Happy to have one of the very first companies we ever had, O-I Glass, and its Chief Financial Officer, John Haudrich, an old friend of ours. Having joined the company in 2009 and having become Vice President of Investor Relations, Chris Manuel. Chris, great for being here. Thank you for being here. Great that you're here, and want to thank you for making the trek again with all of it the way.
Thanks, George, for hosting this conference. It's always a great venue. What I have here is about five minutes of prepared comments. I just want to talk through what's, you know, what is our strategy, what are we trying to get done as a company, and also provide a more update on our business outlook of where we stand right now. Before we go any further, please note the safe harbor clauses within the materials that are hosted also out on our website. You probably already know O-I, just the background. We are the world's largest glass container manufacturing company. We make and serve the top brands and covering beer, spirits, a whole host of different categories that hopefully you enjoy on a day-to-day basis.
Not only are we the largest glass company, we're the largest that serve the mainstream and the premium categories. We do this by serving thousands of customers, spanning 74 different countries, with our network of 64 plants, covering 18 different countries, with our team of almost 20,000 employees. As you can see, we, you know, we have the financial scale that is unique to our business, and we'll talk a little bit more about what makes O-I unique. Consumers and customers love glass. I think it, you know, we've done a lot of surveys over the year. If a consumer had a choice between a glass container and some other alternative, they usually pick the glass container.
Our customers also love glass because if you are a brand manager and you're trying to show image, differentiation, quality, premium, glass stands out as a very, very unique substrate to be able to put your product in. What we need to do is we need to make glass more cost-competitive in the marketplace, so we can get glass into more hands out there. That's what we're very much focusing on, and as we accomplish that, we are going to leverage our privileged customer relationships, many going back more than 100 years, spanning all over the globe. We believe that we're gonna be able to grow our business, leveraging that privileged footprint, because not only can we serve local accounts, but we can solve large global accounts, both with a global reach, but also a local feel.
What are we trying to get done? What is our thesis? Building on what I just said, we are improving the competitiveness of our business. We're doing this through an end-to-end value chain analysis. Every stone is being unturned to look at opportunities to improve the competitiveness of our system. As we do that, we believe we're gonna be able to grow the business, focusing more on premium categories that have a great fit for glass, and then that'll be able to launch expansion in different categories and geographies to be able to grow the business. We're doing this all with an economic profit mindset. We have economic profit defined down to every node of our business, down to every SKU of our business. We know where we make money, and we know what we need to do to be able to make money on that business.
As you look at it, we project improved financial performance. As you can see on the chart on the right, with our expectations of EBITDA improvement, that's about an 8% CAGR per year. We're gonna be executing this strategy over three horizons. The first horizon, which you may have heard of, is Fit to Win. That's where we're radically addressing costs, and I'll touch base upon that in a, in a minute. By reducing those costs, we believe that we will make, again, our product more competitive in the marketplace, and more people will be able to cost effectively get the attributes of glass in their products. That will drive profitable growth. Ultimately, you create that virtuous cycle.
By doing that, we earn the right to look at expansion, M&A, different capital allocation options into the future, which is Horizon 3. Fit to Win, that's where we are right now. We're kind of in the midpoint of that endeavor. As you can see on this chart, we're off to a very good start. In 2025, we had $300 million of cost savings. That exceeded our target of $250 million. We got the momentum behind us and doing very well. We target this year, in 2026, at least $275 million of savings. We have a three-year target of $750 million, which we actually increased that target here recently.
To put it in perspective, $750 million of savings is about a 15% reduction in the cost base of our company. That'll go a long way. That's gonna be very important to be able to improve the competitiveness of our product in the marketplace. What is this doing for us? We believe that we're making solid progress towards our 2027 Investor Day targets. EBITDA is improving, margins are improving, Fit to Win is off to a great start, and in fact, we just, as I mentioned, we increased our targets there. Free cash flow has rebounded, leverage is improving, and we've inverted into positive economic profitable growth. That brings us to where we are right now in 2026.
