Conference Transcript - OI 2026-06-10

Gabe Hady, Analyst — Wells Fargo

Good morning. Gabe Hady here, the senior packaging analyst at Wells Fargo, joined by my colleagues in the room, Richard and Richard Carlson, Bailey Gordon, and representing OI Glass, apologies, is the president CEO, Gordon Hardy, and John Hodrick, SVP and CFO. Also in attendance is a longtime friend and colleague, Mr. Manuel, VP of Investor Relations. Thank you all for attending. I say this every time, it is intended to be interactive to the extent you all have questions in the audience, please don't hesitate. And with that introduction, you all put out a slide deck last night. I think you have some prepared remarks that you'd like to go through. And then if there's time, we have Q&A.

Gordon Hardy, CEO

Yeah, great. So we're a scale player to many of the largest food and beverage brands in the world. You know, with over, you know, 6,000 customers, you know, across Europe and the Americas. So most of you are familiar with what we do. If we take a look at the, you know, where we're at, we'll move to the next slide. So, you know, as I've flagged up in our last learnings call, we really have a business of two hemispheres, where the Americas, which is further along in terms of our strategy execution based on fit to win, is performing strongly. And we continue to see excellent execution around our fit to win program, our proximity to customer, and our businesses gaining share and improving their earnings um you know between 24 and 26 operating profit in the america is up about 60 percent and so you know that's proof positive that the strategy we have in the execution of that is is is delivering um europe is somewhere in the region of you know six to ten months behind in terms of execution of our fit to win program driven largely by the operating environment in europe where it can take anything up to a year to accomplish what you can accomplish in terms of change programs in the Americas. Soft start to the year in Europe driven by our flagged energy reset of about 150 million. And then with the ensuing energy crisis, that drove of incremental energy driven inflation into the business. What we are seeing is an incremental improvement as we move through into the second quarter. And while April and May were still soft volumes in Europe, we are starting to see an uptake in volumes in June and a very strong delivery of our fit to win cost out program.

Gabe Hady, Analyst — Wells Fargo

You know, our balance sheet is strong.

Gordon Hardy, CEO

we have strong liquidity and you know overall I would say in all markets demand is still soft you know consumers are still challenged from an inflationary point of view and now with the additional energy costs you know we see some of that continuing to play out that notwithstanding as we get fitter we get more competitive and as I flagged up on the earnings last earnings call we've picked up you know at least 15 new pieces of significant business that start to play through in the second half of the year and into into 2027 so our thesis of being getting fitter and translating that into being more competitive and picking up you know incremental profitable volume is is well truly playing through um that sat set against the the kind of macro background of lower overall demand um you know we maintain our our kind of outlook for um uh for for the full year uh guidance you know of somewhere between 1.125 and 1.2225 so um softer start than expected um driven primarily by by energy uh and softer demand particularly in europe but an accelerating fit to win program um you know we set out at the start of the year about 250 we expect to beat that um and that then sets us up for you know um a fast start in in 2027 anything to add there john yeah

John Hodrick, CFO

i mean just the with a little bit that transitional period on the volumes you know we did tweak the second quarter outlook a little bit, and that's included in there. So no change to the full year trajectory of the business, just a little bit of a later transitional period from into positive growth that we're starting to see here in May. And you.

