Anthony Pettinari, I'm the Packaging Analyst here at Citi, and we're very pleased to have for our morning session Gordon Hardie, CEO, and John Haudrich, CFO of O-I Glass. Gordon is going to walk us through some comments on O-I, and then we'll go straight to questions, and Gordon, John, thank you.
Thank you, Anthony, and thank you to the Citi team for hosting us here this morning. Good morning, everybody. Today, I'll give you an overview of the business of O-I Glass, an outline of framework for increasing the value of the business sustainably over time. We'll then be happy to take any questions at the end of the brief presentation. Before we proceed, please review the safe harbor comments on slide three and various disclosures found in our presentation, which is posted on the website. Let's start on page four, which gives an overview of O-I. O-I is a trusted global supplier of glass packaging for the food and beverage industries. We serve thousands of customers across Europe, Asia, and the Americas through a network of 68 plants in 19 countries, supported by our dedicated team of 23,000 associates.
We partner with leading beverage brands, helping them create moments of enjoyment for millions of consumers every day. Glass is the preferred packaging choice for many, as it enhances brand image and provides a premium experience. Consumers value the safety and sustainability of glass containers, which are synonymous with quality. Our customers appreciate our high service levels, extensive manufacturing and design capabilities, and the benefits of our strategic footprint. Adjusted earnings per share have improved in recent years, and we have strengthened our balance sheet and risk profile. While current market conditions are challenging, we have a solid foundation to build upon. We are committed to increasing earnings and enhancing business value. Importantly, we are not solely dependent on a general market recovery. Instead, we focus on productivity improvements and targeted efforts in key segments with successful customers.
Central to our recovery is the Fit to Win program, which reviews our entire business process. This initiative aims to enhance collaboration with suppliers and customers, fostering deeper partnerships and driving competitiveness. With an economic profit mindset, we are well positioned to create greater value for the company in the years ahead. Moving to page five, O-I partners with many beloved and trusted brands, as glass packaging is essential to the value of top beverage brands worldwide. We've highlighted just a few of our 6,000 global customers, which include major blue chip companies as well as prominent local and regional brands. For instance, we serve the top 10 global spirits brands and lead the glass packaging market for beer in the Americas and in Europe. O-I excels in building strong customer relationships, backed by our robust design capabilities and high service levels.
This positions us to help our customers improve efficiency, drive growth, differentiate their products, and enhance sustainability. As a result, we believe we are well positioned to grow earnings and increase the overall value of the company. Let's now move to page six. O-I has a strong presence in both the Americas and Europe, supported by advanced technical and manufacturing capabilities. In the Americas, we operate 32 plants across seven countries, servicing diverse markets from Canada to Brazil. We anticipate strongest growth in Latin America as we strengthen and stabilize our North American business through our Fit to Win program. In Europe, we cater to thousands of customers, including many iconic food and beverage brands that are exported worldwide. Europeans have a strong preference for glass, using it at twice the rate of other markets we serve.
We expect European glass demand to grow at about 1% annually, supported by our network of 34 plants in 10 countries. Approximately 55% of our business comes from large multinational accounts with long-term contracts, while the rest consists of regional and local customers with annual purchase agreements. Overall, we serve a wide range of end-use categories in the food and beverage market. I'm now on page seven. Like many manufacturers, we face near-term market challenges. However, over the long term, we expect glass demand will recover, and an improved competitive position will enable O-I to leverage key mega trends that will support low single-digit growth. These include premiumization, health and wellness, new differentiated brands, focus on sustainability, growth of global brands in beer and spirits, and a rebound in travel retail.
While current demand is soft given cyclical macro conditions, we believe these trends will resume once markets normalize, and this view is shared across our customer base. Moving to slide eight, let me switch gears and discuss a roadmap to increase the value of our company. We believe O-I has significant potential and are taking meaningful actions to advance the company. Our focus is on driving near-term returns by enhancing our competitiveness position and capital discipline. This approach will position us well to achieve profitable growth when the market returns. We will execute this transformation plan over three horizons. In Horizon 1, we will concentrate on our Fit to Win program, which we anticipate will significantly enhance our profitability, cash flow, and competitive position. We believe we can achieve substantial earnings improvements by optimizing the profitability of our existing volume, independent of market recovery or additional volume.
Our goal is to transform O-I into a highly competitive operation with a solid economically profitable foundation. To achieve this, we may choose to exit some non-profitable business and shut outmoded capacity before shifting our focus to growth in the next horizon. In Horizon 2, we intend to accelerate profitable growth by leveraging a much more competitive cost position enabled by our Fit to Win program. As we seek to grow the business, we plan to align our CapEx with strategic customers' long-term plans, particularly in large and developing markets. Finally, in Horizon 3, we expect to have strategic optionality, which may include geographic expansion into new growth markets with potentially large profit pools. This plan is different from past efforts. We are conducting a comprehensive review of our entire business and value chain.
