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

Thank you. Thank you for standing by. My name is Gabby and I will be your conference moderator today. At this time, I would like to welcome everyone to the OI Glass Second Quarter 2026 Earnings Conference Call. After today's prepared remote, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I would now like to turn the call over to Chris Manuel, Vice President of Investor Relations. Please go ahead. Thank you.

Thank you, Gabby. Good morning, everyone, and welcome to the OI Glass second quarter 2026 earnings conference call. With me today are Gordon Hardy, our CEO, and John Hodrick, our CFO. After prepared remarks, we will open the line for Q&A. Press release and earnings materials are available on the company's website. Please review the safe harbor statements and disclosure regarding our use of non-GAAP financial measures included in those materials. Today's remarks do include forward-looking statements, and actual results may differ materially from our current expectations. With that, I'll turn the call over to Gordon, who will begin our presentation.

slide three thank you chris and good morning everyone today we will review our second quarter results discuss market conditions and provide an updated view of our 2026 outlook and 2027 targets Before I begin, I want to thank our OI colleagues around the world for their continued commitment and flexibility during a challenging operating period. Let me start with a straightforward assessment. We are clearly disappointed with our first half performance. Europe has not delivered the expected results as outlined in our investor day framework. We own those results. We are taking decisive action. We also think it is important to distinguish between a strategy that is not working and one where value realization has been delayed. We will address that distinction throughout today's discussion. With that, let me turn to recent performance. Second quarter net sales were stable, while adjusted earnings were $0.09 per share compared to $0.53 per share last year. Performance varied significantly by region. Strong America's result helped offset substantially lower earnings in Europe, while an unusually high adjusted tax rate reduced results by $0.18 per share. In the Americas, segment operating profit increased 22% year over year, which we believe demonstrates strong execution of our strategy and the resilience of the business, even with one furnace event during the quarter. Europe was significantly below our expectations and prior year performance. We do not believe this is a structural issue with the business or our strategy. Rather, we believe the shortfall reflected three main factors, elevated competitive pressure affecting selling prices, higher energy costs related to Middle East conflict, and unanticipated operational inefficiency. following restructuring across multiple EU plants, along with two furnace events. We believe these issues are largely transitional and should improve as market conditions recover, And we work through the remaining restructuring challenges.

Thank you. Thank you. We are currently troubleshooting with the internal team. Sorry, folks. We're just troubleshooting the speaker. Give us one moment. Thank you.

Gabby, do you have it now? Now you have it.

Yes, we have you. Go ahead. Okay. Put us back onto the main line.

Doing that now. Thank you. off yes they've completely disconnected us okay hold on so we're off again Okay, we're live. Good morning again, everybody.