Gordon Hardy, CEO

So, you know, the fundamental thesis is we transform the cost base, well on track. So, you know, by the end of this year, we'll have taken north of half a billion dollars of cost out of the business typically you know that is that's practically 80 percent of of the initial 650 targets there or thereabouts we've upped that target to 750 million and probably see opportunities above that typically these kind of programs if if you haven't got 30 percent out in the first 15 months program probably isn't going to deliver what we've been able to demonstrate in the first 15 months that we got north of 45 percent out and went on track to um to either deliver or outperform the 7 750. um you know at id we um we kind of laid out our thesis that our cost base was too high uh we needed to face that reality and then we needed to work across the chain to not get cost just out of our own business but across the incoming and outgoing chain and we're making tremendous progress working with suppliers and customers on stripping out waste and inefficiency across the the the total chain we can continue to you know sweep underperforming low ep or negative ep volume out of the business and focus on positive and and higher EP volume, and we see a significant shift in food, which is a very high EP category for us, and it's now our second largest category of product. So we're starting to see that shift in premiumizing the portfolio, as well as becoming more competitive and mainstream. You know, we're very clear on where we play and how we win across each geography, and And we have clear category and market strategies in place for that. And the overriding kind of metric for us is, is it economically profitable and it's founded on the thesis that growth or value creation only occurs when you drive growth above your cost of capital. And we have tremendous visibility on where we create and where we leave value in the So overall, you know, our thesis is robust despite a kind of softer start to the year. And as we look forward into next year, while the path to 1.45 billion is steeper, we absolutely see a path there. Is there less margin for error? Absolutely. But we still see a path to the 1.45. So, you know, that's really our strategy is get fit, turn that fitness into competitiveness and then access the volume growth that's in the market. And then by 2028, you know, that gives us the optionality to look at, you know, different forms of capital management and also how we expand into into new geographies or new categories. You know, it's pretty clear, widely and deeply understood across the organization and is now one of the strengths of the business that top to bottom. You can walk into any office, any plant, and people can explain in a quite articulate way what the strategy is. So I might stop there, Dave, and hand over to you.

Gabe Hady, Analyst — Wells Fargo

All right. A couple things, I guess. You mentioned, you started off by saying that you're a scale player. Yeah. And I think for all packaging companies, volume matters. It drives efficiencies, productivity, and, of course, you get the incremental contribution from the sales. In glass, it's even more pronounced. I don't have to tell you guys run this business. I just watch from afar. So volume is important. You mentioned winning 15 pieces of new business. I don't want to put you on the spot and tell us exactly what that means. customer by customer. And then markets being softer, and then you call out food is now being your second largest category. I'm assuming that's behind beer. And so maybe give us, if you can, by market, where you're seeing the weakness. It sounded like from the slide release that it was going to be more in Europe, and America's is actually holding up pretty well. So maybe just North America, proper Central America, and then South America? And then what's driving the weakness in Europe? I know you mentioned energy. I'll stop there. There's lots of questions in there. We can

Gordon Hardy, CEO

revisit. Yeah. So, you know, as I said, in the Americas, our businesses are performing strongly, you know, particularly, you know, Brazil, Colombia continue to perform. And if I take a look at Brazil you know with new entrants coming into that business over the last five to six years we've we've had a drop on market share but our business is more profitable today than when we had you know eight to ten points higher market share driven by you know absolutely outstanding execution by the team there of our of our fit to win program and then working much more closely with customers um to to execute in the market colombia uh peru still very strong markets for us mexico a bit softer because of the you know the export challenges into into this market but we've been able to translate that competitiveness into you know volume growth in the domestic market and then in north america you know um we've been able to really drive tremendous productivity that has made us more competitive and actually I think I pointed out our first quarter this year despite a number of of kind of macro challenges was probably the best quarter that business had in ten years so capacities are reasonably tight you know in the Americas operating 96 to 98% um you know pricings are robust and we continue to execute very well and are well advanced in in embedding in you know how we're operating the business differently you know across the chain europe um we're probably as i said six to ten months behind the execution of getting the costs out um and we're we're now in the final stages and over the summer we will have executed everything that we we announced that notwithstanding you know soft demand practically across every category in europe but primarily in the wine segment where you know wine volumes have been dropping now for you know three to four years at somewhere between mid to high single digits and resulting in over capacity and and downward price and margin pressure through our fit to win process which the business there has executed well within the confines of of the rules and regulations has allowed us to be more competitive so we've been able to defend some of the volumes we had but there are other pockets particularly in wine where we said there is just no economic value to us being in those categories or with those customers and we have shed those volumes. Food operating well for us, premium beer operating well for us, and with being more competitive and revitalizing our go-to-market system, we've seen a fair chunk of those 15 customers in Europe picking up. So we think we've hit the kind of trough in europe and expect to see volumes kind of swing up from from this month to the to the rest of the year but there's no doubt europe has taken the brunt of the energy crisis at the consumer level to give you an idea i i i filled my car last weekend hadn't done it for a while because i've been traveling a lot, to be stunned with almost $10 a gallon. So that is impacting demand in Europe. And we saw some of that in May in certain categories. So Europe will remain from a demand point of view to be challenged for the rest of the year for sure. But our business, as we get fitter, we're able to defend and actually pick up some markets here in certain categories.

