Q1 2023 O-I Glass Inc. Earnings Call
Good evening.
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Hello, and welcome to the <unk> first quarter 2023 earnings Conference call. My name is Alex and I'll be cortex in the coach today, if you will.
To ask a question at the end of the presentation that you can press star followed by one on the telephone keypad.
Thanks, a lot to withdraw your question you May press star followed by two.
I'll now hand over to your host Christopher Manuel Vice President of Investor Relations. Please go ahead.
Thank you Alex and welcome everyone to the O I glass first quarter 2023 earnings call. Our discussion today will be led by Andres Lopez, our CEO and John Hardrick our CFO .
Today, we will discuss key business developments and review our financial results. Following prepared remarks, we'll host a Q&A session presentation materials for this call are available on the Companys website. Please review the safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.
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 to announce exceptionally strong first quarter revenues, which significantly exceeded prior year results elsewhere that's guidance.
Last night <unk> reported adjusted earnings of $1 29 per share, which was more than double prior year performance and represents record first quarter results.
Adjusted earnings benefited from very strong net price realization across the enterprise.
Well as from our margin expansion initiatives.
Likewise operating performance exceeded our expectations. Despite the disruption from a number of external events.
Expected sales volume was down view and challenging prior year comparison among other factors.
Yes.
These strong results, we continue to advance our strategy and efforts to improve margins are all ahead of plan.
Importantly, our capacity expansion plans.
Acknowledging development support magma and ultra and our deleveraging actions all remain on track.
Even very strong first quarter results, we have increased our full year 2023 weakness outlook and.
And now expect adjusted earnings will range between $3 and <unk> and.
And $3 25 per share.
We are also providing second quarter guidance and expect adjusted earnings will range between 80% and 85 we.
We choose a solid increase from last year.
John will expand on our financial performance and outlook have been made.
Let's move to page four and these costs recent saves volume trends.
Entering the year, we expect that first quarter achievements will be down some you in a very challenging prior year comparison.
As you can see on the left volumes were up a robust six 4% in the first quarter of 2022.
During that period shipments increased as we recovered from prior year global supply chain challenges.
My wife's customer secure glass inventory at the onset of the Russia, Ukraine War, and we ship out of inventory in some markets and very strong demand.
During the first quarter of 2023 up 12 shipments were down about 8% from last year.
<unk> was softer than we originally anticipated.
We expect that volume will be down 3% to 4% faced with a challenging prior year comparison.
Record low inventory levels, especially in southern Europe .
Shipments were impacted by temporary events, such as generally strikes in France seeming unrest in Peru, and flooding in Northern California, which we believe represented around 2% of our decline.
Volume was further impacted by some customer destocking across the supply chain as well as softer consumer demand in a few markets, which together we estimate accounted for an additional 2% to 3% of our lower shipments.
These trends were the most notable across the mainstream beer food and NAV categories in North Central Europe and Mexico.
While there are many moving pieces here, we believe underlying demand was down about 2% to 3% during the first quarter.
Looking at the segments volume was down about 5% in the Americas compared to 3% growth in the prior year quarter as civil unrest in Peru, and flooding in northern California contributed to lower volumes.
In Europe shipments were down 12% compared to 10% growth last year.
Importantly, we remain oversold in the wine category across southern Europe , yet the social situation in France, <unk> Bi weekly strikes on pension reform since January .
Strongly penalize our results in that market.
Overall, we now expect sales volume will be down low to mid single digits in 2023.
While we will continue with modestly lower shipments this year.
Micro pressures, we expect long term glass demand will continue to benefit from key mega trends such as premium mutation.
On wellness and increased interest in sustainability.
As we look to the future, we relayed last demand should grow between 2% and 3% a year across the key markets that we serve as illustrated on the right.
We have established another set of ambitions and achieve our objectives to advance <unk> strategy in 2023, and we are off to a faster start thus shown on page five.
First quarter segment profit margin stopped 22% and benefited from $180 million of net price realization and $37 million of margin expansion initiative benefits, which included very good progress in North America.
