O-I Glass, Inc. /DE/ Q3 FY2025 Earnings Call

Good morning. Thank you for attending today's O-I Glass Third Quarter 2025 Earnings Conference Call. My name is Jerry, and I will be your moderator today. I would now like to pass the conference over to our host, Chris Manuel, Vice President of Investor Relations. Please go ahead.

Thank you, Jerry, and welcome, everyone, to the O-I Glass Third Quarter 2025 Earnings Conference Call. Our discussion today will be led by Gordon Hardie, our CEO; and John Haudrich, our CFO. 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 Gordon, who will start on Slide 3.

Good morning, everybody, and thank you for your interest in O-I Glass. Today, we will review our third quarter performance, examine recent market trends and highlight the progress we have made on our transformation journey. We will also share our improved outlook for 2025 and an early view on key business drivers for further improvement in 2026. Before we begin, I want to acknowledge the dedication and determination of the entire O-I team. Your commitment, teamwork and execution are the drivers behind our ongoing transformation. Last night, we reported third quarter adjusted earnings of $0.48 per share, delivering strong results that exceeded both last year's performance and our own initial plans. Our top line remained stable, supported by higher average selling prices and favorable FX, even as overall consumer demand remained subdued. We saw revenue growth in non-alcoholic beverages, food and RTDs, while beer and wine experienced declines due to softer consumer demand. Importantly, the execution of our strategic initiatives is leading to a higher quality of revenue as we strip out waste and inefficiencies, expand in growing categories and exit some unprofitable business. As a result, segment operating profit rose by more than 60% year-over-year, and margins are up a robust 570 basis points, propelled by significant benefits from our strategic program and increased production levels following last year's inventory reduction. Fit to Win contributed another $75 million in the third quarter and $220 million year-to-date. We now expect to surpass our original 2025 savings target, and this program is strengthening our competitiveness, enhancing performance and enabling durable profit improvement. Despite ongoing macroeconomic headwinds, our strategy is delivering results. We have raised our full year 2025 guidance and now expect adjusted earnings per share to nearly double versus 2024. Momentum is building, and we anticipate continued growth in adjusted earnings and free cash flow in 2026 as we advance towards the target set out at our recent Investor Day. Let's now move to Page 4. As we review our quarterly results, it is important to consider current trends within the broader market context. Packaging dynamics are evolving. Short-term cyclical pressures, including inflation, consumer price resistance and elevated supply chain inventories have temporarily dampened demand. However, we anticipate these headwinds will ease over time. Longer-term factors such as lower per capita alcohol consumption and increased substrate competition will persist in certain markets, yet these challenges are expected to be offset by growing interest in premiumization and sustainability. Furthermore, rising consumer health awareness is driving growth in no, low alcohol beverages as well as food and water. These trends suggest a more balanced and sustained demand for glass over the long term. In the interim, our focus remains on eliminating waste and inefficiencies, building higher quality revenue streams, delivering a more profitable portfolio and positioning the business for future shifts in consumer demand. O-I has navigated market volatility effectively, maintaining stable net sales in recent years. As we address near-term cyclical pressures, we are carefully balancing price and volume to achieve a relatively stable top line. For the full year, we now expect pricing to be flat and sales volumes to be down about 2%, which is consistent with softer consumer demand. Despite this, our Fit to Win initiative is delivering a higher quality business mix and strengthening our competitive position, as evidenced by improved margins and segment profits. Looking ahead, we anticipate O-I will achieve 1% to 2% annual sales volume growth post 2027, as markets stabilize, strategic initiatives enhance our cost position, and we drive profitable growth in the next phase of our strategy. Let's now turn to Page 5 to review the progress of our Fit to Win initiative, which I'm pleased to report is ahead of schedule. Fit to Win is significantly reducing costs across the enterprise as well as optimizing our network and value chain to enhance competitiveness and support future growth. In the third quarter, we achieved another $75 million in savings with benefits of $220 million through the first 9 months of the year, well ahead of our initial plans. With this momentum, we expect 2025 savings will range between $275 million and $300 million, which exceeds our current year goal. So we are well on our way to at least $650 million of benefits by 2027 on a cumulative basis. We are making excellent progress in Phase A, which focuses on streamlining SG&A costs and initial network optimization actions. We've already secured $100 million in SG&A savings in 2025, and we are on track to reach our 3-year target ahead of schedule. Our network optimization is also moving quickly. We have communicated the closure of 13% of capacity to align supply with demand. 8% is now complete and all remaining actions should be completed by early next year. Phase B centers on transforming our entire value chain. The first wave of our total organization effectiveness rolled out across 15 plants is completed, and each location has met or exceeded expectations. The second wave covering another 15 plants is in progress, and we should complete the remaining plants by the end of next year with benefits continuing into 2027 and beyond. Our teams are driving strong results in procurement and energy reduction, further boosting savings and resilience. New supplier agreements are set to enhance productivity and competitiveness over the next 3 years. Overall, the Fit to Win program is delivering results faster than planned. We are well ahead of our targets for 2025 and are positioned to unlock even greater value through 2027, despite challenging market conditions. Now, I'll hand it over to John, who will start with a review of our third quarter results on Page 6.

