Hello, everyone, and welcome to the O-I Glass First Quarter 2024 Earnings Conference Call. My name is Emily, and I'll be facilitating your call today. I will now turn the call over to our host, Chris Manuel, Vice President of Investor Relations, to begin. Please go ahead.

Thank you, Emily, and welcome, everyone, to the O-I Glass First Quarter 2024 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. Last night, we reported first quarter earnings of $0.45 per share. As expected, results were down from historically robust performance in the prior year period. Lower earnings primarily reflected softer demand due to the market downturn and temporary production curtailments to balance supply with lower shipments while net price was down slightly. Our margin expansion initiatives are off to a particularly good start this year, although it's lower than originally anticipated. Consumer consumption patterns are gradually improving and we are encouraged by the progress in our shipment trends since the fourth quarter of last year. As conditions gradually improve, we are focused on the factors within our control. I'm proud of the continued excellent operating performance across the enterprise, and we have increased our full year margin expansion initiative target as we seek to optimize our 2024 results amid slower demand. Importantly, we continue to advance MAGMA to create a long-term competitive advantage for the company, and we are excited for the start-up of our first MAGMA greenfield plant in Bowling Green, Kentucky this summer. As we look to the balance of the year, we are adjusting our full year 2024 outlook to reflect a slower market recovery, which John will review a bit later. Nevertheless, we remain confident about the long-term trajectory for glass demand as well as stronger future earnings potential as markets recover over time. Let's turn to Page 4 to discuss current market trends. While still soft, the commercial environment is gradually improving. As shown on the top chart, our shipments on a year-over-year basis were down 12.5% in the first quarter compared to a 16% decline in the fourth quarter of 2023. Additionally, April shipments show gradual improvement as demand was down about 10% from prior year on a per day basis when adjusting for the shift in the Easter holiday between 2023 and 2024. Consistent with discussions in previous calls, inventory stocking across the value chain has been a significant driver for lower shipments this past year. Destocking is in the later stages for products with a short cycle such as beer, NABs and food while activity will likely continue for a couple of quarters for longer cycle products, including spirits and wine. Additionally, consumer patterns are improving but at a slower rate than expected, as illustrated in the bottom chart. Trends improved consistently over the course of 2023, but were choppy during the first quarter this year and lagged our expectations. Software consumption is attributed to factors we hear about in the news every day, such as cost inflation on food and beverage products, driving price elasticity challenges. Prolonged higher interest rates and consumer confidence that remains below pre-pandemic levels. Furthermore, we have seen a limited share shift and some trade down, especially as our customers ramp up promotional activity, which tends to favor more value brands. As we look to the balance of the year, we expect shipments will improve as the stocking activity drops off over the next several months. However, we have revised our 2024 sales volume outlook to reflect a more gradual improvement in demand over the course of the year as we now project a slower rate of consumption recovery than originally anticipated, which is shown in the circle in the lower chart. Overall, we now expect our 2024 sales volume will be flat to up low single digits compared to our prior outlook of low to mid-single-digit growth. As markets improve, we anticipate long-term glass demand will continue to benefit from key mega trends such as premiumization, health and wellness, as well as increased interest in sustainability. Overall, we expect glass demand will substantially recover to pre-pandemic levels over time. Importantly, we are well positioned to take advantage of the rebound as it unfolds. Now I'll turn it over to John, who will review our first quarter performance and updated 2024 outlook in more detail starting on Page 5.

