Q1 2021 O-I Glass Inc Earnings Call
Good day, Thank you for standing by and welcome to the O I glass first quarter 2021 earnings conference call.
At this time all participants lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
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I'd like to hand, the conference over to Chris Manuel You may begin.
Thank you Blue and welcome everyone to the O I glass first quarter 2021 earnings conference call. Our discussion today will be led by Andre slope as our CEO and John Hodulik. Our CFO today, we will discuss key business developments and review our financial results. Following prepared remarks, we'll host a Q&A says.
And <unk>.
<unk> materials for this earnings call are available and the company's website at O Dash I Dot com.
Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included and those materials now I'd like to turn the call over to Andres, who will start on slide three.
Good morning, everyone.
We appreciate your interest and eyeglass world.
Overall, we are pleased with our performance during the first quarter.
Adjusted earnings of 35 cents per share we're in the middle of the original guidance range.
This was achieved despite those rupture them from pandemic related lockdowns in several markets as well as severe weather that impacted our operations in Texas, Oklahoma and Mexico.
In fact their formats was strong across all key business metrics after excluding the impact of severe weather and related elevated energy costs.
Higher prices more than offset on their line inflation and of course Asia volume was up around 1.5 per cent.
Importantly for favorable demand trends accelerated.
As we progressed through the quarter Likewise earnings benefited from the combination of very good operating performance and our margin expansion initiatives and in fact, these efforts more than offset day operational impact of severe weather.
And finally cash flow was favorable compared to historic range, reflecting continued very good working capital management.
On top of a strong operating performance I am very pleased with the progress we made advancing our strategy in.
In fact, I believe a wide reach and important inflection point.
As you've seen over the past several quarters, we have demonstrated a step change and auto related to consistently perform and deliver on our commitment and these.
And this was achieved despite a very difficult backdrop, which underscores the improved resilience of our business and demonstrates improved agility.
At the same time, we are removing the constraints of the past and we are successfully advancing breakthrough innovations to create a new future per line.
You asked in the last few weeks, we reached an agreement in principle on a third and final resolution of our legacy asbestos related liabilities and we successfully started up our first fully scaled Mac and the line. We expect these and other strategic actions will usher in a period and Neil period of prosperity for awhile.
And to spend on that in a moment.
As we look to the future we remain optimistic about our business outlook, we expect second quarter adjusted earnings will approximate 45 to 50 cents.
Which is a significant improvement from the prior year, which was the most disruptive theory goes with the pandemic.
Furthermore, we are reiterating our previously communicated full year guidance, despite the headwinds during the first quarter.
Let's move ahead to slide four please costs recent volume trends.
As you can see on the chart. The man has been relatively stable over the past 15 months, except for the second quarter of 2020, which whilst the onset of the pandemic.
As I mentioned, our first quarter 2021 shipments were flat with last year, but up around one 5%, excluding the temporary impact of severe weather and.
In fact, nearly all markets improve when and adjusted basis.
In the Americas shipments were down one three per se.
However, adjusted for the severe weather on their line demand went up about one five per se.
Volume was up mid single digits, and Brazil, and beyond your markets underlying demand was up low single digits, and North America, and down slightly and Mexico given capacity constraints.
Shipments were up 2% and Europe.
Demand was sluggish and earlier in the quarter due to elevated lockdowns and some supply chain corrections.
However, rents improve significantly as the quarter progressed, and we were up low double digits in March.
And these improve them and west broad base, and the only exception and west mineral water, which was soft the view and court failed restaurant and hotel check theory.
But we have these causing the past demand for healthy sustainable glass containers house remains strong despite significant swings and pray.
And retail channel activity.
We have share some additional insights in the chart on the right.
And it illustrates the expected trains and food and beverage consumption by channel before during and after the pandemic.
Naturally on premise dropped during the pandemic that was substantially offset by strong retail sugars.
Going forward consumption is expected to remain elevated and the retailer and while there should be a strong rebound in on premise consumption.
Oh it all total consumption is expected to increase modestly you and changing market dynamics and heightened social activity post pandemic.
In particular, we expect double digit demand growth compared to 2020 language as we lap.
Sales of the pandemic.
In fact cheaper and start up more than 20% month to date in April. So we are off to a good start.
Barring any unexpected developments, we now expect demand this year will be up between three to four per same from 2020 as shipments recovered back toward 2019 leverage with further growth to come.
Let's turn to slide five.
In addition to solid underlying performance. We also achieved a number of key milestones during the first quarter as we continued to advance our strategy.
On this page, we released our 2021 priorities and whaler and provide some highlights for the first quarter.
Touch base on each of our three platforms.
And we aim to expand margins, we have targeted $50 million, so garage and usually benefits us wireless continued performance improvement in North America.
We have made good initial progress in each of these benefits totaled $35 million during the first quarter as we accelerated efforts skewing the impact of severe where I.
I would like to emphasize how well the company these responding to our weather and energy issues. We think the span of two weeks, we court tail and restarted operations across several large plant, which amounted to around 19% of our global capacity and did so with minimal operating and Patrick issues.
While these Rob Dave. These outstanding response is an indicator of the improved resilience and operating agility on a sustained basis in North America and Mexico.
Likewise, it reflects the positive impact of the manufacturing and engineering capabilities, we have been developing across the enterprise.
Next we seek to revolutionize glass to support these we expect to validate the Mcmahon generation, one design and Jeremy at launch our glass out because he campaign and retrofits and ESG.
First we are pleased with our progress and magma and we had a very successful startup of our new Black My line and host mean in Germany.
Your line is already generating high quality glass bottles and further testing will be conducted over the next few months.
Likewise, we will be training and then transfer and the line to a local plant personnel as we target commercialization of these new line by mid year.
