Q1 2022 O-I Glass Inc Earnings Call
Calling it a cold.
To that.
Okay.
Good day, and thank you for standing by and welcome to the Hawaii Glass first quarter 2022 earnings conference call at.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there it will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone 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. Please go ahead.
Thank you Ryan and welcome everyone to the O I glass first quarter 2022 earnings conference 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 financial results. Following prepared remarks, we'll host a Q&A session.
Presentation materials for this call are available on the company's website.
Please review the Safe Harbor comments and the disclosure of non-GAAP financial measures included in those materials.
I'd now like to turn the call over to Andre who will start on slide three.
Good morning, everyone.
I appreciate your interest in Oi glass.
We reported a strong first quarter results last evening.
Adjusted earnings So 56 cents per share significantly exceeded guidance, primarily due to better than expected shipments and production levels.
As illustrated on the left earnings improved across all key measures with adjusted EPS up 60% from the prior year.
Shipments increased nearly six 5%, reflecting a strong demand for healthy sustainable glass containers and growth was most pronounced in Europe .
The team did a great job of increasing the speed and efficiency to boost production to meet demand amid historically low inventory levels.
In the Americas. The reason, it's also rebounded from the impact of Winter storm Yuri last year.
I suspect that higher selling prices across all markets more than offset elevated cost inflation unfavorable performance reflected the benefits of our ongoing margin expansion initiatives.
Our Hearts go out to all those impacted by the tragic conflict in Ukraine.
Keep in mind, we do not have operations in Ukraine, or Russia. So we have not been directly impacted.
However, these developments have complicated an already challenging situation, you an elevated cost inflation and supply chain issues.
As I will discuss later.
<unk> continues to demonstrate increase agility and execution discipline delivering on its commitments despite elevated macro uncertainty.
As we manage through a highly volatile environment, we continue to make very good progress on our transformation.
Our multiyear margin expansion initiatives are off to a good start this year.
We are investing in an expansion we are advancing back my USD and our glass advocacy campaign.
Likewise, we are optimizing our portfolio and addressing legacy liabilities.
Ounce yesterday paddock recently achieved another key milestone as boating asbestos claimants overwhelmingly approved the proposed plan of reorganization.
<unk> is now entering the final phase of the chapter 11 process and we remain optimistic that Barak will resolve its legacy asbestos liabilities by mid 2022.
Finally, we are increasingly optimistic for our business outlook, reflecting a strong first quarter results and good momentum.
We expect higher second quarter results and we have raised the top end of our earnings guidance range.
John will expand on our financial performance.
The outlook a bit later.
Let's move to page four as we review our recent sales volume trends.
As you can see on the chart demand has been exceptionally strong as the momentum that began in the fourth quarter continued through the start of this year.
Sales volumes accelerated each month of the first quarter, which increased six 4% compared to the prior year.
Shipments increased across all key geographies.
<unk> was up more than 3% in Europe , you almost 10%, even as both regions implemented sizable price increases to offset elevated cost inflation.
We believe there are several key drivers for reason of strong demand.
First last year benefiting from consumption trends that emerge over the course of the pandemic such as increased at home dining where people seek a more healthy and premium experience.
That's correct receipts on markets reopening in many geographies product amount itself.
On premises rebounding across the globe and we are seeing a strong demand across all markets, including European wine and spirits, which are supported or close the globe.
At the same time glass historically imported from Russia, and Ukraine has been displaced due to the recent conflict, which is driving up demand for locally produced glass in Europe .
Oh at all four of them <unk> product inventories remain far below pre pandemic levels in many markets. We serve continue to be well oversold, especially in Europe and Latin America.
Finally, glad he is increasingly more competitive compared to alternative substrates, reflecting relative input costs and availability.
Keep in mind that 90% of our glass is cheap we seen around 500 miles of our plants and more than 85% of our inputs are locally sourced.
As a result.
Our supply chain issues have been less impactful on glass download yourself streets and glad he is well aligned with the emerging preference for local supply chains.
Reflecting these ongoing trends, we expect shipments will grow low single digits in the second quarter, Despite a difficult 18% growth comparison from last year.
Given recent positive momentum, we now expect our full year sales volume will be at the high end or exceed our original guidance range of up to 1% growth in 2022.
Of course, we continue to monitor macro trends, which could affect this outlook.
As I mentioned, we are facing capacity constraints in key markets, such we minus record low inventory levels.
Even this challenge we have been leveraging the global capability to increase productivity that we developed over the past few years.
As a result, we are enjoying the benefits of increasing manufacturing of speeds and efficiencies to boost production to better meet the strong demand.
Likewise, we are mixed managing our business to improve margins and support our strategic customers growth ambitions.
In mind that we will be adding substantial new capacity over the next few years to support demand growth.
Let's turn to slide five.
On top of favorable near term performance, we continued to advance our transformation.
We are expanding our margins during the first quarter, we successfully raised selling prices as we offset cumulative cost inflation.
Faced with incremental inflation pressure, we have implemented a second price increase starting in the second quarter.
