OI - NYSE

Good morning, everyone, and welcome to the O-I Glass Second Quarter 2024 Earnings Conference Call. My name is Kiki and I'll be your conference operator today. [Operator Instructions]. I will now hand you over to your host, Chris Manuel, Vice President of Investor Relations to begin. Chris please go ahead.

Thank you, Kiki, and welcome everyone to the O-I Glass second quarter 2024 conference call. Our discussion today will be led by CEO, Gordon Hardie and John Haudrich, our CFO. Today we will discuss Gordon’s view on the business as he joins O-I, key business developments and review our financial results. 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 4.

Thanks, Chris. Good morning, everyone. It's a privilege to be O-I's new CEO. I've spent my career serving the food and beverage industries across the world, including at a few of O-I's customers. Drinking from a glass bottle gives consumers a unique experience. From that perspective, no other packaging container delivers quite like glass. First, I would like to recognize and thank all those at O-I who tirelessly focus on our customers and their consumers every day. It is this focus and attention to quality that makes O-I a trusted partner and supplier to many of the world's leading food and beverage brands. As a member of the Board of Directors over the past eight years, I've seen firsthand the progress the team has made to make O-I a more integrated and capable company. The team has achieved much, but in discussions over the last weeks we know and acknowledge that we have not yet achieved the company's full potential nor consistently met the expectations of our shareholders. It is my focus to deliver consistent performance that significantly increases the value of our company. We have a solid foundation. We are determined to increase the value of O-I for all stakeholders. In this morning's call, I will share my initial impressions as CEO, our horizon 1 focus areas, including a set of core operating principles and our initial roadmap to boost the value of the company. This includes a new program called Fit To Win to strengthen our competitiveness. Fit To Win is not just another cost out initiative. It will fundamentally reshape our company and how we work. It will deliver absolute transparency on cost and returns, enable faster decision making closer to the market and customers, and will boost competitiveness to fuel growth. As a result, we expect to significantly improve our medium term performance through a set of self-help efforts that are within our control. We also anticipate this program will best position us to more effectively take advantage of any market rebound. Shifting to the quarterly results. We reported second quarter adjusted earnings of $0.44 per share. As expected, adjusted EPS was down from an historically high performance year, given current challenging macro conditions. Lower earnings reflected a decline in net price realization, moderately lower shipments levels and higher operating costs due to capacity curtailments to balance supply and demand. As we focused on elements in our control, these headwinds were partially mitigated by solid operating and cost performance. Market conditions remain sluggish but are gradually improving. While our second quarter shipments were down mid-single digits from last year, this is an improvement on the double digit declines we saw over the last few quarters. Our volumes are now more consistent with underlying consumer consumption patterns as destocking recedes in most categories. Importantly, we expect year-over-year sales volume growth starting in the second half of the year. As we look to the balance of 2024, we are adjusting our full year outlook as we take rapid action to ensure we are well positioned for a strong 2025. Over the medium term, we expect stronger future earnings as we execute our Fit To Win program to improve our competitiveness. This will position us more effectively as markets gradually recover over time. Moving to page 5. I would now like to share my initial insights and share how I intend to lead the company as we move to drive better and more consistent results. Since joining the company in May, I've traveled widely and met with many key stakeholders across the value chain. I've spoken to over a 1000 O-I colleagues around the world from the shop floor to the leadership team to better understand how we can make O-I more competitive. I've been impressed by the knowledge, skills, and resilience of the O-I team across the company as well as by their willingness to face reality and offer concrete ideas for improvement. I've engaged with many customers to discuss opportunities they see in their businesses and to understand their pain points. I've also spoken with suppliers to see how we can improve together to make the value chain more efficient and make O-I more productive and more sustainable. I have visited retail stores and on premise outlets and met with many contacts in the food and beverage industries. From these interactions, I have a much deeper understanding of stakeholders and market dynamics. I also gained critical insights into how to make our company safer, fitter, more sustainable, and more valuable. It is said that performance equals potential minus interference and I've used this concept to help frame our path forward. O-I has significant potential. We have a great team. We have a privileged footprint. We have long standing relationships with a diverse customer base. Customers view O-I as a trusted supplier with high quality products and deep knowledge of their business and their markets. They also appreciate that glass is a highly sustainable packaging solution that is all natural, healthy and a great fit for a more sustainable world. However, it is clear that we have not achieved our full potential. As you look straight on the right, we have outlined the three key pillars of our Fit To Win program to address the interference that is holding us back and represents the first horizon of our long term strategy. Our first pillar focuses on enhancing our competitiveness. We intend to sharpen the focus of the business model and organization. We plan to decentralize more decision making and accountability to our operations across the markets we serve making decisions closer to the customer and the market. We believe this will drive greater accountability for profit, capital allocation, and cash generation. We also expect this will allow for the simplification of our corporate organization. At the same time, we plan to conduct an end-to-end supply chain review with the objective of streamlining our total value