Thanks, Andres, and good morning, everyone. O-I reported first quarter earnings of $0.45 per share. Consistent with our expectations, results were down from historically high earnings of $1.29 per share last year. As illustrated, earnings primarily reflected a decline in segment operating profit, while slightly higher non-operating expense was mostly offset by some favorable FX. Additional details on non-operating items are included in the slide. Let's turn to Page 6 and discuss recent performance across our two segments. The Americas posted segment operating profit of $102 million, which was down from $176 million last year. Net price was a slight headwind and sales volume was down 15%. Elevated operating costs reflected significant temporary production curtailments to balance supply with demand, which was partially offset by favorable margin expansion initiative benefits. In Europe, segment operating profit totaled $133 million, down from $222 million last year. Like the Americas, net price was a modest headwind and sales volumes were down 10%. Higher operating costs reflected the impact of elevated temporary production curtailments, lower JV performance, and prior year energy credits that did not repeat. These headwinds were partially offset by benefits from our margin expansion initiative program. Let's turn to Page 7 to discuss our updated 2024 business outlook. As noted on the left, we have adjusted our full year earnings guidance for a few factors. Net price is stable, yet we have reduced our sales growth expectations, reflecting a longer destocking process and a more gradual improvement in consumer consumption patterns than originally anticipated. Given softer demand, we intend to take incremental production curtailments to ensure inventories remain in check. Importantly, we are accelerating our curtailment activity in the second quarter following the softer start of the year. To help mitigate slower sales growth, we have increased our full year initiative benefit target to at least $175 million. Finally, our outlook has been impacted by unfavorable FX trends, higher interest rates, given the change in the forward curve and a higher tax rate. As a result, we now expect adjusted earnings to approximate $1.50 to $2 per share compared to our prior outlook of $2.25 to $2.55 per share, and we have updated our view of quarterly earnings allocation. Free cash flow should range between $100 million to $150 million, reflecting lower earnings, partially offset by other favorable cash levers, including moderately lower CapEx. We intend to maintain a healthy balance sheet position and expect to end the year with leverage both in the low 3s, which will naturally decrease as volumes and earnings recover. As Andres discussed, we believe current market conditions are temporary. While it will likely take longer than originally anticipated, earnings should rebound when sales and production volumes substantially return to pre-pandemic levels. Now I'll turn it back to Andres, who will provide an update on our key strategic objectives on Page 8.

Thanks, John. Despite the market downturn, we continue to execute on the five key priorities we established this year to enable our long-term strategy. We are off to a good start with our margin expansion initiatives, which are helping offset some of the current market pressures. As noted, we have increased our full year target, which includes planned restructuring activities in 2024 that are now substantially complete. We will continue to evaluate our network requirements as future market trends unfold. At the same time, we are expanding our business to enable profitable growth. As I will discuss further on the next page, our MAGMA greenfield project remains on schedule, and we continue to advance attractive expansion projects, while others remain on hold pending further market recovery. All MAGMA R&D is advancing well, and we remain on track for our first Gen 3 deployment in 2026. Likewise, we recently approved two new ULTRA lines in Europe to support increasing customer interest in lighter weight packaging. Our ESG efforts are progressing well, and our 2024 capital plan includes all key projects that enable our long-term sustainability roadmap. Furthermore, we are excited that the U.S. Department of Energy has selected O-I to receive up to $125 million in funding over the next few years to accelerate the deployment of industrial decarbonization technologies. Finally, we intend to maintain a healthy balance sheet, as John discussed. Overall, we are off to a good start this year as we advance our long-term strategy. More on MAGMA on Page 9. Our Heritage network is a great fit for many of the categories that we have served for decades and will continue to serve into the future. However, markets have evolved, and we now see greater brand proliferation and increased product fragmentation. MAGMA reimagines the entire glassmaking process to serve a more differentiated market. MAGMA is more flexible and scalable and can be more rapidly deployed. It is smaller and will fit into an industrial warehouse, which lowers future capital intensity and operating costs. Furthermore, MAGMA can be near located or colocated to reduce logistics costs and is designed around sustainability from the ground up. In short, MAGMA is designed to meet the market requirements for today and into the future. We are nearing an important milestone, and we expect to start up our first MAGMA greenfield in either late July or early August. Located in Kentucky, which includes nearly 100 whiskey distillers, this new plant is an example of how MAGMA can enable profitable growth in attractive fragmented markets. Let's turn to Page 10. We believe MAGMA and ULTRA will increase O-I's right to win in the marketplace. In particular, increased flexibility, scalability, and rapid deployment will create key benefits for O-I across attractive differentiated markets and categories. Overall, MAGMA and ULTRA together represent a majorly forward and sure spend O-I's total addressable market by over 30%. We look forward to hosting investors and customers at our new greenfield facility in the future, which will demonstrate all our innovative technologies that will create a new competitive advantage for O-I and enable glass to win in the marketplace. Please move to Page 11 for some final remarks. O-I continues to navigate well through challenging macro conditions and delivered solid first quarter results despite softer-than-expected shipment leverage. While we have revised our current year outlook to reflect a slower than anticipated market recovery, we are taking the right steps to position the company for future success. We are properly aligning supply with lower demand, and we have increased our already record high target for margin expansion initiative benefits. Despite the short-term challenges, we remain confident in the long-term positive trajectory of glass packaging, and we are well positioned for the rebound, which should significantly improve future earnings over time. Importantly, we are excited for the start-up of our first MAGMA Greenfield plant this summer as we align our business to the future of glass packaging. Before we take your questions, I would like to end with a few reflections on my time as CEO. Over the past several years, we have significantly transformed the company, and we are now a much more disciplined, agile, and capable organization. After stabilizing our operations, the team significantly enhanced our ability to execute, and we have consistently delivered on our commitments. We rebalanced our network, expanding our Americas footprint and divesting non-core assets. We have reduced risk and improved our cash flow profile with a fair and final resolution of our legacy asbestos liabilities, and we have the best balance sheet in nearly a decade. While improving core performance and optimizing our business structure, we also developed new breakthrough technologies that will create a new competitive advantage for years to come. I'm proud of what we have accomplished and we'd like to thank the O-I family for all that we have accomplished together. I would also like to thank each of you in the investment community for your interest in O-I over the years. The best is yet to come. Speaking on behalf of Gordon Hardie, our incoming CEO, he is actively engaged in the transition. He is looking forward to joining the O-I team in mid-May and meeting with the investment community in the near future. Gordon has served on the O-I board for over 8 years and knows the company well. With his years of experience working in the food and beverage industry, including some of our customers, he is well positioned to lead the company into the future. Thank you, and we're now ready to address your questions.

