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

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

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

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

Chris Manuel: Thank you, Alex and welcome, everyone, to the O-I Glass first quarter 2023 earnings call. Our discussion today will be led by Andres Lopez, our CEO; and John Haudrich, our CFO. Today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for this call are available on the company's website. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. I'd now like to turn the call over to Andres, who will start on Slide 3.

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

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

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

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

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

Photo by Quino Al on Unsplash

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

See also 15 States with the Largest Declines in Unemployment and Kevin O'Leary’s Stock Portfolio: 10 Stock Picks for 2023.

To continue reading the Q&A session, please click here.