This holistic approach aims to reshape our company and streamline our operations, optimize our network, and reduce our cost of doing business significantly. In order that we boost our competitiveness and drive profitable growth. While it is early days, we have established initial three-year targets that span both Horizon 1, 2, and H, as captured on the slide. Specifically, by 2027, we expect to generate sustainable adjusted EBITDA of at least $1.45 billion, free cash flow of at least 5% of sales, and an economic spread that is at least 2% above the cost of capital. We expect our results will improve by $300 to $350 million in 2027, which represents around a 30% increase from 2024 adjusted EBITDA levels. Turning to page nine, let's discuss our new Fit to Win program, which is the first step in our value creation roadmap.
As the saying goes, performance equals potential minus interference. Our Fit to Win program aims to enhance O-I's competitive position by addressing the obstacles holding us back. Despite current market challenges, we are quickly implementing our Fit to Win priority in two phases. Phase A focuses on streamlining our organizational structure. Phase B will reshape our supply chain to support profitable growth. From these efforts, we expect to achieve at least $300 million in savings by 2027, with a target of $175 million in savings by 2025, 60% of our three-year goal. In the past 90 days, we've made progress in three key areas: reducing excess inventory, boosting productivity, and reshaping SG&A. With regard to reducing inventory, we cut 18% of our capacity in Q3, lowering our inventory days from 71 to 59, with further improvements expected in quarter four.
With regard to driving productivity, we are eliminating redundant and low-profit capacity, which is crucial to our turnaround. We are evaluating the closure of at least 7% of our capacity by mid-2025, aiming for over $100 million in annualized savings. With regard to shaping the reorganization, we are simplifying our structure, shifting accountability to local markets, and significantly reducing central operating costs. These changes should lower SG&A expenses and our cost of doing business to no more than 5% of sales by early 2026, saving over $200 million annually. Overall, these initial actions for Fit to Win should generate over $300 million in savings and support our 2027 EBITDA target. In phase B, we will focus on optimizing our supply chain by enhancing productivity, closing high-cost operations, and reallocating profitable volume within our network. We will also improve procurement, operational efficiency, and sales management.
These new approaches are expected to deliver additional savings and higher margins, helping us meet our performance targets for 2027. We will share more details about phase B at our investor day in March 2025. Let's now turn to page 10 and discuss MAGMA, our new innovative approach to melting and producing glass. MAGMA offers enhanced flexibility and other features designed to meet the evolving needs in the market. The core technology works, and we are ramping up production at our first MAGMA Greenfield facility in Bowling Green. Our team is focused on commercializing the Bowling Green plant and validating key assumptions at an industrial scale, including achieving economic profitability within a reasonable timeframe. This is a new challenge we've set for both the MAGMA and commercial teams. Let's now move to page 11.
We are enhancing our discipline around capital allocation decisions, which is essential for improving economic profit over time. We've made all profit-centered owners accountable not only for their P&L, but also their balance sheet and cash flow moving forward. As shown on the right, we have significantly improved our free cash flow profile since 2022, thanks to successful resolution of the asbestos-related legacies and liabilities. Over the past decade, nearly half our free cash flow prior to the Paddock resolution was allocated to asbestos payments totaling over $1.5 billion. Starting in 2023, for the first time in decades, all of our cash flow is now available to enhance shareholder value. Looking ahead, we plan to allocate capital to get Fit to Win, improve our capital structure, and eventually return value to shareholders. Now let's move to page 12 to discuss current market conditions.
Please note that we are not updating the guidance shared recently during our quarterly earnings call. 2024 has been a challenging year, with earnings and cash flow down due to softer demand and our decisive actions to right-size inventories. While demand remains sluggish due to macroeconomic factors, market conditions are gradually improving, and our third-quarter sales volumes increased by about 2% compared to last year. Importantly, we are positioning O-I for future success and anticipate higher earnings and cash flow along with reduced leverage in 2025. We remain cautious regarding commercial factors until we see clear signs of improved consumption. However, we expect significant benefits from our Fit to Win program next year, including $175 million in cost savings from closing un profitable and redundant capacity, as well as lower SG&A expenses. Additionally, earnings should improve as production levels rise, with stabilizing demand and normalizing inventory levels.