chain and driving efficiencies through productivity. This productivity will be used to boost earnings and fuel growth. For example, we targeted and completed a total organization effectiveness assessment at two of our highest performing plants in one geography and see a path to achieve between 10% and 15% efficiency gains. We therefore believe the opportunity across our network is significant and expect it should yield meaningful network optimization benefits and higher returns. We also expect this program will increase our focus on a more profitable mix of segments, products, and customers. Importantly, we will leverage our operational capabilities built over the past several years to accelerate execution of our Fit To Win program. Our second pillar revolves around significantly enhancing our capital discipline and cash generation by leveraging an economic profit mindset. With this approach, the company will be responsible for improving earnings as well as optimizing the invested capital in the business as we seek to earn a target return above the cost of capital. We will direct resources and capital where we can achieve an attractive return with a clear framework to prioritize and drive value creating investment decisions. Since starting, I've read through the list of every capital project we have undertaken in 2023 and in the plan for 2024. It is clear to me that we can drive greater focus and capital discipline and drive better outcomes for the business. Our third pillar stresses the improving our financial performance and consistently achieving our commitments through a relentless focus on execution. Importantly, we intend to use economic profit as a key financial measure going forward and we are evaluating how we will incorporate it into our incentive structure at all levels of the organization. In addition to our Fit To Win program, we have developed a set of operating principles. These principles will focus our actions to maximize the value of the company and are shown at the bottom of the slide, namely making safety our number one priority, using economic profit to drive value creation, driving productivity, continuous improvement and sustainability building shared value with customers strengthening leadership throughout the business and operating with transparency, teamwork and integrity. Let's now turn to Page 6 and discuss our long term roadmap for value creation. We aim to increase our profit capture over three horizons. During horizon 1, we will focus our Fit To Win program that I just outlined to drive a deep change in the competitive position of the company. I see significant earnings improvement that is within our control and not dependent on the level or timing of a market recovery. It is my view that we do not require large near term volume improvement to meaningfully boost the earnings power of the business. We have sufficient self-help opportunities over the next 18 months to drive greater profitability and returns to set the business up properly for a fuller market recovery in 2026 and 2027. We anticipate the productivity improvement from horizon 1 will deliver greater efficiency, margins, and cash generation. We plan to accelerate the realignment of our commercial portfolio between global, regional and local customers and prioritize premium end segments in each category. We are currently under indexed in premium especially in spirits. Our operating units already have a line of sight to those opportunities and a solid pipeline for new products such as our lightweight bottles enabled by Ultra. We expect this will enable an acceleration of economically profitable growth in horizon 2 with a laser focus on each of the segments and channels across each market we serve. During horizon 2, we intend to align our CapEx with strategic customers' long term plans, particularly in large and developing markets. We have a number of working examples of such customer arrangements, but we believe there is much greater opportunity. Finally, in horizon 3, we expect that we will have strategic optionality. This may include geographic expansion into new growth markets with large profit pools, which could be a great fit for MAGMA at the right economic profit. While it is early days, we have established initial three year targets which span both horizon 1 and horizon 2. By 2027, we expect to generate sustainable adjusted EBITDA of at least $1.45 billion with EBITDA margins of 20% or higher, free cash flow of at least 5% of sales and economic profit that is at least 2% above our cost of capital. Additionally, we are announcing several near term actions as part of our Fit To Win program, which we believe will position O-I for a step change improvement in performance starting in 2025. One, we expect to accelerate temporary production curtailments in the third quarter to rapidly reduce elevated inventory levels and improve free cash flow. Two, we expect to close at least six furnaces, representing about 4% of our capacity over the next three quarters to eliminate redundant capacity as a first step of network optimization. Three, we expect to reduce SG&A costs significantly as we streamline the organization. We will present a more detailed road map at our next Investor Day on March 14, 2025 in New York City. A few thoughts on MAGMA, I'm now on page 7. MAGMA's core technology works. The generation 1 smelter development is complete and we are ramping up production of our Gen 2 Greenfield in Bowling Green, which was designed to test all of MAGMA's current operating technologies. This Greenfield is on track for commissioning in August and ramping production in the third quarter. MAGMA's increased flexibility has the potential to rewrite our business model, but it must deliver a meaningful economic profit within a reasonable timeframe. This is the new challenge I have set for the MAGMA and commercial teams. As we improve the efficiency of our plants and optimize our network, we will shift our focus on resources to installing MAGMA Gen 1 melters in certain legacy furnaces as they are replaced at end of life. In addition to leveraging our R&D investments, retrofitting certain plants with MAGMA melters will add additional flexibility and other benefits to our network. Naturally, we will continue optimizing our Gen 2 site in Bowling Green. Additionally, we will leverage this technology into our core business and work with strategic customers to use MAGMA to develop more cost effective supply chains, particularly in logistically difficult markets. Now I will turn over to John who will review market trends, second quarter performance and our updated 2024 outlook in more detail.

