Earnings Call Transcript - OI Q2 2025

Operator, Operator

Hello, everyone, and thank you for joining the O-I Glass Second Quarter 2025 Earnings Conference Call. My name is Lucy, and I'll be coordinating your call today. It is now my pleasure to hand over to your host, Chris Manuel, Vice President of Investor Relations, to begin. Please go ahead.

Christopher David Manuel, Vice President of Investor Relations

Thank you, Lucy, and welcome, everyone, to the O-I Glass Second 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 earnings 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.

Gordon J. Hardie, CEO

Good morning, everyone, and thank you for your interest in O-I Glass. Today, we will walk you through our second quarter performance, key market dynamics and our outlook for the remainder of the year. Let me begin by expressing my thanks to all our colleagues across O-I. Your dedication, agility and focus are instrumental in driving the transformation we are undertaking. Last night, we reported second quarter adjusted earnings of $0.53 per share, exceeding our plans and outperforming the same period last year. This result reflects the meaningful progress we are making towards a leaner and more competitive company. We continue to navigate a complex environment, including softer consumer demand in certain markets and many macro uncertainties. While overall second quarter shipments declined approximately 3%, performance varied by region as volumes increased in the Americas but declined in Europe. On a year-to-date basis, shipments were up nearly 1%, and we continue to expect full year 2025 volumes will be stable with last year. Our Fit to Win program is delivering strong results. We achieved $84 million in savings this quarter, bringing our first half total to $145 million, well on track to meet or exceed our $250 million target for 2025. Fit to Win is foundational to renewed competitiveness by significantly reducing total enterprise costs to improve performance and enable future growth. We've had a strong start to the year in difficult market conditions and are effectively managing the factors within our control. As a result, we are raising our full year guidance and now expect adjusted earnings to increase between 60% and 90% compared to 2024. John will provide more detail on our outlook and quarterly performance shortly. As announced last evening, following a comprehensive review, we have made the financially prudent decision to halt further MAGMA development and operations. While the earlier stages developed meaningful technical advancements, we have concluded the platform does not have the pathway to the operational or financial return requirements as most recently detailed at our March Investor Day. Through our best at both operations strategy, as outlined at our Investor Day, we expect to drive significantly higher premium output at lower operating cost and capital intensity than MAGMA would have realized in the coming years. This decision aligns with our focus on driving competitiveness and economic profit. Accordingly, we intend to reconfigure our Bowling Green facility into a best cost premium focused operation. We are confident this is the right path forward for our business, our customers and our shareholders. Let's now turn to Page 4 to review recent market trends. Overall, our shipments for the first half of 2025 were up nearly 1% compared to the prior year. Volumes increased in the mid-single digits in the first quarter, but declined approximately 3% in the second quarter. Lower glass shipments are consistent with softer consumer offtake, which is down low to mid-single digits in mainly European markets amid ongoing macroeconomic uncertainty. Unseasonal weather this spring and summer across the Northern Hemisphere further impacted consumption patterns. Finally, we have started to exit some business with unfavorable economic profit, consistent with our disciplined approach. Despite recent softness, we have also had some notable wins as we leverage Fit to Win to drive future profitable growth. Likewise, we have seen a 35% increase in our new product development pipeline as brand owners look to spur growth. As previously noted, we are navigating mixed market conditions. Second quarter shipments increased in the Americas but softened in Europe. In the Americas, shipments were up approximately 4% in both the second quarter and year-to-date, driven by solid rebound in beer and spirits categories. Notably, both Andean and North American regions outperformed the segment average with all geographies reporting positive growth despite continued soft consumption patterns, especially in the U.S. As we embed Fit to Win, we see our competitiveness improving in key markets, especially in North America. In Europe, volumes were down 3% year-to-date and down nearly 9% in the second quarter, which we attribute to the following factors: about 3 percentage points were due to a supplier-related delay at a major plant reconfiguration project in Europe, which is now ramping up well. We estimate another 3% of the decline was timing related as increased beer and wine sales in the first quarter, likely in response to trade policy uncertainty, negatively impacted Q2 shipments. And finally, the balance of the decline pertained to macroeconomic uncertainty and unfavorable weather conditions, which is in line with or favorable to broader consumption trends. Despite these challenges, there were bright spots as nonalcoholic beverages and food categories posted low single-digit growth. To align supply with demand and manage inventory levels, temporary production curtailments remain in place across Europe with a continuing drag on our operating costs there. We remain engaged in consultations with European and local works councils on long-term network optimization initiatives aimed at addressing excess capacity in the fleet. These actions, when finalized, are expected to strengthen our competitive position and support sustainable profitable growth in Europe. In July, our global shipments were down mid-single digits compared to July of last year, reflecting continued soft conditions plus the rephasing of some specific customer order activity and the delayed ramp-up of a reconfiguration project at a European plant. We continue to expect full year 2025 volumes to be in line with the prior year as shipment levels are projected to be stable across both the Americas and Europe. This outlook holds despite some intra-quarter fluctuations, which are primarily driven by comparisons to prior year performance. Let's now turn to Page 5 and review the progress of our Fit to Win program, which is focused on significantly reducing total enterprise costs while optimizing our network and value chain to drive competitiveness and growth. In the second quarter, we delivered $84 million in savings, bringing our first half total to $145 million, surpassing our initial plans. With momentum building, we remain confident in achieving our 2025 savings target of at least $250 million and at least $650 million cumulatively by 2027. Phase A centers on reshaping our SG&A structure and initial network optimization actions, and we remain on track to meet both our 1-year and 3-year goals. We have completed actions to secure our $100 million SG&A savings target for 2025 with more opportunity underway to drive additional savings next year. Importantly, our network optimization efforts continue to progress, including the recently announced actions in the Americas. We continue to expect initial network optimization activities will be completed by mid-2026. Phase B focuses on transforming costs across the value chain, including the rollout of our total organization effectiveness program to optimize system-wide capacity. Following a successful pilot at the Toano plant, the first wave of 15 facilities is nearing completion of the same rigorous process. Results are meeting or exceeding our expectations. Additionally, our cost transformation team is making meaningful progress in procurement and energy reduction initiatives. These efforts are contributing significantly to our overall savings and enhancing operational resilience. We are making significant progress on the end-to-end value chain efficiencies with a number of significant agreements made with strategic suppliers to improve productivity and competitiveness over the next 3 years. In summary, momentum is building and initial Fit-to-Win benefits have exceeded our expectations. We are on track to meet or exceed our 2025 objectives and unlock further upside in the years ahead. Now I will turn it over to John, who will walk you through the second quarter performance and updated 2025 outlook, beginning on Page 6.

