Earnings Call Transcript - OI Q3 2024

Operator, Moderator

Hello and welcome to today's O-I Glass Third Quarter 2024 Earnings Conference Call. My name is Bailey and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Chris Manuel of Investor Relations. Please go ahead.

Chris Manuel, Investor Relations

Thank you, Bailey, and welcome everyone to the O-I Glass third quarter 2024 conference call. Our discussion today will be led by CEO, Gordon Hardie and our CFO, John Haudrich. Following their prepared remarks, we will host a Q&A session. Presentation materials for today's 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 would like to turn the call over to Gordon, who will begin on Page 4.

Gordon Hardie, CEO

Good morning, everyone and thank you, Chris. Today, we will review our recent performance and the actions we have taken and will continue to take to grow the value of O-I. Last night, we reported an adjusted net loss of $0.04 per share for the third quarter of 2024, a decline from last year's strong performance. Our lower earnings primarily reflected curtailment of 18% of our production during the third quarter, as we took decisive action to reduce inflated inventory levels after several quarters of sluggish demand. Net price was also down, partially offset by higher shipment levels. We are rapidly implementing our Fit To Win program to improve performance. In addition to rightsizing inventories and making significant reductions in SG&A costs, we are working to drive productivity and close unprofitable redundant capacities to improve our economic profit. While these actions impact near-term earnings and cash flow, we believe they set the foundation for a solid recovery in 2025 and should enhance our long-term competitive position, which is key to future profitable growth. As we take these self-help actions to improve the company's value, we see that market conditions are slowly recovering. Our sales volumes were up modestly in the third quarter as shipments increased in nearly all geographies. Further, our MAGMA program achieved a key milestone as our first greenfield plant began operations in Bowling Green, Kentucky this past quarter. 2024 has been a challenging year. Our performance has been impacted by destocking in both the trade and home, together with sluggish consumption given economic uncertainty. We have therefore adjusted our outlook to reflect a continued softer-than-expected marketplace. While this performance is well below what the business can deliver, we expect significantly better results in 2025, as our Fit To Win measures improve our competitive position and markets gradually recover. Let's now move to Page 5 and further discuss the actions we are taking to increase the value of the company. We believe O-I has significant potential and are taking meaningful actions to advance the company. Our focus is on driving near-term returns by enhancing our competitiveness and capital discipline. This approach will position us well to achieve profitable growth when markets turn. We will execute this over three horizons. In Horizon 1, we will focus on our Fit To Win program, which we expect will drive a step-change improvement in profitability, cash flow generation and the competitive position of the company. We see significant earnings improvement that is within our control by improving the profitability of the volume we have and not dependent on the level or timing of a market recovery or incremental volume. In Horizon 2, we intend to accelerate profitable growth by leveraging a much more competitive cost position enabled by our Fit To Win program. As we seek to grow the business, we plan to align our CapEx with strategic customers' long-term plans, particularly in large and developing markets. Finally, in Horizon 3, we expect to have strategic optionality, which may include geographic expansion into new markets with potentially large profit pools. This plan is different from past efforts. We are conducting a comprehensive review of our entire business and value chain. This holistic approach aims to reshape our company and streamline our operations, optimize our network and reduce our cost of doing business significantly in order that we boost our competitiveness and drive profitable growth. While it is early days, we have established initial three-year targets that span both Horizon 1 and Horizon 2 as captured on the slide. Specifically by 2027, we expect to generate sustainable adjusted EBITDA of at least $1.45 billion, free cash flow of at least 5% of sales and an economic spread that is at least 2% above our cost of capital. We expect our results will improve by $300 million to $350 million in 2027, which represents around a 30% increase from the 2024 EBITDA levels. Let's now turn to Page 6. While near-term performance is under pressure given sluggish market conditions, we are rapidly implementing our Fit To Win priorities in two phases. In Phase A, we are streamlining the organizational structure. In Phase B, we are reshaping the supply chain to enable profitable growth. From these first steps, we expect to deliver at least $300 million in savings by 2027. We are making rapid progress and anticipate achieving at least $175 million in savings in 2025, which is 60% of our three-year target. Key milestones achieved