Q2 2022 O-I Glass Inc Earnings Call

August 3, 2022

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Hello, and welcome to stage III, plus second quarter 2022 earnings conference call.

My name is Alex and I'll be coordinating your cold stacked.

If you would like to register their questions during the presentation.

So by pressing star one on your telephone keypad.

I'd now like to hand over to Chris Manuel Vice President of Investor Relations. The floor is yours. Please go ahead.

Thank you Elliot and welcome everyone to O I glass second quarter 2022 earnings call today, our discussion will be led by Andres Lopez, our CEO and John <unk> our CFO .

Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials now I'd like to turn the call over to Andre who will start on slide three.

Good morning, everyone.

I appreciate your interest in Oi glass.

Last night or I announce a strong second quarter adjusted earnings of 73 per share, which exceeded prior year results as well as guidance.

Performance improved across all business layers.

The last shipments increased slightly compared to the prior year and the benefit of higher selling prices continued to more than offset the cost inflation.

Likewise solid operations cost performance and our margin expansion initiatives contributed to this strong quarter and helped offset elevated costs as we ramp up our expansion projects.

As illustrated on the left all key measures improve with adjusted EPS up about 35% from the prior year and that down significantly.

In addition to our strong performance, we continued to advance our strategy.

Our balance sheet is now in the best position since prior to the substantial investment to build out the Americas network between 2015 and 2019.

This includes the acquisition of Hawaii, Mexico, and <unk> sponsored an ABC uncomedic work.

Additionally, <unk> recently announced the first U S Magna a greenfield facility at bowling Green, Kentucky, which started mid 2024.

Last.

It's certainly not least the company has achieved a third and final resolution of Barrick's legacy asbestos liabilities and fully funded the paddock Trust as of July 2018.

Hawaii has passed an inflection point and we are developing a track record of consistently delivering on our commitments.

I'm proud of the team said Youll ATM strong execution, Amit <unk> outperformed precedented macro volatility.

While I will review, our revised capital expansion and Magneti relevant plan, which has been adapted to better fit the current macro challenges, while achieving our investor day goals.

Finally, John will review, our recent business performance strengthening capital structure and improved outlook for 2022 and discuss how <unk> is well positioned to navigate the potential Russian natural gas for payment in Europe .

Let's move to page four as we reviewed recent sales volume trends.

Our <unk> increased nearly 1% in the second quarter, which comps on top of an 18% improvement in the prior year quarter.

Volume was up nearly 1% in both Americas, and Europe with the strongest demand in the Andean Mexico and solid with Europe .

Year to date achievements were up 3% about 5% in Europe and 2% in the Americas.

Market trends clearly favorable glass, resulting in the strongest market fundamentals seen over 20 years.

Let me comment on a few of the longer term secular trends.

Across Latin America, a structural shift in demand is driving sustainable growth.

Customers and consumers increasingly favor premium products on our customers are localizing international brands that have been successfully imported police markets for several years.

We're gonna mutation failures, one way glass containers, while consumers fueled by lithium sustainability considerations are prompting greater use of returnable bottles.

For example, last now holds 50% market share in the Brazil beer category as both one way and returnable glass gained share.

As illustrated at the bottom of the page we have improved our mix in North America by consistently shifting away from beer to oil growth categories. In fact U S. Mega beer only represents today around 15, one 5% of our North America business and 4% globally.

In Europe , a large volume of glass historically imported from Russia, and Ukraine is not longer available due to a recent conflict, which drives up demand for locally produced glass.

Glass has demonstrated a strong performance across markets both on premise and off premise over the last few years really finding long held assumptions about last resilience through channel shifts.

Finally, our strong demand is driving increased new product development and glass, which is up about 10% from pre pandemic levels. According to <unk> data.

Clearly there are many important drivers for continued secular demand growth.

We expect our full year sales volume will be up around 1% in 2022 is healthy demand is.

He is tempered by record low inventories and capacity constraints across many markets in fact, our volumes each quarter. This year should exceed pre pandemic levels.

Improved production at speed and efficiency can support modest sales volume growth for now.

Long term, we have several expansion projects underway that will add much needed capacity in 2023 and beyond.

Yes.

On top of a strong performance, we continued to advance our transformation they are starting to page five.

Our margins are up 130 basis points year to date, despite unprecedented cost inflation.

In April we successfully raised selling prices for the second time this year.

It should exceed these full year net price objectives.

Likewise, our margin expansion initiatives are off to a good start and we have already exceeded our annual target.

I made the strongest glass fundamentals in over 20 years, we have revised and adopted our expansion in magna developing plans to enter feed the macro challenges.

Further strengthen profit our growth and achieve our financial targets.

Spend more on the next page.

Our SDN glass advocacy efforts are also progressing with.

Nearly one third of our electricity is now being supplied from renewable sources, a big step towards our goal of 40% renewables by 2030.

Our glass advocacy digital marketing campaign remains in high gear.

<unk> $650 million digital impressions year to date, which supports our growing commercial pipeline.

Our current portfolio optimization program should be completed by year end ahead of schedule.

Finally, we achieved a third and final resolution of legacy asbestos liabilities by mid 2022 as expected.

Overall, we are making excellent progress on our key strategic objectives.

Advancing to slide six.

Last fall, we introduced our capital expansion plans to enable profitable growth over the next three years and our corresponding magma development plan.

Since then unprecedented macro challenges have impacted these plants, we are experiencing delays of six to 12 months as we contend with significant supply chain lax cost inflation labor availability issues as well as COVID-19 related disruptions.

As a result, our original plan no longer meets commercial requirements.

Hawaii is responding to these macro challenges with agility.

We are introducing our revised capital expansion and Macmillan development plan, which we believe better.

Better needs to asbestos environment importantly that revised suspension plan enabled sort of 5% to 6% organic volume growth target and sustain the 20% return on investment goal across our portfolio with lower total capex.

We are planning on a wider range of smaller scale projects that reduced construction costs and complexity broadens our market reach and feed the timeline required to meet customers' expectations.

In particular is sky high as steel and cement prices and supply chain lax are hampering larger scale greenfield expansion, whether with legacy or early Magna generation technology.

So we have reduced the number of greenfield projects in favor of line extensions, adding lines to existing furnaces reactivating idled furnaces and other similar efforts.

The map shows the various projects included in our revised capital plan.

There are no changes to the new capacity coming online in 2023.

Likewise in ECL Magnus pension plans will be focused in the U S to support the attractive at spirit and Ips distribution business, starting with the recently announced <unk> facility in bowling Green, Kentucky.

<unk> is proceeding well yet progress is slower than originally anticipated due to the same macro challenges. So we are focusing our R&D and engineering resources on to Magna Greenfield lines in the U S. Rather than a larger number of sites based on early generation Mcmath technology. This will help accelerate that.

<unk> our generation three solution, which includes the full suite of Magna capabilities that are best positioned to address key market opportunities.

We expect to complete development of our generation tool solution by mid next year, which will be the basis of our new bowling Green facility.

Generation III development should be completed in mid 2024 with the first site to follow in 2025.

In summary, the revised plan meets <unk> environment and supports our Investor day financial and growth targets now I'll turn it over to John to review financial matters, starting on page seven thanks.

Thanks, Andreas and good morning, everyone why reported second quarter adjusted earnings of <unk> 73 per share up 19% from the prior year. This strong improvement was fully attributed to very favorable net price realization and slightly higher sales volume all other elements FX divestitures, corporate interest and taxes et cetera.

<unk> essentially netted to zero.

Segment operating profit was $257 million up from $232 million last year as margins improved 60 basis points, despite FX headwinds favor.

Favorable net price increased segment operating profit by $42 million as higher selling prices more than offset elevated cost inflation.

At the same time volume and mix added $6 million as shipments increased 0.6%.

Finally operating costs were comparable with the prior year.

Segment operating in.

<unk> improved significantly in both the Americas and Europe , despite unfavorable FX and dilution from recent divestitures.

The Americas posted segment profit of $130 million up $14 million from the prior year on an adjusted basis.

Reflecting modestly higher sales volumes and improved operating costs, while higher selling prices nearly offset elevated cost inflation.

Given this situation we are focused on adapting future contracts to improve this pass through and margins, especially in North America.

In Europe segment operating profit was $127 million up $33 million from the prior year on an adjusted basis.

Earnings benefited from very favorable net price, while operating costs were higher due to elevated asset project activity and input costs. The chart provides additional details on nonoperating items overall second quarter results were exceptionally strong reflecting favorable performance across all key business leaders.

Let's turn to page eight as discussed we continue to make very good progress on our key strategic objectives, including the financial priorities you see here.

As shown on the bottom chart, our total financial leverage approximated four times at the end of the second quarter in fact, leverages at the lowest level since prior to substantial investment to build out the Americas network, including the acquisition of O I, Mexico in 2015.

Likewise leverage was down more than a turn since this time last year overall, we expect to end the year in the mid to high threes, which is favorable to our 2022 objective.

Let me outline our current capital allocation principles, reflecting the best glass fundamentals in a generation our top priority remains investing in expansion ultimately enabled by Magna, which drives profitable top line growth higher margins and greater cash flows continued balance sheet improvement as our next priority, which is tracking well finally.

