Q4 2022 O-I Glass Inc Earnings Call
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Hello, everyone and welcome to the I O I glass full year and fourth quarter 2022 earnings Conference call. My name is Daisy and that'll be cool Thank Neal coach day.
If you would like to register a question. Please press star followed by one on your telephone keypad. Please only ask one question and one follow up to allow others the charm.
I would now like to hand, the call over to your House, Chris Manuel Vice.
Vice President of Investor Relations to begin so Chris. Please go ahead.
Thank you David and welcome everyone to the O I glass full year and fourth quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO and John <unk>. Our CFO today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session.
Presentation materials for this earnings call are available on the Companys website. Please review the safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials I'd now like to turn the call over to Andre who will start on slide three.
Good morning, everyone and thanks for your interest.
We are very pleased with <unk> performance in 2022 half results exceeded guidance and we achieved all of our key commitments.
Last night, we reported adjusted earnings of $2 30 per share, which represented more than 25% increase from the prior year results and exceeded guidance.
As you can see on the left we have very good business momentum with consistent adjusted earnings growth over the past several years.
The strong results reflected solid execution across all key business layers.
Earnings benefited from significant net price as well as sales volume growth good operating performance on our margin expansion initiatives.
Importantly, full year free cash flow and fourth quarter results also exceeded our most recent business outlook. In fact these represent the 12th consecutive quarter, we have met or exceeded the street consensus.
In addition to our strong operating performance. We also achieved all of our key strategic objectives in 2022.
Margins were up and we initiated our capacity expansion program to enable profitable growth that includes our first magma Greenfield plant.
We also significantly improve our structured us resolve these legacy asbestos related liabilities and we completed our portfolio optimization program.
We now have the healthiest balance sheet in the past decade.
Reflecting solid business momentum, we expect our performance will continue to improve in 2023 as we further advanced our strategy Jan.
John will expand on our financial performance.
Outlook heavy later.
Let's move to page four as we review our recent Sage volume trends.
Suspected achievements inquiries about 1% in 2022 following significant growth in 2021 when volumes rebounded from the onset of the pandemic.
While demand remains healthy our growth has been limited by capacity constraints and record low inventory levels in key markets.
Growth was most notable in the spirits wine on categories, while beer and food were slightly down.
Chip mentioned increased nearly 4% in Europe .
And we're up across all end use categories and meet the strong underlying demand in glass supply constraints.
Volume declined 1% in the Americas, primarily reflecting lower production due to planned and unplanned downtime in North America and Brazil.
We contended with record low inventories across Latin America.
Consistent with guidance for quarter achievements were down about 3% given the challenging prior year comparison when volumes were up a robust five 4%.
Looking to the future. We anticipate continued healthy demand as illustrated by Euromonitor projections, indicating <unk> annual growth of 2% to 4%.
Key markets, we serve through 2025.
Overall, we expect our shipment levels would be flat to up 1% in 2023.
The first phase so far expansion program will add much needed new capacity. However, this benefit will be tempered by record low inventory levels and the impact of higher asset project activity activity as maintenance initiatives normalized and supply chain issues.
The stronger shipment levels are you anticipating in 2020, Florida as more new capacity comes online.
Overall, we have not seen significant changes in demand patterns lately, but we'll continue to monitor market conditions, given the <unk> call for recession.
Let's turn to page five.
On top of a strong recent performance. We also achieved all 2022 key strategic objectives.
Segment operating profit margins were up 110 basis points as we exceeded our targets for both net price realization and margin expansion initiative benefits.
As noted our capacity expansion projects are progressing well as we capitalize on the strongest glass fundamentalists.
20 years.
Although magneti development efforts are advancing well and we have broken ground on our first magna Greenfield in Kentucky.
Likewise, the fully scaled market trial of our new ultra lightweight solution is proceeding well.
Our ESG unless advocacy efforts continue to advance as discussed we significantly and profile of the structured US Battle result is legacy asbestos related liabilities and we wrapped up our portfolio optimization program.
I want to thank the team for advancing our strategy and achieving all key objectives in 2022.
We have established another set of ambitious and achievable objectives to advance July strategy in 2023 as shown on page six.
Higher earnings and margins should benefit from a strong <unk>.
Net price realization on our ongoing margin expansion initiatives.
As you can see we have increased our annual <unk> target to more than $100 million.
Which now includes a set of focused initiatives to advance performance across targeted operations, primarily in North America.
Airports include growing in attractive markets in North America supported by our ongoing expansion program Likewise.