While we expect that performance will be Frontloaded. In 2023, we are ahead of pace for these key efforts and expect upside benefits.
Our plans for profit our growth also remained on target.
The new line in Canada is now operational in our Columbia Brownfield should be online late in the second quarter.
Likewise, we have kick off our next expansion projects in Brazil, Peru, and Scotland, which should be operational next year.
Finally, our first Mac by Greenfield in bowling Green also remains on track and should be commissioned at around mid 2024.
Importantly, <unk> is proceeding well and our first ultra barrels are undergoing market testing with final qualifications expected in the second quarter.
Finally, our ESG on glass advocacy efforts are progressing well and net David let that leverage should end the year comfortably below three times levered.
I am highly confident that these efforts will advance our strategy as we continue to transform Hawaii.
Let's turn to page six.
Certainly we are happy to report a strong performance and solid progress advancing our strategy.
We are also proud of how our transformation is having a big positive impact on Oi and the communities in which we serve.
As you can see in the middle we recently accelerated your PCL the groundbreaking for our first Magna Greenfield plant in bowling Green, Kentucky.
Which will serve the growing the spirits category as well as our Ips distribution business <unk>.
France, we completed a sizable investment at our <unk> plant that will significantly reduce our total emissions.
Likewise, we are partnering with many customers and communities through increased glass recycling across the U S. On our progress in ESG has been recognized by <unk> sustained <unk> and Newsweek magazine.
Finally, we have launched a number of award winning and disruptive offerings as part of our expanding new product development effort.
These are just a few success stories that we continue to transform Oi and benefits the communities in which we serve.
Now I'll turn it over to Jan to review financial matters is starting on page seven.
Thanks, Andrew and good morning, everyone Oi reported first quarter adjusted earnings of $1 29 per share, which significantly exceeded both prior year results and guidance as noted on the left we posted significant year over year improvement across a wide range of financial measures.
Earnings increased in both the Americas and Europe as segment operating profit improved at $398 million compared to $231 million in the prior year.
Higher results, primarily reflected strong net price, which is consistent with broader market dynamics, given unprecedented cost inflation over the past few years.
Around 70% of this improvement related to recovery of prior period inflation. This includes contracted price increases this year on long term agreements that recover inflation on a lagging basis as well as the annualized effect of last year's price increases and the benefit from recently renegotiated long term contracts and north.
America.
The remaining 30% of our higher prices pertained to new increases on open market sales this year, which offset the incremental inflation, we incurred in the first quarter strong net price also reflected our favorable long term energy contracts in Europe . Additionally.
Additionally segment profit reflected favorable operating cost as earnings benefited from very good factory performance and our margin expansion initiatives. In fact, the first quarter was the second best manufacturing performance over the past five years.
Furthermore, inventory reevaluation contributed $35 million or <unk> 15 per share, which offset the impact of elevated project activity.
As <unk> discussed sales volume was down from the prior year.
The Americas reported segment operating profit of $176 million, which was up nicely from the prior year earnings benefited from good commercial contract execution, while sales volume was down solid operating results, mostly offset higher costs due to elevated planned project activity in Colombia, and Canada and.
In Europe segment operating profit was $222 million up significantly from the prior year higher selling prices favorable operating performance and inventory reevaluation boosted earnings while sales volume was down.
The chart provides additional details on non operating items.
Actual first quarter performance significantly exceeded our outlook to better understand these dynamics, we have provided a high level reconciliation between actual results and guidance as you can see solid commercial execution drove most of this upside.
Actual gross price realization exceeded our original estimate while elevated cost inflation moderated some as noted better than expected operating performance boosted earnings along with a lower tax rate given stronger earnings and favorable regional earnings mix.
These benefits were partially offset by softer than expected sales volume given macro pressures yet again, the company delivered strong earnings and margin improvement despite a highly volatile macro environment.
Let's move to page eight and discuss our business outlook and we have updated our full year guidance given very strong first quarter results.
