Everybody, wrapping up the formal remarks at our conference this year. We saved the best for last. We're delighted to be again hosting O-I, who's spoken at our conference probably going back to the mid-1990s. I'm George Staphos, B of A's paper and packaging analyst, and thrilled that Chris Manuel from Investor Relations and John Haudrich, Chief Financial Officer of the company, are here, presenting today. Chris, as you know, has been in IR for O-I for five years. You know, prior, he was a well-esteemed peer, doing analysis on paper and packaging. John Haudrich has been with O-I since 2009, and has been Chief Financial Officer of the company since 2019, and certainly has been, both gentlemen have been engaged with O-I through a positive period with a lot of positive change. And so without further ado, I give you John Haudrich. John?
Thanks, George, and the B of A team for hosting us. This is always a great venue. Love coming to it, George. Great discussions over the last couple days or so here, so thanks.
Thank you, John.
Today I plan to talk about how O-I represents an attractive investment opportunity. Afterwards, obviously, we'll spend some time taking questions. Before we proceed, please take a look on page two there of the Safe Harbor Comments as well as the other disclosures you'll find in the presentation, which can be found on the website if you don't have it. Let's start on page three, where we have a high-level profile of the company. As most of you know, O-I is the global leader in glass packaging. Glass is the preferred substrate for many of our customers who seek to leverage glass to help build their brands. Likewise, consumers love the healthy and premium experience when consuming food and beverage products from a glass container.
We serve thousands of customers across Europe and the Americas through our network of 68 plants spanning 19 countries, supported by our dedicated team of nearly 23,000 employees. We are focused on driving long-term growth and performance improvement across all aspects of our business. As you can see in the chart there, adjusted earnings are up nicely over the past few years as we also managed to significantly improve our balance sheet position. Building on our long history of glass leadership, we are developing breakthrough technologies like MAGMA and Ultra, which should accelerate profitable growth, boost our financial performance, and further enhance glass as the most sustainable packaging solution. Moving to slide 4, O-I serves many of the brands that you love and trust.
We have profiled a handful of our 6,000 customers here, which span the large blue chip brands shown on this page, as well as many of the local and regional brands that we serve across the world. Let's move to slide 5. O-I is the glass packaging leader in both the Americas and Europe, which are about of similar size. In the Americas, we serve many different markets spanning from Canada down to Brazil. We see the strongest growth in Latin America, while North America should be more stable over time. We operate 32 plants across 7 different countries in nearly the clear majority of our businesses covered by long-term agreements. In Europe, we serve thousands of customers, including many of the iconic food and beverage brands that are exported across the world.
Europeans love glass with twice the level of glass intensity per capita of the various different markets that we serve. Overall, we expect European glass demand should grow about 1%-2% a year on average, which we support with our network of 34 plants across 10 countries. While 35% of our business is with large multinational accounts with long-term contracts, the majority of our business represents small customers with annual purchase agreements. As you can see shown here on the right, we serve a wide range of end-use categories across the food and beverage market. Turning to page 6, O-I continues to execute a consistent strategy focused on creating shareholder value. Over the past several years, we have significantly transformed the company, and we are now a much more disciplined, agile, and capable organization fully focused on executing our strategy. We intend to drive long-term profitable growth.
We are expanding in attractive markets and categories as we increasingly leverage the sustainability of glass packaging and other attributes to drive growth. Importantly, we will deploy new breakthrough technology that we believe is a great fit for current and future market trends and should increase the size of our addressable market. In addition to growth, we are taking action to increase margins and our ROIC. The team is squarely focused on improving productivity across all facets of the business, leveraging our very successful Margin Expansion Initiative program. Furthermore, we have transformed our capital structure, and we continue to optimize our business portfolio. Following the resolution of legacy asbestos liabilities in 2022, all of our free cash flow is now available to create shareholder value for the first time in decades. Let's discuss each of these pillars briefly.
