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Text: Our discussion today will be led by Andres Lopez, our Chief Executive Officer; and John Haudrich, our Chief Financial Officer.
Today, we will discuss key business developments and review our financial results.
Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.
We appreciate your interest in O-I Glass.
We're very pleased with our performance during the second quarter.
We reported adjusted earnings of $0.54 per share.
Results exceeded our guidance range and reflected a stronger-than-expected shipment levels as well as favorable ongoing operating performance.
We continue to see favorable performance across key business levers.
Shipments improved 18% and production rebounded 27% compared to the prior year, which was impacted by the onset of the pandemic.
The strong demand also reflected consumer preference for healthy, premium and sustainable glass packaging as markets reopen.
Furthermore, the benefit of higher selling prices substantially offset the rated cost inflation and continued favorable operating performance was driven by the positive contribution of our margin expansion initiatives.
Second quarter cash flow was also very strong as a result of solid operating performance.
As I noted last quarter, O-I has reached an inflection point.
We have seen a step change improvement in our ability to consistently perform and deliver on our commitments, which is underpinned by advanced capabilities across many disciplines developed over the last few years.
I believe current quarter results underscore this view.
As I will discuss shortly, we continue to advance our bold plan to change O-I's business fundamentals.
In addition to better-than-expected earnings and cash flow, I'm very pleased with the progress we made advancing our strategy.
Our margin expansion initiatives are exceeding our expectations, and we achieved a major milestone with MAGMA this past quarter.
Likewise, we continue to rebalance our business portfolio and advance our efforts to resolve our legacy asbestos liabilities.
As we look to the future, we remain optimistic about our business outlook.
We expect third quarter adjusted earnings will approximate $0.47 to $0.52, which is a significant improvement from the prior year.
Our full year earnings and cash flow guidance has improved.
We now anticipate full year earnings of between $1.65 and $1.75 per share and $260 million of cash flow.
Let's move ahead to slide four to discuss recent volume trends.
As you can see on the chart, second quarter shipments were up significantly over the prior year, which was impacted by the onset of the pandemic.
Total shipments increased 18% this year compared to a 15% decline last year.
In the Americas, second quarter shipments were up 17%, with all geographies improving from the prior year.
The rebound was most pronounced in Mexico and the Andeans, which were significantly disrupted in 2020.
In Europe, shipments were up 22% and all geographies improved double digits from last year.
While the pandemic was very disruptive, underlying trends point to a stable or modestly improving demand.
For example, second quarter shipments were in line with 2019 levels, reflecting a return to pre-pandemic levels.
Glass has proven to be very resilient despite significant market volatility.
This includes supply chain disruptions, transportation challenges and major channel shifts between retail and on-premise consumption patterns.
The chart on the right illustrates how food and beverage consumption patterns should evolve across channels over the next 18 to 24 months.
As you can see, on-premise consumption is expected to rebound after the depths of the pandemic, while retail purchases should remain elevated compared to pre-pandemic levels.
While we first shared these analysis last quarter, the evolution of packaging demand over the past couple of quarters, supports these trends and continues to reinforce the projected consumption patterns in this chart.
As we look to the future, we expect continued volume growth.
While markets had already rebounded well in the third quarter of last year, we expect our shipments to be flat to up 1% in the third quarter of this year.
Reflecting solid demand year-to-date, we have increased our full year 2021 growth outlook.
While our prior guidance called for 3% to 4% growth, we now expect growth of between 4% and 5% in 2021.
In addition to a strong operating performance, we also achieved a number of key milestones during the first half of the year as we continue to advance our strategy.
On this page, we released our 2021 priorities as well as some highlights on our progress.
I'll touch base on each of our three platforms.
First, we aim to expand margins.
We have targeted $50 million of initiative benefits as well as continued performance improvement in North America.
We have made good initial progress with our margin expansion initiatives.
Benefits totaled $40 million during the first half, and we now expect to exceed our original $50 million target for the full year.
North America in turn has demonstrated a strong resilience responding to severe weather, high freight inflation and a tight supply chain situation, and sales volumes are comparable to 2019 levels.
Next, we seek to revolutionize glass.
To support this, we successfully validated several technology milestones for MAGMA Generation one line in Germany as well as continue to advance our Glass Advocacy campaign and reposition ESG.
Similarly, we remain on track to pilot the Generation two MAGMA line in the Streator, Illinois, in the second half of the year and continue to make solid progress developing Generation three.
Additionally, we're actively working on a R&D lightweighting program we call Ultra, targeting significant container weight reductions to improve even further the convenience and sustainability profile of glass.
O-I's Glass Advocacy campaign aims to rebalance the dialogue about glass.
Our digital marketing campaign is well underway with over 660 million impressions program to date and the campaign has reached over 80 million people across the U.S.
We are building a community of glass advocates, who regularly engage with our content, which demonstrates the relevance of our message.