Oh it all we are confident Oi will meet its full year net price objectives.
Likewise, our margin expansion initiatives are off to a good start and we are on pace to achieve our $50 million annual target.
As we discussed demand remains robust and we are adding much needed capacity in key markets to support profitable growth.
The first round of expansion projects in Colombia, and Canada should be online in early 2023.
However market conditions have changed we are seeing more cost inflation, a much longer lead times on key copied or items due to supply chain challenges.
These issues are impacting our original capital investment on magma development timelines.
As a result, we are evolving our plants with agility, we expect a broader range of smaller scope capital projects, rather than a few large scale greenfield or brownfield initiatives.
These will be while uncharted spansion timeline as well as the risk project execution.
Likewise, we are accelerating development of our generation III, Mcmaster evolution, which is even more accretive and valuable even increasing macro volatility and uncertainty.
While our evolving plan will likely be very different than what we laid out last year I am confident we will achieve our objectives always seen our original investment commitments and return profiles.
Our BSG on glass advocacy efforts are also progressing well near.
Nearly one third of our electricity is now being supply from renewable sources.
A step change increase stores hard goal of 40% renewables by 2030.
Please see the appendix, which day July Smb's shoes, and comprehensive set of ESG goals.
Our glass advocacy digital campaign is gaining momentum with over 500 million digital impressions in the first quarter alone.
If you joined the call a bit early.
You likely heard the new song.
Better in a glass by Chase Mcdaniel, a rising country music star.
He is a great fund song, which represents another angle of our marketing efforts and we include more details on this slide.
As part of our portfolio optimization program, we have completed or enter into a sale agreements totaling $1 3 billion.
And I remain highly confident we will complete this program before year end.
Importantly, we remain optimistic that pattern will resolve this asbestos legacy liabilities by midyear.
As mentioned earlier.
Voting is best those claimants have overwhelmingly approved products plan of reorganization.
A hearing to consider computation of the plan by the bankruptcy Court is currently scheduled for May 16.
Upon confirmation of the plan paddock and the <unk> plant proponents will seek affirmation by the Delaware District Court.
Once that occurs that plan will go effective or eyeglass and Patrick will fund the trust with $610 million and asbestos personal injury claims will be channeled to the trust.
Advancing to slide six.
Over the past five years building capabilities has been a top priority.
We now have the agility to navigate the tremendous volatility we have seen since the start of the pandemic I'll.
As a result, we have delivered on our commitments supported by solid consistent execution.
Over the past few years, we have leverage long standing relationships with suppliers and customers to find ways to overcome severe inflation shortages in materials and logistics issues in order to meet the TSA.
They hold their objectives.
At the same time, our improved financial performance inventory management and portfolio optimization, our free enough capacity capital to pay for much needed capacity expansion.
We are again acting with agility to navigate an increasingly volatile and uncertain world This year.
As illustrated on the page, we are taking a rigorous and systematic approach across all facets of their usage.
Despite a clear step change improvement in execution. This performance has not yet translated into better valuation for life yet.
Yet I am confident it will.
More importantly, Oi is now well positioned to meet or exceed the commitments to all our stakeholders, including investors now.
Now I'll turn it over to John .
Thanks, Andres and good morning, everyone I plan to cover a few topics today, including our recent performance progress on financial priorities as well as our 2020 to business outlook I'll start with a review of our first quarter performance on page seven.
<unk> reported very strong first quarter 2022, adjusted earnings of 56 per share, which significantly exceeded our guidance and prior year results of <unk> 35 per share higher earnings reflected favorable net price strong sales volume and solid operating performance, which also benefited from the rebound of winter storm here last year.
Segment operating profit was $231 million up from $175 million last year favorable net price increased segment operating profit by $15 million as higher selling prices more than offset elevated cost inflation.
Volume and mix added $17 million of shipments increased six 4%.
Finally favorable operating performance helped reduce operating costs by $26 million.
Increased speed and efficiency boosted production levels, three 7%, which supported strong demand amid record low inventory levels.
Segment operating profit improved significantly in both the Americas and Europe . The Americas posted segment profit of $129 million up from $100 million last year, reflecting favorable spread more than 3% sales volume growth and improved operating costs higher earnings also reflected the rebound from winter storm year last year.
And incremental benefits from our margin expansion initiatives.
In Europe segment operating profit was $102 million compared to $75 million in the prior year.
Earnings benefited from higher shipments, which increased nearly 10% very good operating performance as well as higher selling prices, which more than offset elevated cost inflation.
The segment also benefited from our ongoing margin expansion program.
The chart provides additional details of nonoperating items overall, we're very pleased with our first quarter results, reflecting favorable performance across all key business lovers.
Turning to page eight we continue to make solid progress on our 2022 financial priorities. While the first quarter is a seasonal use of cash for the business recent free cash flow performance has been favorable compared to historic levels. As you can see on the Upper chart. We continued to advance our portfolio optimization program and have entered into asset sales totaling $1 <unk>.