Our first question today comes from Ghansham Panjabi with Baird.

Andres, congratulations on your retirement and also on your very impressive legacy you're leaving behind. Wish you well for the future. Yes. So I guess, first off, in terms of the volume adjustments relative to the prior guidance, are there any notable categories that are driving that sort of derating if you will? Or is it just broad-based at this point?

I think it is broad-based with the exception of the Andean countries, which is the place where we invested in expansion, that is performing quite well. And in fact, Colombia specifically is growing year-on-year in the mid-teens. Every other market is experiencing this slowdown, with some markets having more destocking impact, for example, spirits in North America or in spirits in Mexico because of tequila. But for the most part, it is everywhere with the exception of the Andean countries and specifically Colombia.

Ghansham, I would add, if you take a look on a category basis, consistent with Andres said, we're seeing the best recovery and improvement in the beer category. But it is choppy across the different markets. As Andres mentioned, Colombia, for example, is doing quite well. In some other markets, it's still kind of flattish to down a little bit. But overall, we've seen the most improvement in beer, which again is one of your shorter cycle areas that we mentioned the destocking is substantially complete, and we're seeing that improve. Yet you're still seeing that the wine and spirits category is still kind of down in that low to mid-single digits, and with the expectation it might drag on a little bit longer given the consumer consumption in that area is softer and it might take a little bit longer for that area to destock.

Got it. And then in terms of the destocking specific to wine and spirits, what sort of timeline is realistic as it relates to the destocking component? And then also just given the weakness that you're seeing across the board, I know you have a lot of contracted business, but just touch on maybe the competitive activity across the different regions, just given sort of a lower for longer volume dynamic.

So with regards to destocking, we're seeing some interesting evolution lately. Demand trends are changing as we speak. We're seeing some interesting evolution. With regards to the spirits and wine, we expect this to continue through the second half, improving along the way, but it should be recovering in the second half overall.