We will evaluate return of value to shareholders, which may be enhanced as our balance sheet position improves.

In summary, our balance sheet is in the best position in years, and we are committed to the appropriate capital allocation for value creation.

Let's discuss our business outlook I am now on page nine overall, our outlook has improved results for the first half of the year exceeded our original expectation and we have good momentum heading into the second half of the year.

We provided our updated outlook for both the third and fourth quarter as well as full year keep in mind, we are absorbing unfavorable FX dilution on recent divestitures as well as incremental interest on funding. The Paddock Trust together. These factors represent around a <unk> <unk> headwind to earnings in the back half of the year.

Furthermore, our network is capacity constrained, which will limit volume growth into the second half. However, the addition of new capacity early next year, along with improved productivity will support 1% to 2% growth in 2023.

We expect third quarter adjusted results will approximate 55 to <unk> 60 per share, which is comparable to the prior year. Yet. This represents approximately a 5% to 10% improvement in operating performance when adjusting for FX divestitures and pattern.

We anticipate continued favorable net price and stable or slightly higher shipment levels operating costs will likely be higher as we ramp up planned asset project activity, which will be partially mitigated by our margin expansion initiatives.

We anticipate fourth quarter adjusted earnings will range between 20, and 30, which is down from the prior year, but potentially up around <unk> when adjusting for FX divestitures and paddock earnings will benefit from favorable net price. However, we expect sales volume will be down some shipments grew five 5% in the prior year quarter and we now.

Contend with low inventories and capacity constraints again operating costs will likely be higher as we ramp up expansion expansion projects, which will add new capacity in early 2023 to support growth.

Looking at the full year, we are increasing our earnings and cash flow guidance. We now expect adjusted earnings will range between $2, five and $2 20 per share and free cash flow should exceed $175 million adjust.

Adjusted free cash flow should topped $400 million.

Which is on the high end of historic performance levels and future cash flow growth will be supported by our expansion investments.

This outlook assumes $600 million of Capex, this year, which will be concentrated in the second half. Please note that ongoing supply chain challenges could impact project timing.

Of course, we continue to monitor macro trends, including potential recession signals, which may affect our business outlook. Overall, we are much better positioned to navigate a potential recession than in the past given solid glass demand fundamentals.

As we all know there is a risk of Russia natural gas curtailments over the next several months in Europe , which could be disruptive, let's turn to page 10 for <unk> to further discuss this topic.

Europe is preparing for potential Russia natural gas curtailments through this next winter countries are actively sourcing more gas from other locations, including the U S and middle East as well as ramping up alternative energy sources, such as temporary rarely restarting idled coal fired plants. In addition to these actions. The EU has established a plan to reduce energy usage.

<unk> by 15% to mitigate the brunt of potential Russia gastro talents. Each member country will have a specific plan potential drivers include promotion of consumer behavior changes government imposed gas allocations and safeguarding key industries.

We have been tracking in evaluating this situation for some time and preparing our operations early in the year, we started to install energy switching capabilities and establish agile network optimization plans to date, 20% of our capacity in EU is capable of running with oil and we expect to have 50% covered by year end.

As we maintain best in class long term energy contracts that protect against volatile spot market prices and.

Importantly, glasses, often regarded as an essential product and many EU markets for example, Italy and France, our largest markets currently have taken positions that may protect the glass industry.

At this time it is unclear if meaningful issues will emerge. If this scenario does materialize, we are well positioned to manage the situation, which we believe represents only a slight potential risk to <unk> 2020 to business outlook now back to Anders.

We are very pleased with our second quarter results and the achievement of several key milestones in our transformation journey.

Hawaii is managing well through macro volatility at the end margins have improved despite significant cost inflation.

By Wise, we are executing our revised capital plan that is appropriately suited for today's business environment.

We have increased our full year earnings and cash flow outlook, reflecting solid progress year to date and good momentum.

This represents the ninth consecutive quarter Hawaii.

Has either met or exceeded guidance and we have consistently increased our full year outlook in fact.

Our updated 2022 earnings outlook is approaching our 2024 target from last year at Investor Day.

It all we are increasingly optimistic about our 2023 performance provided no significant changes in business conditions.

In conclusion, I believe <unk> represents an attractive investment opportunity.

We are successfully addressing many historical where accounts on the stock and materially improving our capital structure.

Likewise, we are delivering on our commitments to generate profit our growth execute on our plan and advanced breakthrough <unk> technology.

We are confident visa strategy will continue to create value for our shareholders.

And we're ready to address your questions.

Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.

If you change your mind can suppress thoughtful about too.

And for parents to ask a question. Please ensure your devices Amit locally.

Today, we ask you limit yourself to one question and one follow up.

Our first question comes from Ghansham Panjabi from Baird. Your line is open. Please go ahead.

Thanks, Good morning, everybody.

Good morning, so on the European exposure.

Slide 10 in your Investor deck.

With 34 plants, there and obviously some are more exposed to.

Russian natural gas and others.

How much flex capacity do you have in your system at current in Europe , I can't imagine, it's too high but just.

Just curious as to your ability to flex across your manufacturing footprint. If there were some disruptions in countries such as for example, the Czech Republic.

Yes ghansham.

<unk>.

Florida has seen 20% of our capacity that allow us to use oil.

Already provides that flexibility every court palin level that we have heard about is in the range of 15%.

We already have capacity converted up to 20% we expect to have.

Up to 50% by year end and that is going to provide a very good protection for us to be able to have.

Capacity to the ROM without a program to serve our demand.

Now it is important to consider that the largest markets in which we operate.

<unk> bin.

Having the Colbert to manual fee sales very active highlighting that most likely glass will be characterized as an essential industry. So we've got that very large part of our footprint.

We know, Germany, and Czech half.

One of the.

Largest challenges nevertheless, the situation for them each already improving because they are already implementing measures to reduce consumption to increase their reserves going into a winter for example, Germany is stock at this point is at 70%, which is two five to three months of <unk>.

Slide.

Check is 80%, which is close to five months of supply, but again they are actively not only sourcing from different sources in this case, but they are.

They already activating their communities for substantial savings. So we are pretty optimistic that the riskier will be really minimized if I if I rescheduled now the oil countries Hungary, which.

<unk> already has been.

Focusing their priority on glass supply because they are used to we supply coming out of Ukraine into Hungary, which is not available anymore for a country that has a very large agricultural industry. So.

The focus is really on supply so they're continuing to pay off our operations over there in our minds is will be there.

All in all when we look at all of this even though we watch this very closely in a continuous basis, we feel very comfortable that this risk is really low for us.

Okay, that's great and then in terms of the $47 million price cost.

Segment of variance for Europe , how do you think that evolves in the back half of this year and then on North America.

$5 million decline is that just a timing issue given the surge in natural gas prices.

Yes, Yes got you. This is John we believe that our we believe that will have a long term.

Net price favorable variance.

That includes the back half of the year. So we had about 16 since favorable net price overall for the company in the second quarter, we think that the levels in the third and fourth quarter will be very very consistent with that and to your point on the Americas being down $5 million. One thing I'd point is year to date it is actually.

Up $7 million down $5 million in the second quarter and Youre right. It gets a little choppy because overall the Americas in particular in North America has a higher proportion of long term contracted businesses have price adjustment formulas. So we've been very working actively to push the inflation.

Through through pricing as quick as we can but some of it is tied up in annual Pis.

That will have to work through but again as we said in our prepared comments, we're actively working on the contract structures in the America, because it does need to be more flexible.

And in this case for North America any spread we're not really getting this year is going to be a positive for 'twenty three stragglers correct, yes, we do expect positive spread in 2023.

Our next question comes from George Staphos from Bank of America. Your line is open.

Hi, everyone. Good morning, Thanks for the details.

Just some props youre too thanks again for just over the years, making the deck clearer and really well outline at least in my view, thanks very much for that.

My question around operations.

So when we think about magma and the shift to the new plan relative to the old plan. How comfortable are you that the constraints on steel the constraint ton concrete the lead times all the stuff that we've been hearing about for the last year and a half and industry overall not just from you all.

Makes you still comfortable about the new rollout of the technology and the new capacity expansion plan relative to where you were what makes you couple that you wont be having to dial. This back another year from now for these same issues relatedly.

Since there seems to be and correct me if I'm wrong.

A greater amount of sort of heritage technology.

Relative to I think you're going to have only two new magma lines in the U S. What does that mean, what are the implications for ongoing reliability class quality.

Capital intensity.

Magma was in part around reducing the capital intensity footprint.

And improving the quality of the glass over time, so how does that all shake out and then a quick follow on.

Okay.

What we've done with this new plan is.

Change, what usefully Greenfield projects, which are highly impacted by the conditions you mentioned.

The oldest <unk> reward that is required in Memphis deal on all of that to projects that are required much smaller infrastructure. So line extensions line as he assumes bringing back a existing capacity that is now so from that perspective, we are lowering the risk of the whole plan significantly now our folks.

