O-I Glass, Inc. 2026 Q3 Earnings Call

Please go ahead. Thank you, Jesse.

Good morning, everyone, and welcome to O-I Glass third quarter 2026 conference call. Joining me today are Gordon Hardie, our CEO, and John Haudrich, our CFO. Following prepared remarks, we will open the line for questions. Our earnings release and presentation are available on the company's website. Please review the safe harbor comments and disclosures regarding use of our non-GAAP financial measures included in those materials. Today's remarks include forward-looking statements, and actual results may differ materially from current expectations. With that, I'll turn the call over to Gordon. We'll start on slide 3.

Thank you, Chris. Good morning, everyone. Today, we will review our third quarter results, update our 2026 outlook, and share an initial view of the key business drivers for 2027. Before I begin, I want to thank all our O-I colleagues for their focus and commitment. Our teams acted with urgency to navigate a difficult environment, particularly in Europe, while continuing to serve customers across challenging markets. Our third quarter results reflected three key trends. Net sales were stable and year-over-year shipments continued to improve. Adjusted EBITDA declined from last year. Results were stable in the Americas, but significantly lower in Europe, where higher than anticipated energy and freight costs drove performance below our expectations entering the quarter. Adjusted EPS was down, reflecting lower operating margins and an unusually high tax rate. Europe remains our largest opportunity to improve financial performance, but progress has been slower than expected.

These results are unacceptable, and we are acting with urgency to address the issues weighing on earnings. As I will discuss shortly, we have sharpened our focus on our four priorities to restore European margins to competitive levels. In the Americas, our team delivered another solid quarter demonstrating the impact of disciplined execution, Fit to Win, and close collaboration with customers. This performance also reflects the broader impact of Fit to Win, which continues to strengthen our cost base and has delivered $135 million of year-to-date benefits. At the same time, energy, freight, and demand headwinds require us to update our 2026 guidance. While these pressures weigh on the near-term outlook, demand trends are gradually improving and actions underway should position us for improved adjusted earnings, cash flow, and profitability in 2027.

Against this backdrop, our priorities are clear: execute the Europe Recovery Plan, sustain momentum in the Americas, and capture the remaining Fit to Win opportunity to strengthen performance and grow the value of O-I. Let's now turn to slide 4 and discuss the top line. As noted, net sales were relatively stable at approximately $1.6 billion, as favorable currency translation largely offset modest declines in selling prices and volume. While demand remains sluggish and uneven across markets and categories, year-over-year shipment comparisons continue to improve sequentially, as shown on the chart. Third quarter volumes declined approximately 2% from the prior year. In the Americas, shipments were down approximately 1%, reflecting the earthquake in the Andean region and the onset of the U.S.-Canada trade dispute. Overall, solid growth in Latin America largely offset lower demand in North America. In Europe, shipments declined just under 4%.

Demand increased in the U.K. and remained stable in Northern Europe, while Southern Europe remained under pressure, particularly in wine-related markets. For the fourth quarter, we expect enterprise shipments to range from flat to up low single digits, supported by new business wins and easier prior year comparisons. For the full year, we expect sales volume to decline 3%-4% from 2025. Looking ahead, we expect gradual sequential improvement to continue, supported by new business wins representing approximately 4% of annual sales volume. Now let's turn to slide 5. Fit to Win remains central to our strategy and continues to strengthen our competitive position, as demonstrated by our new business wins. This program delivered approximately $50 million of benefits in the third quarter, bringing the year-to-date total of $135 million and cumulative benefits of $460 million since inception. The actions previously identified under Phase A are substantially complete.

We also recently initiated a process with employee representatives regarding the proposed permanent closure of an additional European plant. Going forward, our focus is shifting to Phase B execution, including total organization effectiveness, procurement, energy, and supply chain optimization. The Americas demonstrate how Fit to Win can strengthen competitiveness and resilience when paired with consistent execution, even in a challenging macro environment. Europe is earlier in that progression. We intend to build on initial gains in plant efficiency and establish a stronger foundation for future benefits. We now expect $180 million of net benefits this year, reflecting the time required to address supply chain challenges in Europe. The deferred benefits will shift into next year, and we continue to target at least $650 million of cumulative Fit to Win benefits by the end of 2027.