Likewise, we've recently closed one low margin foreigners are in the process of closing one more low margin for us in the near future.
Currently we are distributing that volume within the network. We also intend to improve our commercial policies as we reset over 40% of our customer agreements with more favorable pricing terms and implement corn price adjustment formulas, which will recover significant prior period cost inflation.
We are off to the races, and expect to advance our capacity expansion program to enable profitable growth.
We aim to complete our Canada, and Colombia projects during the first half of the year as we continue the next phase of projects in Brazil, Peru, and in Scotland as well as our first Mac Mountain Greenfield and can talk to you.
Additionally, we will advance our magneti development efforts that will enable commercialization on both the jet of both Gen. Two and Gen. Three in 2024 and 2024, respectively.
Likewise, we expect to complete the ultra qualification in Colombia that will pave the way for future deployments.
We intend to accelerate the use of key technologies to help reduce greenhouse gas emissions on top of a set of initiatives to expand recycling rates.
We will advance our glass advocacy campaign on increasingly prioritized fleet two week connections to build the <unk> brand with decision makers. Finally, we will continue to improve the capital structure and expect to reduce our net debt leverage ratio to below three times by the end of 2023.
Im highly confident these efforts will advance our strategy as we continue to transform Oi.
Turning to page seven.
We are very excited about our first magna Greenfield plant in bowling Green, Kentucky, which is on track for initial commercialization of Gen. Two by mid 2024 and yen three by mid 2025.
We are designing the plant will be a showcase facility that will demonstrate all of our next generation capabilities.
These newest state of the art facility will include the Mac My mentor, New model, our <unk> system and Biopharming machine it will be fully digitized wed a high performance operating structure.
These highly scalable plan will eventually include all the magnet generations with advance sustainability features as well as ultra light weighting system.
<unk> in the Oregon Trail volume Green plan will demonstrate the value of near location and will be a key hub for further customer collaboration investor visits and demonstration of <unk> next generation capabilities.
I invite you to review a recent video that we created that chose <unk> in action and Florida. This cautious he has many important attributes.
This slide includes the link to the video.
Now I'll turn it over to John to review financial matters, starting on page eight.
Thanks, Andres and good morning, everyone Oi reported full year adjusted earnings of $2 30 per share, which exceeded guidance and increased 26% from the prior year in fact performance improved across several key financial measures as illustrated on the left.
Our earnings improved in both the Americas and Europe as segment operating profit increased to $960 million, reflecting strong net price realization as well as modest sales volume growth and solid operating performance despite higher asset projects expense.
Turning to the fourth quarter, we reported adjusted earnings of 38 cents per share, which was up from the prior year and exceeded guidance results increased 36% from the prior year when adjusting for FX divestitures and interest in funding the Paddock Trust.
Fourth quarter segment profit was $206 million up more than 25% on an adjusted basis as margins increased 100 basis points strong net price boosted earnings and as expected sales volume was down about 3% given challenging prior year comps finally operating costs were up primarily.
<unk> elevated asset project activity.
The Americas reported $83 million of segment operating profit, which was down from the prior year on an adjusted basis.
Earnings benefited from favorable net price, while sales volume was down 6% amid elevated project activity as expected higher operating costs were partially offset by our margin expansion initiatives.
In Europe segment operating profit was $123 million up $52 million from the prior year on an adjusted basis very favorable net price boosted earnings while operating costs were up as noted the chart provides additional details on nonoperating items, yet again, the company delivered strong earnings and margin improvement despite a highly.
Volatile macro environment.
Let's turn to cash flow and the balance sheet I'm now on page four.
Page nine as shown on the left we reported free cash flow of $236 million, which exceeded guidance that was down from the prior year due to higher Capex given expansion project investment adjust.
Adjusted free cash flow, which excludes the strategic capex totaled $426 million an increase from the prior year, demonstrating <unk> improved operating performance in fact, our cash flow conversion was around 36% well ahead of our 25% to 30% goal.
At the same time, we have significantly improved our balance sheet position as shown on the right total financial leverage was around three four times at the end of the year down one turn from last year and two turns from 2020. This.
This improvement reflects higher earnings solid free cash flow generation and proceeds from our portfolio optimization program, while funding. The Paddock Trust in fact, we achieved our 2024 Investor day goal of three five times leverage well ahead of schedule.
Recognizing our progress both Moody's and S&P increased our credit rating this year and we now have one of the better balance sheet and the rigid packaging sector and.
In summary core operating cash flows improved and our balance sheet is in the best place in a decade.
