Q3 2021 O-I Glass Inc Earnings Call

October 26, 2021

Ladies and gentlemen, thank you for standing by and welcome to the O I glass third quarter 2021 earnings 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 one on your telephone keypad.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, Mr. Chris Manuel Vice President of Investor Relations. Sir. Please go ahead.

Thank you Laurence and welcome everyone to the O I glass third quarter conference call. Our discussion today will be led by Andres Lopez, our CEO and John Hardrick 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 call are available on the company's website.

Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.

I'd like to turn the call over to Andre who will start on slide three.

Good morning, everyone.

We appreciate your interest you know eyeglass.

We are pleased to report third quarter adjusted earnings So 58 cents per share.

Despite a number of macro challenges.

Why is once again delivering on its commitments us earnings exceeded our guidance range.

Demand for glass containers Easter strong get our shipments were down about 1% in the quarter due to choppy demand patterns steaming from low inventory levels and ongoing large supply chain issues.

On the order hand production levels rebounded nicely from the prior year, which was impacted by the final stages of mandatory curtailments at the onset of the pandemic.

Also higher selling prices and the benefits of our revenue optimization initiatives fully offset elevated cost inflation.

Well it all better than expected results, primarily reflect strong operating performance and cost management enabled by our margin expansion initiatives.

As we will discuss shortly we're making great progress on our 2021 priorities, including today's announcement of intent to sell our lead parfait brand and business at an attractive valuation as part of our portfolio optimization program.

We are also accelerating wife's transformation as we shared at our Investor day last month.

The combination of favorable market conditions for glass containers.

Is ongoing transformation and the introduction of magma is building the path too yes.

Yes, the one Nigel on Brazilian company yesterday, a new paradigm for glass and yes to profitable growth.

We are confident these plan will enhance value for all its stakeholders and ensure sustainable pillsbury people away.

If you haven't already we incurred issue to you our investor day presentation, which can be found on our website.

Reflecting good momentum we are increasing our full year earnings outlook.

We now anticipate 2021 adjusted earnings will range between $1.77 and $1.82 per share and we expect at least $160 million for free cash flow.

We expect fourth quarter adjusted earnings will approximate 30 to 35 per share I mean, the elevated cost inflation pending price recovery starting in early 2022.

They're starting to slide four.

As we continue to deliver on our commitments. We are also making very good progress advancing our strategy.

On this page really start 2021 priorities as well as some highlights on our progress.

Touch base on each of our three platforms.

First we aim to expand margins.

We have targeted $50 million top initiative benefits as well as continuous performance improvement in North America. As you can see we have already achieved our full year initiative to target and now expect benefits with total around $60 million in 2021.

Next we seek to revolutionize glass.

<unk> My generation wireline has been commercialized in Germany, and our generation. Two line is as you know Streator, Illinois, just being piloted in the second half of 2021.

Our glass advocacy on ESG efforts are also gaining steam.

We will continue to optimize our structure.

This includes a number of airports ranging from portfolio adjustments, improving the balance sheet simplifying the organization and addressing legacy liabilities.

Regarding our divestiture program, we have entered into agreements for over $1 billion of assets age to date, including the recently announcing tend to sale our lap our Fe random business in Europe.

As laid out during our Investor day, we are investing up to $680 million over the next three years that include up to 11 magma lines to enable property of our growth is.

Expansion plans, our focus on severely or solid markets across Latin America premium spirits in the U S and the UK and premium beer in Canada.

As John will expand upon year to date free cash flow is quite favorable compared to past strengths and we continue to advance other important efforts, including the paddock chapter 11 for <unk>.

Mrs.

Overall, we're very pleased with our progress.

Moving to slide five we have laid out the key elements of artist strategy shared during Investor day.

As I noted earlier, the combination of favorable market conditions for glass containers oi's ongoing transformation and the introduction of magma are building the path to yes, yes.

Yes, the profit our growth.

Lastly is poised to benefit from key megatrends, such as wellness sustainability premier mutation of harm living reflecting do stay wings global market growth is anticipated to ours, that's one 6% a year and higher in the principal regions, where we operate.

Given these trends on a revitalized commercial approach we are investing in new capacity to enable key growth opportunities within our strong organic commercial pipeline.

Yes, one agile and resilient company.

The transformation is well underway and I believe recent performance demonstrates the momentum we are building.

We expect significant benefits from our ongoing margin expansion initiatives.

Expanding our portfolio optimization program to realign our business port of volume fund organic growth and improve our return on invested capital.

Also we intend to resolve legacy asbestos on pension liabilities that have hamstrung the organization for decades.

Finally yesterday, a new paradigm for glass enabled by magma.

Neil breakthrough solution provides a host of other external capabilities to build on top of our world class Garry touch network with magma we can meet the needs of an evolving market and expand our business.

These efforts are set to accelerate oi's transformation through profitable growth improved financial performance and value to all its stakeholders.

We are excited about the future and we believe <unk> represents a compelling investment opportunity now.

Now over to John.

Thanks, Andres and good morning, everyone I plan to cover a few topics today, including recent performance progress on our capital structure as well as our current 2021 business outlook I'll start with a review of our third quarter performance on page six.

<unk> reported adjusted earnings of 58 per share as noted during our Investor day, we expected results would be at the high end or slightly exceed our guidance of 47 to 52.

Stronger results reflected good operating momentum as we exited the quarter.

Segment operating profit was $243 million, which significantly exceeded prior year higher.

Higher selling prices fully offset elevated cost inflation linked to higher energy and freight costs.

While demand remains strong sales volumes dipped, 1% due to choppy demand and ongoing supply chain challenges in several markets we serve.

Likewise favorable cost performance was driven by an 8% improvement in production levels as the prior year was impacted by force curtailment due to lockdown measures.

Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives.

Slide includes additional details of non operating items overall, we are pleased with favorable performance trends.

Moving to page seven we have provided more information by segment in the Americas segment profit was $133 million up from $113 million last year.

Despite significant cost inflation pressures favorable net price reflected timely pass through on costs and the benefits of our revenue optimization initiatives sales volume was down 3% in particular, we have seen some food categories rebalance as on premise reopens, but food volumes still remains above pre pandemic levels.

Likewise, we have intentionally mixed managed certain low value categories, given tight inventory conditions and ongoing supply chain challenges on the other hand production rebound at 9% and earnings benefited from good ongoing operating performance as well as our margin expansion initiatives, which offset elevated freight costs.

In Europe segment profit was $110 million compared to $88 million last year sales volume was up nearly 2% with strong growth in the wine category, while higher selling prices, partially mitigated elevated cost inflation.

Significantly lower operating cost reflected an 8% improvement at production levels very good operating performance and benefits from our margin expansion initiatives keep in mind that we no longer report in Asia Pacific region. Following the sale of ANZ last July.

Let's shift to cash flows and the balance sheet I'm now on page eight.

We are following a specific set of guiding principles for our cash flow and capital structure that are aligned with our strategy to increase shareholder value, we expect significantly higher free cash flow this year and key working capital measure should be inline or favorable compared to 2020 levels.

As illustrated on the chart, our third quarter free cash flow was $213 million over the past year, we have improved the consistency of our cash flows which now reflect the normal seasonality of our business solid operating results and working capital management.

Year to date cash flows approximated $181 million. So we are well positioned to achieve our full year guidance of at least $260 million of free cash flow.

Second we preserve our strong liquidity and finished third quarter with approximately $2 $1 billion committed liquidity well above the established floor.

Third we are reducing debt added into the third quarter. Our net debt was $4 3 billion the lowest level since 2015, and our BCA leverage ratio was around three six times, both net debt and our leverage ratio compare favorably to our full year targets.

So far this year, we have entered into agreements to sell $128 million of assets. It's part of our portfolio optimization effort. This includes today's announcement of a binding commitment from a subsidiary of Berlin packaging to acquire our lay parfait brand in business for 72 million euro or about $84 million.

