Q3 2022 O-I Glass Inc Earnings Call
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And C J.
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Hello, everyone and welcome to the Iwai costs third quarter 2022 results Conference call. My name is Sam and I'll be coordinating your call today.
If you'd like to ask a question Jayson presentation, you may do so by pressing star followed by one.
Pat.
I will now hand, you over to your host Chris Manuel Vice President of Investor Relations to begin Chris. Please go ahead.
Thank you Sam and welcome everyone to the Oi glass third quarter earnings conference call today, our discussion will be led by Andres Lopez, our CEO and by 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 company's website.
To review the Safe Harbor comments, and our disclosure and use of non-GAAP financial measures included in those materials now I'd like to turn the call over to Andres.
Good morning, everyone.
Appreciate your interest eyeglass.
Last night, we announced a strong third quarter adjusted earnings of 63 per share, which exceeded prior year results as well as guidance.
As illustrated on the left all key measures improved.
Segment operating profit and adjusted EPS increased nearly 10% Mark.
<unk> improved 60 basis points from financial Leverages was down more than a full turn.
Earnings benefited from higher selling prices, which more than offset cost inflation.
Expected sales volume was up slightly amid record low inventories and capacity constraints in key markets.
We worked to commission a much needed new capacity, we did incur some additional costs, which were mostly offset by solid operating performance and benefits from our margin expansion initiatives.
In addition to our strong performance, we delivered on a number of key transformation initiatives. During the third quarter <unk> achieved a fair and final resolution of its legacy asbestos liabilities and the <unk> funded in July .
Why has reached an inflection point and for the first time in decades, we are focusing all of our strong cash flow on efforts to increase shareholder value.
Second we also completed our $1 $5 billion portfolio optimization program in August , which held reduce debt and pre fund our expansion investments.
Finally, our leverage ratio is now in line with our 2024 Investor day target well ahead of schedule and net debt was the lowest level since the Oi, Mexico efficacy issue.
Recognizing our significant progress both Moody's and S&P upgraded our credit rating during the quarter.
We have updated our business outlook, reflecting our strong year to date performance and good momentum heading into the fourth quarter.
As you May recall, we did raise our full year earnings and cash flow outlook during an investor conference in September .
We now expect full year revenues will be at the high end of that guidance range and cash flow should be in line with our updated outlook.
Despite elevated macro uncertainty we are encouraged by our performance and expect continued progress in 2023 and beyond.
It'd be later, John will discuss our business outlook, we're less key themes for 2023.
Let's move to page four as we reveal recent <unk> volume trends.
Our tip men's increased nearly 1% in the third quarter volume was up around 4% in Europe and down almost 2% in the Americas.
In Europe demand was strongest in the southwest and north central markets across multiple end use categories.
In the Americas shipments were down mostly due to elevated asset maintenance.
And repair activity in Brazil, and North America.
With that said the <unk> were up double digits, and our spirits and NAV were the strongest categories across the Americas.
Global shipments were up nearly two 5% year to date about 4% in Europe and 1% in the Americas.
On the right. We have provided the latest euromonitor consumption projections for the 2023 to 2025 period.
As you can see glass is expected to grow nearly 2% to 4% across the markets that we serve and should be in line or exceed the overall packaging growth rate in those markets.
The strong growth projections further support the favorable Mega trends, we have discussed on the last several calls leading to our strongest glass fundamentals, we have seen in decades.
As I've mentioned earlier, we are capacity constrained across several key markets. Our expansion investment program will add much needed new capacity over the next few years in fact, the first phase of our Canada expansion project is now in production and more capacity will be enable in Canada in Colombia in the first half of next year.
Let's turn to page five.
On top of a strong recent performance we continue to advance our transformation.
Segment margins are off a 100 basis points year to date, reflecting a strong net price realization and very good progress on our margin expansion initiatives.
As noted our expansion projects are progressing well as we capitalize on the strongest strongest glass fundamentals in 20 years.
All of the macro development efforts are advancing well and we have made very good progress on key Magnum innovation, such as the model our barge system, which is critical for Greenfield expansion there.
Team is excited and preparing for our first Mac Mac Greenfield in Kentucky, which remains on track for mid 2024.
Likewise, we are preparing our new ultra light weighting solution portfolio scale market trials, starting in the fourth quarter of this year.
Our ESG and glass advocacy efforts are also progressing well.
As these costs, we wrapped up our portfolio optimization program and paddle resolve these legacy asbestos liability.
Overall, we're making excellent progress on our key strategic objectives.
I encourage all of you to take a look at our updated sustainability report, which can be found on the company's website.
You can see a few highlights on page six.
We are already more than halfway to our 2030 emissions reduction target on our implementing technologies such as gas oxy furnaces with heat recovery to further <unk>.
Renewable energy now represents more than 27% of our energy source, a 14 percentage point increase from 2020, and we are well on our way to.
Our 2030 goals.
Likewise, we are expanding recycling collection sites and our recent green bond <unk> numerous projects to spend call. It users.