Like in our technology developments, we are very encouraged by the positive response and progress made, and we'll continue to advance these marketing efforts.
I'll touch on ESG momentarily.
Third, we will continue to optimize our structure.
This includes a number of efforts ranging from portfolio adjustments, improving the balance sheet, simplifying the organization and addressing legacy liabilities.
Regarding our divestiture program, we have completed or entered into agreements for $930 million of assets sales to date.
So we are over 80% of our way toward our targeted divestitures by the end of 2022.
As John will expand, on our cash flow during the first half of the year was quite favorable given historic seasonal business trends, reflecting very good working capital management, which support debt reduction.
In March, we entered into a long-term strategic agreement with Accenture to manage our global business services activities, and we completed the first phase of this transition in July.
In addition to reducing G&A cost, we expect to accelerate capability enhancement by leveraging world-class processes and technologies.
As you know, we reached an agreement in principle back in April for a fair and final resolution to our legacy asbestos-related liabilities.
Efforts to complete the reorganization for Paddock are proceeding as expected.
Before I turn over to John, let me add a few comments on sustainability.
At O-I, our ESG and sustainability vision is holistic, grounded in innovation and touches every part of our business.
In our vision, we see a future where the innate circularity of glass meets O-I's disruptive technologies and other innovations to change how glass is made, sold and recycled.
This sustainable future of glass involves the development of significantly lighter glass containers through Ultra, which implies a lower carbon footprint per container.
It also involves the use of cleaner gas oxygen fuels and improved technology in traditional furnaces.
On top of that, O-I's revolutionary MAGMA melting technology will be capable of using biofuels and other carbon neutral renewable sources of energy, like hydrogen, as well as more grades of recycled class.
MAGMA includes a more flexible manufacturing process, including the ability to turn the unit on and off to optimize the use of energy and efficiency.
It also can be co-located at manufacturing and filling facilities.
This will reduce freight and potentially leverage the use and reuse of wastage, water and other resources.
In addition, we're building a future where innovative approaches, such as glass for good, enhance glass recycling while providing a benefit to the community, elevating O-I's ESG profile.
We are looking forward to sharing all of this and more in our coming 2020 sustainability report, which will be available at the end of Q3.
Now over to John.
I plan to cover a few topics today, including a recent performance, progress on our capital structure as well as our most current 2021 business outlook.
I'll start with a review of our second quarter performance on page seven.
O-I reported adjusted earnings of $0.54 per share.
Results exceeded our guidance of $0.45 to $0.50, given stronger-than-anticipated shipments and favorable cost performance.
In particular, sales volume was up more than 18% from last year compared to our expectation of 15% or higher.
Segment profit was $232 million and significantly exceeded prior year results, which were impacted by the onset of the pandemic.
Higher selling prices substantially offset elevated cost inflation linked to higher energy and freight costs.
Naturally, higher sales volume and favorable mix boosted earnings.
Likewise, favorable cost performance was driven by a 27% improvement in production levels as the prior year was impacted by forced curtailment due to lockdown measures.
Keep in mind that maintenance and project activity costs have normalized for the disruption last year.
Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives.
The slide includes additional details on nonoperating items.
Let me point out that we did record a gain on an indirect tax credit in Brazil after a favorable court ruling, which has been excluded from management earnings.
Overall, we are pleased with favorable performance trends.
Moving to page eight.
We have provided more information by segment.
In the Americas, segment profit was $124 million, which is a significant increase compared to $52 million last year.
Higher earnings reflected 17% higher sales volume as the prior year was impacted by the onset of the pandemic.
Higher prices substantially offset cost inflation, which was elevated due to higher freight costs.
In Europe, segment profit was $108 million compared to $42 million last year.
The significant earnings improvement reflected a 22% increase in sales volume, while the benefit of higher selling prices partially offset cost inflation.
In the case of both regions, very good operating performance, mostly reflected higher production, which increased 28% in each segment, while supply chains remain very tight across the globe.
Likewise, very good operating performance also benefited from our margin expansion initiatives.
Keep in mind that we no longer report in Asia Pacific region following the sale of ANZ last summer.
In addition to comparing results to last year, we have added a comparison to 2019 to better understand our performance with pre-pandemic trends.
As illustrated on page nine, our current underlying performance exceeds pre-pandemic levels.
Adjusted primarily for the divestiture of ANZ, segment profit was up $7 million in the second quarter of 2021 compared to the same period in 2019.
Overall, higher selling prices have nearly offset elevated cost inflation, while sales volume and mix were comparable to 2019 levels.
Favorable results were really driven by improved operating and cost performance reflecting our margin expansion initiatives.
Let's shift to cash flows in the balance sheet.
I'm now on page 10.
We are following a specific set of guiding principles that are aligned with our strategy to increase shareholder value.
As we focus on maximizing free cash flow, we expect significantly higher cash flow this year and key working capital measures should be in line or favorable compared to 2020 levels.
