O-I Glass Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2023

Key Takeaways

  • OI delivered full-year 2022 adjusted EPS of $2.30, up 26% year-over-year, and 4Q EPS of $0.38, surpassing guidance and marking twelve consecutive quarters of consensus beats.
  • Free cash flow reached $236 million (adjusted free cash flow $426 million), exceeding targets and driving net debt/EBITDA down to ~3.4×, which contributed to Moody’s and S&P credit-rating upgrades.
  • For 2023, the company forecasts adjusted EBITDA above $1.37 billion (+15%), adjusted EPS over $2.50, shipments flat to +1%, CapEx of $700–725 million, and aims to reduce leverage below 3.0× by year-end.
  • The capacity expansion program is underway with the first MAGMA Greenfield plant in Kentucky on track for Gen 2 by mid-2024 and Gen 3 by mid-2025, alongside projects in Brazil, Peru, and Scotland.
  • Shipments declined 3% in Q4 2022 and full-year volume growth was constrained by capacity shortfalls, record-low inventories, and elevated maintenance activity, while recession risks could dampen future demand.
AI Generated. May Contain Errors.
Earnings Conference Call
O-I Glass Q4 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Hello, everyone, and welcome to the OI Glass Full Year and Fourth Quarter 2022 Earnings Conference Call. My name is Daisy, and I'll be coordinating your call today. Please kindly only ask one question and one follow-up to allow others the chance. I would now like to hand the call over to your host, Chris Manuel, Vice President of Investor Relations, to begin. So, Chris, please go ahead.

Speaker 1

Thank you, Daisy, and welcome everyone to the OI Glass full year and 4th quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO and John Hodrick, our CFO. Today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q and A session. Presentation materials for this earnings call are available on the company's website.

Speaker 1

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 Andres, who will start on Slide 3.

Speaker 2

Good morning, everyone, and thanks for your interest in O I. We are very pleased with OI's performance in 2022 as 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 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 levers. Earnings benefited from significant net price as well as sales volume growth, good operating performance and our margin expansion initiatives.

Speaker 2

Importantly, Full year free cash flow and 4th quarter results also exceeded our most recent business outlook. In fact, this represents the 12th consecutive quarter We have met or exceeded Street consensus. In addition to a 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 1st MAGMA Greenfield plant. We also significantly improved our structure as Paroc resulted its legacy asbestos related liabilities, and we completed our portfolio optimization program.

Speaker 2

As a result, 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 advance our strategy. John will expand on our financial performance and outlook a bit later. Let's move to Page 4 as we review recent sales volume trends. As expected, shipments increased about 1% in 2022 following significant growth in 2021 when volumes rebounded from the onset of the pandemic.

Speaker 2

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 and NAB categories, while beer and food were slightly down. Shipments increased nearly 4% in Europe and were up across all end use categories amid strong underlying demand and glass supply constraints. Volume declined 1% in the Americas, primarily reflecting lower production due to planned and unplanned downtime in North America [SPEAKER JOSE RAFAEL FERNANDEZ:] And Brazil, while we contended with record low inventories across Latin America. Consistent with guidance, 4th quarter shipments were down about 3% given the challenging prior year comparison when volumes were up a robust 5.4%.

Speaker 2

Looking to the future, we anticipate continued healthy demand as illustrated by Euromonitor projections, indicating average annual growth of 2% to 4% in the key markets we serve through 2025. Overall, we expect our shipment levels would be flat to up 1% in 2023. The first phase of our 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 as maintenance initiatives normalize and supply chain issues ease. Stronger shipment levels are anticipated in 2024 as more new capacity comes online.

Speaker 2

Overall, we have not seen significant changes in demand patterns lately, But we continue to monitor market conditions given the risk of recession. Let's turn to Page 5. On top of the 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 fundamentals in at least 20 years.