<unk> and ultra will also provide significant sustainability benefits in the future.
Overall, we're making solid progress glass is already the most sustainable packaging solution and I believe you will be hard pressed to find many industrial companies with so many levers to improve.
Their sustainability position.
Now I'll turn it over to John to review financial matters, starting on page seven.
Thanks, Andres and good morning, everyone Al I reported third quarter adjusted earnings of 63 per share results exceeded guidance and increased nearly 10% from the prior year, despite headwinds from FX divestitures and interest on funding the Paddock Trust.
Segment operating profit was $266 million up from two.
$243 million last year's as margins increased 60 basis points to around 16%.
Favorable net price increased segment operating profit by $48 million as higher selling prices more than offset elevated cost inflation ship.
Shipments increased half a percent while the net effect of higher sales volume and a change in mix was a slight benefit.
Finally operating costs were up modestly.
The Americas reported $130 million of segment operating profit, which was about flat with the prior year on an adjusted basis.
Earnings benefited from favorable net price the combined impact of one 8% lower sales volume and favorable mix was about flat.
Higher cost reflected elevated asset project activity and unplanned downtime, which were partially offset by our margin expansion initiatives. While performance was solid across the segment. We have been focused on addressing future customer agreements to restore margins in North America and as previously discussed we are taking proactive measures to rebalance.
Network improved mix and enhance earnings.
In Europe segment operating profit was $136 million up $44 million from the prior year on an adjusted basis as margins reached 20%.
<unk> earnings primarily reflected very favorable net price results also benefited slightly from the combination of three 6% higher sales volume and a change in mix.
Finally, operating costs were down about $5 million.
Mostly reflecting the benefit of a subsidy received in Italy to help mitigate the impact of elevated energy costs net of an insurance recovery in the prior year period that did not repeat this year.
The chart provides additional details on non operating items as noted our effective tax rate was at the high end of our guidance range due to regional earnings mix and discrete tax items in the quarter.
Yet again, the company delivered strong earnings and margin improvement, despite a highly volatile macro environment.
Let's turn to page eight we continue to make very good progress on our financial priorities, which are well aligned with our strategic objectives that <unk> discussed our cash flow outlook has improved over the course of the year and cash conversion is set to exceed our original expectations.
We have taken action to optimize our structure improved the balance sheet and reduce our risk profile.
As shown in the bottom chart, our total financial leverage approximated three six times at the end of the third quarter, which is in line with our 2024 Investor day target well ahead of schedule.
Given an increasing interest rate environment, we intend to further reduce leverage to below three times over the next few years and we will continue to review our capital allocation priorities in summary, our balance sheet is in the best position in years and we are committed to further improvement.
Let's discuss our business outlook I am now on page nine overall, our outlook has consistently improved over the course of the year, including our increased guidance provided in September .
Year to date results have exceeded our original expectations and we had good momentum heading into the final stretch of the year.
We now expect fourth quarter adjusted earnings will range between 28, and <unk> 33 per share results will likely be down some from last year, mostly due to headwinds from FX divestitures and additional interest on funding. The asbestos Trust however earnings should be up on an adjusted basis.
Our fourth quarter outlook has improved from prior guidance given the third price increase we implemented in Europe as previously communicated sales volumes will be down a little given a challenging prior year comparable keep in mind inventories are at record low levels and we are constrained in several key markets until new capacity as commission.
We now expect our full year 2022 earnings will approximate $2 20 to $2 25 per share which is at the high end of our recently increased guidance range. Furthermore, we continue to expect 2022 free cash flow will approximate or exceed $200 million, which is in line with our improved outlook we shared in September .
As we round out 2022, we are sharing some preliminary themed on 2023 I'm now on page 10 despite.
Despite elevated macro uncertainty we remain optimistic and expect continued progress in 2023, starting in January strong net price will benefit from ongoing price increases amid continued cost inflation and annual adjustment formulas that pass on a lot of the inflation we incurred in 2022.
Sales volume will likely be flat or up low single digits. As we begin to commission new capacity. While it is unclear if we will face a recession our modeling indicates the potential volume impact is pretty modest overall, especially given our oversold position in key markets.
Like in 2022, we have we will have higher costs due to elevated project activity that will be partially offset by continued benefits from our margin expansion initiatives.
Naturally results will be impacted by higher interest rates, given rising interest rates as well as FX headwinds overall, we expect 2023 earnings will be in line or likely up from 2022, which represents a strong double digit improvement from adjusted levels, when considering FX and paddock interest.
Next year's free cash flow should be modestly below or potentially comparable with current year levels as capex investment in our current expansion plan will likely peak in 2023.
Finally, we anticipate continued progress on the balance sheet and financial leverage should be in the low threes by fiscal year 2023. This preliminary outlook reflects our best view of macro conditions and the many levers we have to help manage through elevated market uncertainty like we have done since the inception of the pandemic.
Turning to page 11 of course, we face many macro uncertainties, including a challenging energy situation in Europe or a potential recession, yet we remain confident oi is a much more agile and resilient company as we continue to navigate elevated market volatility we have the strongest balance sheet in years in cash flow conversion is up significantly following the resolution.