As you can see on the left-hand side, we expect an improved earnings, higher EBITDA, higher EPS, higher free cash flow, and improved leverage on our way towards those Investor Day targets. One thing I don't know whether you saw, we did send out a market update earlier this morning. We are maintaining our 2026 guidance, we are seeing more earnings pressure in the first quarter. There are two things going on, both in Europe, okay? First, we are seeing incremental competitiveness pressure, primarily in the wine category, it's in Southern Europe. It's in Italy and in France, mostly in Italy, that's putting a little bit more pricing pressure than we anticipated. Usually, those negotiations happen from kind of mid-November to, you know, early to mid-February.
It's extending more, and some of those agreements that were previously set are being reopened against a competitive environment. We expect more pricing pressure in that particular subcategory of the marketplace. The second is, as you may know, is we are in the process of restructuring our business over in Europe. We're eliminating excess capacity to balance our system with supply and demand. In that process of closing three furnaces or three factories rather, and moving that business to other facilities, we are incurring a little bit more logistics and supply chain costs than were originally anticipated. That's a temporary element that will be remedied in the near future. As we stand here today, you know, the earnings quarterly allocation will be below the range that we've identified there.
Again, we are not changing our full year view. We have additional Fit to Win opportunities we're pursuing. There we're reasonably optimistic that through the negotiations we're doing, we'll see some additional sales volume opportunities over the balance of the year. That might come in a little bit later in the year as we work through things. Also, in an environment where typically we see some additional pricing pressure, like we were talking about, often the inflationary pressures go down, given the dynamics that are going on in the marketplace. We saw that last year, our net price headwinds were a lot less than we ultimately thought at the beginning of the year.
Those are three things that we're working on or and working on the procurement side to be able to manage the full value chain that we're looking at. Again, we're focused on driving improved performance. Again, reiterating our outlook for the full year and looking forward to creating more value down the road, as we just talked about in the previous page. Just in conclusion, we believe that we are delivering on what we said during our Investor Day. Last year, we had a very stable top line. We increased improved the quality of our earnings, moving things into more premium categories. We have simplified the organization, and the operations are more cost-effective, with better-than-expected Fit to Win benefits.
Margins are up, earnings are up, free cash flow is up, the balance sheet is getting healthier, and we're driving higher economic profit. Hopefully, that gives you a bird's-eye view of the business. George, back to you.
Thanks, John. Great rundown. Let me get settled here. Yeah. You mentioned that you're not changing your guidance, even though you have this pressure early on, and we appreciate that. Of the three things that you mentioned, you have more Fit to Win, you have more volume later in the year, and you expect there'll be less in the way of net price headwind because of the inflation that's out there in the market.
Yeah, those are the variables at play. I believe that's gonna allow us to achieve what we have.
Now, of those, as I sit here, and tell me where you disagree, the additional Fit to Win, in my view, is the only thing that really is controllable.
That's correct.
Okay. If the other things, if it was just the Fit to Win, where would your guide be as opposed to?
Yeah, for clarity, we have a roadmap to our guidance, okay. That roadmap is fully aligned by cost through Fit to Win, okay. Those other variables that I mentioned, whether it's additional volume or whether that it ends up seeing some softening of inflationary pressures, those would just be other variables that might be added to being able to help the situation, but we're not relying on those by any measure.
Okay. You feel you can be in your range just with Fit to Win [audio distortion]?
That's correct. Yes, all the things that we have in our building blocks, to recover against this, early pressure points are all associated with Fit to Win and cost management.
Remind us what's embedded in your volume outlook for the year, and first quarter, I think, had started somewhat more softly. Help us calibrate on that.
Yeah, sure. We had it guided for the full year that we would be flat to slightly down on sales volume, okay? That included kind of a general view of a flattish marketplace, and we did indicate that, hey, even at ideal operating performance cost standards that we're aiming for, a little bit of our business is still negative economic profit, and we're either looking to either increase the prices on that, ideally, or exit some business, okay? We're making a little bit of room in there for that. We also indicated, you know, just several weeks ago at our earnings call, that the first quarter would be the most challenging.
Yeah.