We now expect adjusted earnings will approximate $3 five to $3 25 per share up from our prior outlook of at least $2 50 per share.
Likewise, our adjusted EBITDA guidance has increased to more than one $4 7 billion.
Overall, we anticipate continued strong net price as well as good operating and cost performance, while sales volume will be down modestly. This year. We have also increased our cash flow outlook, we anticipate our net debt leverage ratio will end the year comfortably below three times as Andrew has mentioned.
Looking at the second quarter, we expect adjusted earnings will approximate 80% to 85 per share results should be up from the prior year due to favorable net price yet sales volume will be down modestly likewise operating costs will be elevated as we commissioned new capacity and we will see unfavorable inventory revaluation as the prior year benefit will.
Repeat Furthermore results will reflect higher interest expense.
While second quarter results will be up on a year over year basis, We do expect earnings will be down some sequentially given our record first quarter results. This is due to a few key elements first the benefit of inventory revaluation will not repeat in the second quarter.
Next we expect incrementally higher operating costs as we commissioned new capacity in Colombia.
And finally interest expense will be up reflecting the progression of higher rates. These elements will be partially offset by seasonally stronger sales volume we.
We are taking all the steps necessary to drive upside performance across the operating leverage we can control yet our outlook is intentionally conservative on the balance of the year given elevated macroeconomic uncertainty, especially in the second half of the year.
As a result, we intend to provide regular updates on our business outlook, especially our cash flow guidance as we gain more clarity on volume and working capital levels. Overall, we remain optimistic and expect strong performance in 2023 and continued improvement in 2024.
Moving to page nine certainly first quarter results were exceptionally strong while this past quarter was unique in some ways. We have been hard at work over the past several years building the engine for sustained earnings and cash flow improvement.
We established a simple agile and effective organization supported by advanced capabilities and new operating systems like integrated business planning, we improved our business mix and structure or exited non strategic operations and shifted away from low profit categories. Furthermore, we reduced risk by resolving legacy asbestos liabilities and lowering debt and pension.
<unk> obligations.
Our margin expansion initiatives have delivered over $350 million and net benefits since 2017, and we expect continued benefits for years to come including improvements in North America <unk>.
Likewise, our margins in Europe have improved consistently since 2015 for.
For the first time in decades, we are investing in profitable growth that we expect will boost future earnings by more than $100 million once fully implemented.
After several years of meaningful R&D investment we are now at the forefront of deploying breakthrough innovations such as Magna and ultra that we believe will reduce our operating costs and support future profitable growth at lower capital intensity.
Over the long run we expect continued earnings improvement driven by profitable growth generally favorable net price realization and continued margin expansion initiatives. Likewise, we expect stronger cash flow due to the combination of higher EBITDA and expansion at lower capital intensity supported by Magna.
Turning to page 10. This engine is solidly in place and generating value as you can see we have delivered consistent performance improvement over the last several years adjusted earnings is up and we have meaningfully improved the balance sheet and capital structure. This favorable trend reflects a comprehensive approach to enable sustained earnings and cash flow performance across all key.
Operating leverage as a result, we have either met or exceeded street expectations for 13 consecutive quarters and importantly, we are confident our efforts will enable sustained earnings and cash flow improvement in 2024 and into the future.
Let me wrap up by covering our capital allocation priorities I'm on page 11, improving our capital structure remains our top priority as noted we expect leverage will end the year below three times and we will continue to reduce leverage consistent with our glide path to two five times leverage over the next few years.
Our second priority is to fund profitable growth, including our current $630 million expansion program.
Turning value to our shareholders as our final priority. In addition to our ongoing anti dilutive share repurchase program, we may consider reinstating a dividend or additional share repurchases as we get closer to our capital structure objectives now back to Anders for concluding remarks on page 12, Thanks Joan.
Summary, we are very pleased with our first quarter performance as adjusted earnings was more than double the prior year results.
In addition to very good performance as we continue to advance our strategy.
With a strongest start to the year many of our key initiatives are tracking favorable to plan.