Thanks, Gordon, and good morning, everyone. Let's begin with our third quarter top line results. Net sales held firm at approximately $1.7 billion with modest improvements in gross price, especially in the Americas. Favorable FX provided a helpful tailwind even as consumer demand remained muted. Shipments in tons declined by 5% as modest growth in the NAB food and RTD categories was more than offset by lower performance in beer and wine. Keep in mind, this headline figure does not fully reflect underlying trends as several factors which are not indicative of actual consumption impacted volumes by approximately 3 percentage points. These factors include: a major capital project commissioning in Europe, which we discussed during last quarter's call; inventory correction in the Mexico and North America beer category related to changes in U.S. trade and immigration policies; and mix changes as we exited some unprofitable business lines, consistent with our focus on increasing economic profit as well as the ongoing trend towards container lightweighting. Excluding these factors, shipments were down about 2%, which is more in line with softer underlying consumer consumption trends. Importantly, overall volumes improved over the course of the quarter and shipments were nearly flat with the prior year in September. While revenues were stable, margins improved significantly and O-I delivered third quarter adjusted earnings of $0.48 per share, exceeding both last year's results and our own plans. This achievement was driven by favorable net price, significantly lower costs, thanks to Fit to Win initiatives and higher production levels despite softer sales volumes. A lower tax rate also benefited the bottom line. Overall, O-I has delivered strong third quarter results, outperforming expectations through disciplined execution, cost reductions and continued momentum from our strategic program, positioning the company for ongoing success. Moving to segment profit on Page 7. The momentum is clear as segment operating profit improved more than 60% from 2024 with robust gains in both the Americas and Europe. In the Americas, segment operating profit rose nearly 60%, propelled by higher net price and continued Fit to Win benefits. Volumes were down 7%. We believe underlying consumer consumption represented half of this decline, while specific factors drove the other half, namely lapping new business wins in 2024, inventory adjustments in the beer value chain across North America and Mexico as well as mix change as we exited some unprofitable business. In Europe, segment operating profit surged by 70%, reflecting contributions from strategic initiatives and higher production following last year's inventory reductions. Net price was a headwind and sales volumes dipped due to a major capital project start-up. Importantly, volumes were about flat, excluding this event. In summary, segment operating profits increased significantly with strong gains in both the Americas and Europe, reflecting the continued success and disciplined execution of our key initiatives. Now let's turn to Page 8 for our updated business outlook. Looking ahead, our outlook for 2025 has improved. Given our strong year-to-date performance and the momentum of Fit to Win, we have raised our full year earnings guidance. We now expect adjusted earnings in the range of $1.55 to $1.65 per share, nearly double our 2024 results. This meaningful increase reflects stronger initiative benefits and better net price, partially offset by slightly lower sales volume. Free cash flow is projected at $150 million to $200 million, an improvement of approximately $300 million versus last year and closer to a $400 million increase prior to restructuring costs. Although the adjusted earnings outlook has improved, our free cash flow guidance remains unchanged due to higher-than-expected restructuring opportunities and the settlement of a legacy environmental liability, which together totaled more than $25 million. Higher restructuring is a result of O-I's accelerated network optimization initiatives, which are expected to deliver benefits in 2026 and beyond. Excluding these temporary and elevated charges, our free cash flow is nearing the 5% of sales benchmark, which is our 2027 target. We successfully refinanced our bank credit agreement last month at favorable economics, which also extends out maturities. Leverage improved over the last quarter, and we continue to expect our leverage ratio will land in the mid-3s by year-end. Despite a challenging macroeconomic backdrop, we are executing effectively and our self-help initiatives are delivering results that exceed our original expectations. As a result, we are increasing our full year adjusted earnings per share guidance and expect this positive momentum to continue into next year. Now let's turn to Page 9 for our early perspectives on key business drivers for 2026. Looking ahead to 2026, we anticipate continued momentum with higher adjusted earnings and free cash flow as we advance towards our 2027 objectives outlined at Investor Day. Revenue is expected to remain stable or increase modestly, supported by better mix, fairly consistent sales volume and higher gross price, reflecting the pass-through of 2025 inflation. This aligns with our strategy to maintain a stable top line while executing Fit to Win to further strengthen our competitive position and lay the groundwork for profitable growth after 2027. Adjusted earnings are projected to improve, fueled by another year of strong initiative benefits. These gains should more than offset the impact of lower net price as we reset favorable energy contracts in Europe, which are expiring at the end of this year. Free cash flow is expected to rise, driven by increased earnings and disciplined capital allocation. Cash restructuring costs should be at or below 2025 levels as we complete key initiatives by mid-2026. Our balance sheet should continue to improve with financial leverage in the low 3s by year-end 2026. With strong execution, ongoing transformation and a clear strategic direction, O-I is well positioned to deliver lasting value to all stakeholders. Now back to Gordon on Page 10.