Our glass out because it campaign aims to rebalance the dialogue about glass.
Airports are well underway with around 110 million impressions during the first quarter as part of our digital campaign.
We are very encouraged by the positive response and progress made and will continue to advance these efforts.
I'll touch on ESG and moving target.
Third we will continue to optimize our cost structure. This includes a number of air force ranging from portfolio adjustments improving their balance sheet, simplifying the organization and addressing legacy liabilities.
Regarding our divestiture program, we have completed about $900 million help asset sales program to eight so we are at about 75% and no hard way towards our revised target of one <unk> one $5 billion by the end of 2022.
Currently we have several land sales that are in advanced stages, and a non bird'll polio efforts continued to move forward.
As we look to grow the business, we recently announced our intent to invest $75 million to profit Dudley expanding beyond where we are currently capacity constrained.
This will be funded primarily by divestitures and will not alter our debt reduction plans.
As John Wheeler span or our first quarter cash flows were quite favorable and historic seasonal trends for the viscous, reflecting very good working capital management, which will support that we auction.
Over the past year, one of our top priorities has been to establish the right organization for the future.
Our goal is to enable an organization that is simple agile and effective to help us consistently deliver on our commitments. This effort continues and last month, we entered into a long term strategic agreement with Accenture to manage our global business service activities.
And the easiest to reusing SG&A costs, we expect to accelerate capability and asthma and by leveraging work class processes and technologies.
Finally, we announced on Monday that our subsidiary Paddock Enterprises LLC has reached an agreement in principle for a third and final resolution to our legacy asbestos related liabilities.
Typically <unk> agreed to a mediator was proposed and for a consensual plan of reorganization regarding the paddock chapter 11 filing.
The agreement provides for total consideration of $610 million to fund a thrust on the effective date of the plant reorganization and subject to documentation and satisfaction of certain conditions.
This is a major milestone and why.
<unk> has paid $5 billion asbestos related claims or 40 years.
You're asking the plastic and these payments have consumed 40% of our cash flows with this agreement we are turning a new page, where we can place all of our focus and resources, who enabled a prosperous future for July and all its stakeholders.
Overall, we are very pleased with our progress and I want to thank the team for their tireless and effective effort to advance our strategy.
Before I turn it over to John Let me add a few comments on sustainability.
More than ever consumers are looking for healthy choices, both for themselves and the planet.
As we say often.
<unk> is made from natural ingredients it won't harm us the earth for the oceans alike. All their packaging it is already 100% recycled and.
And it can be recycled and listen this.
And this is why consumers have long viewed glass as one of the most airplane day package.
Despite what you might hear.
Still of course.
Pulse true today.
Looking on day right side of Slide six you will see the result of a recent survey by Mckinsey that are by the way its consumers beautiful package and sustainability, which confirms what consumers have long believed.
While <unk> will range by geography glass is viewed as a highly sustainable packaging option across most of the markets. In fact, it ranks in the top three across the majority of geographies and importantly, philosophy is perceived by consumers as much more sustainable non metal containers such as aluminum.
This underscores the important pencil part of law and glass advocacy campaign as we seek to rebalance the discussion around packaging and substrates and sustainability.
Now over to Jan Thanks honors and good morning, everyone I plan to cover a few topics today, including our recent performance.
Progress on our capital structure as well as our most current 2021 business outlook.
I'll start with a review of our first quarter performance on page seven.
And why reported adjusted earnings of 35 per share results.
Our results were at the midpoint of our guidance range, but down from 41 last year, reflecting recent divestitures.
Overall very good benefits from our margin expansion initiatives nearly offset the impact of severe weather.
Despite the disruption disruptions during the first quarter segment profit of $175 million was comparable to last year.
Severe weather impacted results by around $40 million, including lower sales and production levels and elevated energy costs that reflect our estimate of expected energy surcharges from this event.
On the other hand initiative benefits of $35 million were better than expected as we accelerated margin expansion actions in light of the challenge of severe weather.
And while cost inflation exceeded the benefit of higher selling prices. This was all attributed to weather related energy surcharges.
As Andrew noted sales volume was flat with the prior year, but up around one 5% excluding the weather impact.
Very good operating performance, our margin expansion initiatives and other cost actions more than offset the operating impact of severe weather.
Slide includes additional details and non operating items overall, we are pleased with favorable underlying performance trends.
Moving to page eight we have provided more information by segment and the Americas segment profit was $100 million compared to $103 million last year.
As noted earnings were impacted by the severe weather, including related energy surcharges while.
And while shipments were down slightly underlying demand was up about one 5% excluding the impact of severe weather.
And finally strong operating performance as well as the benefits from margin expansion initiatives more than offset weather related costs.
And Europe segment profit was $75 million compared to $61 million last year half of this improvement reflected favorable FX, while the region and began to implement annual price increases cost input cost inflation was elevated especially energy related costs.
This was offset by higher sales volumes, which increased 2% from last year.
Improved earnings were driven by favorable operating performance, including benefits from our margin expansion initiatives keep in mind that we no longer report and Asia Pacific region. Following the sale of ANZ last summer.
Let's shift to cash flows and the balance sheet I'm now on page nine.
As stated in the past we are filing specific capital allocation principles during the pandemic as.
As we focus on maximizing free cash flow, we expect significantly higher cash flow this year and key working capital measures should be in line or favorable compared to 2020 levels.
As illustrated in the chart, our first quarter cash flow was a $149 million use of cash.
While the first quarter is typically a use of cash given the seasonality of the business. Our performance. This quarter was considerably better than we have seen in prior years. This reflected significant efforts to improve working capital management and consistency.
For example, <unk> was down 11 days from the same period last year, and we now maintain our AR factoring activity to between 35 and 45% of gross receivables going forward. We expect cash flows would be more ratable over the year.
