se. What I would say is, is if you take a look on the expansion projects, it's a total of about $120 million over the life but on a run rate basis. I don't know, if we're going to get all of that next year because we had some this year. We'll have some next year and then we'll have a follow into 2025. I think you're probably right about the margin expansion initiatives. I think we're looking at a robust number there. And then again, it's a little early to call the net price. And like I said, at this point in time, we're just assuming it's neutral

Thanks, Mike. Our next question comes from Arun Viswanathan from RBC Capital. Your line is now open. Please go ahead.

Great. Thanks for taking my question. I just wanted to ask about the demand environment. I think during the quarter, you guys did note some softening in certain markets, maybe some of the higher velocity -- sorry, the lower velocity experience markets and some other areas where you keep on strength before. Could you just give us an update, maybe what you're seeing across some of your major categories and what you expect over the rest of the year? Thanks.

Yeah. So the -- when we look at categories, the largest impact that we've seen so far is in line. And as we mentioned before, it's closely related to low OI inventories. So it's not as much the market itself is those inventories, which makes it very temporary. We have seen a decrease in beer in North Central Europe and that's been primarily driven by lower consumption. And we've seen some impact in spirits, particularly in Mexico coming from a slower growth of the tequila category is still growing, but not as fast as it was growing before.

Thanks, Arun. Our next question comes from David Page from Wells Fargo Security. Your line is now open. Please go ahead.

Andres, John, Chris, good morning. I wanted to -- John, you left the door open a little bit. So I want to try to ask the question. In terms of sort of the more open market business that you referenced, obviously, outside of the 55% that's sort of our long-term contract. Can you maybe break it out by geography, sort of what your exposure there is -- and then just sort of thinking about the supply-demand dynamics in the different regions, we had some capacity come out of the market here in North America. So I feel that, that market should be relatively snug similar comment in Brazil, but different it's growing. So it should be pretty tight there. Europe is the one area where I think a lot of people are focused -- it sounds like you do have some capacity coming back online and then yourselves and some others are adding some, I think of this coming back lines trying to more localized production. But just sort of how you're thinking about, I guess, the potential supply-demand dynamics going into 2024. And then like I said, your kind of exposure to that open market business?

Yeah. Okay. So our -- just to start with the mix of our contract base, okay, again, 55% of our business globally is under long-term agreements that have price adjustment formulas and 45% is open market, that tends to be one-year type of agreement that get reset generally between November and February of each year in most cases. So if you take a look at that regionally, in Europe, we have about 30% fixed 70% open market. It's just one skewed to the open market thing. I think a lot of wineries right, and smaller customers in that regard. Over in North America, 95% or whatever is under long-term agreements, multiyear contracts with very small amount into the open market. And if you get in down into Latin America and that area, it's probably 50-50 maybe skewed a little bit more towards contracted business. And then I think there's just a natural process of working through price with the open market activities given the history of inflation in that region. So that's kind of the mix of that category. On -- I'll make some initial comments on capacity and see if Andres wants to jump in on that, too. But on the capacity side, if you take a look globally, we operate in Europe and the Americas, which is about a 40 million ton demand system. That's about 40 million tons of glass is consumed each year. There - over the next three years to our understanding, there's about 2 million tons of announced new capacity coming online, and it's split all over the different markets. But that's calling at 1% to 2% -- 1.5% to 2% of new capacity coming online on an annual basis, if you just kind of straight line it across the period of time. And that's kind of in line with the overall fundamental growth position of the marketplace. And so yes, some new capacity is coming on. We're about a third of that. And some of it is actually replacing outmoded capacity. So it's not necessarily all incremental expansion. But if we take a look at that over the longer arc of multiple years, we think that it's a very responsible level of capacity relative to the expected growth profile of the marketing

Yes, perhaps to complement with regards to the new capacity coming in line at the end of the second half and in 2024 for O-I, part of that capacity is in the Andean countries with strong consumer demand still and the premium category is growing really well. So that's a pretty good investment over there. Brazil, I mentioned before that glass is up here today 44%. Premium beer, which is our indexed to glass is up 15.5%. So this market is pretty solid, and we'll have some capacity coming up in 2024 over there. The over capacity goes to the U.K. to serve the scotch market, we have a factory that is right at the center of that region, so very well located with very good long-term prospects for growth. The investment in Canada is under contract for localization of a volume that is already there. So it's a pretty low risk. And the other one is in Kentucky to serve the growing U.S. local market and export market in the spirits business. So, we are in a very good place from a new capacity coming up for O-I.

Thank you for that. The second one is that I wanted to dig in a little bit on Ultra, and I feel like this is maybe I don't know a topic that's misunderstood or sort of glossed over. We had an opportunity to talk about it in the second quarter. But it looks like you qualified some of that -- those bottles done in Colombia here during the second quarter. Can you just talk about what you guys are doing there? And then maybe the opportunity to leverage that across your system? It seems like it's a little bit less capital intensive than MAGMA, so I just wanted to maybe how quickly you can deploy something like that across some of your other factories and things like that?

Yeah. So we've been very successful qualifying ULTRA in Colombia, which is where we did it recently. We are planning other investments in this case, in Europe, where there is a strong interest in that. As you mentioned, the capital intensity of that investment is low. So that's quite good. And today, what we have is quite good, that is the early horizons of that. Remember that we are planning to go as high as 30% weight reduction, which will have a very positive impact on sustainability. So we're going to be fairly soon talking about further investments in ULTRA, which will help to position the glass container a lot is stronger from a sustainability stand point in the future.

And Gabe, to your point, I think the good aspect of ULTRA is it can be scaled up quicker at lower capital intensity. So as we work on MAGMA, which we think is the ultimate tool to address the marketplace, bringing in ULTRA in the medium term, we'll really be able to give us a boost as we really lay the foundation for broader MAGMA deployment down the road, which will also include ULTRA. The good news about ULTRA can be retrofitted to our current base as well as being able to use the MAGNA going forward. So it's a great tool.

Thanks, Gabe. [Operator Instructions] Our next question comes from George Staphos from Bank of America. Your line is now open. Please go ahead.

Thanks very much. Just a quick follow-on. In terms of the $59 million or so of cost, $66 million. In the Americas segment, you said $25 million, I think or so was curtailment. Can you parse the rest by category? And then just a quick follow-on on the commentary about the imports of glass. I think you said Andres, in to the Andean region all of that glass from your vantage point would be one-way glass, or is anybody importing returnable glass. And then if so, how do we think about that relative to what your demand should be for next year? Thank you.

Yes. So, George, on your first question, the breakdown of the $50-some-odd million in the unfavorable or higher costs in the Americas. $20 million of it was inventory revaluation, which I think we identified during the previous call, about $10 million was elevated cost for asset project activity. Again, that was something that I think that was included in our guidance before. And the other $20 million or thereabout is associated with the temporary curtailment downtime. That's the one thing that was not in our original guidance, obviously, that was added in the quarter.

And the efforts of last year are primarily one way, but there is a lot of new product development activity, both in one way and returnable in Andean as well as in Brazil. If we look at Brazil, returnable glass is growing 3.5% -- 3.1% year-to-date and is even going into premium products, which it's fairly new. So it's supporting the growth of premium. So it's -- we're seeing growth in both. The imports are primarily related to Huawei.

We have no further questions. With that, I will now hand back to Chris Manuel for final remarks.

Thank you, Carla. That concludes our earnings conference call. Please note that our third quarter call is currently scheduled for November 1, and remember making a memorable moment by choosing safe, sustainable glass. Thank you.

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