$3 billion to date.
This includes completing the Columbia tableware sale in February and signing a sales leaseback transaction, which is set to close in the second quarter.
Other projects are in advanced stages, and we remain confident that we will achieve our $1 $5 billion goal. This year well ahead of our original schedule as.
As we expect to resolve our legacy asbestos liabilities by mid 2022, we recently refinanced our $2 $8 billion Bank credit agreement at attractive terms, which includes a $600 million delayed draw feature to fund the future Paddock 500000, <unk> Trust. Finally, we continue to advance our pension derisking activities and reduce <unk>.
<unk> financial leverage which declined significantly from this time last year as shown in the lower chart.
Let's discuss our business outlook I'm now on page nine we expect second quarter adjusted earnings will range between 55, and <unk> 60 per share, which is up from 54 last year keeping.
Keep in mind. This outlook is net of dilution from recent asset sales and incremental interest expense as we anticipate funding the paddock Trust.
From a revised base of around 50, we expect improved business performance will add five to 10 10 of profit. We anticipate continued favorable net price as Andrew noted we have implemented a second round of price increases this quarter amid persistent cost inflation pressure.
Shipment activity activity will likely moderate to low single digit growth given capacity constraints and historically low inventory levels.
Finally, we anticipate continued strong operating and cost performance. However, we do expect incremental costs as expansion project activity ramps up.
Shifting to the full year, we are increasingly optimistic about our 2020 to business outlook demand for healthy sustainable glass containers remains strong operating performance is solid and we are effectively raising prices to recapture cost inflation of course, we continue to monitor monitor macro developments, including demand trends and supply challenges.
Including cost and availability of key inputs, such as natural gas in Europe .
We have revised our full year earnings outlook, we now expect adjusted earnings of between $1 85, and $2 10 per share as we increase the top end of our range improved guidance reflects favorable first quarter results and good momentum as the business navigates a period of elevated uncertainty. We have also reaffirmed our original <unk>.
Cash flow guidance now back to Andreas Thanks, Shaun let.
Let me wrap up with a few comments on the slide.
It all to a strongest start this year.
First quarter earnings significantly exceeded our original guidance as the reason, it's performed well across all key reasons levers supported by a strong demand for healthier sustainable glass packaging imports.
Importantly, we are focused on a set of near term catalysts to create value efforts to recapture the impact of cost inflation on our margin expansion initiatives are going well, we are enabling a strong demand with increased production of speed and efficiency. Following decades of litigation, we intent to establish a third and final resolution of our leg.
As you have vessels liabilities by mid year, which help consume over 40% of our cash flows in the last decade alone.
Likewise, our portfolio optimization program is moving swiftly and we expect to complete that program this year, which will support our expected expansion projects over the next three years.
Why is a much more agile and capable organization as we have demonstrated over the past year through disciplined on effective execution and consistently meeting or exceeding our commitments we remain.
Optimistic about 2022 and expect higher earnings both in the second quarter and full year that reflect our comprehensive our team and business performance.
For your interest eyeglass and we welcome your questions.
Thank you.
Yes.
And as a reminder to ask a question. Please press star one on your telephone keypad.
To make sure your questions breast <unk>.
We also ask you limit yourself to one question and one follow up and reenter the queue for additional questions. Thank you. Please standby, while we compile the Q&A roster.
Your first question comes from Ghansham Panjabi from Baird. Your line is open.
Thank you and good morning, everybody and congrats on a very strong start to the year.
Thank you good morning, Andrew.
First off just sort of.
Thinking high level in terms of what's been happening in Europe .
Can you just give us a better sense as to why volumes have started off so strong in the year and then just in terms of the competitive backdrop with plants being located in Ukraine, and Russia et cetera, just give us a sense as to what the current capacity situation is in Europe .
Thank you Ghansham.
So the situation in Europe .
It's quite positive for the demand has been through in by pretty much every segment in which we are.
Evolve now mineral water, which.
Decreased dramatically during the pandemic time is fully <unk> and that is a substantial volume.
As we've said before Champaign Bordeaux wine.
<unk>.
Italian wine they were also quite soft before the pandemic as we entered the pandemic and in the last.
Theater sold.
These categories are becoming a stronger and stronger and theyre driven by local demand as well as by experts now.
We are present in and we have a very large presence in two markets in Western Europe , France, and Italy, where beer is performing extremely well and is growing very fast and our head of alternative packaging.
And the factor related to your question that is also.
Boosting demand for multiple suppliers nodule SaaS and you've seen it reports is the fact that the capacity that used to go from Russia, and Ukraine into Europe is not growing anymore and one goal for any foreseeable future. So that's a substantial amount of capacity now some cap.
Passenger yields would shut down because of the macro conditions and most likely will take a while to return.
So those are specific to Europe now.
There are factors that are common to all markets, including Europe .
Consumers are focused on premium products at home consumption remains the performance of glass in off premise and on premise has been very strong. So Chen chief does not really impact that in fact is favorable to glass inventories in the supply chain are very low and they will continue for a while we close up the market is thoroughly oversold.