John A. Haudrich, CFO

Thanks, Gordon, and good morning, everyone. O-I reported second quarter adjusted earnings of $0.53 per share, exceeding both our expectations and prior year results. The performance was primarily driven by strong contributions from our Fit to Win program and improved competitiveness. As shown on the left, adjusted earnings surpassed last year's figures. We faced expected headwinds from lower net price, lower sales volumes and temporary production curtailments yet these factors were more than offset by substantial Fit to Win savings and favorable below-the-line items, including a moderately better-than-expected tax rate, supported by favorable regional earnings mix. Looking to the right, segment operating profit increased in the Americas but declined in Europe. In the Americas, segment operating profit improved significantly, reflecting notably lower cost due to Fit to Win benefits, higher shipments and fairly stable net price amid tight capacity utilization. In Europe, segment operating profit declined due to lower net price and softer sales volumes. Operating costs rose slightly due to the impact of ongoing production curtailments, but these were largely offset by Fit to Win savings. We expect performance in the region to improve progressively as our downtime decreases, network optimization actions deliver a better cost position and our cost competitiveness improves. As part of our focus on economic profit, we've made meaningful progress in reducing inventories across the enterprise, down approximately $160 million compared to the same period last year. We remain on track to meet or potentially beat our year-end 2025 target of fewer than 50 days of inventory supply. In summary, second quarter results exceeded both our plans and prior year levels, positioning us well for continued success through the rest of 2025. Now let's turn to Page 7 to review our business outlook. Given our strong year-to-date performance and momentum of the Fit to Win program, we have raised our full year 2025 guidance. We now expect adjusted earnings to range between $1.30 and $1.55 per share, representing a 60% to 90% improvement over fiscal year 2024. We also anticipate about a $300 million year-over-year improvement in free cash flow, driven by stronger operating results, reduced capital expenditures and lower inventories despite $140 million to $150 million in cash restructuring costs. Additionally, we've refined our expectations for the quarterly cadence of earnings throughout the year. As you can see, we expect the third quarter will be generally consistent with trends noted in the first half of the year. Fourth quarter will be softer due to the typical seasonality of our business and the tax impact of lower earnings levels. Please note that our outlook may not fully account for potential volatility stemming from evolving global trade policies and other external factors. For more details, please refer to the appendix, which outlines the assumptions behind our updated guidance. Despite a soft macro environment, we are executing well and our self-help efforts are exceeding original expectations. As such, we are increasing our full year earnings guidance. Now I'll turn it back to Gordon to conclude on Page 8.