Looking ahead, we fully expect our financial performance to rebound as O-I implements the Fit to Win program and markets gradually recover. We will provide more details at our investor day in March. Let me conclude on page 13. First, O-I is a leading global supplier of glass packaging known for our strong customer relationships, high service levels, and robust manufacturing capabilities. Second, we are taking swift and decisive actions to position the company for a solid recovery in 2025 and beyond. And third, our Fit to Win initiative is central to our strategy aimed at enhancing our competitive position and driving future profitable growth. Finally, we are optimistic about the future and committed to increasing the value of O-I. Thank you, and we are now ready to take your questions.
Gordon, thank you. Thank you for that. Maybe we can start off, if you can talk a little bit about the demand environment and maybe talk a little bit more about what you're seeing regionally between the major markets of the Americas and Europe and the 18% of capacity that you curtailed in 3Q. How is that kind of divided between the geographic footprint and the extent that you're thinking about volumes in 2025?
Yeah. So I think overall demand is sluggish. There are pockets of consumers that are doing it tough. You have the overhang of inflation, the pandemic. So as we look across total market, I would say demand overall is sluggish. However, there are pockets of growth. For example, food and non-alcoholic beverages are seeing growth, I would say, in all regions and in most markets within those regions. We see premium beer growing in North America and in pockets of Europe, particularly places like Italy, Germany, where there are demand challenges. I would see, in wine, particularly in Southwest Europe and in the U.S., and of course in spirits. Spirits, particularly out of Europe, big export markets to North America and particularly to China. And with very sluggish demand in China, that's impacting those production regions, even though consumption in those regions per se is fine.
It's the export markets that are holding some of those categories back, so a mixed picture. Obviously, we've got footprints across the key geographies, and that does give us an ability to mix and match and optimize where we can. With regard to sort of 2025 volumes, we're assuming flat volumes for our business and focus is really on getting efficient. In fact, in our 2027 plan, we're assuming flat volumes through the plan with the focus on driving productivity, right-sizing the network, and focusing on that volume, which is economic. And of the curtailments that you've taken this year that you plan for this year, how much of that is permanently closed? How much is coming down? Yeah, we've cut down about 14%, and we expect at least half of that to be permanent.
Is there a way, I mean, without talking about specific assets or locations, when you think about evaluating potentially 7% capacity reductions, what are the criteria? Is it a product type? Is it a region?
I think we've done an end-to-end view of the business, and we have a very clear view on where we create and destroy. So that absolutely is a starting point for us. Do we have a piece of business that is, from an economic point of view, profit point of view underwater? Can we fix it? If we can fix it, let's go and fix it. If we can't fix it, it's fine. By fixing it, I mean, there's probably 10 pieces of work you can do. Eight of those are internal and two are with the customer. And so we're focused on doing the eight pieces of work internally, getting more fit, getting more productive.
And then when we've done all that, we can go to the customer and say, "We've done everything on our side. What can we do together here?" And either we can do that and we get to the economic profit returns we're looking for, or if not, then we'll pass. So very much, that's the first point of call. Then you look at the capacities across the network. I think we have a very good system of not just looking at capacity within a market. We have the ability to look across the region and model capacities and flows very well. So leveraging that strategy.
That's how we do it. Obviously, we have deep discussions with customers and what their plans are and what their needs are. And when we're shifting macro profile, everybody's doing scenarios and what might happen with tariffs and so on. So we're working with customers, and we have the scale and we have the network to help you navigate that as smoothly as we can.
When you think about substrate share, glass has, in some cases, like North American mass beer has lost share. Maybe that's run its course. You gained back some share in Brazil during the pandemic. When you think about sort of maybe flattish growth in 2025, what are the substrate share dynamics that you're seeing in the market or that you anticipate?
Yeah, I think the reality is, over the long run, glass has lost share to cans, and when I came in and I said to the business, "Okay, let's understand what those dynamics are." The reality is glass has not been cost competitive to cans, right? And so we're reframing how we look at what competition is, so yes, being competitive with other glass competitors, but that is only half of the way there, because if you look at food and beverage overall, glass and cans, it's actually growing at a nice clip, 2%-4%, depending on the region, depending on the market, but the lion's share of that growth over the last 10, 15 years has been taken by cans. Why?
Because they're the most cost-effective. And consumers can only sustain so much of a premium. And so what all the analysis we've done is, if glass is within a 15% price gap to cans, then you see a very significant flow from cans back into glass. Where it's 25%, 30%, and above, consumers ultimately decide with their pockets and they shift. And I've spoken to many customers who say, "I want more glass in my portfolio, but there's a cost issue."
So part of the rationale for Fit to Win is not just to improve earnings for a year or two or three. It's to fundamentally reset the cost base of our business such that we are within that gap that allows customers to choose glass. So we're reframing the competition, and we're reframing the level of cost competitiveness this business needs to get back on a growth trajectory. It'll take us two or three years to get there. So that's how we think about it.