EBITDA for this business was $7 5 million euros in 2020 with a similar performance on a 12 month trailing basis. This represents a compelling valuation in excess of about nine multiple we expect the proposed sale will be completed by year end or early next year. The agreement also includes a long term supply agreement for <unk>.

To sell glass containers to Berlin to support expansion of this attractive and growing brand.

Finally, we intend to Derisk legacy liabilities as we advance the paddock chapter 11 process as previously announced we have an agreement in principle for a consensual plan of reorganization, where O Y will support paddocks funding of a 524 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. Overall, we continue can you continue to improve our cash flow and balance sheet position.

Let me finish up with a few comments on our business outlook I'm now on page nine we have increased our full year earnings guidance to between $1 77, and $1 82 per share reflecting favorable third quarter results. We now expect free cash flow will be at least $260 million.

We anticipate fourth quarter adjusted earnings will approximate 30 to 35 per share.

Our fourth quarter results should be down from the prior year as cost inflation peaks important importantly, we are preparing to implement annual price increases early next year to recapture the impact of inflation.

Given ongoing global supply chain challenges, we anticipate sales volume will be about flat with the prior year. Additionally, we expect continued strong operating performance and benefit from our margin expansion initiatives. This outlook is based upon current FX rates as the dollar has strengthened some in recent weeks.

Keep in mind that maintenance and engineering activity will be at their highest levels for the year. During the fourth quarter also our outlook reflects current conditions, which could shift given the level of macro uncertainties across the markets we serve.

We have also shared some additional themes for 2022, which are consistent with our longer term outlook shared at our Investor day with that I'll turn it back to Andres. Thanks, Shaun Let me know.

Wrap up with a few comments when it's the right thing.

Overall, we are pleased with our performance during the third quarter Importantly, Oi continues to achieve its commitments. Despite a number of macro challenges and uncertainties. I believe these represent a step change improvement in our ability to consistently perform and deliver.

At the same time, we continued to advance our key priorities for 2021 or.

Our multi year margin expansion he needs that people started gaining his team Mike Knights advancing and we continue to improve our cost structure.

We are now a much more agile language ceiling organization that is well positioned to accelerate our transformation.

Finally, we are building the path to yes that we outlined last month at our Investor day.

For your interest in O I glass and we welcome your questions.

Lawrence already.

At this time, if you would like to ask a question. Please press star one on your telephone keypad.

In the interest of time and to enable everyone on the call to participate please stay with your inquiry to one question and one follow up.

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Your first question comes from the line of George Staphos from Bank of America. Your line is open.

Andrew It's John Chris Good morning, everybody.

Thanks for the details.

My questions will be around pricing related to the choppy volume environment as you termed it. So you gave us a little bit of color, but could you dig a bit more deeply in terms of what.

Is in fact happening in terms of the supply chain and what it's doing to your volume.

What amount of earnings might you have lost because of the choppy patterns and then as we look to 'twenty. Two as you are trying to recover inflation through your pricing.

What are the risks that this volume environment prevents you from doing that.

Particularly as regards Europe, what's the setup on European pricing. Thank you very much.

Yeah sure so the I'm.

Looking at the supply chain issues, we have external factors and we have internal factor stool.

In the in the external factors as an example, when customers are facing.

<unk> they don't get their inputs on time, they tend to reuse hard over there so delay at Otis.

When their phase they are facing truck availabilities, who's your same thing or labor issues in.

Internally, we are limited by inventory have you seen in several markets. So as you know Andean has been running tight Brazil tool Mexico is it the same in some cases, depending on the mix in North America. It's also the case.

Important to highlight that the food category has been re racing as we have been going through a shift from off premise to on premise now. It's also important to highlight that far to that one.

Seeing the category repainting, the gain versus <unk> and as we mentioned in the opening remarks, we're also.

<unk> makes managing some business given priority to margin and return.

As we go into 2022.

We've been <unk>.

Very active managing.

So we are able to offset inflation.

We're doing it in the total fronts.

In the procurement side that we're looking at the commercial side from a procurement perspective, we have very solid policies in place and actions to mitigate and we are executing on them from a commercial perspective. We are we already have our plan for price increases going fully for the following year, we see a constructive.

Environment for prices in 2022, and we expect to fully recover inflation.

Yeah, George I would ask will add one other thing that you had asking whats the impact on the third quarter of these supply chain.

No impacts and things like that we had expected going into the quarter that volumes would be flat to up 2%. They were down 1%. So I think you can attribute that difference of say two years to 3% differential mostly to the supply chain related issues in one format or another so it's having a marginal impact but it's noticeable.

Going into 'twenty two.

And just to complement George.

<unk>.

Demand fundamentals are very solid.

And just referring to Europe, which you asked for.

Dan the man in Champaign, and Bordeaux wine. These various strong demand for prosecco and Italian wine is solid for already a strong.

We're seeing a very good recovery of meeting a watered us the on premise channel, we see home activity and beer is growing quite well in key markets for us in Western Europe. So we're seeing high single digit growth for beer in glass in Italy, France, and the UK, which are very relevant market for us. So we those solid fundamentals.

We don't see any issue for our price increases.

We're very confident we're going to have fully record inflation going into 2022.

That's perfect. Thank you very much guys I'll turn it over.

Your next question comes from the line of Ghansham Panjabi from Baird. Your line is open.

Good morning, this is actually Matt Krueger sitting in for Ghansham. How are you doing this morning, Hey, Matt. Thank you.

Great. So there's been some recent conversation about magnesium limitations, causing supply shortages in aluminum, which is obviously a substrate that you compete with directly.

<unk> levels.

If these shortages were indeed to come to fruition.

How equipped is oi, specifically to handle any potential volume that that might flow into glass. That's now being serviced by aluminum cans and have you guys thought about what the potential benefit could be from that angle any any details or thoughts there as far as capacity.

Availability, what would really help.

Yeah. So at this point in time, we are operating at high utilization levels and that's why during Investor day, we laid out a three year plan.

For capacity expansion. So we believe those expansions are timely.

The markets that we had advertising through the expansions are quite as strong and through that.

Glenn we expect weather as they used to that you highlight.

Yeah.

Great that's.

That's helpful. I guess, that's it for me thanks.

Your next question comes from the line of Anthony Pettinari from Citi. Your.

Your line is open.

Good morning, it's actually Brian Birchmeier sitting in for Anthony.

On the price cost recovery in 2022.

How much of what you're assuming is already secured contracts in place and it's just a matter of timing caught up.

And how much needs to be recovered and contracts yet to be negotiated.

Yeah, I would say that this is John I'll be between 55, and 60% of our business across the globe is covered under some form of long term agreement.

And those long term agreements include price adjustment formulas. So that part of it is established going into next year. The other call. It 40% to 45% is open market that tends to get renegotiated on an annual basis. The most obvious example of that is about 70% of the business in Europe.

Is renegotiated on an annual basis generally speaking in the very early part of the year here. So that's the that's the the areas primary focus on price movement going into the new year. In addition to the Pis.

Got it thanks, that's very helpful.

And I'm on for Q can you parse up the drivers behind the negative price cost between energy labor freight and raw materials and then based on your contract structure.

Which of those buckets is going to be easiest and most difficult to recover next year.

So I would say that the big it clearly the biggest issues that youre seeing is on the fuel side.

Followed probably by the freight side in that regard to electricity comes through also.

A little bit more.

Modulate it.

And then if you take a look at in particular, the fuel side, which is the biggest driver of that.

In North America.

That is pretty much pass through on a monthly or quarterly basis, one of the reasons, we've been able to keep up pretty well with price cost spread year to date is because in particular in North America.

You are able to have those quick timely pass throughs and in the Latin America markets, you generally see a pretty good timely pass through inflation overall I would say all of these inputs that we're seeing are ones that are broad based across the market, where I think as you can see the supply chain is is organizing around globally to two two.

Pass through those cost inflation areas.

Very much square in the price adjustment formulas that we have for our business and obviously a focus of the negotiations going forward.

Got it thanks, I'll turn it over.

Your next question comes from it comes from the line of Mark <unk>.

From Bank of Montreal Your line is open.