I'll now comment on recent performance. Second quarter net sales were stable, while adjusted earnings were $0.09 per share, compared with $0.53 per share last year. Performance varied significantly by region. Strong America's result helped offset substantially lower earnings in Europe, while an unusually high adjusted tax rate reduced results by 18 cents per share. The Americas segment operating profit increased 22% year over year, which we believe demonstrates strong execution of our strategy and the resilience of the business, even with one furnace event during the quarter. Europe was significantly below our expectations and prior year performance. We do not believe this is a structural issue with the business or our strategy. Rather, we believe the shortfall reflected three main factors. One, elevated competitive pressure affecting selling prices. Two, higher energy costs related to the Middle East conflict. conflict, and three, unanticipated operational inefficiencies following restructuring across multiple EU plants, along with two furnace events. We believe these issues are largely transitional and should improve as market conditions recover, and we work through the remaining restructuring challenges. Global demand was also softer than expected, with shipments down approximately 4.5% year over year. However, trends improved through the quarter, and June volumes were flat with last year. Operational disruptions also limited sales opportunities and accounted for about half of that decline. We believe fit to win remains a key driver of value creation. We have delivered significant savings year to date despite operational disruption and inefficiencies. In light of these near term challenges, we have adjusted our 2026 fit to win target, while our three year target is now in line with our original expectations of 650 million. Given these factors, we have updated our 2026 guidance and recalibrated our 2027 targets from last year's Investor Day. Importantly, we believe firmly in our strategy. We are realigning the timing to achieve our goals, not changing the strategy. Let's now discuss the top line on slide four. Net sales remain relatively stable in the quarter. Volume performance continued to reflect soft demand, although trends improved as the quarter progressed. As noted, global shipments declined approximately 4.5% year on year, while June volumes were flat with last year. Recovery has been difficult to predict given sluggish consumer demand and customer destocking in certain markets. In the Americas, shipments were down 7%, reflecting challenging prior-year comparisons, exiting some unprofitable business, and a furnace event that limited sales opportunities. In Europe, shipments declined 2%, primarily due to operational disruption that constrained sales. that impact, underlying trends were roughly flat in Europe. We continue to see pockets of strength across the portfolio. Non-alcoholic containers remain a standout performer, and several geographies exceeded local market trends in prior year levels. The Andean group delivered double-digit growth, while Brazil was up low single digits. In fact, we outperformed the market in the majority of category and market clusters amid generally sluggish demand. We continue to expect second half growth supported by easier comparisons and new business wins while maintaining a more cautious recovery outlook. Our commercial transformation continues to gain traction. We are focused on business that generates economic profit and are applying greater discipline across the portfolio. Following strong execution in the Americas, we are starting to get more traction in Europe. New business wins represent approximately 2% of annual sales sales volume with contributions expected later this year. While the recovery remains gradual, improving momentum and portfolio optimization strengthen our confidence in delivering profitable growth. Let's now move to slide five. Fit to win remains central to our strategy and continues to generate meaningful benefits. We believe the program is improving our cost position, strengthening our competitiveness, and building the foundation for long-term profitable growth. Since launch, Fit2Win has generated more than 400 million of net benefits through the the first half of 2026, we delivered 85 million of benefits. This is net of 30 million of direct operating inefficiencies. And the total impact of disruption was approximately $45 million when including constrained opportunities and additional logistics costs phase a execution remain strong. Announced plan closures are complete and we are advancing the final stages of organizational restructuring. Phase B continues to progress, although operational disruption has delayed TOE benefits. We are also advancing supply chain, procurement and energy initiatives that should deliver increased increasing benefits over time. We have revised our 26 and 27 targets to reflect the headwinds discussed today. We now expect approximately 200 million of fit to win savings in 2026 and at least 650 million over the three year period. Importantly, this reflects timing and execution disruption, not a change in underlying opportunity. The Americas performance and recent customer wins are encouraging signs of improved competitiveness through Fit2Win. As execution stabilizes, we believe this can deliver meaningful value over time.

