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

Good morning. My name is Henry, and I will be your lead conference operator today. At this time, I would like to welcome everyone to the O-I Divestiture of Australia and New Zealand Conference Call. [Operator Instructions] Now I would like to welcome -- now I would like to turn the call over to our presenter for today, Mr. Chris Manuel, Vice President of Investor Relations. Sir, you may begin the conference.

Thank you, Henry, and we appreciate everyone joining us this morning on short notice to discuss the sale of our ANZ business unit that we announced last night. The related press release and presentation materials are located on our website at o-i.com under the Investors section. Before I go any further, please note the safe harbor comments and disclosure of the use of non-GAAP measures included in the presentation materials. As illustrated on Slide 3, we are taking bold structural actions to change O-I's business fundamentals. First, we are driving strong operating performance through our turnaround initiatives. Second, we are revolutionizing glass by developing a new business model for glass packaging, leveraging breakthrough innovations like MAGMA. And third, we are optimizing our structure by rebalancing our business portfolio and derisking our balance sheet. Despite the challenges of the pandemic, we continue to make good progress across all 3 fronts. Our plant performance is the best we've seen in well over a year with great progress at our focus factories. In fact, we have accelerated many of our cost improvement initiatives to partially mitigate the impact of COVID-19. MAGMA is advancing well, and we intend to have our next installation in Holzminden, Germany live early next year. This is a key milestone that we expect will lead to broader implementation of our Generation 1 MAGMA unit starting in 2022 and beyond. Furthermore, we are taking definitive action to optimize our structure. Late last year, we divested our soda ash joint venture and reduced debt. In January, we initiated the Chapter 11 filing for Paddock as we seek a final resolution for our legacy asbestos liabilities. And last night, we announced the sale of our ANZ business as we rebalance our business portfolio and improve our financial flexibility. I strongly believe these are the right steps for O-I, our customers, employees and, most importantly, our investors. I'm highly confident in our ability to execute across these fronts through bold structural actions designed to create shareholder value. Next, to Slide 4. As announced, we have entered into a definitive agreement to sell our ANZ business to Visy Industries, which is one of the largest packaging and resource recovery companies based in Australia. The sales price approximates AUD 947 million, which represents a 7.6x multiple on full year 2019 EBITDA. This transaction follows a robust sales process, which has yielded a full and fair valuation. Net proceeds will be used to reduce debt and improve O-I's financial flexibility. The company's ANZ business is the leading glass container producer in Australia and New Zealand. We operate 5 plants in those markets and had revenues last year of AUD 754 million and EBITDA of AUD 124 million. I want to take a moment to thank all the hard work by many leaders across our ANZ business to reach this sale agreement and meet the challenging backdrop of the pandemic. We believe Visy is the right company to advance this business into the future. This divestiture is consistent with our strategy to optimize O-I's structure as we aim to align our business with the interest of O-I's global customer base, reduce debt and create shareholder value. This decision was part of a broader strategic portfolio review that I will discuss further in a moment. Importantly, the sale will substantially complete O-I's strategic business review process. Keep in mind that our tactical divestiture program targeting $400 million to $500 million of gross proceeds by the end of 2021 continues, and we have completed around $200 million in divestitures to date. Let me expand on our decision to divest ANZ. I'm now on Slide 5. As many of you know, we have focused on our European and Americas footprint in recent years. Following that effort, we initiated a strategic review last year to examine our business portfolio. We consider many factors as we look to rebalance our network. First, we sought to properly align our network with the markets that match the strategic interest and growth plans of our global customer base. We also evaluated future business opportunities and the geographies where we look to invest. Likewise, we evaluated our own cash and capital returns. As a result of that review, we decided to divest our ANZ business. After a number of our global customers decided to exit the ANZ market, we now have minimal overlap of key accounts in ANZ. We believe our future investments should focus on our core operations in Europe and the Americas. We are pleased with the outcome and believe this represents a full and fair valuation for these assets. Likewise, we believe applying proceeds to debt reduction enables a positive transfer of enterprise value to our investors. With that, I'll turn it over to John, who will review the transaction further.

Thanks, Andres, and good morning, everyone. I'm now on Slide 6. As noted, the divestiture of O-I ANZ will yield gross proceeds of AUD 947 million. We have included gross proceeds and EBITDA information in Australian and U.S. dollars based upon recent exchange rates. The divestiture includes 2 transactions for tax purposes. First, O-I has entered into a sale-leaseback agreement with a REIT for certain properties, which will gross around AUD 214 million. The remaining business interest has been sold to Visy for AUD 733 million. We anticipate that around 95% of gross proceeds will be received from Visy at the time of closing, and the remaining balance will be paid within 12 months of closing without any conditions precedent. O-I will retain the proceeds on the sale-leaseback transaction, while Visy will assume the lease agreement. All regulatory approvals have been obtained, and we expect both transactions will close by August 31, subject to normal closing conditions. As noted on the chart, gross proceeds totaled USD 650 million at recent exchange rates. Importantly, we anticipate minimal leakage given our legacy tax position and the structure of the transaction. While preliminary and subject to post-closing adjustments, we expect net proceeds will approximate USD 620 million, which accounts for taxes, debt-like items, an estimate for net working capital adjustment and fees. Net proceeds will be used to repay debt and the chart identifies the debt tranches we are targeting. Overall, we expect our leverage ratio will improve by about 0.25 turn. After the sale of ANZ, O-I will focus on 2 operating segments, including Europe and the Americas, which reflects the 2 integrated supply chains that we run. Our minor holdings in Asia will be considered a non-reportable segment and included in corporate retained in other after closing. In summary, we believe the divestiture of ANZ is consistent with our strategy to optimize our structure, rebalance our portfolio as well as reduce debt and leverage. In conjunction with announcing this transaction, we did provide a business update on second quarter performance in yesterday's announcement. Fortunately, the quarter ended on a high note after enduring the brunt of the pandemic in April and May. Our June volumes were down 3% from the prior year as markets started to reopen. This compared favorably to the 18% decline in daily shipment levels for the April and May period that we previously disclosed. As such, total second quarter sales volumes were down about 15% from last year. Keep in mind, there was 1 less shipping day this year compared to 2019. Normalized for shipping days, our second quarter volumes were down about 13.5% from last year. Importantly, sales volume trends continued to improve through the first half of July. Regarding operations, performance remained very strong throughout the second quarter, and results benefited from cost control measures. While we are still in the quarterly closing process, we anticipate second quarter adjusted earnings will be above breakeven. Importantly, we generated good positive free cash flow despite the second quarter typically being a seasonal use of cash for the business, reflecting strong cash and capital management. We will provide more information when we report earnings the evening of August 4, followed by a call the morning of Wednesday, August 5. That concludes our prepared remarks. We would be happy to take your questions now. Henry, can you initiate the Q&A process?