As far as the competitive environment, the only thing I think we can add is that we are managing our business as we have over the last several years to really balance supply with demand and be very, very crisp on our inventory levels so that we maintain the proper balance within our system. I really can't comment too much on the competitors.

The next question comes from Mike Roxland with Truist Securities.

And Andres, congratulations and best of luck in your retirement. Just on my first question, in terms of the accelerating curtailment activity. Is that mostly occurring in the Americas? And is there something that specifically happened because you sound a little more confident last quarter? You also were at a conference in late February, where you reiterated your guidance. I'm wondering if something happened between the conference or versus last quarter that made you become more cautious? And I understand that the backdrop is volatile, the consumers are volatile, but has something really happened more recently to increase your cautiousness and negatively affect your outlook?

So curtailments have been more pronounced in the Americas, as you mentioned. Now as we enter the year, we had an expectation regarding the pace of destocking as well as the consumer consumption levels. Now Q4, with all the data we have was the lowest point in the year-on-year comps for us. Q1 showed an improvement versus Q4, and April is showing an improvement versus Q1. Now we had a pretty low margin, so that may be why the Q1 is so low. Now with all that in mind and with the latest information at hand, we see destocking taking a little longer than we originally anticipated. So we are correcting that. Consumer consumption is recovering but is recovering at a slower pace. Now there are some encouraging signs. For example, when we look at the wine in Europe, wine out of Italy, the exports are growing year-on-year in the latest data that we have, for example. But then we got to see that continue for the balance of the year. There is some positive evolution in beer and wine inside Italy at this point. There is improved performance of beer in North Central Europe. So all of this is unfolding as we speak and that makes it a little bit more challenging. But we believe we now corrected that volume based on the latest information we have and more in line with the actual destocking pace as well as the level of consumer consumption.

Yes. Mike, what I would add is if you look at the curtailment activity, we had about an 8% curtailment in the first quarter which was kind of a line, maybe a little higher than the sales volume decline that we were expecting in the first quarter going into the period. Obviously, the actual decline was bigger than that. So we are stepping up the curtailment activity. It will probably be anywhere between 10% to 12% level of our curtailment over the balance of the year with probably the peak being in the second quarter here as we catch up for adjusting for a little bit of slowness in the first quarter. As we look to where, as Andres mentioned, we have been most active in our curtailment in the Americas, and so probably incrementally more curtailment will be occurring in Europe as we look to rebalance everything over the course of the year.

Got it. For my follow-up, could you discuss any additional opportunities you have in MAGMA that might help offset the current demand weakness? You mentioned that you’ve set a target total of $175 million for the year, and it sounds like you've completed several projects to reach that target so far. What additional resources do you have beyond the $150 million or around $175 million to help mitigate the ongoing demand challenges?

Yes. So we see opportunities in multiple markets. MAGMA given its flexibility, scalability, time to market, and many other things, lower capital intensity, lower total cost of ownership, and the ability to colocate or near locate has many opportunities for MAGMA. So for example, what we're doing right now in Kentucky is to put capacity right where the demand is for these craft distilleries, making capacity available for them to be able to guarantee their supply. Like that, you will be able to map similar situations across the United States and in other markets. And there are enough opportunities already identified to support a larger scale deployment starting once Gen 3 is concluded. So we mentioned here that MAGMA is very good for fragmented premium markets, which are high value, and that's where we're focusing our efforts and our plans at this point.

And Mike, to your question on what's driving the additional benefits we're looking for in the margin expansion initiatives going from $150 million to $175 million. Keep in mind, $75 million of that is related to restructuring of various facilities or SG&A reductions that we made decisions on in the fourth quarter of last year. All that work is substantially done. And so we are at the run rate of that benefit already. And so that certainly helped us in the first quarter and it gives us the confidence. So we really are looking at another $100 million above that. If you look at historically how the company has performed on these initiatives, that's in our warehouse. One thing I would add is a big shout out to the operations team, we're seeing the best performance in operations in seven years, and that is providing us a backdrop of being able to drive more benefits in that regard. We are shifting some of our capital spend a little bit less on growth right now because of the softness in the market and a little bit more towards cost-related projects, automation, things like that. That's sustaining additional benefits this year, but also really building the pipeline for continued benefits and continued margin expansion into the future.