Magna increases because instead of being implement in a larger number of lines, we're going to focus on two lines that will allow us to test everything we wanted to test by the way we are already testing Gen two and Gen three capabilities.

Instead of places in our footprint. So we will be able to test everything and we will be able to have the R&D team and the engineering team focus on those two projects, which will be located nearby tool. So from ballpark, let's say for our purposes, we're going to increase the efficiency of these teams working in these developments which gave us.

A lot of comfort now we are placing all the orders well in advance for everything that is under pressure in the supply chain of today. So with that we are seeing we are quite by with cohort. So the whole design of the plan is taken in consideration in Europe , achieving what you're highlighting which is.

Providing enough time to be able to fully successful and get there on time, we deploy many 24 for these first line on 25 for the second line for Gen. III now Gen. Three is the generation that has all the capabilities. We've been described before.

We are moving faster towards the entry so when it comes to serving the markets. We are improving our position and we're doing that by focusing now our markets are quite.

Healthy at this point in time the mine is high we cannot even started the demand in multiple markets.

Now is extremely important to be able to.

Bring capacity on time to satisfy the customer requirement that kind of projects. We're doing are going to do that the original plan because of all the acos.

We'll take too long and we wouldn't be able to.

Deliver on time.

Now capital intensity is one of the articles of magma he will be there. So we're taking all the actions to improve.

Our body engineering, and all of that fully able to help offset some of those pressures and we expect that over time.

Supply change will improve.

I'm, just I get that I guess and I appreciate all the color. There just correct me if I'm wrong, the fact that.

With the revised plan you will only have two magnum greenfield additions relative to what had been up to 11 and you have a lot of legacy and brownfield additions.

Three four years from now on an ongoing basis, let's assume everything goes as you expect will the new <unk>. If you will have a greater capital intensity than you would've otherwise had with the first plan.

Why or why not and then just a quickie because we've got some questions. On this can you give us a bit more color in terms of why the volume is down in the fourth quarter or is it purely capacity constraints or are there other weakness is showing up in the business. Thank you and good luck in the quarter.

George This is John just on the capital intensity comment keep in mind that generation, one and generation two.

We're always going to have kind of the legacy look of a large factory structure and things like that right. So the capital intensity of those we're still relatively high little lower than legacy, but still relatively high. It's generation three that allows you to get to that 40% lower capital intensity that we talked about during investor day, which.

We still see as the target and keep in mind everything that we were going to do in the original plan over the next three years was either going to be what we call generation, one five or generation two still relatively high and the capital intensity environment now we're leapfrogging a lot of that activity right and we're going to be going to generation three quicker. So I don't think thats over.

All changes are capital intensity picture.

By re sequencing things much at all.

And then on your later question on the fourth quarter that is all a comp issue. Okay. We were up five 5% last year.

Reduction wasn't up five 5%, we were serving that out of inventory of course inventories now are at record lows. It's just a matter of capacity constraints relatively low inventories and a tough comp in the fourth quarter, but again all of that gets ultimately taking care of early part of the year. When we bring new capacity online first in Colombia I think.

<unk>.

And just to complement that the our.

Our perspective on the Magna potential remains intact and goals that we had in our plan. We presented to you last year also remain intact and the good thing is the plan, we put together can help us to achieve both.

Our next question comes from Michael <unk> from <unk> Securities. Your line is open. Please go ahead.

Congrats Andres John Chris on the solid quarter and outlook and thanks for taking my question.

Thanks.

So you mentioned the you have the 20% flex capacity oil does that switch come at a higher cost and what I'm trying to get is you've done a very good job hedging natural gas effectively in Europe , but wondering if you've been able to similarly hedged on oil such that if you do make that switch, we're not going to see us.

Sky Rocketing your your energy costs.

Yes.

Yes, Mike we have like I said, 20% flex capacity going to 50%.

That capability.

<unk> will have.

The ability to run on gas on oil, but it also has blending capabilities between gas and oil too so you'll be able to not have to fully switch one way or the over one way or the other now on the fuel oil. It is more expensive, it's not nearly as expensive as spot markets of natural gas are today just to be clear on that and of course, if we.

We did incur that higher cost, we would obviously will be looking to pass that onto the marketplace. Just as we've done very successfully so far through through the cycle.

Got it I appreciate that John and then just one quick follow up one of your European competitors recently acknowledged that has lost market share because of tight inventories I'd also mentioned that.

Other players have not been as aggressive on implementing price as it has been in the market can.

Can you just talk about any share you may have gained in Europe .

Was that because of that share gain was it due to price or other factors that will evolve.

Let me let me just give you one perspective.

On debt.

We'd be measuring <unk>.

Net promoter score NPS for several years now.

And the improvement in that NPS, which means highly at customers CES has been material and material is material.

And it is quite high in multiple customers. So I think why is build to a strategic partner and customers come to us.

There are many reasons one of them being Darwin.

Now inventories are tight in the system, they're tied for us too, but our planning processes have improved significantly so we have become.

A lot more effective and efficient working with lower inventories in terms of therapies.

Yes, and I would add on that is relative to the competitive environment question out. There. Obviously every company is a little bit different have a different book of business different markets that they serve things like that but.

I will tell you what we're trying to get done we're trying to increase the top line increase our prices increase the volume of the business increase our segment profits increase our margins and increase the profitability of the business, we accomplish all of those.

Our next question comes from Anthony Pettinari from Citi. Your line is open.

Good morning.

On the.

You've been active on divestitures, but I think youre still around $200 million away from the $1 5 billion dollar target can you comment on sort of incremental opportunities remaining there.

And is that maybe more likely to come through divestitures or sale leaseback or and then just broadly does the strength that youre seeing in glass.

Yes.

Maybe.

Has it caused you to maybe kind of reconsidered divestitures potentially.

Yeah sure. So for clarity, we've completed about $1 $3 billion of our one 5 billion program, we have $200 million left Thats. One final sales lease back that we expect to accomplish here in the relatively near future.

As we look to the opportunities going forward, we've been fine tuning our portfolio now for a couple of years.

Followed after a period as we indicated expanding in the Americas now we've been fine tuning our network et cetera, I mean, I think we're at later stages and that Theres always opportunities that we will continue to evaluate.

We also need to understand.

The receptivity of the best marketplace to be able to get the best valuation for any divestitures that we have.

But as I said the market is really good we're liking how our business is looking now of course, there's opportunities to fine tune, but.

We're more focused now on operating our company.

Okay, that's very helpful.

Then just a follow up to Mike's question on the.

Nat gas to oil switching potentially you said it would come potentially at a higher cost, but you would look to recover those higher costs in the market with price increases is that is that higher cost I mean is that something that could potentially impact kind of the full year outlook or is that something thats really potentially just at the margin and.

Do you think that you have confidence that you can recover that within the year.

Yes, I think it's a marginal issue for the company right now even in our prepared comments, we said that we believe the situation represents a fairly limited exposure. If you take a look at it.

The EU is trying to reduce their consumption by 15% a good chunk of this could be done through.

Behaviors are you already seeing dictates in Germany for example of cutting out no longer heating pools, and asking people to reduce the temperatures in offices and homes and things like that for example, I've heard one degree centigrade change in the heating of the facility actually reduces total consumption by about 6%.

The consumer behavior activities are pretty big lever out there you throw that with in there.

We believe that will be well received by many markets about the nature of our product and the essential nature of glass overall, we think the net effect of allocations and all of those items is relatively low and then on those allocations. If you have to ultimately do some switching with oil and things like that the exposure is relatively.

<unk> low not to mention the ability to go back to the marketplace and pass it through so that's kind of how we're looking at all the different pieces of the pie and hope that helps.

Our next question comes from Kyle White from Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking my question I was just curious if you guys had seen any kind of consumer spending their behavior changes because of input inflation that is potentially impacting demand for glass products.

Any kind of impact from price elasticity yet.

Yes, so so far we haven't seen it.

Any impact sulfate changing behavior in the consumer side on our demand now it is important to highlight that.

Our demand is <unk> by fundamentals and underlying drivers.

Our.

Beyond what we can serve today. So I'll just I'll give you. An example in beyond the end markets in Brazil, There is localization of international Angola brands.

<unk> volume that is already in those markets.

For it to local production when you put that together with the healthy demand or volume users in a market like that plus other factors, we cannot serve those markets today and there are plenty of imports going into it that market and others.

Don't buy as or even the customers or competitors.

Which.

Provide a cushion for demand so let's assume that consumer behavior changes in the future.

Kind of cushion we have in those markets in Europe because of their displacement displacement of more than 5% of the capacity because of the conflict that now going to be produced locally in Europe .

I'd say a cushion on protection for our demand. So that's why we feel uncomfortable comfortable about.

I'll answer a bit year on year end 2023.

Is there underlying demands at the new capacity that he is going to come online that John mentioned can help us to have.

Our substantial growth next year, but it's also our performance with the multi <unk>.

Our margin expansion initiatives and our positive perspective on the spreads. So all these things are coming together to help us.

Expect a pretty good performance for the balance of the year end 2023.

One thing I would add is if we did go back and looked at what happened to the <unk>.

<unk> and the.

