Q2 2021 O-I Glass Inc Earnings Call
Good day and thank you for standing by welcome to day O I glass second quarter 2021earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone please be advised on these.
Confluences being recorded if you require any further assistance. Please press star zero and I don't know like to hand. The conference. It was really to your speaker today, Chris Manuel Vice President of Investor Relations. Please go ahead.
Thank you Melissa and welcome everyone to the O I glass to Q 'twenty 1 earnings call.
Our discussion today will be led by Andres Lopez, our CEO and John <unk>, our CFO today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session presentation materials for this earnings call are available on the company's website at O Dash Dot com.
Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included and those materials and now.
I'd like to turn the call over to Andres, who will start on slide 3.
Good morning, everyone.
We appreciate your interest in O I glass.
We're very pleased with our performance during the second quarter.
Reported adjusted earnings of 54 cents per share.
Results exceeded our guidance range and reflected a stronger than expected shipment leverage that's way less favorable ongoing operating performance.
We continue to see favorable performance across key levers.
Keith mentioned proof, 18% and production rebound at 27% compared to the prior year, which was impacted by the onset of the pandemic.
It's got on demand also reflected consumer preferences for healthy premium and sustained and sustainable glass packaging as markets reopen.
Furthermore, the benefit of higher selling prices substantially on Saturday weighted cost inflation and continued favorable operating performance was driven by the positive contribution of hard marketing expense any news confused.
Second quarter cash flow was also very strong as a result of solid operating performance.
As I noted last quarter why has reached an inflection point we.
We have seen a step change and for women and our ability to consistently perform and deliver on our commitments, which is underpinned by advanced capabilities across many disciplines and develop over the last few years I believe core and quarterly results underscore these meal.
And I will discuss shortly we continue to advance our ball plant tool change Hawaii business fundamentals.
And to better than expected earnings and cash flow I am very pleased with the progress we've made advancing our strategy.
Our margin expansion and easiest people start exceeding our expectations and we achieved a major milestone with magma this past quarter.
Likewise, we continue to rebalance our business portfolio and advance our efforts to resolve our legacy asbestos liabilities.
As we look to the future we remain optimistic about our business outlook, we expect third quarter adjusted earnings will approximate 47 to 52 cents, which is a significant improvement from the prior year.
Our full year earnings and cash flow guidance has improved and we now anticipate full year earnings between $1.65.
And $1 on 75 per share and $260 million of cash flow.
Yeah.
Let's move ahead and to a slight forward fleet costs and recent volume trends.
You can see on the chart second quarter shipments were up significantly over the prior year, which was impacted by the onset of different dynamic.
Product shipments increased 18% this year compared to a 15% decline last year.
And the Americas second quarter shipments were up 17%, we'd argue overdraft is improving from the prior year.
The rebound was most pronounced in Mexico, and the Andean which were significantly disrupted in 2020.
And Europe shipments were up 22% and all geographies improved double digits from last year.
While the pandemic was very disruptive underlying <unk> point to a stable or modestly improving demand for example, second quarter shipments were in line with 2019 levels, reflecting a torn it return to pre pandemic levels.
Glass has proven to be very resilient, despite significant market volatility.
These include supply change disruptions from transportation challenges and major channel chips between retail and on premise consumption patterns.
The chart on the right illustrates how food and beverage consumption patterns true evolved across channels or the next 18 to 24 months.
As you can see on premise consumption is expected to rebound after day absorbed the pandemic, while retail purchases should remain elevated compared to pre pandemic levels.
And we first Cherokees analyses last quarter.
Evolution of packaging demand over the past couple of quarters supports these strength and continues to reinforce the projected consumption patterns and discharged.
As we look to the future. We expect continued volume growth while the markets have already rebounded well in the third quarter of last year, we expect our chipman and should be flat to up 1% in the third quarter of this year.
Reflecting solid demand year to date, we have increased our full year 2021 growth outlook.
While our prior guidance called for 3% to 4% growth, we now expect growth of between 4 and 5% in 2021.
They're starting to slide 5.
And through our strong operating performance. We also achieved a number of key milestones during the first half of the year as we continue to advance our strategy.
On this page, we leased our 2021 priorities as well as some highlights on our progress on <unk>.
Based on each of our 3 platforms.
First we aim to expand margins.
We have targeted $50 million Sofia initiative benefits as well as continuous performance improvement and North America. We have made good initial progress with our margin expansion initiatives benefits.
Benefits totaled $40 million during the first half and we now expect to exceed our original $50 million target for the full year.
North America, and foreign has demonstrated a strong resilience responding to severe weather high freight high price inflation and a tight supply chain situation and sales volumes are comparable to 2019 levels.
Next we seek to revolutionize glass.
And this we successfully validated several technology milestones for magma generation, 1 line and Germany as well as continued to advance our glass advocacy campaign and reposition EOG.
Similarly, we remain on track to pilot the generation 2 Mac maligning, the Streator, Illinois in the second half of the year and continue to make solid progress developing generation III.
Additionally, we are actively working on a RMB lightweight and program, we call ultra targeting significant container weight reductions to improve even further and the convenience and sustainability profile of glass.
Why is glass advocacy campaign aims to rebalance the dialogue about glass.
Our digital marketing campaign is well underway with over 660 million impressions for all of them to date and the campaign has reached over 80 million people across the U S.
We are building a community of glass advocates who regularly engage with our content, which demonstrates the relevant and so far and measures.