Thanks, Gordon. Good morning, everyone. I'm starting on slide 8. The commercial environment remains soft, yet conditions are gradually recovering. Our year-over-year shipment trends improved sequentially between the first and second quarters and we expect sales volume growth over the balance of the year. As shown on the left, our second quarter shipments were down 4.5% from the prior year compared to the 12.5% decline in the first quarter. Shipments in Europe were flat as both beer and wine returned to modest growth, while spirits remained a bit soft. In the Americas, volume was down 8.5% in the quarter, given lower beer, wine and spirit shipments in North America and Mexico, yet volume was up double digits in the Andean market following recent expansion projects. We have provided more details on our second quarter sales volume trends by category on the right. Except for spirits, our shipment levels are now generally consistent with underlying consumption patterns which remain soft. Destocking has receded across most categories except spirits which we expect will continue through the end of the year. I do believe we have turned the corner. Our shipments were up more than 5% in July and we anticipate mid-single digit growth in the second half of the year supported by easier prior year comparisons and slowly improving consumer consumption. Overall, we expect glass demand will gradually recover over time and we are well positioned to take advantage of the rebound as it unfolds. Let's discuss our recent financial performance on Page 9. O-I reported second quarter adjusted earnings of $0.44 per share. As expected, results were down from historically high adjusted earnings of $0.88 per share last year given challenging macro conditions. As illustrated, adjusted earnings primarily reflected the decline in segment operating profit, while non-operating items in FX were generally stable. Additional details are included on the slide. Let's turn to page 10 and discuss performance across our two segments. The Americas posted segment operating profit of $106 million which was down from $126 million, last year. Net price was flat, while shipments were down 8.5% as discussed. Despite elevated temporary production curtailments, operating costs were up just slightly given favorable margin expansion initiative benefits. In Europe, segment operating profit totaled $127 million, down from $200 million, last year. As anticipated, net price was a headwind in Europe, while sales volume was flat. As you can see, operating costs were elevated mostly due to higher temporary production curtailments to balance supply with demand, softer demand noted over the past few quarters. Let's move to page 11 and discuss our updated 2024 business outlook. We have revised our full year guidance to reflect softer demand as well as rapid inventory control measures that should position O-I for success starting in 2025. We now expect sales volume will be about flat or down slightly from prior year and O-I is accelerating temporary production curtailments to quickly align supply with lower demand. As a result, total production should be down about 7% from last year and we expect our year end IDS levels will be consistent with historically low inventories achieved back in 2022. Inventory control actions will be concentrated in the third quarter. While this will negatively impact near term results, we will rapidly align supply with softer demand, get our inventories at the right level and significantly reduce the need for costly curtailments in the future which should boost results next year. Additionally, we have adjusted our free cash flow guidance to reflect the updated business outlook as well as an additional estimate for anticipated restructuring activities as part of our Fit To Win actions. This slide provides the specific details on our revised outlook. While we are adjusting our 2024 outlook, we are taking quick action to rebalance our network given current market conditions that should position O-I well for 2025. As Gordon discussed, we expect our Fit To Win program will significantly improve earnings, cash flow and economic profit over the next three years. Now I'll turn it back to Gordon who will conclude on slide 12.

Thanks, John. Again, it's a privilege to be O-I’s CEO. I see significant opportunity to advance our company. We are focusing the company on a new set of priorities aimed at improving our value. While down from historically high performance last year, the company continued to navigate well through ongoing challenging market conditions during the second quarter. Fortunately, we achieved good sequential sales volume improvement in the second quarter and expect to return to growth over the balance of the year. While we have reduced our full year outlook, we are taking rapid action that we expect will impact near term results, which should better position O-I for success in 2025 and beyond. This is an exciting time. We are determined to grow the value of the company as we execute Fit To Win, drive greater capital discipline and deliver profitable growth. I look forward to working closely with the financial community. Thank you and we are now ready to take your questions.

Thank you. [Operator Instructions]. The first question comes from Ghansham Panjabi from Baird. The line is now open. Please go ahead.

Thank you, operator. Good morning, Gordon, and everyone, and Gordon congrats on your new role.

Thanks, Ghansham.