With that, I'll now turn it over to John on slide six. Thanks, Gordon, and good morning, everyone. The top line was fairly stable, while second quarter results were below our expectation, given challenges in Europe. Net sales were nearly $1.7 billion, down about 2% from the prior year favorable currency and stable consolidated selling prices partially offset lower sales volumes. I'd Adjusted earnings were $0.09 per share compared with $0.53 last year. Lower net price was the primary headwind. Selling prices increased in the Americas, but declined in Europe amid competitive pressure. Europe was also impacted by higher energy costs related to the Middle East conflict and the one-time reset we have discussed previously. Lower sales volume was offset by favorable operating costs, reflecting fit-to-win benefits net of unanticipated costs tied to operating inefficiencies and furnace events. Adjusted earnings also reflect an unusually high adjusted tax rate driven by lower European earnings and a reduced full-year outlook. We also recorded a significant non-cash goodwill impairment charge and increased tax valuation allowances. Both are excluded from adjusted earnings. The impairment was triggered by the decline in the company's share price during the quarter and it reflects Europe's current challenges from an accounting perspective. These charges do not affect cash flow. operating plans or fit to win milestones. Our priority is to bring the same discipline and execution to Europe that have improved performance in the Americas while recognizing that progress is taking longer than expected in a tough macro environment. Regarding the balance sheet, leverage is up some given lower EBITDA. However, liquidity is very good at $1.5 billion. We have no maturities until 2028, and we have ample headroom on our senior security covenant. Let's turn to slide seven. Segment operating profit was $171 million compared to $225 million in the prior year, as strong performance in the Americas was more than offset by continued pressure in Europe. In the Americas, net sales were $949 million, up about 1%. Higher selling prices and favorable currency more than offset a 7% decline in volumes. Segment operating profit increased 22% to $165 million, and margins expanded by around 300 basis points to 17.4%. 4%. Higher net price, favorable FX and operating costs, net of a furnace event, more than offset lower volumes. This represents the highest second quarter profit in the Americas over the past 10 years and demonstrates the value of fit to win. In Europe, net sales were $704 million, down 5%, with shipments down 2% as due to the pandemic. disruption limited sales opportunities. Segment operating profit was $6 million compared to $90 million last year. declined primarily reflected unfavorable net price from competitive pressures and higher energy costs. Europe delivered solid gross fit to win benefits, but temporary operational disruption and inefficiencies prevented those benefits from translating into net savings. Let's turn to slide eight. We are revising our full year 2026 guidance to reflect the second quarter shortfall and a more measured pace of improvement in Europe. Please note that we have removed adjusted earnings guidance because the effective tax rate is highly sensitive to changes in operating earnings, particularly given the low level of anticipated earnings in Europe. We now expect adjusted EBITDA of $1.0 to $1.1 billion, with updated free cash flow and leverage guidance included on the chart. We continue to anticipate strong performance in America, with results expected to be up nearly 60% in 2026 versus 2024. As Gordon noted, lower or current year guidance is primarily different by three factors in Europe. Continued market challenges, including additional price pressure and higher energy costs related to the Middle East conflict. adjusted fit to win timing due to temporary operational disruptor and additional costs at a few specific plants. We believe the revised outlook better reflects current operating conditions and the environment we expect through the balance of the year. Importantly, we believe performance in Europe should improve sequentially over the second half. Let's turn to slide nine. We are also realigning our 2027 targets to reflect the same factors affecting our 2026 outlook. We now expect adjusted EBITDA of 1.2 to 1.3 billion dollars in 2027, reflecting a more gradual improvement path in Europe. From our revised 2026 guidance, 2027 should benefit from at least $150 million of additional fit to win savings. Potential upside could come from market improvement in Europe and energy price normalization following an eventual resolution of the Middle East conflict. Importantly, we remain committed to the original adjusted ETS. the EPA target of $1.45 billion. We continue to believe that target is achievable, but it will likely take longer than originally anticipated. With that, I'll turn it back to Gordon on slide 10. Gordon Greenfield Thanks, John. Before we close, I want to reinforce several key points. We are not satisfied with our performance. We understand that investors.

will expect clear evidence of improvement. At the same time, the framework we laid out around fit to win, profitable growth, and strategic optionality remains the right path to create long-term value. In Horizon 1, fit to win is delivering meaningful savings and improving our competitive position. the Americas demonstrate the earnings potential of stronger execution. Europe is about a year behind the Americas on fit to win. Ultimately, we believe Europe should improve to mid-teen segment profit margins within the next two years. This should be achieved through initiating recovery of excess cost inflation, addressing temporary disruption and normalizing energy market and completing our fit to win implementation. In Horizon 2, improved competitiveness is supporting profitable growth with new business opportunities expected to build volume momentum through the second half of 2026 and into 2027. In horizon 3, we are evaluating strategic options to strengthen the portfolio, improve our position in the value chain and preserve flexibility for long-term value creation. In short, we are addressing near-term challenges with urgency while staying focused on the strategy we believe will create sustainable growth. sustainable long-term value. With that, let me conclude on the next slide. To close, second quarter results were below expectations, primarily due to Europe. We understand the drivers and are addressing them directly and with urgency. At the same time, the Americas performance highlights the earning potential of effectively executing our strategy. Demand remains soft, but volume trends improve through the quarter and we expect gradual improvement in the second half. to win continues to deliver meaningful value, even with near-term disruption. Most importantly, our strategy remains intact. We are recalibrating timing, not changing direction. Our focus is clear, restore performance in Europe, improve execution and create sustainable long-term value. Thank you for your time this morning. We will now take your questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please unmute your device. stand by while we compile the Q&A roster. The first question comes from the line of Gansham Punjabi with Baird.