Second we preserve our strong liquidity and finished the first quarter with approximately $2 $1 billion of liquidity well above the established floor.
Third we are reducing debt, we expect net debt will end the year below $4 4 billion and our BCA leverage ratio should get and the year and the high threes compared to four four times at the end of 2020 further divestitures will improve disposition.
Note these targets could shift if the paddock trust funding occurs prior to year end.
At the end of the first quarter net debt was down around $900 million from the same period last year, reflecting improved free cash flow and proceeds from divestitures despite unfavorable FX.
During the quarter, we did receive the final $58 million and proceeds on the ANZ divestiture, which was used to reduce debt further.
Furthermore, our leverage ratio was around four times, which is well below our covenant limit of five times.
Finally, we intend to Derisk legacy liabilities as we advance the paddock chapter 11 process.
As Anders noted we have an agreement in principle for a consensual plan of reorganization, whereby Oi will support paddock funding of a 524 G Trust total consideration of $610 million to be paid at the effective date of the plan and.
Importantly, the agreement the agreement provides a channeling injunction.
<unk>, Oi paddock and and their affiliates from current and future liabilities time.
Timing will be a function of the remaining legal and court actions to conclude this matter.
As previously noted we have ample liquidity to fund this trust and the future and for clarity we are not considering equity as a funding method.
Likewise, we remain highly focused on reducing our total debt obligations over time through free cash flow and proceeds from divestitures.
Let me wrap up with a few comments on our business outlook.
I'm now on page 10, as I just mentioned, we anticipate our business performance will improve in 2021 as markets recover and stabilize.
We expect second quarter adjusted earnings will approximate 45 to <unk> 50 per share naturally. This is a significant improvement from the second quarter of 2020, which was impacted by the onset of the pandemic.
The improvement will be driven by higher sales and production volume with more stable demand, we expect shipments will be up more than 15%, which would be more in line with 2019 levels.
<unk> production should be up more than 20% as we do not anticipate the operating disruption we saw last year given the major lockdowns underway at that time.
Finally earnings should benefit from continued operating performance.
Improved operating performance, while some temporary benefits and prior periods will not repeat for a re phased more details are on the slide.
We are reiterating our full year guidance, despite the weather related headwinds and the first quarter. This includes adjusted earnings of $1 55 to $1.75 EPS.
And free cash flow of approximately $240 million.
<unk> with prior comments, we anticipate hosting investor and Vince and the near future. We expect the first will be in September after we have validated and magna at holzman and by around mid year, a specific date will be announced soon.
During this session, we will update our strategy provide more details and magma, including a valuation analysis and preliminary deployment plan likewise.
Likewise, we will share key company targets and milestones subsequent investor events, we'll expand on key topics with that I'll turn it back to Andrew Thanks, John and let me wrap up with a few comments on slide 11.
And it all we are pleased with our first quarter performance, which was in line with our original guidance range. Despite the headwinds from weather issues and the ongoing pandemic in fact, our underlying performance was favorable across all key business levers selling prices and underlying volume went up and costs were down.
Our margin expansion and easier teams are working well and our ability to deliver on our commitments has improved.
And I'm very pleased with the progress we're making on our bold plan to change O I's business fundamentals our business is more stable and we are at a much more agile organization as a result, our resilience and performance has improved and we are consistently delivering on our commitments.
Likewise, we are we moving the constraints over the past like legacy asbestos liabilities, while successfully advancing breakthrough innovations such as Magnum. We expect these and all of our key strategic actions will pave the way for a prosperous future.
Finally, we are encouraged by market trends and expect improved business performance and profit our growth in 2021 and beyond.
I continue to believe our best days are yet to come.
Thank you for your interest and eyeglass and we welcome your questions.
Thank you if you have a question at this time. Please press the star followed by one and then you touched on and telephone and.
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Please be advised that the Q&A session is limited to one question and one follow up question.
Your first question comes from the line of Ghansham Panjabi from Baird. Your line is now open.
Thank you and good morning, everybody.
Good morning Corey.
Yes.
And since you last reported.
Obviously vaccines have been deployed almost exponentially and the U S. Europe continues to sort of oscillate between Lockdowns and.
And theres been a significant virus flare up and Brazil can you give us a sense as to how these dynamics are playing out for you regionally at current and how it's changed your geographic sort of volume mix outlook for 2021 relative to your initial guidance if at all.
Yes, so since we experienced the first wave of Lockdowns backing.
'twenty 'twenty I think everyone learn how to navigate these times, where lockdowns come up.
And that's what we're seeing in Europe. For example, lockdowns have been a strong nevertheless, they manage growth is quite high with exception of one.
Products, which use minute of water, which is being impacted by the lockdowns.
Reducing activity in hotels, and restaurants and everything else is up.
So that has been learned we have learned that there is.
A very good <unk> resilience of the glass.
Packaging in both channels, so as we've seen channel shifts between on premise and off premise.
And we've seen a very strong performance in retail.
Given as they and their island and so they would all be and on premise and now we're seeing on premise coming back up and.
And the United States as an example, but we expect that some are big and that we got in the off premise is whenever you would retain going forward.
And there are good things taking place out there and the various markets for example, and Europe demand for beer is very strong.
Looking at least in Nielsen and studies.
For Western European countries.
Or four dimensional glass he has various from wood compared to alternative packaging for those countries that are relevant to y.
They weren't doll line, which was soft for two years in a row is now quite as strong and the reason reported that is the exports to China article back up again as well as the exports to Asia, United States with the reelection of tariffs and then when we look at the Americas demand for beer is very strong and user growth of all the markets <unk>.
The United States and this is highly influenced by default pools of consumers of the preference of consumers for premium products.