Performance of our business back in the Great recession, 2008, and 2009 and what we really found is a lot of those premium categories did fine and in fact, they're affordable luxuries and held up quite well, but the one category that was under pressure was the U S. Mega beer as we all know and as Anders indicated that's about a 4% volume for the company right now in <unk>.

We've mixed manage ourselves more to more attractive categories.

So all in all that would suggest in addition to the very very strong market fundamentals.

It's a different landscape.

Maybe we'd seen in the past even in the U S market.

There is localization of international and global brands.

We are going to one of those localization right now and into the first half of next year, which is going to help volumes in North America.

That's very helpful. And then on your energy needs in Europe are you able to say how much of your energy needs for next year is already secured and contracted at all.

Or hedged if you will going into 2023.

For competitive purposes, we don't throw out numbers in that regard, but what I would say is we're very comfortable we would take a long term.

Structural approach to managing gas.

Energy overall, we've been doing that even before the pandemic. So we're in that we're in good shape there.

Again, what I would say is we are confident of having favorable spread again in 2023.

Our next question comes from Mark Wilde from Bank of Montreal. Your line is open.

Thanks, Good morning, good quarter and good progress on a whole range of initiatives over the last few years.

Wanted to just chase down Kyle's question, a little bit further if I can.

To what extent do you feel like you're benefiting at the moment in Europe from the fact that some of your peers are not as well hedged on gas as you are and really don't have any choice around around raising prices I know you need to be careful about this for competitive terms, but it does seem like it is.

It's probably one element in the mix right now.

I mean, I would say mark our sales volumes were up 5% or so in Europe in the first half of the year and again, they were up more like 6% or 5% or something like in the second half of the year. This is not an environment, where there is a massive market share changes going on I think the market overall was oversold.

We've actually been supplementing a little bit with imports from Asia in that regard, but I think at the end of the day the ability to do massive movements and share just isn't there given the supply demand dynamics.

But right now it kind of current gas prices over in Europe are you actually seeing capacity go out of the market because they're just there's no margin for somebody who's not hedged at this point.

Yes, Mark we have seen that and overall, we believe about 5% of capacity between Ukraine.

Ukraine, Russia War and those marginal players, we believe that they've come offline about 5% in total so there are some smaller.

Kind of niche players who have shared operations timing, yes. There was there were repairs that were to happen earlier in the year.

<unk> never happened in those foreign isn't a down.

That's up to the shortage coming from Ukraine, and Russia. So.

Ukraine, and Russia at up to $1 million plus obviously coastal.

Coastal 5% diesel or things are.

Hopefully the whole footprint.

On top of it.

We now move to Adam Josephson from Keybanc capital markets. Your line is open. Please go ahead.

Okay addressing Jon good morning.

John One question on the price cost comments, you made about next year that you're confident you'll be price cost positive next year irrespective of what happens to Nat gas oil et cetera.

And that is that there wouldnt be severe demand destruction in Europe , if everyone's jacking up prices substantially I assume.

In fact, what youre, assuming that even if Europe goes into a major economic downturn that glass demand is going to hold up well and if so why would you expect that.

Well first of all I would say our projections are based upon some reasonable level of business normalcy. If you can't throw out the two or three Sigma event type of a deal but at this point in time, even going back to it if were seeing an environment, where the where Europe is trying to plan around that.

15% reduction in <unk>.

<unk> demand.

Again in an environment, where.

The net effect on our business has moderated because of behavior changes and things like that we're thinking we're seeing kind of a.

Marginal change in the cost structure.

<unk> structure overall in the marketplace.

If there is some some type of event over in Europe that we cant foresee right now that that results in.

A different scenario, we cant project that right now, but for the relevant range of outlook for the business, we feel pretty comfortable about the ability to maintain positive spread going forward and we continuously monitor.

Several scenarios that includes all the drivers of demand up and down.

And we include price elasticity.

And when we put all that together.

We see a very small risk.

That demand be.

Being impacted unimportant monitors.

Remember the fundamentals, we ascribing the openings remarks, and we highlight it.

And what are some of the questions are pretty strong and.

They're not necessarily driven by GDP, they're auctions that either customers or consumers are taking.

That are significantly larger than the glass supply can serve.

And all of that comes out of caution we got to go through all that first before we go into a negative alright, and so we got them all and all of that together and Foreign example, replacing the 1 million tonnes in Europe .

Is a pretty challenging thing for the industry you won't it won't be around the corner.

I appreciate that answer and John just can you back to the capital and magma plant. So you are talking about how capacity constrained you are in your inventories are at record lows, yet you're delaying these projects by.

Call it a year and some of what you're attributing to cost inflation some of what youre attributing to labor availability supply chain problems.

And if it just cost inflation I would think you would go ahead with the projects anyway, because if you can't keep up with demand why not spend a little more money to get this capacity up in time. So can you help me just.

Just at a basic level understand what the primary reasons for these delays are again, particularly given how supply constrained you are saying you are.

Yes, so first of all we are.

This change allows us to bring smaller.

Smaller projects faster than we would've been otherwise able to do because it's the big Greenfield complex projects that are delayed because of the availability of steel labor availability. All the types of things that go into that the big complex structure. So let me be clear that we're still going to enable the growth that we originally planned.

But we weren't going to be able to do that if we were trying to do a handful of bigger greenfields that are just slowed because of all of these elements give you. An example, if you're doing a big complex project.

And one major part is missing because of this delayed over in China or something along those lines the whole project stops right.

Just youre just behind that bottleneck in that particular element, but if you have a number of smaller scale projects youre able to get those parts more and there's less complexity by getting those in there and you can actually get those to market faster. That's what we're dealing with here, we're not really dealing with with changes in demand or the inability to do that it's on.

All associated with trying to deal with the bottlenecks that are hampering larger scale more complex projects rather than smaller scale on something that is quite positive is all of the projects that support the incremental capacity for 23, having good quarters talking regarding the coal sector.

Does that makes sense.

Our next question comes from Gabe <unk> from Wells Fargo. Your line is open. Please go ahead.

John Chris Good morning, Thanks for taking the question good morning.

I was curious if you can one of your competitors.

You had talked about kind of initiating a portfolio review or potential restructuring of the North America.

And.

I feel like I've heard multiple homes kind of being displeased.

Government.

But of a head scratcher for me.

Given it's a pretty well consolidated market. So two part question one is.

Do you kind of feel like you as you look across your business, if there's a similar level of most pricing.

I kind of feel like based on results to date.

<unk>.

Almost all rules.

Do you see potential for me I know, you've kind of alluded to it but.

Potential Goldman going home.

Pricing.

Yes.

Yes so.

We started.

About six years ago.

<unk> Fi.

Away from Mega beer.

And that implies not only accessing or increase our positioning in growing categories like food. This period's <unk>.

And premium beer about changing the footprint and.

And we've been doing that consistently every year, we've been investing in our footprint to change it to be able to go to those categories now as we do that we've been updating that footprint.

And so we've been doing that consistently.

Now.

With regards to commercial conditions, we are actively working on that.

We've been working on that through <unk>. It obviously with so many changes that are happening today and will continue to so going into the following year.

So we've been quite proactive with these market that has had.

Some change.

That is implying four examples that to a mega weird is only 15% one 5%.

Share of this market is about half what it used to be so.

North America market for us, it's not so index to that.

Any more and in fact, there are these growth categories that are performing quite well.

Including premium beer for what for which we are seeing a very good growth.

Okay, and then I guess.

Maybe this is too simplistic way to look at it but I think kind of on a year to date basis.

You are kind of positive plus 60 price.

Price cost.

Talks about similar and John for the second half.

So I mean should we kind of just extrapolate that out and then.

Just because you kind of teased us with it.

Out into next year.

Can you give us a preliminary view on.

If we freeze input cost they are today appreciating obviously Europe is volatile.

Would you expect something soon.

Sure.

Next year.

And then any kind of view into startup costs, because it looks like a lot of this project activities and you're ramping up next year I think Colombia was delayed by maybe six months or so.

So just maybe on the order of magnitude on what you.

Expect kind of startup costs and rebuild.

Yeah sure. Okay. Let me, let me unpack a few of those elements in there. So first of all on the net price realization don't extrapolate the first half to the second here.

Use the second quarter and continue that for each of the quarters, because we were in ramp up mode with price. We had two price increases over the course of the first half. So I think the second quarter is a better illustration of the run rate that we would expect to have in both the third and fourth quarter, which obviously is a little bit more than just annualized <unk> of that first half of the year.

And then 2023.

I can't be too specific on dollar amounts or nor should we at this particular point in time, but overall, we think just looking at the year that would be looking at 1% to 2% kind of volume growth as we included it in our prepared comments, we do anticipate positive spread.

And to quantify that just yet and we expect continued margin expansion initiatives continuing on as we've been able to quite successfully achieve so the one thing that we do have out there to your comment is we do have more asset enablement costs, a lot of the startup cost as maintenance and engineering and labor cost and everything that go on to <unk>.

And of that.

If we take a look at that this year, there is probably something in the tune of $35 million to $40 million probably call. It 15 to 20.