The NPD activity is high and glass is local and that's very convenient for for many customers.
Okay. Thanks for that Andreas and then in terms of the.
The asbestos settlement.
You're very very close to that at this point can you can you just take us through the tax consequences is the is the full amount and fully tax deductible.
Would that start to kick in.
And just any other color you could share with us on the taxation of that.
Yes, Ghansham this is John .
Just as in the past this type of payment would also be a tax deductible item.
<unk>.
Obviously taxes are complex and theirs.
Net carryforward losses, and things like that that need to be considered.
But this does extend out you know that period of benefit for the organization and there is a reasonable amount of tax shield associated with this of course tax regimes matter, but it will probably be a couple of years before this comes into play considering the net loss carry forward position of the company.
Right now, but it does extend that window.
Awesome. Thanks, so much.
Your next question comes from Michael Robertson from so Lisa.
Hi, Andres, John and Chris Congrats on a strong start to the year.
Thank you.
I just wanted to follow up on your comments on the Magna rollout I think last quarter you referenced a three month delay in project activity and that was due to the supply chain.
And some contract labor it sounds now that this is also impacting the rollout of magma.
Can you just give us any more color on how you anticipate rolling out mobile I think you were supposed to have 11 lines rolled out by 2024, how do you see that now playing out and does that effect.
The EBITDA guidance for free cash flow guidance that you provided at your Investor Day in September .
Okay. So we are making very good proudest developing magma Gen. One gen two and three.
Developing ultra which goes along with that which is lightweight containers as well as.
The signing for alternative fuel use in Magna.
Now as everything else in the project space.
Our developing has been delayed is taking longer as you mentioned so it depending on what equipment is involved.
It is.
More standard or less now all things have been also.
Impacting the U I don't meet them back my colleague locked down to slow down development labor shortages and a slightly times that we already mentioned so we are increasing our focus and resources on developing like muscle. We can report timelines now projects in general out as opposed to the same pressures.
The supply chain and it is very high inflation in capital equipment and equip malines types. So we engaged an effort that we call a capital expansion with a third party support.
<unk> analyzed our whole planning implementation and it reached that plan and what we're doing is identifying projects currently projects that can be smaller or simpler or faster to implement or lower capital intensity and can be geographically distributed so they reduce risk but allow us.
To meet the objectives, we will need a tool. So so the objectives are intact.
The compensation of projects will change and we're going to be able to share more detail on that in the knee.
Near future, but we are.
Moving forward to meet the same objectives, we laid out for you, including developing magma and making sure generation III is available for deployment in 2025.
And Mike for clarity on your later question. There is all of our earnings related outlook that we laid out on <unk> is very much intact. We're managing this as Andre said to be able to achieve that that means sales volume growth should be in place earnings should be in place the balance sheet should be in place on that.
On the cash flow side, it's going to be a little bit lumpier, just because of the supply chain elements, there, but the cash flow generation over the three year cycle remains intact, it's just gonna be a little bit more lumpy and we'll lay that out in the future. Once we have the plant fully scoped out.
Got it. Thank you and then just two quick.
A follow up just on that John when do you think you will be providing an update.
The revised plan and what are you looking to do to achieve the.
Financial metrics you laid out in <unk> and then just quickly any comments you have on early trends youre seeing thus far in <unk>. Thanks, very much and good luck in the quarter.
Yes, as far as laying out that the update here probably the next quarter, we will be doing that understanding the supply chain issues are the dominant factor here. So we'll lay out the new plan and the revised plan and everything like that and we just need to understand that will also kept to continue to be agile going forward or supply chain issues continue to persist or change.
With regards to April in the second quarter, we are chipping in line with our forecast the forecast reflects one less day in shipments by an ultra reflects large fortinet repairs that are taking place at this point that demand is quite strong across all markets and it continues that way.
Operational performance is very strong we just mentioned that our teams globally are very well organized leveraging the capabilities. They developed to be able to increase the speed and efficiency, which are allowing us to serve.
Even incremental demand.
So we are very optimistic about the year, we're very confident.
In our execution and this quarter continues to reflect that.
Next question.
Right.
Thank you. Our next question comes from George Staphos from Bank of America.
Hi, everyone. Good morning, Thanks for the details and congratulations on the quarter.
<unk>.
And frankly, the clarity of the presentation is continues to improve so we thank you for that I guess.
My question.
We go through your guidance look at <unk> look at the first quarter and just use mid points and recognizing that's simplistic analysis. It suggests that the second half of the year is perhaps down versus last year and I am just trying to understand gentlemen to what degree you're just.
Building in some cushion because of the obvious.
Unpredictability in Europe , and elsewhere that you've got to contend with both again.
What's happening with the Ukraine, and Russia, and inflation and the like and if we could extract that cushion assuming there is that in there.
What would that amount look like and what would your guidance be if not for the for that and then I guess the second question that I had.
Related to that is was there any effect of pre buy from what you could see in the results.