Speaker 2

All Magna development efforts are advancing well and we have broken ground on our 1st Magna Greenfield in Kentucky. Likewise, the full scale market trial of our new ULTRA lightweighting solution is proceeding well. Our ESG and glass advocacy efforts continue to advance. As discussed, we significantly improved our structure as part of ReSalty's legacy asbestos related liabilities And we wrapped up our portfolio optimization program. I want to thank the OI team for advancing our strategy and achieving all key objectives in 2022.

Speaker 2

We have established another set of ambitious and achievable objectives To advance OI's strategy in 2023, as shown on Page 6, higher earnings and margins should benefit from a strong Net price realization and our ongoing margin expansion initiatives. As you can see, we have increased Our annual initiative target to more than $100,000,000 which now includes a set of focused initiatives to advance performance across targeted operations, primarily in North America. Efforts include growing in attractive markets In North America, supported by our ongoing expansion program. Likewise, we recently closed 1 low margin furnace and are in the process of closing one more low margin furnace in the near future. Currently, we are distributing that volume within the network.

Speaker 2

We also intend to improve our commercial position as we reset over 40% of our customer agreements with more favorable price and terms and implement current 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 projects during the first half of the year as we continue the next phase of projects in Brazil, Peru and Scotland as well as our 1st MAGMA Greenfield in Kentucky. Additionally, we will advance our MAGMA development efforts that will enable commercialization on both Gen 2 and Gen 3 in 2024 and 2024, respectively. Likewise, we expect to complete the Ultra qualification in Colombia that will pave the way for future deployments.

Speaker 2

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 and increasingly prioritize B2B connections to build the O I brand with decision makers. Finally, we will continue to improve the capital structure and expect to reduce our net debt leverage ratio to below 3 times by the end of 2023. I'm highly confident these efforts will advance our strategy as we continue to transform OI. Turning to Page 7.

Speaker 2

We are very excited about our 1st MAGMA Greenfield plant in Bowling Green, Kentucky, which is on track for initial commercialization of Gen 2 by mid-twenty 24 and Gen 3 by mid-twenty 25. We are designing the plant to be a showcase facility that will demonstrate all of our next generation capabilities. This new state of the art facility will include the MAGMA melter, new modular batch system and pilot forming machine. It will be fully digitized with a high performance operating structure. This highly scalable plant will eventually include all Magma generations with advanced sustainability features as well as ultra lightweighting system.

Speaker 2

Located in the Bourbon Trail, the Bowling Green plant will demonstrate The value of MiR location and will be a key hub for further customer collaboration, investor visits and demonstration of OAIS next generation capabilities. I invite you to review a recent video that we created that shows Magma in action and further discusses his many important attributes. The slide includes the link to the video. Now I turn it over to John to review financial matters starting on Page 8.

Speaker 3

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. Earnings improved in both the Americas and Europe As segment operating profit increased to $960,000,000 reflecting strong net price realization as well as modest sales volume growth And solid operating performance despite higher asset project expense. Turning to the Q4, we reported adjusted earnings of $0.38 per share, which was up from the prior year and exceeded guidance.

Speaker 3

Results increased 36% from the prior year when adjusting for FX Interest in funding The Paddock Trust. 4th quarter segment profit was $206,000,000 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 reflecting elevated asset project activity. The Americas reported $83,000,000 of segment operating profit, which was down from the prior year on an adjusted basis.

Speaker 3

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 $123,000,000 up $52,000,000 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 non operating items.

Speaker 3

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 4 rather Page 9. As shown on the left, we reported free cash flow of $236,000,000 which exceeded guidance yet was down from the prior year due to higher CapEx given expansion project investment. Adjusted free cash flow, which excludes This strategic CapEx totaled $426,000,000 an increase from the prior year demonstrating OI's improved operating performance.

Speaker 3

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 3.4 times at the end of the year, down 1 turn from last year and 2 turns from 2020. 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 3.5 times leverage well ahead of schedule.

Speaker 3

Recognizing our progress, Both Moody's and S and P increased our credit rating this year and we now have one of the better balance sheet in the rigid packaging sector. 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'm now on page 10. Overall, we have very good momentum heading into the New Year.