In the case of Latin America, specifically, there is localization of global brands, which is driving significant demand.
And in beer, there is conversion from repair and Ulster one way and there is also and transfer of new players in certain countries food.
Food is strong across all our markets and which we operate and in our case in particular, we've been quite successful onboarding, new mix and the United States. So there are plenty of dynamics, taking place beyond the lockdowns per se and we're seeing clearly markets like Europe that everyone learn oldest stable.
Learn outerwear industrial valves.
I would just build on that and if you take a look at the demand that we have it particularly in Latin America, and take Brazil, where you had mentioned that there's there's the cases going up but we're in such an oversold position down in those marketplaces that tell you. The truth, we're still looking very optimistic about the demand structures and in those particular markets.
Okay. That's helpful. And then from a second question specific to asbestos I mean relative to other <unk> hundred 24 G type bankruptcy cases, the resolution that you announced earlier this week was quite a bit faster than what other companies have been able to deliver upon previously so what insight can you provide and the time line up your specific situation and also what are the next milestones going forward. Thanks, so much.
Yes, sure I'll, let address that Ghansham as you know we entered into this process looking too.
Establish a fair and final resolution that was a top priority for the for the business as you saw and Andrew explained we've got a lot of good things going on with the business and we went and turn at a new chapter and this I think after the initial administrative processes with us.
We had a.
A mediation process with two very good mediators at the.
Table, there and and that was a very effective process to bring this to a head in a timely manner. So so we really appreciate.
And the effort that went into that as.
And as far as next steps.
There are.
A number of steps to complete the bankruptcy I just to give you a little inside of some of the things there's the drafting of the reorganization plan the disclosure statement on <unk>.
Rotation and voting materials will be a number of court hearings and this needs to be approved by both the U S bankruptcy and the Delaware courts.
Overall, we expect this process will be measured in months not years for example.
Perfect. Thank you.
Your next question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is now open.
Hi, everyone. Good morning.
Thanks for the details and good work on the progress so far and congratulation on that I guess my first question is on the.
Accelerated cost reduction activity could you put a finer point on how you're able to.
Accelerate.
And what specific tactics did you work how much of that is transitory well some of it come back into the P&L. If it was accelerated and the first quarter.
And might we not see that $50 million number if it is not temporary and in the first quarter.
Actually prove to be conservative and I had a follow on.
Yeah, I'll take that one.
George first of all all the savings that we achieved under our margin.
Enhancement initiatives are intended to be permanent savings. Okay. So we accelerated them, but they aren't going to disappear. For example, so as we look to the full year benefit of the $50 million, we're still very comfortable with that and and we may see the potential to do a little better than that.
So how did things get accelerated I would say a couple of categories, where we were able to push things was on the on the labor optimization front is one area that sticks out. So we were able to do more work. There of course, there is some consumption related areas that we knew that we could do better at and we invoked those particular activity early but but again those are those tend to.
Things that are more permanent in nature and that timing related and in that regard.
So it's $35 million, we probably expect it to about $20 million and the first quarter. So we did about $15 million better than we had anticipated, but again those are permanent and so when we think of the second quarter as we indicated the actually the incremental amount of initiative benefits might be modest and the second.
<unk>, it's not like they flip around but.
Then go and you go into the back half of the year you start to pick up steam in that regard.
As we look to the total benefits not included in the $35 million, we did have some belt tightening here and and the second.
And second quarter that might be I'm, sorry, first quarter that might be in the neighborhood of $5 million to $10 million.
And that's part of when we made the comments about some temporary adjustments and everything when we gave our full year I mean, our second quarter guidance of 45 to 50.
Those will be a little bit lower and examples of those would be timing of maintenance costs.
For example, with the level of activity that had to happen and then between Texas, and Mexico and things like that there was a little bit less focus on some of the maintenance activities within the business. So that's just going to happen and the second quarter, but again, that's different different distinct from the 35 that we believe is going to carry forward.
Thanks, Sean point of clarification, and then a question on Patrick just what is the consumption related area that univocal a bit more quickly. If you could just sort of say what that is and then.
And Patrick again, it's nice to see that Youre getting to resolution here.
And I recognize we've covered you for a long time, we know how big of a burden it's been to you from a cash flow standpoint over the years.
But if we didn't have asbestos.
As you studied it what.
It would be the one or two things that you could do right now that you can't do at the present time, given this burden and overhang that you've had either from a capacity or some other standpoint and John as you studied it what do you think it would do to your cost of capital and not having this.
As a concern for a while going forward. Thank you and good luck in the quarter.
Okay.
Yes, so on the consumption area.
There is.
Maintenance comes out, but I want to distinguish that between maintenance that is the timing element and maintenance, but but how effectively we go out with parts and elements and.
Spending and indirect spending activities or some of the areas that we can do better at.
From a procurement standpoint activities like that we accelerated those to be able to get the costs down and and the consumption a little bit faster and we thought got it so.
And then moving on to some of the asbestos questions. There. So what are some of the things that we're able to do now that we would not have been able to do and the past.
I think if you look at the leverage of the company overall. It is it is higher than we would like and primarily because we historically havent had the cash flow to be able to work down the debt and things like that so clearly are off one of our opportunities is to delever. The company at a rate that we wouldn't be able to do otherwise it.
At the same token we do have capacity constrained market places that we referred to now.
We highlighted that as we work and the <unk> and the expansion there we're going to be funding that through through additional divestitures, but as we look to the future.
That is our primary area to be able to go to to be able to look at and and of course, we're very excited about.
Magma and the prospects, there and being able to have the right balance sheet and placed and advance of being able to move that forward or some really important things on our mind of how we would how we would use it to cash.
And then and your last question was cost of capital for the organization.