Gordon J. Hardie, CEO

Thanks, John. In closing, O-I is executing well and delivered a strong first half of 2025. Despite mixed market conditions and sluggish demand, we remain sharply focused on what we can control and are making excellent progress on all self-help fronts. We expect a meaningful rebound in performance, adjusted earnings and cash flow this year and have increased our full year guidance accordingly. Executing Fit to Win and our long-term value creation road map, as illustrated on the right and discussed in detail during our March Investor Day, positions us well for the future. Importantly, these initiatives are largely within our control. As we continue to execute our strategy, we are confident in our ability to meet our goals, including radically reducing the cost base, building a more premium business portfolio and driving economic profit. This should deliver strong financial results, including sustainably higher EBITDA and create long-term value for our shareholders. Thank you for your attention. We look forward to your questions.

Operator, Operator

The first question comes from Ghansham Panjabi of Baird.

Ghansham Panjabi, Analyst

Congrats on all the cost-out progress. I guess, first off, in terms of your volume assumptions for 2025, how does that break out by segment? I guess I'm just curious as to your confidence as it relates to being able to hit flat volumes and just given the uncertainty, et cetera, at this point?

John A. Haudrich, CFO

I can kick off on that one, Ghansham. Overall, if we take a look at our segments, as we indicated, we believe both Europe and the Americas will be generally stable year-over-year. So in the first half of the year, you saw a stronger Americas and a little bit softer Europe. We expect that to maybe kind of invert in the back half of the year, but it's only due to comps. Overall, what we're seeing over the course of the year is a generally stable environment with maybe the exceptions of some disruption due to the capital project that Gordon talked about as well as maybe some fluctuation we saw between the first and second quarter associated with tariff concerns or uncertainties and trying to buy ahead. Other than that, if you take out the noise of kind of prior year comps and things like that, you're looking at a pretty stable environment.

Ghansham Panjabi, Analyst

Okay. Got it. And then my second question, as it relates to the Bowling Green plant, what exactly is that going to be pivoted towards? What is the timeline associated with that? And what is the cash cost, just rough cash cost as it relates to making that transition at that point?

Gordon J. Hardie, CEO

Yes. So that facility is focused really on premium opportunities in spirits in the U.S. And we still see a big opportunity in that category in those segments of the market. So MAGMA was conceived to deliver against premium. And when we look at our best at both strategy and we look at the cost we feel we would need to be at to really grow significantly our premium volume and the capital intensity we required to deliver the target economic profit, that was the right call for us, and we see a path to being able to reconfigure that plant to get lower operational costs, lower capital intensity and to really grow the premium business in the U.S. We're working on that reconfiguration as we speak. And at the next earnings call, we'll give a further update on that, Ghansham. But that's our focus for that facility right now.

John A. Haudrich, CFO

On the cost side, Ghansham, that facility does have invested capital around the superstructure around legacy assets and things like that, which obviously can be utilized in this. But I think it's a little early to be able to give any specifics there.

Gordon J. Hardie, CEO

Yes. But Ghansham, as we've laid out in the past, every project we undertake will have to be able to deliver a WACC plus 2 minimum return for us going forward.