John Hodrick, CFO

Gabe, what I'd add is going into the quarter, we thought we were going to be flattish, Sales volume, plus or minus a little bit. Underneath that, we expected Europe to be up low single digits and the Americas to be down low single digits, primarily because of comps. I mean, the Americas is about what we expected. Europe, instead of being up a little bit, is kind of flattish. That's what we're seeing for the quarter at this point.

Gabe Hady, Analyst — Wells Fargo

So America's down low singles, Europe flattish. So all things considered, not as maybe bad as, I shouldn't say as bad, but the way you describe it is like $10 a gallon gas, like there's a big change. Marginal. Is that fair in Europe? Yeah, the margins have... Marginal change in terms of what your expectations were.

John Hodrick, CFO

I mean, we're just talking a few percentage points at the end of the day. Instead of being flattish, we're going to be down a few points and mostly that's that trajectory.

Gordon Hardy, CEO

And I think the trajectory of volume between quarter one and quarter two in both regions actually has improved. So from probably minus seven in the Americas first quarter to minus three in the second quarter, and then moving into positive territory in quarter three and quarter four, and the same dynamic happening in Europe.

Gabe Hady, Analyst — Wells Fargo

Okay. That was going to be the next question, I guess. So to the extent that the new 15 pieces of business are contributing an influx positive at some point during the second half, that'll be a piece of it. And then we're sort of subject to what the market is going to be doing. Yes. Okay. Food being, like I said, the number two

John Hodrick, CFO

category, where was it? Can you frame that up for us? It used to be about 15% of our overall demand. It's not closer to 20%. So it's moved five percentage points over the last few years. And in fact, if you go back to a number of years, alcohol used to be something like 75% of our total portfolio related now it's about 60 where you see that 40 associated with with both nab and the food category so we are seeing a shift towards the the non-alcoholic categories

Gordon Hardy, CEO

over time yeah and you know food you know driven by a couple of of things you know as as people shift out of alcoholic beverages it's not that they're consuming less liquid but they're moving into you know non-alcoholic drinks and we're seeing water kind of for us anyway explode right very strong demands you know for both in in europe and in the us and you know as the whole microplastics issue really starts to gain momentum in europe particularly we're seeing a big shift in many of the iconic food brands in food plastic into glass. And we're also seeing within dairy, you know, things like yogurts and drinks moving from, you know, plastic into glass. And that now is a structural trend. We're starting to see that happen in North America, but not necessarily at the same pace. So we would see, you know, that trend a bit behind in North America, but certainly gaining momentum. And then if you look throughout the rest of the Americas, you know, there's always been a very solid base of glass and food, and we're seeing that growing as well. So we see that trend continuing to grow as we get fitter and we reorganize our assets to take advantage of that. We see food as a growing part of that. and a premium part of the portfolio.

Gabe Hady, Analyst — Wells Fargo

One last one on the quarterly update. So I think the update was 20% of EPS. Now, there's a decent size range, and I know there's some tax noise in there, but it would imply kind of, what is it, 20 to 27 cents? 20 to 30 cents, somewhere in that range is kind of the exact. And we were at 25 to 37 and a half. Yeah, something like that, right. A point of volume is 7 cents, so it's a sales volume. So are production volumes, inventories, sort of where we would have planned them to be?

John Hodrick, CFO

We're matching the production down. If the volumes are a little bit softer, we're looking to take seven days of IEDS out of the system this year. So we want to make sure that we're bringing that down. So our production has been moving down with it. So to the degree that you're losing the contribution and the production component of it, that's the only differential that you're seeing in the quarter.