And then just a quick follow on to Mike's question with Mac on magma is itself a model where you were trying to have smaller more modular capacity, that's more geographically dispersed so I'm not sure exactly what you're getting at in terms of the adjustment to the plant since magma is in itself a plan of using smaller more modular <unk>.
So thats dispersed thanks, guys and good luck in the quarter.
Thank you. So let me let me just start with the.
First question.
We are very optimistic about the year.
And we continue to see very favorable demand fundamentals.
Operating performance. He is very strong we are effectively pricing through cost inflation.
So.
We are in a good policies you know as we all know there is a significant macro uncertainty, which impacts all industries not just glass and it's not just July .
And that is characterized for example by input cost volatility the supply chain risk and potential recessionary pressures at some point and is difficult to determine when that point would be but our operations are solid and we are optimistic.
For the year, but we also why don't we probably.
Yes, maybe to add on that specifically to some of the number calculations youre doing George there just give you our perspective on how you were thinking about it.
We did increase the top end of the range by 10 cents.
If we look at it the first quarter exceeded the top end of our original guidance by 13.
But at the same time, we do have a few cents of added pressures stronger dollar higher interest expense and things like that so that kind of drove that net 10% number there. We have not made any further adjustments to our forward business outlook from what our original guidance was just reflecting those dynamics on the top and so obviously, it's Earl.
Earlier in the year and we will continue due to update our outlook as we can.
Navigate the market volatility one thing to keep in mind in the second half of the year is we do have probably about 13, a year over year headwinds associated with FX.
The divestiture dilution and additional interest on paddock. So keep in mind that those are numbers that are kind of just structural elements, there, which really would indicate that operating performance. We expect things to be good in the back half of the year from a operating performance standpoint.
Thanks for that John very fair with regards to the.
Pretty wide.
The strong shipments in Europe have been taking place for two quarters in a row.
So that would take us to believe that this is not a pre buy.
Situation and when we take into consideration the various factors that are common to our regions as well as the individual factors impacting demand in Europe . We really those are really the drivers so pretty wide might be some we believe he has very little if there is and two quarters in a row wouldn't be up <unk> <unk>.
<unk>.
With regards to Magna Youre right Peter.
It allow us to keep.
Implement this module capacity beyond that however, most of the projects. We had in our plan are very large greenfield through magnum, but very large greenfield and Asia with them. For example is lead times on inflation impact those kind of projects.
More than various small projects that are primarily life extensions and things like that one reason for that is the civil infrastructure that needs to implemented so building such as steel and all of that that's going to even material inflation. So the.
What we are doing with a lot of agility, which is one more example of the change that Oi is rectal and figure out plans that meet all our objectives, which is really worth.
Yes.
Are the drivers of value.
For shareholders.
One thing to add on that Magna component.
Ultimate solution General Gen. Three is the one that really allows you to scale down and go into the light manufacturing warehouse and things like that.
Where we are in the development cycle. The plans over the next couple of years here, we're really more like a generation one five or two we still rely on a lot of the larger infrastructure items, but ultimately that's why we went out with accelerate gen. Three because it is a great solution for this situation that we're seeing right now.
Thank you guys. Thank you.
Your next question comes from Mark Wilde Bank of Montreal. Your line is open.
Now I'd like to add my congratulations very good quarter.
Can you talk about how you are managing the European energy pricing in the first quarter and whether you know energy prices in Europe , which look like they're going to be a much higher going forward.
As sourcing changes, whether thats, causing any long term changes in your planning for the European market.
Okay. So the.
We have started our warrick.
Deal with the situation that we're going through to a long time ago.
And our capabilities in procurement for example, allow us to manage inflation to a point.
Our capabilities in the commercial space are also a big support to be able to deal with this and we have started to plan all our warrick.
For price increases to be able to fully offset inflation.
Not later than the middle of last year.
And we've been executing according to our plan. So we plan very early on but we planned well and we're executing in line with that we believe we have the right mechanisms toward through these from a procurement standpoint from a commercial standpoint, but also the culture of the company. Because this is a company that works very well cross functionally and Toledo.
With these kind of situations you need a lot of function of award you need.
The finance team and their unique business intelligence, you need a lot of.
<unk> held from different functions to be able to it.
These having a long term impact.
And the reason is can this change our perspective of the business not at this point.
With what we know today, we believe we can navigate this well.
Things change if things deteriorate, we'll adjust accordingly, but so far we feel very good about the way we've been handling tourists.
I would add to that Mark real quick is that we are investing in other energy switching capabilities. So that we would have the flexibility between energy oils and other things like that from from from just increase flexibility and then really over the long run with magna might be able to run off of Biofuels in hydrogen down the road granted that's a few years out.
On those markets need to develop but it gives you even more flexibility on an energy standpoint over the long term.
Okay, and I wanted to just kind of following on that Andres can you give us some sense of what all of these cost changes have meant in terms of the relative cost of glass versus other substrates and whether any of those changes are.
I'll turn the behavior of your customers.
Yeah. So the.