Your line is now open. Please go ahead. Hi Gordon and John. This is William Cots on for Gansham. I think my my first question just what gives you confidence on 2027 plan? You know, obviously 2026 has shut out, shook out meaningfully below your initial expectations, so just some more color in 2027 would be great and then I'll follow up. Thanks.

Yes, I'll take that first. And when we talk about moving from 26 to 27, first of all, we've obviously rebased 2026 for the factors that we talked about. As we look going forward, we are highly confident of the 150 million plus of fit to win benefits. We're going to, even in a disrupted environment, we're going to generate $200 million or more this year. So we're confident, especially as we get through that through the disruption elements and the benefit of executing and exiting from some one-time elements into the next year. Beyond that, we're really not making a lot of forward estimates about strong recovery. We still have included in there kind of a flattish volume environment. We still have the baseline of the Middle East conflict, sluggish demand, affordability issues, all things. You know, there are probably more upside opportunities with ultimately the resolution of the war and the normalization of the energy markets, as well as, you know, with a better background in that regard, in affordability elements, consumer consumption, and not to mention us putting into effect our Horizon 2. profitable growth and the forward opportunities that we have on a number of the new wins that we have in the new businesses that Gordon mentioned. So those underpin our view of 2027, which of course has been rebased from the original expectation. And just to build on that, William, we see what we can deliver in the Americas.

with the tight execution of the strategy and fit to win. As we've said on previous calls and here again today, Europe is about a year behind the fit to win implementation. And so we expect that to improve sequentially through the next four to six quarters. And that also is an underpinning of our thinking around our 2027 result.

Okay, great. That's super helpful. Thank you. And then just one more on volume expectations for the back half of the year. How much would that be like contracted new business versus, you know, just the general expectation of a market recovery? I know you said June was flat, but, you know, if we could just hear that and maybe how July is shaking out too, that'd be great. Sure.

Well, as we've outlined, we rejigged and reconfigured our go-to-market approach in both the Americas and in Europe. And we're seeing the early benefits of that coming through. I think last time, or last outing we mentioned, we had picked up 15 pieces of new business that equated to about one, 1.5% of volume. We subsequently picked up more business that will start to flow in the back half of this year. and into next year, which represents about 2% of volume. So we're gaining traction. We're becoming more competitive in the market. you know, we, you know, when we look at it, we see it sequentially improving through this quarter and into the fourth quarter. So, you know, all the early signs are positive that we're becoming more competitive and we're translating that competitive into.

into profitable volume growth. I'll add just a couple of data points on there, William. The new contracted business, as far as what we expect, it's going to ramp up in the second half of the year. It probably adds something like 1% to 1.5% annualized run rate in the back half of the year as we then build into 2027 when you see the full 2% being realized. So that comes as a as a tailwind. And then to your question on July, basically all of our markets are performing kind of in line with what we saw in June, net net in total. The one thing that we gotta say is that there's still a little, in one geography, we are still dealing with a little bit of transitional elements of one of the furnace events we had. So there was still a little bit of headway on volumes due to the ability to supply. But through July, we believe that we're out of that. And then going forward, we should see the trends fall through to the full market opportunity.

Okay, great, great. That's super helpful. Thanks, guys. Your next question is from Mike Roxland with Truist Securities.

Go ahead, your line is now open. Yes, thank you, Gordon, John, Chris, for taking my questions. Good morning, Mark. Good morning. Just wanted to follow up to provide some more color on those operational efficiencies along with the two furnace events in Europe. More color around what they are, what disruptions were, when they started to occur, and what your plan has been to get them fixed and where that plan currently stands. Thank you. Yep.