Yeah. So I guess, you've been on the board for nearly a decade. The company's pursued various iterations of cost outs and optimization plans, etc. What do you think is the holistic difference between what you're outlining now versus previous programs? And then how do you ensure that there won't be customer service issues as you consolidate and curtail some of these furnaces that you've outlined?

Yes. Thanks for that question Ghansham. Look, the company has over the last seven years certainly improved its operational executional capability and has done some very good work on productivity in specific parts of the business. I think what we're presenting here is a whole of company end-to-end review across the entire business and the whole value chain are right back to suppliers. So it's more holistic. It's going to reshape the company. It's going to reshape how we work. It's going to simplify the business, allow us to speed up and allow us to innovate faster. We're going to get to absolute transparency on costs and returns to make better value creating decisions and it will boost competitiveness to fuel growth. So I think the main difference between what the team has achieved before and what we're now focused on is really an end-to-end review of the business and once and for all kind of address areas of what I would call interference in creating more value in the company. In terms of customer service, if all you do is kind of change costs and let the customer down, that's not an outcome. We have a very good integrated business planning system in the business, which is both medium term, but also great S&OP processes and we will make sure that we have enough inventory in the system to guarantee our customers that we will not let them down. Our job is to make sure that our customers' plants are running on time as they should with no interruptions from us and we have a very experienced team now across the many markets and from my own experience where I run daily fresh businesses at 99.5% daily fresh world, I'm well versed and very conscious about changing supply chains and not letting people know. So it's a point well taken, but I think we're across it and we'll deliver the changes without letting the customer down.

Okay. Thanks for that, and then your decision to accelerate focus on cash flow basically realign inventory specifically 3Q. Is that just an acknowledgment of maybe this should have been done earlier and you're trying to sort of clear the system as the company cycles into 2025? And on that, do you think that process will end by the end of this year just based on the fact that volumes are starting to work up a little bit relative to the baseline?

Yes. Let me take the second part first. As our volume and consumer pull through a line, we would expect a natural decline in inventory levels, but the level of injury we have at around $1.2 billion that's just trapped cash and the way this industry works is your furnaces flow 24/7 365. You don't have much flexibility in terms of operating week-to-week, month-to-month. So we've taken the decision to unleash or free that cash and as we go forward, that is something we're going to be focused on is the working capital in the business. We're currently running at about 60 days, but we have pockets of our business and operating units that are operating well below 30 and that needs to become the benchmark. So that we generate as much cash as possible from our operations.

Ghansham, I would add to that. If you take a look at our temporary curtailment activities this year, it'll probably be about 15% of our total capacity will be curtailed this year. That's up from 8% last year, so 7% incremental. So, this year, we are absorbing about $180 million of additional cost to rebalance the network and get inventories down to, call it in the mid to low 40s of IDS. So, as we look forward, managing to that low inventory levels and ideally lower as Gordon is -- we're going to be positioned for that going into next year and as we think about next year, we get out from underneath all that extra incremental cost that I was referring to there. So it should significantly boost our performance next year.

Okay. Thanks for those numbers.

Thank you. The next question is from George Staphos from Bank of America. Your line is now open. Please go ahead.

Hi, everyone. Good morning. Gordon, best of luck to you in the new role and thanks for taking my question. I'm going to take a similar tack. I've covered Owens Illinois since 1992 and I've seen good years, bad years, but I've seen many restructuring and optimization and redirection programs for O-I over the years and one of the things that winds up being the interference as you put it Gordon is the inherent fixed cost of the business. In many ways it lends itself to command and control style because you just -- you have to run or else you're going to get eaten alive by the fixed cost. So why is this latest iteration of being more decentralized, being closer to the customer going to work when in the past it hasn't necessarily worked out, as you wish, and candidly, again, you've been on the board since 2015, what's been the interference from management standpoint in doing some of these things if in fact they were should have been done? And then I had a question on MAGNA.

Sure. Thanks for that, George and I look forward to meeting you at some stage.

Same here.