Going into this period of time, there was a gap between us and.
Relevant alternative packaging, if you will.
That differential has.
Decreased by 50%.
So for all purposes E DS.
Favorable to glass.
Now it is important to keep in mind that.
In some cases and in particular, when we compare with aluminum cans, we play in different lanes.
They are driven by energy the readings of sports drinks bottled water.
Higher sales <unk> carbonate, it's all brings those products, which are growing and are driving their performance in our case were driven by our demand is driven by premium products.
<unk> in wine and food.
In N B's in beer. So we are in different lanes, we play in different segments.
If you want to compare a container for <unk>.
<unk> segment between the tool that gap has closed.
Okay very good I'll turn it over thank you.
Q.
Yes.
Your next question comes from Gabe <unk> from Wells Fargo Securities.
Andreas done this morning.
Good morning.
So you guys I think Andreas you just confirmed.
Kind of historically speaking, it's been a life practice to forward buy or hedge energy kind of beginning in the mid year or even before that so I think.
As we can.
Think about 2023 and rolling those forward.
And I don't want to say energy is around 20% of cost of goods, depending on what youre, making.
Would that then.
<unk> that you need another round of kind of high single digit price increases in Europe .
Appreciate things are fairly volatile at the moment, but just sort of freeze.
Energy, where it's at today.
Yes, so we've been executing as we.
Promise so last year.
We got the question very off thing with regards to are you going to record inflation.
And our answer was yes, we will.
And we've done it and we.
We had our first price increase inflation continued to go up we implemented the sick.
So we will continue to monitor inflation and if the situation presented itself with incremental inflation.
We're going to take action.
And I would add gave that we take a very long term structural approach to our procurement and financial management of the organization. We don't go its not a month to month or quarter to quarter type of practice with the organization. So so we try to manage over the long term.
Yeah.
Okay, and then I guess down in Brazil have you seen any change either I guess on the consumer side in terms of consumption patterns and or at your customers.
I think.
I think it's reasonable to assume there a little bit more economically sensitive down there and given the inflation that they've seen on the consumer side.
A little bit more replenishment of the returnable fleet or anything like that that you've seen versus one way.
Yes, so the.
There is a large scale expansion of premium beer, taking place in Brazil.
And that is generating a very large volume.
Which piece.
He is utilizing painful the capacity available for glass in the country those products tend to be less impacted by these inflationary situation in Brazil.
So at this point, we are sold out all the capacity is being used.
And these larger scale expansion of premium beer continues our returnable containers are being emphasized and I in court issues will take a look at the latest.
Presentations by large customers in that country and Youll see how the emphasis is not only in glass returnable glass.
And that's.
He is also going through the system that win.
Inflation goes up in those countries and those economies returnable containers are a very good way to.
Protect margins by our customers.
Thank you good luck.
Your next question comes from Kyle White from Deutsche Bank. Your line is open.
Hey, good morning, Thanks for taking the questions and congrats on a very strong quarter, just hoping to better understand the volume cadence through the quarter up 6% for the quarter, but I believe volumes are tracking up 4%.
February .
So why such the acceleration in March was that just all related to taking share from from Russia, and Ukraine or any other details you can provide.
Well I think it's a the multiple factors that we described are common to markets and the once that are particular to Europe . So.
Mineral water for example, he is accelerating in that period of time.
When the economies were still locked down or limited in activity and the on premise channel to us.
At partial capacity the minute of water. It was lowered now with full year.
The experts of Champaign and process or the wind Italian wine are very strong and that's driving that incremental demand. The performance in the countries that I described in western Europe of course.
Capacity in Ukraine, and Russia that is not going into Europe .
He's a buffer for the <unk> system. So.
I think when we look at Europe . It is important to take into consideration that.
There is a significant buffer so they mandate has slowed down quite a bit before that buffer is consumed.
So that helped us to be confident about the demand in Europe .
If I could just follow up do you have a sense of how much volumes from Russia, Ukraine were a benefit to you this quarter and what you kind of expect for the balance of the year from that.
There are multiple dislocation taking place, but I would guess study.
<unk>.
Highlight a gross number and it could be around $1 million.
<unk> pumps.
It's about a 20 million ton system over in Europe to give you a nice outcome.
Very large very large buffer and and thats not considering the.
Drivers of incremental demand in the market.
It's just these dislocations.
Create a gap of 1 million tons or so.
It needs to be absorbed by the local capacity.
Got it and then on my second question can you just provide an update on your inventory levels. Typically I believe you guys use the first quarter to kind of build up inventories doesn't seem like that's necessarily the case given the strong demand this quarter.
Will that impact maybe volumes or typical seasonality through the balance of the year or how should we think about it.
Well, so the already inventories have been.
Reviews over the last.
Two or three years.
The reason why we can do it is because we changed the planning processes of the company and you might recall that we implemented IBP integrated business planning, we changes how this business can be run and as a result of that planning process, our supply and demand planning capabilities, which are very different than they use.