With elevated costs that we're incurring as we ramp up. These particular types of projects now next year is going to be another robust year of activity for these projects and things like that so I don't see that going down maybe it goes up marginally.

But.

Obviously, we've taken a big step up in that in this particular year and including the second half of the year when we have peak activity.

They provide you the information on LIBOR.

Our next question comes from Jay <unk> from Goldman Sachs. Your line is open. Please go ahead.

Good morning, everybody. Thank you for the time this morning, and all the details in the slide deck.

Kind of follow up on the last question about the North American market.

I was wondering if you could just kind of talk about some of the premium demand drivers and to the extent that we do see the competitor that was mentioned kind of tried to shift its mix more towards the premium products that you guys have seen driving demand growth there like how do you feel about the kind of current.

And situation that is out there to the extent you see kind of increased competition from large competitor in the market.

Sure.

Yes, I think the growth of the premium Vod is quite important and they.

Growth over the imported and global brands. He is very important tool.

And it is.

Important to highlight that what has been produced abroad.

He has been localizing, the United States, which provide a volume opportunity and we're seeing that obviously impacting our numbers our focus on diversifying away from Mega past six years now.

So this is a process that takes time and we've been we've been consistently every year working on that but we also have.

Our Ips, which those tuition business.

Which we continue to develop that and that's very important because that business has.

Chop to two 3 million tons that are all imported.

And through these and matching that.

Through Ips and matching that with magma.

Have a very good access to that market that is quite a premium market.

By the way the Kentucky first line is going to be serving.

Ips Ips volume as well as the spirits, which is also a premium market. So we've been working actively on this for years now.

And we feel we're making good progress and there is a lot to be honest deal and will continue to focus on that.

Got it. Thank you and then John just a quick housekeeping item for you.

In terms of the paddock funding so was the cash actually moved to the Paddock Trust this quarter and if so does that also imply that you guys drew down on the delayed draw.

Yes on both accounts on July .

July 18th we fully funded the paddock trust with $610 million.

The $600 million of that came from the delay draw. So we pulled on that and so that's where we stand right now.

We have no further questions I'll now hand back to Chris Manuel Vice President of Investor Relations for final remarks.

Thank you everyone that concludes our earnings call. Please note our third quarter call is currently scheduled for November 2nd.

And as a reminder, making a memorable moment by choosing safe sustainable plus thank you.

Today's call is now concluded. Thank you for your participation you may now disconnect your lines.

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Hello, and welcome to stage III Clos second quarter 2022 earnings conference call.

My name is and I'll be coordinating your call today.

If you would like to mentioned a question. During your presentation you may do so by pressing star one on your telephone keypad.

I would now like to hand over to Chris Manuel Vice President of Investor Relations. The floor is yours. Please go ahead.

Thank you Elliot and welcome everyone to Oi glass second quarter 2022 earnings call today, our discussion will be led by Andres Lopez, our CEO and John <unk> our CFO .

Today, we will discuss key business developments and review our financial results. Following prepared remarks, we'll host a Q&A session presentation materials for this call are available on the Companys website. Please review the safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials now I'd like to turn the call over to <unk>.

<unk>, who will start on slide three.

Good morning, everyone.

I appreciate your interest eyeglass.

Last night I announce a strong second quarter adjusted earnings of 73 per share, which exceeded prior year results as well as guidance.

Performance improved across all business layers.

That last shipments increased slightly compared to the prior year and <unk> of higher selling prices continued to more than offset the cost inflation.

Likewise solid operations cost performance on our margin expansion initiatives contributed to this strong quarter and helped offset elevated costs as we ramp up our expansion projects.

As illustrated on the left all key measures improve with adjusted EPS up about 35% from the prior year and that down significantly.

In addition to our strong performance, we continued to advance our strategy.

Our balance sheet is now in the best position seems prior flu a substantial investment to build out the Americas network between 2015 and 2019.

This includes the <unk>, Mexico, and <unk> wireless expansion in <unk>.

Additionally, <unk> recently announced the first U S market about Greenfield facility at Bowling Green, Kentucky, which started mid 2024.

Last but certainly not least the company has achieved a third and final resolution of paradox legacy asbestos liabilities and fully funded the paddock Trust as of July 2018.

Hawaii has passed an inflection point and we are developing a track record of consistently delivering on our commitments.

I'm proud of the team said Youll see on our strong execution on the backdrop of unprecedented macro volatility.

While I will review, our revised capital expansion and Mike now the relevant plan, which has been adapted to better fit the current macro challenges, while achieving our investor day goals.

Let's move to page four as we reviewed recent sales volume trends.

Our <unk> increased nearly 1% in the second quarter, which comps on top of an 18% improvement in the prior year quarter.

Volume was up nearly 1% in both the Americas and Europe with the strongest demand in the Andean Mexico and solid with Europe .

Year to date achievements were up 3% about 5% in Europe and 2% in the Americas.

Market trends clearly favorable glass, resulting in the strongest market fundamentals seen over 20 years.

Let me comment on a few of the longer term secular trends.

Across Latin America, a structural shift in demand is driving sustainable growth.

Customers and consumers increasingly favor premium products on our customers are localizing international brands that have been successfully imported to these markets for several years.

Immunization favors one way glass containers, while consumer up your lithium sustainability considerations are prompting greater use of returnable bottles.

For example, <unk>.

<unk> now holds 50% market share in the Brazil beer category as both one way and returnable glass gained share.

As illustrated at the bottom of the page we have improved our mix in North America by consistently shifting away from beer to oil growth categories. In fact U S. Mega. We're only represents around 15, one 5% of our North America business and 4% globally.

In Europe , a large volume of glass historically imported from Russia, and Ukraine is not longer available due to a recent conflict, which drives up demand for locally produced glass.

Glass has demonstrated a strong performance across markets both on premise and off premise over the last few years really finding long held assumptions about last resilience who channel chips.

Finally, our strong demand is driving increased new product development and glass, which is up about 10% from pandemic levels. According to <unk> data.

Clearly there are many important drivers for continued secular demand growth.

We expect our full year sales volume will be up around 1% in 2022 is healthy demand is.

He is tempered by record low inventories and capacity constraints across many markets in fact, our volumes each quarter. This year should exceed pre pandemic levels.

Improved production at speed and efficiency can support modest sales volume growth for now.

Long term, we have several expansion projects underway that will add much needed capacity in 2023 and beyond.

Yes.

On top of a strong performance, we continued to advance our transformation theyre starting to page five.

Our margins are up 130 basis points year to date, despite unprecedented cost inflation.

In April we successfully raised selling prices for the second time this year.

It should exceed these full year net price objectives.

Likewise, our margin expansion initiatives are off to a good start and we have already exceeded our annual target.

I made the strongest glass fundamentals in over 20 years, we have revised and adopted our expansion in magna developing plans to enter feed the macro challenges.

Further strengthen profit our growth and achieve our financial targets.

Spend more on the next page.

Our SDN glass advocacy efforts are also progressing with.

Nearly one third of our electricity is now being supplied from renewable sources.

A big step towards our goal of 40% renewables by 2030.

Our glass advocacy digital marketing campaigns remains in high gear.

<unk> $650 million digital impressions year to date, which supports our growing commercial pipeline.

Our current portfolio optimization program should be completed by year end ahead of schedule.

Finally, we achieved a third and final resolution of legacy asbestos liabilities by mid 2022 as expected.

Overall, we are making excellent progress on our key strategic objectives.

Advancing to slide six.

Last fall, we introduced our capital expansion plans to enable profitable growth over the next three years and our corresponding magma development plan.

Suzanne unprecedented macro challenges have impacted these plants, we are experiencing delays of six to 12 months as we contend with significant supply chain lax cost inflation labor availability issues as well as COVID-19 related disruptions.

All original plan no longer meets commerce sales requirements.

<unk> is responding to these macro challenges with agility today, we are introducing our revised capital expansion and magma development plan, which we believe.

Better needs to asbestos environment.

Fortunately the revised expansion plan enables our 5% to 6% organic volume growth target and sustain the 20% return on investment goal across our portfolio with lower total capex.

We are planning on a wider range of smaller scale projects that reduced construction costs and complexity broadens our market reach and feed the timeline required to meet customers' expectations in <unk>.

Particular is sky high as steel and cement prices and supply chain lax are hampering larger scale greenfield expansion, whether with legacy or early Magna generation technology.

So we have reduced the number of greenfield projects in favor of line extensions are in lines to existing furnaces reactivating idle pharmacies in order to stimulate efforts.

The map shows the various projects included in our revised capital plan.

There are no changes to the new capacity coming online in 2023.

Likewise in Israel Magnus pension plans will be focused in the U S to support the attractive as spirits and Ips distribution business, starting with the recently announced Magna facility in bowling Green, Kentucky.

The other thing is proceeding well yet progress is slower than originally anticipated due to the same macro challenges. So we are focusing our R&D and engineering resources on to Magna Greenfield lines in the U S. Rather than a larger number of sites based on early generation Mcmath technology. This will help accelerate.

Our generation III solution, which includes the full suite of Magna capabilities that are best positioned to address key market opportunities. We expect to complete development of our generation two solution by mid next year, which will be the basis of our new bowling Green facility.