Thanks, John. As we wrap up today's call, I want to emphasize the significant progress O-I has achieved and the solid competitive foundation we are establishing for the future. Our strong year-to-date performance driven by the ongoing success of our Fit to Win program has enabled us to raise the 2025 adjusted earnings guidance once again. Looking ahead, we anticipate continued growth in both earnings and free cash flow in 2026. We are delivering on the commitments made at our recent Investor Day, maintaining a stable top line, enhancing our quality of revenue and advancing our transformation despite a challenging environment. Our efforts to realign our network and supply chain are supporting mix improvement and positioning us for long-term profitable growth. Our cost transformation initiatives are generating substantial savings and increasing our competitiveness, and we have streamlined our organization to be more agile and focused. As a result, margins and earnings are up, free cash flow is increasing, and our balance sheet continues to strengthen. Most importantly, we are executing well, building momentum and expect to create sustainable value for our shareholders. Thank you for your continued support and confidence in O-I. We look forward to building on this momentum and achieving even greater success together. We're now happy to take any questions you may have.

We will now take our first question from Ghansham Panjabi from Baird.

Gordon, considering the demand environment and the fluctuations we've observed over the years, how much does the recent decline impact your perspective regarding whether this is a cyclical downturn or a long-term change due to shifting consumer preferences? If we look back to 2019, volumes have decreased by about the mid-teens, and you are adjusting your capacity accordingly. I'm interested in your thoughts on what the appropriate baseline for volumes might be moving forward, or if this marks a new starting point.

Thank you, Ghansham. The demand environment is quite dynamic. Depending on the segments, categories, and geographical locations, there are various dynamics at play. Overall, it's clear that both beer and wine are experiencing declines in most markets. However, within the beer category, premium brands are seeing some growth, while mid-tier and lower equity brands are losing market share to private label products. Consumers are facing challenges, and I've observed this firsthand in the market. Interestingly, we're noticing growth in non-alcoholic beers, with reports suggesting that up to 60% of new users in this category are from Gen Z, who are entering the beer market through non-alcoholic options. There seems to be a cyclical aspect to beer consumption, alongside a shift towards health and wellness, with consumers opting for low and non-alcoholic beverages. We still feel the lingering effects of COVID on supply chains and consumer behaviors, particularly with how Gen Z is interacting with different categories. In terms of wine, there appears to be a structural challenge; younger consumers find accessing wine difficult due to the complexity of various appellations and labels. The wine industry acknowledges this and is exploring ways to simplify the category for consumers, which should help over time. From our perspective, we have about 1.7 times the volume of our nearest competitors. During this period of volatile demand, our focus is on enhancing profitability and cash flow from our existing volumes while strengthening our portfolio and core business. This involves shedding volumes that do not deliver economic profit. You will see the results reflecting this strategy, as we expect volumes to decline, but margins and cash flow to improve significantly this year. Determining the right baseline for volumes is a complex question. However, we are focused on volumes that provide economic profit. We are in the early stages of our three-horizon strategy, aiming to get fit so we can seize growth opportunities when they arise. While there is volume to be had by targeting lower margins, that does not align with our strategy. We are getting fit to be more competitive when the market turns, with a clear understanding of the types of growth we seek in terms of categories, segments, markets, and customers. While timing is a factor, we anticipate 1% to 2% volume growth that will enhance economic profit and cash flow post-2027. So, that’s how we view the situation, Ghansham.