And that's a bit of a tricky one.
What I would say is that.
And the equity.
Cost of the business has has.
Equity value of the business has been a little bit.
And reduced as a result, because of the overhang of asbestos at least we believe so I think there'll be a rebalancing ideally that there'll be market more market capitalization of the business as this liability goes away, but as we are able to service debt and reduce and improve our balance sheet I think our debt debt load and carrying cost of debt will go down a lot too so.
A lot of moving pieces and that and hopefully those give you some additional insights.
Thank you John.
Your next question comes from the line of Anthony Pettinari from Citibank Your.
Your line is now open.
Good morning.
Good morning, your guidance for <unk> has price cost is neutral and I just wonder if you could parse that out a little bit.
Specifically.
In terms of passing through some of these these costs like freight that has spiked up pretty quickly and are you doing special price increases are and it seems like some of your peers are probably not going to recover some of these costs until maybe the second half. So just wondering how you get to sort of neutral price cost so quickly.
Yeah. So so.
Youre right our guidance is basically they have neutral.
Price inflation spread now our original guidance for the full year just for clarity is to have some pressure. There. We do we do anticipate and the back half of the year that that spread will be a little bit.
A little bit of a pressure, what we're saying is that.
B B.
Inc. Price increases that we have for the year. So for example, and the first quarter prices were up about 2% or so.
That is at a rate a little bit higher than the rate at which we're seeing inflation increase now we do anticipate that to start picking up as you mentioned.
Logistics costs and freight and some of the energy categories are the more inflationary areas and particularly the U S has some some freight pressure but.
But we got a good start to the pricing improvements and the beginning of the year. So so that's moving forward.
And of our margin expansion initiatives as we've referred to it as a revenue optimization program and Theres a lot of value based pricing included and that and that's going quite successfully for the organization and thats contributing to some of the the ability to manage through the front end of the beginning of the cost inflation, we continue to expect that to improve but the.
Some of the cost inflation will we'll start to Mount for the year now as we look at inflation overall, we are seeing it going up but keep in mind last year was a record low inflation, we expected increased inflation this year, but it's the whole higher than we thought but still probably at or below a normal year of inflation for the company. So the type of.
The dynamics and the Pis and the pricing activities and the width business, Ken can manage through it at least for the next quarter too.
Okay, that's very helpful and.
And then you talked about sold that sold out conditions in the and these and I think Brazil is it possible to quantify maybe how much volumes you have left on the table.
Whether it's half a point and the Americas are a point or something like that.
You could have otherwise have met and then is there any sort of general thoughts around capex needs in 2022 plus.
Based on some of these opportunities.
Yes, it is difficult to quantify.
Volume that we are not.
And joining at this point and time because of being capacity constrained.
We can say is and every one of those countries.
If we had more capacity today, we will be selling more.
What we're doing is we are evaluating opportunities.
And seeing what needs to move forward, but we always has and we've been saying very clearly that our priorities and free cash flow and that reaction and so as a consequence of that we're looking at tactical divestiture opportunities beyond the targets that we in each of your established to be able to read ecmo and stool and opportunities.
Okay. That's helpful I'll turn it over.
Okay.
Your next question comes from the line of Paul Kanno from Seaport Global Your line is now open.
Yes, hi, and thanks for taking my questions.
So firstly.
And I was wondering on the divestiture program that you have another 250 million, including the non sales.
Have line of sight to I'm sorry.
And the other non operating I guess non income generating assets that you can.
But you can divest besides a $50 million that you discussed.
Yeah, I think there is a value for that 250 million or so left to go it will be a mixture of land sales I think the land opportunity is above the $50 million, maybe one way to look at it is that if you blend.
The divestiture of land sales that don't have any EBITDA leakage as well as some of the operating side, you're probably looking at a 10 times multiple on EBITDA as far as what we think is the net effect of all of this understanding that the operating assets are going to go and start certain multiple and then you don't have any EBITDA leakage on.
The land sales side.
Okay.
Okay great.
That's very helpful.
Other thing I wanted to.
Understand.
With regard to the sustained upbeat.
You mentioned about the perception of glass and certainly.
And gained recyclable.
But.
What progress are you, making and what do you see as the perception in terms of actually having glass roof being recycled and the reason I'm asking that is because I think even your kind of hometown and perrysburg recently, it was announced that theyre stopping their exit.
Except and glass and I guess, you guys are going to accept the glass from consumers and specific locations, but still that is clearly a hurdle to having higher glass recycling rates.
And in that town, but also globally as we think about.
<unk>.
Lots been recycled.
Yeah. So the recycling rates in Europe are very high and even though the highest.
So we have that experience with us, which we intend to lead.
And we move forward.
And I can rates in the United States are not as high and obviously, we got a.
And make a significant change and the system in this country is not and Niecy.
Tasked to accomplish however, we're taking several actions and different fronts to weather IOC and one of day meetings for example, the GPI and its members.
Put together a roadmap for recycling of Spansion with very clear targets and the bolt with the Boston Consulting group reported that effort. That's now on the execution and we haven't seen that and Alan.
Long time, much us quite as I remember.
We have we've been exporting solutions for a separate stream collection.
Based on the experience in Europe, and we are running some pilots about that.
We are deploying a program that we call glass for growth, we choose with converged glass.
Collection into value for the communities for example to improve education and the communities.
We are working on close close loop look safe status with our customers too.
And all we are rebalancing dialogue and increasing awareness of our glass benefits and in particular, we are working on educating communities about the.
Actual value of glass recycling.
Great. Thank you very much.
Your next question comes from the line of Mike <unk> from Barclays. Your line is now open.
Great. Thanks, Good morning, guys.
Yes.
