O-I Glass, Inc. (OI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the O-I Glass Paddock Filing Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Mr. Chris Manuel, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, Jonah, and welcome, everyone. We're here to discuss the recent voluntary filing for Chapter 11 of Paddock Enterprises, LLC, a wholly owned subsidiary of O-I Glass, as the company seeks a final and equitable resolution to its legacy asbestos-related liabilities. Our discussion today will be opened by Andres Lopez, our CEO; and followed with additional detail by our CFO, John Haudrich. We appreciate your participation on short notice. Given the court-related procedural activities initiated today with Paddock's Chapter 11 filing, management will share prepared remarks. However, the conference call will not include a Q&A session. Presentation materials for this call are available on the company's website at o-i.com. Please review the safe harbor comments and discussion of our use of non-GAAP financial measures included in those materials. I'd now like to call -- turn the call over to Andres.

Thanks, Chris. Good morning, everyone, and thank you for joining us today. It is an exciting time as we recently established a new holding company structure named O-I Glass, and we are now taking definitive action to address our legacy asbestos-related liabilities. As part of our recent corporate modernization, we have isolated the company's legacy asbestos-related liabilities with a subsidiary named Paddock Enterprises, LLC. This has structurally separated the asbestos-related liabilities from our glass-making subsidiaries. This morning, Paddock initiated a voluntary Chapter 11 reorganization to finally and equitably resolve its current and future asbestos-related claims. This is a boldest step that is directly aligned with our strategy. I'm now on Page 3. During our third quarter call, we reviewed our investment thesis and the strategic steps we are taking to drive value creation. First, we are leveraging our strong market positions as the leading global glass producer with key strategic customers as well as capitalizing on important trends like product premiumization and sustainability. Second, we are actively engaged in several initiatives to improve operating performance, including revenue and mix optimization and accelerated cost reduction. Efforts also include new breakthrough product introductions as well as footprint optimization in North America. We will discuss these initiatives further on our fourth quarter and year-end earnings call in a few weeks. Third, we are making solid and encouraging progress on breakthrough innovations like MAGMA that will help remove the historic constraints facing glass, enabling future profitable growth. Finally, we are optimizing our capital structure. This includes divesting noncore operations and assets that don't generate attractive cash flow returns or [ previous ] strategic direction of the business and our strategic customers. A few weeks ago, we announced the sale of our minority interest in a soda ash JV that yielded $195 million of cash proceeds, which were used to repay debt. Divestitures of other noncore operations will follow. Additionally, our strategic portfolio review, including the evaluation of alternatives for our Australia and New Zealand business units, is progressing well. De-risking legacy liabilities is also core to our effort to optimize the capital structure. As such, addressing Paddock's legacy asbestos-related liabilities through Chapter 11 is aligned with our strategy. We have been dealing with this issue for decades and believe this boldest step will equitably and finally resolve all of Paddock's current and future asbestos-related claims. Importantly, this move, along with the other strategic steps just described, will further unlock the value creation potential of our unique global franchise. If you will advance to Slide 4, I will turn the call over to John, where he will provide more details.