in the past 90 days include three focus areas: reducing excess inventory, driving productivity and reshaping SG&A. With regard to reducing inventory, we have cut 18% of our capacity in Q3, reducing IDS by 17% to 59 days with further improvement in quarter four to come. With regard to driving productivity, we are working to take out all redundant and low profitability capacity. Significantly increasing productivity is the cornerstone of the turnaround of the business. We are evaluating the closure of at least 7% of capacity by mid-2025 to reduce the fixed cost base of the network. The closure of unprofitable and redundant capacity should generate more than $100 million of annualized savings. As part of this evaluation, we have already announced the closure of approximately 4% of capacity, which should benefit 2025 results. With regard to reshaping the organization, we are moving to de-layer the structure, shift accountability to local markets, and reduce central operating costs significantly. These actions should reduce SG&A expense to no more than 5% of sales by early 2026, saving over $200 million on an annualized basis. The first steps are well underway with more than half of the targeted savings expected in 2025. Overall, initial Fit To Win actions should generate over $300 million in savings and underpin delivery of our 2027 EBITDA target. Additionally, in Phase B, we expect to generate additional value through total supply chain optimization by driving productivity across the fleet, closing high-cost operations and transferring profitable volume into our remaining network. Efforts will also include procurement productivity, operational improvements and a more disciplined sales force management. These new ways of working should deliver further savings and higher margins, helping us to achieve our 2027 performance targets. We will provide more details on Phase B at our March 2025 Investor Day. Let's now turn to Page 7 and discuss the commercial environment. As we quickly implement our Fit To Win priorities, we do see some green shoots in most geographies evidenced by modest sales volume growth during the third quarter. On the left, we have illustrated our volume trends. Following several quarters of lower demand, shipments increased by 2% in the quarter. Volumes in the Americas increased by 7%, with shipments rising across all geographies, including a double-digit increase in Brazil. All categories showed improvement except for spirits, which continued to face challenges, particularly in North America. Shipments in Europe were down by 2%. However, we noted solid growth in Southeast Europe and the UK, while shipments were down in Southwest Europe, given softer beer and wine demand, including slower export activity. Although market conditions remain uncertain, consumer demand trends seem to be slowly recovering, as illustrated on the right. While all categories have shown improvement over the course of the year, consumption of beer, wine, and spirits in glass containers is still lower, while food and non-alcoholic beverages are up from the prior year. Our shipments trends now align with consumption trends, as destocking recedes in most categories except for spirits. Rather than the modest U-shaped recovery we expected earlier in the year, actual trends indicate an L-shaped recovery, given a more gradual improvement in consumer demand. It has been a challenging year for Hawaii, along with the broader food and beverage marketplace to accurately forecast consumer trends, given complex macro factors. In particular, there is considerable uncertainty and lack of clarity regarding the levels of in-home pantry stock and the rate at which it is depleting. This remains a significant unknown, particularly in the U.S. To address these forecasting challenges, we are working more closely with customers on integrated business planning. We have also made targeted investments to improve our market understanding and predictive analytics capabilities. Over the balance of the year, we remain cautious and expect sales volumes to be about flat in the fourth quarter with October shipments up 2% from last year on a same-day basis. Let's now turn to Page 8. While we have navigated sluggish market conditions since mid-2023, we believe this is largely cyclical and demand will return, but more slowly than originally expected. The two charts on this page show the overall consumption trend by category for products in glass packaging. We have separated the trends between mainstream and premium products. Over time, glass demand is increasingly influenced by key megatrends such as health, wellness, sustainability, and premiumization. As you can see, the trend over the past 25 years is clear. Premium products tend to grow faster than most mainstream categories, even if at times they are temporarily impacted by macroeconomic cycles or events. Further, the growth of premium products is expected to continue, supported by customer strategies and investment. As a result, we are confident that demand across mainstream categories will stabilize, while stronger growth will reemerge across the premium categories in time. We are changing our operational and commercial focus to properly capitalize on this growth. Now, I'll turn you over to John, who will review financial matters.