TUI and the flexibility in our manufacturing operations when do we combine all of that these companies are able to work with much lower inventories and thats, what youre, saying so our inventories are lowered now demand. Obviously is very strong. So at some point, we're going to be limited by inventories, but I think it's important to highlight that we really.
The levels we.
Describe for this year.
We believe our sustainable.
And we might be able in some places to still go even further down.
Because of what I described before.
Yes, just to back that up with a couple of data points on a year over year basis, our Ibs inventory days sales was down about eight days and on a sequential basis between the fourth quarter and the first quarter. They were down about two days and you are right usually you start to start to build some up there but.
But we do believe as Andrew says that we are continuing to manage to lower inventories through the new technology with the summer we're putting in new more new technology. So we're regularly doing this to be able to support this going forward.
And keep in mind, we are also with this better speed and efficiency that we've talked about before building up creep capacity additions to the business to be able to support that so so the combination of managing to continued lowered.
Inventory efficiencies and create capacity of supporting that.
Strong demand growth that we're seeing and in some markets we need some line extensions last year. So we highlighted that in previous calls.
That's something that is supporting us to serve incremental demand in those markets.
Got it thank you I'll turn it over.
Thank you.
Your next question comes from Adam Josephson from Keybanc. Your line is open.
Thanks, everyone. Good morning, hope you're well.
John .
Good morning on dress.
John a couple of cash flow questions for if you don't mind.
You raised your net income guidance by a little bit.
Free cash flow language is the same I know inflation is getting more severe.
And it seems like you've raised your volume expectations by buy something so can you just help us with the extent to which you're free cash flow expectations have changed at all I know the language remains the same but.
At or above 125 could be a very big range for all we know so how are you thinking about free cash flow.
Compare to three months ago, and how wide is the range that you're really thinking about that it could be this year.
Yes, yes, thanks for the question and keep in mind, you know let's.
Lets parallels to the our earnings outlook. So we have $1 85 to 210 is our EPS outlook.
So 185 do you think that is kind of the floor, while the $125 million of free cash flow is the equivalent floor to that to that earnings number so to the degree that earnings outperform and continue to be on the mid to higher end of our guidance range. It would lead you to believe that that free cash flow also would continue to.
Improve.
So to give you a kind of a sense you can kind of look at that range and get a feel for the magnitude of the opportunity there.
One thing I would say is you take a look at the other levers of cash flow. Besides EBITDA.
Cash flow.
A remained pretty stable overall, we expect working capital to be a continued to be a modest source of cash.
Going forward this year compared to the compared to the prior year free Capex is pretty stable overall, obviously, we're changing our plans around a little bit but the overall number is pretty stable and you look at the other levers that we outlined at the year end. They are pretty much are intact. So hopefully that gives you a sense of of the range possibilities and how we're thinking about that guidance.
I appreciate it just one follow up.
Could it end up being are you thinking that the number could be considerably higher than that 125 are you thinking now what we really think is it's 125 or something maybe a little bit higher but not dramatically. So.
Well I think I think you could look at the range based upon the earnings range and yes and yes.
By that picture and that gives you a sense of the EBITDA movement.
The thing that could be choppy as is capital investments can be choppy, just with supply chain issues and things like that so so those are the variables were mostly taking a look at.
No.
Whatever your conversion ends up being this year John .
Are you thinking just based on your change Capex plans for this year and perhaps beyond that.
Your conversion will be similar over the next two years.
As it will be this year or are you thinking of conversion could change in a pretty material fashion over the three year period.
Well, what I would say is as you know that we primarily focus on conversion on adjusted free cash flow taking out the strategic capital because that could be lumpy. So that guidance that we provided during our investor day I think it was 30%, 35% something like that of adjusted free cash flow conversion is what we expect to generate over that period of time.
Now to the other question of supply chains, and they're affecting the capital timing and things like that let us come back a little bit later in the year mid year, whatever deck to give you a better sense of what that is.
It really is again, it's driven mostly by supply chain things overall, we're seeing a little bit of spreading out of.
The capital expenditures just things are always you know three months to six months lower right now than you'd like so so that kind of needs to be flushed through the overall sequencing compared to what we originally expected.
I appreciate that and just one last one John if I may I think George was asking about I think cushion for potential cushion in your full year guidance given the outperformance in <unk> and given your two and your second quarter guidance are you just to be clear are you thinking about it like that or are you thinking now look weak visibility is just it's limited.
Ed.
And they may look at how much you beat your first quarter guidance by that visibility is very limited and this is really the best we can do and.
We don't really think there is a whole lot of quote cushion in terms of the implied <unk> guidance can you just flush that out a little bit more.
Yes, I mean I go back to the original guidance for the year that we gave heading into the year had a <unk> 20 range right on a relative sense of performance or so now we have a little bit of a wider range because we picked up the top end I'm sorry, you had a 15.
A 25 cent range.
So.
As we think about it.
What we've done is we've increased the top end of our guidance range based upon what we've achieved in the first quarter, we really havent rebase anything else for the balance of the year. So to the degree of the business has good momentum and we continue to see solid demand in the ability to get the creep capacity and to be able to generate more sales volume, yes, there theres probably.