Gabe Hady, Analyst — Wells Fargo

Okay. All right. Maybe I'll guess I'll stick with sort of the numbers and medium-term outlook. You called out the 1-4-50. It's a longer putt. Not one to use a lot of golf analogies, but can you talk about what has to go right? Or, you know, if we kind of stay in this, I mean, we're reading articles about more conflict with the Middle East. I'm assuming the longer that persists, it's going to make it tougher in Europe from a volume standpoint, consumer affordability, all the things we read about. Anything else that you need?

Gordon Hardy, CEO

So, you know, no question, you know, the current environment and the, you know, the energy, the incremental energy, because we'd more or less solve for the 150 energy reset. It's the incremental indirect energy piece that's hitting us. does that make it a steeper climb to 1.45 yes it does is there a less margin for error yes that said we we still see a very clear path it's you know it's down to um controlling what we control within that and we're we're confident we can do that and then the rest is is really the external how the consumer kind of responds um so um if we were maybe 90 percent you know confident pass has that dropped a little yes but it's still north of 50 percent in terms of being able to uh deliver on that but it is a steeple climb okay yeah just to anchor that and

John Hodrick, CFO

some of the numbers as we kind of go from even if you just take the midpoint of kind of our guidance this year to the one 1.450 you have to see more than 250 million dollar improvement right so it's it's a it's a bigger delta than we originally anticipated we always earmarked at least 150 million dollars for fit to win next year and and uh ideally we can continue to outperform in that regard to be able to help that's that leaves you about 100 million dollars so the uh you know looking at the commercials for the business you know stable to a little bit of volume growth goes a good way to you know addressing part of that but then also on on the the net price environment you know if in fact the markets you know the energy markets moderate or stay flat you know and against a an environment where you got better capacity utilization especially over in europe that may bode well for a net price positions it's a little bit positive next year so those are the kind of three moving pieces that kind of you know support the one 450 from kind of the midpoint of this year yeah keep in mind yeah on the pricing side 55% of our business has price adjustment formulas and so they inflate elevated inflation we're picking up this year we're going to be able to pass that on formulaically leaving another component in the open market primarily in Europe against ideally an improving capacity utilization background yeah I think the

Gordon Hardy, CEO

fit to win piece will be a key part of it we have 150 and we've demonstrated an ability to take out roughly you know 300 a year um you know when you go through these programs you build a you know the productivity capability in the business um it it tends not to just have right you know the ability of the business to get after costs actually improves so you know we we've penciled in 150, we have a higher number in our thinking. So that should help.

Gabe Hady, Analyst — Wells Fargo

Some management teams might call that muscle memory. Keep working. In Europe, you mentioned wine being down mid to upper single digits. I'm assuming that's kind of isolated to certain in France, Italy. Is that capacity coming out of the market? I mean, we know what you all are doing. At least I'm not asking you to speak for your competitors, but what's out there in the public domain that such that it can't be repurposed is kind of a question and be disruptive.

Gordon Hardy, CEO

Yeah. Overall, there's about 8% I think of European capacity, which is 1.7, 1.8 million and tons have been flagged, you know, we've been clear to the market where we are and what we've taken out. Yeah, so a lot of it is coming out completely. And then volume shifting into, you know, remaining capacity. So, you know, that's how we see it. We don't see a lot of repurposing into other categories um i i think the the challenge uh for wine is i think you know the industry probably sees it as structural you know when you start lifting vines out that have been in the ground for you know 20 30 40 50 years then um you know that capacity, that origin capacity is gone, it's coming out. And there's two challenges for wine that are structural and probably unrelated to price or inflation is you've got boomers who are either drinking less as they get older or passing away so that demand evaporates and not replenishing that at a fast enough pace,

Gabe Hady, Analyst — Wells Fargo

particularly with the Gen Zers who came of legal drinking age

Gordon Hardy, CEO

at the start of COVID or during COVID. They just haven't come into wine at the same level. And the industry is working through how it responds to that, but it's going to take a number of years for that to reset. There is the export challenge and the overhang from COVID on on wine stocks being in the system particularly in the us and then you have chinese demand which has been cut right back driven by you know some consumer challenges in china but also you know an edict uh of no alcohol consumption that you know at at party events at you know political party events that has all impacted back to wine but of all the categories i would say the balance in wine is more structural than cyclical, whereas things around beer is probably weighted more towards, and spirits certainly weighted more towards cyclical than structural, is how we see it.