As illustrated on the chart, our second quarter cash flow was $117 million and was comparable to the prior year, which benefited from significant inventory reduction due to forced production curtailment.
Over the past year, we have improved the consistency of our cash flows and now reflect normal seasonality of our business, solid operating results and very good working management.
Second, we preserved our strong liquidity and finished the second quarter with approximately $2.2 billion committed liquidity well above the established floor.
Third, we are reducing debt.
We expect net debt will end the year below $4.4 billion, and our BCA leverage ratio should end the year in the high 3s compared to 4.4 times at the end of 2020.
We expect to receive divestiture proceeds over the next several months, which will further improve our balance sheet position.
Please note, these targets could shift if the Paddock trust funding occurs prior to year-end.
At the end of the second quarter, net debt was down almost $1 billion from the same period last year, reflecting improved free cash flow and proceeds from divestitures.
Furthermore, our bank credit agreement leverage ratio was around 3.8 times as of midyear, which is well below our covenant limit.
Finally, we intend to derisk legacy liabilities as we advance the Paddock Chapter 11 process.
As previously announced, we have an agreement-in-principle for a consensual plan of reorganization, whereby O-I will support Paddock's funding of a 524(g) trust.
Total consideration is $610 million to be funded at the effective date of the plan.
Importantly, the agreement provides a channeling injunction protecting Paddock, O-I and their affiliates from current and future liability.
The Paddock reorganization is proceeding as expected and timing will be a function of the remaining legal and court actions to conclude this matter.
As previously noted, we have ample liquidity to fund the trust in the future.
And for clarity, we are not considering equity as a funding method.
Likewise, we remain highly focused on reducing our total debt obligations over time through free cash flow and proceeds from divestitures.
Let me wrap up with a few comments on our business outlook.
I'm now on page 11.
As Andres mentioned, we anticipate our business performance will improve in 2021 as markets stabilize and recover.
We expect third quarter adjusted earnings will approximate $0.47 to $0.52 per share.
Naturally, this is a meaningful improvement from the third quarter of 2020, which was impacted by ongoing COVID required production curtailments in Mexico and the Andeans.
Overall, we expect shipments will be flat to up 1% from the prior year.
Keep in mind, demand had already rebounded in the third quarter of 2020 from pandemic lows.
Production should be up about 8% to 10% from last year, which was still impacted by lockdown measures in some markets.
At the same time, certain costs like maintenance and depreciation have normalized following the pandemic-induced disruption last year.
Likewise, the current supply chain is fairly stretched across the value chain, reflecting the impact of prior year production curtailments as well as a strained transportation situation in many markets.
Finally, we expect continued solid operating performance and benefits from our margin expansion initiatives.
Our full year 2020 outlook has improved as we've tightened our earnings expectations to the high end of our guidance range and increased our free cash flow estimate.
We now expect adjusted earnings of $1.65 to $1.75 per share and free cash flow of approximately $260 million.
This adjustment reflects higher expected shipment levels, which we now anticipate will increase 4% to 5% compared to 2020.
Likewise, we expect the benefit of our margin expansion initiatives will also exceed our original goal of $50 million.
We anticipate the benefit of higher shipments and improved cost performance will more than offset the impact of winter storm Uri, which, of course, was not included in our original guidance.
During this session, we will update our plans that will include more details on MAGMA.
Likewise, we will share key company targets and milestones.
Subsequent investor events will expand on these key topics.
Let me wrap up with a few comments on slide 12.
Overall, we are very pleased with our second quarter performance, which exceeded our guidance due to stronger sales volumes and improved cost performance.
In fact, our underlying performance was favorable across key business levers.
Selling prices and volumes were up and costs were down.
Our margin expansion initiatives are working well, and our ability to deliver on our commitments has improved, underpinned by advanced capabilities across business functions, rigorously built over the last few years.
I'm very pleased with the progress we are making on our bold plan to change O-I's business fundamentals.
Our business is more stable.
We have well-structured business planning processes, and we are a much more agile and resilient organization.
Likewise, we are removing the constraints of the past, like legacy asbestos liabilities, while successfully advancing breakthrough innovations, such as MAGMA.
Finally, we are encouraged by market trends, which is reflected in our improved earnings and cash flow guidance for 2021.
Over the past several years, we have been hard at work, improving the foundational capabilities of our company as well as staging the company for continued transformation.
We look forward to our Investor Day on September 28.
During this event, we will share our exciting plans to align glass and O-I with the future packaging for decades to come.
We are confident this plan will increase shareholder value and all share a new period of prosperity for life.

user
q2 adjusted earnings per share $0.54 excluding items.
currently, o-i expects q3 2021 adjusted earnings will approximate $0.47 to $0.52 per share.
now expects 2021 sales volume in tons should increase 4 to 5 percent compared to 2020.2021 adjusted earnings per share should approximate $1.65 to $1.75.

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