John Haudrich, CFO

Thank you, Gordon, and good morning, everyone. Let's begin with our recent financial performance on Page 9. O-I reported an adjusted loss of $0.04 per share in the third quarter, a significant decline from historically high adjusted earnings of $0.80 per share last year. This decrease was primarily due to higher operating costs as we curtailed 18% of our capacity to rebalance inventory levels in response to sluggish demand over the past several quarters. Downtime impacted year-over-year results by about $0.65 per share, partially offset by strong operating and cost performance. Net price was also down, partially offset by 2% sales volume growth. While sales volume was softer than anticipated, net price was consistent with our expectations heading into the quarter and reflected price adjustment established at the beginning of the year as well as cost inflation mostly in Latin America. The third quarter should be the lowest net price realization in 2024 and is expected to be less of a headwind in the fourth quarter. Non-operating items were a net headwind with higher interest expense and an elevated tax rate more than offsetting the benefits of lower corporate retention costs. Heading into the quarter, we expected flat to slightly positive earnings in the third quarter. Our operating performance was in line with these expectations as favorable cost performance mostly offset the impact of lower sales volume. Non-operating costs were about $0.05 higher than expected, primarily due to higher tax rates. Turning to Page 10, let's discuss the performance across our two segments. The Americas posted a segment operating profit of $88 million, down from $116 million last year. Net price negatively impacted results mostly due to cost inflation across Latin America, while sales volume increased by 7%, as Gordon discussed. Additionally, we temporarily curtailed 15% of our capacity to reduce elevated inventory levels, which was up from the prior year resulting in higher operating costs. In Europe, segment operating profit totaled $56 million, a significant decrease from $185 million last year. As expected, net price was a major headwind due to price adjustments earlier this year and sales volume declined slightly. Operating costs were high as we temporarily curtailed 21% of our capacity to rapidly reduce inventory levels that had built up over the past several quarters, which was significantly up from prior year downtime levels. Let's discuss our business outlook on Page 11. We continue to recalibrate our full-year 2024 guidance due to softer than anticipated demand. Our prior guidance assumed sales volumes would be up mid-single digits in the second half of the year. Actual third quarter volume was up 2% and we now expect fourth quarter sales volume to be about flat with prior year levels. As such, we have revised our annual sales volume outlook lower by 2% to 3%. As shown on the left, we now expect full year adjusted earnings to approximate $0.70 to $0.80 per share, down from our prior guidance of $1 to $1.25 per share. Lower full year sales and production volume impacted our annual guidance by about $0.30 per share, which should be partially offset by about $0.05 of additional cost management actions. Lower earnings also drive a higher annual effective tax rate due to minimum tax withholdings and interest deductibility limitations in certain jurisdictions. We have also adjusted our free cash flow guidance, which we now expect will be a use of cash between $130 million and $170 million. This sizable adjustment includes lower earnings due to softer shipments and additional cash payments related to incremental plant and SG&A restructuring as part of our Fit To Win actions. However, the most significant change is due to higher working capital levels with year-end IDS expected to be in the low 50s compared to our previous target of mid 40s due to softer-than-anticipated demand in the second half. IDS in the low 50s is still favorable compared to historic standards. Over time, we aim to further reduce IDS to enhance cash flow as we improve our end-to-end supply chain. As Gordon noted, we do not believe our 2024 performance is reflective of what the business can deliver. In particular, current year earnings and cash flow have been significantly impacted by temporary production curtailments and restructuring charges, among other factors as detailed at the bottom of the chart. As such, O-I's underlying earnings power is stronger than current year results illustrate. Let's turn to Page 12. 2024 has been a challenging year. However, we are taking proactive steps, which we believe will set the stage for stronger performance in 2025. As illustrated in the chart, we are providing an early view of the key business drivers that we anticipate will support improved results next year. We expect Fit To Win initiatives will boost adjusted earnings in 2025 by at least $175 million and results should benefit from some level of production normalization after significant inventory adjustments. Yet, we maintain a cautious outlook on commercial conditions until markets fully stabilize. We anticipate better free cash flow, supported by higher earnings and lower capital expenditures as we adopt an economic profit approach to capital allocation. Finally, we expect lower financial leverage as earnings and cash flows rebound. The chart includes more details for your review. Now, I'll turn it back to Gordon on Page 13.