Speaker 3

Earnings will benefit from strong net price realization and flat to modest sales volume growth. Operating costs should be up due to elevated asset project activity, partially offset by the benefit of margin expansion initiatives. As a result, we anticipate adjusted EBITDA should exceed $1,370,000,000 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 front loaded in 2023.

Speaker 3

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 3 price increases over the course of the year. As such, we anticipate earnings will be up nicely during the first half of the year, while second half results to be more comparable to 2022 levels. You can see that reflected in our Q1 guidance of $0.80 to $0.85 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 are providing base performance levels for full year 2023 rather than an EPS range at this time.

Speaker 3

We do intend to introduce an Earnings guidance range in a quarter or 2 once there's greater market clarity. Adjusted free cash flow should increase to at least $450,000,000 And free cash flow should be at least $150,000,000 which is down from the prior year due to elevated CapEx approximating $700,000,000 to 725,000,000 Higher CapEx reflects increased expansion investments as well as normalized maintenance project activities as supply chains improve. As Andres mentioned, our leverage ratio should end the year below 3 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 3 years.

Speaker 3

Importantly, we have already achieved all of our key 2024 financial targets as presented at our most recent Investor Day, well ahead of schedule and 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 stabilize. 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.

Speaker 3

As noted, we expect leverage will end the year below 3 times. We will continue to reduce debt consistent with our glide path to 2.5 times leverage and expect to eliminate our net unfunded pension liabilities over the next few years. Our second priority is to fund profitable growth. This includes our current $630,000,000 expansion program. We do anticipate continued modest portfolio optimization as we seek to increase ROIC, which could also help with debt reduction or expansion.

Speaker 3

Returning value to shareholders is our final priority. We will continue our anti dilutive share repurchase program. Likewise, we may evaluate additional share repurchases or reinstate a dividend as we get closer to our capital structure objectives. Thank you, and I'll turn it back to Anders for concluding remarks.

Speaker 2

Thanks, Leon. In summary, we are very pleased with our performance in 2022. Adjusted earnings per share increased more than 25% from the prior year and exceeded guidance. As noted earlier, We have met or exceeded a strict consensus for 12 consecutive quarters. In addition to a strong performance, we also achieved all key strategic objectives In the past year, we increased margins, initiated our capacity expansion program, advanced breakthrough technologies and significantly improved The structure of the company.

Speaker 2

We have a strong momentum heading into the New Year. As such, we expect higher results as we continue to advance our strategy in 2023 beyond. Finally, I believe O I represents an attractive investment opportunity as we strengthen our financial profile, Execute our transformation program, enable profitable growth, advance breakthrough innovations like MAGMA and Ultra and further leverage our sustainability position to win in the new green economy. We are confident this strategy will create value for all stakeholders. Thank you.

Speaker 2

And we're ready to address your questions.

Operator

Thank you. Please kindly only ask one question and one follow-up to allow others to Our first question today comes from Ghansham Panjabi from Baird. Ghansham, please go ahead. Your line is open.

Speaker 4

Thank you, ma'am. Good morning, everyone. Good morning. I guess, Anders, looking back at 2022 on a segment basis, I mean Europe was up 320 basis points from a margin standpoint year over year. It's up significantly versus the pre COVID level.

Speaker 4

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 or energy costs more broadly, revert towards prewar levels?

Speaker 2

Thank you, Ghansham. Well, if we look at the demand fundamentals in Europe, they're very solid. In 2022, All in uses, beer and a beef, food, wine and spirits, performed 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 champagne, Bordeaux wine, Prosecco, Italian wine in France and Italy, It is particularly strong.

Speaker 2

And you know these two markets are very large and relevant markets for OI. The spirits in the UK is very strong too. Now along with that, we mentioned before, there is a large shortage of glass in Europe that is driven by all this growth that I mentioned, Plus the capacities locations that are up to 1,000,000 tons, about 4% 5% of the total supply. And we believe this is going to take several years to be resolved, right? So from an demand standpoint, we see this continuing.