I think where we're coming from is over the last five to seven years, as I've said, I think the team has done a very good job on bringing some sort of core disciplines around operations and execution to the business that weren't there before and I believe, no, we have really strong foundational capability around supply chain and operations, customer engagement, pricing discipline and so on. Where we're going is, I've been in about 20% of our plants, so there's about 18% of our plants, spoke to a lot of people across our total chain and there are many, many ideas on how to prove the operations of the business and for my background, I've worked in heavy manufacturing businesses and capital intensive businesses and I have methodologies that we've introduced already to the business and to give you an example, we've taken two of the fittest plants in one geography in O-I we put it through a four week assessment and from that assessment in two of our fittest plants, we have seen 10% to 15% efficiency improvements and you map that out across the network and you can see sizable opportunity and I stress that those assessments are based on process improvements and way of working improvements, not requiring a whole lot of capital if any at all. So I believe just driving the operational excellence to a new level, we're bringing in some sort of new capability and new ways of thinking and new ways of running the plants, there's significant opportunity. I also think in terms of just running the assets harder, we have quite a bit of spare capacity. There are opportunities, I think, to sweat our assets much more effectively and drive cash out of them in a way that hasn't been done before and if you look at our end-to-end supply chain, the way we work with suppliers currently and the way we work with customers, I see opportunities to improve that. I've spoken to quite a number of our suppliers and when I asked them what can we do differently, there's five, six, seven, eight ideas on how we can work more effectively together and strip waste out of the supply chain. Likewise, with customers, this is an industry and this is a sort of a rough average across the whole industry, but forecast accuracy -- order forecast accuracy from customer to supplier is somewhere between 50% and 70% and that represents a lot of opportunities for both sides to again get more efficient, strip waste sold and generate more cash and I think as I said I've read through all of the CapEx's of 2023 and 2024 and I see opportunities for us to become much more selective and much more demanding on returns on capital. I think finally there's you put all that together, you end up being a more competitive company and then you can really go after kind of more profitable growth and I've spoken to customers, for example, that have said, hey, we've had opportunities over the years, that we would have liked to put your way, but we weren't able to take those opportunities because our cost base was too high and couldn't get the returns. So we're going to address that and those types of opportunities, which are ongoing as our customers grow, there'll be opportunities for profitable growth. Yeah. So that's how I think about it. I can't comment on the past. I'm here to kind of drive the present and create a much better future for O-I.

Understood. Listen, my last and thank you for the candidness there. I guess my other question, what are we saying about MAGMA at this juncture relative to what the company's expectations might have been two, three years ago? And have what do you think the investment in MAGMA has been today? Is it $0.5 billion. Any way to size that? So how is the vision on MAGMA change and what's the investment in it at present? Thank you and good luck in the quarter and we look forward to meeting with you as well.

All right. Thanks very much. Look, MAGMA is a very exciting technology that has the potential to change how we work, how we invest, how we run the plant and how we work with customers. So the technology works. We go live this month on our Gen 2 facility in Bowling Green in Kentucky, which is a world class facility, where all the operating technologies of MAGNA are going to be sort of road tested at commercial scale and we're confident that we're well on track there, but when I look at MAGMA, I see opportunities for us to monetize and extract value from MAGMA much earlier than maybe the previous plan. So what I've said to the MAGMA team who are world class engineering talent, who are bringing first world kind of technology and glass here and our commercial team who work very closely with many of the leading brands in the world. How do we make this deliver returns faster? and that's what I'm focused on. We also have Gen 3 as you know, but I really want us to get focused on extracting value from the assets that we have sooner than is planned. So that really is the change in focus and yes, I think the team are excited about it actually putting it to work earlier.

And George to your second question the level of investment, we've invested over about a 5-year period of time about $200 million on the direct R&D expense side. We've also put about $40 million into R&D CapEx. So, that's the total kind of R&D component and then, of course, we've been also spending CapEx over the last few years to build out our facility in Holtzman [ph] and which was the Generation 1 as well as the Bowling Green facility that's in excess of $100 million of investment at that particular facility. So to give you an idea of the level of investment.

And just an add on, on MAGMA. What this technology does, it gives us switch on switch off capability in the plants as opposed to running them 24/7 365 and that allows you to radically reshape how you run plants and the flexibility you have and so on and why not bring that closer and move faster on it if it's there to generate better returns, better flexibility and I think it also opens up different types of strategic discussions with customers that will allow us to grow with customers more effectively, particularly in logistically difficult markets. So that's the rationale behind it and we're looking to deliver cash from it sooner rather than later

And when we go to our I Day in March, we'll lay this out in a lot more detail amongst other things.

Thank you. The next question is from Mike Roxland from Truist Securities. The line is now open. Please go ahead.

Yes. Thank you, Gordon, John and Chris for taking my questions and Gordon, congrats on the role and look forward to working with you.

Thanks, Mike.

Gordon you mentioned targeting more profitable segments and customers, you mentioned one of the -- I guess one of the holes in the portfolio not having enough premium exposure. Can you give us some more color around how you intend to gain share in profitable setting to customers? Have you started -- is it just targeting premium? Are there other avenues for you to drive more profitable growth? And have you actually started to prove some business and walk away from unprofitable accounts, unprofitable business?