<unk> of legacy asbestos related liabilities.
<unk> serves the global food and beverage market, which is more recession resistant than many businesses.
Likewise, our business mix has improved over the years as we shift to more attractive end use segments in U S. Mega beer now represents only 3% of global volumes importantly, we're significantly oversold in key markets across Latin America, and Europe , which provides a buffer from potential recession volatility.
<unk> is well positioned to manage Russia natural gas curtailments as we enabled energy switching capabilities across half of our EU network by around year end.
While Russia has curtailed LNG EU storage levels are around 94% across the continent and ahead of schedule, reflecting very good efforts to reduce gas consumption. Finally, we have consistently demonstrated improved agility amid significant market disruptions since 2020 now back to Andres.
Thanks, Sean in summary, we are pleased with our third quarter results and continued progress executing our transformation.
The company is performing well and our business outlook continues to improve in.
In fact, the company has either met or exceeded street expectations for 11 consecutive quarters.
Importantly, <unk> is a much more capable agile and resilient company and we expect continued progress in 2023 and beyond.
Finally, I believe <unk> represents an attractive investment opportunity as we reduce our risk profile execute our transformation program enabled profit our growth advanced breakthrough innovations like Magna and ultra and further leverages, our sustainability position to winning the new green economy.
We are confident this strategy will create value for all of its stakeholders. Thank you and we are ready to address your questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now and if you change your mind. Please press star followed by two please note that participants are limited to one question and one follow up question on the <unk> for any further questions and when <unk> ask your question.
Essentially in line is on mute locally.
Yes.
Yes.
Our first question comes from Ghansham Panjabi from Baird.
Your line is now open. Please go ahead.
Thank you operator, and good morning, everybody.
I guess first good morning, Josh.
The backlogs in Europe , and Latin America that you called out obviously being strong as you head into 2023 can you just give us a bit more color in that in terms of sizing of that backlog and the visibility you have associated with it.
Yes.
Yes.
When we look at the markets in Europe .
Italy, and France, specifically RFP importing a significant amount aware from from various places within Europe .
And in other places so that provides.
A a buffer if you will as we move forward in case of some changes in demand.
Now that situation Ghansham is also present across our other markets. So when we look at the North America market. It is importing one.
For one 6 million tons of every year.
And when we look at Brazil, or the Andean countries is the same that those two markets are important so that situation of what you call. The Lac Lac is present in multiple markets that are very important for us.
And when we add up all those imports that's more than $2 5 million tonnes.
And then we mentioned in our previous calls that there is a dislocation of supply company as a result of the conflict between Russia, and Ukraine, and thus more than 1 million tonnes more than 5% of the capacity in Europe , and that's also adding to that so.
It looks to us that we have a pretty good buffer coming out of all of those factors.
We go forward and into 2023 and as a result.
Pretty confident that our pricing position will be very constructive as we go into the following year.
Yes, I would just add Andrew mentioned.
We've got about at least a 5% oversold position in Europe , we're probably looking at double digit oversold positions across Latin America.
Okay perfect. Thank you for that and then in terms of the margin expansion initiatives, the 50 plus million that youre anticipating for 2023.
The drivers any different than what you've seen in the last couple of years, you've been pretty consistent with that sort of level I'm just curious if theres anything different for next year.
They are the same some of the.
Initiatives are going to addressing or improving the top line some of them are pursuing year on year productivity.
At this point, we are more mature in terms of our capability to drive those so we are more and more confident we can achieve what we've been achieving in the previous CRC say is a pretty systematic approach.
Across the organization that is really already in those results.
Perfect. Thanks, so much.
Thank you.
Our next question comes from George Staphos of Bank of America to July and is now open. Please proceed.
Thanks, Hi, everyone. Good morning, Thanks for the details.
Sure.
You mentioned this I think a couple of quarters ago again, we really appreciate the clarity on the material guys and the guidance the early guidance on slide 10.
On operations, that's where I wanted to spend my time first can you talk about the unplanned downtime that you saw in the Americas what caused that.
What the effect of that was and then Relatedly, we're seeing the capital spending bump up into 2023.
What are the key categories in buckets in terms of what's driving that.
Okay. So there are several drivers of unplanned downtime.
One of them is unexpected issues that.
Repair so we are addressing right away, but the oil part comes from the challenges.
<unk> by the supply chain to and always difficult to get materials and equipment. They get delayed. So every time, we get enough equipment to be able to deal with a given repair we are very proactive moving forward on repairing.
EBITDA repaired wasn't in our forecast so that lets make it on plan there.
<unk>.
As we go forward.
Our accounting on a improving and gradual improvement of that supply chain situation.
As that happens then we expect a higher number of repurchasing 2023.
As things normalize that.
That obviously drives the capex, but also the inflation that we saw in capital equipment along the year.
Consider to continue into the following year driving up the Capex number yes, let me just quantify a couple of those of those elements on the costs in the Americas, We did have probably about $15 million of higher operating cost.