Some some upside to that but theres also with all the uncertainties that we're talking about so theres just a stew of different variables in place so it's harder to.
Identify a particular cushion or not all I'd say is that we're incrementally more positive on the operating performance of the things that we can control, but theres the uncertainties with the macros and we're just gonna have to work and we'll work that through the next several months I think it'll be pretty telling on those elements and we'll update guidance as we get closer to.
Mid year.
Thanks, so much.
Your next question comes from Jim Meyers from Goldman Sachs. Your line is open.
Hey, good morning, everybody. Thank you for taking the time and squeezing me in here just one quick one for me here on the balance sheet.
Congratulations first of all on coming close to the the paddock settlement with regards to the $600 million delayed draw term loan just wondering if you can help me kind of think through.
That funding source. So you know first of all it's kind of an option for you right now and then even if it is drawn relatively short maturity.
So curious if you could kind of help me think about how.
That becomes a permanent part of the capital structure versus kind of some considerations around.
Capex asset sales et cetera. Thank you.
Yes, so our intent would be to use the delayed draw when when we complete panic and we fund it and to your point is within our BCA that delayed draw has a extends through the end of 2024. So we have a lot of there's something over a year and a half to be able to address that on a long term basis.
<unk>, we would look to refinance that into into longer term debt.
Of course at the same token you you brought up the point, we continue to do our portfolio optimization more cash is coming in.
We had a couple of hundred million dollars more.
<unk> still to come and so we will be looking at the inflows of that then that the rebalancing of the delayed draw and the rest of the things in totality here not to mention the cash flows of the business. So we would expect to be active in the capital markets sometime over the balance of the year in all likelihood, but let's see.
How those cash flows come through those other sources too.
Very helpful. Thank you very much.
Okay, Great and I think we have time for one more question.
Sure.
Your last question comes from Anthony Pettinari from Keith Your line is open.
Hi, This is actually Brian Bird Meyer sitting in for Anthony.
Thanks for the new volume growth guidance for 2022, just given some of the supply constraints that you've spoken about is there a cap on the level of volume growth that Oi could see this year.
And then based on the level of volume growth already seen in <unk> and your guidance for <unk>. It seems to be implying kind of flat or negative growth for the second half. So I'm. Just wondering if you can explain that dynamic a little bit.
Yes, so we have multiple sources, so incremental capacity to.
So for incremental demand this year one is we.
We are not having a repeat of the formulary impacting the first quarter. So that's one.
Sensors that we implemented last year.
Al.
Available for us to.
Getting incremental supply increased productivity, which is which is quite impactful and it's going quite well.
Inventories, depending on the market and we have more available in inventories, but we continue to work on that.
And.
Then just exiting the year, we would have two large projects already available, which is project to 90 and the project in Canada.
Yes, I mean, I think I could add a couple.
More context, there if you look at our increased productivity increased level of production in the first quarter, which was three 7%. It fell ended three buckets are about equal size. One was the rebound from winter storm here, that's come and gone.
Other one third is the capacity adds that Andre talked about but the other one third is debt increased speed and efficiency that we've been achieving so the enduring element of that is probably your biggest incremental headwind to be able to add incremental benefit to be able to deliver more.
Say deliver on more sales out there as well as how well, we how efficient we can be with inventory.
Got it thanks for that detail.
Last question for me.
Large beverage producer that Hasnt really use glass historically is conducting a returnable glass pilot in the U S right now.
Can you just remind us from OIS perspective, how do the economics of returnable glass compare to the economics on one way glass and is it possible to say what percent of your current portfolio comes from returnable glass right.
Yeah. So the returnable glass is a has very large presence in Latin America, that's not in the United States.
Because it makes multiple trips to the market. This is the the.
Best option for them from a profitability perspective are really wanting to market because.
Is better for consumers he is better for our customers too.
There are some pilots out there is increasing interest themed returned and I really think the United States.
We got up western closely to see how they develop.
But at this point as I mentioned before we're seeing incremental emphases on returnable glass in markets like Brazil because of the <unk>.
Higher inflation in those markets now from a sustainability standpoint, there is no better package than returnable glass.
It beats everyone else by by a very large margin.
Yeah, and just to underscore the economics, there, let's say that you just use a baseline of 10 cents for model, obviously, it could be all over but depending on the bottle in the market that you're in but the equivalent returnable.
Item on a pre unit of consumption is well below 1% I mean these bottles usually make lives trips at 2030 times, even with collection and cleaning costs and stuff like that.
Well well below anything out there that you can touch in the marketplace, whether it's glass aluminum plastic or whatever.
Got it okay guys. Thanks that concludes our earnings call. Please note our second quarter call is scheduled for August 3rd and.
And remember it tastes better and a glass, so making a memorable moment by choosing safe healthy and sustainable glass. Thank you.
This concludes today's conference call. Thank you all for joining you may now disconnect.
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Okay.
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