John A. Haudrich, CFO

And one final point I want to reiterate that the outlook that we provided during Investor Day about the outlook for the business as well as the capital investment in the business still holds. We're going to fit this in within that. We're not going to change at this point in time our CapEx outlook for the business.

Operator, Operator

The next question comes from Arun Viswanathan of RBC.

Arun Shankar Viswanathan, Analyst

Just wanted to ask about the Fit to Win benefits. So you were able to accelerate those from $61 million to $84 million in Q2. It looks like you are guiding to $250 million plus now and then $650 million plus in the long term. So maybe you can just frame the upside opportunity there, are you guys finding more as you peel back the layers a little bit more? And would those be mainly in SG&A? And I guess related to this point, the corporate costs were also a little bit lower this quarter at, I think, $25 million. Is that the new level of corporate that we should kind of consider? Or was there something unusual in there? Is that really reflective of those lower SG&A costs?

Gordon J. Hardie, CEO

Yes. Well, I'll take the first part of that question, Arun. As we've laid out over the last year or so, Fit to Win is designed to review the cost base of the business across the entire value chain from the back end of our suppliers right through to our customers' warehouse. And we've been systematically working through the value chain and peeling back where all the costs are, where the waste is, where the inefficiencies, what's driving that. And at every part of the chain, as we suspected and as our thesis held, there's opportunities to get more efficient and to strip out waste. That means us working differently with suppliers and with customers. And likewise, they're changing some of the ways we work, but we're making tremendous progress on that and have already signed a number of agreements with suppliers that drive much greater productivity and competitiveness for us. Within our own footprint, we shared the results of Toano on previous calls and made great progress there. And we are now in the first wave of 15 plants being rolled out. That's about 60%, 65% through that program for those plants. And we're on or exceeding the targets we had set. So very happy with how that is going. And then as we sit with customers and we look for ways to improve order forecast accuracy, logistics, warehousing, again, working through all of that and finding opportunities. So as we set out at the beginning, this is an end-to-end review of the cost base of the business and stripping out the waste and inefficiencies. And then reinvesting some of that back into the business or using that to be more competitive in the market, which we're already seeing signs of, particularly in the Americas.

John A. Haudrich, CFO

To build on that and to answer your other corporate question, Arun, if you look at Page 5, the outperformance that we're seeing really is in the Phase B area. To Gordon's point, we're already above our full year target for that area. And just building off of that and taking out those productivity and efficiency opportunities and actually jumping ahead of the actual full rollout of the TOE project is driving the upside opportunities that we're seeing across the business. And to that, the corporate levels, we would expect to be a reasonable range is $100 million to $120 million a year is a logical place for the corporate cost.

Arun Shankar Viswanathan, Analyst

Great. If I could ask a quick follow-up, as you look toward the second half of next year, you're already at $145 million for the first half. Should we assume that the benefits from Fit to Win will continue to grow? Or have you already captured more than 50% of this year's benefits? Do you still expect to see ongoing sequential growth in those benefits?

John A. Haudrich, CFO

I think we'll see sequential growth. But keep in mind, in the fourth quarter, we will start to lap the early phases of the activities. And as you can see on the chart on Page 5, we had $25 million of benefits already in the fourth quarter. So while the core activity continues to drive momentum, there'll be a little bit of a comp element to the fourth quarter.

Christopher David Manuel, Vice President of Investor Relations

Yes.

Gordon J. Hardie, CEO

I would say culturally as well, Arun, we are relentless on waste and inefficiency coming out of the business. So even if we hit a number, there's no satisfaction in that. We drive on as long as there's waste and efficiency to be had, we're going after it.

Operator, Operator

The next question comes from Mike Roxland of Truist Securities.

Michael Andrew Roxland, Analyst

Congrats on all the progress. Gordon, you mentioned that in your comments that shipments were weaker in July and you cited rephasing of order activity and delayed ramp-up at a configurated plant. Do you have any sense what your order books look like for August?