Like and our technology developments, we are very encouraged by deposits with response and progress made and will continue to advance these marketing efforts.
Touch base on thoughts on ESG momentarily.
Third we will continue to optimize our structure.
This includes a number of airports ranging from portfolio adjustments, improving their balance sheets, and simplifying the organization and addressing legacy liabilities.
Regarding our divestiture program, we have completed or enter into agreements for non $930 million of assets age..2 day. So we are over 80% of our way towards our targeted divestitures by the end of 2022.
As John will and will expand on our cash flow during the first half of the year was quite favorable and viewing historic Sichuan and business strengths, reflecting very good working capital management, which supports debt reduction.
In March we entered into a long term strategic agreement with Accenture to manage our global business services activities and we completed the first phase of these transition in July the Asia.
On to reusing as G&A cost, we expect to accelerate capability enhancement by leveraging world class processes and technologies.
As you know we reached an agreement in principle back in April and 40 acre and final resolution to our legacy asbestos related liabilities.
To complete the reorganization for Patrick.
Proceeding as expected.
Oh it all we are very pleased with our progress and I want to thank the <unk> team for their tireless and effective effort to advance our strategy.
Before I turn over to John Let me add a few comments on sustainability.
How do I, our ESG and sustainability, we see on these holistic.
And it and innovation and touches every part of our business.
And our vision, we see a future worthy and Nate singularity of glass meets wise. These are optical technologies and innovations to change how glad she's made solids and recycled.
The sustainable future of glass involves developing and up significantly lighter glass containers true ultra which implies a lower carbon footprint per containers.
And also involves the use of cleaner to gas oxygen and fuels and improved technology and traditional partners on top of that life's revolutionary Mac momentum technology will be capable of using biofuels and other carbon neutral renewable sources of energy light hydrogen.
As well as more grades of recycled glass.
And Mike My includes a more flexible manufacturing process, including the ability to turn the unit on and off to optimize the use of energy and efficiency.
It also can be co located at manufacturing I'm feeling facilities. These will reduce freight and potentially leverage the use and reuse of waste gate water and other resources.
And now the issue and we're building a future where innovative approaches such as glass for growth enhance glass recycling, while providing a benefit to the community elevating OIS ESG profile.
We are looking for work, but sharing all of these and more.
2020, sustainability report, which will be available at the end of Q3.
Now over to John.
Thanks, <unk> 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 second quarter performance on page 7.
<unk> reported adjusted earnings of 54 per share results exceeded our guidance of 45 to 50, given stronger than anticipated shipments and favorable cost performance and particular sales volume was up more than 18% from last year compared to our expectation of 15% or higher.
Segment profit was $232 million and significantly exceeded prior year results, which were impacted by the onset of the pandemic.
Higher selling price of substantially offset or offset elevated cost inflation linked to higher energy and freight costs.
<unk> higher sales volume and favorable mix boosted earnings.
Likewise favorable cost performance was driven by a 27% improvement and production levels as the prior year was impacted by force curtailment due to lockdown measures.
Keep in mind that maintenance and project activity costs have normalized after the disruption last year.
Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives.
This slide includes additional details on non operating items, let me point out that we did record a gain on and indirect tax credit and Brazil. After a favorable court ruling which has been excluded from management earnings.
Overall, we are pleased with favorable performance trends.
Moving to page 8 we have provided more information by segment and the Americas segment profit was $124 million, which is a significant increase compared to $52 million last year.
Earnings reflected 17% higher sales volume as the prior year was impacted by the onset of the pandemic.
Are prices substantially off costumes to offset cost inflation, which was elevated due to higher freight costs and.
And Europe segment profit was $108 million compared to $42 million last year, the significant earnings improvement reflected a 22% increase and sales volume, while the benefit of higher selling prices, partially offset cost inflation.
And the case of both regions very good operating performance, mostly reflected higher production, which increased 28% and each segment, while supply chains remain very tight across the globe.
Likewise very good operating performance also benefited from our margin expansion initiatives keep in mind that we no longer report and Asia Pacific region. Following the sale of ANZ last summer.
In addition to comparing results to last year, we have added a comparison to 2019 to better understand our performance with pre pandemic trends as illustrated on page 9 our current underlying performance exceeds pre pandemic levels.
Adjusted primarily for the divestiture of ANZ segment profit was up $7 million and the second quarter of 2021 compared to the same period and 19.
Overall higher selling prices have nearly offset elevated cost inflation, while sales mix sales volume and mix were comparable to 2019 levels and favorable results were really driven by improved operating and cost performing performance.
Reflecting our margin expansion initiatives, let's.
Let's shift to cash flows and the balance sheet I'm now on page 10, we are following a specific set of guiding principles that are aligned with our strategy to increase shareholder value.
As we focus on maximizing free cash flow, we expect significantly higher cash flow this year and key working capital measures should be inline or favorable compared to 2020 levels.
As illustrated on the chart, our second quarter cash flow was $117 million and was comparable to the prior year, which benefited from significant inventory reduction due to force production curtailment.
Over the past year, we have and improve the consistency of our cash flows and now reflect normal seasonality of our business solid operating results and very good working capital management.
Second we preserved our strong liquidity and finished the second quarter with approximately $2.2 billion of committed 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 end the year in the high threes compared to $4.4 times at the end of 2020.
We expect to receive divestiture proceeds over the next several months, which will further improve our balance sheet position.
Please note these targets could shift if the paddock trust funding occurs prior to year end.