You know, it's a comp issue. We were up, you know, between 4% and 5% last year on volumes. It ended up ultimately being pre-buying, okay? As that played before the tariff pressures and stuff like that, or tariff dynamics came into play. We believe that we were you know, we had indicated we'd be down mid to single digits, to high single digits in the first quarter. It'll probably trend to that higher end of the range. Primarily, as people are negotiating and those negotiations extend out for that open market, there's not a lot of buying activity. Most people kind of sit on their hands a little bit, waiting for those negotiations to be done before they enter in the buying part of the market.
I think that dynamic's gonna play out a little bit here in the first quarter, which is not unexpected. Now, from there, we believe that, you know, the comps for our business, just to be clear, get easier as the year progresses, that we think that, you know, volume should be kind of flattish in the second quarter and then invert to modest improvements in the back half of the year.
Okay. Thanks for that, John.
Sure.
We'll have more, but any questions in the audience for John? Okay, we'll keep forging ahead. You mentioned, if you could give us a bit more color on that , is that inclusive of the, is that all the $750 million that would reduce your cost base by 50%, or just some component within Fit to Win would allow you to do that?
$750 million represents 15% of our cost base. We're about a $5 billion cost base or so, thereabout. That's what that relates to. Of course, you always got moving things like inflation and other factors that are moving in, at the core controllable cost is at $750 million.
Okay. Now, the $750 million, which was raised from $650 million?
Yeah.
It was greater than $650 million, now it's greater than $750 million, so increment of $100 million, roughly. Was there any of that that was just related to the fact that as of last time you'd given the guidance, the dollar was a lot stronger, and so there was some currency benefit? If that's the case, you know, I want to see what it might mean in terms of your ability to, you know, reduce your cost base by the 15%, 'cause there would have been some.
Yeah, yeah, that's a, that's a, that's a good question. Just to be clear, when we reconcile our earnings, which we do every quarter, we always pull FX out. It's its own line. The FX running through the revenue and the FX running through the cost, we pull those out. When we show price, net price and volume and costs, including the Fit to Win benefits, they should be on an FX-neutral basis, you know, on an annual basis. Then you can see the kind of the cumulative impact of FX on the earnings stream by just looking at that one line. It should be a pure cost savings number story.
Understood. Fit to Win, you know, radically reduces enterprise costs. You mentioned more than once that it's an end-to-end analysis to everything from SG&A to, you know, Total Organization Effectiveness or efficiency. Which of those benefits are more likely, hopefully, they want it all, to dissipate and which ones tend to be longer lasting? With TOE, can you help us understand what it means, where you found 10% or 15% trapped capacity? What does that actually mean, and why can you continue that on an ongoing basis?
Yeah, sure.
You meant, TOE right now is where? Just Toano?
It's 50% done. About 40%. 35%, 40% of our, 35-40 plants are done with that. Well beyond the pilot phase. Hey, we're designing this to be sustained cost savings. That's the only way we can be competitive, is to sustain the cost savings. When it comes to, for example, the SG&A, you know, we all know if you just go and make cuts, those aren't very sustainable. We're redesigning our organization, and we're eliminating, you know, capabilities that we just don't think are affordable in the business. One of the areas was in the R&D area. We were doing a lot of R&D, and we've substantially retrenched on that, okay, as an example. Some areas we're investing in more, like commercial capabilities, because if we want to grow the business, we need to do that. We've also redesigned, you know, how we run our operations.
My whole function, too, is changing on what we're doing, and we're bringing in experts to simplify business processes and things like that can be done. It's with an aim to sustainability. On the operating side, I would also say, I mean, we're trying to drive to a higher level of plant productivity. You know, one thing if Gordon was here, he would say, "Hey, you know, the ideas of improved performance in the glass industry are somewhat limited historically." It's a fairly insular industry, a lot of lifers who have been managing these businesses for a long time. What we were missing as a company, at least, is the latest ideas on manufacturing efficiencies and productivities.
That's what Gordon's been bringing in, right? Is how do we run these differently and more effectively so that this is a sustainable level of savings?
Mm-hmm.
I guess it gets a little bit to your other question, you know, what is it that actually drives the benefit? When you're looking at TOE, which is Total Organization Effectiveness, which is a program to improve the productivity of our plants, that ultimately releases trapped capacity, so that you can ultimately serve your customers with less assets or ideally sell more into the marketplace, right? This is how it kind of looks. The start of it is really focusing on speed and on labor efficiencies, okay? By that, by speed, I mean, you know, you can pull a furnace at a certain rate, and there's scientific studies that say, "Here's the sweet spot of where you pull a furnace," meaning how much glass is coming out of it.