Gordon J. Hardie, CEO

Yes, we have a clear outlook. The Americas are showing strong performance, and we are seeing recovery in regions like Northern Europe and the U.K. As John mentioned, we anticipate Europe to stabilize in the latter half of the year. However, consumer spending remains weak across most regions, with the exception of Latin America. In Europe, both wine and spirits are performing below long-term averages from last year, largely due to macroeconomic trade challenges. A significant portion of scotch and French red wine production is exported, with the U.S. and China not yet returning to historical levels. In the U.S., beer remains sluggish, including imports. Nonetheless, we are witnessing growth in certain areas such as nonalcoholic beverages, particularly water, as well as food products benefiting from trends like reducing microplastics. Latin America, especially in food and nonalcoholic beverages, is performing well, with spirits showing strong recovery in Mexico and beer proving resilient. Reflecting on our initial principles from last July, we expect flat volumes over the next two years. As we achieve cost savings, we will share those benefits with our strategic customers, focusing on maximizing returns from our existing volumes and increasing our efficiency. This positions us strongly for when consumer demand rebounds. Therefore, our strategy over the next two years revolves around improving efficiency and returns rather than simply focusing on volume, especially in a climate of sluggish demand where chasing volume at lower margins is not ideal.

Michael Andrew Roxland, Analyst

That's very helpful. I appreciate all the color. And then just one quick follow-up. You mentioned the progress on TOE. If I heard you correctly, you said the first wave of 15 facilities has been meeting or exceeding your expectations and you're about 60% to 65% through those plants. Is there any more color you can provide around the progress, maybe some of the cost savings or the returns that you've generated thus far at those 15 facilities?

Gordon J. Hardie, CEO

Yes. The process involves visiting our plants to understand the cost structure and identify what drives costs and where waste occurs. We focus on the top five issues or losses and work systematically through them. The results from our pilots in Toano and the initial study conducted in June '24 are materializing. We have outstanding talent in our plants, and with fresh perspectives and innovative thinking from other industries, we are discovering substantial opportunities for significant productivity improvements. Our plants are becoming more effective and efficient. I am pleased with how quickly our teams have embraced these new methods and are addressing waste across the board.

Operator, Operator

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

George Leon Staphos, Analyst

Congratulations on the progress so far. I wanted to come back to MAGMA, not to necessarily do a postmortem on it and the wise and wears, but really to understand how glass fits in customers' mix. And so when MAGMA was talked about a few years ago, the notion was you'd be able to drop in smaller facilities, you'd be able to be more nimble, you'd be able to then get into customers' new product launches more quickly. At least that was part of the story as I recall, and correct me if I'm wrong on any of that. And for whatever reason, MAGMA is no longer being utilized. Is it that the process itself didn't really live up to your expectations? Is it that customers don't really look to glass for that sort of new product quick on the run type of product anymore or type of TOE and all that you're doing in the organization now gives you that agility that you thought you're going to get for MAGMA, but you don't need to spend the capital there. How would you have us think about that, what's happened here and why you don't need MAGMA anymore?

Gordon J. Hardie, CEO

Thank you, George. Let me begin with our customers. Consumers clearly prefer glass, and I've had the opportunity to meet with around 70 customers in the past year. Every single one of them expressed a desire to incorporate more glass into their offerings, driven by sustainability and the ongoing trend of premiumization. Glass is essential to the product lines of all our key customers. This year, our new product development pipeline has increased by about 35%, a significant jump as our customers aim for growth. There's no doubt in my mind that glass remains a priority for our clients, a sentiment I've heard repeatedly. Regarding MAGMA, the initial thought was to produce smaller batches of premium products, and I can confirm that the technology works. However, I'm evaluating whether it can generate the returns we need if we consider scaling up to 10, 12, or 15 units, and what other alternatives we might have. As CEO, I feel it's crucial to confront reality and make informed decisions. I also aim to utilize our capital as efficiently as possible. When assessing the flexibility and potential efficiency of TOE techniques, it became clear that this route offers us a better opportunity to meet our customers' desires for premium products at a reasonable cost. We have ambitious goals for premium offerings and require higher volumes than what a MAGMA furnace could provide. The strategy we will pursue allows us to combine the best elements, and we already have a business model within our portfolio that successfully does this, yielding excellent returns and flexibility. What we're planning is not uncharted territory; it's something we can improve upon significantly. I am confident that we are developing the necessary operational capabilities to execute this approach effectively. It is the right choice for us, our customers, and our shareholders.