Okay. Just one quick follow-up. On the 13% capacity cut, how does that skew between the regions? And I'll turn it over.

Ghansham, this is John. On the balance, there is probably a little bit more going on in the Americas than in Europe. But what I would say is where we stand right now, the Americas is substantially advanced, and the final stages are going to be over in Europe.

We will now take our next question from Josh Spector from UBS.

I was wondering if you could talk a little bit more about the volume kind of cadence and the results in the quarter. I think you explained a decent amount of it, particularly within the Americas between some of the beer headwinds in the quarter and the exits that you guys did. Just wondering if you could bucket those 2 pieces apart a little bit for us. So, should we expect more exits on a go-forward basis? Does that matter for profitability since there's maybe some offset there? So just helping to pick that apart would be helpful to start.

Sure. So, if you take a look at the 5%, I'd break it out about 2% is just softer consumer demand and consumers being more challenged, I think, and kind of price resistance in the market. And then between network optimization and a deliberate decision to exit volume that did not make sense for us from an EP point of view, and then also some very deliberate strategies around lightweighting, that's about 3%. So, the underlying, we think, is about 2%, right? And we probably see that holding to year-end.

Yes, I would add that the exit from unprofitable business contributed approximately 1 percentage point to the 3 percentage point total that isn't solely attributed to consumer consumption trends, and this will continue to occur intermittently for the business. We mentioned this during Investor Day, noting that there is a portion of our business that is significantly not generating economic profit. We will either increase prices in that market or exit that business, and that is the process we will be undertaking over the next year or so.

I appreciate that. I also value the early overview of 2026. It may be premature to quantify this, but the cost savings you've mentioned seem to indicate a benefit of at least a couple of hundred million. You mentioned earlier that the energy contract reset amounts to about $130 million, if I'm correct. If we assume volumes remain flat, does that imply we should expect an increase of $70 million in earnings, or are there other factors we should consider?

We don't want to quantify just yet, but we anticipate a significant increase next year as we progress towards the $1.45 billion target by 2027. We need to factor in the energy credit reset, which we previously mentioned is approximately $150 million. This estimate still holds true. Considering the various aspects of the business, we expect stable volume and gross prices to rise amid low single-digit normalization of inflation, along with the impact of the energy reset and ongoing strong benefits from our Fit to Win program. We will provide more detailed quantification at the end of the year, but we do expect a nice bump next year.

We will now take our next question from Francisco Ruiz from BNP.

I have 2, if I may. The first one is on the restructuring, it's kind of a follow-up on the previous question. Out of the 13% capacity reduction that you are aiming, how much is already announced? And how much is pending apart from the French announcement that you made at the beginning of the year? The second question is in Latin America, more specifically in Brazil, with a very bad quarter in terms of volumes overall. Some of your competitors are increasing capacity. How do you see the area in the coming quarters?

Yes, this is John. I'll cover the first point regarding restructuring. Back in 2024, we had about 13% excess capacity, which was resulting in approximately $250 million of unabsorbed fixed costs. We have since announced a closure of 13% of our capacity, which will significantly alleviate those fixed costs. As of the end of the third quarter, we have completed 8 percentage points of that reduction, predominantly in the Americas. We still have 5% remaining, which will be addressed in the early part of next year, primarily focused on Europe, including our announcement in France. We expect restructuring charges for this year to be around $140 million to $150 million, slightly higher than our initial estimates due to more rapid progress in certain areas. However, we foresee a carryover of restructuring costs into next year that will be at or below this level, and we anticipate being out of the cash activity exit range by mid-2026. Overall, we expect better cash flow momentum moving forward in the latter half of the year.