Thank you, Andres, and good morning, everyone. Today, O-I has taken definitive action to resolve its legacy asbestos-related liabilities. These liabilities relate to a thermal insulation product called Kaylo that included asbestos. The company produced Kaylo from 1948 to 1958, at which time it exited the business. Over the following decades, we have incurred billions of dollars in gross asbestos-related expense and settled hundreds of thousands of asbestos-related claims. As Andres touched on earlier, we completed a corporate modernization effort in late December that created a new holding company called O-I Glass. O-I Glass is a public company, and all shares of Owens-Illinois have been replaced one-for-one for shares in O-I Glass. Importantly, all of the company's glass operations are held within a subsidiary called O-I Group. As a result of a merger process, the legacy asbestos-related liabilities are now ring-fenced within another subsidiary named Paddock Enterprises, effectively isolating the asbestos-related liabilities from the operating company. The appendix includes a diagram of O-I's organization pre and post modernization for your reference. Earlier this morning, Paddock voluntarily filed Chapter 11 bankruptcy. This has no bearing on O-I Glass or its operating subsidiaries, which will conduct business as usual for customers, employees, suppliers and investors. There are a few important implications of these actions. First, all of O-I's asbestos-related claim payments will be suspended, which will enhance O-I's cash flows, pending the conclusion of Paddock's Chapter 11 proceedings and a final determination of Paddock's asbestos-related liability. Please note, debt reduction remains our top priority for use of cash. Second, the bankruptcy court will provide a single forum to establish a certain, final and equitable resolution of Paddock's current and future asbestos-related claims. Finally, the ultimate resolution of this Chapter 11 filing should permanently remove asbestos-related cash flow and balance sheet volatility and uncertainty, which will enhance future capital allocation flexibility. Over the balance of our discussion, I'll build on these points as well as provide more background information, discuss why we have made this decision now and outline next steps. Let me provide a little historic context on Slide 5. Paddock and its predecessor operated a business unit that produced and sold an insulation product that contained asbestos from 1948 to 1958. That business was sold in April 1958. Under the Kaylo brand, this unit recorded cumulative sales of roughly $40 million during that 10-year period. Despite the relatively small size of the business and short duration of operations, the company has disposed of more than 400,000 asbestos-related claims incurred -- and incurred total gross expense of approximately $5 billion for asbestos-related costs. As illustrated on the right, Paddock's asbestos-related liability has declined from around $800 million in 2015, but pressures in the tort system required an additional charge in 2018. Likewise, asbestos-related payments have also been declining, but 2019 payments were elevated related to the additional charge that I mentioned. As of September 30, 2019, the company's lifetime asbestos-related liability totaled $467 million. Over the past 4 years of litigation, the company has proactively used administrative claims-handling agreements to manage the majority of its asbestos claims. So after years of litigation and substantial payments to resolve asbestos-related claims, why is Paddock filing Chapter 11 now? Let me address that on Slide 6. After years of following a consistent strategy to address asbestos, the company conducted a fresh-eye review of the situation. That effort identified a number of aspects for this decision. First, newer legal developments support the viability of our corporate modernization and Chapter 11 approach. Second, the tort system has continued to deteriorate. Speaking broadly, the evidentiary standards for other torts appear to be loosening. This is most notable in the talc and weed killer cases. As a result, the risk of significant adverse verdicts has elevated in general. More specifically to asbestos, plaintiffs are increasingly unwilling to accept historic values consistent with the administrative claims-handling agreements. This is despite the aging of the plaintiff population and narrowing window for legitimate exposures. As a result, we have seen escalating settlement demands and values. Finally, addressing Paddock's asbestos-related liability in federal bankruptcy court has several advantages over the status quo. Importantly, all of the asbestos-related claims are evaluated and resolved in one place and are not subject to differing legal standards or risk profiles. Further, the process allows for a determination of all current and future asbestos-related claims and provides finality and certainty for O-I's lifetime asbestos-related costs. Likewise, the bankruptcy process allows for the creation of a trust to pay all current and future asbestos-related claims in various options to fund such a trust. In summary, positive legal developments, benefits of federal court procedures and a deteriorating tort environment make a Chapter 11 reorganization the right choice to manage Paddock's legacy asbestos-related liability. Let me summarize on Slide 7 by recapping the key implications of Paddock's bankruptcy and reviewing next steps. Most importantly, it is business as usual for O-I Glass and its operating subsidiaries, which are not affected by Paddock's filing. Following modernization, O-I Glass is now a public company, which continues to trade under the OI ticker. All legacy shares have already been converted into shares of O-I Glass, and there are no expected changes to the company's dividend policy or share repurchase programs. While Paddock's Chapter 11 filing does not eliminate the company's asbestos-related liability, it should establish a final, certain and equitable determination for that liability. The appendix provides additional information on the typical asbestos-related bankruptcy filing process. Pending a final determination and settlement, which could take some time, all asbestos-related claim payments will be suspended. This will benefit cash flows and improve capital allocation flexibility. That concludes our prepared remarks. Unfortunately, we cannot host a question-and-answer session at this time given the court-related procedural activities initiated today with Paddock's Chapter 11 filing. I would note that our next scheduled event will be reporting earnings the evening of February 4, followed by a Q&A call the morning of February 5. We will look forward to a dialogue then. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.