There's a sweet spot of where you run your forming machines, the machines that make your bottles, okay? What we found in our network is that we were running that speed below the capability of the system, okay? The furnaces were being pulled, we weren't pulling as much glass out, as fast as, you know, the ideal standards would be same thing on the forming. By bringing the speed up of the pulling glass out and the forming speeds, we can get more capacity out of the system than we were getting there before.
Mm-hmm.
The key thing is to be able to do that with high level of productivity and quality, right? What we do is we get the labor and the speed up to kind of ideal standards. The second phase of it is to make sure that you're really focusing on, you know, furnace efficiencies. That tends to be batch composition and making sure there's consistency in batch composition, for example, and energy utilization is probably another major component of that, to make sure that that is done in the most effective way. Because that has a lot of impact on quality in the back, downstream. You get those moving in the right direction, you know, you have less rejects.
You know, what's unique about glass is that we make a raw material, and we convert it instantly into a product that has to be at Six Sigma quality. Okay? A baby has to be able to eat out of this. What ultimately, as a result of those very high standards, is a lot of glass just gets knocked off the line. You know, a very effective plant historically runs at 90% productivity, but you still have 10% waste. 10% of your product is getting knocked off and recycled and thrown back in the system.
By doing better on that batch composition and the forming processes after you come through in those initial speed out activities, that allows you to really reduce the failure rate of the products, improving the quality and improving and increasing trap capacity even more. The combination of moving faster and in higher quality, i s what gives you the release of the trap capacity.
John, on the quality standpoint, does trying to run with greater quality mean you have any incremental energy in the process, you know, improve the crystallinity or some other property within the glass? Secondly, as you're pulling the furnaces at a quicker rate, I know you and we'll talk about it later in some of the Q&A that we have, you expect CapEx to be maintained at a certain level. Does the CapEx necessarily go up? Because I'm pulling the furnaces harder. Why would that happen?
Yeah. If you're talking about a 10% increase in the furnace pull, we're not talking about something that meaningfully changes the life of the furnace. In fact, you pulling it at the right level causes a level of efficiency that target rate is the right spot for the capital intensity of the plant. If so, if you're pulling it less than that, you are actually not using your capital efficiently. If you're pulling harder than that, you're probably destroying the life of your furnace. Okay, to give you, to answer that part of the pie. As far as, you know. The whole idea is if you can make the precision of your manufacturing better, you end up with better quality. Quality in and of itself is a major energy savings if you can improve the quality of the product.
What do you think you can get that to? 5%?
You know, I mean, we have plants in our system that run close to that, you know. You know, it's not across the fleet, but that's part of the whole issue. That's part of the whole target of. If you look at TOE, it's around OEE standards and calculations. You know, if, you know, world-class is kinda 85% or better TOE, 75% is a very good performing plant, but you might find yourself at, yeah, 60% or 65% right now. You're trying to move your way up those different systems to be able to improve the trap capacity, which includes all of the factors we just talked about, not just the reject rates.
Okay. another question for you off of this. You mentioned that through Fit to Win, you are finding areas where you can drop innovation quite a bit, but there was something else that you said as a related point, which I wanted you to, if you could remember, sort of reaffirm, 'cause I didn't catch it. Having covered the industry for a long time, one of the things that we look to ultimately is innovation. Is that next product, you know, that stimulates growth, copycatism. "Hey, that beverage in glass was really hot. L et's replicate it." Why should we not worry that cutting the R&D might not hurt that, very simplistically?
Yeah, let me be very clear. There's a difference in how we talk about R&D and innovation.
Okay.
R&D is kind of what we talked about historically with MAGMA and core changes and how we manufacture and things like that.
Got it.