Let's discuss our 2023 business outlook I am now on page 10 overall, we we have very good momentum heading into the new year earnings will benefit from strong net price realization and flat to modest sales volume growth operating cost should be up due to elevated asset project activity, partially offset by the benefit of margin expansion initiative.
As a result, we anticipate adjusted EBITDA should exceed one $3 7 billion, an increase of 15% from 2022.
Full year adjusted earnings should exceed $2 50 per share, reflecting very good EBITDA improvement, partially offset by elevated interest expense.
Overall, we expect earnings will be Frontloaded in 2023.
Net price realization will likely peak in the first half as earnings benefit from annual price adjustment formulas that recapture prior year inflation and new increases effective in January of 2023, Likewise, we will lap the prior year three price increases over the course of the year as.
As such we anticipate earnings will be up nicely during the first half of the year, while second half results could be more comparable to 2022 levels. You can see that reflected in our first quarter guidance of 80 to 85 per share, which is a significant increase from the prior year, reflecting strong net price and the benefit of inventory revaluation due to elevated inflation.
Given macro uncertainty and the risk of recession, we're providing base performance levels for full year 2023, rather than an EPS range. At this time, we do intend to introduce an earnings guidance range and a quarter or two once there is greater market clarity.
Adjusted free cash flow should increase to at least $450 million and free cash flow should be at least $150 million, which is down from the prior year due to elevated capex approximating $700 million to $725 million higher Capex reflects increased expansion investments as well as normalized maintenance project.
These supply chain improve.
As Anders mentioned, our leverage ratio should end the year below three times as we continue to focus on balance sheet improvement amid a higher interest expense environment.
Overall, we are optimistic as we enter 2023 and expect continued positive momentum despite ongoing macro uncertainty while intentionally cautious on the back half of the year, we are well prepared to manage through elevated volatility as we have done over the past three years importantly, we have already achieved all of our key 2024 financial.
As presented at our most recent Investor day, well ahead of schedule in our 2023 guidance exceeded those goals.
Given the foundation, we have established and good momentum we anticipate continued performance improvement in 2024 and beyond and expect to introduce new long term targets once macro stabilized.
Let me wrap up by restating, our capital allocation priorities I'm now on page 11, improving our capital structure remains our top capital allocation priority. As noted we expect leverage will end the year below three times, we will continue to reduce debt consistent with our glide path to two five times leverage and expect to eliminate our net.
Funded pension liabilities over the next few years, our second priority is to fund profitable growth. This includes our current $630 million expansion program. We do anticipate continued modest portfolio optimization as we seek to increase ROIC, which could also help with debt reduction or expansion.
Returning value to shareholders as our final priority, we will continue our anti dilutive share repurchase program. Likewise, we may evaluate additional share repurchases or reinstated dividend as we are closer to our capital structure objectives. Thank you and I'll turn it back to Andrew for concluding remarks.
Thanks Leon.
In summary, we are very pleased with our performance in 2020 pills adjust.
Adjusted earnings per share increased more than 25% from the prior year and exceeded our guidance.
As noted earlier, we have met or exceeded the street consensus for 12 consecutive quarters.
<unk> strong performance. We also achieved all key strategic objectives in the past year, we increase margins initiated our capacity expansion program advanced breakthrough technologies and significantly improve the structure of the company.
We have strong momentum heading into the new year.
Such we expect higher results as we continued to advance our strategy in 2023 and beyond.
Finally, I believe <unk> represents an attractive investment opportunity as we strengthen our financial profile execute our transformation program enabled profitable growth advance rates through innovations like Magna and ultra and further leverages, our sustainability policy assumed going in the new arena economy, we are.
Confident this strategy will create value for all our stakeholders. Thank you and we're ready to address your questions.
Thank you as a reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.
Ladies Cline.
Ask one question and one follow up to allow us John .
If you would like to withdraw your question. Please press star followed by <unk>.
Wanted to ask a question. Please ensure you Amit.
So that star followed by one on your telephone Keypad Register a question.
Our first question today comes from Ghansham Panjabi from Baird Ghansham. Please go ahead. Your line is open.
Thank you, Matt and good morning, everyone.
I guess I'm just looking back at 2022 on a segment basis, I mean, Europe was up three.
320 basis points from a margin standpoint year over year.
It's up significantly versus the pre COVID-19 level and obviously there was a lot of chaos last year with European natural gas and so on and so forth.
How do you think this evolves from a margin structure standpoint specific to Europe .
For example, natural gas prices, our energy costs more broadly.
Towards prewar levels.
Thank you Ghansham.
If we look at the mine.
<unk> in Europe , they are very solid.