Thanks, Good morning, John.

Andres Good morning, Chris.

I wondered just going back to the European energy issue.

If you can talk about what type of mechanisms you have in place to mitigate the impact of that on the European operations because it seems like it's Europe has really been the epicenter for the energy issue and also whether those issues are having any impact on your ability to operate on.

Other words, if you can't get natural gas.

Yeah. So the.

Mentioned before from a procurement standpoint, we have policies in place to mitigate this.

These kind of price increases.

I think we are in a good policy as soon as a result of that we've been taking very effective action.

And we don't expect any issue because of that move and our commercial position going forward for which we have a very clear plan.

When it comes to the supply is very difficult to know what the winter is going to now.

Now <unk>.

It is a let's assume that there is a normal winter with nothing out of the normal pattern.

<unk>.

When we consider the markets in which we are present the suppliers, we have and the contracts we have in place we see very little risk for us to have a supply.

Issue going through the winter if things go.

Stream.

And we'll see what that is and we'll adjust accordingly, but at this point in time, we don't expect for our operations based on our location and as I mentioned suppliers and contracts.

To have a high freeze for any REIT really at this point for supply.

Okay. That's helpful.

If I could just wondering what we're hearing these stories on the public press about the shortage of glass bottles here in North America.

Just to unpack that for us a little bit and sort of how we've come to this point because it wasn't very long ago.

People across the industry, we're closing glass plants and so I'm just curious how much of this you think is kind of trade and logistics issues. How much of this is the sum of the duties on imported glass what what the all of the issues are and then what.

What you can do to kind of capitalize on the situation in the near term.

Yes, so the.

While demand for glass he has a strong.

And it has been increasing continually continuously.

Continuously increasing.

In some cases the comps in peaks that are difficult to preserve.

Now our inventories are tight so that's compounding with that.

They imported the glass in particular from.

China has been coming down so that adds to the problem. So now at this point, we are utilizing our capacity to do as we can as we mentioned before mismanaged menus importantly in these circumstances. So we can support margins and a return and then we're doing everything we can to improve productivity to be able to.

Support base and as you know we also have.

Established a supply network across the Americas and in some cases, we support the United States out of Mexico or are you in the Andean countries, depending on seasonality and all that so all of that is in place to take advantage of the situation with you as we can now from a customer perspective, we've been very actively working with.

The customers collaborating with them well to minimize these issues and we're confident that as we go into 'twenty, two we're going to be in a better position because our inventories are.

Better.

At least to be able to support them through their peaks.

Okay. That's helpful I'll turn it over thanks Andres Thank you.

Your next question comes from the line of Mike Lee head from Barclays.

Your line is open.

Great. Thanks, Good morning, guys.

Morning firms.

First I wanted to follow up on the supply chain side of things, particularly on the external factors and your customers that Andreas I think you've laid out well like labor trucking or other material shortages have your customers, giving you a sense or do they even have visibility frankly on how those factors should trend into the fourth quarter of 'twenty two.

I'm, just trying to get a sense of whether they're easing or.

Staying the same as we sit here today.

Yes, so the.

These supply chain issues are widespread across industries.

They're impacting everyone I think what what is good in our case is our relationships with customers and having a very good place and our coordination is very strong so that gave us the ability to.

Respond better and as I mentioned before because of that work, we expect that we will be able to better manage through situations going into 2022.

Also knowing their actual needs based on the growing demand.

We can also plan better for these supply across the Americas network, which we are leveraging <unk> as we can to support the supply for our customers.

Okay.

Alright, that's super helpful and maybe as a follow up for John.

Looking at the point to outline and I appreciate it's still early and there's a ton of moving parts, but I wanted to ask about the free cash flow conversion I guess should we still think about that kind of 20% to 25% conversion rate from EBITDA before the step up in growth Capex, how should we think about that.

Flow through next year.

Yes.

Kelly.

We're introducing a new measure that we call adjusted free cash flow.

And so that takes it looks just at maintenance capital.

I think when you take a look at.

You know that.

Adjusted free cash flow as a percent of EBITDA youre actually looking at a number higher than that because it's just the maintenance capital component of it is something probably north of 30% on an adjusted free cash flow conversion.

Great. Thank you.

Jim.

Your next question comes from the line of Kyle White from Deutsche Bank. Your line is open.

Hey, good morning, Thanks for taking the question I think you mentioned about the headwinds in regards to your volumes on food specifically in the United States as at home consumption wins do you have a sense of how much incremental food volumes you gained throughout the pandemic that could potentially pose a headwind.

Going forward as our at home consumption wins. Thank you.

So food went up during the pandemic double digits right. It was a very strong peak because of the dot com consumption.

While we are seeing right now is that that peak, obviously came back down because the on premise channel is already open however, we're keeping.

Important gains versus pre pandemic levels. So at this point, we're seeing between 3% and 4%.

Incremental volume versus those layers. So premium is excuse me <unk>.

<unk> is quite healthy because of the focus of the consumers on premium products and this is happening across all categories.

And the studies, we've looked at and reviewed indicate that that is a longer term trend is at some level of premium amortization continued to own at home living focus is going to be there. So most most.

Project, some form of continuation of that type of demand structure.

Got it I'll turn it over.

Your next question comes from the line of.

<unk> Tiano from Seaport Research your line is open.

Yes. Thank you very much for taking my questions. Firstly can you provide in the Americas partner print on your shipments by region or by more specific regions and also.

Why despite that shortfall.

What data points give you confidence that demand was actually very even though shipments were down 3%.

Yes so.

In the U S. I'll give you a few data points when we look at both channels on premise and off premise <unk> Nielsen data on Cta.

This statistics, we're seeing interesting performance for example in beer, which is up.

2% of Spirit's seats up late 13 and premium wine around 10, so what that means is even with the channel rebalancing that.

Demand for those products is quite good and those products have really well aligned with glass.

Domestic beer decline has improved we are at half the rate we used to weed out of Ireland and a smaller base. So the impact is going down in our system and international beer brands and premium beer.

I would mostly offset that offsetting that decline now.

Now we continue to diversify away from domestic beer and we've been successful doing that that's why we're seeing the growth in food as an example.

And as I mentioned before the imports from China are lower than before so that's also increasing local supply.

When I look at the.

And then.

Countries, Mexico, Brazil.

In the three of those Mark in the three of them. There is very solid performance across all categories, Mexico in particular strong local demand for flu and in <unk>, but then exports for beer tequila and in and out of Mexico are quite as strong in the Andean beer performance is strong due to premium beer and global.

Ill beer brands and one way glass he is growing.

Also fluid is strong out of the Andean countries III by exports in the case of Brazil, We're seeing good performance of returnable glass. He is back to pre pandemic levels.

Yes.

40% of the total beer.

<unk> already seen.

New products in the returnable glass in Brazil, which you say very good.

Ah indication of.

How premium products are important for abuse markets Huawei glass heats up.

At 9%.

Corey.

Sure.

Compared to six or 7% before so it is increasing and premium products are 22% higher than pre pandemic layers. So those markets are doing really well.

We are limited by capacity, but as we explained before.

As part of the three year plan, we are adding capacity to all those markets to take advantage of these opportunities.

Okay great.

My second question is on your Capex plan.

Hi.

So.

Your strategic investments would be more geared towards 2023 and 24.

It seems your strategic Capex number almost $300 million.

40%.

Strategic Capex, you said you would spend over a three year period. So.

Did something change did you decide to spend more capital upfront because youre seeing more opportunities.

No. This is very much in line with I believe what we laid out during Investor day, what we're going to do is we're going to see capex.

Capex ramp up here in 2022 kind of peak in 2023 and ebb off in 2024 on the strategic capital side I think what we were referring to as the sales volumes that were realizing are going to ramp up ratably.

More backend loaded as the capacity comes online in the 2023 and 2024 window. So this is all consistent with the planning nothing has changed and the thing I would add too is that I guess it.

Also consistent with what we said a nine day is that the portfolio optimization activities will also be front end loaded here. So that we anticipate having the cash in house on those transactions before the cash goes out for the Capex that we spend on the strategic capital side.