Yes, Francisco, regarding Brazil, I visited a couple of weeks ago and spent a week exploring the market and meeting with customers. On a positive note, we're experiencing strong growth in non-alcoholic beverages like waters and juices, as well as in wine and spirits. However, we've seen significant declines in beer. It's easy to attribute this to the weather, and indeed, I heard many people mention that this winter has been the coldest in 30 years in Brazil, which has certainly affected consumption. Additionally, consumers are facing challenges with spending power, leading to some trading down in beer. We're also noticing customers launching new products in the market, and there were substantial price increases that affected volumes in the short term. On the food side, we experienced a decline in volumes mainly due to shortages of raw materials, particularly olives, which impacted our business. The key issue with beer seems to be largely weather-related, coupled with mid- to high single-digit price increases on shelves, which have pressured consumption. However, we're starting to see signs of recovery, and with the summer months approaching in Brazil, we expect better volumes ahead.

Just another question. I don't know if you have mentioned, but as you did in other quarters, can you give an idea of the current trading in October?

Yes. Reflecting on what Gordon mentioned, we now expect the full year to show a decline of about 2%, which aligns with the overall consumer consumption pattern. The fourth quarter is tracking in that low single-digit range, so there is nothing particularly new regarding consumer consumption trends.

We will now take our next question from Mike Roxland from Truist.

Congrats on a strong quarter in a tough environment. Can you hear me?

Yes.

Perfect. Okay, great. Just wanted to follow up on the pruning of unprofitable business. I realize you mentioned in response to an earlier question that in the Americas, that amounted to about 1%. Can you comment on what that was in Europe? Because when I look at some of your peers, your peers had volumes that increased low-single-digits. Your European volumes declined 4% in 3Q. So, I'm just wondering how much of that volume decline in Europe was you guys walking away from unprofitable business, which your peers then possibly picked up versus, let's say, underlying consumer weakness?

Yes, Mike, as we indicated, overall, shipments were down about 3% in Europe. We attribute that mainly to the major project that was underway, which we discussed last quarter. It was primarily in the spirits category, and that had the biggest impact. While we did walk away from some business there, it was largely due to that major project.

Yes. And just to add a bit of color on Europe for us, Mike. We kind of look at this in probably 3 parts. Southern Europe was very strong for us actually and strong growth in all categories and particularly waters, food, RTDs. In Western Europe, we were impacted a bit by wine with wine exports down and spirits, some of the French spirits not picking up yet in terms of shipments to either the U.S. or to China. Northern Europe was good, was strong for us across food and spirits and beer. And then, as John said, we had that commissioning, which was slower than we had anticipated. So, yes, we're pretty happy where we are in Europe, given the context there. We're very focused on improving the profitability of the volumes we have, and we're not chasing volume just for the sake of volume, and we're being very disciplined around that. As I said, there is volume out there that can destroy your margins and eat your cash, and that's not our game plan.

One thing to add, Michael, on the question about the walking away from unprofitable business, and you can see that in our revenue and earnings results. Yes, the revenue is down as a result, but the decremental margins on the lower volumes were half of what you would normally expect. So, you see us walking away from unprofitable business, and it's very visible in the bottom line performance of the business.

Thank you for the insightful comments. I would like to follow up by asking about the cost spread to aluminum cans. Considering the current aluminum prices in the U.S., how does the spread compare to the 25% you mentioned during your Investor Day? Do you believe you could gain market share next year if aluminum prices stay high and as alumina hedges expire? I understand it's still early, but could you provide an update on how much your actions so far have impacted the cost spread to cans?

Yes. Mike, I'll start with the first part of your question. If we look at the current high cost of aluminum, we believe that the cost differential in the U.S. has shifted from the previous 25% to 30% range to a level where glass can compete more effectively, which is at a premium of 15% or less to aluminum. It's still early to tell, and as things evolve in the market, this is what we observe regarding the competitive position of the product.