At the end of the second quarter net debt was down almost $1 billion from the same period last year, reflecting improved free cash flow and proceeds from divestitures. Furthermore, our bank credit agreement leverage ratio was around 3.8 times as of mid year, which is well below our covenant limit.
Finally, we intend to Derisk legacy liabilities as we advance the paddock chapter 11 process as previously announced we have an agreement and principal for a consensual plan of reorganization, whereby Oh I will support paddocks funding of 502004 G Trust total consideration is $610 million to be funded at the effective date of the plan.
Importantly, the agreement provides a channeling injunction protecting paddock oi and their affiliates from current and future liability.
The paddock reorganization is proceeding as expected and 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 the trust and the future and for clarity we are not considering equity as a funding method. Likewise 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 11.
As Andres mentioned, we anticipate our business performance will improve in 2021 as markets stabilize and recover.
We expect third quarter adjusted earnings will approximate 47 to 52 per share naturally. This is a meaningful improvement from the third quarter of 2020, which was impacted by ongoing COVID-19 required production curtailments and Mexico Indianians overall, we expect shipments will be flat to up 1% from the prior year keep in my.
And demand had already rebounding and the third quarter of 2020 from pandemic lows.
Production should be up about 8% to 10% from last year, which was still impacted by lockdown measures and some markets at the same time certain costs like maintenance and depreciation have normalized following the pandemic induced disruption last year. Likewise, the current supply chain is fairly stretched across the value chain, reflecting the impact of prior year production curtailments and.
Well as a strained transportation situation and many markets. Finally, we expect continued solid operating performance and benefits from our margin expansion initiatives.
Our full year 2000, and 'twenty outlook has improved as we've tightened our earnings expectations to the high end of our guidance range and increased our free cash flow estimate. We now expect adjusted earnings of $1.65 to $1.75 per share and free cash flow of approximately $260 million. This adjustment reflects higher expect.
Shipment levels, which we now anticipate will increase 4% to 5% compared to 2020. Likewise, we expect the benefit of our margin expansion initiatives will also exceed our original goal of $50 million, we anticipate the benefit of higher shipments and improved cost before performance will more than offset the impact of winter storm Europe, which of course.
It was not included in our original guidance and.
As a final note we will be hosting our investor day. The morning of September 28 at the New York Palace. During this session and we will update our plans that will include more details on magma and likewise, we will share key company targets and milestones subsequent investor events, we will expand on these key topics.
With that I'll turn it back to Anders.
Thanks Shawn.
Let me wrap up with a few comments on slide 12.
It all we are very pleased with our second quarter performance, which exceeded our guidance due to a stronger sales volumes and improved cost performance. In fact, our underlying performance was favorable across key weakness levers selling prices and volumes were up and costs were down.
Our margin expansion initiatives are working world on a relative to a levered on our commitments has improved underpinned by a bond by advanced capabilities at growth business functions and rigorously builds towards the last few years.
I'm very pleased with the progress we are making on our bold plan to change our Ais business fundamentals.
Our business skews more to stable, we have well as structural business planning processes, and we are a much more agile and resilient organization lie.
Wise, we are removing the constraints over the past like legacy asbestos liabilities quite successfully advancing breakthrough innovations such as magnum.
And finally, we are encouraged by market strength, which is reflected and our improved earnings and cash flow guidance for 2021.
Over the past several years, we have been hard at work improving the foundational capabilities of our company as well as the staging of the company for continued transformation.
And we look forward to our Investor day on September mid September 28. During this event, we will share our exciting plans to align glass NOI with the future of packaging for decades to come.
We are comfy and this plan will increase shareholder value and I'll share a new period.
Prosperity for Hawaii.
Thank you for your interest in O I glass and we welcome your questions.
As a reminder to ask a question you will need to press star 1 on your telephone.
Question press, the pound or hash key.
Please from me Mr. Chris The 1 question and 1 follow up thank you.
Your first question comes from the line of Ghansham Panjabi from R. W. Baird. Please go ahead your line is open.
Thank you and good morning, everybody.
Gotcha and good morning I was.
And just kind of looking back at <unk> can you just give us a bit more color on which regions.
Verticals came in better than you originally thought for the quarter and then also the same for as it relates to the outlook as well for the second half of the year.
Well from a demand perspective.
All regions, all markets and which we operate across segments performed.
And in line with our expectation and noticed slightly ahead and then we're seeing.
A pretty solid common pattern across the world, which is they focus on premium products and trading up and that's helping every category.
And our business.
Yeah, I would add is as you look at the volume trajectories. They were they were particularly strong and the Latin America marketplaces and in certain pockets over in Europe, where were actually strong also.
Towards the southern part of Europe, we saw.
Larger gains than other parts of the markets and so really when you think about the second quarter I would say it was mostly a volume driven and upside to the business and it was really driven by those particular markets.
And as we think about the performance going forward.
We expect the volumes as we mentioned in the prepared comments to start to more normalize obviously it was a very disruptive period last year and the comparisons but still be up.
Zero to 1% keep in mind, the second third quarter of last year was actually up 2%. So it was kind of a relatively difficult comps. So were overall seeing pretty good trends as we look at our business really theres strong demand everywhere and and a pent up demand for our product. The real issue is where is the production capacity and with.
Whereas the supply chain and be able to support that and given the constrained transportation situations.
Sure and.
And maybe as a follow up just can you give us a sense as to if you were to baseline on new product introduction activity. If you will.