First two on the paddock funding mechanism one is there a rough expectation yet on when you would expect to commit the funds and two should we expect one lump sum payment or a series of two or three contributions.
Yes, so for clarity on the timeline. It goes back to what I had mentioned before is that there is a series of activities that have to go out.
And have to occur until that plant and gets confirmed the last stages of those as I mentioned before.
Final approval by the U S bankruptcy court and the Delaware Court and so.
That is a whole profit is gonna be paced by that and as I mentioned before this is engaged and months, but but not year. So so we think it will happen reasonably quick as far as the timing of this.
The consideration is do we add that and once we come out of that out of that plant and the bankruptcy court approval, but as we as I mentioned earlier on is this is an agreement in principle and there's a lot of stuff that has to be written up and documented and work out in that regard, but we would anticipate at this point in time and it follows quickly thereafter.
Okay, and when we should expect one lump payment at the time or would it be like a payment series, it's two or three contributions.
And so let's deal with that and the future a little bit but at this point and time, we would anticipate would happen very quickly after the plan confirmation.
Got it fair enough and then for my follow up just a question maybe if I can reference slide four I just wanted to make sure I'm reading that correctly is 3% to 4% volume growth still your expected full year volume growth and if it is not whats the current.
Full year expected shipment growth and what that expect implies for the back half of the year. Thank you.
Yes, yes sure.
Our original guidance going into the year back in February was up to beat to be up 2% to 4%, so 3% to 4% as we've closed that and from.
From that time and improve the overall outlook for the year. So our volumes were essentially flat year during the first quarter as we mentioned the.
And the second quarter, and if we're up and that 15% plus range that that equates to.
3% to 4% and kind of annualized increase and so and the back half of the year that would imply fairly stable demand with the one thing that we don't know is where we're seeing some good strong demand here, but how our supply chain is looking and and.
Will there be some supply chain adjustments in that regard and also the capacity that we have within our business to be able to meet further demand as we work through things.
So that's our best estimate right now and we will continue to update the market as we see things and progress around mid year.
Alright, thank you.
Your next question comes from the line of Kyle White from Deutsche Bank. Your line is and I hope.
Hey, good morning, Thank you.
Wanted to go back to your business your business update that you provided back in February just to make sure I understand.
So when you pointed to earnings being below your guidance and and now actually coming in line with the original guidance.
And a 40 million dollar weather impacted pretty severe so was march just much better than what you're expecting there and.
February or was it all driven by accelerating some of these margin and experiences that you talked about.
It's a combination about and that the volumes were definitely better and March and then we were originally expecting because at the time that we had given that kind of update on guidance and the mid quarter or so we had indicated we thought volume as a result, we're going to be down but they ended up being flat. So that represents a margin will increase and the volume.
Activity, but also the the cost performance was very strong.
Weather hit Us in February and the team got working very quickly and.
Defectively to it and the March period due to take a lot of cost out and I think it is important to them.
I mentioned that the program that we have for example, whether it's cost of goods sold is called total system cost.
This has been and implementation for about three years now so he's fairly mature and these cores cost.
Across the entire system, he can actually organization top down and across it has a very good structure information and systems very clear targets. So we have a pretty.
A strong capability that west develop our time and I think now we're enjoying the ability to influence cost.
And a pretty important and moderate and I think youre seeing the impact of that.
Got it.
And then are you getting any traction with customers and the hard Seltzer category is there an opportunity in Europe as maybe some bands brands start to penetrate that market or maybe an opportunity to kind of premium and is existing brands here and the U S or maybe target premix cocktails and both regions.
Yes, we are and obviously, we cannot comment about them because they are in development, but yes. There is increased activity in fact, the glass advocacy campaign.
We're moving forward.
And is calling day interest of both consumers and customers and we see it for example.
Reflected in the leads that were.
Excuse me and this is the operator and has been a technical issue with the line with the presenters helicopter to connect them now.
Okay.
Speakers. Please go ahead.
Yes, sorry, we had some technical difficulties something drop.
And.
Do you want to continue with your question.
Yes, I mean, I'll ask it again, but I was just asking about the opportunity with hard seltzer.
And in the USA and Europe, and understanding that you cant comment and then.
And any future.
Commercial developments, but maybe talk about if you see and more opportunity in Europe versus the U S or anything of that nature. Thanks.
And so there is increased interest.
And by customers across markets.
And putting ourselves in glass and oil products adjacencies of beer and oil products. The new product development activity has increased the glass advocacy campaign is starting to create the interest in consumers and customers and for example, you will see foresee a CRM and our.
Organization, and we have seen the leads and that seaport thesis and increased as a consequence of some of the latest campaigns that we move forward.
There is significant value and glass.
Weighted to branding and supporting brands supporting premium products, and we are seeing that incrementally and recognized by customers and then moving forward with some of the clients.
Just if I could I wanted to make one quick because as John and wanted to make one quick clarification to a question from Mike earlier, because I realize that maybe some of my comments on the timing of the payment for.
The <unk> 524 funding was a little bit inconsistent. So let me just clarify that the terms of the accepted mediator proposal at the $610 million of.
Total consideration is to fund and the effective date of the plan confirmation of course, there is some final documentation.
Required and final steps between now and then but that is the terms set forth and the mediator proposal can be excited so I just want to clarify that point.
Okay.
Okay, Operator, I think we're ready for the next question.
Thank you and your next question comes from the line of Mark <unk> from Bank of Montreal and your line is now open.
Thanks, and congratulations on that.
Good start to the year headwinds notwithstanding.
John I wondered if you can just talk a little bit about the expectations in terms of the second half you did.
Beat expectations on the first quarter your second quarter guidance is above most estimates, but you held the full year and.
And at existing levels I wondered if you can just help reconcile that for us.