Moving to page 7, we seek to expand in attractive markets and categories across the markets that we serve. The best opportunities leverage the key megatrends driving glass demand growth. These include premiumization, health and wellness, brand proliferation that requires packaging differentiation, as well as sustainability. While current demand is soft given cyclical macro conditions, we believe these trends will continue once markets normalize, and this view is shared across our customer base. As you can see on page 8, glass is a great fit for growing categories with a natural affinity for glass. Examples include creamy alcohol, sparkling wine, spirits-based RTDs, non-alcoholic beverages, and specialty drinks. As noted here, long-term growth projections range from mid-single digit to double-digit growth, reflecting many of the favorable megatrends that we just discussed. Moving to slide 9, O-I is expanding in premium markets across premium categories with premium technology.
These investments are supported by the favorable megatrends and attractive long-term growth projections in key categories. We are focused on a diverse portfolio of expansion projects targeting an average return of around 20%. The team has completed projects in Colombia and Canada, and we expect to commission our first greenfield MAGMA facility on the Kentucky Bourbon Trail around mid-2024 with an additional line to follow. Given the softer market, we have deferred some projects a few quarters until markets recover. We continue to evaluate opportunities for profitable growth, including future deployment of our MAGMA technology. Moving to slide 10, we intend to leverage the sustainability of glass packaging to drive profitable growth. Glass containers are the most sustainable packaging solution, and the key attributes are unmatched by alternative substrates.
Consumers like that glass is all-natural, infinitely recyclable, and safe for food and beverage applications because it does not require a synthetic liner. Our focus now is to further improve the sustainability of our manufacturing and logistics processes as we seek to reduce our carbon footprint and container weight. MAGMA and Ultra are being designed around sustainability. We are investing in proven technologies like gas -oxy furnaces to reduce emissions, and we are increasing renewable energy sources and cullet utilization rates. Importantly, our ESG plan is fully integrated into our long-term strategy and capital plan. For more details, please refer to the appendix of our IR and our annual sustainability report, which you can access through the QR code on this page. Moving to page 11, we believe breakthrough innovation is critical to drive profitable growth.
O-I has a rich history of innovation beginning in 1903 when Michael Owens invented the first glass bottle machine. R&D remains at the core of our business, and today we have over 3,800 patents and applications worldwide. Over the past several years, we have focused on developing MAGMA and Ultra to address changing market requirements and create new exciting opportunities. Please turn to page 12. Our heritage network is a great fit for many of the categories that we have served for decades and will continue to serve in the future. However, markets have shifted, and we now see greater brand proliferation and increased product fragmentation. MAGMA reimagines the entire glass-making process to serve a more differentiated market. While a new melting technology is core to the system, we have redesigned the entire end-to-end production line to meet market requirements.
MAGMA is more flexible, scalable, and can be more rapidly deployed. It will be much smaller and fit into an industrial warehouse, which results in lower Capex, operating costs, and enables near-location reduced logistics. Importantly, MAGMA is designed around sustainability from the ground up. Along with Ultra, we can reduce the weight of our glass containers by up to 30% to improve convenience, reduce logistics costs, and greenhouse gas emissions. We expect to commission our first MAGMA greenfield, leveraging Generation 2 technology in Bowling Green, Kentucky, around mid-year this year, and our first Gen 3 line in early 2026 with further Generation 3 deployments to follow. Let's turn to page 13. We believe MAGMA and Ultra will increase O-I's right to win in the marketplace. In particular, increased flexibility, scalability, and rapid deployment will create a key competitive advantage for O-I across attractive differentiated markets and categories.
Overall, MAGMA and Ultra together represent a major leap forward and will expand O-I's addressable market by over 30%. Let's move to page 14. In addition to profitable growth, we are focusing on proving performance across all facets of the business. These efforts are supported by our robust Margin Expansion Initiative program that has generated approximately $400 million in benefits over the past several years. This program includes 3 platforms: revenue optimization, factory performance, and cost transformation. As you can see, we have consistently improved margins since 2020, and we are targeting in excess of $150 million in margin expansion benefits in 2024, which will represent record results in that program's 8-year history. Importantly, we continue to see further opportunities for good initiative benefits into the future.