The remaining opportunity is substantial, particularly in Europe, where successful execution of the recovery plan should strengthen operating stability and contribute to higher adjusted earnings and free cash flow. I will return to this shortly. With that, I'll turn the call over to John on slide 6.

Thanks, Gordon, and good morning, everyone. Net sales were generally stable, but adjusted results declined from $0.48 per share of profit in the prior year to a loss of $0.09 per share. Lower net price was the primary headwind. Average selling prices declined just under 1% overall, as improvement in the Americas was more than offset by declines in Europe. Cost inflation also remained elevated, particularly for energy in Europe, reflecting the one-time reset discussed previously and additional inflation related to the Middle East conflict. The impact of slightly lower sales volume was offset by favorable operating costs as Fit to Win benefits more than offset higher delivery and maintenance costs, lower joint venture performance, and other one-time items. As in the prior quarter, adjusted earnings also reflected an unusually high tax rate, primarily due to lower earnings in Europe.

Turning to the balance sheet, net leverage increased modestly due to lower earnings. We continue to maintain ample headroom under our senior secured leverage covenant, and liquidity remains strong at $1.5 billion. Let's turn to slide seven and review segment performance. As shown on the left, enterprise adjusted EBITDA and segment profit declined year-over-year. Performance continued to differ sharply by segment, with solid results in the Americas and continued pressure in Europe. In the Americas, net sales increased more than 3% from the prior year period to $970 million. A volume decline of approximately 1% was more than offset by a selling price increase of just over 1.5% in favorable currency translation. Segment operating profit declined approximately 2% to $137 million. Favorable operating costs and currency translation largely offset slightly lower volume and net price.

The year-over-year comparison did include a $6 million one-time insurance recovery in the prior year that did not repeat. In Europe, net sales were $634 million, down approximately 8% from the prior year period. Selling prices and sales volume each declined nearly 4%, and currency translation was also unfavorable. Europe's earnings remained under significant pressure. Segment operating profit was $2 million, compared to $95 million in the prior year period. Unfavorable net price was the largest driver, reflecting competitive pricing pressure. Elevated energy and freight costs were approximately $15 million above our expectations for the quarter. Lower volume was also a modest headwind, while operating costs benefited from greater plant efficiency following post-restructuring disruption in the first half. Now let's turn to page eight. We are updating our 2026 outlook and providing an initial view of the key levers and business drivers for 2027.

As shown on the left, we now expect 2026 adjusted EBITDA of $925 million-$950 million, and free cash flow usage of approximately $300 million. We expect year-end leverage ratio will range from 4.5x to 5x. The revised earnings outlooks reflects lower sales volume, including the estimated impact of the U.S.-Canada trade dispute, higher energy and freight costs, and lower Fit to Win benefits, primarily due to the slower pace of Europe's recovery. Importantly, we have secured coverage for 100% of our fourth quarter European natural gas needs. Barring extreme price spikes or supply disruption, this coverage should significantly limit further changes in direct gas costs for the remainder of the year. In addition to lower operating income, free cash flow will be affected by higher inventories resulting from softer sales and cash used to strengthen our 2027 energy risk management position.

We expect 2026 results in the Americas will be nearly 50% above 2024 levels, driven by record performance in Latin America. However, earnings in Europe will likely remain under pressure through the first quarter of 2027 due to peak energy inflation and normal seasonality. We believe this outlook appropriately reflects current operating conditions and our expectations for the remainder of the year. Turning to the right side of the slide, our initial view of 2027 calls for higher net sales and adjusted EBITDA, significantly improved free cash flow, and lower net leverage. Although it is still early, we expect net price to improve through commercial actions, including commercial PAFs and procurement initiatives. We have covered more than 90% of our forecasted European natural gas needs for 2027, including 100% for the first quarter.