We have increased our full year business outlook, reflecting excellent first quarter results. Likewise, we expect continued earnings improvement in future years as we noticed the strong foundation established over the past several years. Finally, I believe <unk> represents an attractive investment opportunity as we have strengthened our financial profile success.
We execute and leverage our transformation program enabler long term long term profit our growth advanced rates through technology and innovations like Magna on ultra and further leverages, our sustainability position for winning the new opening 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.
Wonder if you'd like to ask a question you can press star one on your telephone keypad.
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Please limit yourself to one question and one follow up question the full re entering the queue. Thank you.
Our first question for today comes from George Staphos of Bank of America. George Your line is now open. Please go ahead.
Thanks, Alex Hi, everyone. Good morning.
Thanks for the details to address and team.
I guess my question to start is given the volume that we've seen this year and understanding that there are lots of things that have contributed to the weaker than expected volume.
Does it change at all your outlook for your deployment of capacity and to 'twenty four.
If at all and Relatedly.
You show Euro monitor data, which shows various.
Growth outlooks and shipment statistics to date, but if I had your top five or 10 customers on the line right now would they also agree that their use of glass would be growing 2% to 3% Andras, how would you think about that.
Thank you.
Thank you. Thank you George So we don't have any concern about the utilization of the capacity that we are building at this point on we will be able going into next year.
There are multiple reasons for that for example, if we look at the.
New capacity in Canada that is to support localization of global brands, which are already there in.
In terms of volume so we don't need to create a new volume in in that area. When we look at the Andean countries.
We've been importing a lot of where do we able to sustain those markets. So.
So for all purposes, the slowdown that we're seeing at this point in time, which is temporary will only outside those imports, but the volume remains very strong and as we go into the future quarters and these three quarters, we're going to be able to utilize that capacity in pool. The same happened in Brazil. In fact, Brazil continues to be very strong.
Progress at this point on imports are very high by primarily by multiple players. We are reporting very little in that market, but the market itself is missing a lot of capacity to be able to supply the demand. When we look at Scotland. It is to serve a growing segment of.
Hi, Ines periods, so we feel very comfortable and the new Mac. My line is going to serve via spirits business in the United States also which is growing quite well so.
We're very comfortable we're going to be able to utilize this capacity going forward.
With regards to <unk> and the projections, we've talked before about the glass demand fundamentals. They are very solid they are very different than the used Louie.
The consumer preferences favor.
Glass consumption, so we feel comfortable with those projects is having.
Having been treated.
Prior to the presentation of the market.
And your customers I would say.
Go ahead, John sorry about that yes.
Yes, just to add a little bit there is keep in mind that for the expansion that we have is substantially covered by long term agreements.
So I think that backstops the expansion programs.
And these expansions are responding to the requirements of those customers.
Okay, and so just a clarification and a quick follow on and I'll get off the line here. So your customers would say they expect their usage to be growing 2% to 3% in the relevant categories and then John what do you think you can do on an ongoing basis in terms of operational cost out in the next few years again on an annual basis. Thanks, guys. Good luck in the quarter.
Yes in some cases that growth is even more.
It also cancel which customer we're talking about.
Okay, Yeah, just to build on the last point is George.
Just through looking at our capital allocation and the amount of Capex and things like that where we're still having the same note a number of expansion project opportunities with customers over the long term here. So so I think that there is still pent up demand.
On the the ability and desire for us to grow capacity with them to support their growth. So I think that underscores their support of the substrate.
As far as the cost out goes as you look over the last several years, we've averaged $50 to $75 million I would say and just our margin expansion initiatives, we bumped that up to a $100 million of this year because of the added focus in North America that covers a wide range of elements I think that for the next few years, we probably should be on the north end of that range.
Two because the improvement that the fundamental improvement of the cost takeout margin expansion initiatives has legs for many years as I mentioned in the prepared comments and I think the opportunity for continued margin improvement in Americas is a multi year process. So I think I think we got a few years here of very strong cost and margin improvement opportunities.
Thank you so much.
Okay.
Thank you Nick.