The next question comes from Arun Viswanathan with RBC Capital Markets.

Great. I guess, again, I just wanted to go back to the volume front. So do you think it's possible that we revert to, say, a flattish or 0% or 1% growth trajectory maybe in the back half of this year, especially facing easy comps in Q3, Q4 and maybe some capacity additions and your MAGMA build-out? And is that kind of where you place long-term glass demand? Or do you think there's been some structural weakness now that we should revert to maybe a lower growth rate?

So our expectation is that we will go back to pre-pandemic levels. And the same is the perspective of our customers. So every customer we talk to is planning to go back to pre-pandemic or slightly higher, depending on the industry in which they are. So now as destocking finalizes, which has been the largest driver of our sales drop and consumer comes back up, we should be able to start seeing that level of performance. Knowing exactly where that is going to fall is difficult, but our expectation is that we're going to later in the year and exiting the year will be a much different pace when compared to today.

Yes. The build-out off that, Arun, I would say that right now, we're in a mode where we are recovering to, as Andres said, that pre-pandemic basis as the consumer gradually starts to improve, as we mentioned. So I think it's a little early to be able to call long-term trends because we have to see a little bit more there. But as we look at what's driving the softness right now, whether it's destocking or just kind of the macros and things like that, it's too early to make a call that there's any change in the drivers for our business over the long term. So we haven't really changed that perspective yet. Now to your question about the back half of the year too. So it's included in our materials on Page 4. We do expect things in the back half of the year to be up mid-single digits or high single digits, again, to your kind of what you're alluding to, there are easier comps. We were down mid-teens last year. So we will be comping those to give us stronger growth overall to recover in time to pre-pandemic levels, and then we'll see the longer-term trends unfold.

And everything we are describing in response to your question doesn't involve any deployment of MAGMA.

Great. And then just real quickly on price cost. So I think you may have addressed this, but you wanted to hold on to, say, two-thirds of your pricing that was put in place over the last couple of years. Do you still feel comfortable with that cadence, especially given that we've potentially seen some further deflation on the raw side? Or how would you kind of characterize your outlook for price cost after this report?

Yes. Initially, when discussing price costs this year, we maintained our original outlook of experiencing some pressure, approximately a little over $200 million. This has not changed. We have observed a slight easing in cost inflation, particularly regarding energy, with some impact on raw materials. Pricing has been modified somewhat, mainly because energy adjustments in North America are quickly passed on to our customers. Looking at the broader trend of cost inflation, we are anticipating low single-digit inflation, reflecting a slight decline from our previous estimates. It's important to note that more than half of our business operates under long-term agreements with price adjustment formulas, which should support continued recovery as we enter next year. While it might be premature to discuss the overall pricing landscape moving forward, historically, aside from the past year, our company has generally experienced neutral to slightly positive net pricing in a balanced environment, assuming demand returns to a more normalized state. We believe this remains the fundamental framework for our business, although we need to navigate some of the ongoing transitions discussed during the call.

The next question comes from George Staphos with Bank of America.

Andres, congratulations on your retirement and all that you achieved at O-I and the support of our research. I would like to revisit the issue of why March turned out to be slightly weaker than expected, based on your customers' perspectives. It seems that March was softer than anticipated even when adjusted for days, which has been the case for many companies. What feedback have you received from your customer base on this matter, and why are you confident that improvements will occur in the second quarter? Additionally, regarding customer insights, you've mentioned it might be early to make definitive calls, but as you consider the next couple of years, what concerns you the most about the volume outlook? What aspects provide you the most confidence? Are factors like destocking and subsequent recovery, changing consumer tastes, or shifts in consumption patterns influencing your perspective? There has been some conversation in the industry about changes in consumer preferences, including a shift away from traditional spirits. What feedback are you receiving from your customers regarding this in relation to your demand outlook?