Speaker 2

When we look at the gas prices, we're continuously looking at the TTF futures. And when we look at those futures, That they suggest to us that this is going to be a multiyear dynamic. And today, we're dealing with a milder winter. This is there is still winter to go. We will be facing replenishing the storages.

Speaker 2

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 bought position in the second half When prices drop a little bit, most likely they're buying positions today and that will take most likely care of 2023. So, we're out of this year into the following years. But back to the TTF futures, when we look at them, They suggest this is going to be a multiyear dynamic.

Speaker 2

And back to Europe performance, the European performance improvement has been a long term trend. Since 2015, every year we've been upping earnings and margins and returns, and we're seeing the continuation of that. I think we're very well organized and prepared in Europe to really drive value out of that very important market.

Speaker 4

That's very helpful. And then for the Q1, can you quantify the inventory revaluation benefit? And then also related to that, you're pointing towards $100,000,000 plus margin expansion initiatives for the year in terms of benefit. Can you just give us a bit more color as to what that's being driven by?

Speaker 3

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 levels of inflation that we have, periodically we have to do these inventory revaluations. It is adding about $20,000,000 or almost $0.10 in the Q1 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.

Speaker 3

So it doesn't contribute Meaningfully to our full year outlook for the business. And as we look at the margin expansion initiatives, dollars 100,000,000 if you look at that, we had a target in 20 $22,000,000 of $50,000,000 We came in at $70,000,000 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, plant 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 various different things. But we did add, as Anders noted in the prepared comments, a more focused activity over in North America, and that is Certainly contributing to the ability to get to $100,000,000 in particular, the price resetting activity that Andres mentioned should give us some initial benefits That will bring early benefits to getting to that number.

Speaker 2

Yes. And I think it's important to highlight that the resetting of conditions commercially In North America, it's a long term move. So this has been a market under significant pressure over the last few years, And we're working on this structurally. So we're working on a large turnaround effort to get back to the earnings and margins and returns Potential of this very important market. So what we're doing in the commercial side, from our perspective is a long term move.

Speaker 2

Thank you so much.

Operator

Thank you. Our next question is from George

Speaker 3

George, are you there?

Operator

We're not getting any audio from George, so I'll move on to the next question. Our next question today comes from the line of Anthony Pettinari from Citi, Anthony, please go ahead. Your line is open.

Speaker 5

This is actually Brian Bergmeier 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 natgas moving lower? And 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?

Speaker 2

So there is a shortage of capacity of 1,000,000 tons adding up to about 5% of the supply. We haven't seen the 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, are all importers at this point in time.

Speaker 2

So beyond that 1,000,000 tons, There is a significant volume that is imported every year into those markets. So from our perspective, The backlog in Europe is quite large. Inventories are still to go up. And This situation with capacity in Europe is going to be a long term issue. I think you can see that When several players, including O I, are building capacity to be able to keep up with the growth and those circumstances of dislocation of capacity.

Speaker 2

This is going to take time to be resolved.

Speaker 5

Got it. Thanks for that color. Yes, last question for me. Equity earnings were up quite a bit in 4Q. I guess, just what do you attribute to that growth?

Speaker 5

And do you have any Thoughts on equity earnings in 2023?

Speaker 3

Yes, sure. So we have About 4 or 5 strategic JVs that we have spread across the globe. And we have in particular 2, 1 in Europe and that It caters to the higher end categories and then one over 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 have buoyed up that joint venture over in Europe.

Speaker 3

We expect continued good progress in our joint ventures in 2023 also.

Speaker 5

Got it. Thanks. I'll turn it over.

Speaker 2

Thank you.

Operator

Thank you. Our next question is from Mike Roxanne from Truist Securities. Mike, please go ahead. Your line is open.

Speaker 6

Thanks, Andres, John, Chris, congrats on a solid quarter and a solid year.

Speaker 2

Thank you.

Speaker 6

First question I had, just Anders, you mentioned and John, you made a comment as well in terms of resetting the contract in North America. How far along are you in doing that? And do those contracts allow you to recover previous inflation? I think, Anders, you made a comment that allow you 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 of resend those contracts and if you're able to recover anything historically?