I mean, O-I has seen restructuring or cost-out efforts before. From a big picture perspective, how do you really, how is Fit to Win different?
Yeah, good question. So I think the business has done some very good things over the years, and there have been pockets of productivity that they've gone out pretty well. People ask me, "What's different?" What is different is that first thing, resetting who the competition is. That makes you reset where you need to go on the cost curve. So that's facing up to a new reality or facing what the reality actually is over the long run. I think that's the most important thing we can do is, what is the reality we're facing? Then taking the appropriate action.
That's a philosophical shift, a mindset shift, which is the most important thing. And then reviewing the business end-to-end. Not just looking within the four walls and maybe a bit out over the perimeter is actually going back through the supply chain, figuring out who your best and most strategic suppliers would be, working with them to strip waste and inefficiency out of the supply chain. We ask them to do things that probably add cost to their business but don't add value to ours. We need to stop doing things like that. Likewise, we look for productivity plans from all of our suppliers based on the volume of business we have with them. Likewise, with customers, this is an industry which the overall forecast accuracy rates are somewhere between 50% and 55%.
It's a time cost in terms of getting the production scheduling and the inventory right. Having discussions, I've already started discussions at the most senior level with my customer peers and saying, "Hey, how do we work differently to strip?" Because if it's like that for them, as far as for us, it's like that for them in terms of driving inefficiency into their business. How do we strip the waste out of the total supply chain? Having dedicated projects, having shared objective funds with suppliers and with customers to go after that in a very systematic, disciplined track to it. That's what's different. Facing a different reality, an end-to-end review, stripping out waste everywhere we find it, not just in pockets. Taking those savings and improving margins, but also reinvesting in new capabilities like digitization, innovation, and helping the customers grow.
The focus on sort of economic profit, how does that change sort of decision-making and incentives within O-I?
A couple of things. The only time you make money is when you've paid everybody off, including the cost of your capital. What's left over is the true economic profit of the business. That was not a focus before. When you bring in that focus, you also get there bringing in a very heavy focus on capital and capital usage and capital deployment. We've said to people, "The minimum internal rate is WACC plus two," which is about returns need to be a minimum of 10 out of 10.
We've also done, and John and team have done a great job of segmenting the capital, which is a fast yes, which is a bit of a longer discussion, and which is a categorical no, and so we have stopped projects or rejected projects that in the past might have got through because they drove incremental volume or a particular customer wanted it. We now have very clearly defined criteria, starting with 10.5% minimum return. It's also going back and looking at capital over the last two or three years and saying, "Well, this was promised. Where is it? Where it's not?" Going back and making sure we get what was promised, so an absolutely ruthless focus on return on capital and capital allocation and efficiency of that, and I have no more P&L roles in the business.
There are no P&L balance sheet and cash flow roles, right? Because if you just have P&L roles, you can maximize the P&L, but drive a lot of capital inefficiency. And so we've reshaped the expectations for business leaders. And as we go forward, we're creating what we call an EP tree, an economic profit tree through the six levels of the organization. And then mapping each segment or each category of role to a point on the tree, the KPIs, and then we will link incentives to that going forward, all the way through to the.
And in that lens of kind of capital efficiency, but also improving competitiveness with glass or with cans, how should we think about MAGMA?
And MAGMA is, it's a new technology. The technology works. Like any new piece of technology, you've got to show that it works at scale, industrial scale, because that's the real test. Oftentimes, it's easy to make it run in private plants and you're not under the stresses and strains of reality of everyday life. So making it work at industrial scale and making it work at industrial scale and delivering an economic profit. They're the twin objectives I've set for team, and that's what we're about.
We've opened this fabulous state-of-the-art facility in Kentucky. It's in commissioning mode, and we're ramping up. That's the challenge, and we're going to run it hard, and we'll review it as we go forward, and as we go forward and we learn more about it, we'll see where we can apply it either greenfield or into some of the legacy. It's part of the mix of tools that we have to transform the value of business, but it's not a silver bullet. There are no silver bullets. It's part of the mix.
And we've been talking about sort of competitiveness of glass versus cans. Just within the glass industry, how do you kind of think about O-I versus maybe some European competitors? You could benchmark on SG&A or how do you rate O-I's?
Yeah. Look, we've done the benchmarking, and some of these are public companies. Many of you may well have done the benchmarking. When we look at things like SG&A, when I came in in May, the runway was about 8% of revenue in SG&A. We have competitors operating at five and below. It's clearly uncompetitive. And then as you get into benchmarking networks and plants, we have opportunities to get a lot more efficient.