Gordon Hardie, CEO

To conclude, we are taking rapid decisive action to position the company for a solid recovery in 2025 and beyond. Our Fit To Win initiative is central to our strategy to improve our competitive position and enable future profitable growth. We are optimistic about the future and are determined to improve the value of O-I. Thank you, and we are now ready to take your questions.

Operator, Moderator

Our first question today comes from Ghansham Panjabi from Baird.

Ghansham Panjabi, Analyst

I guess, first off on the working capital being a much bigger negative than you initially projected, I think you said roughly $100 million more. Is it likely that you'll still have too much inventory as we sort of cycle into 2025? I think you just said that volumes are tracking a little bit lower than you forecast for the back half of the year. And I'm also trying to reconcile why you're expecting 4Q volumes to be flat when October was up a little bit?

John Haudrich, CFO

Yes, Ghansham, I can talk about the working capital. Yes, as I mentioned in the prepared comments, we were targeting kind of mid-year that we would get our IDS down to the mid-40s, which is at a historically low level for the business. Based upon what we're seeing with sales volumes being a bit softer and the fact that it's challenging to move our network that quickly, we're probably going to be in the low-50s. So, a little bit of a delta there, and that's resulting in higher inventory at the end of the year, higher working capital as you referenced. As we stand here right now, there's about $125 million of debt we're incurring in expense as we draw down inventories this year, meaning extra expense that we're taking because production is lower than the sales activity. We think that at least half of that or more will come back next year as we exit the worst of the inventory destocking activity, but we will continue in all likelihood to do some drawdown of inventory. So, the remaining component of that $125 million will be in a future period.

Ghansham Panjabi, Analyst

Okay, got it. And then, as it relates to pricing in Europe for 2025, what is the base case at this point? And I'm just asking because obviously you're doing a lot in terms of cost outs and so on and so forth. But if you look at European margins for 2024, just assuming just sort of your estimates for the fourth quarter implied estimates for the fourth quarter, margins are basically back to pre-COVID levels. And so, are you assuming that you're going to get cost savings next year and that offsets incremental pricing on the downside or should we expect margins to build up of ‘24 specific to Europe?

John Haudrich, CFO

I can take the last question first and then turn it over to Gordon on the volume and other questions. Certainly, our margins right now are in a suppressed level. Even as we mentioned before, we're at about 18% curtailment level in the third quarter. We'll probably be in that 16%, 17% still in the fourth quarter, okay. So, we're going to be incurring an earnings penalty that's pretty consistent with what we saw here in the third quarter. That in effect is suppressing the margins. We do believe that a more normalized segment profit margin in the mid-teens is probably a good next step for the business to tear up to. It will obviously be a little bit higher in Europe and a little bit lower in the Americas given the mix of business.

Gordon Hardie, CEO

When we look at volume, I think we're sort of calling flat and it's almost a view of the two hemispheres. So if you look in the Americas, I would say that we were looking at flat to increases driven and then in Europe, I would say would be flat to slightly down on volume driven by the wine situation and also as big export markets like China and the U.S. are suffering some softness, you could see spirits volumes maybe coming off a bit there. With regard to pricing. Again, I think we are looking at a sort of flat situation, mainly probably in Europe, a bit of price pressure as there is probably more capacity there in the market, less pricing pressure I would imagine in the Americas given particularly in places like Brazil, where the capacity is fairly full across the region. We've got tighter capacity in North America, a bit more kind of free capacity in Europe, which may put pressure on some pricing. We're looking as we look forward on flat. And then, as we've laid out, we are taking very rapid action around the cost base of the business. And the net of all that is we see an improved outcome for the business going forward.

Operator, Moderator

The next question today comes from the line of George Staphos from Bank of America.

Unidentified Analyst, Analyst

This is actually Tash on for George this morning. So I guess with the capacity closures that you've done so far and those that you're considering for next year, I guess, where do you think you will be running in terms of utilization rate by the end of next year? And then, what can be the potential benefit from better operating leverage as a result of that?