Great. Thank you very much.

Your next question comes from the line of Allison's Tom from Loop capital. Your line is open.

Great. Thank you Ed.

My questions I just wanted to ask it was pretty clear from your press release and also comments. This morning that you had to walk away from some lower.

In our March business here in the U S. During the third quarter is that a short term impact or you know how much longer do you think second last where your back or would you be able to satisfy a portion of your customer base.

Yeah. So.

The.

The margin management that we did was primarily due to <unk>.

Inventory Spartan inventory shortfalls that we had or if things are getting a little bit low because of the supply chain issues and that the strong ramp up after the markets opened up again and what we're seeing is that in certain categories in certain parts of the geographies. We just don't have the.

The.

Inventories that we would ideally have for that original mix of business. So what we're doing is we're managing the mix of our business to be able to take advantage of the inventories that that are in the system and be able to capitalize on the strong demand for glass. This is a transitory issue, but it's not something that goes away in one quarter for example.

Okay. Thanks, so much guys I'll hop back in the queue.

Your next question comes from the line of Erin visual Hagan from RBC capital. Your line is open.

Hello.

Laurence.

Over the next one.

Your next question comes from the line of Adam Josephson from Keybanc. Your line is open.

Good morning, <unk>, John Chris Thanks for taking my questions. Good morning.

One on <unk>.

Good morning, just one on earnings and then one on your cash flow outlook on the earnings John just a month ago, you talked about earnings being at the high end or slightly higher than 47% and 52.

It turned out to be a fair bit higher than that I assume it was not because of volume inflation, obviously, you're not getting any better. So can you just help me understand what led to the pretty sizable beat relative to what you would seem to indicate a month ago that wasn't on the volume side, yes.

Yes, yes, sure yes, exactly the numbers proved out to be better than we were anticipating that this pointed to September being a good strong month for the business in particular, what we saw was very good labor efficiency.

The quality performance of the business was very very good and a number of.

Asset projects that we had underway actually wrapped up a little bit earlier and lower costs at the end of the day than we originally intended so so very good operating performance across those major levers towards the end of the quarter.

Got it thanks, Shawn just on free cash flow, if I try to do a free cash flow bridge for this year Youre thinking $2 60, plus maybe call. It $2 80 ish Capex plus working capital I would think we'd be about a $300 million drag year over year, such that if earnings are up a bit you were talking about flattish.

Or basically negligible free cash.

Correct me, if I'm wrong, there and then some.

Sequent two years, Capex will step down a bit but it will still be call. It $640 million. So I'm. Just wondering can you help me with what Youre thinking free cash flow not adjusted free cash flow, but actual free cash flow over the next three years or so am I thinking about it the right way or am I missing something.

Yeah.

Well for one thing, we're not going to we're not at today getting into specific numbers around 2022, and 2023 beyond but I think what we're saying here is that the reported free cash flow will dip. Some here in the next couple of years, we expect it to remain positive, okay, a bit but it'll that some.

Because of the strategic capital and then ramp up but the previous conversations. We've had is is that we do think that that additional strategic capital. That's in there is fully funded by the portfolio optimization actions that we're doing such as like the sale of the <unk> business that we announced today and we think the net effect of those actions is about 50 to 60.

Of additional EBIT run rate as we get the improved.

Margin management as a result of those businesses as we ramp up to something where it's more self sustaining going forward on.

Incremental growth driven by mango over the longer term.

Got it thank you John.

Your next question comes from the line of Mike <unk> from <unk> Securities. Your line is open.

Thanks, very much good morning, Andres John for taking my questions.

Just quickly on the revenue optimization initiatives, you mentioned and how that is impacting.

Obviously the company has done a lot of our work around upgrading its sales marketing and innovation capabilities. The company is obviously going through analyzing each account to make sure you receive the appropriate value for the products I'm. Just wondering can you talk about what you've done specifically in the quarter and how does that revenue optimization. This has actually benefited the passenger.

Yes. So that's you mentioned the this is one of the margin expansion initiatives.

It is really about leveraging the capabilities, we will slow over the last few years to improve our top line. So what happens in the third quarter is really the product of the work that we've done.

Over the quarters in <unk>.

Frankly.

Over time, setting up things to be able to capitalize.

Better on the top line opportunities we have quite sophisticated.

Tools in place at this point, we have processes.

That are also very well established so there is lots of rigor and discipline around that top line and that's what helped us with Q4.

Yeah, I would just just for good Q3, sorry about that.

Good clarity I mean, our revenue our margin expansion initiatives <unk> has three major projects revenue optimization, which which we're discussing here.

In the quarter, there was probably between five and $10 million of benefits associated with that that helped.

Through that through the spread and has consistently been performing very well and we also have on the cost side, our factory performance as well as our cost transformation is more on the SG&A side all of those added incremental benefits too.

But then of course, we net those against things that are working against US for example, freight was about a $10 million headwind in the quarter. So we had about $10 million of net.

Margin expansion initiatives out of those three buckets. When you when you netted off against that incremental freight costs. So we want to make sure that we're looking at something that's a net benefit to the organization.

Got it and then just.

One quick question on the mixed management.

Obviously John.

John You mentioned, the inventory tightness and something that you expect this inventory this mixed management ultimately correct local matter, especially maybe given the supply chain given how tight inventories.

You look at all the accounts your customer counts.

Are you walking away from certain businesses that just arent profitable at this point given customers, while youre, probably maybe they need to pay you for it at this point given the inventory tightness you're saying.

We get appropriate value, we don't need your business.

And maybe this is a permanent shift.

In your business to more of a higher quality mix.

Other than you have historically.

Yes, yes, it does stay focused so we're giving priority to.

Margin on return.

And as we navigate through all of these various challenges that as a very important criteria. We are using to define what is a priority for us.

You've got all of the above going on there's some places where youre looking at the inventories right and saying, Hey, I don't have that specific inventory and I'm going to shift a weighted to this other category because you do have the inventory and some that are permanent.

<unk> and mix.

And America North America, we've commented over the time, we've actually transitioned about 35% of our beer capacity to other categories over the last several years is spirit's two wines to food categories and things like that and that is always ongoing to make sure that we can continue to shift our capacity to better margin business.

Thank you good luck in the quarter.

Thank you.

Next question comes from the line of Gabe Haiti from Wells Fargo. Your line is open.

Andres John Chris Good morning.

Okay.

I wanted to come at the inflation.

Question I guess.

Couple of different angles. The first is.

I'm, assuming the answer is yes, but have you guys kind of gone through.

The total cost of ownership calculations.

Kind of taking into account, a new baseline of where raw materials are today.

Kind of thinking about obviously aluminum.

Almost doubled when we include aluminum premiums warehousing et cetera.

And then again kind of asking in the context of these dual control policies that China might be putting into place that.

Could imply kind of structurally higher aluminum costs.

Go forward so.

To the extent that it makes glass packaging a more cost competitive.

Alternatives then.

Is that something you guys have been looking at them.

I guess corollary to that.

Magma in theory should improve that even more.

Initial customer response been since you guys kind of announced this aggressive expansion.

Yeah. So let me just give you one perspective on that and John can complement to one of the advantages of glass, that's a supply chain for glass, it's mostly local.

And that has two very important then impacts one is caused the other one is environment.

So.

When you look at the dynamics that you described there.

Related to low end supply chains.

That are very large in nature that support those substrates that are demanded for multiple places are not creating those pressures, but thats not the case of glass. So as you know.

Mel glass in the same facility in which we convert it to containers. So our supply chain is very integrated with very important implications on cost them very important implications on sustainability.

Yeah as far as I guess.

I'm sorry.

Yes.

And I was just going to add one point there Gabe to your original question is that how do we go and price how do we look at the opportunities in the marketplace.

Clearly price based upon market, we're not a cost plus producer. So clearly we look at the competitive landscape across all opportunities to make sure that we price accordingly to get value relative to the competing opportunities.

And then the other question you had was what has been the initial customer reaction has been on magma.