And as I said in July, we had run a program where we took two reasonably fit plants within our network, and we see opportunities from those two plants, and then you extrapolate across the fleet to improve efficiency anywhere between 15% if we go through this next two to three years. So opportunities abound to improve the efficiency of the company. And there's tremendous leverage for us if we get it right because we have about 1.7x volume of our nearest competitor. So the value for us of getting it right and getting more efficient is multiplied by the scale we have.
So when you think of it in those terms, there's a huge price for us getting the volume we have more profitable as opposed to chasing new volume at discounted prices and putting in capital to get there. Our focus really is on right-sizing and extracting the maximum value we can out of the volume we have, getting fit. And then when we're fit, accessing growth that is truly profitable growth and not profitless prosperity.
Without too much of a history lesson, I mean, do you think there are sort of reasons that O-I's cost structure became a bit more bloated than competitors? Was it a function of the pandemic or the response or how?
I think all of those things. We have one competitor that also went through a period of private equity ownership that hasn't been pursued. But the past is the past. My view is on driving the present and creating a much more valuable future for our business. And we have the customer relationships. We have the footprint. We have the people, and we have the technical know-how. It's all about execution. That's what I'm focused on. That's what John and the team are focused on, and we have alignment within the business to go after that hard and leave no stone unturned. I don't know if there's any questions.
Hi. Yeah, look, we know that the furnace technology works, and it gives you tremendous capability to be able to switch on and switch off and run smaller volumes of premium product. But it's only part of the solution because a lot of the opportunities we're looking at, they're large-scale opportunities, and you just need larger fitter facilities to go after them, right? But it can be part of the mix. As I said, it's not the silver bullet. There are no silver bullets. This is onesies and twosies and blocking and tackling and where it's appropriate. Because a MAGMA furnace is probably what, 40,000 tons. There are parts of the world where that works, particularly in premium segments. When we have customers that want us to do that, we can have discussions.
Can we put in a MAGMA furnace first and then maybe put in a second one?
So it's all part of the mix, is how I would put it. And the focus now is this plant, and I think we'll, at the appropriate time, we'll certainly have people come and visit. But the focus is getting that plant operating at industrial scale, at the top of the top quartile performance level, and having a portfolio of products there that delivers a strong economic profit, right? And the more we can prove that to ourselves, then the more it becomes part of the mix.
Yeah.
So I don't want to overpromise on it. It's part of the mix, and we'll use it as we would use any other tool or any other plant in the network. Everything has to earn its weight, and MAGMA will be no different no matter how shiny the plants are and so on. Yep.
Gordon, we talked about supply and demand. Can you talk a little bit about pricing? And I guess first question, maybe philosophically, is how do you approach pricing and getting paid for the value of your products maybe differently than O-I is in the past? And then second question, maybe just more tactically, I think this is the time of the year where you have a lot of these contract renegotiations or negotiations on pricing.
Well, look, first of all, I'd say we have many customers where we have multi-year contracts. One of the things that surprised me, actually, was the longevity of some of the customer relations we have. Some of these have been back over 50 years, right? So there's deep, deep connections between O-I and the customers. The other thing is our NPS, our Net Promoter Score, is absolutely in the top quartile and low. And so when I went to customers for the first time, you have a certain expectation of maybe not everything is perfect, but I mean, the positive feedback from customers and the, I suppose, the expectation the customers have that they want us to be part of their growth plans going forward would surprise me, okay?
That said, there are pockets of growth out there that we have missed with those same customers because we couldn't make the numbers work. Pricing is okay, but for whatever reason, we couldn't make those numbers work. We have to get ourselves into a cost position that those pockets of growth are valuable. In other words, that they deliver returns above their cost of capital. I had one customer who said they've done multiple projects over the years, would like to have done them with us.
We couldn't make those too. We can't let opportunities like that, and the way to do that is to get super fit, and so I see growth in the market that we can access if we're fit, that will give us returns and will help our customers ride with the largest player in the market and give them the stability and the ability to invest in their business, so that's how we think about it, so we're getting in order for that.
Yes. In terms of kind of the bridge to 25, as we think about price-cost broadly, how?
Yeah. What we're planning for is probably net pricing of sort of. Right? Most of that probably is also a compact that we're going to export it to.
Maybe kind of final question, wrapping it up. You have an investor day, and I'm not going to ask you to spoil it, but as you think about the cash generation potential of the business and where leverage is and where it could, if you get Fit to Win right and volume stabilize and you're able to kind of execute on this, how should we think about sort of the cash flow opportunity and?
Look, we've laid out 2027.