Moving to page 15, O-I is keenly focused on making disciplined capital allocation decisions, which is central to improving the ROIC over time. As noted on the right, we have significantly improved our free cash flow profile since 2022 with a successful resolution of legacy asbestos-related liabilities. Over the past decade, nearly half of our pre-asbestos free cash flow was used to fund asbestos payments, which exceeded $1.5 billion. Starting in 2023 and for the first time in decades, all of our cash flow is now available to enhance shareholder value. As we look to the future, we intend to allocate capital to fund profitable growth, improve our capital structure, and return value to shareholders, which may include additional share repurchases or reinstating a dividend as we get closer to our capital structure objectives.
Turning to page 16, we believe our financial performance over the last several years reflects the consistent execution of our strategy. Revenues and adjusted earnings are up nicely while we have significantly reduced our financial leverage. Cash flow has been stable and included elevated strategic investments to enable profitable growth as that we discussed. For example, in 2023, our strategic investment exceeded $300 million, so our underlying key underlying free cash flow was much more robust than you see here reported. Overall, the company has delivered strong performance despite significant macro volatility and changes that have emerged since the pandemic. Moving to page 17, we have included our most recent business outlook shared during our year-end conference call earlier this month. Please note that we are not updating guidance today. In 2023, we reported the highest adjusted earnings in the past 15 years.
We do anticipate 2024 adjusted earnings will be down from historically high performance last year, reflecting the continuation of current soft market conditions through the first half of this year. Yet, we expect market conditions and our financial performance will improve over the course of the year. Importantly, we anticipate adjusted earnings will rebound to greater than $3 per share with higher free cash flow as sales volumes recover to pre-pandemic levels over time. Let me conclude on page 19 with why I believe O-I is a compelling investment opportunity. Over the past several years, we have significantly transformed the company, and we are now a much more disciplined, agile, and capable organization. As a result, we have significantly improved performance and delivered on our commitments quarter after quarter.
We are focusing on enabling long-term profitable growth by expanding into attractive categories aligned with favorable megatrends, and we are delivering disruptive new technology that we believe is a great fit for current and future market trends and should increase the size of our addressable market. In addition to growth, we are improving productivity across all facets of the business, leveraging our very successful Margin Expansion Initiative program. We have transformed our capital structure, and we have the best balance sheet in years. Following the fair and final resolution of legacy asbestos liabilities, all of our cash flow is now available for shareholder creation for the first time in decades. Likewise, our improved operating performance and capital structure provide the flexibility to explore future return of value to shareholders over time. We are confident this strategy will create value for all stakeholders.
Thank you for your interest in O-I, and George, back to you for some questions.
Thanks, John. Appreciate the presentation. I guess you said you're not updating guidance today. Should we take that as things are as you expected, or you're being noncommittal and just we're not updating at this juncture?
No, no. I think we're comfortable with the outlook that we provided, just to be clear on that and just to give you a little bit of a view on things and the trajectory of kind of what we're seeing in the marketplace, just for clarity. You know, the fourth quarter volumes were pretty low. They were down 16%, and we included in our earnings call that volumes were down about 10% in January, so sequential improvement over that. In February here, we're looking at kind of high single-digit kind of volume decline.
So, so we're stair-stepping our way up to improvements in performance and trends, which is very consistent with the projections that we had established at the beginning of the year.
Okay. I appreciate that. And then what else should we be as we sit in our seats trying to evaluate your progress over the course of the year to make sure that you're making progress towards your ultimate guidance? You know, is it going to be volume pretty much that guides the year one way or another, and in turn, trying to figure out that volume trajectory for you, if that's the right answer? Should we be focused on scanners? Should we be focused more on GDP and its effect on demand? How would you have us evaluate your progress?
Yeah.