Associated with the combination of <unk>.
Planned maintenance activity, primarily in Brazil, we had a big furnace rebuild plus some of the other.
A new convert capacity additions that we're working on as well as that.
Unplanned downtime components that onwards was discussing there that $50 million was partially offset by about $5 million of margin expansion initiatives and there you see the change in the operating costs in the Americas.
You take a look at the capital spending for next year, we're looking at about $725 million to $750 million of that is we provide in there.
$275 to 300 million of that is.
Associated with our expansion initiatives a lot of the upfront on that is going to be working on Canada, and Colombia, which are the two big projects, but we also will be working on some of the bigger projects going into end of 2024, which are included in the chart that we had in our previous.
Conference. So we're going to be just continuing to rolling out we've got 11 different projects over the next couple of years, So that's going to span those activities.
Winning component is about $450 million of maintenance spending we did about 375 this year and maybe thats kind of our historic average, but I think we're looking at a little bit of an increase right now because of two things. One is we are catching up on some of the maintenance activities that Andrew referred to because of the delays in supply chain, but we also are seeing.
Some cost inflation in the Capex side.
Okay. Thanks, a lot John I, just wanted to sort of.
Look under the Hood on that point, and so are you and Thats, what I was getting at or is there anything troubling.
The unplanned outages that youre seeing I E. Even.
<unk> the furnaces, you've been pulling out a pretty great rate and youre, starting to see unplanned outages crop up more frequently or is it.
There is nothing really that we should be worried about there from your vantage point and then related just can you give us a bit more color on how the magma.
Mile markers are going you said everything.
And on track, but what's the next thing we should be sort of asking about holding your two and 23. Thank you.
Those issues that I mentioned of the first category is driving the unplanned repair happen every year. So so it's not it's not unusual.
When they appear then we just have the rest of them and keep going.
Were very proactive at this point every time, we have an opportunity to get on us hitting a better condition, we will show.
But there is nothing really concerning other than the regular activities. We got to continue keeping us you've seen very good place maybe one thing to add on that is since the big projects have been harder to do incrementally because of the supply chain. So we've been doing more small projects and thats to give that to keep the assets in good conditions.
But we do them more episodically and that shows up in unplanned downtime because you do those activities. They buy you a couple of years, but all of those go through expense rather than capital. So I think it's somewhat a little bit of a reallocation of where you're seeing some of the money coming through.
And with regards to our Mac now were doing well.
We continue to make very good progress developing the technology for generation, two and three and at this point, we have three pilots centers in which we are.
Piloting components of that technology, one is the innovation center. The only one is 300, Illinois and the oil in these calls than in Germany.
And we're making very good progress and in line with meeting the timelines for our first line in Kentucky.
All right guys I'll turn it over thank you.
Thank you.
And our next question is from Mike <unk> of <unk> Securities. Mike. Your line is now open. Please go ahead.
Thanks, Andres John Chris Congrats on another strong quarter.
Thanks.
Just following up on George's question, just could you just outside of some of the unplanned downtime are there other issues John that you mentioned about closing the margin weakness in.
In the Americas, and maybe can you expand upon some of the initiatives that you're pursuing to restore margins in that region and then just quickly though in Europe , how sustainable are those 20% margins.
Yes, so in the Americas keep in mind, if you take a look at our book of business about we have about 55% of our businesses long term contracts, it's more like 30% in Europe , but it's more like 75% in the Americas and as you know a lot of those contracts have price are all of them have price adjustment formulas and while we can pass.
Through an energy cost quickly in North America, most of the other basket of goods get picked up through the annual price adjustment formula in this case it should go in more or less in January of this of this next year or so so the Americas does have a little bit more of a lag effect and what you see in Europe and its ability to recover all the significant cost inflation this year. So.
So thats going to be a natural element mic that will help out the margins and the overall performance in the Americas.
Next year for example.
And in Europe as far as the strong margins I think we've mentioned it before we take a very long term position.
Structural position on our on our energy contracts and we believe we believe we have the best in class.
<unk> positions on a long term basis on energy so as it pertains to margins in the future in Europe , especially in a world where we have this elevated environment of energy risk and costs were well positioned on a long term basis, but for competitive purposes, we arent extending beyond that.
I think it is important to highlight that the.
Work on the margins in Europe has been going on for several years. So while we see two as the product coupled upwards. The margin expansion initiatives are contributing their makes employment is contributing and also what we've done over the last year in the.
Current inflation Theyre very high inflation that we're facing as we.
We have very strong capabilities in procurement, we have very strong capabilities in commercial.
And we are planning well ahead of time and.
And that gave us the confidence last year that we were going to put a record inflation effect.
The margins in <unk>.
How a positive net price.
The tank position, what we have today, we are very confident we are going to perform well in 2023 for the same reasons.
Got you that's very clear.
Just one quick follow up on Magna capacity.
The new capacity Youre, bringing on lines and Kentucky can you talk about how much of that capacity is already committed to customers and how much maybe you were leaving for spot volume and the reason I'm asking is that one of your peers.