Yes. And then, Mike, as you've said, and I think as we've said in our Investor Day, we can't be reliant on the price of aluminum to be competitive to cans. We've got to find our own path there to 15% or less spread between cans and glass, which we are focused on. But it does give us a bit of extra time if aluminum prices rise. But we've got to get there irrespective of where aluminum is over the journey between now and 2027. But just as a close out on that, the closer we are, the more competitive we are, then the more choice our customers have in which substrates to use and indeed consumers, which one they choose on shelf.

We will now take our next question from George Staphos from Bank of America.

Congratulations on your progress and the improvement in margin. You did a great job last quarter. I have three questions, and I will ask them in order. First, regarding Slide 7 and your waterfall chart, can you share where you excelled and where you fell short in relation to your increased guidance for the year? My second question relates to some operations you were evaluating last quarter regarding potential closures or restructuring. Were there any timing factors impacting whether these operations remain active or are transitioned to non-operating status? How has that situation developed? Is it still a downtime issue? Lastly, looking ahead to 2026, I understand there are many factors still in play. Given that you anticipate strong results for next year, characterized by increased earnings or cash flow, it seems that your early commercial discussions on pricing revisions with customers are going well. Could you provide an update on that process, including whether it is progressing earlier or later than expected? Any qualitative insights would be appreciated.

Yes. I would like to address the last question first, if that's okay. We are entering that season, and as John mentioned, we expect gross pricing to be up. Our capacities are tight, but it's still early. We are focused on being disciplined in improving the profitability of our current volume. Any contracts that don't make economic sense will be phased out, allowing us to allocate our resources to volumes that meet our margin and cash targets.

Yes, George. Regarding your questions about performance changes this quarter and our future guidance, Fit to Win in cost performance has exceeded our expectations. We've raised our full year guidance by $25 million to $50 million. Additionally, net pricing has been positive compared to our earlier expectations, helping to balance some of the softer sales volumes we have experienced. Overall, the commercial performance, factoring in both price and volume, aligns with our expectations, albeit with some different components. The primary factor behind the improved performance this quarter, and our expectations for better results in the fourth quarter and for the full year, is mainly due to Fit to Win enhancements. On your next question about operations and restructuring, last quarter, we announced approximately 10% capacity closures, and this has now increased to about 13%. We have successfully identified an additional 3 percentage points of capacity to balance supply with demand and are moving towards permanent closures. By the end of the third quarter, 8% of this was completed. We are still incurring some restructuring and temporary downtime charges through the quarter, which will continue until the end of the year. However, once we transition out of this in early next year, those charges will significantly decrease.

John, recognizing it's the same pair of pants. It's just different pockets. Does that help the fact that you're able to close that incremental capacity help your guided EBIT and EBITDA for the year? And if so, is there a way to quantify that?

Yes. Yes, I think it is. And keep in mind, when we talk about our Fit to Win numbers and benefits, the $270 million to $300 million this year, we are taking into account those permanent closures. And so, as we do better on that and make more progress on that, that is driving in part the upside of the performance on the cost performance. In addition to that, what we call Phase B, which is also doing better, which is the more accelerated total organization TOE projects and other cost-related things. So Fit to Win is going up because of a lot of things, but partly because of the ability to close out capacity. Now, keep in mind, the activity in Europe is going to shift a little bit into the early part of next year from maybe our original expectations, but we've been able to pull forward some activities into the Americas. So, net-net, we're able to backfill some of that time.

We will now take our next question from Anthony Pettinari from Citi.

This is Bryan Burgmeier on for Anthony. Just following up on maybe the volume discussion from earlier. You talked about growth in non-alcoholic beer and maybe some younger consumers staying away from wine. Just maybe from a high level, how would you frame kind of O-I's ability to maybe capture some of these new product launches? Do we expect that to maybe be more of a 2027 item once you're through Fit to win? Or are you may be seeing some early traction with new product launches and kind of new business in '25 and '26?