So the financial performance for the company is going to be really driven by three primary elements, and I do believe volume is the most, you know, salient one to keep an eye on, George. But if we take a look at the other two, net price, we believe, is established at that time. At this point in time, we're done with our annual price negotiations, and our price adjustment formulas are pushed through in that regard. We are seeing, you know, a pretty tamer view on cost inflation, so that seems to be pretty favorable, and so I think we're confident in our net price position. As you take a look at our margin expansion initiatives, you know, we're talking about $150 million of improvement.
About half of that is kind of locked and loaded, you know, between the restructuring activities that we've done primarily in North America as well as some SG&A headcount reductions that occurred in the fourth quarter. So I think that we're, you know, coming out of the gate pretty strong on those with a good line of sight of the remaining component. So really, what you're left with is the trajectory in which volumes improve and recover. So keep in mind, you know, the volume declines that we saw in 2023 as volumes were down 12%, the backdrop of consumer consumption was only down about 4%, and you can see that in the Nielsen data. And so the remaining component, call it 8%, was pretty heavy destocking going through the process.
You know, so the volume projections that we're talking about this year, call it low single digits to mid-single digits, can be achieved substantially with just exiting the destocking phase, okay? And so where we are on that. So first of all, the destocking for the faster value chain areas, I mean, as you know, turning chains like beer and NABs and food, we believe that that destocking was substantially done around year-end, okay? But longer value chain areas that get more exported across the world, call it wine and spirits, they started destocking later, kind of mid-2023, and we think that destocking process will continue through mid-2024. So you know, as we're seeing right now with the volume, you know, trajectories that I just shared with you earlier, all things seem to be falling in place in that regard.
As far as trying to understand it, the thing that the best information is understanding, obviously, the Nielsen, you know, consumer consumption trends. It's a little bit more difficult to see what's going on in the wholesale and retail channels and things like that. That's been a struggle, I think, for all companies. But you know, keeping an eye on whatever information that you can see about the wholesale levels in particular are important. We saw inventories at the retail level getting back to historic levels. The value chain elements of the wholesale were still a little bit elevated, and I think we're keeping an eye in particular to the wholesale inventory drops to get more comfortable about the trends of destocking.
Thanks, John. That's very, very helpful.
On the destocking being done for spirits and wine by middle of this year, other than it being a one-year anniversary versus when you started to see its effect last year, what else informs that one-year?
Oh, it's our conversation with our customers.
Yeah.
Yeah. And I think it's a combination too because you really have two kind of groups there. You have the spirits business that tends to be, you know, reflective of large CPG-type companies, right? And they have their projections that they share with us and good insights. On the wine side, that tends to be a much more fragmented business.
And what we've seen here more recently is that, given some softness in that market, you know, a lot of wine historically has been exported to China, and that China demand had not materialized, they've actually kind of pulled back and are almost in a just-in-time inventory management mode. So as that flushes through and as demand starts to rebuild a little bit, we believe that that will trigger people coming back into the buying activities.
There's probably one other point I would make. We're not, it's a wide range, low to mid-single digits, and some of that depends on the pace of this, but we're not banking on a lot of promotional activity or a big lift in consumer activity. That's something that perhaps our avenues for upside as the year goes on. So it's not a, I think it's a balanced approach.
Thanks, Chris.
Any questions from the audience? Next question from me then, and it was triggered by one of the slides that you had. You know, you say rightly that sustainability is important to the glass consumer. How do you improve the recycling rates in glass? One of the panels we had yesterday, you know, talked to the fact that, among other materials, glass is a bit of a challenge in terms of recycling and in terms of its costs, in terms of the handling, and so as a result, much of it will wind up, you know, not being turned back into new glass but will go into landfill. So how do you improve that? If you agree with the premise, maybe you disagree with that, but.
Well, I think you have to differentiate Europe versus the Americas. In Europe, the recycling environment is much different.
It's led at the federal government in those different countries. For example, recycling of glass is at the 77th percentile. It's actually better than any other packaging substrate.
So. John, where is that, the 77th percent?