Yes, yes, sure I mean, as we all know that last year was a very disruptive period and the seasonality. The typical seasonality of the business did and play out, but we're seeing a much more reversion back to the norm there on mark. So so what we have typically seen and <unk> business and the past as the first.
<unk> and the fourth quarter are very consistent with each other they are both the winter periods and the.
And the northern Hemisphere, and and the second quarter and the third quarters were also very consistent with each other and consistent with the the summer period and the northern hemisphere. So so the back half of the year will look a little bit like a mirror image of the first half of the year. So I think that that is probably a little bit of reverse.
And back to the norm.
Hopefully that answer Richard.
Yes, it does it does and.
Andre So im just curious whats the recycling rate look like down in Latin America.
We talked about Europe, we talked about North America.
Yes, I think it's similar.
Similar levels of the United States, So Americas are pretty much and similar.
Similar levels.
And so I'm just curious on that I mean, it seems like.
Theres, a little bit of and inconsistency this push on sustainability, but and Latin America Youre selling more one way glass when you don't have recycling.
Yes. So we are we are squarely focused on improving the systems and all the countries.
And we have acknowledged that the.
And the situation in Europe is really a strong situationally and Americas and it's not as strong now we have ways to improve this we've been quite passive communicating the benefits of glass and interest and communities in.
And these efforts that is changing is not an easy net effort, but we're moving it forward.
Okay, and finally just related to this can you talk a little bit about the glass advocacy work you called up the incremental expense and the earnings release.
Yeah. So this is a campaign and social media that is intended to retrofit issue and they ran if it took glass and we want to rebalance day I allude around packaging.
And make sure the benefits of glass are appropriately policies.
Position and understood both by consumers and customers and stakeholders in general So we've been very active on that.
One of the reasons why.
Things are not as good as you would like them to see do we and the recycling is because of being passive for quite a while world that is changing and we're becoming very active in that front and the glass advocacy campaign is intended to reposition and glass.
Now very important too high that Magna has several important characteristics that are going to support the recycling of glass and that's something that we're going to talk as we get together and in September that the company is actually changing and.
Excuse me actually working to change the fundamentals of that recycling assistant and the markets, where it is low because the potential of the product is really high is a great product is 100% recycle line non out there is highly recycled where the airport has been move forward, we're going to move forward at the airport and the places where there is not.
Okay very good I'll turn it over.
Okay.
Your next question comes from the line of Adam Josephson from Keybanc. Your line is now open.
And dress John and good morning, Thanks for taking the questions.
And just one on the updated strategy that youre talking about at the Investor Day, I mean, you've been reducing structural costs pretty effectively for years, you've been working on magnum off for years.
You're obviously dealing with the asbestos liability and.
Hopefully that will be a thing of the past and and the next few months. So I guess I'm wondering what the updated strategy really is in other words distinct from what you've been doing consistently over the past two to three years in terms of cutting costs and working on magma et cetera.
Yes, so the.
We're going to update the strategy on in September So, we're going up and provide an update to you on that at that time now we've been.
This quarterly focus developing capabilities in this organization that we are.
And needed to perform.
And for example, I just described the Forex system costs, but we also are working on cost.
And he has hit the is that the impact of CNA now it takes time to develop those capabilities and what we're seeing is.
Those margin expansion initiatives are Larry and those capabilities that we built and as a result, we are.
Effectively impacting margin expansion and earnings expansion.
Now, we're going to see that building over time, even more we believe those units at these are multiyear initiatives and the impact of that is still yet to come because we are this is now gaining the momentum.
The Mac value element is a measure that technology development that doesn't happen and HR payroll.
We've been several years now into this things are going and really well we are using high quality glass and goes mainly and at this point in time. So it takes time that youre going to see the value of this technology and this effort when we get together and in September and obviously, Idaho and as basketball as has been widely covered and he say.
Various structural and moving the organization and.
We're very pleased with the progress.
And the thing I would add there is as Andre stock was talking Magna as a major development and for us, but it's not just the technology. It's how you go to market and as we've said several times in the past, it's about a new business model for glass and so I think that opens up a number of doors that maybe have not been considered in the past for our business and so you will I'm sure will elaborate on that.
Got it thanks, Sean and just back to the sustainability issue and this Mckinsey survey Youre talking about so if I look at this and the U S. Consumers think glass is much more.
Sustainable then metal containers, obviously, yet the last 10 years.
Metal containers have been growing at a far more rapid rate than has glass. So if in fact U S. Consumers view glasses more sustainable why are they not buying it nearly to the same degree and that they are cans.
Well there are multiple reasons for that and I think we already tended to other day. So all of those reasons, we their strategy and we're moving forward and one obey and he has been that we have and being expanded for example at the rate. These could be a standard to take the opportunity. This package inherently has well, we're making those moves SaaS youll see and we just.
And I would say invest meaning the Andean countries to support that growth, we just made that.
And our sponsor and in Europe, and your Encore, which is was very timely and he has been selling extremely well from the start and is supporting the past and.
Growth of that beer demand in Europe, I, just explained to you how.
And they call that how the demanding western European countries.
And for glass and the countries that are relevant for us is being strong and better performance that alternative packaging. So there aren't many things at play I think youre looking at things.
Our fraud with a perspective of where we're coming from and I think it's important that and our meeting in September we can explain clearly to you and where we're going to which is it reflected significant changes and our impacting day mark.
Thank you and interest.
And next question comes from the line of Ireland, and Vince <unk> from RBC capital markets. Your line is now open.
Great. Thanks for taking my question.
Congrats on the progress with asbestos and the recovery as well I.
And I guess my first question is just on the volumes.
We have seen some some.
Deferring a data on wine.
Have you seen kind of a drop off and are in line.