In 2020 tool falling uses beer and <unk> fluid the widening periods.
Form quite well. So this is happening across markets in Europe and across end users. When we look at wine and beer demand for example, so champaign borderline process <unk> Italian wind in France, and Italy. It is particularly strong and you know these two markets are very large.
Markets for Hawaii as periods in the UK is very strong tool.
Now.
Along with that we mentioned before there is a large shortage of glass in Europe that is driven by all of these growth that I mentioned plus the capacity of these locations that up to 1 million tons.
4%, 5% of the total supply and we believe this is going to take several years to resolve strike. So from now the minus one point, we see this continuing.
When we look at the gas prices.
We're continuously looking at the <unk>.
<unk> future.
And when we look at those futures.
That does suggest to us that this is going to be a multiyear dynamic.
And today, we are dealing with a milder winter.
There is still winter to go that we will be facing replenishing. The storage is most likely the dynamics are going to change at that time. So I think we got to see how this unfolds, but you would expect that.
Many users of natural gas, but position in the second half when prices drop a little bit most likely they're buying positions today and that will take most likely.
<unk> 2023, so we're out of this year into the following years, but back to the <unk> futures when we look at them.
Suggest this is going to be a multiyear dynamic and back to Europe performance there.
European performance improvement has been a long term trend since 2015 every year, we'd be not be in earnings and margins and returns and we're seeing the continuation of that I think we're very aware of the organized and prepared in Europe to really drive value out of that very important market.
Yes.
That's very helpful and then for the first quarter can you quantify it.
Inventory revaluation benefit and then also related to that point.
Pointing towards $100 million plus margin expansion initiatives for the year.
A benefit can you just give us a bit more color as to what that's being driven by.
Yes, Ghansham. This is John so on the inventory revaluation as you know we have to properly state the inventories on our balance sheet and given the higher level of inflation that we have periodically we have to do these.
Inventory revaluation.
It is adding about $20 million or almost 10 cents in the first quarter of this year relative to if we did not have that adjustment, but keep in mind that that really doesn't affect the full year. It just kind of flushes through over the course of the year. So it doesn't contribute meaningfully to our full year outlook for the business.
And as we look at the margin expansion initiatives of $100 million. If you look at that we had a target in 2022, a $50 million. We came in at $70 million. So we've been doing well in this and we feel confident that we can continue to do well through the combination of our margin our revenue optimization activities, which has things like value based pricing.
Icing planned profitability, which is a lot of the cost related elements of the plants as well as what we call cost transformation, which is on the Opex side as we continue to do a various different things, but we did add as Anders noted in the prepared comments and we're focused activity over in North America.
And that is certainly contributing to the ability to get to $100 million in particular, the price resetting activity that onerous mentioned should give us some initial benefits.
Bring it early benefits to getting to that number and I think it's important to highlight that the.
Resetting of conditions commercially.
In North America is a long term move.
So this has been a market under significant pressure over the last few years and we're working on visa structurally.
We are working on a large turnaround effort to get back to the earnings and margins and returns potential of these very important market.
While we are doing in the commercial side.
From our perspective is a long term move.
Thank you so much.
Yes.
Thank you.
Next question is from George Staphos from Bank of America. George Your line is open. Please go ahead.
George GA there.
I was wondering any will be from George So I'll move on to the next question next.
Our next question today comes from the line of.
Anthony Pettinari from.
Anthony. Please go ahead your line is open.
Hi, This is actually Brian Bird Meyer sitting in for Anthony Thanks for taking the question.
You've been saying capacity in Europe is reduced by about 5% due to the war and elevated costs.
Have you seen any capacity come back online with Nat gas moving lower.
Do you have a view on your industry operating rates in Europe in 2023, just kind of based on the projects announced by Oi and competitors.
So.
There is a shortage of capacity of 1 million tonnes.
To about 5% of their supply.
Haven't seen capacity coming back at some point it will come back some of it will come back, but you also got to take into consideration that the.
Italy, and France as an example.
And even north Central Europe .
<unk> at this point in time, so beyond that 1 million tonnes. There is a significant volume that is imported every year.
Until those markets so.
From our perspective.
The backlog in Europe is quite large.
<unk> R is still to go up.
And.
These situations with capacity in Europe is going to be a long term issue.
I think you can see that.
When several players including Oi.
Our building capacity to be able to keep up with the growth in those circumstances of dislocation of capacity.
This is going to take time to be resolved.
Got it thanks for that color.
And last question for me equity earnings were up quite a bit in <unk> I guess, just what do you attribute to that growth and do you have any thoughts on equity earnings in 2023.