The amount of glass that is recovered and recycled.
In Europe in total, or is that a specific country?
That's Europe in total.
Thank you. Sorry about that. Yeah.
So now you move over to the U.S., and you see quite a different story, right? I mean, there's really not any federal, you know, legislation and rules imposed there. You know, we do have 9 states that are bottle bill states that actually drive most of the recycled content in the United States. But otherwise, you are, you know, managing things down at 3,000 different municipalities, right? So that's where the challenge comes into play, at least at the policy standpoint.
The fact is that there is a lot of glass that is recovered. The problem is a lot of it ends up going into the landfill. Right. Right? And so one of the issues that we, O-I, can actually influence as opposed to boiling the ocean on so many different fronts, there's two things that we're doing. One is driving in many cases, there is not, call it, treatment facilities that are near where the sources of that excess supply is at. And so the need to actually help and work to get the treatment facilities close by that can take that raw recycled content and turn it into, call it, that we can actually use in our facilities. It's kind of a broken piece in the chain in a number of different markets, okay?
So that's something we're working to partner with third parties to be able to develop that ecosystem. And we also have a program called Glass for Good, which is where we do work with the different municipalities. We set up the glass recycling centers, and then we actually use the profits for that to turn it back into the community by books for the kids at schools and different things like that to drive more call it activity. The good news over the last year is that we've actually seen a few percentage point increase in the use of recycled content, largely here in the United States. So that's a positive element.
Over what period of time?
About the last year.
Okay. And presumably, if MAGMA works and you can drop facilities closer to places where you have, call it, then you are, you know, improving that opportunity as well.
Yeah. And the good thing about MAGMA too is it uses a broader range of recycled content quality. And so, you know, that will open the door up to more cullet being available. Right now, we're saying, "Hey, that quality isn't good enough for what we need to do, put in legacy furnaces," but it will meet the needs of what we're designing MAGMA for because it's a steel tank and not, you know, a silica brick structure that might be more exposed to different materials that are mixed into the cullet.
And then the other question around sustainability, but from a different end of the prism, you mentioned the fact that, again, other materials have a synthetic liner of one form or another.
Many people, I mean, it seems like that's intuitively known, but I don't see the industry promoting that as much, and it might be something that you're concerned about, the customers being concerned about this. But how do you leverage that, right? Because that's unique to glass, and no one else has that.
Exactly. I think all the attributes of glass are strongly in favor of whether it's the returnability, the recyclability, the fact that you don't have the health and wellness aspect of it. We do have what we call our Glass Advocacy Program. It's a digital marketing campaign, and we've had, you know, over 1 billion, you know, images or, you know, instances where people have been able to view different things. That has been, you know, instrumental, and it's mostly been focusing on the US to try to get the awareness up.
We're actually shifting that in the last couple of months over to more of a B2B type of connection. So it's actually driving the decision behaviors by the CPG companies and our customers to be more aware of that because they're the ones making the decision whether to put their products in glass or not in addition to what the consumer awareness is.
So when you measure on this and the synthetic liner that exists in other packaging, whether it's cans, certainly it's in plastic because it is the liner, the substrate is, what do you find? Does the consumer care? The consumer does care.
I mean, in fact, when we've gauged through this Glass Advocacy Program and we look at purchasing intent after the advertising campaign, what we have seen is actually that purchasing intent is 4.5 times higher than the typical improvement in purchasing intent when these similar types of programs have gone underway. So when the message is heard and message is received, we've actually seen a very good response back by the consumer. Of course, getting penetration in and getting an awareness, you got to say something 8 times for it really to sink in, right? And so it takes time to actually move the needle.
So is the last one for me on this is the medium social media? Is the medium you're going to take out ads on Sunday football?
Is it, you know, how are you going to get that Glass Advocacy Program even more broadly disseminated or the message?