And over the last couple of years, where are we at current relative to where we were pre.
Pre pandemic and then also many of the regions. John You just mentioned Europe, and Latin America, I think capacity for you was already tight so how do you expect.
Sort of capacity.
And is there a flex capacity I guess going into next year and it's kind of support. These are the markets that are growing little bit faster. Thanks, so much.
Thank you and so the.
So we have the new product development activity accelerating that growth markets when.
And when we compare to pre pandemic levels. In fact I was looking at on this study seeks by mean til and glass performance is quite a strong and ahead of every other substrates. So that's something.
That will be good to look at.
We're tightening capacity as you mentioned.
We expect some productivity going into next year that should be helpful. Early in the year, we faced some SUV and we're in some markets and we lost on production because of that so we will recover to that and as you know we are adding capacity in the Andean region and.
And these point and time, obviously, that's going to come into operation by the very and of the year or going into the following year and but we're also looking at other markets and OLED opportunities just because of and how strong the market is at this point and time and we see those strength continuing into the future.
Thank you.
Your next question comes from the line of George Staphos from Bank of America. Please go ahead. Your line is now open.
Thank you hi, everybody and good morning.
George Thanks for the details.
I wanted to dig a little bit into Europe further.
And the performance obviously it was quite good from a volumetric standpoint, but comparisons were obviously pretty easy.
Why shouldn't investors Chondrus look at this as just a rebound off of an easy comp and.
And why what points would you give us to presume to have confidence that glass can actually grow for you in Europe.
And whether it's new contracts hold assuming those sorts of things what makes you confident that this isn't just a.
And 1 quarter story Relatedly.
It sounded like from the prepared remarks that there is more price recovery work to be done in Europe relative to the Americas could you comment to that what work needs to be done and do you ultimately expect across the whole platform Americas and Europe to recover all of the negative price cost the 26.
And so year to date as we go into 'twenty 2 thanks very much true.
Thank you George so.
Volume and operating performance in Europe is quite strong and the all and users in Europe across markets are performing well and the 1 that was now and before which does mean it on the water has.
And I started to recording as soon as the Eureka channel and West opening which is barred from sales and restaurant now very important Champaign is performing a lot better and he's backup and remember John Payne was soft even before pre pandemic.
And and now is as strong and then they were though wine is also strong again.
Most of the improvement and exports.
<unk> word remove and China is starting to recover now there is a data point that is very important when we look at the Nielsen data for beer containers versus alternative packaging and western European countries.
The performance zone.
<unk> is well ahead of the alternative packaging and.
And would be good to just take a look at countries like France, Italy, Netherlands, and the UK, which are very important markets for Hawaii.
As I mentioned at the beginning and operating performance. These various strong tool. So we're very confident the trends we're seeing now to continue when it comes to price and price recovery in Europe and across markets.
And so a year, we had so on expectation for inflation and obviously in place when he is higher than we originally expected prices are also higher now there is not enough to cover any day incremental inflation that we're experiencing so a spread is higher now we're comfortable as far as 2021 is concerned that we will be.
Meeting our commitments with day.
Based on the information we have available today and our focus right now is on 2020, 2 and we see a constructive.
Pricing is and aureole going into that year and fully able to fully record inflation.
George I would add just 2 points of that 1 is if you look at our volume trend other than the Covid clock, so called Covid quarter last year, our volumes have been flat to up 2% over the last 3 quarters. So we've seen a sustainable level of demand.
Year to date.
But more importantly is the commercial pipeline from the business is developing quite well.
There's a lot of demand for our product and these arent necessarily just transactional opportunities. These are strategic opportunities where investors I mean, our customers are looking to do meaningful things and looking to have our support to do those so that gives us the confidence that over the longer term.
There's good demand for the product and we should be there to help them out and yes. There is 1 aspect that it's also important to support the strength.
The food category.
Which went up significantly.
During the peak of the pandemic is retaining some of the gains and it is expected to retained some of the game. So that's that's an important point the only 1 is.
On the emphases of consumers and customers and premium products, that's really happening prettiest structurally across categories and that is very good for less.
Alright, Thank you I'll turn it over.
Your next question comes from Mike Colby.
Bank of Montreal. Please go ahead your line is open.
Good morning, Andres Good morning, John and good quarter, Hi, Mark how are you.
I Wonder just to come back on George's question Andres for the full year, where do you expect price cost and I mean is.
And this was mentioned we're down about $26 million and the first half what should we expect relative our full year number.
Yeah, Mark I'll I'll address that 1 a typical year of inflation for us is anywhere between 100 and $140 million okay.
And the last time, we spoke last quarter, we were thinking it was on the high end of that range I would think that we would rebase. The view of inflation right now and a growth since about $150 million to $175 million clearly we are seeing an increase by.
But at the same token the last time, we talked we were talking about a unfavorable spread about about $30 million I would say with the pricing activities and other initiatives underway that negative spread is probably creeped up to $40 million. So we haven't necessarily kept up dollar to dollar to the rising cost inflation, but we've done a pretty good job being able to moderate that.
And obviously you know we have tightly pass throughs, and some markets and the energy and the U S. For example is a good 1.
But more importantly, when we get into the first quarter next year is the typical price improvement window, where as Andres mentioned, we would look to pick things up.
And as you look at the sequencing of activities because you mentioned that the 26 million year to date keep in mind that the energy surcharges, we incurred on winter storm Yuri really and also included and that okay. So we have 15 and $20 million of surcharges, we've incurred year to date.