We are indeed responding to the consumer softness by launching new products. Currently, our product pipeline is up around 8% to 10% this year. New product development represents about 10% of our total volume, which includes both entirely new products and renovated ones that have been redesigned for better presentation on shelves. We are witnessing an increase in new product development. As we streamline our plants and enhance their flexibility, while also working on our best at both strategy, we can respond more quickly. We are also restructuring our new product development organization, which had become somewhat inefficient due to being overly decentralized. This new structure will be implemented in January, and we anticipate reducing our time to market by at least 50%. This will enable us to respond quickly to customer needs and bring products to market efficiently. We are observing growing demand for new offerings, especially as newer consumers engage differently with brands. Our Fit to Win strategy is making our organization more agile, allowing us to collaborate with customers and suppliers in new ways, thus speeding up our market response. Contrary to the narrative that Gen Z is shying away from certain categories, we see them entering these categories differently. Notably, 60% of new consumers in the non-alcoholic segment are Gen Z in many of our markets. This new product development is crucial to our value shift strategy moving forward, as we typically achieve better margins with these offerings.

Building on that, even though the market has been a little soft, the non-alcoholic beverage category in North America and Europe is up mid-single digits. We are seeing a bright spot in those categories, particularly with waters which have been performing very well. We have achieved some notable successes in those areas, and more consumers are shifting towards them. Interestingly, there are articles that discuss how people who might have previously ordered a glass of wine when dining out are now opting for sparkling water or similar beverages at their tables. This reflects an intriguing set of dynamics that also benefits the business.

Yes. I believe glass is well positioned with younger consumers because they are much more aware of sustainability globally and have a very positive perspective on glass packaging. We are observing this reflected in these categories as well. These are encouraging trends for us.

Got it. Got it. Really appreciate all the detail. It's really helpful. And then, just a quick follow-up, John. I think you mentioned a charge from an environmental liability during the quarter. I guess, is that a new item? I didn't recall hearing that before, but maybe I missed it. Just any detail you can provide on that.

Yes, we have mentioned this in our 10-Q reports over the past several quarters. There is a former subsidiary with an old paper mill that ceased operations in 1967, and it is now situated on federal land. We reached a settlement with the federal government regarding this matter. Although it is an issue that is 58 years old, we made a payment this quarter of just over $15 million, which is part of the larger amount of over $25 million that I referenced.

We will now take our next question from Arun Viswanathan from RBC Capital Markets.

Congrats on the progress as well. I guess, I just wanted to go back to the volume and understand maybe some of the cushioning that you have. So, I think in the past, you've noted that each point of volume is maybe $0.07 in EPS, which we could potentially gross up to maybe $14 million of EBIT and each point of production is $0.13, which is maybe, I don't know, $25 million of EBIT. So, I think you went in the year expecting this year was going to be flattish on volumes. You're up low to mid-singles in the first half. I know you're up 4% in Q1, but it does look like you're now maybe down 1% on the year or so, maybe could end up the year down 2% or 3%. So, does that kind of imply that you have $40 million to $50 million of EBIT cushion within Fit to Win benefits that's offsetting that greater than expected weakness in volumes? Maybe you can just kind of frame out how you're finding extra savings to offset the volume weakness.

Yes, Arun, I’ll address that. From a commercial performance perspective, we are nearly where we anticipated at the start of the year. Volumes have decreased around 2% for the year, impacting costs as you mentioned. However, net pricing has turned out to be more favorable than we expected. These two factors have largely balanced each other. As Gordon noted in his prepared remarks, we are working to manage the interplay between price and volume in a relatively soft market. Our goal is to strike a balance that yields the best possible financial results while maintaining a stable top line. With these two aspects offsetting each other, the primary improvement this year is due to Fit to Win. That's what is propelling the positive momentum, leading us to raise our guidance for the year once again.

Yes. And just to add to that, please continue.

No, that's fine. Sorry, Gordon.

Yes. No. And as I've said since the start, we're focused on better quality revenue and not chasing what I call kind of profitless prosperity volume for volume's sake. And we really are strengthening the quality of the portfolio we have and improving the returns on the portfolio we have. And you can also see that coming through in the margin expansion and obviously seeing it coming through on the cash side as well. And that's going to be an ongoing feature for us, right, really improving the quality of the revenue we have going forward.

Great. Given this volume performance, do you think you might need to take additional downtime as you approach 2026? Could you also provide an update on inventory levels, particularly concerning Europe and the wine and spirits markets where you're experiencing some weakness? If you do need to take that downtime, will you have other strategies to counter those challenges?