It's private. If it needs to be. Maybe you disagree. Maybe it's like. No, no, no. It's primarily a social media connection in that regard. Now, historically, we've only done it in the United States. We're going to be broadening it out to more marketplaces going forward. And in fact, being able to capitalize on an already very favorable impression of glass to sustain it and grow it over in Europe has an opportunity, whereas maybe you're doing it more from a baseline increasing awareness in the United States. So you got different opportunities in different markets that we're looking at.
How confident are you that you'll be able, switching gears, to maintain that 75% of net pricing achieved over the last couple of years in your margin on a going forward basis, and why should we be comfortable that that's going to be the case?
Yeah. Sure. So we've had a very good performance on the net price, and I do believe that you ultimately need to look at the price improvement over the last few years really over the cycle. And so, yeah, you can kind of draw a line at 2023 and then say that we're going to give a little bit back in 2024 and retain 75% of it. But I think if you take a look at the history of our business, for example, the last six of the last seven years, we've had favorable net price.
This is an industry and a business that generally is able to price through inflation. It's a premium product and generally supports that. You can ultimately, over time, improve your margins a little bit. The most current year is probably a bit of an exception. Keep in mind, we were negotiating those 45% of our open market business, you know, in probably one of the most challenging environments where demand was down double digits, 16% in the fourth quarter. Despite that, we only saw about a 1% reduction in net gross price over the last in 2024 versus 2023. So despite some of those challenging conditions, we'll only see about a 1% gross price reduction.
On the enterprise as a whole?
On the enterprises as a whole.
And the mix of that is we saw a couple of percentage point increase on our contracted business because it has PAFs pushing through. And then on the open market business, which is primarily in Europe, you saw kind of low- to mid-single-digit kind of price declines in certain pockets of the business over there given the backdrop that I just talked about in the competitive environment. But it's also kind of an extreme environment in which you had to negotiate prices. And we're actually pleased with the relative performance of gross price over this last year despite, you know, that most challenging environment.
Going forward, in an environment where you would expect volumes to start to normalize and in particular the inventories of glass in the marketplace tightening up because, you know, we were all catching up from, you know, the downturn that happened last year, we believe that the next environment, you know, next pricing environment starting next November will be a much more constructive environment, much more maybe back to normal. And as a result, we would think that we should have kind of the historic normal, you know, outcomes achieved. When we consider pricing,
when you consider pricing and margin, is more of the relative competitive response, if there is one, from other glass manufacturers, or is it really more when you think about pricing and commercial strategy, you're more reflecting on what the other substrates may or may not do?
Yeah. I think in this particular situation.
Recognizing you swim in different lanes, as you've said many times.
Yeah, yeah, yeah. We don't cross over nearly as much as we had in aluminum, for example. Now, if you go back to 2023, you know, the overall categories that we serve were down about 4%. Glass was down about 4.5%. So there was about 0.5 percentage point in where we saw some downshifting and some movement. But compared to historic shifts that we would experience during cyclical downturns, that's a very, very small level of change. And what we saw where pockets were, yeah, so we did see some conversion maybe over in Eastern Europe and cans, but, you know, glass actually picked up share in the Netherlands and beer and the Andes and Brazil also. So it's kind of a mixed bag out there.
So all things considered, we're pretty confident about the position of the product.
And John, just to be clear, the 4% and the 4.5%, those were volume declines?
That was. Yeah. So for example, if our volumes were down 12% last year, we believe 4%-4.5% of it is due to consumer activity, and the rest of it was largely driven by inventory destocking. And if you take a look at some of those consumer consumption trends, you know, we were down 4.5% in 2023. But if you take a look at those last statistics on the last 12 weeks, it was down about 4%. And you bring that to the last 4 weeks, it was down about 3.5%. So we're actually starting to see the consumer behavior starting to get a little bit better.
Okay. Thank you for that. Any questions from the audience? All right.
We'll keep forging ahead. You talked about $150 million of the margin improvement for this year. Again, you know, kudos to the company for executing on this over the last number of years. Is John, using your phrasing, locked and loaded? What is the determinant of the other half, whether you get that in or not?