And really as we think about that we will have $40 million of negative spread plus that $15 million to $20 million of surcharges that means that we still have most of the cost inflation impact and the back half of the year and it's probably most pronounced in the fourth quarter, because as you recall last year and during the pandemic prices were declining.
Any deflation and area and some places and that kind of trough out and the fourth quarter and it's been ticking up since then so really on a comp basis youll see it most pronounced at least and in our business and the fourth quarter.
Okay and John.
Kind of look ahead does it kind of my follow on to the next Jeremy here Youre talking about kind of supply and demand being very tight and all your regions.
Would it be reasonable to expect that you are actually able to make some headway from a price cost standpoint next year, where you just you just expect a credit water.
I mean time will tell I think that'll be I mean, clearly, we see an opportunity to to Inc.
Increased prices to pick up the.
Backlog that we've had and this year.
I think that to answer your question is more of a question of how transient inflation tends to be or not but certainly our intention is to pass through the cost inflation of our business into the system and to and that's what we plan on it.
Okay, I'll turn it over non stop.
Your next question comes from Mike <unk> from Barclays. Please go ahead on your line is open.
Great. Thanks, Good morning, guys.
First I just wanted to circle back on the outlook <unk> is obviously stronger than you anticipated, but it doesn't look like the second half outlook was raised that much is that getting back to the last question just a function of better volumes being offset by kind of cost inflation can you just kind of flesh out some of the puts and takes.
As you think about the back half of the year right now.
Yes, I mean, you hit the nail on the head unit volumes will be up a little bit on debt that will be certainly beneficial good operating leverage and the business, but keep in mind that cost inflation is going to be more pronounced as we go through the end of the year, particularly the fourth quarter.
And we do have a couple of other things for example.
We did have a little bit and what do we do plan to have a little bit more maintenance activity and the back half of the year than we saw on the first half that's probably about a nickel difference between the first half and the second half and of course, I mean, I think we need to be cognizant of the delta variant and what it could do and so obviously we're.
Keeping a cautious eye on that as we looked at the expectations for the business and the back half of the year.
Got it that makes sense and then Andres.
A question on the glass advocacy campaign I know you highlighted the number of online impressions youre, receiving but I guess is there a way to measure or how do you measure internally how successful. This campaign is and ultimately getting consumers to choose glass and maybe just bigger picture I. Appreciate is the leading producer you want to take the lead.
But is this something where you think of the overall glass industry.
You need to be more vocal getting out there about the benefits and your eyes of glass as the preferred substrate.
Yeah. So the 1 way to reflect the impact of the campaign. Each day number of leads we're getting into a <unk> system from our customers.
So that's been at record levels and just looking for new product developments I think the message is going through is being received by customers, but it's also being received by consumers and we're seeing it by the level of impressions and the level of engagement that word engagement, which is interacting with our messages and used.
Social media. So we're very encouraged by the progress I think.
And there was a long period of time in which we weren't very silent.
These products has great attribute.
So on and as we said before and we wanted to rebalance day dialogue around packaging and that's what we're doing and we're very pleased with the progress and we intend to continue.
Great. Thank you.
Your next question comes from Adam Josephson from Keybanc. Please go ahead. Your line is open.
Thanks, and good morning, everyone.
Just 1 more on the second half guidance and particularly the <unk> guidance. The implied <unk> guidance, you talked about price cost being a drag could talk about the maintenance being deferred.
Is the seasonality impact of that implied <unk> guidance on the business used to be quite seasonal and you've talked about making it much less sales spreading production across the 4 quarters such that you won't have the same working capital swings us that what is the seasonality and the business at this point, obviously last year was kind of a throwaway year.
I'm just trying to understand what impact seasonality is having on that implied <unk> guidance.
Yeah, I would just say is that debt.
As a theme we're seeing a reversion back to the normal here on the seasonality of our business of course, theres moving pieces right, but but what that implies is.
From an earnings standpoint, usually the third and the the.
The second and third quarters look a lot alike, and the first and the fourth quarters look a lot alike, and so you referred to our implied guidance. If you look at those overall I think it reflects that now the 1 key thing though is in the fourth quarter. We do have this this.
And price cost inflation pension.
And keep in mind in the first part of the year is when we go after those prices and we start to start to normalize that so overall I think we're seeing more of a reversion back to the norm.
I appreciate it and just 1 follow up John and I think Ghansham asked you about this but your capacity is pretty tight you said demand is really good but you're only going on youre thinking flat to up 1% and <unk> on volume.
You have the capacity and the Andean region coming but what is your what are you able to grow volume by at this point just given your capacity situation and how should we think about next year with that and mine in terms of what a reasonable expectation from shipment growth might be.
So well capacity side, but as I mentioned before.
Productivity.
And is expected to take place and the following year, which should support us soybean higher volume.
But we also had the impact of severe weather, which was quite large in Mexico and the United States. So that should be helpful, but I would say or at all.
And as we go into the I D.
And I have the ability to share with you.
What is ahead of us in terms of opportunities for growth and I think something very important is we are piloting generation tool in the second half of this year and we expect to have compute nature and of our assumptions before year end and the relevant and some generation 2 is that it enables July to go Greenfield with magma.
From that point on and we expect that to be part of our future. Obviously, we gotta go to projects and installations first and that might be more of a 'twenty 3.
Impact but.