Yes sure so.
We have about four or five strategic JV that we have spread across the globe.
And we have in particular to one in Europe and that caters to the higher end categories and then one over in.
In Mexico, those have been doing quite well for the business again, a lot of the trends that we've been seeing over in Europe buoyed up.
That that joint venture over in Europe , We expect continued good progress in our joint ventures in 2023 also.
Got it thanks, I'll turn it over.
Thank you.
Yes.
Thank you.
Next question is from Mike <unk> from <unk> Securities. Mike. Please go ahead. Your line is open.
Thanks, Andres John Chris Congrats on a solid quarter and a solid year.
Thank you.
First question I had just you.
You mentioned, John you made a comment as well in terms of resetting the contracts in North America, how far along are you in doing that.
Do those contracts allow you to recover previous inflation I think I'll. Just you made a comment that allow you to to recover some of that inflation. So I'm just wondering if they.
Fully allow you to recover the inflation that you experienced last year, partially just some more color around where you are in the process. We are seeing those contracts and if you're able to recover anything historically.
Well, so we had a plan to reset contracts impacting this study in 2023.
That's mostly loan.
Is <unk>.
Percentage of the total business.
We expect to record inflation through apps, so that's going to come.
Into 2023.
We're also resetting the conditions of those contracts.
The issue to PAA.
Inflation recovery.
So.
This is a large effort to recovered.
Healthy margins healthy returns in this important market.
Yes, one thing I would add on that one Mike is that the contracts that we're referring to as North America is long term contracts five to seven plus years type of windows. So none of the ones that we're addressing right now we're set call at 215 to 2018, something like that which are some of the most challenging environments that we saw in the North America.
Marketplace with what was going on with Mega beer at that time as well as the hard seltzer. So.
They were set in pretty challenging economic conditions, we are seeing a much more constructive environment.
As the growth in the premium categories and a lot of other new attractive categories that we're seeing in north and so we're in a much better places we reset those contracts.
Got it.
Now Jonathan for anything retroactively.
Last year does it look.
Yes, the price adjustment formulas that debt Andras had spoken about will recapture 2022.
Inflation that obviously was significantly rebounding and what I would say is the terms of the <unk>.
In terms of these new agreements are measurably better than the terms that we had prior to that you can a portion of that to recovery of historic inflation or you can just attribute it to more value creation, but it is a step up and the overall value that we're getting on that business.
Got it and then my second question just can you provide us with an update on the progress you've made in adding the energy flexibility to European plants. I think you were targeting either late last year early this year.
Percent of quick with that.
And then maybe switching flexibility and then just as the energy contracts that you've already.
Entered into say pre COVID-19.
Likely rollout next few years, given where we are today given the fact that European natural gas prices are lower is it fair to assume that you are exploring options to enter into similar type contracts to hedge your energy positioned in Europe .
Yes.
The progress on adding or enabling that.
Current assets to use alternative fuels, we're making very good progress the final target is 50.
The Zip constancia as have been improving so that gives us a little bit more relief in that process.
We started very early last year and we're in a very good place at this point in time.
We're able to respond if that is necessary.
Then on the other question on the energy contracts, just a little background for.
Everybody again, we've taken for years, a sophisticated structural approach to the energy procurement as a result number of years ago, We established best in class long term energy contracts.
And that was done prior to the run up in the cost that we've seen in the last few years.
As you alluded to this long term position extends well beyond the current year. So we should have an enduring competitive advantage here for this period of time in and keep in mind. We do believe we need this is not only just the inflation that we're seeing.
Directly, but we have SG&A inflation higher interest rates.
Capex inflation and things like that.
So at this point in time, we don't feel the need to get into the marketplace and <unk>.
<unk> alluded to a little earlier is is even though natural gas has come off in Europe off of its high it kind of averaged 102000 euros per megawatt hour last year, it's still quite elevated at around 60.
<unk> per megawatt hour compared to maybe pre.
Paul pandemic numbers of 2000.
<unk> per megawatt hour. So at this point in time, it's still quite elevated and of course, we're seeing probably a little bit of a lower window given the warm winter, but we believe that there is still a structural challenge over in Europe on energy so.
Again, I think we don't feel any pressure to get into the market.
Thanks, very much and good luck for the year.
Thank you. Thank you.
Thank you.
Our next question today comes from Kyle White from Deutsche Bank. Please go ahead. Your line is open.
Hey, good morning, guys. Congrats on a strong quarter strong year. Thanks for taking the question I guess just first I think you mentioned you are looking to introduce an actual guidance range for the full year in the future as we gain more mark.