<unk> is planning to increase capacity by about 400000 tons by 2024, So I'm just wondering if you.
Kentucky coming online selling production into 2024 do you have 80% committed 90% completed that should we be concerned about.
Any increased competition from from one of your larger peers.
Yes, so there is no concern about.
Placing debt capacity in the market that are too big blocks of driving that demand one ESP.
The fragmented.
Fragmented market that is solid supply primarily through imports that's $1 6 million tonnes.
Whilst we have capacity in the in the country to be able to supply that with Magna, which is a very good feel for that it will be a natural fee. So there is no issue with that we have a growth plan for in that market is a multiyear plan and magna as a part of it.
Now, we will supply our spirits customers out of that tool with which we have long term agreements.
That would be secure and that capacity is going to be right, where the demand is so it is going to be very close to <unk> in a unique position versus our capacity that might be available in the country.
Got you. Thank you and good luck in the balance of the year.
Thanks, Mike Thank you.
And our next question comes from Anthony Pettinari from Citi. Anthony Your line is now open. Please go ahead.
Good morning.
Was wondering is it possible to say.
What percentage of net capacity youre, bringing online in 2023.
Percentage of your current footprint and then just from a high level all of the beverage can makers are canceling projects and shutting down plants in some cases.
Are you seeing any of this weakness or do you think glasses.
Rapidly gaining back share just wondering if you could talk about what youre kind of seeing on a high level from in the U S, Brazil and Europe .
Yes Anthony.
I'll touch base on the first one over.
Over the next three years as part of our expansion program, where we're adding capacity to support about 6% growth, okay over and Thats over that three year period of time, we believe on a run rate basis, we're installing capacity that equals about one 5% additional new capacity in 2023, but it.
Might be between one and one and a half realized because we're implementing and rolling it in now and we go into 2024, we're going to see more coming online is probably our peak odd new capacity on boarding and that period of time with it starting to trail off a little bit in the in the subsequent period there.
So understood you want to touch base on the second part, yes, so as we shared before during the Investor day, and some of the previous calls aluminum cans and glass play in different lanes. So our growth is driven by premium products in our spirits and wine and food and in ABB.
Beer.
And their growth is driven by carbonated soft drinks energy drinks and sport drinks bottled water and our soldiers.
So what's happening tool in the aluminum industry at this point is related to.
Their position versus those segments, which are different from the segments that are driving our growth.
So for our purposes, those two things are separate things.
That's why we are growing the way, we're growing and youll see outperformance the wages.
Okay. That's helpful I'll turn it over thank you.
And our next question comes from Mark <unk> with Bank of Montreal, Mark utilized Allison. Please go ahead.
Thanks, Good morning, Andreas Good morning, John .
Good morning.
Any way to help us size the.
The cumulative impact on <unk>.
Container prices over in Europe . Once this third price increases.
Just order of magnitude what would it do to the cost of a wine bottle. If we stack all of these increases on top of each other.
What I can indicate for you.
Arent, providing forward guidance per se on the current price increase that we have in the marketplace, but if you look at our European numbers in the third quarter.
They were up about 18% on a year over year basis, that's the cumulative effect of the price increases that we have year to date, obviously, the third price increase would be additive to that to give you a sense of the direction that we have going on here.
Okay. That's helpful and then Andreas just for my follow on I'm kind of curious you've mentioned the ultra light weighting initiatives is there any way to quantify the savings from both a cost standpoint, but also just what it does to the weight of the container.
Yes, so I can share with you what what the target is so is reduction of weight up to 30% so very significant.
When we we are already seeing some of those models that are coming out of the innovation Center.
It is it is really impressive how lidar.
And they are going to have not only a cost impact, but a sustainability impact which is very significant.
<unk> assumes by containers are going to go down.
We're going to start the first trial production of air commercial trial of that at the end of this quarter and then we award along with the customer over the first quarter next year to get ready for commercialization in the second of the very first.
Container under those conditions.
I cannot share cost reduction targets at this point, but obviously, 30% real chewning weight is quite the impact.
One thing I would add to it is it.
Another real benefit Mark is that as you lightweight and you're you have furnace pull right you can actually get creep capacity out of this so that youll have more capacity out of any individual firms because youre using less product in each bottle. So that's another way for us to be able to support that really good growth on a pretty low cap.
Intensity basis going forward.
Okay. That's helpful. Thanks, John Thanks, Andrew.
Thank you.
And our next question comes from Colin Watts Deutsche Bank. Your line is now open. Please proceed.
Hey, good morning, Thanks for taking the question on volumes was there any noticeable difference in how demand our volumes trended throughout the quarter. We've seen some other packaging peers talk about slowdown later in the quarter, but it doesn't seem like you're seeing anything of that nature.
So the cadence was positive along the quarter July was softer review will always on September were stronger and as we look at October we're seeing that in line with our expectations, obviously as you know.
Current quarter when compared to prior year that was a part of pattern year.
We will be lower but it's higher than pre pandemic levels. So it's about 2% higher than pre pandemic levels. So our volumes are.