I think more emotion to be able to follow growth, which we have and being able tool for a long long time, and we're doing that through they save some marketing capabilities that we've developed it and MPD capabilities on new industry development converging with the new technology will be relative.
And then I would add on top of that Joseph Joseph and Adam.
The operational elements of this and we've also been working hard on the balance sheet to be able to stage that so that we have the financial flexibility to go do the things that are necessary to be able to unlock that pent up demand for a product that we've struggled and a lot for a long time to be able to enable within within our business.
Yes, and I think it's important also to factory and the.
The multiyear impact of.
The margin expansion initiatives.
So we're still we're seeing impact on the impact of those initiatives last year. This year and we expect to see it into the following year store, so that's going to be flowing through our numbers.
Okay. Thank you.
Your next question comes from software and Shannon from Seaport Global Securities. Please go ahead, you ladies and gentlemen.
Yeah, Hi, Andrew and gentlemen.
And shifting the guidance firstly.
You mentioned and now your volumes are on both pre pandemic levels can you provide little bit more color by some of the businesses kind of food and alcohol and beverage and non alcoholic beverage as well as on revenues very soft revenues, how do you compare now versus pre pandemic.
Yes, so at all.
The resilience of glass tube channel chiefs, having a lot better than we ever thought and and in fact quite a strong when you look at the performance of glass over the last few quarters, even though lockdowns were up and down and shapes, we're happy to and happening back and forward between the channels. We continue to perform in the volume.
Dimension.
Let me just give you an idea of what's taking place by by market. So Europe solid across all end users, meaning and on water recovery, which was <unk>.
Respected TUI once the Lockdowns were raised so that's working well, but the recovery of Champaign is pretty important Venezuela, the Bordeaux wine exports.
And I chair also in the earlier and the call the performance of beer, which is which is quite significant so Nielsen data clearly.
Stage debt.
Beer and glass is our head of alternative packaging and western European countries, and very important countries, like France, Italy, and Netherlands, and the U K, but when we look at the U S. B.
Beyond the resilience to channel shifts.
And a decrease in the rate of decline will beer and repaid.
We're seeing an increase and alcoholic beverages, this consumption and retail tool and we're seeing a paramount and shift.
Or gain a foot consumption.
And on premise coming from off premise, which is which is important for our demand now when it comes to and a BS.
And as spirits, we're also seeing and improved performance in the case of <unk> with premium products like kombucha or RTD coffee.
In the case of experience is driven by consumers trading up and focus on premium products.
We look at it on.
Mexico, Brazil, and the Andean countries very solid demand, we're selling the capacity and in those markets is primarily about evaluating.
Further opportunities for expansion 1 data point that is important and Brazil is the recovery of the return on our segments.
And the pay.
Peak of the pandemic took place back in April and the chair of the return on package went down to 20% coming from 40% is now a lack to 40% so pre pandemic leverage and that's very that's very important.
And <unk>.
Create affordability for beer and that market, but it's also very important for sustainability, we could know package can equal the performance of the return on our container and.
And in the Andean region, there is a starting position and global brands and premium products across categories, which is driving demand.
Okay, perfect and I guess, my Mic solar and wanted to understand a little bit on day.
Margin expansion initiatives, you said that now you're going to do over $50 million and 2021. Firstly can you put on more precise color on these and secondly from 2022 what are the real continues do you see for expansion and if you can.
And it won't be 5.
So let me touch first on the margin.
Expansion initiatives are.
There are 3 big initiatives, 1 is fully focused on the top line and as price mix and volume on each element of working capital related tool.
The commercial organization and the other part these focus on the Cogs cost of goods sold it is and therapy and the oil and his focus on SG&A and what these initiatives are doing is leveraging all the capabilities, we really and this organization over the last few years. So we're now having the opportunity to enjoy that and if at all day.
And that's why they're so as structural and multiyear and we are we feel very comfy and allowed the impact not only and this year by going forward.
Yeah, and and to answer your first question is.
On the margin expansion initiatives, our original target was $50 million. This year, we believe we'll probably be somewhere in the range of between 60 and $70 million. This year, so definitely higher and keep in mind that those programs are net benefits. So that's net of other changes and other spend categories. So that's all.
Also absorbing some of the incremental logistics costs and some other spend categories that are in there. So it just shows that there's good underlying performance to address this point across the across the business.
And we'll spend more time going into next year, but there's clearly continued run rate opportunities and momentum in this space.
Maybe to put it into perspective, a little bit.
We did tightened our earnings guidance for the whole year and are up in the upper half of it what we're saying is that the benefit of higher sales volume and and the incremental margin expansion and initiatives that we're talking about is probably adding something like 30.
2 our earnings at the same time, we do have some some headwinds.
<unk> headwinds such as what we incurred with winter storm Yuri and then some of the increased creep on pressure on the spread.
But the good news is the things that are going the right way our fundamental underlying business performance, while some of the things that have been headway headwinds rather are more temporary or transient in nature. So so we're pretty optimistic about the future opportunities and the company to drive continued earnings improvement.
Great. Thank you very much.
And then.
Your next question comes from Kyle White from Deutsche Bank. Please go ahead. Your line is open.
Hey, good morning, and taking my question on the on premise can you just talk about what Youre seeing that gives you the confidence on premise consumption of glass and food and beverage will be higher post pandemic than it was pre pandemic.
Driven by food and is it specific to the United States are you seeing it in Europe as well.