Generation III development should be completed in mid 2024 with the first site to follow in 2025 in.

In summary, the revised plan meets to asbestos environment and supports our Investor day financial and growth targets now I'll turn it over to John to review financial matters, starting on page seven.

Thanks, Andreas and good morning, everyone.

Reported second quarter adjusted earnings of <unk> 73 per share up 19% from the prior year. This strong improvement was fully attributed to very favorable net price realization and slightly higher sales volume all other elements FX divestitures, corporate interest and taxes et cetera, essentially netted to zero.

Segment operating profit was $257 million up from $232 million last year as margins improved 60 basis points, Despite FX headwinds.

Favorable net price increased segment operating profit by $42 million as higher selling prices more than offset elevated cost inflation.

At the same time volume and mix added $6 million as shipments increased 0.6%.

Finally operating costs were comparable with the prior year.

Segment operating profit improved significantly in both the Americas and Europe , despite unfavorable FX and dilution from recent divestitures.

The Americas posted segment profit of $130 million up $14 million from the prior year on an adjusted basis, reflecting modestly higher sales volumes and improved operating costs, while higher selling prices nearly offset elevated cost inflation.

Given this situation we are focused on adapting future contracts to improve this pass through and margins, especially in North America.

In Europe segment operating profit was $127 million up $33 million from the prior year on an adjusted basis earnings benefited from very favorable net price while operating costs were higher due to elevated asset project activity and input costs. The chart provides additional details on nonoperating items overall second quarter results.

We're exceptionally strong reflecting favorable performance across all key business leaders.

Let's turn to page eight as discussed we continue to make very good progress on our key strategic objectives, including the financial priorities you see here.

Likewise leverage was down more than a turn since this time last year overall, we expect to end the year in the mid to high threes, which is favorable to our 2022 objective.

We will evaluate return of value to shareholders, which may be enhanced as our balance sheet position improves.

In summary, our balance sheet is in the best position in years, and we are committed to the appropriate capital allocation for value creation.

Our network is capacity constrained, which will limit volume growth into the second half. However, the addition of new capacity early next year, along with improved productivity will support 1% to 2% growth in 2023.

Contend with low inventories and capacity constraints.

Again operating costs will likely be higher as we ramp up expansion expansion projects, which will add new capacity in early 2023 to support growth.

Adjusted free cash flow should top $400 million, which.

Which is on the high end of historic performance levels and future cash flow growth will be supported by our expansion investments.

This outlook assumes $600 million of Capex, this year, which will be concentrated in the second half. Please note that ongoing supply chain challenges could impact project timing.

As we all know there is a risk of Russia natural gas curtailments over the next several months in Europe , which could be disruptive, let's turn to page 10 for <unk> to further discuss this topic.

By 15% to mitigate the brunt of potential Russia gastro talents. Each member country. We will have a specific plan potential drivers include promotion of consumer behavior changes government imposed gas allocations and safeguarding key industries.

As we maintain best in class long term energy contracts that protect against volatile spot market prices.

Importantly, glasses, often regarded as an essential product and many EU markets for example, Italy and France, our largest markets currently have taken positions that may protect the glass industry.

We are very pleased with our second quarter results and the achievement of several key milestones on our transformation journey.

Hawaii is managing well through macro volatility at the end margins have improved despite significant cost inflation.

Likewise, we are executing our revised capital plan that is appropriately suited for today's business environment.

We have increased our full year earnings and cash flow outlook, reflecting solid progress year to date and good momentum.

This represents the ninth consecutive quarter.

Either met or exceeded guidance and we have consistently increased our full year outlook in fact.

Our updated 2022 earnings outlook is approaching our 2024 target from last year at Investor Day.

We are increasingly optimistic about our 2023 performance provided no significant changes in business conditions.

In conclusion, I believe <unk> represents an attractive investment opportunity.

We are successfully addressing many historical where accounts on the stock and materially improving our capital structure.

Likewise, we are delivering on our commitments to generate profit our growth execute on our plan and advanced breakthrough <unk> technology.

We are confident visa strategy will continue to create value for our shareholders.

And we're ready to address your questions.

Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.

If you change your mind can suppress thoughtful about too.

When preparing to ask a question. Please ensure your devices on eastern locally.

Today, we ask you limit yourself to one question and one follow up.

Our first question comes from Ghansham Panjabi from Baird. Your line is open. Please go ahead.

Thanks, Good morning, everybody.

Good morning, so on the European exposure.

Slide 10 in your Investor deck.

With 34 plants, there and obviously some are more exposed to Russian natural gas and others.

How much flex capacity do you have in your system at current in Europe , I can't imagine, it's too high but.

Just curious as to your ability to flex across your manufacturing footprint. If there were some disruptions in countries such as for example, the Czech Republic.

Yes ghansham.

<unk>.

Florida has seen 20% of our capacity that allow us to use oil.

Already provides that flexibility every court palin level that we have heard about is in the range of 15%.

We already have capacity converted up to 20% we expect to have.

Up to 50% by year end and that is going to provide a very good protection for us to be able to have it.

Enough capacity to run without a program to serve our demand.

Now it is important to consider that the largest markets in which we operate.

<unk> bin.

How in the Cologuard manual fee shale very active highlighting that most likely glass will be characterized as an essential industry. So we've got that very large part of our footprint footprint protected.

We know, Germany, and Czech half.

One of the.

Largest challenges nevertheless.

Situation for them each already improving because they are already implemented measures to reduce consumption to increase the reserves going into a winter for example yard when your stock at this point is at 70%, which is two five to three months of supply.

Chegg is 80%, which is sort of close to five months of supply, but again they are actively not only sourcing from different sources in this case, but they.

They already activating their communities for substantial savings. So we're pretty optimistic that the riskier will be really minimized if I if I rescheduled now the oil countries Hungary, which.

<unk> already has been.

Focusing their priority on glass supplier because they are used to we supply coming out of Ukraine into Hungary, which is not available anymore for a country that has a very large agricultural industry. So.

The focus is really on supply so the continuity of our operations over there in our minds is will be there. So all in all when we look at all this even though we watch this very closely in a continuous basis, we feel very comfortable that this risk is really low for us.

Okay, that's great and then in terms of the $47 million price cost.

Segment variance for Europe , how do you think that evolves in the back half of this year and then on North America. The $5 million decline is that just a timing issue given the surge in natural gas prices.

Yes, Yes got you. This is John we believe that our we believe that we will have a long term.

Net price favorable variance that includes the back half of the year. So we had about <unk> <unk> favorable net price overall for the company in the second quarter, we think that the levels in the third and fourth quarter will be very very consistent with that.

And to your point.

On the Americas being down $5 million, one thing I'd point is year to date, it is actually up $7 million.

At down $5 million in the second quarter and Youre right. It gets a little choppy because overall the Americas in particular in North America has a higher proportion of long term contracted businesses have price adjustment formulas. So we've been very working actively to push the inflation.

Through through pricing as quick as we can but some of it is tied up in annual Pis.

That will have to work through but again as we said in our prepared comments, we're actively working on the contract structures in the America, because it does need to be more flexible.

And in this case for North America any spread we're not really getting this year is going to be a positive for 'twenty three railroads correct. Yes, we do expect positive spread in 2023.

Our next question comes from George Staphos from Bank of America. Your line is open.

Hi, everyone. Good morning, Thanks for the details.

Just some props youre too thanks again for just over the years, making the deck clear and then really well outline at least in my view, thanks very much for that.

My question around operations.

Since there seems to be and correct me if I'm wrong.

A greater amount of sort of heritage technology.

Relative to I think you're going to have only two new magma lines in the U S. What does that mean, what are the implications for ongoing reliability class quality.

<unk> intensity, because I thought magma was in part around reducing the capital intensity footprint.

And improving the quality of the glass.

Over time, so how does that all shake out and then a quick follow on.

Okay.

What we've done with this new plan.

Change what usefully in Greenfield projects, which are highly impacted by the conditions you mentioned right the.

All of this even award that is required Samantha Steele on all of that to projects that are required much smaller infrastructure, but I saw line extensions liner that you assumed from bringing it back existing capacity that is now so from that perspective, we are lowering the risk of the whole plan significantly now our focus on <unk>.

Mcmath increases because instead of being implement in a larger number of lines. We are going to focus on two lines that will allow us to test everything we wanted to test by the way we are already testing getting two and three capabilities in several places in our footprint. So we will be able to test.

Everything and we will be able to have the R&D team and engineering team focused on those two projects.

We'll be located nearby tool so ballpark, let's say for our purposes, we're going to increase the efficiency of these teams working in these developments, which gave US a lot of comfort now we are placing all the orders well in advance for everything that is under pressure in the supply chain of today, so with that we think we.

We are quite quite with cohort. So they are all really sign of the plan is taken into consideration you're achieving what you're highlighting which is providing enough time to be able to luis successful and get there on time with the deployment of <unk> 24 for these first line <unk> 25 for the second line for Gen. III now Gen three.

The generation that has all the capabilities we've been described before.