Just fine.
Got it and then on Europe , how much of your energy needs. There is already secured for next year and where you are at regarding the strategy of switching 50% of its capacity to oil versus Nat gas and then longer term do you think there could be any potential opportunity for share gains.
From maybe some smaller players that aren't as protected from the higher energy costs going forward.
So.
We are doing very well preparing the capacity to take <unk>.
Various fuels.
We are planning to be ready with 50% of the capacity by year end. So that's progressing well now the situation of natural gas in Europe has improved quite a bit.
Since our last call.
Functional reaction measures have been quite effective that's one thing.
Weather has been milder at this point in time, so that's helping or contributing to <unk>.
Balanced here.
Storage now the liquid natural gas handling capacity is up so thats, helping the supply and as a result of the historic levels are pretty high. So they are all in excess of 90% on EBIT <unk> across countries. So.
The situation at this point looks a lot better than before nevertheless, we are prepared with capacity rate to three cheap required.
And on the energy contract.
Question I would say is as I mentioned earlier, we take a long term approach on our energy contracts that were well established for 2020.
Three before the run up in the environment that we have right now so we're in pretty good position there for competitive purposes. We don't we don't quantify that but I would say we continue to see that despite that very good position. There is a lot of inflation in the environment through indirect costs and things like that so we.
Do need good net price realization to cover that not enough not to mention other inflationary situations like SG&A interest.
Capex as I mentioned before so we really manage our net price for the company on a cash basis to make sure that we maintain this strong cash flow needed to continue to support the investments in the company. Yes. There is something that we don't mention very often which is.
How is our position with customers and Walgreens.
When we look at our policies assumed from a quality service perspective on oil performance with our customers measure to net promoter score it has been improving significantly over time.
We are in some places in some markets in at very high levels. At this point. So there has been a very solid evolution in our relationship and therapies with customers, which put us in a good position going forward.
It sounds good I'll turn it over.
Thank you.
And our next question comes from Gabe <unk> from Wells Fargo gave your line is now open. Please go ahead.
100, <unk>, John Chris Good morning.
Good morning.
I was hoping maybe you could help us.
Understand I guess or maybe compare contrast.
What might be a recession, because I feel like some of the fact pattern is consistent with 2008 2009 and some of it is is different obviously.
Rice and which or.
Or the inflation, that's hitting the consumer is occurring for different reasons.
Versus a strategy that was employed by Hawaii.
14 years ago or so.
So maybe why you think.
The negative impact might be limited to 1%, 3% and again I appreciate I think the market was down.
Around that magnitude during the global financial crisis, but.
Again.
If we're kind of sitting here with maybe a little bit of a.
Critical eye.
The consumer getting hit with a lot of inflation why might not while we may not see the similar.
Draw down in volumes that we did.
<unk> nine versus what you guys are proposing here today.
Okay.
<unk>.
Just to comment on 2008 2009.
Yes, the difference with this time there are multiple reasons why distributions different let me start with the pricing, which is what you suggest at.
At this point in time, where pricing we've priced within market.
At that point in time, we werent and those two positions are very different.
Now there are multiple reasons why to expect better performance.
The short answer to that is the last name on fundamentals are very solid in all markets and theyre very different when compared to the time that you referred to in.
In which class what's considered to be in secular decline that's not the case anymore. So that's been solved.
The demand drivers today in several markets are not that GDP sensitive and let me give you. One example, localization of global brands, which is happening across markets.
That's not sensitive to GDP and like that there are other examples the capacities location in Europe , the Florida 1 million tonnes creates a conditioning, which security supply is important for everyone.
Now I mentioned before that in several key markets.
Those markets are importing a significant amount of where that adds up to more than $2 5 million tons and you've seen all the all in key markets for Hawaii, Italy, France, North America and in Brazil.
Now the other thing is glass today and as a consequence of what we lived through the last three years.
As demonstrated that is very resilient to channel shift on premise and off premise and what is expected. If we go into recession is that at home consumption is going to go up and if that happens glass performs very well in those conditions and the last point is the new business opportunities pipeline that we have today.
Chapter one 7 million tons that wasn't present at that point in time. So none of these conditions on many others, but obviously, we will take a long time to describe all of that.
Different than what we lived through backing all nine.
And overnight.
I would just add two things of that one is over the last decade, we've seen them more mix increase improvement in our mix to more premium categories.
And in fact, those are considered affordable luxuries.
So even if things are a little tough out there you still go by that bottle of Bourbon or whatever it.
That's been proven out over time in fact over in OE dollars nine we saw those same categories grow when other more.
Mainstream camatte commodities actually decline in fact and we've.
Mentioned before in the prepared remarks.
Mainstream beer is only 3% of our global volume anymore that was the category that took the biggest hit during the global recession in <unk> <unk>. So we're a bit less exposed in that regard.
Alright, I appreciate the thorough answer we tend to agree with you just on the <unk> some of that Alright, and then can you quantify for us.
Given and should take a mile type thing on the 'twenty three view, just where corporate expense you expect that to land this year.