Question comes from Anthony Pettinari from Citi. Anthony Your line is now open. Please go ahead.
Hey, good morning.
Just wondering following up on George's question.
I think in the past you've talked about being around 5% oversold globally, I'm wondering where that stands now following the <unk>.
Slight slowdown and then separately I think you've talked about maybe around 5% of European capacity being removed last year.
I'm wondering where that stands now.
Yes, So let me talk about the.
The capacity in Europe , so capacity west remove some of it.
He is coming back now the European market has been growing steadily year after year.
At a pace that can consume that capacity not only that one that is coming back which is we just partly come back but all the new capacity that has been implemented.
Okay, and then in terms of your oversold position globally, I mean is that sort of in balance now with the updated volume forecast or just how should we think about that.
So the April we're seeing these temporary epoch projections that we cherish niday, we mean by at this point in time, we're going to go to these temporary pause, while we were building and Danny will come back because the fundamental remain remained the same so we feel that our projections are accurate then there will be.
Okay. That's helpful I'll turn it over.
Our next question comes from Ghansham Panjabi from Baird. Your line is now open. Please go ahead.
Thank you operator, good morning, everybody.
Some of the big beverage and food companies that have reported thus far are pointing towards that consumer in Europe , starting to exhibit elasticity and also trade dynamics and purchase patterns are you seeing something similar at this point and then just more broadly how do you think your portfolio is positioned against that lower consumer spending dynamic globally.
Yes, so the <unk>.
We're seeing mixed signals as we listen to the.
Earnings releases and conference calls for multiple multiple companies from our perspective.
Underlying demand is going down at this point in time, primarily because of supply chain destocking.
I think it's early to the third I mean, what consumers are doing.
At some point they might slow down we'll see what that is.
So far for this quarter, we've seen a pretty drastic supply chain destocking and that's what's driving the underlying demand.
Yes.
<unk> add their ghansham.
Not having a crystal ball on that as we indicated in her prepared remarks, we've just taken a conservative view.
The back half of the year of the financial performance side. So in the event things prove slower I think we're covered in the event things.
Bounce back because this is a inventory destocking and things normalize I think we could benefit on the upside.
Got it and then as we think about earnings for 2023 being almost $1 higher than in 2022.
It's very early but as we update our models for 2024, what do you think we should keep in mind as it relates to potential headwinds in the year over year basis, and then related basis. At this point do you see a path for earnings in 2024 for Oi to be higher than what you currently see for 2023.
So for clarity I think at this point in time, Ghansham and consistent with their comments just a few minutes ago. We do expect 2024 to be higher than 2023, even against our updated guidance there.
So while sales volume right now is clearly a headwind due to the macro pressures we would anticipate good volumes next year, there could be a bounce back effect, let's see what happens there, but even without that we are adding much needed new capacity as we mentioned before and that should provide.
Good accretive growth for the company Likewise again back to the previous comment we do we are confident on margin expansion initiatives, especially considering the tail winds on the recovery in North America.
We're not counting on.
<unk> strong net price we've had.
The last seven years, we've had to date favorable net price.
Out of those seven years, but even with that said.
We are still facing call it 7% or so cost inflation this year and as you know 55% of our business is under long term agreements with price adjustment formulas that will kick in to cover that next year. So that's a good a good boost also now we don't know what inflation looks like we accepted expected to moderate and we don't know other other commercial activities.
B, but overall with those elements, we're pretty confident that 2024 will be higher than 2023.
And I will add to that that the operational performance.
Continuously improve and Xi'an, describing the opening remarks.
This has been one of the best performance in the second one in the last five years.
And in DC is responding to all the capabilities that we will then.
That is expected to continue delivering an improved performance over time, which will impact 2024.
Got it thanks, so much.
Thanks.
Thank you our next.
Next question comes from Dave <unk> from Wells Fargo.
Your line is now open. Please go ahead.
Andreas John Chris Good morning.
Hi, Good morning, I was hoping.
Maybe you can give us a little bit of clarity.