Yeah. So the way the categories, the consumer categories that we serve through our customers are structured is there tends to be commodity, mid premium, premium, and super premium and above and if I take a look at our portfolio, about 80% of it is in that mid premium and below, and about 20% -- 17% to 20% is bit above. So we're under indexed when you see the premium portfolios of many of our customers, both small and large and a lot of that is legacy because of the plants that were geared for old kind of mainstream beer and we have in some of our operating businesses very effectively changed the operations of the plant to service those markets and we're going to double down on that. There's better margins in premium and super premium, and I think that's an opportunity. You need to change slightly how the plants operate and how they're configured and you need to train people a bit differently what to do. So that's on one hand. We also have outstanding design capability in this business. We have a hand in advising our clients on some of the most glorious packaging that you see in the market and on the shelves and on the back bars. I mean our O-I designers have a hand in that. So we have tremendous capability in that area and therefore are well placed to enter premium and in some parts of our business, historically it just hasn't been a focus and it will now become a focus and then we will put plans in place with the operating units to drive more premium business and you know how you win it, you win it through innovation, you win it through design, you win it through service, you that's by being a better overall supplier, more valuable supplier with a wider breadth of service, you can supply to our key customers. So yes, so that's how we're thinking about it. It's an opportunity and there are a number of different ways into it with different customers in different geographies. So that's what we're focus on and therefore deliver better margins.

Got it, and I appreciate all the color and then just, you mentioned also significant self-help over the next 18 months. You take into, additional temporary production curtailments, you're closing at least six furnaces, you've mentioned reduced in SG&A. Just any more color you can provide on those initiatives? Have you identified any other plants or furnaces that could ultimately be rationalized? And how much SG&A do you intend to remove from the business? Thank you. Yes.

In short, yes. We have some pretty clear views right across the value chain on where there's opportunities either to work more effectively with suppliers, to make the chain more efficient and share the savings. Likewise, with customers, I think there's opportunities just in the whole supply chain, to work together to strip out waste and share some of the gains and then within our own walls, for example, the example I gave there are those two plants which are high performing plants and yet we see opportunities of 10% to 15% by boosting a methodology or a concept called OE, overall equipment effectiveness, which hasn't been a traditional measure in this business, but is a measure I've used in other companies that very effectively helps the teams to focus on how you sweat the assets harder. Yeah. So that combination as I said, the what I would call portfolio momentum, so moving more from commodity and mid premium to premium, just clarifying where is best to do what work. We have quite a bit of duplication in the business often. So look, the way I look at it is we're going to look at heavy activity across the business and figure out if there's a better, smarter, faster, more efficient way to do that and that's what we've started on already and we're going to take an economic profit lens to everything. The only time we make money is after we've paid everyone and paid our capital charge what's left over. So we're we've got a pretty clear view now across our fleet where each plant lies in terms of economic profit and we get down to SKU level pretty quickly and that then will allow us to take action and from that point of view, if there's 10 levers you can pull, eight are usually self-help and two you've got to get some help from the customer. So that's how we look at it and, yes from all the ideas I've received from all my colleagues across the world and I'm pretty confident we've got a long list of self-help opportunities.

And Mike, all of that above is what's driving the targets that we set for 2027. So it's substantially that self-help umbrella that accounts for the difference between kind of our expectations this year to the 2027 preliminary targets.

Got it, very clear. Best of luck.

Thank you. The next question is from Anthony Pettinari from Citi. Your line is now open. Please go ahead.

Good morning. Gordon, when you look at the key geographies that O-I operates in, maybe U.S., Mexico, Brazil, Europe, how would you kind of rank the business performance in terms of regions where you're maybe closer to fit to win or regions where maybe you have a lot more work to do? And then I guess second question maybe kind of related. I mean, your predecessor made the decision to exit Asia, which was big part of O-I historically. Would you look -- you talked about growing in markets, would you look at potentially pairing the portfolio or exiting certain geographies as well?

Yes. Let me answer the second part first, if I may. So our focus as we've laid out is in horizon 1 getting fit, getting super fit and in horizon 2 building momentum by seeking out kind of profitable growth. In terms of expansion into new geographies, I really see that as a horizon 3, when we are really operationally and financially in a position to bring some value to those markets and bring some value to customers that are operating there, either those already there or we have customers that are looking to expand, their footprint as well and there are opportunities to do that, but that is not the primary focus at the moment and would it become a strategic option for us geographical expansion? Yes, and just not right now. So that's the other part of the -- or the second part of the question. Could you remind me of the first part again?

Well, just what regions are closer fit to win?

Sorry, yeah. So which ones are closer fit to win? Look, we have a range, okay. We have very fit businesses in Latin America, but there's still opportunity there. Historically, I think the North American business was skewed more to beer and that category obviously has declined and so there's a shift required there and we've got a good spread of good businesses across Europe. Every business in our portfolio has an opportunity to improve, some more than others and some in different parts than others. Some are maybe better on manufacturing and supply chain, maybe less on innovation. So there is a patchwork if you like and what we're doing is systematically saying to each part of the business, okay, from our analysis and from what the customers are saying and where the market opportunities are, here is a defined program of levers and self-help levers to work on. So the picture varies by market and by geography and by business, but I would say across the board every, operating unit and every part of the business has an opportunity to improve.