As we have seen the growth and the seltzer market, what's your kind of overall view on online.
Move from here.
Well during the pandemic <unk> has been growing.
The weighted rate than before.
We got up observe closely what is going to happen one months things normalized.
So I assume you're referring to the United States.
Because the installation and you're upset okay, so and so and they know how to states.
The situation and is being better than the west before.
It's primarily focused on premium wines, which is where we play the most and that's that's been the case.
And the last year, we got and see what's going to have enough third things normalize and.
Theres still some period of time to be able to get there.
Okay, and then just on the quarterly kind of cadence for volume. So I guess, maybe you are up 20% and the first part of April do you expect that pace to kind of continue through the rest of the quarter and then.
Do you expect to kind of negative growth in Q3, Q4 to get you to that 3% to 4% for the full year or how are you thinking about the evolution of volumes as you move through <unk> through 'twenty one.
Things are still quite volatile across supply chain. So it's very difficult to make a provision or volume and what he is going to be.
I think what we're seeing in April.
Pretty good and paid a point.
It is difficult to extrapolate that data point to the quarter or the year at this point in time, So we got up and stay close to markets. I think you are seeing this in a multiple companies volatility is high even it could be even involving more elements than a day a year ago in terms of thing and drivers of volatility so at.
At this point and time.
The first quarter.
Worked out well for us and from other mining standpoint, with exception of the severe weather impact.
April has been very strong and.
And we will be close to market.
The mine and we'll update you as things progress.
I would just build on there remember last year April and May where kind of your toughest comps with the with the.
With the pandemic.
Good strong comp comparable numbers and the April and May are expected June will probably be a little bit more and more normalizing as we saw last year was starting to normalize blending out to that 15% plus for the whole quarter.
So that's kind of how we would look and you got to consider the comp and the aspect of this and keep in mind, we are not targeting a decline and volumes in the back half of the year more and more stability.
Just just kind of trying to see how the tea leaves work at this point and time understanding that.
Theres a lot of reopening activities and we'll give an update around mid year about how we look to the back half.
And I think we.
We have time for one last question.
Your last question comes from the line of Gabe Haiti.
From Wells Fargo Securities. Your line is now open.
Andres, John and Chris Good morning.
And to be quick.
Can you comment and all John about the tax profile.
Oi going forward I guess, two part question and one is is there any sort of onetime tax benefits associated with funding.
Trust when that does occur and then number two.
Are there kind of a legacy Nols that were associated with the tax shields.
And with funding that along the way does that go with the bankrupt entity or does that stay with Hawaii, such that you will kind of continue to have a kind of a low.
Our cash tax rate going forward.
Yes, so I mean.
Kind of a normalized.
The effective tax rate for us is and the mid call. It that mid to high <unk> is a little bit elevated this year because of just a little bit lower earnings we haven't fully pulled out of out of the.
The pandemic.
Pandemic elements in that regard I mean, there has been some legislative changes around the world I'm thinking of Mexico, and the Netherlands, where they where they've kind of been.
Addressing some of the interest deductibility, so that's kind of pushed us up to that and mid to high twenty's compared to maybe the mid twenty's and the past.
As you think about the tax profile and.
In reference to the payment that would be made for the 524 G Fund.
That would obviously be a payment from oi to paddock from.
And from the support agreement from Oi than Paddock wood didn't make too to that fund.
And that obviously just like any other historic asbestos payment that we have made provide some relative tax.
Shield or benefit to the organization of course, there's a lot of discussion about tax proposals under the administration right now and things like that so it's hard to put a bead on on how consequential that is.
But we would anticipate that and and if there would be something on the sizeable side of tax changes.
That could be a beneficial for a couple of years with the company when you bring that aspect and and legacy Nols and other tax attributes that we havent passed so more to come and it's a little foggy out there with what's.
And what's happening on tax legislations line.
Alright. Thank you and then specific to the second quarter guidance, you guys are producing kind of at a 20% rate and expecting kind of 15 plus percent sell through.
If history has taught me anything that production rates are equally if not more important to kind of the income statement impact.
And on a quarter to quarter basis. So.
And I calculate that benefits and maybe call it $25 million and the second quarter again kind of over producing versus what youre selling.
And I think I heard you say, maybe $10 million of some maintenance that got delayed so is it not fair to say your quote unquote over earning by $15 million and the second quarter and maybe that's why the second half.
And kind of a little bit cautious on it or and.
And I guess by the way and thinking about it is if I were to annualize kind of that 45% to 50 right.
And I get to a bucket and you do a buck or $2 kind of normalized earnings potential.
You can give us any pointers there.
Yes, I mean, theres a lot to unpack there, but what I would say is.
One on an annual basis, 1% of volume growth is generally worth $15 million to $20 million to US 1% of production improvement is probably closer to 20%. So so you can calibrate where things are at.
Actually on what Youre seeing is more of a comp from the prior year issue than anything else because frankly, our production and sales volumes right now are very consistent with each other and we continue to see a stable to improving overall demand environment. So it gets a little wonky from quarter to quarter, but.
Look at it that way rather than maybe necessarily just just looking at from a comp standpoint and the prior year.
And to your full year component the annualized <unk> and a 45 to 50 and you only issue would be the seasonality of the business as I mentioned in the first and the fourth quarters are a little bit seasonally weaker, whereas you see that strength coming and the second and third so hopefully that is helpful lot. That's there's a lot of elements and development.
Thank you guys.
Thanks.
Okay that concludes our earnings call. Please note that our.
Second quarter Conference call is currently scheduled for August 4th and remember to make it a memorable moment by choosing safe sustainable glass. Thank you.
This concludes today's conference call. Thank you for participating and have a wonderful day and you may all disconnect.
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And here.
Operator.
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And going forward.
And moving.
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