I guess on the second quarter brands. So I think John you mentioned <unk>.
$35 million.
Inventory.
Revaluation benefit that occurred in Q1 that would not recur in Q2, and then I think you talked about elevated.
Activity across the system being a headwind and then partially offset by seasonally higher volumes, but maybe if you can put a finer point on some of these other items and if I Miss anything thank you.
Yes, yes, so some of the bigger pieces moving pieces, there that will be sequential headwinds so to speak if you want to call. It that is probably a 25% to 30.
Sure.
Change in inventory revaluation. So that's the biggest component that comes through the elevated operating costs because of commissioning new capacity and also we have kind of a large wave of maintenance activity is probably 10, probably closer to 15.
Quarter over quarter headwind and then as we look at interest expense, it's probably another dime at least.
As we stand here today, so yeah, we'll have seasonally stronger.
Sales volume that will partially offset that but those are the big moving pieces.
Okay, and I guess just.
Again I appreciate its April 2023, but you guys are talking about.
Earnings being up next year, I'm interpreting that as EBIT da.
And so I guess as we translate that down to cash this year I think was supposed to be peak.
For Capex.
So if I start with the 170 fives and <unk>.
Same kind of EBITDA is.
20 million Bucks for 25 or whatever the number is.
Capex being down call it 75 to 100.
Are there any other cash flow items that we should be mindful of I mean is there anything with working capital that.
We will be required for the business.
Yes.
Without getting into specifics like I said, it's a little early to get into the numbers per se.
Take a look at some of the moving pieces, obviously, we've got to take a look at our capital plan and.
Whether there is any ads are already adjustments, whether thats the level of maintenance spending or the strategic projects that we have that's still a little bit of in front of us.
Now on a working capital side to the degree that you do have sales volume growing obviously, you will have to support that through.
Available inventory so.
Those are all moving parts.
I think you gave us a little early to give that texture of 24 cash flows.
Fair enough. Thank you.
As a reminder, externalized ask a question you can press star funds by one on your telephone keypad.
Our next question comes from Arun Viswanathan from RBC capital markets.
Line is now open. Please go ahead.
Okay.
Good morning, Thanks for taking my question just curious on the volume outlook. So it does seem like.
The.
You guys are capacity constrained we've been hearing actually that the consumer just kind of.
Also a little bit weak in certain areas in certain regions.
You described the potential for a snapback next year is that dependent on a better macro.
Environment or how are you thinking about the volume trajectory that you are seeing for <unk>.
Intermediate term, especially given your capacity additions.
Yes, just for clarity I think our volumes will be up next year irrespective of any macro snapback so to speak because.
Majority benefit of our expansion program right now from adding capacity really comes through next year.
If we have a snapback that is.
Further boost to that outlook or it isn't the growth next year. We don't believe is contingent on a snapback.
Okay. Thanks, John and then just on the price cost side, you noted that.
A lot of the pricing actions.
Prior year prior year and catch up.
And you don't expect to maybe see some of that gains in the future is.
Is that accurate or how much price did you potentially hold onto.
Given that we are kind of moving through a deflationary environment would.
Would you consider that Europe is still oversold.
Again these are structural price increases that we shouldn't.
Kind of consider.
Yes.
Earnings power level kind of on a go forward basis.
Yes so.
I would say that we are confident in our price position like you said just to reiterate the majority of what you saw in the first quarter pertained to price adjustment formulas or prior period activities and then really the incremental inflation I mean incremental price increases that we did in the first quarter were all in response to incremental cost inflation.
And don't forget that this is a world where.
We're still seeing inflation right is still 7% or so and whether it is open market or rather as price adjustment formulas on a look back basis going into next year.
That should that should benefit us and one thing I would also say is.
Net price is not a luxury in our business. It's not only this doesn't tell the full picture. We also have to cover and a higher interest expense inflation on SG&A inflation on capital goods. So for our position, we really need to manage through the cash cycle and look at inflation through the cash cycle and so we should.