And I would say, it's been very good with with the intent to expand our business I think that's been very well received by customers in many markets. We've talked about for some time is as we run against capacity constraints. So so everybody is very very encouraged that we're working with that that there's new opportunities coming around the corner.

And I think I think they've responded very well to the capabilities that we're laying out in the table with magma because it just fits so well with the market realities that all of our customers are facing in today's world.

And then one more aspect of magma.

Magma we've held glass.

Production and supply to become even more luck call. It because we can colocate or near locate.

And we can also scaled down debt capacity to be able to follow growth.

But at the same time protect the economies of scale, which is a significant change for the industry.

Thank you guys I'll hop back in the queue.

Okay. I think this will be the last question Laurence.

Yes, Sir we have a follow up question from Ghansham Panjabi from Baird. Your line is open.

Hi, Thanks, a lot for letting me hop back in the queue. This is Matt Krieger anchor gotcha.

Understanding that the tight capacity situation and mitigate the opportunity here, a little bit, but I wanted to touch on what youre seeing in the hard seltzer market, we're starting to see some marketing campaigns and advertisements come out with glasses.

Packaging substrate in that market and obviously theres been a lot made about the slow by the slowdown there.

<unk> side of things.

Can you just talk about what your penetration level is in the hard seltzer ready to drink market and maybe what you see the opportunity being moving forward across your business.

So the hard Seltzer category is only an upside for glass.

Our current chair he is very very small however, the attributes for glass, which makes it very good for branding.

He is a perfect fit for what is going on in that category, which there is a significant proliferation of presentation confusing the consumer. So that's one of the things that we're seeing the customer doing and that's why the new products now.

Now the category is slowing down.

Obviously, that's lower demand than previously expected by the suppliers that are supplying currently that category for the most part.

Now when it comes to.

Where the capacity of 10 score and the capacity of Glasgow is very important to highlight what we got up do any 90 day.

Glass and aluminum can play in different lanes of product categories.

They are products that are driving the.

Demand of aluminum cans are.

Products in which we are not present, so if anything our upside for us if we if we get into it but there are several other categories that are really driving the demand for glass and in particular, they move towards premium and all of those categories.

Okay.

Great. That's helpful. Thank you.

Yes.

Yeah.

Alright, Thanks that concludes our earnings call. Please note that our fourth quarter and yearend call is currently scheduled for February 2022.

And remember joined team glass by making a memorable moment and choosing safe sustainable glass. Thank you.

This concludes today's conference call you may now disconnect.

Yes.

Okay.

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Yes.

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Ladies and gentlemen, thank you for standing by and welcome to the O I glass third quarter 2021 earnings 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.

Ask a question during the session you will need to press star one on your telephone keypad.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, Mr. Chris Manuel Vice President of Investor Relations. Sir. Please go ahead.

Thank you Laurence and welcome everyone to the O I glass third quarter conference call. Our discussion today will be led by Andres Lopez, our CEO and John Hardrick 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 call are available on the company's website.

Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.

I'd like to turn the call over to Andre who will start on slide three.

Good morning, everyone.

We appreciate your interest in Oi glass.

We are pleased to report third quarter adjusted earnings of 58 per share.

Despite a number of macro challenges.

Why is once again delivering on its commitments of earnings exceeded our guidance range.

Demand for glass containers Easter strong yet our treatments were down about 1% in the quarter due to choppy demand patterns as steaming from low inventory levels and ongoing large supply chain issues.

On the order hand production levels rebounded nicely from the prior year, which was impacted by the final stages of mandatory curtailments at the onset of the pandemic.

Also higher selling prices and the benefits of our revenue optimization initiative fully offset elevated cost inflation.

Well it all better than expected results, primarily reflected strong operating performance and cost management enabled by our margin expansion initiatives.

As we will discuss shortly we're making great progress on our 2021 priorities, including today's announcement of intent to sell our <unk> brand and business at an attractive valuation as part of our portfolio optimization program.

We are also accelerating oi's transformation as we shared at our Investor Day last month.

Combination of favorable market conditions for glass containers.

<unk> ongoing transformation and the introduction of magma is building in the past two years.

Yes, so on agile and resilient company yesterday, a new paradigm for glass and yes to profitable growth.

We are confident these plan will enhance value for all its stakeholders and ensure sustainable prosperity for Hawaii.

If you haven't already we incurred issue to you our investor day presentation, which can be found on our website.

Reflecting good momentum we are increasing our full year earnings outlook.

We now anticipate 2021 adjusted earnings will range between $1 77, and $1.82 per share and we expect at least $160 million for free cash flow.

We expect fourth quarter adjusted earnings will approximate 30% to 35 per share.

Elevated cost inflation pending price recovery starting in early 2022.

Let's turn to slide four.

As we continue to deliver on our commitments. We are also making very good progress advancing our <unk> strategy.

On this page, we released our 2021 priorities as well as some highlights on our progress.

I'll touch base on each of our three platforms.

First we aim to expand margins.

We have targeted $50 million of initiative benefits as well as continuous performance improvement in North America. As you can see we have already achieved our full year initiative target and now expect benefits with total around $60 million in 2021.

Next we seek to revolutionize glass.

<unk> My generation one line has been commercialized in Germany.

In our generation two line is streator, Illinois is being piloted in the second half of 2021.

Our glass advocacy on ESG efforts are also gaining steam.

We will continue to optimize our structure.

This includes a number of airports ranging from portfolio adjustments, improving the balance sheet simplifying the organization and addressing legacy liabilities.

Regarding our divestiture program, we have entered into agreements for over $1 billion of asset sales to date, including the recently announced intent to sale, our <unk> random business in Europe.

As laid out during our Investor day, we are investing up to $680 million over the next three years that include up to 11 magma lines to enable profit our growth is.

Expansion plans, our focus on severely our solid markets across Latin America premium as periods in the U S and the UK and premium beer in Canada.

As John will expand upon year to date free cash flow is quite favorable compared to past trends and we continue to advance other important efforts, including the paddock chapter 11 for <unk>.

Mrs.

Overall, we're very pleased with our progress.

Moving to slide five we have laid out the key elements of our strategy shared during investor day.

As I've noted earlier, the combination of favorable market conditions for glass containers OIS ongoing transformation and the introduction of magma are building the path to yes, yes.

Yes, the profit our growth.

Lastly is poised to benefit from key Mega trends, such as wellness sustainability Premier mutation of harm Leary, reflecting these failings global market growth is anticipated to ILS, one 6% at year and higher in the principal regions, where we operate.

Given this range on a revitalized commercial approach we are investing in new capacity to enable key growth opportunities within our strong organic conversion pipeline.

Yes, one agile and resilient company.

The transformation is well underway and I believe recent performance demonstrates the momentum we are building.

We expect significant benefits from our ongoing margin expansion initiatives.

We're expanding our portfolio optimization program to realign our business port of volume fund organic growth and improve our return on invested capital.

Also we intend to resolve legacy best those in pension liabilities that have hamstrung the organization for decades.

Finally yesterday, a new paradigm for glass enabled by magma.

New overlay through solution provides a host of additional capabilities to build on top of our World Class Heritage network with magma, we can meet the needs of an evolving market and expand our business.

These efforts are set to accelerate oi's transformation through profitable growth improved financial performance and value to all its stakeholders.

We are excited about the future and we believe <unk> represents a compelling investment opportunity.

Now over to John.

Thanks, <unk> and good morning, everyone I plan to cover a few topics today, including recent performance progress on our capital structure as well as our current 2021 business outlook I'll start with a review of our third quarter performance on page six.

<unk> reported adjusted earnings of 58 per share as noted during our Investor day, we expected results would be at the high end or slightly exceed our guidance of <unk> 47 to 52 <unk>.

Stronger results reflected good operating momentum as we exited the quarter.

Segment operating profit was $243 million, which significantly exceeded prior year.

Higher selling prices fully offset elevated cost inflation linked to higher energy and freight costs while.

While demand remains strong sales volumes dipped, 1% due to choppy demand and ongoing supply chain challenges in several markets we serve.