And sort of is there something I guess, maybe nonrecurring in nature, there and why it would be down next year.
And then the.
I guess rebuild activity if you can quantify that for us just to help us build the bridge.
Yes. So so corporate expenses. This year are elevated or are we expecting around $220 million. This year that is a $50 million increase year over year. There's two main drivers for that one it's been a good year. So management incentives are up about $30 million in that regard.
$20 million is just a cost inflation kicking out higher level cost inflation kicking out than we've seen in the past and particular in insurance cost and one thing to keep in mind is we do have about $60 million of elevated R&D costs embedded in that number for higher magma ultra cost those will be with us for a few years.
Once gen three and ultra commercialized than those start to rebase. Some so.
Just to understand that the pattern of corporate expense and as far as next year.
Rebased <unk> management incentives alone is 25% to $30 million, let's say of a reduction and we'll give more clarity in the year end call about the total position on on corporate.
Spencer.
As far as rebuild activity as we mentioned before.
We are probably getting back into a more normalized level that typical environment is about 12 to 14 furnaces a year and so that's what we would be returning to.
Thank you good luck.
And our next question comes from Arun Viswanathan from RBC capital markets. Your line is now open.
Great. Thanks for taking my question.
I guess I just wanted to ask first on the.
The earnings bridge so.
You called out about 25.
Of headwinds.
And then you've also discussed price mix.
Volume price and then volume mix and so on.
Potential tailwind.
Yeah.
How would we kind of parse that out I guess is it is it mostly.
Volume mix is the variable factor or what would you say is kind of the <unk>.
Biggest uncertainty if you look forward into 2013.
Yes.
Well I would say because we look to 'twenty three and Youre looking on I guess page 10, and the directional arrows. We have the biggest lever that we have we will continue to be net price in.
In this environment.
And mix will be as we say kind of off to maybe flattish. So it's going to be more muted in that regard.
So of the two two levers it's the net price is the biggest now we'd look at.
Things that are more variable out there obviously what is the pace of cost inflation.
That is always one that's a little bit.
Harder to pin down we are expecting in this under the set of assumptions remaining elevated cost inflation maybe not.
2022 levels, but still quite a significant amount of cost inflation in particular as the higher cost that we've all been seeing flush their way through the value chain still higher raw material costs and labor costs and in particular being up. So those are the probably that's the probably the biggest unknown and of course.
When it comes to volume as we give a sensitivity there maybe a 1% to 3%.
Span there of any recessionary pressures of course, we don't see that right now, but we just wanted to give you a sense of that.
Sensitivity as we see things right now.
And just just to clarify so do you believe that one 3% are saying or some kind of in that low single digit range is the.
More long term growth rate.
Vacuum glass containers.
Is there anything that would maybe pushed that up as far as substrate conversion or anything else.
And then the other question I had was.
When do you expect that 700 million plus of Capex to kind of come down and if so.
What level do you think that is really sustainable over a long term.
Yes, as far as long term growth don't don't equate the 1% to 3% that's our sensitivity to any type of recessionary pressures, but if you go to page four of the materials. We gave the projected long term growth, which is anywhere from say, 2% to 4% of sales volume growth in applicable markets that we operate that okay. So that that we believe is the long term growth.
Right and in fact, we've been growing at about a half a percent this last quarter, but the feeling behind it is still is this low single digit type of demand environment out. There is just obviously, we're capacity constrained in that regard and as far as the Capex obviously.
2003 will be the most elevated environment for the expansion capital.
That's the biggest driver there, but we are giving.
Views on Capex levels for example in 2020 for yet.
Thanks.
Okay.
As a reminder, if you are allowed to ask a question. Please press star followed by one on your telephone keypad and our next question comes from Adam Josephson from Keybanc. Adam. Your line is now open. Please go ahead.
Okay.
Andres and John Good morning, Thanks, very much for taking my questions.
Anthony asked about earlier about Ken Good morning, John Anthony was asking earlier about can versus glass demand and I think you mentioned that cans are used for soda sparkling water hard seltzer energy and consumption of those products is being affected by.
Price increases in and falling disposable incomes et cetera.
Yes, Im still kind of confused by y <unk>.
Demand for premium products would be holding up better than demand for soda and sparkling water. If we're going into a recession I would think demand for premium products, if anything would be getting hit harder than for things like soda. So can you help me understand that dynamic and what gives you confidence that demand for premium products will have.
Up perhaps better than that for soda.
Yes, so the.
Consumers are premium products.
Florida, those products and they tend to stay.
In that in those categories during the recession its been demonstrated.
Cross several recessions already so this is something that we've seen in the past and we expect to happen today, you've seen that there has been a lot of.
Focus on identifying or trying to identify if there is trade down taking.
Taking place on so far is not that clear that there is trading down.
Now, let you mentioned happens at a lower tier. So it is there is the pure commodity type of products and they want that gold where just about that those will trade out because that consumer is more sensitive to those issues now let me just make a comment with regards to how our markets have changed.