Gabe Hady, Analyst — Wells Fargo

John, maybe one for you on the tariff side. You mentioned maybe some, I guess, USMCA shipping bottles from Mexico into the US. Does anything change, I think, what is it now, Section 301, that they were trying to go to a more permanent structure on in terms of whether it's Europe or other countries?

John Hodrick, CFO

Yeah, to give you an idea, about 14% of the bottles that we make pass across the U.S. border in one format or another, okay? 9% of that is primarily Mexico coming into the U.S., all under USMCA, and I haven't heard anything that would structurally change that at all. So you're left at 4% coming in primarily from Europe, but that's usually coming in as filled bottles, okay? So So this is more about how our in-use categories, their customers fit. But I haven't heard anything that's going to meaningfully change it. And it's not a hugely material factor to the business overall.

Gabe Hady, Analyst — Wells Fargo

We get this question a lot. It seems like it's pretty dynamic with where aluminum is, but I'll ask it again. We use 2024 as a baseline for the aluminum content for a can. And I know it's one category in which you guys kind of compete head-to-head with another substrate. Mark-to-market today, it's probably the aluminum content is up six cents. So a canned cost would be up 60-percent-ish. Your guys' cost structure is also not standing still. So it's that, you know, we can't just... And those guys hedge. You all hedge. As you said today, today's thing in comment, conversations with customers, are they looking to lean any more or less into the glass? I think there was a piece of business that you won here domestically that's been doing well for one of your customers in glass because it's differentiated. So just maybe cost component of it and then conversations with customers in that category.

Gordon Hardy, CEO

I think when we started on this journey, and we mentioned that the cost differential between glass and cans in North America was around 35%, which no matter what the packaging does for the equity of the brand, a lot of consumers say, I'm just not paying that premium. sure and and so recognizing that is that is for us an unsustainable position and and you know one of the you know core objectives of fit to win was to get our cost base right so that we get within at least 15 percent of the cost of account to to a bottle differential um i think we're there now partly driven by our own efforts and partly driven by the rising costs of aluminium not yet fully seen in because of the hedging but as we move forward and those hedges roll off we actually are seeing the cost of glass and cans really tighten up we're probably at parity in europe or close to parity and we're certainly around probably around the 10 mark and we are seeing demand for glass for beer increasing we can sell all we can of it right now in north america and indeed Europe. So having said that, you know, tariffs come and go, we've got to be able to get to that level of cost competitiveness on our own structural improvements over time. Does it help in the short term? Absolutely, but mid to longer term, we've got to get there without a tariff situation that could change at any time.

John Hodrick, CFO

I would add, you know, we're actually bringing a furnace back online, the previously closed furnace in the Mexico area to be able to support the demand growth in North America, given the backdrop of what we're just talking about here. So it is translating into orders and it's translating into different capacity management.

Gabe Hady, Analyst — Wells Fargo

On the topic of capacity, I'll call it competitiveness. That kind of caught you guys by surprise in the market at the beginning of this year in Europe. two-part question. Anything change there in terms of, you know, I think things are all, I think, buttoned up on the contracting side. And then we did pick up an article. It looked like someone was adding a furnace here in North America, which not our glass, so it's, I think,

Gordon Hardy, CEO

Pennsylvania. How do you guys think about that? Yeah, you know, I think in Europe, you know, we see capacity running at about 90%, 90, 91%. When you look at the announced capacity closures, we will probably see that tightening up towards year end, somewhere being, you know, 96, 98%. And with regard to, you know, pricing last year, the window was extended. You know, there were contracts thought were closed and then they come back and reopen and there was quite a bit of skirmishing with people, you know, looking to fill the capacity. We probably see that position kind of tightening up as that capacity comes out in Europe. Overall, in the Americas, you know, capacity utilization running probably 97, 98%. Yeah, we saw that furnace come on stream. It's a small addition to what is a very large market. So, it probably won't make a huge amount of difference, the overall level of capacity utilization in the market.