So the events took place in Europe, one in France, one in the UK. One was a fire, one was a leak. And that caused us to short ship into the market and put extra pressure on the network in the context of a changing network that hadn't yet settled. And also in the context of increasing logistics costs. What have we done about it? We've got both local engineering and expert furnace engineers that were in place. supported by some outside expertise to fix those issues. We're confident that those issues are now fixed and those both those plants are are starting to resupply the market as you know, getting up to what their full potential supply should be as we work through July. supply. They were the main issues, but when you're changing the supply network, as we were with three plant closures in you know, in the interim did add pressure into the network at a time when, as I said, costs were rising, there was less available logistics capacity. That caused us to have to pay more for what was available. So that was, that really was the root cause of that. We did also, you know, experience kind of number of small one-time events around rail transport not being available in France and having to shift to road freight. That also caused us a bit of disruption and certainly put in a significant chunk of cost. Again, that's a once-off and we don't see that reoccurring.

as we go through the back half of the year. You know, maybe just one other comment, Mike, on top of that, just to show, compare that to the Americas where we did have a furnace event and the segment was able to fully offset it and deliver. It just shows the resilience in the business that once you do get through all the restructuring and activities, and then you get the TOE the operations where you want it to be. We're confident that while this is a blip that occurred because of the combination of the furnace events and closing the three factories at one time, we believe that we'll get out of that into a much more stable environment.

Got it. So to put a vote, I mean, you're past these events now, though. They're in the rearview mirror, everything's been corrected, and you should be operating better today than in 2Q? Yes, absolutely. We're past those events. The rest of the fleet in Europe is performing well, and we expect the...

that performance to sequentially improve through the next four quarters as we embed the TOE, the total operating efficiency methodologies into the plant at the same level we have embedded them into the US. As I said, you know, Europe is about a year behind the implementation of Fit2Win. And, you know, we expect, you know, the catch-up to occur is occurring as we speak. Yes.

Got it. And then just one quick follow-up. You mentioned, Gordon, that you don't believe that what you're seeing in Europe is structural. What gives you confidence that it's really not a structural issue in Europe? And what I'm trying to get at is when I look at some of your peers that recently reported, one of your peers reported close to a 30 percent EBITDA margin in the first half. So there obviously are benefits to be had in the European market. It seems like you guys are a little bit behind that, a little bit behind that. So what are you trying to do to maybe catch up from a portfolio perspective, from an earnings and market perspective to what some of your peers have been posting in terms of their earnings and their margins? Thank you.

Okay. First of all, let me just give some context around Europe. It's a very large market, very attractive market, 22 million tons and over $2.5 billion of profit pool in the region. you know, our peers are, you know, running businesses that are not going through a restructuring as we are in in europe um I come back to our original thesis, the business was uncompetitive and we are going through the actions required to get this business more competitive in Europe. So we're in transition, right? and executing that. Yes, we've had a stumble, a chunk of it of our own making. We own that, we know how to fix it. We know what the issues are. We have the right resources in place. We've made the required changes of leadership and have no leadership in place with the skills that can address the, the supply chain network issues that we're facing. So we see ourselves being able to execute that in the months and quarters ahead to the standard that we've done it in the Americas. and we have the right resources and governance around that. We expect, you know, within two years to be back at kind of high teens margins. And, you know, that's assuming, you know, energy markets somewhat normalize. There's some, you know, demand coming back into the market in certain categories, but we don't need, nor do we expect, you know, huge lifts in demand. But we have a clear plan. our own, you know, our fit to win, running the operations and the supply chain in as fit a manner as we are now running it in the Americas. We've also upgraded substantially our energy procurement, our energy risk management and our energy usage. capabilities in all these plants. And we expect those benefits to flow through, you know, in the coming quarters. And to give you a data point on that, in terms of energy usage, we've put in a new system across all of the plants. And some of our plants in Europe are now generating, savings of anywhere between 5% and 7% year on year in energy usage. So there's a lot of good things happening in Europe. We're making a lot of progress in a lot of areas. But we did have this stumble that is sort of masking that. We feel we're working through that. By year end, we'll have settled the supply change significantly and we'll start to extract the full value of the restructuring and the capacity optimization. So, you know, we have a lot of data points we feel gives us confidence that we can execute in a way that delivers into the high teens over the next 18, 24 months.