So mainstream beer has been really.
A point of pressure for us in demand toward the year. So as you know and when you look at our growth numbers are art performance in every year. It has been highly influenced by mainstream now we shared with you before that we have been focused for several years now on diversifying into growing categories, which are premium.
Rhodopsin nature like food.
<unk> premium and a spirit now as a consequence of that mainstream that used to be around 40% in North America is down to 13%, but globally mainstream is only 3%. So when we look at our performance going forward, we got to take into consideration that the most vulnerable category is becoming really a.
Small so that's important the oil part facing the United States. As an example, there are imports that go up to one 6 million tons per year.
You might recall that we acquired a distribution channel.
On distribution organization with vitro, which is called the Ips and we've been developing that organization by substantially and we're growing quite well with that which gave us access to all of that volume, which we didn't have before.
That's in favor of outperformance as we navigate.
That engine types.
Thanks, Andres and John just on the Italian subsidy can you. That's the first I've heard of a subsidy in Italy can you talk about.
Why you received that were you expecting that do you expect more such subsidies.
Any details around that I'd appreciate it.
Yes sure.
We were aware of a potential subsidy heading into the third quarter yet it wasn't fully.
Quantified or confirmed until later in the quarter and September the subsidy was about $13 million, which was probably about $6 million higher than we originally estimated but we did incur at least $10 million of more cost inflation than originally forecasted in Europe . So the net effect is rather muted compared to our original.
Guidance.
And historically, we have Italy has issued a lot of credits over the year that they manage things through that we've had these things called white certificates in the past, it's how they manage a lot of these different things. It's one way that they also incent.
Development and expansion within property within industries and things like that through this process. So it is not particularly a surprise, it's actually included and its a legislative item in Italy. So in fact, I think in the last quarter call. We had indicated that even with the energy situation building up debt that we had some pretty.
Firm positions through some of the governments like Italy, and electric position official positions in France that would be supportive of the industry. So not a huge supply surprised a little bit bigger than we expected, but so was cost inflation.
Thanks, John .
And our next question comes from Jay <unk> from Goldman Sachs. Your line is now open. Please go ahead.
Good morning, everybody. Thank you for getting me in here.
I was wondering if you could just kind of decompose the minus 2% shipment number in the Americas, how much of that was kind of unexpected downtime impacts versus outright just demand in.
Latin America, Slash, Brazil, and North America.
You do know that you havent maintain a sold out position in Latin America.
On North America is there anything kind of fundamentally you're seeing from demand perspective in North America.
Yes, I would say there is two primary drivers for that 2% down it was down in Brazil, where we had as I mentioned earlier, a large furnace rebuild so that was the driver for that the sole driver for that in fact, if it wasn't for that Theres strong double digit demand.
Act up in that marketplace. So whatever we can produce we can sell in that market and then the other reason was in.
In North America, I think it was a combination of two factors. One is we did have some incremental unplanned downtime same situation inventories are relatively low.
If theres a little bit lower production than anticipated that impacted sales the only area, where we saw a little bit of <unk>.
Weakness.
Across our global network and in the quarter was in beer in North America, and that was probably fundamentally from a demand standpoint, a couple of percent down from what we anticipated, but it wasn't a major driver of the overall performance for the company.
Just to complement that looking at Brazil, and the Andean.
That market is characterized by customers focus on growing premium that category was very very small they have a significant opportunity ahead of them. So they've been focused on premium and this is across categories, but they're also localizing global brands in those markets and there is a conversion taking place between.
From returnable containers into.
Into one way containers glass containers and that's related to.
The convenience of for some consumption locations, so thats moving quite well as well as the use of returnable containers for affordability.
And for sustainability reasons are all end users are growing there our limited by capacity today, obviously, our inventories don't contribute to.
Adding capacity and we're building that's why would it be incremental capacity in those markets.
That's helpful. Thank you and then John just a quick follow up.
And some of the leverage comments, you made targeting kind of low threes by the end of next year, but it did sound like you were talking about longer term getting getting below that three number can you talk a little bit about just kind of how youre thinking about long term leverage on the business like what is what is the right number and why is it that number.
Yeah, I think on the.
We believe in this business of being a strong double B Corporation.
Good place to be.
Obviously.
World, where interest rates are rising.
Our view of the target Leverages is dropping some right in the past is kind of mid to high <unk> mid to low threes would be kind of a good place to be but with the higher interest rates. We do below we believe being below three times leverage is the right answer for the company and I think it's a good balance between.
No.
Being able to allocate our capital for creating value as well as a good healthy balance sheet.
And being very mindful of the interest rate environment that we're into and also being mindful of being a position that has it.
Appropriate spread and the interest rate funding position for the company.
Thank you very much.
Thank you.
And there are no further questions I would like to hand call back to Chris for any closing remarks.
Okay. This concludes our earnings call. Please note that our year end call is currently scheduled for February one 2023, and remember make it a memorable moment by choosing safe sustainable glass.
Thank you.
This concludes today's call. Thank you for joining you may now disconnect.
Yes.
Yes.