George Leon Staphos, Analyst

For my second question, if possible, you talked about your current run rates and that things get a little bit better in August. Is there a way to parse the down mid-single digits across the regions? And then as we shift into the fourth quarter, you talked a little bit about why it's maybe now a lesser piece of your earnings cadence for the year. But can you give us a bit more color there? I know fourth quarters are small. The numbers can move around a lot. If we choose the midpoint versus one end of the range or the other in the range of the guidance, we can come up with different conclusions. But the fourth quarter seems a little bit weaker. And is any of it related to the volumes that we're seeing right now?

John A. Haudrich, CFO

Sure, I can address that. Our business has a seasonal pattern, with approximately 60% to 65% of our earnings per share generated in the first half of the year, while the remaining 35% to 40% comes in the latter half. This trend has remained consistent over the past five years. After we exited the ANZ business a few years back, we have become more focused on the Northern Hemisphere. Since our products are used more in the summertime, this seasonality plays a significant role in our earnings distribution. Regarding our fourth quarter outlook this year, we have planned for potential temporary downtime in addition to the usual seasonal fluctuations. The restructuring and network optimization in Europe are taking longer than we initially expected, and although we are adhering to all necessary guidelines, the delay may require us to account for more temporary downtime in the fourth quarter as we strive to keep our system balanced until the tasks are completed. Furthermore, I'd like to note that our effective tax rate is highly influenced by overall earnings levels. With a dip in fourth-quarter earnings, especially due to the anticipated temporary downtime, we may experience a relatively higher tax rate, which could affect our results more significantly in this period. This situation is more about the downtime and managing our network optimization rather than any changes in business trends or volume. I hope this clarifies your concerns.

Gordon J. Hardie, CEO

Yes, if I quickly go through the segments or regions, beer in North America has performed very strongly for us, and we have outperformed the category, with core spirits showing very strong momentum. As seasonality kicks in, we may see a slight decline in beer. However, brown spirits tend to be more prominent in the latter half of the year, so we anticipate continued momentum there. Wine is weak across the board. I spent time in California recently, and the industry is looking for ways to overcome this. Many believe that the wine industry has managed to recover from various setbacks over the last 50 years, which gave me a sense of confidence. Nonetheless, wine has indeed been weak in Q2. Non-alcoholic beverages are performing well for us in North America, and we expect that to continue. Food may be soft in Q2 but should improve in Q3 and Q4, especially as we approach the holidays. In Europe, beer, particularly in Central Europe, is down, as are wine and spirits. This reflects a general trend. However, food and non-alcoholic beverages are performing very well for us. We anticipate a slight rebound in spirits in the second half of the year, with white wine performing better than red. In the Andean region, we are seeing strong performance, particularly in Brazil, where we are up 3-4% in Q2, and our order book is very strong. Surprisingly, beer in Mexico has stabilized, especially in the domestic market, and tequilla has rebounded significantly as the tequila industry explores new markets beyond the U.S. Southwest Europe is affected by red wine, but food and non-alcoholic beverages are performing well. We also see potential for growth in the back half of the year in the U.K. I hope this provides you with a clearer picture of the business.

Operator, Operator

The next question comes from Anthony Pettinari of Citi.

Bryan Nicholas Burgmeier, Analyst

This is Bryan Burgmeier sitting in for Anthony. Just maybe on net price. I noticed you're expecting a little bit less of a headwind now than originally. I think you raised the range by about $25 million. Maybe just what kind of drove that? Do you feel like prices for the second half are maybe locked in now? Do you have kind of line of sight to that? And just maybe generally, how do you feel about sort of European operating rates at this point?