Don't look at just net price is what's going on competitively dynamic about being able to manage through the cycle. So I think like I said, it's not a luxury it's something that we need to be able to manage the cash cycle.
And just one more quick one if I can just on the free cash flow when do you expect.
Your free cash flow will be closer to that adjusted number.
475.
And so you're just you're providing one kind of a guidance number.
So keep in mind, the adjusted free cash flow is to demonstrate what the underlying cash flows of the business operationally and it deducts the cost of maintenance capital. So.
I think.
Yes, Im sorry.
<unk>. It does not include the impact of expansion capital included in that is the netting of the maintenance capital. So that will always be there. So I think we'll always have some level of expansion growth related IRR related.
<unk> in the business.
So I don't know if you ever totally closed that gap, but important point is through the strategic projects that we're doing right now they ultimately lift up the total EBITDA and then the true free cash flow should actually surpassed the level of adjusted free cash flow business. Eventually right. So that's what we're trying to aspire.
Two and I don't want to get caught up in one bucket or another but we believe that at the end of the day. All of this is creating a virtuous cash cycle for the business.
Thanks.
Thanks Keith.
Next question comes from Mike <unk> of <unk> Securities. Mike. Your line is now open. Please go ahead.
Thank you. Thank you Andreas John Chris Congrats on a great quarter.
Thanks.
Just wanted to get your thoughts on <unk>.
Fundamentally I think last call you mentioned.
The fundamentals of the strongest you've seen in 20 years and obviously there is a little bit of a break here, where they're seeing destocking schuylkill slower consumer went up but you're still guiding to at least on a normalized basis.
Growing demand.
Can you walk us through some of the things that youre doing internally checks and balances just to make sure. The company is not getting ahead of its skis given currently favorable industry dynamics.
Yes, we think the glass fundamentals that we've been describing remain valid obviously at this point in time, we're seeing these macro dynamics that will create a pause.
We might see a little bit of.
Trading down by consumers.
That is very typical of a recession bad once the economy lounge back then the consumers move up the ladder. It again, so what we see is a temporary pause and then.
Fundamentals with King again, because they've been responding to the evolution of the consumer page what their preferences are and that will continue.
Influencing our Lima.
And one thing to add to that Mike is if you take a look at our capital expansion program that we have underway right now the amount of growth of that enables is still frankly below our market share position of the expected market growth over the next few years under those set of assumptions so as far as concerned about getting ahead of.
And ourselves on our skis, we're still our investments still is below the quote unquote, our market share position of that growth.
And all of those volumes.
Sure.
Go ahead sorry.
No no.
My apologies.
Sorry, Mike I think we lost you there we didn't hear you guys.
Okay.
I guess the question is I mean anything that youre doing internally to stress test.
Forecast.
<unk> forecast and the like to make sure that what they are forecasting is actually going to materialize because some of your peers.
Some.
Substrates little aggressive and therefore cast and I'm wondering just given that it has been.
Turning the dynamics here.
What are you doing anything internally to make sure that your forecasts are accurate and appropriately stress testing.
I would say that we've got a pretty advanced business intelligence capability, where we were able to forecast and look at all the different many many variables in the business.
And that does point to hey, if we wanted to understand the recessionary impact of our business.
And I've said this before in the past it could be down 3% or so that seems to be the sensitivity to it but if we take a look at all of those fundamental dynamics. They still point to continued growth of our business and more normalized environment, but I would also go back is what are we doing with one of the things. We did do is we secured this growth through <unk>.
Long term agreements so in that sense.
I don't think that were going over our skus or going beyond what the customers are willing to commit to.
Got it and just one quick follow up just in terms of the <unk> initiatives, obviously, you're targeting $100 million plus for this year for next couple of years.
I believe the last few years have focused on price and revenue optimization could you just expand on.
The opportunities that you're pursuing whether it be see like SG&A reduction.
Lowering cost in the plants or somebody else's you need to assume that that.
That will be responsible for getting you to that.
But over the next few years.
Yes, yes, I would say.