Innovation is a whole another story. In fact, innovation becomes even more important. I mean, what we're hearing from our customers right now is that obviously, demand's soft out there, right? You're finding it across the whole fleet of different end-use categories, with the exception of food and NAB, which are doing quite well. You know, brand managers wanna stimulate growth. Okay? They need to move their products, and innovation is a critical element of that. We have found a lot more interest coming to us and saying, whether it is a brewer... Now that, for example, you know, aluminum was a 25%-30% premium.
I mean, glass was 25%-30% premium in the U.S., now it's down to about 10% with the changes in, with aluminum cost. In Europe, it was about a 14% premium glass to aluminum. It's down to parity. Now that the product, you know, is more comparative in price, there's a lot more opportunities, and we're hearing a lot more interest from customers, including major brewers and things like that, saying, "Hey, how do I stimulate demand?" It requires innovation. It requires that new design. The good news is glass can do that across multiple different dimensions: color, design, bringing the quality of the glass, you know, embossing, all those types of things in a way that a lot of other substrates can't.
I think there's a renewed interest in how they utilize glass, but that means that we need to step up into the innovation game. You know, glass kind of missed a couple important trends. I mean, they, it did not hit the Truly and the-
Hard seltzers.
Yeah, hard seltzers. Thank you. Thank you. We missed that. You know, the RTDs were limited here in the United States because we were not able to legally put that in glass containers. We've done more successfully over in Europe. We need to be able to be in a position to jump on these newer trends that are coming out with innovative, different design of products that actually stimulate growth in the market and drive that brand image that our customers are looking for.
In North America, you said glass is at a 10% premium?
Correct.
At Europe, you're now about parity.
About parity, yes.
When do we actually see that, right? That's been part of Fit to Win. It's been something you've talked about more broadly as that cost differential lessens, that opens the aperture for business. You can get it. It's first quarter, we get it, but why are we not seeing more opportunity, given that very good reported improvement in cost position versus can?
Yeah, 'cause I think that those cost positions have changed all within the last six months or so.
Okay.
We know that these trends tend to, you know, buying patterns and marketing schemes and things like that, you know, it, you know, extend over a longer period of time. What I would say in conversation with our commercial teams is, the level of engagement and interest by, you know, our customers, including the big brewers, has gone up significantly.
Okay.
You know, we're looking forward to that maturing and turning into opportunities. it's important for us. I mean, you know, the cost of glass and aluminum has closed. A lot of that's because of the price of aluminum or tariffs, everything. We're coming in through TOE to fundamentally improve the cost position over time of our facilities. Granted that, you know, those trends create a umbrella for us right now.
Yeah.
We want to turn that into a permanent differential.
TOE increased efficiency at Toano by 10%, and you said you're getting similar gains. Help me understand, you know, as though I was looking at it, why you were running below efficiency and what, you know, what allowed you to regain that efficiency? Was it somebody just pulling the furnace guide off the shelf and saying, "Oh, we could run more quickly"? Like, what actually happened that it's like, we're running below?
Sure. Yeah.
Help me understand how comfortable you are that CapEx is gonna be, you know, $450 on an annual basis, you know, I guess starting around 2027 or so.
Yeah. S o the first question was, why weren't we running more efficiently to start with?
Yeah.
I think that goes back to long-held standards that were generally accepted in the glass industry, okay. It was held that, hey, okay, you could pull a furnace at a certain rate, or you could run a forming machine at a certain rate, but it was best to do it a little lower than that to avoid issues and challenges. Maybe it would pop up into a quality issue down the road if you try to push it a little bit harder. I think that these were long-held standards, some of them going back manufacturing, you know, indoctrinated into standards that we had, you know, technical standards within the system that were more conservatively set than necessary.
Okay.
Those preconceived standards have been challenged. We said, "Okay." Of course, there was resistance, where people said, "Oh, my gosh, if I start speeding up, that'd be a problem." We say, "Speed up 1% a week, see how it goes." All of a sudden, you know what? Hey, it's fine. We're winning it over. We're pushing those standards in a way that were just, you know, preconceived in the past.
CapEx getting to $450, so your free cash flow can be, you know, 5% or better of sales over time.
That's right.
Help us understand why we won't be seeing a rise in CapEx as you're pulling the furnaces more quickly?