Likewise favorable cost performance was driven by an 8% improvement in production levels as the prior year was impacted by force curtailment due to lockdown measures.

Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives.

This slide includes additional details of non operating items overall, we are pleased with favorable performance trends.

Moving to page seven we have provided more information by segment in the Americas segment profit was $133 million up from $113 million last year.

Significantly lower operating cost reflected an 8% improvement in production levels very good operating performance and benefits from our margin expansion initiatives keep in mind that we no longer reported in Asia Pacific region. Following the sale of ANZ last July.

Let's shift to cash flows and the balance sheet I'm now on page eight.

We are following a specific set of guiding principles for our cash flow and capital structure that are aligned with our strategy to increase shareholder value, we expect significantly higher free cash flow this year and key working capital measures should be inline or favorable compared to 2020 levels as.

As illustrated on the chart, our third quarter free cash flow was $213 million.

Over the past year, we have improved the consistency of our cash flows which now reflects the normal seasonality of our business solid operating results and working capital management.

Year to date cash flows approximated $181 million. So we are well positioned to achieve our full year guidance of at least $260 million of free cash flow.

Second we preserved our strong liquidity and finished third quarter with approximately $2 $1 billion of commit.

Our committed liquidity well above the established floor.

Third we are reducing debt.

Into the third quarter, our net debt was $4 3 billion the lowest level since 2015, and our BCA leverage ratio was around three six times, both net debt and our leverage ratio compare favorably to our full year targets.

So far this year, we have entered into agreements to sell $128 million of assets as part of our portfolio optimization efforts. This includes today's announcement of a binding commitment from a subsidiary of Berlin packaging to acquire our lay parfait brand in business for 72 million euro or about $84 million EBIT.

EBITDA for this business was $7 5 million euros in 2020 with a similar performance on a 12 month trailing basis. This represents a compelling valuation in excess of about nine multiple.

We expect the proposed sale will be completed by year end or early next year. The agreement also includes a long term supply agreement for <unk> to sell glass containers to Berlin to support expansion of this attractive and growing brand.

Finally, we intend to Derisk legacy liabilities as we advanced the Paddock chapter 11 process as previously announced we have an agreement in principle for a consensual plan of reorganization, where <unk> will support paddocks funding of 502004 <unk> 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. Overall, we continue can continue to improve our cash flow and balance sheet position.

Let me finish up with a few comments on our business outlook I am now on page nine we have increased our full year earnings guidance to between $1 77, and $1 82 per share reflecting favorable third quarter results. We now expect free cash flow will be at least $260 million.

We anticipate fourth quarter adjusted earnings will approximate 30% to 35 per share.

Fourth quarter results should be down from the prior year as cost inflation peaks important importantly, we are preparing to implement annual price increases early next year to recapture the impact of inflation.

We have also shared some additional themes for 2022, which are consistent with our longer term outlook shared at our Investor day with that I'll turn it back to Andres Thanks, John let.

Let me wrap up with a few comments on his life Inc.

At the same time, we continued to advance our key priorities for 2021.

Our multiyear margin expansion he needs. It teams are gaining his team Mike Knights advancing and we continue to improve our structure.

We are now a much more agile and resilient organization that is well positioned to accelerate our transformation.

Finally, we are building the past two years that we outlined last month at our Investor day.

For your interest in Oi glass and we welcome your questions.

Lawrence already.

At this time, if you would like to ask a question. Please press star one on your telephone keypad.

In the interest of time and to enable everyone on the call to participate please limit your inquiries to one question and one follow up.

You may have entered the queue again by pressing star one.

Your first question comes from the line of George Staphos from Bank of America. Your line is open.

Andrew John Chris Good morning, everybody.

Thanks for the details.

My questions will be around pricing related to the choppy volume environment as you termed it. So you gave us a little bit of color, but could you dig a bit more deeply in terms of what.

Is in fact happening in terms of the supply chain and what it's doing to your volume.

What amount of earnings might you have lost because of the choppy patterns and then as we look to 'twenty. Two as you are trying to recover inflation through your pricing.

What are the risks that this volume environment prevents you from doing that.

Particularly as regards to Europe, what's the setup on European pricing. Thank you very much.

Yes, so the.

Looking at the supply chain issues, we have external factors.

Factors and we have internal factors too.

In the in the external factors as an example, when customers are facing.

<unk>, they don't get their inputs on time.

They tend to reuse hard orders or delay our artists.

When they are phase they are facing truck availabilities as the same thing or labor issues in.

Internally, we are limited by inventories in several markets as you know Andean has been running tight Brazil tool Mexico is it the same in some cases, depending on the mix in North America is also the case.

Important to highlight that the food category has been re raising as we have been going through a shift from off premise to on premise now. It's also important to highlight that for that one.

<unk> seen the category repainting, the gain versus breath pandemic levels and as we mentioned in the opening remarks, we're also.

<unk> makes managing some business given priority to margin and return.

As we go into 2020 tool.

We've been <unk>.

Very active managing.

So we are able to offset inflation.

We're doing it in several fronts.

In the procurement side that we're looking at the commercial side from a procurement perspective, we have very solid policies in place and actions to mitigate and we are executing on them from a commercial perspective, we already have our plan for price increases going fully for the following year, we see a constructive.

Environment for prices in 2022, and we expect to fully recover inflation.

Yes, George I would ask will add one other thing that you had asking whats the impact on the third quarter of these supply chain.

Going into 'twenty two.

And just to complement George.

<unk>.

Demand fundamentals are very solid.

And just referring to Europe, which you asked for.

The demand in Champaign, and Bordeaux wine. These various strong demand for prosecco and Italian wine is solid for already a strong.

We're seeing a very good recovery of meaning awarded us the on premise channel, we see home activity.

And b areas growing quite well in key markets for us in Western Europe. So we're seeing high single digit growth for beer in glass in Italy, France, and the UK, which are very relevant market for us. So we had those solid fundamentals, we don't see any issue for our price increases.

And we're very confident we're going to fully record inflation going into 2022.

That's perfect. Thank you very much guys I'll turn it over.

Your next question comes from the line of Ghansham Panjabi from Baird. Your line is open.

Good morning, this is actually Matt Krueger sitting in for Ghansham. How are you doing this morning, Hey, Matt. Thank you.

Great. So there's been some recent conversation about magnesium limitations, causing supply shortages in aluminum, which is obviously a substrate that you compete with directly.

<unk> levels.

If these shortages were indeed to come to fruition.

How it quick is oi, specifically to handle any potential volume that that might flow into glass thats now being serviced by aluminum cans and have you guys thought about what the potential benefit could be from that angle any any details or thoughts there as far as capacity avail.

Availability, what would really help.

Yes. So at this point in time, we are operating at high utilization levels and that's why during Investor day, we laid out a three year plan.

For capacity expansion. So we believe those expansions are timely.

The markets that we are advertising through the expansions are quite strong and through that.

Glenn we expect to address the issue that you highlight.

Great that's.

That's helpful I guess.

That's it for me thanks.

Your next question comes from the line of Anthony Pettinari from Citi. Your.

Your line is open.

Good morning, it's actually Brian Berg Meyer sitting in for Anthony.

On the price cost recovery in 2022.

How much of what you're assuming is already secured via contracts in place and it's just a matter of timing caught up.

And how much needs to be recovered and contracts yet to be negotiated.

Yes, I would say that this is John between 55, and 60% of our business across the globe is covered under some form of long term agreement.

And those long term agreements include price adjustment formulas. So that part of it is established going into next year. The other call. It 40% to 45% is open market that tends to get renegotiated and on an annual basis. The most obvious example of that is about 70% of the business in Europe.

As renegotiated on an annual basis generally speaking in the very early part of the year here. So that's the that's the area. That's primary focus on price movement going into the new year. In addition to the Pis.

Got it thanks, that's very helpful.

And <unk>.

<unk> can you parse out the drivers behind the negative price cost between energy labor freight and raw materials, and then and then based on your contract structure.