Clarity what are you waiting on here to get more clarity on is it more as the consumer demand is inflation just any more details you can provide behind that decision.
Yes, I think it is it has to do with all the macros I think the first.
Variable that we're looking at more than anything is what is the likelihood of recession and particular in the back half of the year and the implications. We don't really see any any any tripping any wire between now and mid year in our business now we just don't have the visibility into the back half of the year. So we've intentionally tap down our expectations.
And what we're showing here in the back half of the year because of that uncertainty.
And so obviously what happens on interest rates and everything like that has a big effect on how people view of the economy and potential harder soft landing and things like that so obviously, it's a big determinant of I think whether we trip into recessionary pressures or not so we're clearly watching all watching that and of course the <unk>.
<unk> activity.
And sentiment from our customers.
I appreciate it and then on volumes looking at the Americas do you have a sense. If the decline. This quarter was the result of any destocking or was it just consumer weakness given inflation just what's your best sense of the driver here.
I would appreciate it if youre also giving any kind of target range for volumes for 2023 by the segments or by the region.
Yes.
The fundamentals in the Americas are very good and in fact, when it comes to that.
America will remain with very large backlogs.
And.
Markets that that's why we're building capacity and.
We are importing glass as well as other players not importing lastly, we were able to afford those markets.
No.
The Americas portfolio, So North America is.
He is quite.
As stable.
The performance of the Mega.
<unk>.
It has been stabilizing the decline has been a slowing of premium beer is growing well and premium products on a.
A very good place the issue is that we have very tough comps with with Q1 2022 now us.
We were coming back from the pandemic inventories were revealed there was a price increase in the second quarter of <unk> through that.
Increased fortunately in the first quarter of 'twenty one.
So we're dealing with that on top of it our inventories are low so we can.
Chip anymore out of inventories incremental.
For incremental demand as we had before so.
In that situation when the state and then we have a higher level of acid activity at this point and in some of these markets, which is also limiting our ability to to chip. So all those things come together.
We are in our forecast at this point in time everything is proceeding as we expected.
<unk>.
Capacity comes into operation, we're going to see the positive effects of that on demand.
And kind of on other aspects of your question. There. If you look at what happened in Americas, where the volumes were down 6% in the fourth quarter that was attributed to our own maintenance activity. We had significant rebuild activity going on both in Brazil, and North America and back to honors his commentary the inventories there.
A record low level.
Record low levels and given that activity it was very difficult to meet the demand and as we look to 2023.
Overall, we think probably theres, probably more volume growth opportunity in the Americas.
Given that all markets are dealing with low inventory levels, but we are adding new capacity over in Europe .
In the Americas, primarily in Colombia, and Canada, So that will come online and allowed to have a little bit more growth in the Americas.
Sounds good I appreciate the details.
Thank you.
Thank you. Our next question today comes from.
<unk>.
Well Nathan from RBC capital markets.
Erin. Please go ahead your line is open.
Okay.
I guess I just wanted to understand the earnings in context of your <unk>.
<unk> Chairman long term targets. So you noted that you reached 24 numbers expectations ahead of time and 23 here. So would you characterize that.
Three guidance, which is about 15% above.
Sure.
Many of the street expectations are and you noted.
12 quarters in a row would you characterize your 'twenty three kind of whole year outlook.
On operating income as kind of a new base level.
The way I would kind of think about it is.
Since you're growing now and then.
2% to 4% range in 'twenty.
<unk> thousand three something below that for macro concerns.
Would you just apply kind of a new margin range on on some of this heightened growth.
So maybe in the out years.
You've reached 25% in 'twenty four and.
In 2000.
26 levels 25 is that how we should think about it.
Yes.
Yes, what I would say is included in our prepared comments. We had indicated we expect continued earnings improvement and not only in 'twenty three but also in 'twenty four.
There's a lot of moving parts, we're managing a lot of levers in the business.
Of course, we are raising prices as we've discussed before.
But we are profitably growing our business most of that capacity expansion will come more online in 2024, and 2025 and to your point, we're targeting profit nice category. So those should be be able to inch the margins up in that particular regard we got more ongoing margin expansion.
<unk>, and particularly where we're profiling North America. They think there is a couple of years worth of opportunity there that we're going to be focusing on.
We're also focusing on the capital structure as you know in trying to improve that position that will benefit the organization and of course, a little bit longer term, while we starting 2024, we got magna coming online and that that starts to change the capital intensity and and margin position of the company and a more favorable way so.