Currently, we are balancing supply with demand and still experiencing some business downtime. However, we have increased our permanent capacity closures, which we expect to complete by early next year. As a result, we anticipate being reasonably balanced between supply and demand once this is finished, significantly reducing downtime in that category for the business. In terms of inventory management, we ended the third quarter with inventory days in the low 50s, around 52 or 53 days. Our goal is to reach about 50 days this year, representing a roughly 15% year-over-year decrease. Due to the softer sales volumes we are currently experiencing, we might finish in the 50 to low-50s range, but this is still very close to our overall goal.

So, I think we have time for one more question.

We will now take our next question from Gabe Hajde from Wells Fargo.

I have two questions. Looking at the model and considering how you're describing the commercial outcomes, it seems competition is slightly different. While I understand you can't manage this on a quarter-to-quarter basis, I've noticed prices are increasing significantly in the Americas. I believe you may have addressed this already, but could you clarify the intentional business strategies affecting the product mix, any formulary price adjustments in the Americas, and the deliberate pricing decisions you’re making in North America?

Yes, Gabe, I can address that, and Gordon can add any further comments if he wishes. Our price, both gross and net, is noticeably weaker in the first quarter. It has been soft in the first half of the year but is expected to improve in the second half. In the Americas, particularly in North America, we adjust energy costs on a monthly or quarterly basis, which slightly contributes to the pricing. I would also note that the capacity utilization in the Americas is likely in the mid-to-high 90s, indicating a fairly tight environment. In comparison, Europe is around mid-90s to low 90s in capacity utilization, but it should see improvements as several capacity closures are finalized.

We have a clear process for making decisions regarding our portfolio. Previously, we've discussed that we have visibility down to the SKU level in terms of economic profit. There are various internal strategies we can use to enhance the economic profit of specific products or product ranges. We assess whether these improvements make sense for us. However, even if we implement these changes on certain ranges, we still require significant price increases from customers. Some customers may agree that the price, quality, service, and other factors justify the increase, while others may not. In those cases, we decide to remove that business segment since it often adds complexity to our supply chain and may carry hidden costs. This complexity affects our operations, especially with larger production lines, which were initially designed for longer runs but have become too complicated over time. We're actively working to simplify this and understand the financial impact of our decisions. Reducing non-economic volume from our business is beneficial and is reflected in our results. This, in turn, allows us to focus capacity on more profitable SKUs, which is the core of our strategy.

Got it. Maybe that kind of feeds into my second question. Most of the capacity adjustments, I think you talked about in the U.S. or in the Americas. By our math, maybe 0.5 million tons or so that's been identified in Europe. What about the tons and closures, and really, I think you talked about 40% of that business that gets exported out of your European operations into some other part of the world, and it's still relatively depressed. So, I guess what's enabling you to service that business as you talk about having the potential to come back with those capacity adjustments?

Yes. When considering the spirits market, the two main regions are the U.S. and China. Currently in the U.S., we're facing some temporary pricing challenges affecting consumers. We believe this is a temporary situation and expect the inventory issues to resolve, allowing the U.S. to continue importing large amounts of spirits from Europe. China is also facing similar demand challenges, but we anticipate improvement over time in both markets. Additionally, markets like India and South Korea are showing strong growth. We are noticing early signs of recovery in travel retail, with a 3% increase in volume year-to-date, although it hasn't reached pre-COVID value levels yet. Overall, we believe these are cyclical issues that will eventually resolve, and we are prepared to meet the demand when it returns.

And to build on that, Gabe, yes, we are closing out excess capacity to balance supply with demand. But keep in mind, our TOE, Total Organization Effectiveness program is intended to unlock trapped capacity in the system. That will allow us to grow, and that is by far the cheapest way to get capacity within the system with great operating leverage when you enable it.

And so, getting the operations a lot fitter and then sweating them a lot harder than they were in the past, Gabe.

I will now pass the conference back over to Chris for any additional remarks.

Thank you. That concludes our earnings call. Please note, our year-end and fourth quarter call is currently scheduled for Wednesday, February 11, 2026. And remember, make it a memorable moment by choosing safe, sustainable glass. Thank you.

Thank you.

Thanks all.

That concludes the O-I Glass Third Quarter 2025 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.