Okay. And would you look at exiting geographies as O-I did with Asia or is that not on the table now?

Look, the way I look at it is, what is the EP profit pool? And can we get a reasonable share of it? If there ever came a situation where there was no path to economic profit, yes, we'd re-divert capital elsewhere, but as I look at the spread of markets we have at the moment, I see a path to improving our economic profit in all the geographies in which we operate.

Okay that’s helpful. I will turn it over.

Thank you. The next question is from Joshua Beder from UBS. The line is now open. Please go ahead.

Hi, good morning. Actually, this is Sean speaking on behalf of Josh. Yeah, thank you for taking my question and congratulations on the new role Gordon. So well, we actually have a few questions in terms of the EBITDA guidance. So my first question is based on the current trends entering into the second half, can you say with confidence that there will be no further guidance cost for this year? And also any color on quarterly EBITDA distribution for second half? Thank you.

Yes, what I would say is that this is John. So we really take a look at the forward volume outlook for the business and obviously we tried to take a reasonably conservative view of what is the pluses and minuses and I believe that our guidance accounts for a reasonably wide range of possible outcomes including softer demand and that would be the primary variable that it would be driving any variance in our outlook right now. Obviously, what we did here was we took a pretty big impact in the third quarter in particular with the downtime that we're taking in accelerating in that. So that's all part of that. That's the biggest driver for our change. Frankly, if we weren't taking those actions, we'd probably be at the south end of our current range, but we are doing that is the right move to set us up for the next year that that's precipitated the bigger change in the outlook. As far as the distribution of the outlook on that, as you can see the Europe has transitioned first into more positive sales volume in that regard, but it's also the market where we have to do a little bit more catch up on the inventory control. So, I would say that the North American market or the Americas market is probably seeing a little bit slower recovery on the demand as far as a year-over-year basis and things like that, but more of the catch up and the downtime is over in Europe. So, they're both probably equal but, for different reasons.

Okay. Thank you, and also in terms of the EBITDA distribution between third quarter and fourth quarter, so do you mind also give some color on that? Thank you.

Between the third and fourth quarter. Yeah, okay. So if you take a look at the main drivers that are going on in the business in the third quarter, obviously we're looking at a soft quarter. It's driven by two factors. One is the third quarter is going to have our peak net price pressure. You've seen about $50 million to $60 million in net price pressure year-to-date. We're going to see more than that in the third quarter alone. It has to do to two factors. One is a comp base question and the comparisons against last year and the fact that energy and logistics costs in the first half of the year were softer or lower inflation than we originally were anticipating and in some geographies, we pass that back to our customers on a timely basis. So that's flushing through in that regard. We would expect net price to be better in the fourth quarter relative to the third quarter and then in the third quarter, we're going to take a pretty meaningful impact over $100 million impact, $0.50 per share alone on the inventory curtailment activity, but in the fourth quarter that's actually going to -- should be a positive because we took significant action last year. Even though we're going to continue to take downtime in the fourth quarter, it's going to be less than the 20% or so that we had in the previous fourth quarter period. So hopefully that gives you a little bit of texture of the moving parts.

Okay. Thank you. Yeah. My last question is about the EBITDA bridge. Actually, how we should think about the EBITDA bridge from 2024 until the 2027, $1.5 billion target?

Yes, obviously we're not providing a lot of details on the 2027 outlook. Again, we'll do that more than I Day, but back to earlier conversations, this is mostly driven by self-help activities and I think you would substantially see that in the cost performance line of the business without taking a big hard stance just yet on the commercial outlook for the business.

Thank you very much. I will turn it over.

Thank you. The next question is from Arun Viswanathan from RBC Capital Markets. The line is now open. Please go ahead.

Great. Thanks for taking my question, and good to speak with you Haudrich. So I guess the question I had was when you look at the guidance revision, it looks like you're cutting it by about $0.60 at the midpoint. You gave some statements in the presentation this time and last that each 1% reduction in volume and production is $0.20 at EPS. So is that kind of how we're thinking, maybe like a 3% reduction in combined in both as far as how you're thinking about the revised outlook?

Yes, I would say on the sales side, it is probably in that neighborhood of 2% to 3%. We're talking probably about a 4% change in our outlook on production, a little bit more than that and yes, you could extend those by those numbers that we provide there. So in other words, the incremental production downtime is worth about $0.50 and then the volume is something in this call it anywhere $0.10 to $0.20 type of range and then you got the tax impact.