John A. Haudrich, CFO

Yes, sure. Brian, thanks for the question. When we take a look at the drivers for net price, as we had entered in the year, we had a higher expectation of that pressure point. It's obviously moderated. I think the net price pressure for the first half of the year is about $70 million, and we're thinking right now, it might be $100 million to $125 million down from our previous expectations. Really, really, there are two factors going on is that inflation has moderated probably more so than we expected. Energy prices have moderated. So that is definitely one of the drivers. And then we have seen probably reasonably stable net pricing and gross pricing in the business. If you take a look at our business year-to-date, our sales volumes are up about 1%, but gross price is down about 1%, right? So it's not really fluctuating that much in the grand scheme of things. We thought it might be under a little bit more pressure. So it's really kind of both levers moving. And I would say like if we take a look at the back half of the year, most of the year-over-year pressure point has been incurred in the first half with a little bit still dribbling into the back half.

Bryan Nicholas Burgmeier, Analyst

Got it. Got it. Appreciate that detail. And then maybe just sort of broadly from a high level, do you think that the U.S., EU trade deal kind of coming together this week provides maybe a level of clarity for customers that you and they have been looking for to maybe get orders kind of going again? Or do you think maybe the industry needs time to sort of digest this and adjust to the tariffs? Just anything you can kind of share on maybe if a trade deal changes anything for you and your customers in 3Q and in the second half?

Gordon J. Hardie, CEO

Yes. Look, any certainty is a good thing. There's been so much uncertainty and customers trying to figure out do they need to ship bottling operations to different regions and so on. And so no decisions in the industry that I've seen have been made around this. So anything that brings certainty is a good thing, then people can plan around that, and we can work with customers accordingly. The headline number is 15% on everything coming into the U.S., but I still understand some commentary that it's still not clear on where wine and spirits sit and all of that. And whether that potentially is 0 for 0 or whether it's 15%. So there's still not full clarity on that, I would say. So the faster we get to that, the better, and then we can work with customers accordingly. So the more certainty, the better it is, I would say.

Operator, Operator

The next question is from Josh Spector of UBS.

Anojja Aditi Shah, Analyst

It's Anojja Shah sitting in for Josh. I just wanted to go back to MAGMA quickly. Are there any cost savings associated with this decision that maybe weren't dialed in before, but do need to be added now?

John A. Haudrich, CFO

Thank you for the question. I would say the main savings come from our overall reduction in D&E costs for the business, which is part of our SG&A savings initiative. From an operational perspective, we are ending operations, resulting in a minor loss, but I don't consider it significant for the Bowling Green aspect. The more important factor is the reduced SG&A costs that are included in our SG&A savings targets.

Anojja Aditi Shah, Analyst

Okay. And based on your comments on inventory earlier in the prepared comments, and I think your prior guidance for working capital and free cash flow was flat. It sounds like now you'd expect working capital to be a benefit to free cash flow this year. Can you just tell me what you're expecting in your guidance?

John A. Haudrich, CFO

Yes, that's correct. Earlier this year, we believed that working capital would likely be a minor factor. Currently, we anticipate a working capital benefit of up to $50 million this year, depending on our inventory management. However, we are also facing higher restructuring costs, which will be on the upper end of our expectations. We have updated our guidance to reflect this change and have also raised our interest expense estimates due to shifts in the forward curve. Overall, we believe our free cash flow outlook remains consistent with what we projected at the beginning of the year. Foreign exchange factors play a role in this situation with many variables at play. However, I want to emphasize that we are focused on free cash flow, and achieving a $300 million year-over-year improvement, despite incurring $140 million to $150 million in restructuring charges, demonstrates a significant enhancement in our business performance. We aim to continue this momentum as we work towards our Investor Day targets of increasing to 5% of sales and eventually reaching 7% of sales over the next few years.

Operator, Operator

The next question comes from Francisco Ruiz of BNP Paribas.

Francisco Ruiz, Analyst

I have two questions, if I may. The first one is if you could update us on how the negotiations with French authorities are on the restructuring you proposed a couple of months ago. And also a follow-up on this is that what else is missing in terms of restructuring or closing facilities in order to get to your phase A savings on Fit to Win? The second question is if you could help me to understand what is the bridge between your Fit to Win benefits and the rest of the cost at operating costs apart from the central cost. I mean there is a gap of $20 million, $30 million this quarter. So what is this coming from?