Which of those buckets is going to be easiest and most difficult to recover next year.

So I would say that the big it clearly the biggest issues that youre seeing is on the fuel side.

Followed probably by the freight side in that regard to electricity comes through also budget.

A little bit more more.

Modulate it.

And if you take a look at in particular, the fuel side, which is the biggest driver of that.

In North America.

Pass through those cost inflation areas again very much square in the price adjustment formulas that we have for our business and obviously a focus of the negotiations going forward.

Got it thanks, I'll turn it over.

Your next question conference comes from the line of Mark <unk>.

From Bank of Montreal Your line is open.

Thanks, Good morning, John.

Good morning, Chris.

I wondered just going back to this European energy issue.

Yes so.

As I mentioned before from a procurement standpoint, we have policies in place to mitigate these these kind of price increases I think we are in a good position as a result of that we've been taking very effective action.

And we don't expect any issue because of that move and our commercial position going forward for which we have a very clear plan.

When it comes to the supply is very difficult to know what the winter is going to now.

Now.

It is a let's assume that there is a normal winter with nothing out of the normal pattern.

<unk>.

When we consider the markets in which we are present.

Flyers, we have and the confidence we have in place, we see very little risk for us to have a supply.

Issue going through the winter if things go.

Stream.

And we'll see what that is and we'll adjust accordingly, but at this point in time, we don't expect for our operations based on our location and as I mentioned suppliers and contracts.

To have a high freeze for any risk really at this point for supply.

Okay. That's helpful.

If I could just one we're hearing these stories on the public press about the shortage of glass bottles here in North America.

Just unpack that for us a little bit and sort of how we've come to this point because it wasn't very long ago.

What you can do to kind of capitalize on the situation in the near term.

Yes, so the.

While demand for glass is a strong.

And it has been increasing continually continuously.

Continuously increasing.

In some cases it comps in peaks that are difficult to reserve.

Now our inventories are tight so that's compounding with that.

They imported glass in particular from.

China has been coming down so that adds to the problem. So now at this point, we are utilizing our capacity, though as we can as we mentioned before mismanagement and as importantly in these circumstances. So we can support margins and a return and then we're doing everything we can to improve productivity to be able to.

Support base and as you know we also have.

Established a supply network across the Americas and in some cases, we support the United States out of Mexico or are you in the Andean countries, depending on seasonality P&L that so all of that is in place to take advantage of the situation with you as we can now from a customer perspective, we've been very actively working with.

The customers collaborating with them well to minimize these issues and we're confident that as we go into 'twenty, two we're going to be in a better position because our inventories are.

Better established to be able to support them through their peaks.

Okay. That's helpful I'll turn it over thanks Andres Thank you.

Your next question comes from the line of Mike Lee Head from Barclays. Your line is open.

Great. Thanks, Good morning, guys.

Good morning firms.

So I wanted to follow up on the supply chain side of things, particularly on the external factors and your customers that Andreas I think you've laid out well like labor trucking or other material shortages have your customers, giving you a sense or do they even have visibility frankly on how those factors should trend into the fourth quarter of 'twenty two.

I'm, just trying to get a sense of whether they're easing or.

And the same as we sit here today.

Yes, so the.

These supply chain issues are widespread across the industries.

Impacting everyone I think what what is good in our case is our relationships with customers are in a very good place and our coordination is very strong so that gave us the ability to risk.

Respond better and as I mentioned before because of that work, we expect that we will be able to better manage through situations going into 2022.

Also knowing their actual needs based on the growing demand.

We can also plan better for these supply across the Americas network, which we are leveraging to as we can to support the supply for our customers.

Great that's super helpful and maybe as a follow up for John.

For the step up in growth Capex.

How should we think about that.

Flow through next year.

Yes, I think tell you this.

We're introducing a new measure that we call adjusted free cash flow.

And so that takes it looks just at maintenance capital.

I think when you take a look at.

That.

Alright, thank you.

Okay.

Your next question comes from the line of Kyle White from Deutsche Bank. Your line is open.

Hey, good morning, Thanks for taking the question I think you mentioned about headwinds in regards to your volumes on food specifically in the United States as at home consumption wins do you have a sense of how much incremental food volumes you gained throughout the pandemic that could potentially pose a headwind.

Going forward as I hope consumption wins, thank you.

So food went up during the pandemic double digits right. It was a very strong peak because of the at home consumption.

While we are seeing right now is that that peak, obviously came back down because the on premise channel is already open however, we're keeping.

Important gains versus pre pandemic levels. So at this point, we're seeing between 3% and 4%.

Incremental volume versus those layers. So premium is excuse me <unk>.

<unk> is quite healthy because of the focus of the consumers on premium products and this is happening across all categories.

Project, some form of continuation of that type of demand structure.

Got it I'll turn it over.

Your next question comes from the line.

<unk> Tiano from Seaport Research your line is open.

Yes. Thank you very much for taking my questions. Firstly can you provide in the Americas partner print on your shipments by region by more specific regions and also.

Despite that shortfall.

What data points give you confidence that demand was actually very even though shipments were down 3%.

Yes, so the.

In the U S. I'll give you a few data points when we look at both channels on premise and off premise Nielsen data on Cta.

This statistics, we're seeing interesting performance for example in beer, which is up.

Like 2% of Spirit's seats up late 13 and premium wine around 10, so what that means is even with the channel rebalancing that.

Demand for those products is quite good and those products have very well aligned with glass.

Domestic beer decline has improved we are at half the rate we used to wait out of Ireland and a smaller base. So so the impact is going down in our system and international beer brands and premium beer.

Our mostly offset offsetting that decline now.

Now we continue to diversify away from domestic beer and we've been successful doing that that's why we're seeing the growth in food as an example.

And as I mentioned before the imports from China are lower than before so that's also increasing local supply.

When I look at the.

And then.

Countries and Mexico, Brazil in the three of those Mark in the three of them. There is very solid performance across all categories. Mexico. In particular is strong local demand for fully on in <unk>, but then exports for beer Tequila and <unk> out of Mexico are quite as strong in the Andean beer performance is strong.

Due to premium beer and global beer brands and one way glass he is growing.

Also fluid is strong out of the Andean countries driven by exports.

So Brazil, we're seeing good performance of return our glass is back to pre pandemic levels.

Is 40% of the total beer.

Category.

We're seeing new products in the returnable glass in Brazil, which is a very good.

Indication of.

Our premium products are important for these markets, while where glass is up.

At 9%.

<unk>.

Sure.

<unk> to six or 7% before so it is increasing and premium products are 22% higher than pre pandemic load. So those markets are doing really well.

We are limited by capacity, but as we explained before.

As part of the three year plan we are.

Adding capacity to all those markets to take advantage of these opportunities.

Okay great.

And my second question is on your Capex plan.

Aye.

<unk>.

Your strategic investments would be more geared towards 2023, and 24 and it seems your strategic Capex number almost $300 million these 40% oil.

Strategic Capex, you said you would spend over the three year period. So.

Did something change did you decide to spend more capital upfront because youre seeing more opportunities.

No. This is very much in line with I believe what we laid out during Investor day, what we're going to do is we're going to see camp Capex ramp up here in 2022 kind of peak in 2023 and ebb off in 2024 on the strategic capital side I think what we're referring to as the sales volumes that were.

Realizing are going to ramp up Ratably I mean, more backend loaded as the capacity comes online in the 2023 and 2024 window. So this is all consistent with the planning that nothing has changed and the thing I would add too is that I guess.

Great. Thank you very much.

Your next question comes from the line of Allison Tom from Loop Capital. Your line is open.

Great. Thank you Ed Thanks for taking my questions. Just wanted to ask it was pretty clear from your press release and also comment. This morning that you had to walk away from some lower.

Margin business here in the U S.

Third quarter is that a short term impact or how much longer do you think second last where your back or would you be able to satisfy a portion of your customer base.

Yes so.

The.

The margin management that we did was primarily due to.