So I think we've got a lot of levers a lot of arrows in the quiver to be able to continue to drive improvement going forward at this point in time, we're not providing necessarily long term guidance and things like that and we will reintroduce those once or once we see a little bit of stabilization in the macros.
Thanks, John and then just as a quick follow up on free cash flow. Then so how do you see that evolving states in the $2 36 in 'twenty two.
Working capital I would imagine it could be a slight positive in 'twenty three just given some of the pullback.
Some of the raw materials or is it the other way that.
You are still building inventory and that's going to be a drag.
Is there a possibility for free cash flow to approach $400 million.
In 2003, maybe.
So.
First of all I would say that we expect continued progress in our adjusted free cash flow.
That takes out the wireless due to the changes in capital allocation expansion investments.
So the big drivers there obviously is a continued improvement in EBITDA. The capex as we noted at least with the planned activities. We have right now 2023, yes $300 million of Capex, considering what we did in 2024 that leaves about $150 million of Capex for expansion in 2020.
Four so that's a drop off right and so that should go and benefit.
The cash flow position of the business.
Some other lovers interest expense, obviously is up quite a bit this year, hopefully that stabilizes at a particular level or we will see what happens with rates and see what goes on in there.
And.
So I think we're pretty pretty optimistic about the ability to generate improved cash flow in particular, just to reinforce the adjusted free cash flow this year will be $450 million or higher and Thats an improvement over what we saw in 2022.
Thanks.
Thank you.
Next question today comes from the line of Gabe <unk>.
Wells Fargo.
Please go ahead your line is open.
Andres John Chris Good morning, Congrats on the year in the quarter.
Good morning, I just had.
Two quick questions one.
Regional specific to Brazil, and just trying to I guess compare contrast, what we saw in the.
Last couple of months of the year on beer production down in Brazil.
And I guess relative to some I'll call. It political instability down there and then sort of what youre seeing with your customers as they're managing.
The different pack mix down there so.
Maybe in tougher economic times folks go back to reusable and then any insight into where you think the fleet might be on the renewable side, if that's something that needs to be replenished.
Appreciating again that you guys are adding some capacity down there and inventories are pretty tight.
Yes, so we have data for Brazil through November year to date 2022 for beer.
And in that data for the entire year to that point <unk> was growing close to 5% so that.
One month's of glass has been very strong use bolting returnable and one way.
Overall, the Brazilian market. Despite of the capacity increases continues to be very short of supply imports are very large.
And that's driven by <unk> performance, which is which is quite good.
But it's also driven by good performance across all end users. So these market and the India market sorry in that same boat. They are both performing quite well across end users.
They are both short of capacity and we're building in both markets to be able to address that challenge.
The returnable containers are doing quite well because of two reasons one is they generate.
Better affordability for consumers and better for sustainability reasons. This is their edge container you can have for sustainability reasons.
The consequence of that there is expansion of the use of those containers even in premium brands.
Wasn't the case before if.
If we look at Mexico for example.
Our customers are emphasizing return our containers for <unk> and they're doing it for those two reasons and thats driving it.
So incremental demand in that market too so all in all the our performance in Brazil is quite good there is capacity.
Being built and so we expect that to come online it is going to help our volumes there.
We will continue from there.
Alright, Thank you Andrew.
<unk>.
Europe , and just I know it's.
It's challenging in terms of visibility, but maybe knock on effects from China reopened and we talked a lot about.
On Prem off Prem consumption during the pandemic, but to.
To the extent that we get maybe another.
Active year of travel from from folks over in China that have been locked up for a while.
And a lot of I guess.
Here, it's being sold through duty free is that something where youre hearing from your customers.
I want to be prepared for for that or is that just sort of.
Made up in my head.
Well the on premise channel is back for eco what they call <unk>, which is hotels and restaurants on catering is back.
That's driving very good demand something that we learned over the last three years different.
When compared to what we used to be.
<unk> is that the resilience of the glass packaging in both on premise.
But as he needs to chip in on premise to off premise is very good so.
It actually moves.
I think lastly has went up performed well.
With regards to China, we've got.
To see where this goes but there is an expectation for reopening and higher level of activity. That's something that we had mentioned before but I've got to be factoring in energy prices, because thats going to pull from their tool.
On top of the word issuers on historic lows, which are going to play on the prices in Europe .
So altogether all in all that.
Demand in Europe is very healthy.
On premise and off premise the expectation also use that the at home consumption will remain it has remained so.
Just to be higher during the pandemic, but he is now higher than it used to be print pandemic.
In that channel, we performed well.