John Haudrich, CFO

We included in the slide that for 2024, we anticipate around 13% temporary capacity curtailment to address softer sales volumes and reduce inventories. More than half of this will be addressed through permanent capacity closures, which will provide us with $80 million next year and $100 million on a run rate basis. The remaining temporary curtailment will contribute to this, with about half likely returning to the business next year as we move past the worst of the destocking. While we expect some level of destocking to continue, this situation offers us flexibility in the marketplace to capitalize on any improvements in volume. Ultimately, 75% of the issue will be managed through capacity closures and normalizing inventory management.

Unidentified Analyst, Analyst

Appreciate that. And then I guess in terms of the initial 2027 targets you put out in terms of EBITDA, I guess what sort of volume growth are you underwriting for that? And I guess, what is the potential long-term volume growth of the business moving forward? And what gives you confidence in that regard?

John Haudrich, CFO

I'll address the first part of that is our assumptions right now are volume neutral, okay. Right now, when we take a look at bridging from where we are today to where we think is the $1.45 billion, that does not volume contingent at all. It assumes volume neutrality.

Gordon Hardie, CEO

And then, with regard to sort of how the markets are going to evolve from a volume perspective, over the medium-term and through the cycle, as we've seen in the charts there, we see mainstream glass stabilizing, while premium glass will continue to grow consistently. We see many of our major customers driving this portfolio approach and investing behind it. If we look at our own portfolio, it's split really between 80% commodity to mid-premium and 20% premium. And to play in that midstream more effectively, we need to get our cost base down. We need to be more competitive and not just against glass. We need to close the gaps to cans as well. As I said on our previous outing, the current gap between glass and cans is about 35% and that's just too high. You will lose share. We are losing share to cans and all the data we have suggests if we can get that cost premium between 15% and 17%, then you see a reverse flow from cans to glass. So, that's the reality and we need to face up to that and we need to get into it and that's exactly what we're doing in terms of driving the competitiveness of the business across both the organizational structure and particularly across the total supply chain. And so as you get that cost base down, be more competitive, not just against other glass competitors but against cans that then underpins our cost base that also allows you to leverage into premium and so take advantage of that continued and consistent premium growth as we go forward. And so that's our approach. I think all the data supports that the customer strategies, the customer investments behind premium and then the opportunities we see to really get after a much lower cost base in the business underpins that approach and that we feel will give us a better portfolio mix, a richer portfolio of mix with higher margins and better ROIC as we go forward.

Operator, Moderator

The next question today comes from the line of Arun Viswanathan from RBC Capital Markets.

Arun Viswanathan, Analyst

I guess first question would be, when you think about some of your bridge items, it looks like for EBITDA, would it be possible to potentially add in the $175 million Fit To Win benefits for ‘25 on top of, say, the lower end of your guidance, maybe $1.1 million? And so the starting point could be kind of in that $1.25 to $1.75 range. What are some of the headwinds to that kind of math when you think about ‘25?

John Haudrich, CFO

Yes, Arun, yes, I think you're thinking about it right. I mean, we got a base this year that we shared. The $175 million is meant to be additive to it as well as some value, as I mentioned earlier, the normalization of production because we're exiting the worst of the inventory destocking. On Page 12 of the materials, we have some of the puts and takes. You'll still do better and some of the interest will start to come down a little bit. You see normalization of tax rate as earnings get better. Of course, we have the commercial elements that we identified there, either neutral to some slight headwind in sales volume and then the negative net price that we flagged there. We don't believe it will repeat of 2024, but there might be some pressure there. So hopefully, that gives you some of the moving parts. And certainly, while we're not looking to quantify all these levers today because it's too early, we certainly will fill in the blanks at the next year in earnings call.

Arun Viswanathan, Analyst

And similarly on the free cash flow bridge, so, you went from a source of $75 million at the midpoint down to a use of $150 million, so kind of a $225 million swing there. When you think about a free cash flow going forward, should you be free cash flow positive in '25 or does this kind of slower inventory depletion push that out a year or two into '26 or '27? How are you thinking about that as well?

John Haudrich, CFO

Just to clarify, on Page 12, we expect to achieve better free cash flow and become cash flow positive next year, with earnings improving due to lower capital expenditures as we move away from the peak strategic spending of the past few years. We're adopting a more economic profit approach to maintenance spending in our business, and working capital should normalize. We've faced challenges with production downtime affecting accounts payable, although we are making progress on inventory levels. As production stabilizes next year, we expect an increase in accounts payable and continued reduction in inventory, despite some temporary downtime.