Yeah, yeah. First of all, you know, our CapEx over the preceding years, which was higher, was mostly extra spending towards expansionary investments and things like MAGMA and things like that, okay? That was running $150 million-$200 million a year for multiple years. We're out of that mode, okay? We haven't really reduced the core maintenance spending over the last several years, okay? Those numbers are fairly consistent. We've been drawing down the strategic CapEx. Now, with that said, you know, we have been in the process of eliminating 13% of excess capacity, right?
We're closing facilities. We're eliminating, you know, excess capacity, but also some of the, you know, highest cost operating factories that we have within the system. Some of those that were probably due for furnace rebuilds sooner rather than later. One of the reasons that they're underperforming was they're late in their asset life. With a smaller fleet, with, you know, a higher level of capital, you know, pull through of the trapped capacity, you can, you know, over time continue to right size the fleet, which just ultimately relies on less assets and, therefore, less CapEx.
We believe that that cycle is gonna allow us to maintain our CapEx in this kind of relevant range for a period of time.
Thank you, John. As we're wrapping up, any last questions for O-I? John, maybe two last ones from me and we'll wrap. One, you know, glass tends to have a bit more of an alcohol exposure, for better or for worse.
Yeah.
Why is that something that you're not concerned by in terms of your growth outlook over time?
Sure.
How do you sort of leverage that for the better? M aybe it's on the cost side, and get more share there, and also come up with, you know, other categories to add to that, and then, to your end market, so you have more end market to grow for, more TAM to grow for? Regionally, as you're applying Fit to Win, which markets do you expect will be North America, South America, Europe, will wind up over time having the most capital intensity?
Yeah. So let me answer that last one first. All of our operations are gonna be under review and going through the same processes, right? What I would say is that, historically, your highest capital intensity actually has been in North America, and there's probably the most opportunity to improve that network, okay? I would say that your Latin America market is very, very well run from an efficiency standpoint. Europe is somewhere in between. It's a lower cost than the North America, but it is also well run and has a lot of fragmented customer base, it's a little bit of a different mix of business.
They all have a little bit of different need and each one of them will be tailored, especially as we move to what we call our Best at Both, where we make sure that we understand where the premium market opportunities are, where the mainstream market opportunities are, recalibrate the systems accordingly, okay? to your last question on the mix of business and where do we think growth is at, especially relative to some, you know, cyclical and secular trends, right? For one thing, you know, we would say that the, you know, the last several years have been fairly, you know, all over the place. you know, going back 2 years ago, we were sold out, and we were actually air freighting glass containers for spirits customers at different places.
Obviously, now we're in a different world, where it's much softer. Of course, we're dealing with multiple factors at one time. You know, there's the affordability challenges, there's policy changes, for example, on tariffs and immigration. Then, of course, you have, you know, change as Share of Throat, is what we call. You know, what are people going to drink? The fact is, there is less alcohol consumption, but people are drinking something, right? You know, what we're finding is that even with some reduction in alcohol consumption, that people still want the premium experience when they do drink, okay? That tends to be more associated with more premium products.
They'll have a fine cocktail, or they'll have a fine glass of wine, you know, even if maybe they don't have three of them, right?
Right.
So we need to move ourselves upstream into the more premium categories because that's where the experience is going to be when you do consume alcohol. So I think that is very well positioned for glass.
Okay.
With that said, people are drinking something. What we have seen is that double-digit growth in things like waters, like what we have right here, you know, doing very well. Maybe you go out to dinner, maybe you don't have a glass of wine or a bottle of wine, but you do get a nice bottle of water. For us, it's, that's a container, just as a container would be for other ones, and things like that.
Sure.
You have the zero alcohol beer category, which is very strong onboarding for the millennial categories. Even then, when, within, you know, for example, spirits categories, you see pockets of growth. For example, spritzes are very popular. They're very light, you know, they're easy to consume, they're not a zillion calories and things like that. Those aperitifs and those types of things continue to do well. Flavored whiskeys and everything are doing very well. You gotta find where people are drinking. They're always drinking something, you gotta find what those niches of opportunities are. With the branding capabilities, image, differentiation, the fact that people want to move their products.
Yeah.
We believe the glass is a winning proposition.
Thank you, John. Everybody, please join me in thanking O-I Glass for a great presentation.