Yeah, yeah. So about 75% of our Margin Expansion Initiative benefits this year are going to be achieved on the shop floor, okay? So that's $100 million at least or thereabouts of the $150 million plus. Of that $100 million, half of it is largely driven by restructuring, okay? So the other $50 million is what we need to do otherwise on the shop floor. So that's things that we do year in, year out. It's improved, you know, relative productivity.
We are consistently putting in labor automation and energy efficiency projects radically every year. We'll invest maybe up to $50 million of that this year. So we've been doing that year after year. Those give consistent returns and build up over time to give you a good tailwind in those regards. If you look at the last seven years, we've hit our targets every year, if not exceeded them. And, you know, in many ways, with OI, as far as the challenges we have, most roads lead back to asbestos. And for so many years, without the cash flow, we just were not able to make those types of investments and organize and get the capabilities in the enterprise put in place cost-effectively. That's not the case anymore. We've redesigned our organization to support this. We're investing in the right automation productivity activities.
I think we're pretty confident that we're going to be able to do that on top of the restructuring activities. And since there were years of not doing this, I think there's still long legs left and the ability to pull costs out of the organization. And George, you know, as other background, we've got about half of this target already in hand with actions we've taken.
Yeah. So the other half is the other part that we're still actioning. Well, in flight. Yeah. And $75 million, looking at our historic performance, that's in the sweet spot.
Understood. So $150 million, half is locked and loaded, 75% of the margin improvement this year is on the shop floor. Half of that's restructuring, half of that's productivity. Correct. And basically, the productivity is the accordion. Hopefully, that expands, gets you that amount. Right.
The only thing that would maybe dislodge that then would be if you have a bad volume year because that would feed back into your productivity. I'm not wishing that or expecting that. I'm just trying to understand what my risk factors are.
Yeah. And to tell you the truth. I mean. And disagree. Feel free to disagree if I'm not putting it the right way. Yeah. I think most of that remaining differential will come through, you know, a lot of those labor productivity and energy efficiency programs. I almost put, you know, curtailment activities into a different bucket. We are assuming last year, our volumes, sales volumes were down 12%. Our production was down 8%. We think that our, you know, the volumes will start to recover.
But since we had some inventory build, we're going to sustain downtime longer this year to make sure the inventories are nice and snug by the end of the year. So I think we're already assuming an elevated level of production curtailment, George, and I think one of the most important things that people should understand about OI is there is a significant amount of trapped operating leverage to the upside, okay? So if you look off of 2020 and, you know, 2023, we would need to see a 10% sales volume improvement to get to pre-pandemic sales volumes, okay? So we expect low- to mid-single digits this year. But we're also delaying the return of the capacity because we're drawing down inventories.
As we see volumes improve back to more of that 2019 levels and ultimately bring the capacity back online once the inventory is nice and snug, that's about $175 million-$200 million of additional earnings that come back into the organization, which is a good shot in the arm as we look forward.
Appreciate that detail, John. We look forward to lots of shots in the arm. Yeah. That's right. We'll keep them coming. We'll mark the progress. Yeah, yeah, yeah. So MAGMA. Let's talk about that. At one point in time, I think there were supposed to be, you know, over 10 lines installed. You know, a couple of things have occurred. Certainly now, you're putting in one line right now in Bowling Green. Is that correct?
When the. We're putting in one facility that will ultimately have three lines. I get it. But the.
But one's going in now. That's right. That's right. And then you have how many lines do you have in Holzminden?
We have one line in Holzminden. Correct.
Okay. So as we compare where you were, I think it was September 2021 analyst day versus where you are now with MAGMA, and it looked like there was a lot more lines that you were projecting at that point versus what's in place now, if anything, what's changed other than it's been a tough demand environment and you pushed out some product, which is fine? But anything else that we're missing in that regard?
Well, I think there's probably two things that occurred from that original plan to where we are now. The first of it was COVID and the impact on the supply chain that came post-COVID.