Arun Viswanathan, Analyst

I have one more question about capital expenditures. What is the level of MAGMA spending included in that CapEx number? Is there a possibility to reduce that CapEx even more? Does this figure include both MAGMA and any other capital projects you are working on?

John Haudrich, CFO

As we consider MAGMA, we have just initiated production at the new Bowling Green facility, which is a crucial milestone for us. I do not expect significant MAGMA spending on capital expenditures next year until we pass that milestone and determine the next steps with the new technology. Therefore, we expect capital expenditures to decrease, likely falling below the $500 million mark.

Operator, Moderator

The next question today comes from the line of Gabe Hajde from Wells Fargo.

Richard Carlson, Analyst

This is actually Richard Carlson in for Gabe. It's a very useful slide on Slide 12. So I just want to ask a couple of questions there. So first on sales volume, it sounds like you talked about seeing some green shoots and maybe seeing some more signs of being positive, but you're cautious going into next year. So just want to get some of the puts and takes, what areas are you actually feeling more cautious about and what areas are you starting to get confident and what could the shape of that look like for next year? And then my second question is going to be on net price, because also I guess it looks like you're cautious going into the year. At this point, what is your visibility into pricing for 2025? And what percentage of your contracts are already signed and what could move that number a little bit as we get into the year?

Gordon Hardie, CEO

Yes. Regarding sales volume, demand in Latin America is strong, and in North America, we anticipate it will be flat to slightly up. However, in Europe, there are concerns with spirits due to softening markets in China, which significantly affects European spirits and wine. We're cautious about the outlook in Europe, where there is also some pressure on spirits in North America. Therefore, we will continue to monitor spirits and wine closely, as these factors are shaping our views on sales volume. As for net price, capacities are quite limited in Latin America and North America. In Europe, with declining volumes, we expect there to be more capacity in the market, which may lead to some pricing pressure. These are the two main factors influencing our perspective as we consider 2025.

John Haudrich, CFO

And just to add to that, about 55% of our business globally is under long-term agreements. This figure is about a third in Europe and roughly 70% in the Americas. These agreements are fairly stable and include price adjustment formulas, although there hasn't been much inflation this year. Therefore, we are expecting stability, with a slight potential for improvement. The main negotiations in the open market are taking place in Europe, which constitutes two-thirds of our business there. These discussions typically begin in November, so it is still early. We will keep you updated as we gain more insights into the situation.

Operator, Moderator

The next question today comes from the line of Josh Spector from UBS.

Josh Spector, Analyst

I wanted to kind of follow up on the net price, but maybe think a little bit more medium to longer term. So, I guess as you look at your Fit To Win and your longer term goals of generating $300 million higher EBITDA from savings, how does net pricing play into that? Understanding that there's some hedges that roll off in Europe and when you talk about glass price competitiveness, like, how does all this square together, prices coming down to become more competitive and you guys growing EBITDA at the same time and your costs going up? So any thoughts there would be helpful.

Gordon Hardie, CEO

Yes. We have a focused program aimed at reshaping our organizational structure and improving our cost efficiency while optimizing our operations across the value chain. This involves a comprehensive review of our value chain to eliminate waste and inefficiencies. The goal is to enhance earnings, boost cash flow, and maintain a competitive pricing position in the market, which will provide us with flexibility depending on various market dynamics. Our primary aim over the next three years is to drive productivity and restructure our cost base, positioning us more competitively. There is growth in the market that we have not yet tapped into due to our high cost base. We recognize this challenge and are implementing all necessary measures to ensure we are competitive enough to seize that growth. Our top 20 to 25 customers globally all have growth plans, so we must position ourselves effectively to support their business developments and become their preferred supplier.

John Haudrich, CFO

Josh, I would add that, if you go back to what Gordon was talking about during the prepared remarks, with Fit To Win, we have Phase A there, which is looking at $300 million of savings. That in and of itself, all else being equal would bridge where we are right now to the range that we're talking about in 2027. But we also did indicate there's Phase B, which has more savings and opportunity associated with it. And if we do run into some headwinds, net price or energy et cetera, we're targeting more savings. So, we feel confident about the ability to achieve our target.