Gordon J. Hardie, CEO

Francisco, let me take the first question. So we're engaged with our European works councils and our local works councils, and we're working through the process of consultation and listening to ideas as we move through to getting agreement on how we reconfigure the network to be as competitive as we can be in France. We see France as a very important market in our business, and we have plans to invest quite heavily in France, but we need the right network. And those discussions are progressing to plan. As you know, there's a process you work through the process, and we're committed to doing that fairly and squarely with our colleagues. So nothing more to add there other than it's going to plan in terms of timing of discussions.

John A. Haudrich, CFO

And Francisco, this is John. I'll respond to your questions regarding our current status in the network optimization process and what remains to be done. We have announced a total reduction of about 10 percentage points in global capacity, with around 5% or slightly more now physically closed. The remaining elements involve the actions we mentioned for France and those referenced earlier regarding the Americas, which will take place over the next few quarters. This will complete the announced capacity restructuring. We'll still have a small amount of excess capacity, which we will monitor to see how the market trends develop. Based on that, we will decide if further actions are necessary. Regarding your last question about the $84 million from Fit to Win and other cost movements, I direct you to Page 6 of our materials, where there's a chart detailing the cost breakdown. Operating costs were favorable at $31 million, with $63 million attributed to Fit to Win. Additionally, we incurred $27 million in temporary curtailments due to ongoing downtime until we finalize these permanent restructuring actions. These are the main factors at play. On the corporate side, when you consider the total, the $84 million from Fit to Win along with the temporary curtailments shows an offset in corporate costs, largely due to adjustments in management and personnel counts that were zero last year. I encourage you to review that information for the details you need.

Operator, Operator

The next question comes from Gabrial Hajde from Wells Fargo Securities.

Gabrial Shane Hajde, Analyst

I joined a few minutes late. But I was curious if, John, you could kind of help us with the increase in the guidance range, $15 million. And I think to your point, you talked about price cost being actually a little bit more favorable, maybe by $25 million, if I pick midpoints. And then FX, I think, is maybe a $25 million to $30 million tailwind as well. Volumes up 1% through the first half. We're sort of still targeting flattish, which I guess would suggest down 1% in the back half. You already gave us some color on the mix, Americas versus Europe. And it seems like your Fit to Win and cost-outs are kind of running ahead of expectations. So is there something else that we're missing? I don't want to talk to the upper end of the range. I'm just trying to understand if there are any other puts and takes in our logic there?

John A. Haudrich, CFO

Yes, Gabe. The factors that could push us towards the upper end of the range include foreign exchange impacts, improved net pricing, and potential upsides from our Fit to Win initiative. On the other hand, we anticipate higher interest expenses due to unchanged rates. Additionally, we are planning for more temporary downtimes later in the year in relation to timing for the European restructuring activities, which may extend into early next year. These are the main considerations. Any variations between the high, midpoint, and low ends of the range are likely influenced by broader macroeconomic trends that we're trying to account for.

Gabrial Shane Hajde, Analyst

Okay. And then the follow-up question, I've seen a few announcements here in the past month or so, Heineken being one of them, I think talking about building a pretty meaningful new brewery in Yucatan and maybe some reorienting, Gordon, you alluded to some of their bottling if that were to occur. And then in North America, there was an announcement on reformulation for Coca-Cola. I'd be curious if there's been any sort of early discussions or if you can talk about maybe the opportunity for beer in Mexico on new facilities coming into. I think Heineken is bringing one online in 2026 and then this new big facility will be operational in '28.

Gordon J. Hardie, CEO

Yes, we’re in constant communication with our customers, and I spend about 20 to 25 percent of my time engaging with them to understand their opportunities and challenges. Looking at Mexico, I believe it has significant potential as a beer market in the medium to long term. We have a strong set of assets there, and we’re prepared to seize opportunities as they arise. Products taste better in glass, and we are ready to support customers who want to produce more items in North American glass, leveraging the efficiencies and untapped capacity we're discovering.

Operator, Operator

We currently have no further questions. So I'll hand back to Chris for any closing remarks.

Christopher David Manuel, Vice President of Investor Relations

Thanks, Lucy. That concludes our earnings conference call. Please note that our third quarter call is presently scheduled for Wednesday, November 5. And remember, make it a memorable moment by choosing safe, sustainable glass. Thank you.

Operator, Operator

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