Speaker 2

Well, so we had a plan to reset contracts Impacting starting 2023, that's mostly known. And it is a sizable percentage of the total business. We expect to record inflation through the PIFs, so that's going to come into 2023. But we're also resetting the conditions of those contracts in addition to PAF's inflation recovery. So it's a large effort to recover healthy margins, Healthy returns

Speaker 3

in this important market. Yes. One thing I would add on that one, Mike, is that the contracts that we're referring to, North America has long term Contracts 5, 7 plus years type of windows. So a number of the ones that we're addressing right now were set, Call it 215, 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 So they were set in pretty challenging economic conditions. We're 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.

Speaker 3

And so we're in a much better place as we set those contracts.

Speaker 6

Got it. And so it doesn't allow, John, then for anything retroactively? Anything you experienced last year, it doesn't

Speaker 3

Yes. The price adjustment formulas that Andres had spoken about will recapture 2022 Inflation that obviously was significantly rebounding. And what I would say is the terms of the pricing terms of these new agreements are measurably better than the terms that we had prior to that. You can apportion that to recovery of historic inflation or you can just It's attributed to more value creation, but it is a step up in the overall value that we're getting on that business.

Speaker 6

Got it. And then my second question, just can you provide us with an update on the progress you made in adding the energy Flexibility to European plants. I think you were targeting either late last year, early this year to have 50% equipped with that energy switching flexibility. And then just as the energy contracts that you've already entered into, say, pre COVID or likely will also 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're exploring options to enter into similar type contracts to hedge your energy position in Europe?

Speaker 2

Yes. So with regards to the progress on adding or enabling the current assets To use alternative fuels, we're making very good progress. The final target is $50,000,000 The circumstances have been Improving, so that gave us a little bit more relief in that process. But we started very early last And we're in a very good place at this point in time to be able to respond if that is necessary.

Speaker 3

Then on the other question on the energy contracts, just a little background for everybody. We've taken for years a sophisticated structural approach to the energy procurement. As a result, a number of years ago, we established best in class long term energy contracts and that was done prior to the run up And the cost that we've seen in the last few years. This 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.

Speaker 3

And keep in mind, we do believe we need this. It's not only just the inflation that we're seeing You know directly, but we have SG and 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 Anders alluded to it a little earlier is even though natural gas has come off In Europe, off of its high, it kind of averaged €120 per megawatt hour last year. It's still quite elevated at around €60 euros per megawatt hour compared to maybe pre, call it, pandemic numbers of €20 per megawatt hour.

Speaker 3

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's still Structural challenge over in Europe on energy. So again, I think we don't feel any pressure to get into the market.

Speaker 6

Thanks very much and good luck in the year.

Speaker 2

Thank you. Thank you.

Operator

Thank you. Our next question today comes from Carl White from Deutsche Bank. Carl, please go ahead. Your line is open.

Speaker 7

Hey, good morning. Congrats on a strong quarter and a strong year. Thanks for taking the question. I guess just first, I think you mentioned You're looking to introduce an actual guidance range for the full year and the future as you gain more market clarity. What are you waiting on here to get Is it more is it consumer demand?

Speaker 7

Is it inflation? Just any more details you can provide behind that decision?

Speaker 3

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 in particular in the back half of the year and the implications? We don't really see any tripping any wire between Now in mid year in our business, now we just don't have the visibility into the back half of the year. So we've intentionally tapped down our expectations and what we're showing here in the back half The year because of that uncertainty.

Speaker 3

And so obviously what happens on interest rates and everything like that has a big effect on how people view the economy and potential Hard or soft landing and things like that. So obviously that's a big determinant of I think whether we trip into recessionary pressures or not. So we're clearly Watching that and of course the volume activity and sentiment from our customers.

Speaker 7

And then on volumes, looking at the Americas, do you have a sense of 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? And I would appreciate if you're also giving any kind of target range For volumes for 2023 by the segments or by the region?

