O-I Glass Navigates Near-Term Headwinds, but Shift to Eco-Friendly Packaging Provides Upside

Equity Analyst

Spencer Liberman

O-I Glass is one of the world's largest glass container manufacturers, with furnaces in North America, South America, and Europe. It turns molten glass into containers for beer, wine, spirits, and food, using standard and custom molds for a wide variety of customers. O-I operates roughly 70 glass plants and serves customers across the world, with the US its largest region at about 30% of sales. In the past few years, O-I has gone through a portfolio-optimization plan to increase its focus on its glass container business and prioritized regions. As part of this plan, O-I divested its tabletop glass business as well as its Australia and New Zealand operations and is using the proceeds to fund capacity expansion and modernization projects. 

O-I has a dominant position in the glass container market, often controlling the majority of market share in the regions in which it operates. Alcoholic beverages (beer, wine, and spirits) account for two thirds of the firm's portfolio, with beer making up roughly half of the volume and the remainder split between wine and spirits. O-I sells its glass containers to both mainstream and craft brewers and has benefited from a shift toward craft beer that favors bottles. Nonalcoholic beverages account for roughly 15% of sales, with the remainder of O-I’s portfolio consisting of glass containers for food, which include jams, salsas, salad dressings, and more. 

For the past 30 years, O-I Glass has had material exposure to an asbestos liability associated with its legacy operations that sold products that contained asbestos until 1958. O-I has paid out billions of dollars in settlement claims related to its legacy operations over the past three decades but moved to resolve this in 2019 with the construction of a wholly owned subsidiary, Paddock Enterprises. Paddock filed for bankruptcy protection, and O-I set up an asbestos trust to handle all current and future settlements. A settlement was achieved in 2022 in which the trust would be fully funded with $610 million from O-I, and the company was awarded an injunction that protects it from any future liabilities related to its legacy operation.

Business Strategy & Outlook

We think O-I Glass benefits from durable competitive advantages that should support economic profits for at least the next 10 years. We assign O-I a narrow moat rating based on efficient scale and intangible assets. O-I is one of the largest producers of glass containers in the world, mainly serving beverage end markets. The glass container market is highly concentrated as most regions are typically serviced by a few large competitors that maintain long-standing relationships and strong contracts with customers. The low value of glass containers combined with their significant weight limits transportation distances, which creates localized markets where producers possess strong pricing power. 

O-I is one of the largest producers of glass containers in the world. It has significant market share in most regions it operates, supporting its efficient scale moat source. In most regions, O-I accounts for over half of glass container volume; in some cases, it is the only sizable producer. Its main markets, North America and Europe, are served only by a few competitors with almost no entry or exit in recent years. It is highly unlikely that an incumbent firm will exit, further preventing would-be entrants from attempting to join the market. O-I and its competitors must manufacture glass containers in large numbers and run plants at high capacity in order to remain profitable. Many of O-I’s plants run 24/7. The low-value nature of glass containers paired with high costs of operating manufacturing plants produces a strong barrier for new entrants. Glass containers are also a commoditized product with little room for differentiation. Innovation in the space is easily replicable by competitors as it is usually a change of the shape or size of the container. Because of this, potential entrants would need to resort to price competition to steal market share, which is not a viable alternative. 

Producing glass containers is an intricate and laborious process. Manufacturers turn silica sand, soda ash, and limestone into molten glass with sizable furnaces at extremely high temperatures. The molten glass is then formed into individual containers and slowly cooled to finish the glass. When compared with the production processes for other packaging containers, glass container production has a higher potential of faults due to the temperature requirements and importance of time management in the process. The intricacies and high capital costs to produce glass containers create a strong barrier for new entrants while encouraging incumbents to act rationally. There is almost no incentive to undercut prices or add capacity in hopes of taking business from a competitor. Most glass manufacturers operate under long-term contracts that make poaching very difficult. New entrants would most likely be immediately unprofitable upon entering a market as the capital costs of starting and operating a plant are high, and finding customers that are not currently serviced would be difficult. 