We are moving faster towards the entry so when it comes to serving the markets. We are improving our position and we're doing that by focusing now our markets are quite.

Healthy at this point in time the mine is high we cannot even started the demand in multiple markets.

Now is extremely important to be able to.

Bring capacity on time to satisfy the customer requirement the kind of projects, we're doing are going to do that.

Original plan because of all days will take too long and we wouldn't be able to.

Deliver on time.

Now capital intensity is one of the articles of Magna it will be there. So we're taking all the actions to improve.

Our body engineering, and all of that to be able to help offset some of those pressures and we expect that overtime.

Supply change will improve.

I'm, just I get that I guess and I appreciate all the color. There just correct me if I'm wrong, the fact that.

With the revised plan you will only have two magnum greenfield additions relative to what had been up to 11 and you have a lot of legacy and brownfield additions.

Three four years from now on an ongoing basis, let's assume everything goes as you expect will the new ROI. If you will have a greater capital intensity than you would've otherwise had with the first plan.

Why or why not and then just a quickie because we've got some questions. On this can you give us a bit more color in terms of why the volume is down in the fourth quarter is it purely capacity constraints or are there other weakness is showing up in the business. Thank you and good luck in the quarter.

George This is John just on the capital intensity comment keep in mind that generation, one and generation two.

We're always going to have kind of the legacy look of a large factory structure and things like that right. So the capital intensity of those we're still relatively high.

Little lower than legacy, but still relatively high it's generation three that allows you to get to that 40% lower capital intensity that we talked about during investor day, which we still see as the.

Target and keep in mind everything that we were going to do in the original plan over the next three years was either going to be what we call generation, one five or generation two still relatively high and the capital intensity environment now we're leapfrogging a lot of that activity right and we're going to be going to generation three quicker. So I don't think thats overall changes are capital intensive.

<unk> picture.

By re sequencing things much at all.

And then on your later question.

<unk> on the fourth quarter that is all a comp issue. Okay. We were up five 5% last year.

Reduction wasn't up five 5%, we were serving that out of inventory of course inventories now are at record lows. It's just a matter of capacity constraints relatively low inventories and a tough comp in the fourth quarter of again all of that gets ultimately taking care of early part of the year when we bring new capacity online first in Colombia.

Canada.

And just to complement that the our.

Our next question comes from Michael <unk> from <unk> Securities. Your line is open. Please go ahead.

Congrats Andres, John Chris on solid quarter and outlook and thanks for taking my questions.

Thanks.

Sky Rocketing your energy costs.

Yes.

Yes, Mike we have like I said, 20% flex capacity going to 50%.

That capability will have your ability to run on gas on oil, but it also has blending capabilities between gas and oil too so.

You are being able to not have to fully switch one way or the over one way or the other now on the fuel oil. It is more expensive. It is not nearly as expensive as spot markets of natural gas are today just to be clear on that and of course, if we did incur that higher cost. We would obviously you'll be looking to pass that onto the marketplace. Just as we've done very successfully.

So far through through the cycle.

Got it I appreciate that John and then just one quick follow up one of your European competitors recently acknowledged that it has lost market share because of tight inventories I'd also mentioned that.

Other players have not been as aggressive on implementing price as it has been in the market.

Can you just talk about any show you may have gained in Europe .

Was that because of that share gain was it due to price or other factors.

Ill.

Let me let me just give you one perspective.

On that.

We'd be measuring <unk>.

Net promoter score NPS for several years now.

And the improvement in that NPS, which means how customers see us as being material and material is material.

It is quite high in multiple customers. So I think why is build to a strategic partner and customers come to us.

There are many reasons one of them being that one now.

Now inventories are tight in the system, they're tight for us too, but our planning processes have improved significantly so we have become.

A lot more effective and efficient.

Working with lower inventories in terms of therapies.

Our next question comes from Anthony Pettinari from Citi. Your line is open.

Good morning.

On the.

You've been active on divestitures, but I think youre still around $200 million away from the $1 5 billion dollar target can you comment on sort of incremental opportunities remaining there.

And is that maybe more likely to come through divestitures or sale leaseback or.

And then just broadly does the strength that youre seeing in glass.

<unk>.

Maybe.

Has it caused you to maybe kind of reconsidered divestitures potentially.

Yeah sure. So for clarity, we've completed about $1 $3 billion of our one 5 billion program, we have $200 million left Thats. One final sales leaseback that we expect to accomplish here in the relatively near future.

As we look to the opportunities going forward, we've been fine tuning our portfolio now for a couple of years.

Followed after a period as we indicated expanding in the Americas now we've been fine tuning in our network et cetera, I mean, I think we're at later stages and that Theres always opportunities.

We will continue to evaluate but we also need to understand.

The receptivity of the best marketplace to be able to get the best valuation for any divestitures that we have.

But as I said the market is really good we're liking how our business is looking now of course, there's opportunities to fine tune, but.

We're more focused now on operating our company.

Okay, that's very helpful.

And then just a follow up to Mike's question on the <unk>.

Net gas to oil switching potentially you said it would come potentially at a higher cost, but you would look to recover those higher costs in the market with price increases is that is that higher cost I mean is that something that could potentially impact kind of the full year outlook or is that something thats real.

Potentially just at the margin and.

You think that you have confidence that you can recover that within the year.

Yes, I think it's a marginal issue for the company right now even in our prepared comments, we said that we believe the situation represents a fairly limited exposure. If you take a look at it.

The.

The EU is trying to reduce their consumption by 15% a good chunk of this could be done through.

The consumer behavior activities are pretty big lever out there you throw that with in there.

Tivoli low not to mention the ability to go back to the marketplace and pass it through so that's kind of how we're looking at all the different pieces of the pie and hope that helps.

Our next question comes from Kyle White from Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning, Thanks for taking the question just curious if you guys are seeing any kind of consumer spending their behavior changes because of input inflation.

Impacting demand for glass products.

Any kind of impact from price elasticity yet.

Yes, so so far we haven't seen.

Any impact of a change in behavior in the consumer side on our demand now it is important to highlight that.

Our demand is <unk> by fundamentals and underlying drivers.

That are.

Beyond what we can serve today. So I'll just I'll give you. An example in <unk> markets in Brazil, There is localization of international Angola brands.

<unk> volume that is already in those markets.

<unk> to local production when you put that together with the healthy demand of all end users in a market like that plus other factors, we cannot serve those markets today and there are plenty of imports going into it.

Market.

<unk>.

But don't buy as Oreo and the customers or competitors, which.

Provide a cushion for demand so let's assume that consumer behavior changes in the future.

Kind of cushion we have in those markets in Europe because of their displacement displacement of more than 5% of the capacity because of the conflict that now going to be produced locally in Europe , I'd say, a cushion of protection for our demand. So that's why we feel uncomfortable comfortable about the balance of the year on the UN 2023.

Hi.

Is there underlying demands at the new capacity that is going to come online that John mentioned and can help us to have.

Support substantial growth next year, but it's also our performance with the multi year.

Our margin expansion initiatives.

Our positive perspective on the spreads. So all these things are coming together to help us.

Expect a pretty good performance for the balance of the year and putting 33.

One thing I would add is if we did go back and looked at what happened to the <unk>.

Behavior and.

Performance of our business back in the Great recession, 2008, and 2009 and what we really found is a lot of those premium categories did fine and in fact, they're affordable luxuries and held up quite well, but the one category that was under pressure was the U S. Mega beer as we all know and as Andrew indicated that's down to 4% volume for the company right now.

We've mixed manage ourselves more to more attractive categories.

So all in all of that suggests an addition to the very very strong market fundamentals.

It's a different landscape.

Maybe we've seen in the past even in the U S market.

There is localization of international and global brands, and we are going to one of those organizations right now and into the first half of next year, which is going to help volumes in North America.

That's very helpful. And then on your energy needs in Europe are you able to say how much of your energy needs for next year is already secured and contracted at all.

Or hedged if you will going into 2023.

For competitive purposes, we don't throw out numbers in that regard, but what I would say is we're very comfortable we take a long term.

Structural approach to managing gas.

Energy overall, we have been doing that even before the pandemic. So we're in that we're in good shape there.

Again, what I would say is we are confident of having favorable spread again in 2023.

Our next question comes from Mark Wilde from Bank of Montreal. Your line is open.

Thanks, Good morning, good quarter and good progress on a whole range of initiatives over the last few years.

Wanted to just chase down Kyle's question, a little bit further if I can.

To what extent do you feel like Youre benefiting at the moment in Europe from the fact that some of your peers are not as well hedged on gas as you are and really don't have any choice around around raising prices I know you need to be careful about this for competitive terms, but it does seem like it is.

It's probably one element in the mix right now.

I would say Mark our sales volumes were up 5% or so in Europe in the first half of the year and again, they were up more like 6% or 5% or something like in the second half of the year. This is not an environment, where there is a massive market share changes going on I think the market overall was oversold.

John right now at kind of current gas prices over in Europe or are you actually seeing capacity go out of the market because there's just there's no margin for somebody who is not hedged at this point.

Yes, Mark we have seen that and overall, we believe about 5% of capacity between Ukraine.