And just as a reminder, about 40% of what we actually make in Europe , ultimately gets exported out of Europe , and other markets, such as China, and the Americas or whatever so any any change in those particular market activities more reopening in China could bode well for.
Supported those export activities.
Thank you.
Thank you as a reminder, if anyone would like to register a question. Please press star one on your telephone keypad.
Okay.
Our next question is from Michelle Philip <unk> from Jefferies. Michelle. Please go ahead. Your line is open.
Good morning. Thank you for taking my I have just one question it's.
It's similar to what it had been asked before.
On the European business so can.
Can you refresh us on your sales price increase through 2020, sure looking time will sort of quantum and timeline and also if you can share inside some price renegotiations entering into 2023 and maybe expectations for later in the year. Thank you.
Yes, so specifically on the price increases we don't.
Generally comment on the specific price increases that we put into the marketplace for competitive purposes.
But you can go obviously and look at the information that we have in our financial reports I think if you take a look at the enterprise we were up 13% I believe on an FX adjusted basis on revenue overall as an enterprise and.
That number is available.
I think of 16% over in Europe on average for the full year and obviously the exit rate would be bigger than that.
And with regards to 2023 price negotiations are largely on no I didn't know just in Europe , but across the oil market.
Yes.
And to your second question, where do we stand in and the pricing process.
Most people are familiar with.
70% of our business in Europe is open market.
Or at least annual agreements and those tend to get reset at this time of the year, we are largely through that but not complete and so we continue with that effort, but its like I said, it's pretty advanced.
Okay. Thank you.
Thank you.
Thank you.
A follow up question from Gabe <unk> from Wells Fargo. Please go ahead. Your line is open.
Yes. Thank you guys just one quick follow up.
I know the answer to this but there's been some recent headlines in the news on on another.
Case.
Tangential to litigation that you guys have.
Have a deal with them.
And I just want to make sure I mean, you guys have that was a kind of bilateral agreement amongst all parties and that stuff is moving here in terms of funding the trust and something that <unk>.
Can't be reopened.
Yes, just to be clear the paddock chapter 11 case is closed.
That included a consensual agreement we funded the trust we have we have the channeling injunction fully in place.
So the chapter 11 is closed.
Thank you for that thank you.
Okay.
Kim.
Yes.
Thank you.
Last question today comes from Mike <unk> from Barclays. Mike. Please go ahead. Your line is open.
Great. Thanks, Good morning, guys nice quarter.
Morning.
Real quick on the Capex outlook I. Appreciate again, we're still just in the beginning of 2023.
Broadly 23 be the high watermark for Capex, and we should see it.
Back down into 24 can you just kind of give us a rough sense.
A trajectory there.
Yes. So there is two aspects that are driving obviously the capex, it's the strategic capital stack strategic Capex investments and then well is the maintenance level.
As we had indicated in the materials our maintenance activity is getting up to this low 400 range after being below that for the last few years due to <unk>.
Supply chain.
Rain issues and things like that with Covid and all the disruptions. So we do think of that is probably a fair level it could ebb and flow in different levels from need from one period to the next but its probably a reasonable place to be and then on the expansion side, we have our $630 million of announced program, we spent $190 million of that in.
2022 should be around $300 million. This year, and then dropping off to the tail end of that $150 million based upon our best estimate of timelines now so that would suggest that crests and goes forward of course, then we'll look at any opportunities going forward, but thats, what we have announced at this particular time.
Great and maybe just one quick follow on to that is we just think about.
Slide 11 kind of your capital allocation priorities and our potential return.
Returning value to shareholders kind of when should we think about I mean, if you hit.
Everything you laid out today, you'll be under three times by the end of this year.
When do you think you'd want to.
Talking more about that are flushing that out more.
Yes, so I would say that.
The second bullet point, there that as we were trying to work through this glide path two five times leverage.
And so I think.
The emphasis on return of value to shareholders, we will probably pick up as as we get comfortable about our ability to hit that number.
The economic situation right now the uncertainty everything like that we're trying to see where things will play out and particularly the back half of the year and flow through from that.
I think once we get comfortable about our ability to knock that out in another year or two versus couple of years or something along those lines. I think then we'll be able to profile more more return to shareholders.
Great. Thank you.
Thank you. Thank you.
Thank you. This is all the questions. We have time for today, So I'll now hand back over to Chris for any closing remarks.
Okay. Thank you everyone. This concludes our earnings call. Please note our first quarter conference call is scheduled for April 26th and remember, making a member will moment by choosing safe sustainable glass. Thank you.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Yes.
Okay.