O-I operates roughly 70 glass-manufacturing facilities in countries and regions around the world. Glass containers have a low value/volume ratio, so shipping empty bottles beyond a few hundred miles is unprofitable. In order to win and service contracts, O-I must operate plants near customers to maintain profitability. This market dynamic discourages new entrants from joining the market as they would need to open multiple manufacturing facilities because it’s unprofitable to ship bottles and containers over long distances. Recently, robust demand for glass containers and tight supply in North America and Europe forced O-I to import containers from other regions to meet demand. While this has historically been unprofitable, O-I has been able to pass through most of the transportation costs to the customer. That said, we expect O-I to reduce the number of containers it imports into both regions over the next few years as additional capacity comes online and demand normalizes. 

O-I and its competitors typically sell glass containers under staggered long-term contracts, which provides a strong competitive advantage. The long-term nature of these contracts creates predictable demand, enabling O-I to prepare its production schedules for years ahead. This allows the firm's plants to operate in a manner that maximizes capacity and efficiency. The contracts are also staggered, so food and beverage producers are limited when they are sourcing bids when contracts are up for renewal. It's unlikely any other glass producers will have enough excess capacity to fulfil their orders. This is especially prevalent with larger customers that need a significant number of bottles and cannot afford any delays.

O-I’s contracts also contain cost-recovery provisions that mitigate commodity and energy price volatility with price contingencies. This contract feature has been especially important in recent years as commodity prices and operating costs have increased considerably. While O-I has been able to pass through most increases, there is a lag as most contracts are on an annual basis. Historically, this lag was not an issue, but recent increases in commodity prices have outpaced O-I’s ability to recover price through these contract provisions. As a result, O-I began negotiating stronger provisions in new contracts and updating provisions in current contracts that would remove the lag and allow the company to recover costs quicker.

Narrow

Economic Moat

Owens-Illinois

O-I Glass, Inc. engages in manufacturing of glass products. It offers products to the food and beverage sectors. The firm operates through the following geographical segments: Americas, Europe, and Asia Pacific. The company was founded in 1929 and is headquartered in Perrysburg, OH.

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O-I Glass Exceeds Q1 Earnings, Confident in Future Growth Initiatives

O-I Glass delivered strong Q1 2023 earnings, despite challenges in sales volume due to global disruptions. The company remains optimistic about its capacity expansion plans, technology developments, and margin expansion initiatives. O-I is focused on capital allocation priorities, growth through long-term agreements, and MEI initiatives for revenue optimization and cost transformation.

O-I Glass reports 20% earnings growth, navigates choppy volume trends

O-I Glass reported strong adjusted earnings growth, despite challenges in sales volume and consumer consumption trends. The company's strategic initiatives are on track, and it anticipates future earnings improvement with expansion projects and capital allocation priorities. O-I is focused on navigating choppy volume trends, addressing net price softness, and seizing opportunities for growth through new capacity investments and sustainability initiatives.

O-I Glass reports strong Q3 earnings and anticipates growth in 2024

O-I Glass anticipates a strong 2023, despite softer-than-expected demand. The company is closely monitoring market trends and expects some normalization in the supply chain. With a focus on reducing debt and navigating market challenges, O-I Glass is poised for growth in 2024.

O-I Glass reports historically high earnings, eyes disruptive growth

O-I Glass reported strong financial performance in 2023, with high earnings and margin expansion. The company faces challenges related to supply chain disruptions, cash flow generation, and capital intensity. However, O-I is well-positioned to capitalize on opportunities for growth through investments in disruptive technologies and market trends.

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O-I Glass, Inc. engages in the manufacturing of glass products. It offers products to the food and beverage sectors. It operates through the Americas and Europe geographical segments. The company was founded in 1929 and is headquartered in Perrysburg, OH.

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O-I Glass Agrees to Divest Its Australia and New Zealand Business Unit

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