Josh Spector, Analyst

I guess, if I could just follow up on SG&A. I mean, it's a pretty big target in terms of what you're hoping to save overall. I mean, it looks like maybe a 20% reduction. I guess, if you look at benchmarking yourself versus peers, does that put you closer to peers? Would you be best-in-class? So I guess, how do you determine that that's the right level that you should be operating with?

Gordon Hardie, CEO

Yes. As we mentioned in July, our SG&A to revenue was running at about 8%. Many of our competitors are at 5% or below. That obviously is an immediate benchmark and that's one lens we took on it. The other lens we've taken it is looking at the portfolio, we have an 80% commodity to mid-premium portfolio. Therefore, we need a cost base that reflects that reality and reflects that world. And so, we looked at all of the activity and we asked ourselves how does that support that or how does it subtract from it. And through that lens, we have made the adjustments that we feel are necessary to right size the cost base to support the strategy we have going forward. And really, there is anything we can't connect to a health and safety result, anything we can't connect to a customer and innovation result and anything we can't connect to a better cost outcome and capability outcome is going to get challenged on whether it needs to exist in our business or not. So very clear framework and a very clear set of benchmarks that have guided the decisions and we're very comfortable with the decisions where we've made, and we're very comfortable with the speed at which we're taking action to reduce that cost base.

John Haudrich, CFO

One thing I would add there, we've taken action already that accounts for about $120 million of the $200 million target on a run rate basis. That's 60% of the target. Calendar-wise, we expect to get $100 million out of that next year because of the phase in and things like that. So, we're already more than halfway along on the elements that drive that reduction. More work will be done over the course of 2025, as we look to have an exit run rate from 2025 of the total $200 million that will fully benefit 2026.

Operator, Moderator

Our next question today comes from the line of Anthony Pettinari from Citi.

Anthony Pettinari, Analyst

I was wondering if you could talk about maybe at a high level the improvement in forecasting that you're looking to drive, what enables that and what gives you confidence you can kind of improve forecasting?

Gordon Hardie, CEO

Yes. So, obviously, during the whole COVID period saw a huge disruption in normal patterns of purchasing consumer behavior. And as we saw the sales lift through '21 and '22, nobody wanted to miss sales. So there were big sell-ins through the chain. I think what's as you come out the other side of that and customers and down through the chain distribution partners take a look at their or took a look at their inventories and saw that they were very high, then you have the destocking period. And we're really kind of coming to the end of that sort of cycle. I think the big unknown is what is still in the pantries and particularly around spirits. If you bring beer, wine and spirits home, beer is consumed faster than wine, is consumed faster than spirits, yes. And I think what has become clear is how do you get line of sight all the way through to what's happening in the consumer sort of pantry. And I think it's just sharpened everybody's focus on how do you get visibility through what are very long distribution chains. I mean, if you take a look in the U.S, there's three levels for the chain before you get to the consumer. You take a look at travel retail, it's a massively long train that typically has been kind of hard to get visibility on where all the stock is in different parts of the world. So, we've had those discussions with many of our major customers. We all recognize there's a way for us to share information, share data, share insights in a much more effective way and we've agreed to do that with many customers. And also, we're investing in upskilling our own people and also investing in some AI capability around forecasting, which when coupled with the insights our own people bring, actually is giving us a much better result. Yes. So, I think it's sharpened everybody's focus around it. And yes, I see improvements going forward for sure. And we're starting to see it in our own business. Our forecasts are getting tighter, not where we want them to be yet but we're getting there. And certainly, when you and I've been with many, many customers over the last 100 days, it's a real focus for everybody.

Anthony Pettinari, Analyst

And then just one quick follow-up. You talked about evaluating closure of I think 7% plus of capacity by the middle of next year. I guess at first glance, 7% plus looks like 7% or 8% or maybe 9%. But is I mean, is there a possibility that you could have to close or a meaningfully larger percentage, 10%, 15%? Just trying to frame that 7% or more, and then just kind of the contingency planning around that?