Speaker 2

Yes. So, The demand fundamentals in the Americas are very good. And in fact, when it comes to Latin America, we remain with very large backlogs And in those markets, that's why we're building capacity and we are importing glass as well as our players are importing glass to be able For those markets. So the Americas North II is so North America is quite stable. The performance of the Mega Beer has been stabilizing.

Speaker 2

The decline has been slowing. Premium beer is growing well and premium products are in a very good place. The issue is that we have very tough comps With Q1 2022. That was the time where we were coming back from the pandemic. Inventories We're revealed there was a price increase in the Q2 of 2022 that increased purchases in the Q1 of 2021.

Speaker 2

So we're dealing with that. On top of it, our inventories are low, so we cannot chip anymore out of inventories Incremental or incremental demand as we did before. So the situation is tight.

Speaker 3

[SPEAKER STAVROS VIZIRGIANAKIS:] And then,

Speaker 2

we have a higher level of asset activity at this point in some of these markets, which is also limiting our ability to chip. So, [SPEAKER STAVROS VIZIRGIANAKIS:] All those things come together. But we are in forecast at this point in time. Everything is proceeding as we expected. And as capacity comes into operation, we're going to see the positive effect of that on demand.

Speaker 3

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 4th 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 Anders' comments there, the inventories are just at 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 there's probably more volume growth opportunities in The Americas, given that all markets are dealing with low inventory levels, but we are adding new capacity over in Europe, I mean, in the Americas, primarily in Colombia and Canada.

Speaker 3

So that will come online and allow to have a little bit more growth in the Americas.

Speaker 7

Sounds good. I appreciate the details.

Speaker 2

Thank you. Thank

Operator

you. Thank you. Our next question today comes from Arun Viswanathan from RBC Capital Markets. Aaron, please go ahead. Your line is open.

Speaker 8

I guess I just wanted to understand The earnings in context of your medium term and long term targets. So you noted that you reached your 2024 Numbers, expectations ahead of time in 2023 here. So would you characterize the 2023 guidance, which is about 15% above where many of the Street expectations are and you noted that you beat those 12 quarters in

Speaker 3

a row.

Speaker 8

Would you characterize your 2023 kind of full year outlook on operating income as kind of a new base level. And the way I would kind of think about it is since you're growing now And in the 2% to 4% range, even though 23% is maybe below that for macro concerns. Would you just apply kind of a new margin range on some of this heightened growth. And so maybe in the out years, you've reached 25 and 24 and 25 of 26 levels in 2025? Is that how we can think about it from here?

Speaker 8

Thanks.

Speaker 3

Yes. What I would say is, I mean, and included in our prepared comments, we had indicated we expect continued earnings improvement And not only in 2023, but also in 2024. 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.

Speaker 3

Most of that Past the expansion will come more online in 2024 2025. And to your point, we're targeting Nice categories. So those should be able to inch the margins up in that particular regard. We got more ongoing margin Expansion initiatives with in particular we're profiling North America. There's a couple of years' worth of opportunity there that we're going to be focusing on.

Speaker 3

We're also focusing on the capital structure as you know and trying to improve that position that will benefit the organization. And of course, a little bit longer term, as well as starting in 2024, we got Magna coming online and that starts to change the capital intensity And margin position of the company in a more favorable way. So I think we 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'll reintroduce those once we see a little bit of stabilization in the

Speaker 8

Thanks, John. And then just as a quick follow-up on free cash flow then. So how do you see that evolving, say, from the $236,000,000 in 'twenty two? Working capital, I would imagine, could be a slight positive in 2023, just given some of the pullback in some of the raw materials? Or is it the other way that you're still building inventory and that's going to be a drag?

Speaker 8

Is there a possibility for free cash flow to approach $400,000,000 in 2023 maybe?

Speaker 3

So, first of all, I would say that we expect Continued progress in our adjusted free cash flow. I mean, that takes out the wows 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've noted With the planned activities we have right now, 2023 has $300,000,000 of CapEx. Considering what we did in 2024, that leaves about 100 $50,000,000 of CapEx for expansion in 2024.