Ukraine, Russia War and those marginal players we believe that they have come offline about 5% in total so there are some smaller.

So kind of niche players who have shared operations from timing. Yes. There was there were repairs that were to happen earlier in the year.

<unk> never happen and those partners that are down.

That's up to the shortage coming from Ukraine, and Russia. So.

Ukraine, and Russia add up to a million plus obviously posted 5% on all these other things are Scott are you hoping to hold footprint.

Add on top of it.

We now move to Adam Josephson from Keybanc capital markets. Your line is open. Please go ahead.

Addressing Jon good morning, John .

John wondering one question on the price cost comments, you've made about next year that you're confident you'll be price cost positive next year irrespective of what happens to Nat gas oil, etc. Implicit in that is that there wouldnt be severe demand destruction in Europe , if everyone's jacking up prices substantially.

I assume or.

Is that in fact, what youre, assuming that even if Europe goes into a major economic downturn that glass demand is going to hold up well and if so why would you expect that.

Well first of all I would say our projections are based upon some reasonable level of business normalcy.

You can't throw out.

The two or three Sigma event type of a deal but at this point in time, even going back to it if we're seeing an environment, where the where Europe is trying to plan around that 15% reduction in <unk>.

<unk> demand.

Again in an environment, where.

The net effect on our business has moderated because of behavior changes and things like that where we're seeing kind of a.

Marginal change in the cost structure.

Supply structure overall in the marketplace.

If there is some some type of event over in Europe that we cant foresee right now that that results in.

And we continuously monitor.

Similarly scenarios that includes all the drivers of demand up and down and we include price elasticity.

And when we put all that together.

We see a very small risk.

That demand be.

Being impacted in an important manner.

Remember the fundamentals, we ascribing the openings remarks, and we highlight it.

Countering some of the questions are pretty strong and.

They're not necessarily the rehearing by GDP, they're auctions that either customers or consumers are taking that.

That are significantly larger than the glass supply can serve.

And all of that comes out of caution we got to go through all that first before we go into a negative right and so we got them all and all of that together and Foreign example, replacing the 1 million tonnes in Europe .

<unk> is a pretty challenging thing for the industry you won't it won't be around the corner.

<unk> and <unk>.

John just can you back to the capital and Magnum a plant. So you are talking about how capacity constrained you are in your inventories are at record lows, yet you're delaying these projects by.

Call it a year and some of which you're attributing to cost inflation some of what youre attributing to labor availability supply chain problems.

It just cost inflation I would think you would go ahead with the projects anyway, because if you can't keep up with demand why not spend a little more money to get this capacity up in time. So can you help me just.

At a basic level understand what the primary reasons for these delays are again, particularly given how supply constrained you are saying you are.

Yes, so first of all we are.

This change allows us to bring smaller <unk>.

Smaller projects faster than we would've been otherwise able to do because it's the big Greenfield complex projects that are delayed because of the availability of steel labor availability. All the types of things that go on with the big complex structure. So let me be clear that we're still going to enable the growth that we originally planned.

But we weren't going to be able to do that if we were trying to do a handful of bigger greenfields that are just slowed because of all of these elements.

Give you an example, if you're doing a big complex project.

And one major part is missing because it's delayed over in China or something along those lines the whole project stops right.

Youre just behind that bottleneck in that particular element, but if you have a number of smaller scale projects youre able to get those parts more and there's less complexity by getting those in there and you can actually get those to market faster. That's what we're dealing with here, we're not really dealing with with changes in demand or the inability to do that it's on.

All associated with trying to deal with the bottlenecks that are hampering larger scale more complex projects rather than smaller scale on something that is quite positive. So all the projects that too for the incremental capacity for 23, having good quarters regarding call Center.

Does that makes sense.

Our next question comes from Gabe <unk> from Wells Fargo. Your line is open. Please go ahead.

John Chris Good morning, Thanks for taking questions.

I was curious if you can one of your competitors.

<unk> talked about kind of initiating a portfolio review or potential restructuring of North America.

And.

I feel like I've heard multiple pounds kind of being displeased.

Government.

A bit of a head scratcher for me.

It's a pretty well consolidated market. So two part question one is.

Do you kind of feel like as you look across your business. So there is a similar level of most pricing.

I kind of feel like based on results to date.

<unk>.

Almost all rules.

Do you see potential I mean, I know you've kind of alluded to it but.

For potential improvement going forward.

Pricing.

Yes.

We started.

About six years ago.

<unk>.

Away from Mega beer.

And we did that.

That implies not only accessing or increase our positioning in growing categories like food this periods.

<unk> and premium beer about changing the footprint.

And we've been doing that consistently every year, we've been investing in our footprint to change it to be able to go to those categories now as we do that we've been updating that footprint.

And so we've been doing that consistently now.

With regards to commercial conditions, we are actively working on that.

And we've been working on that through <unk>, obviously with so many changes that are happening today and will continue to so going into the following year.

So we've been quite proactive with these market that has had some change.

That is implying for example debt to a mega weird is only 15% one 5%.

Share of this market is about half what it used to be.

This north American market for us is not so indexed to that anymore and in fact, there are these growth categories that are performing quite well.

Including premium beer for what for which we are.

Being a very good growth.

Okay, and then I guess.

Maybe this is too simplistic way to look at it but I think kind of on a year to date basis.

You are kind of positive plus 60.

<unk> cost.

Talked about similarly, when John for the second half.

So I mean should we kind of just extrapolate that out and then.

Just because you kind of teased us with it.

Looking out into next year.

Can you give us a preliminary view on.

If we freeze input cost they are today appreciating obviously Europe is volatile.

Would you expect something soon.

<unk> or <unk>.

Next year.

And then any kind of view into startup costs, because it looks like a lot of this product activities and you're ramping up next year I think Colombia was delayed by maybe six months or so.

So just maybe on the order of magnitude on what you expect kind of startup costs and rebuild.

Yes, sure let me, let me unpack a few of those elements in there. So first of all on the net price realization don't extrapolate the first half to the second here.

Use the second quarter and continue that for each of the quarters, because we were in a ramp up mode with price we'd had two price increases over the course of the first half. So I think that second quarter is a better illustration of the run rate that we would expect to have in both the third and fourth quarter, which obviously is a little bit more than just annualized <unk> of the first half of the year.

And then 2023.

I can't be too specific on dollar amounts or nor should we at this particular point in time, but overall, we think just looking at the year that youre looking at 1% to 2% kind of volume growth as we included it in our prepared comments, we do anticipate positive spread.

And to quantify that just yet and we expect continued margin expansion initiatives continuing on as we've been able to quite successfully achieve so the one thing that we do have out there is to your comment is we do have more asset enablement costs, a lot of the startup cost as maintenance and engineering and labor cost and everything that go on to <unk>.

And of that.

If we take a look at that this year, there is probably something in the tune of $35 million to $40 million probably call. It 15 to 20.

Of elevated cost that we're incurring as we ramp up. These particular types of projects now next year is going to be another robust year of activity for these projects and things like that so I don't see that going down maybe it goes up marginally.

But.

Obviously, we've taken a big step up in that in this particular year and including the second half of the year when we have peak activity.

That provides you the information of LIBOR.

Our next question comes from Jay <unk> from Goldman Sachs. Your line is open. Please go ahead.

Good morning, everybody. Thank you for the time this morning, and all the details in the slide deck I had a quick kind of follow up on the last question about North American market.

And situation that is out there to the extent you see kind of increased competition from large competitor in the market.

Yes, I think the.

The growth of the premium beer is quite important and big growth over the imported and global brand. So it is very important tool.

And it is.

Important to highlight that what has been produced abroad.

He has been localizing, the United States, which provide a volume opportunity and we're seeing that obviously impacting our numbers our focus on diversifying away from Mega beer in the past six years now.

So this is a process that takes time and we've been we've been consistently every year working on that but we also have.

Our Ips, which is those two <unk> business.

We continue to develop that and that's very important because that business has.

Two to 3 million tonnes that are all in Florida.

And through these and matching that.

Through Ips and matching that with magma.

We have a very good access to that market that is quite a premium market.

By the way the Kentucky first line is going to be serving or Ips Ips volume as well as the spirit, which is also a premium market. So we've been working actively on this for years now.

And we feel we're making good progress and there is a lot to be honest deal and will continue to focus on that.

Got it. Thank you and then John just a quick housekeeping item for you.

In terms of the paddock funding so was the cash actually moved to the <unk> Trust this quarter and if so does that also imply that you guys drew down on the delayed draw.

Yes on both accounts.

July 18th we fully funded the paddock trust with $610 million the $600 million of that came from the delayed draw. So we pulled on that and so that's where we stand right now.

We have no further questions I'll now hand back to Chris Manuel Vice President of Investor Relations for final remarks.

Thank you everyone that concludes our earnings call. Please note our third quarter call is currently scheduled for November 2nd.

And as a reminder, making a memorable moment by choosing safe sustainable plus thank you.

Today's call is now concluded. Thank you for your participation you may now disconnect your lines.

Q2 2022 O-I Glass Inc Earnings Call

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