The benefits this year are pretty balanced and we've got revenue optimization, which is more contract compliance and value based pricing factory performance, which is looking for productivity and our cost transformation program is SG&A type of reduction that we've been doing for a few years, what I would say is that if you.
Take a look at this year, we got a really good as we said on the front end here very good operating performance of the business.
So we're looking for good benefits out of that I mean, we did some restructuring that we took out two underperforming furnaces last year that we're getting the benefit on and we've got a pretty comprehensive program around things like labor energy reduction automation, and logistics and network optimization and working on PTP and <unk>.
Feed improvements and finally.
Maybe the most incremental important part is what we're doing in North America right now and that is Thats, a very holistic too as I mentioned before we've got very good start to our contract renegotiations, there and that was a clear benefit in the first quarter as well as a wide spectrum of operating elements and other other factors within that business.
Got it thanks, very much and good luck in the balance of the year.
Thank you.
Thank you.
Our next question comes from Mike <unk> of Barclays. Mike. Your line is now open. Please go ahead.
Great. Thank you and good morning, and congrats on a nice start to the year.
First question I didn't just European EBIT margins were 28% this quarter I'm, assuming inventory rebuild added a few points there, but just how sustainable do you think underlying margins are mid 20% range or so sort of double what you historically ran out before last year, but obviously.
Youre, taking cost out as well so just how sustainable do you think these current margin levels are.
Yes, well clearly let me first take corrective that one clearly the first quarter was very strong.
Let me just step back and talk about margins overall, where we think this year and where we think that theyre going to go as a company and kind of the major segments.
So this year, we would expect our overall segment profit margins to be in the mid teens, which should be pretty much in line with pre pandemic basis. If you go back to 2017 and 2018, that's exactly where that where the margins were in the Americas, it's probably going to be in the lower teens and <unk>.
Europe should crack 20%.
So, but if we take a look a little bit further into the future with some of the things that we've been talking about during this call and the activities. We're doing we think overall segment profit margins in the next year or two you should be more like in the mid to high teens, and so that would bring the Americas up from potentially low to mid teens, especially with the <unk>.
Recovery in North America, and then continued something 20% or higher over in Europe and of course, then we continue to build from there. So hopefully that gives you some insights on kind of a more normalized view and where we're trying to take the company and.
And I would like to highlight that the margin.
The margin improvement in Europe has been a multiyear dynamic we started to improve back in 2016, and we've been improving year after year at <unk>.
Great. Thank you and then second just a little housekeeping I think you bumped your EBITDA by about $100 million free cash flow moved higher by about $25 million. So.
Working capital offset or John maybe you can just help parse out any other moving pieces there.
Yes, Indeed, you know to your point EBITDA is up more than $100 million in free cash flow up more than $25 million. So obviously the difference there one thing to keep in mind is our free cash flow outlook as a floor and so we anticipate to hit that or like probably do better thats our intent.
To your point working capital performance will reflect what we think is the shape of that.
The sales volume curve and trend so that's going to play out through accounts receivable and inventory through the balance of the year.
We think it's prudent right now to keep a conservative approach on how that plays out and taken the most conservative view on that which is that hey, things continue to be softer towards the.
Over the balance of the year, but then actual demand picks up in the back half.
Back half of the fourth quarter, where you are actually rebuilding receivables for example, and things like that so.
Ideally.
We we bounce back sooner than that but I think at this point in time. It is best to take a conservative approach and probably working capital is probably a $50 million swing factor in our business right now and we will and as we said in the prepared comments, we will keep you updated.
As we see a better sense of what that curve looks like.
Great. Thank you so much.
Thank you.
Thank you. We currently have no further questions. So I'll hand, it back to Chris menu for any further remarks.
Thanks, Alex that concludes our earnings call. Please note that our second quarter call is currently scheduled for August 2nd and remember, making a memorable moment by choosing safe sustainable glass. Thank you for your interest.
Thank you for joining today's call you may now disconnect your lines.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Thanks, Tom.
Great.
Yes.
Sure.
Great.
Good luck.
It's tight.