Yes, I think that as the consumer trend, which is <unk>.
Preferring last first second and his focus on premium products that that is a very important.
Change in trends and that is very favorable for glass. So now remember we sell across multiple categories.
And that gave us a pretty good.
Let's say derisk portfolio.
To count on for the import volume improvements. So we are in full and we already and this periods. We are in NAV, primarily premium we are in wine so multiple categories.
That are primarily.
Categories started by glass.
Got it and then you touched on this a little bit earlier, but just wondering if youre seeing any impacts from the delta here.
And July and August and how did you incorporate this uncertainty and to your outlook.
Yes, we're very cautious obviously because.
We already have a year and a half of experience a base.
At this point, that's ramping up we expect that all the stakeholders.
Learn and enough in this year and a half to take measures that are not sold these relative so at least we don't expect to go back to the very beginning of this but we will see some ups and downs, but the.
I think what's important for these is the resilience of these packaging and channel chips.
If you'll recall you just named backing very early.
And in 'twenty.
We had some <unk>.
Patient that us on premise, what's going to go down.
Off premise world and be able to go high enough to offset the reality is it mostly offset so when he goes back and forth.
We replaced 140 <unk>, that's why he is happening and glass is performing quite well so we feel pretty good about.
Being able to perform.
These variants continues to rise and create some restrictions or time and.
And to build on that I mean, we understanding those types of trends and the uncertainties. We have tried to be a little conservative on that but mostly because of the choppiness rather than any fundamental aspect of demand as Andres mentioned, we've been doing very well it seems and moving through over the last day.
9 months quite well, but we did try to be a little bit of conservative on the outlook of the business and we will see how things progress.
Got it thank you.
Thank you.
Your next question comes from D and Haidee from Wells Fargo. Please go ahead. Your line is open.
Andres and John Chris Good morning, Good morning.
Okay.
Was curious on drawn court.
And if memory serves that startup was kind of delayed given the pandemic. So I'm, assuming that that's kind of up and running at full capacity or at capacity as it sits right now.
Curious if there was any will there be any benefit that carries over into 2022 on the volume side from that.
Yes, So we started the year on core last year delay as you mentioned.
And Ali because of the pandemic, we couldnt really mobilized resources properly, but he just started at the end of last year. So he has been running at full capacity this year.
You sold out and so we're very pleased with the return on that investment.
On the right thing to what the right time.
It won't represent an incremental variable going into 2020, twos and so it's pretty much run and fold.
Okay, and then I guess on going back to the implied Q4.
Guidance I'm more thinking about production levels relative to.
Sales volumes and I think here and the second quarter, you all produced by 10% or so it seems like implied is 8 or 9% and and third quarter as well.
And what's embedded I guess and that Q4 guide in terms of production relative to shipments.
Let me, let me first clarify 1 point.
The reason why youre seeing different sales volume versus production volumes doesn't have anything to do with how we're operating our business. This year I mean, we are producing at practical capacity and then we're selling what we can we can produce and my.
And a supply chain disruption variance variations and things like that so really what youre, saying is the comps are just because of the walking this last year with production and demand activity. So so just just to be clear there is no rebalancing going on and so to speak we're just kind of managing our inventories to be consistent across.
On a comp basis now understanding that last year was still kind of have some of those issues on production and the fourth quarter and be up like 2% or something like that on a year over year basis.
Most of the disruption was done on a production basis as of somewhere mid to late third quarter of last year.
Alright, Thank you and good luck.
Okay. Thank you.
Your next question comes from Lars Kjellberg from Credit Suisse. Please go ahead.
And I just wanted to come back a bit to magma course, you're seeing.
And making some good progress there.
And the other.
Materials.
And youre actually seeing premium pricing for non carbon products.
And the recent positive environmental.
Impact on 1 of our material.
Companies produce is that something you're concentrates and we're seeing and your discussions with customers and also like to hear your view on.
The premium offering and the mix benefit that you're seeing as the premium business is coming back if that's okay.
And benefit that you expect and lost.
And what you've seen in terms on that benefit to quanta.
And so the.
And just sustainability profile of glass I think is something that is going to be incrementally more and more clear and more.
Valued by consumers and by customers and it has a lot to with being hurting at 2 years from glass. So let me just share something with you from our perspective glasses already.
But on other packaging materials as part of it.
And there are 6 reasons for bad debt.
First 1 is is the only material debt is 100% recyclable forever.
A battle transforming to a bottle endlessly.
It is possible to have up to 100 recycled material and every vital.
It is already recycled at best in class rates in Europe, which is showing its potential.
Even if not recycled glass he has never thrash it doesn't hurt.
Eric.
Ocean.
It does not have plastique or plastic liner and content with the product.
And it has return on our glass, which is the most sustainable package and the packaging universe No package notes on subsidiary can meet those stakes condition and so.
So I would say as we go into debt.
Deploying artist strategy, we're going to talk more about that and neither is not only we have that but we are working and highly focused on addressing the recycling system and in the United States that are already pilots in place and they're working well not only that they help us weighted recycling by with the community we can cause a positive impact.
In the community. So we're going to talk more about that at that point and time and then the production technology.
With <unk> and for the existing technology is being designed to be able to use.
Fuels that will allow for a significantly better sustainability profile. So you will imagine that thats going to have a significant body, which not only the product with inherent capabilities, but the recycling system and the right place on the products and technology.
On the right profile from a sustainability standpoint, how are we going on a price that I think is something that we're going to talk more in the future we will have.