Inventory spots in inventory shortfalls that we had or things are getting a little bit low because of the supply chain issues and the strong ramp up after the markets opened up again and what we're seeing is that in certain categories in certain parts of the geographies. We just don't have the.

The.

Okay. Thanks, so much guys I'll hop back in the queue.

Your next question comes from the line of Aaron <unk> from RBC Capital. Your line is open.

Hello.

Laurence let's move to the next one.

Your next question comes from the line of Adam Josephson from Keybanc. Your line is open.

Good morning, <unk>, John Chris Thanks for taking my questions. Good morning.

One on.

Good morning, just one on earnings and then one on your cash flow outlook on the earnings John just a month ago, you talked about earnings being at the high end or slightly higher than 47% and 52.

The quality performance of the businesses was very very good and a number of.

Asset projects that we had underway actually wrapped up a little bit earlier and lower costs at the end of the day than we originally intended so so a very good operating performance across those major levers towards the end of the quarter.

Got it thanks, John and just on free cash flow, if I try to do a free cash flow bridge for this year Youre thinking $2 60, plus maybe call. It $2 80 ish Capex plus working capital I would think we'd be about a 300 million drag year over year, such that if earnings are up a bit you are talking about flattish for <unk>.

Basically negligible free cash.

Correct me, if I'm wrong, there and then in the.

Subsequent two years Capex will step down a bit but it will still be call. It $640 million. So I'm. Just wondering can you help me with what Youre thinking free cash flow not adjusted free cash flow, but actual free cash flow over the next three years or so am I thinking about it the right way or am I missing something.

Well for one thing, we're not going to get Overnighted today getting into specific numbers around 2022, and 2023 beyond but I think what we're saying here is that the reported free cash flow will dip. Some here in the next couple of years, we expect it to remain positive okay.

Will that some.

Of additional EBIT run rate as we get the improved.

Margin management as a result of those businesses as we ramp up to something where it's more self sustaining going forward.

Incremental growth driven by mango over the longer term.

Got it thank you John.

Your next question comes from the line of Mike <unk> from <unk> Securities. Your line is open.

Thanks, very much good morning, Andres John for taking my questions.

Just quickly on the revenue optimization initiatives, you mentioned and how that is impacting.

Obviously the company has done a lot of work around upgrading its sales marketing and innovation capabilities. The company is obviously going through analyzing each account to make sure you receive the appropriate value for the products I'm. Just wondering can you talk about what you've done specifically in the quarter and how does that revenue optimization. This has actually benefited the passenger.

Yes. So that's you mentioned the DSO is one of the margin expansion initiatives. It is really about leveraging the capabilities, we will flow over the last few years to improve our top line.

So what happens in the third quarter is really the product of the award that we've done.

Over the quarters and frankly.

Over time, setting up things to be able to capitalize.

Better on the top line opportunities we have quite sophisticated.

<unk> in place at this point, we have processes.

That are also very well established so there is lots of rigor and discipline around that top line and that's what helped us with Q4.

Yes, I would just just for good Q3, sorry about that.

Clarity I mean, our revenue our margin expansion initiatives <unk> has three major projects at revenue optimization, which which we're discussing here.

In the quarter, there was probably between five and $10 million of benefits associated with that that helped.

Through that through the spread and has consistently been performing very well, but we also have on the cost side, our factory performance as well as our cost transformation is more on the SG&A side all of those added incremental benefits to but then of course, we net those against things that are working against US for example, freight was about a $10 million headwind.

In the quarter, So we had about $10 million of net.

Got it and then just.

One quick question on the mixed management.

Obviously.

John You mentioned, the inventory tightness and tell you that.

Do you expect this inventory this mixed management ultimately correct.

Local matter, reflecting maybe given the supply chain given how tight inventories.

As you look at all the accounts your customer accounts.

Yes.

Walking away from certain businesses that just arent profitable at this point given that customers want your product maybe they need to pay you for it at this point given the inventory tightness you're saying.

It's appropriate value, we don't need your business, we think we're going to go elsewhere and maybe this is a permanent shift.

In your business to more of a higher quality mix than you had when you had historically.

Yes, yes, it does stay focused so we're giving priority to.

Margin on return.

And as we navigate through all these various challenges that is a very important criteria. We are using to define what is a priority for us.

I think <unk> got all of the above going on and there are some places where youre looking at the inventories right and saying, Hey, I don't have that specific inventory and I'm going to shift a weighted it to this other category because you do have the inventory and some that are permanent.

The changes in mix and America North America, we've commented over the time, we've actually transitioned about 35% of our beer capacity to other categories over the last several years is spirit's two wines to food categories and things like that and that is always ongoing to make sure that we can continue to shift our capacity to better margin business.

Thank you good luck in the quarter.

Thank you and our next question comes from the line of Gabe Haiti from Wells Fargo. Your line is open.

Yes.

Andreas John Chris Good morning good.

Okay.

I wanted to come at the inflation.

Question I guess from a couple of different angles. The first is.

I'm, assuming the answer is yes, but have you guys kind of gone through.

Sort of the total cost of ownership calculations.

Taking into account, a new baseline of where raw materials are today.

Kind of thinking about obviously aluminum that's.

Almost doubled when we include aluminum premiums warehousing et cetera.

And then again kind of asking in the context of these dual control policies that that China might be putting into place that couldnt.

It would imply kind of structurally higher aluminum costs.

Go forward so.

To the extent that it makes glass packaging a more cost competitive.

Alternatives then.

Is that something you guys have been looking at them.

I guess corollary to that.

Magma in theory should improve that even more.

Initial customer response been since you guys kind of announced this aggressive expansion.

Yes. So let me just give you one perspective on that and Joe can complement to one of the advantages of glasses that just supply chain for glasses, mostly local.

And that has two very important then impacts one is caused the <unk> environment.

So when you look at the dynamics that you described there.

Related to low end supply chains.

That are very large in nature that support those substrates that are demanded for multiple places on creating those pressures, but thats not the case of glass. So as you know.

Yes, as far as I guess.

I'm sorry.

Yes.

And just going to add one point there Gabe to your original question is that how do we go and price how do we look at the opportunities in the marketplace.

Clearly price based upon market, we're not a cost plus producer. So clearly we look at the competitive landscape across our opportunities are to make sure that we price accordingly to get value relative to the competing opportunities.

And then the other question you had was what has been the initial customer reaction been on magma.

<unk> is coming around the corner and I think I think they responded very well to the capabilities that we're laying out in the table with magma because it just fits so well with the market realities that all of our customers are facing in today's world.

And then one more aspect of magma.

<unk> held glass.

Production and supply to become even more logical because we can co locate or near locate.

And we can also scale down that capacity to be able to follow growth.

But at the same time protect the economies of scale, which is a significant change for the industry.

Thank you guys I'll hop back in the queue.

Okay. I think this will be the last question Laurence.

No Sir we have a follow up question from Ghansham Panjabi from Baird. Your line is open.

Hi, Thanks, a lot for letting me hop back in the queue. This is this is Matt Krieger can answer ghansham.

Packaging substrate in that market and obviously theres been a lot made about the slow by the slowdown there.

<unk> side of things.

Can you just talk about what your penetration level is in the hard seltzer ready to drink market and maybe what you see the opportunity being moving forward across your business.

So the hard Seltzer category is only an upside for glass. So our current chair. He is very very small however, the attributes of glass, which makes it very good for branding.

Now the category is slowing down.

Obviously, that's lower demand than previously expected by the suppliers that are supplying currently that category for the most part.

Now when it comes to footwear.

Where the capacity or cancel and the capacity of Glasgow is very important to highlight what we got out Dooney 90 day.

Glass and aluminum can play in different lanes of broader categories.

They are products that are driving the demand of aluminum cans are.

Okay.

Great. That's helpful. Thank you.

Yes.

Alright, Thanks that concludes our earnings call. Please note that our fourth quarter and yearend call is currently scheduled for February 2022.

And remember joined team glass by making a memorable moment and choosing safe sustainable glass. Thank you.

This concludes today's conference call you may now disconnect.

Q3 2021 O-I Glass Inc Earnings Call

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