John Haudrich, CFO

Yes. I'll address that. We are examining Phase A and Phase B. In Phase A, which involves the 7% plus, we are primarily focused on aligning supply with demand and addressing the overhang we’ve discussed. This will involve a combination of closures and rebalancing our inventory. As we look at economic profit, we aim to identify those few furnaces and plants that are underperforming in terms of economic profit and work to align those issues to eliminate low profitability capacity while strengthening supply and demand. That's the essence of Phase A regarding the 7% plus. Phase B, however, relates more to what Gordon mentioned. If we can enhance productivity and unlock capacity in our network, we can then redirect our business operations to the highest-performing plants. This approach will either facilitate growth or, more likely, help us eliminate the remaining lower-profit, redundant capacity. There are two distinct missions at play here, and there may be additional objectives as we progress into Phase B, but these do not align with the goals of Phase A.

Gordon Hardie, CEO

We mentioned in July that we had conducted some trials on well-performing plants, and we have identified an opportunity to enhance efficiency by 10% to 15%, and we are actively pursuing that. As we evaluate each plant for improvements, it provides us with the flexibility to either target growth volume or scale back capacity in cases where the volume exists but isn't economically viable. The healthier we become, the more options we have moving forward. However, in any situation where we cannot achieve a return, we will not maintain excess capacity.

Operator, Moderator

Our next question today comes from the line of Mike Roxland from Truist Securities.

Nicco Piccini, Analyst

This is Nicco Piccini on for Mike Roxland. Starting with the margin discussion, I believe you mentioned mid-teens for the total company, with Europe higher and Americas lower as a normalized next step. I'm curious if that next step will be in 2025 or after 2027. The reason I ask is that I noticed your peers posted a 24% EBITDA margin, while yours is lower. I wonder why there is such a significant difference and if this can be addressed in Q1.

John Haudrich, CFO

Yes. For one thing, when I was referring to the percentages I was referring to segment profit, EBITDA is probably close to the high teens 20% as far as what where we should achieve. I would say that is a medium-term target, whether that's achieved next year or not. I think we really will get to that when we get into the numbers at the end of the year. Looking at what we could achieve by 2027, I think it would point to the higher end of that range and kind of more of a return to where we were at last year, which is, some of the highest levels of margins that we've seen in a number of years. And I think Gordon already hit on a couple of the differentials of a couple of 100 basis points is just in SG&A alone. So not to mention a number of the competitiveness opportunities that we referred to throughout the discussion. So, it's really a combination of both of those to try to move from where we are right now into a number in margins that are very competitive for the industry.

Gordon Hardie, CEO

Within the business, from this plan, we've got very clear lines of sight on the productivity measures, where they are, how we get at them and what they'll yield. So and there's a very disciplined program behind that to deliver on the numbers we set out from here between now and 2027.

Nicco Piccini, Analyst

I guess just and switching gears to curtailments and closures, does retrofitting MAGMA at the end of life for some of these furnaces either now or in the future, does that come into play when deciding where your closures are?

Gordon Hardie, CEO

It can give us flexibility. Our focus on MAGMA at the moment is, as we've mentioned, we've just gone live in Bowling Green in Kentucky and making sure that we deliver on the ability to deliver industrial scale. There's two hypotheses when you bring a new technology to market. One, does it work at industrial scale and two can you make the right return on it. So that's the real focus for MAGMA at the moment and both the technical engineering and commercial teams. Even in the first few weeks, we're learning a lot and as that plays through and we run that plant at industrial scale, there will be learnings for where best we can then leverage MAGMA going forward. So yes, it will be part of our arsenal as we look at how we configure the chain to best fit to the market to ensure we get the best returns. That's how we're thinking about it.

Operator, Moderator

Thank you. There are no additional questions waiting at this time. So I would like to pass it back to the management team for any closing remarks.

Gordon Hardie, CEO

Thanks, Bailey. Please note that this ends our traditional quarter call. Just two housekeeping items. First, please note that our year-end fourth quarter call is scheduled for February 5, 2025. And then second, please mark your calendar for our Investor Day that's planned for March 14 at The Exchange in New York City. Remember to make it a safe memorable moment by choosing Glass. Thank you.

John Haudrich, CFO

Thank you.

Operator, Moderator

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