It's challenging to pinpoint exactly what occurred in March, but a few factors may have influenced the numbers. For instance, some customers seized the chance to significantly decrease their inventories before the end of the quarter. Additionally, certain customers were approaching the end of their fiscal year, likely prompting them to take related actions. We expect a more typical operation in the second half of the year. Given the current excess capacity, the usual seasonal demand may not apply since customers have immediate access to products and therefore had no need to stock up in advance for the season. While these factors contribute to the situation, it's hard to say for sure. The encouraging news is that April has shown improvement over March and is also better than Q1, which gives us confidence that we are on the right path. However, it's challenging to define the exact pace and timing of recovery. Looking two years ahead, there are discussions about changing trends, but we need to see if these actually materialize. Trends can often emerge only to later fade away, so it feels premature to delve deeply into that. Overall, while we are currently facing a significant decline in volume, the company is in a solid operational position, and our potential for operating leverage is substantial. As volumes begin to recover, we anticipate a positive outcome.

The one thing I would add on that is, and we brought this point up in the last call, our pipeline for new product development is very, very strong. So to us, that is a signal from our customers that they are looking to invigorate their brands and bring them forward and address whatever changes in consumer taste and trends that are out there. And like Andres said, it's a very volatile environment. You go back into the pandemic and people are drinking a significant amount. Now there's a little bit of softness that you referenced, and it's very difficult to find out what is a longer-term trend and what is the reaction to a different environment. So time will tell.

The activity on NPV is occurring across all segments and geographies and is significantly higher than what we've observed in years. This is being initiated both by O-I and the customers.

Our next question comes from Gabe Hajde with Wells Fargo Securities.

Andres, congratulations. Maybe much like you all are focusing on the controllable, maybe focusing just on the sort of more near-term outlook. It wasn't clear if April volumes, whether on a day-adjusted basis or otherwise were positive for you all in terms of shipments. And then just confidence level in the near term kind of second quarter view that it looks like from the chart, shipments will be flattish. Maybe we'll start there.

Yes, Gabe, to clarify, our actual shipments in April increased by 3%. This was partly due to the timing of Easter. When adjusting for the Easter period, shipments were down about 10% on a daily basis, which compares to the first quarter when they were down approximately 12.5%. We have noticed some positive trends, but the improvement has been slower than we initially expected. March was somewhat weaker, as mentioned by Andres, while April is showing improvement, albeit at a slower pace than we anticipated, especially when considering the Nielsen data indicating a slower consumer environment. As detailed on Page 4 in the lower right corner, we have adjusted our growth expectations for each quarter to reflect a softer recovery in consumer behavior. With April seeing an absolute increase of 3%, we expect normalized performance over the rest of the month. We anticipate being close to breakeven in the second quarter, with stronger volume in the second half as recovery continues and we face easier comparisons to last year's numbers.

Okay. One country you guys talked about, the Andean region and Colombia, but we didn't hear much about Brazil. Again, a lot going on there in terms of what we're hearing from a competing substrate, it seems like aluminum is maybe better hedged this year or maybe cheaper from a sourcing standpoint just as that happens and we get more sanctions and things like that and costs move up. Just curious how long maybe of a lead time you have in terms of discussions with your customers for pack mix done in Brazil? And then just maybe commentary on what you're seeing?

The economy in Brazil has been quite stable and hasn't experienced the same challenges as other economies. Our performance in glass for beer is very strong, driven by premium offerings. For context, our year-to-date first quarter growth compared to the previous year is 5.3%, which outpaces growth in other materials. It's important to note that when other soft drink companies report their demand, they often include carbonated soft drinks, a segment in which we do not have significant participation, which skews their figures. However, beer remains a crucial category for us in the country, and it is performing well. As previously mentioned, the recovery has improved over time since the pandemic, and the proportion of beer packaged in returnable glass has increased and continues to remain high.

That concludes our earnings call. I would like to mention that our second quarter call is scheduled for Wednesday, July 31. As a reminder, make it a memorable event by choosing safe, sustainable glass. Thank you.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.