Gabe Hady, Analyst — Wells Fargo

Okay. Free cash flow conversion, we get a lot of questions on that for the packagers in general. And this year, you guys have some restructuring costs flowing through. Can you help us bridge maybe where you're at this year, John, next year, what it looks like in terms of restructuring spend, what it could get to, and then your targets. Is that a 2028 event when we can maybe approach that 40% free cash flow conversion?

John Hodrick, CFO

Well, what we had said is a percent of sales, but we can do it in the terms of that. So we're going to get towards 5% of sales of cash flow. But so where we are right now is clearly in this year, we have taken sizable restructuring charges as we take out 14 percent of the capacity and rebalance our whole network ultimately to get the high capacity utilization and the right fit of the assets for the demand. So last year we had about 140 million dollars worth of restructuring charges. We think it's about 150 million dollars this year, but then next year we think that that's going to trail off into something which is typically normal for business. We're always doing something. It's called 25 to 50 million dollars. So there's going to be a meaningful delta in cash flow conversion next year as we get outside of We've also been drawing our inventories down, which is helping out in that regard. We're going to continue to look through that to be able to be a source of cash for the business over time. But we've also been taking some production penalties to get us there, so a more normalizing demand environment against a better free cash flow conversion on restructuring charges, being really lean on CapEx in the 400s range, you know, 400 to 450 range, and then the tailing off of that restructuring charge should be able to support the target that we have. So if we achieve the 1450 next year and with those elements that we're talking about and dropping it off, we get to our target.

Gabe Hady, Analyst — Wells Fargo

In 27?

John Hodrick, CFO

That would be a 27 target, assuming that you get into those other targets.

Gordon Hardy, CEO

I think as well, what we outlined at IDA is the way the business operated in the past that the supply chain was probably broken across four distinct areas with four leaders and a lot of silo behavior and a lot of cash leaking out between the silos um what we've done you know since idea is we've we brought the whole supply chain together under one leader and so getting our own internal supply chain to work much more effectively cross-functionally and closing those areas of leakage in the business. But also then sitting down with suppliers and doing exactly the same with them and closing out areas of cash leakage by better planning and just working in a better forecasting and working in a more effective way and trapping the cash as opposed to letting it flow. And likewise with customers, you know, there's tremendous opportunity and we saw tremendous opportunity to tighten up the whole cash cycle with customers as well. So taking a holistic cash position across the supply chain and, you know, we're seeing that come through. We're seeing forecast accuracy improve both to suppliers and to customers and we're seeing our ideas come down and we continue to expect to improve on that as we go forward. There's no reason why this business, given the business model, for want of a better word, can't achieve 5% of revenue as free cash flow. No reason at all why you can't do that.

Gabe Hady, Analyst — Wells Fargo

Thank you for that. We approach time, we're at time. Just one last one for you. If you had to pick two folks in the finals for the World Cup, who's it going to be most beneficial for the company?

Gordon Hardy, CEO

Well, it needs to be a country with a very large population, unfortunately Ireland isn't there because we're worth four other countries in terms of that, but my money's on England. I think England could go all the way this year, which would be the first time since 1966. And there's the son of an Irishman captaining England as well, Harry Kane, who's one of the top goal scorers in Europe this year. Argentina could, you know, still a lot of fire left in Messi, and he can change any game. So hopefully it's going to be a fantastic World Cup and really looking forward to it and it gets started tomorrow night. So we hope there's a lot of celebration in every country over the next couple of weeks.

Gabe Hady, Analyst — Wells Fargo

Agreed. Thank you for that. Thank you.