And frankly, the ability to get materials and equipment and things like that, even getting our engineers over to different markets to be able to do what we needed to do. We lost probably 6-12 months on development activity because of the inefficiencies associated with that. In understanding our customers' demand profiles, we ended up having to shift away from MAGMA-related technologies to a much more proven and conservative approach on putting, you know, legacy technologies in place to be able to meet their needs.
Was it more that you couldn't get the equipment and that impaired your ability to do the development, or COVID led to staffing issues and you didn't have the people in place?
It's a little bit of both. I mean, we couldn't get the people over in the right places. And keep in mind, you know, R&D is a very iterative process.
Let's say you want to try out one type of burner and then you realize that you want to do a different type of burner. Well, let's say that would take two weeks usually to get the replacement part. But now it's nine months. And all of a sudden, you really can't prove out different technologies that you iterate through. So all of that was playing out in regard. But I think the more important thing that occurred is we realized that putting in 10 or 11 Gen 1 solutions versus really putting our chips on advancing as quick as we can to Gen 3, which is really the best opportunity that we have to grow the business going forward, that was the gold standard that we were going for, okay? Given everything that was going on, it wasn't practical.
What we did then is we shifted and said, "Let's get to Gen 3 as quick as we can." And that's what I think that we're doing now. That's the one that we ultimately replicate. We could have done, you know, 10 Gen 1s, but, well, that wouldn't get us really to the end zone. And actually, it would have interrupted, you know, the focus on getting to the Gen 3 solutions.
Holzminden is Gen 1, right?
That's Gen 1. Correct. Okay. And then the one that we're doing right now is a Gen 2, and next year will be a Gen 3.
And, you know, one other important point here is that original plan, yes, there were disruptions and issues with supply chain and other elements, but we were still able to meet the new plan that we unveiled early 2022, mid 2022, was still able to meet the objectives and actually at a little bit lower cost. So the original projection was for that to cost $680, and the revised plan was $630. So it was still a little bit more cost-effective, yeah. Yeah.
Is there a way to compare, recognizing it's Gen 1, Holzminden return margin versus legacy?
Yeah.
So the recognizing you're not going to be rolling out Gen 1, you're going to be rolling out Gen 3 ultimately.
Yeah. So what we're trying to do ultimately with Magma is to get the capital intensity down by about 40% from what we do with a historic legacy position.
On a cost position, we'd like to bridge 75% of the differential between a typical can to a glass container, okay? So lowering the operating cost. Now, achieving that will be a stair step from Generation 1, Generation 2, ultimately to Generation 3. We need that Generation 3 technology to achieve those types of objectives. With Holzminden, what was really important for us to establish is that we can operate that Generation 1, you know, melter with the right labor model, with the right energy efficiency, and with the right level of flexibility, meaning be able to turn the thing on and off and quickly do the job changes and all that. We achieved all of that. And when it was running, you know, parallel to the legacy technologies, we were at or better than legacy costs, okay?
So that was what we were looking to achieve with that one, which we achieved. Now, the idea for Generation 2, it brings a lot more to the table, and we would expect that to be at a lower cost and better capital efficiency position. And then ultimately, Gen 3 will be another stair step down. So we're following the typical R&D development curve, and we accomplished what we wanted with Holzminden on our way to where we want to be with Gen 3.
So 75% of the bridge to cans cost, and the 40% was the capital cost reduction? Capital reduction.
Yeah. Keep in mind, the Generation 3 solution is going to be in an industrial warehouse. You just don't have all the metal and superstructure.
I get it. I get it.
But 40% of the capital to get the same revenue with. I'm trying to figure out what's in that.
Yeah. That would be on a per-ton basis. Correct. That would be on a per-ton basis. Correct.
We are pretty much at the end of time. If there are any other questions in the audience, now would be a good time to get them out there. Going once. Okay. Well, if not, please join me in thanking O-I Glass for another wonderful presentation. Chris, John, thank you very much. Thanks. Thank you. Thank you for your interest in O-I.