Great. Thanks for that John and as a follow-up, given these steep actions you are taking now on the inventory side in Q3, and then you just think about some of the category performance, I know spirits is still destocking, but would you say that Q3 really would kind of constitute a bottom as far as operating or economic profit? And, should we expect you know -- when should we expect growth on that, on the economic profit side? And how are you going to track that and kind of report that to us?

Yes, I'll expand on that and we will look to provide more details on both the calculation methodologies in future discussions and quarters and certainly expand on that a lot more during Investor Day. If we take a look at 2023, we were economically profitable a little bit single digit spread margins. This year with everything that's going on, spread margins. This year with everything that's going on, we will be down low single digits on the economic spread approach and things like that. With that said, the lowest point probably would be the third quarter just given the significant, you see it in the P&L with the numbers and that we're referring to, but also, the significant impact that we're taking on both the downtime and ultimately some restructuring charges that we'll be taking over the balance of the year here too. So, we would expect that to bounce back. As far as where we go from there and next year and the cadence of that, we'll lay that out more in detail in the future.

Thank you. The next question is from Gabe Hajde from Wells Fargo Securities. Your line is now open. Please go ahead.

Gordon, I echo what everyone said. Good luck on your new role. John, good morning.

Thank you, Gabe.

I guess the first question is more customer oriented. I guess in their spirit of getting products to consumers on the shelf, they presumably have a vested interest to get you all reasonably accurate forecast. So maybe, John, having benefit of history, this 50% to 75% number that that Gordon talked about, has that changed a lot over time? And really what I'm getting at is I'm assuming mostly across the food and beverage industry in the past four years, forecasting accuracy has not been very good, and then maybe more importantly, based on your kind of customer engagement as you look into 2025, you know, how is their enthusiasm towards glass as a package? And maybe from your vantage point, what are some of the near term factors that could be temporarily impacting pack mix?

I can start with just say, hey, that forecast accuracy is nothing new. That's been around. In particular accuracy at the SKU level is where you really see the variance and it's been kicking out for some time. I'll turn it over to you Gordon.

Yes, and I think over this kind of period last two years with inventory piling up, I think everybody is kind of focused on how they manage inventory in the chain more effectively and so talking to the customers as I have been that has come up as an issue and I think everybody is much more focused on it than they would have been in previous years, right, where it was less of an issue, but with the focus on working capital and inventory, it's absolutely an opportunity and I've raised it with customers and we've agreed that we're going to try and figure out how we improve that, right. The better that number is, the more effectively you can run your plants and the better we and customers can manage their inventory. Yeah. So that is going to be a focus for us, for absolutely sure. I see clear opportunities, you know, in terms of how we work together and our supply chain teams and our customer supply chain teams work more effectively together and share data in a way maybe that we haven't in the past historically shared. So I definitely see opportunities there. In terms of enthusiasm for glass, I mean, it's clear that glass is core to many of the world's kind of great beverage brands and all of the customers have made it clear that glass is very, very much a part of the equity of their brands and see a big part of it and one or two customers who both have glass and cans said to us, we want to do more glass, but we also have to step up and help our customer by working with their teams to innovate more and to make packaging more attractive to customers on shelf. At the retail level, it's well known that the purchase decision is often made at the shelf and glass can absolutely help that. So yeah. So, you know, I see a very kind of clear future for glass and with right across right across all the markets we address. Yeah, and then if you look at, you know, at the markets we address, we're only we're only in about 43% of markets that's where glasses is a big packaging element. Right? So, you know, as you look forward into horizon 3, you know, we absolutely see opportunities to grow glass. Yeah.

Okay. Real quick, maybe a modeling question. Can you give us a sense for the six furnaces that you're looking to close or, I guess, take down temporarily at this point, fixed cost savings associated with that, and trying to not be careful or be careful to not double count, you know, giving you credit for better fixed overhead absorption going into 2025 and or fixed cost savings associated with that, if that question makes sense?

Gabe, I'd say that is we're incurring about $180 million of incremental fixed cost absorption this year as we bring those inventories down. We won't have that cost next year through a combination of accelerated activities that we're doing on the temporary curtailment side, but also through the restructuring costs we're referring to. So rather than parsing them out, I think it's better to stay at a high level perspective and that's kind of a return to 2025 benefit.

Thank you. This is the end of Q&A session, and I'd like to hand over to Chris for closing remarks.

Thank you, Kiki. That concludes our earnings call. Please note our third quarter conference call is currently scheduled for Wednesday, October 30. And additionally, please mark your calendars for our next Investor Day that's planned for March 14, 2025. In conclusion, remember, make it a memorable moment by choosing safe, sustainable glass. Thank you.