[Operator Instructions] Your first question comes from Ghansham Panjabi.

First off, congrats on the sale. And just for some context, I mean, on the press release on April 28, you said you were halting the strategic review in the region. I guess first off, what changed? And then second, will the divestiture of ANZ impact volumes in any other region? I know you mentioned minimal global customer overlap, but are there any specific product lines that could be impacted?

Yes. Thank you, Ghansham. Yes, as we mentioned, the overlap is minimum. We are focusing going forward in the markets where our key customers and core markets are located. So there is no overlap. There is no really any issue that we expect as a consequence of that.

Yes. And on the first question, Ghansham, this is John. As we indicated, we were in a well-advanced stage on the divestiture process of ANZ through the first quarter. I mean obviously, when the pandemic hit, I mean it was a big, big surprise for everybody, a big impact for everybody. And I think it was a difficult environment to get anything going. And at that point in time, things have cooled off. But subsequent to that, obviously, the interest was renewed. I think there's greater confidence in the lay of the land as the worst of pandemic kind of got behind most companies, and we were able to rebuild off of that situation and come to what we believe is a great solution for both parties.

Your next question comes from Mr. George Staphos.

Congratulations. Two-part question, obviously, on the review. One, can you explain a little bit more in terms of why you have a sale-leaseback for a portion of the divestiture? And then in terms of what's remaining in the tactical program, can you give us a rough idea of how much EBITDA would be associated with that remaining, whatever, $200 million to $300 million of divestitures that you're planning for through '21? If there's time, I'll take a follow-on next round.

Yes. Thanks, George. This is John again. Why the sales leaseback? I mean in our prepared remarks, we had indicated it was for tax purposes. By being able to use this transactions in O-I's legacy tax position, it was an ability to optimize that position that otherwise would not have been able to be utilized. We believe, as a result of that, we were able to get better evaluation than we would have been otherwise if we were not able to utilize that. And the other one was the tactical divestiture program. George, I can't give you a quantification of EBIT involved in there. What I can say, though, is that it's a combination of sale of, for example, closed assets, old facilities and things like that, that do not have any EBIT leakage as well as other tangential interest that we might have that really aren't necessarily core to glass that might would indeed have some earnings associated with them. But at this stage, it's too early to be able to give you a quantification of that range.

Your next question comes from Mr. Mike Leithead.

Great. Congrats on getting this over the finish line here. If I look at the reconciliation slide, it looks like the remaining Asia Pacific business lost about $15 million in 2019. I know China had some hiccups last year. So can you maybe just give some context or a greater historical look at what you think those assets could earn going forward?

Yes. Let me just start by just explaining a little bit about what we see in Asia. This is a very important market for our key customers. And over time, we expect good growth out of this region. Now as you know, over the last few years, as the rest of the region, we had high level of asset maintenance activity and we had some expansion work in Southern China, too. Now the -- we also face a little bit of the impact in the economy of China coming from the U.S.-China trade war. Now we believe there are good opportunities ahead in the growth, as I said before, but also the opportunities to streamline cost. And something that we did a few months ago, it was to reset our leadership team, and we have a very strong leadership team in place. So that should support us very well going forward.

Your next question comes from Mr. Anthony Pettinari.

Just with regards to the improved demand that you saw in June, just curious if it's possible to kind of talk about what you saw in Americas versus Europe. And then with regards to the continued improvement in July, just any kind of commentary you can give there given COVID, some states kind of dialing back, reopening, some others doing better. Just any thoughts there.

So as you mentioned, Anthony, there was an improvement in June, as we described. It's being led by the regions or the markets that locked down first. So they started to recover first, too. And they've been recovering quite well during the month of June. Now every market in which we are improved in June. And as you know, Mexico and the Andean countries were deeply impacted by the lockdown orders, and we've seen recovery in those markets. Now what we're seeing too is the trends have continued in July month-to-date. Now we are going to have the opportunity to provide an update in about 3 weeks when we have the earnings call. And at that point, we're going to be able to provide more color.

Your next question comes from Arun Viswanathan.

I'm just curious if you could describe the process for the other asset sales, where you are in that process? And I guess anything you can share as far as what you're looking to do there?