At this point and time that ready to go but it will be valuable for sure.
Got it thanks and.
On the price mix now.
I'm coming back.
Well, the consumer trends and I think.
It's happening everywhere.
And consumers.
Our.
Reed locating their disposable income and 2 <unk>.
<unk> that are more in the higher and <unk>.
And that's happening and that cross markets I mean every single marketing, which we are is the same strength.
And every single and you'll see us going through the same points. So I think is a significant shift.
What consumers value and where they put their disposable income.
Yeah, Yeah, I would say that the biggest growth categories are in fact, those higher premium categories and in many markets given given the capacity situation is there is a mixed management opportunity for us as a business and that implies what we're doing right now and where we're going to go on future.
Thank you.
Your next question comes from Alta and stance from Longbow Research. Please go ahead.
Great. Thanks, and good morning, just wanted to ask a follow up on the glass advocacy and.
Because he campaign.
And at least that you have now reached 80 million and I guess a bit more color as to what that means reached 80 million and you know.
How much of that is a sustainable impact on that group of people.
Yeah.
I would say is you take a look at the digital marketing activity you have number of impressions and hundreds of millions of dollars hundreds of millions of those and and you're able to track with and through the social media activity on the <unk>.
Individual accounts that are being.
And are being seen multiple times and things like that.
And also you can measure the engagement, so who does what with that link such as I read it and.
No.
I watched the video or or even net debt.
And the times when people comment or pass it along and things like that so over through this it's kind of think about it as a funnel and you got all the impressions and then you can start to understand the behaviors and whats sticking with people and whats important is were running multiple campaigns and multiple different is just not 1 big Bang and were understood, we're able to understand which of those really.
Resonates with people and which ones maybe don't resonate as much and you can actually fine tune your marketing campaign overtime. So if Europe for example, like the hike and camp while Theres campaigns that are going to be more focused on people, who have those interests and and whatnot. So it's actually quite interesting how all this plays out and how you can really get a little.
And more pinpointed and actually track the engagement overtime, yes, its social media is the right vehicles for this and because normally the people's attention is.
What about 7 seconds. So is very small message is very short messages. They want is that realistic and social media, it's perfect for that.
Okay. That's very helpful and then just.
I think you mentioned job that you do here.
Latin America was 1 of the regions, where you saw better than expected growth I guess is there any certain product categories that drove that and is that a stable benefits beyond <unk> in that region.
Well, what I would say is as you are looking at fundamentally a capacity constrained markets and across most of Latin America.
And we've indicated that we're going to be we have expanded the Indians were doing more indianians and we've repeatedly indicated that Brazil and also.
And as well.
<unk>.
Over over demand situation, so what youre seeing is across the board, but in particular some of the beer categories, because you've seen an increase and premium beer, which actually is 1 way bottles and and whatnot and so so that trend over time has really picked up and and really benefited that demand profile.
Okay, great. Thank you John and Rice.
Thanks.
We have time for 1 last question.
Yes, we have a question from iron and Vishwanathan from RBC capital markets. Please go ahead. Your line is open.
Great. Thanks for taking my question.
And maybe I could just ask a question on <unk>.
And of some of the structural changes you guys mentioned, so if I heard you correctly, it sounds like shipment growth and the future would settle and to kind of zero to 2% level and then maybe you get another 100 basis points from price.
Price mix I E. You know some of this new product growth magma and so on and so is that the right way to think about kind of top line, let's say like 1% to 3% and then there's some operating leverage there. So maybe you get 3% to 5% EBIT growth and <unk> and then that translates to maybe 5% to 7% EPS growth is that.
On the operating model that.
It makes sense to you guys over the next couple of years. Thanks.
Yeah, Yeah, I mean I.
And I don't think that were going to get into into 2 forward looking I mean, and we have and investor day coming up and almost and about 2 months I think we'll lay out a lot of the forward looking aspects of the business, but if we think about some of the major drivers going going forward.
And especially in the next year, obviously, we don't think it will have some 1 timers like we had with winter storm year, let's keep our fingers crossed on that regard demand is very good but it's a capacity constrained situation with some ability for capacity and the shorter term I think euro monitor has indicated that there was about 1.7% projected glass demand growth over.
The next 3 years, so that might be.
Way to think about it but of course I think that's it.
It's a capacity issue and addition to just the fundamental demand situation, we've talked about price and the fact that we intend to to increase prices relative to the inflation that we're seeing and and we expect X and Sydney continue to see margin expansion initiative benefits I mean, all of those elements are the things that we think are driving the improved performance of the business.
And and of course, we intend to continue to creep up debt free cash flow conversion that we're seeing and the business overtime again, we'll lay that out a little bit more through the investor day and of course, our year end earnings guidance, Yes, I think the Investor day is the perfect.
The opportunity to have this conversation, but overall glass has.
Very good potential and glass in fact can growth if capacity can follow.
And that's based on growth so while we've been doing is preparing and oi to be able tool.
Enjoyed that growth potential and we've done so true.
I would say a pretty deep structural change across the entire business and we're going to have the opportunity to explain that to you at I day.
Thanks.
Alright, guys. Thank.
Thank you very much that concludes our earnings call. Please note that our third quarter call is scheduled for October 28.
And as mentioned, we will be hosting an investor day, and New York City on September 28, and we'd love to see you all and person at that event, so remember, making a memorable moment and true safe sustainable and glass. Thank you.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
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