Speaker 3

So that's a drop off, right? And so that should go and benefit the Cash flow position of the business. Some other levers, interest expense obviously is up quite a bit this year. Hopefully that stabilizes at its particular level, we'll see what happens with rates and see what goes on in there. And so I think we're pretty optimistic about the ability to generate improved Cash flow in particular, just to reinforce the adjusted free cash flow this year will be $450,000,000 or higher and that's an improvement over what we saw in 20

Operator

Thank you. Our next question today comes from the line of Gabe Hajde from Wells Fargo. Gabe, please go ahead. Your line is open.

Speaker 9

Andres, John, Chris, good morning. Congrats on the year and the quarter. I just had, I guess, 2 quick questions. 1, 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.

Speaker 9

And I guess relative to some, call it, political instability down there and then sort of what you're 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 refillable 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.

Speaker 2

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, glass was growing close to 5%. So the performance of glass has been very strong. It's both in returnable and one way.

Speaker 2

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 beer performance, which is quite good, but it's also driven by good performance across all end users. So this market and the Andean markets are in that same boat. They are both performing quite well across end users. They're both short of capacity And we're building in both markets to be able to address that challenge.

Speaker 2

The returnable containers are doing quite well because Of two reasons. One is they generate better affordability for consumers and they're better for [SPEAKER JOSE RAFAEL FERNANDEZ:] Sustainability reasons. This is the best container you can have for sustainability reasons. As a consequence of that, there is expansion of the use of those containers, Even in premium brands, which wasn't the case before, if we look at Mexico, for example, Our customers are emphasizing returnable containers for NABs and they're doing it for those two reasons and that's driving a sizable incremental demand In that market too. So all in all, the outperformance in Brazil is quite good.

Speaker 2

There is capacity being built. So we expect that To come online, it's going to help our volumes there and we'll continue from there.

Speaker 9

Thank you, Anders. And one on Europe and just I know it's challenging in terms of visibility, but maybe knock on effects from China reopen. And we talked a lot about on prem, off prem consumption during the pandemic. But to the extent that we get maybe another Active year of travel from folks over in China that have been locked up for a while And a lot of, I guess, spirits being sold through duty free. Is that something where you're hearing from your customers that they want to be prepared For that or is that just sort of made up in my head?

Speaker 2

Well, the on premise channel is back, What they call Horica channel, which is hotels, restaurants and catering is back. So that's driving very good demand. Something that we learned over the last 3 years, different when compared to what we used to believe, Is that the resilience of the glass packaging in both on premise resilience to shift in on premise to off premise It's very good. So any direction it moves, I think glass is going to perform well. With regards to China,

Speaker 4

[SPEAKER JOSE RAFAEL FERNANDEZ:] We got to see where this goes, but

Speaker 2

there is an expectation for reopening and higher level of activity. That's something that we didn't mention before, but got to be factoring In energy prices, because that's going to pull from there too, on top of the weather issues and storage levels, which are going to play on the prices in Europe. So all in all, the demand in Europe is very healthy on premise and off premise. The expectation also is that the At home consumption will remain. It has remained.

Speaker 2

So it used to be higher during the pandemic, but it's now higher than it used to be pre pandemic. And in that channel, we perform well. And just as

Speaker 3

a reminder, about 40% of what we actually make in Europe ultimately gets Sported out of Europe and other markets such as China or the Americas or whatever. So any change in those particular market activities, more reopening in China Could bode well for support of those export activities.

Speaker 9

Thank you.

Operator

Thank you. Our next question is from Michel Philippe from Jefferies. Michel, please go ahead. Your line is open.

Speaker 10

Good morning. Thank you for taking my line. I have just one question. It's similar to what has been asked before, Well, it's now focused on your European business. Can you refresh us on your sales price increase through 2022, both in terms of rough quantum and time line?

Speaker 10

And also if you can share insights on price negotiations entering into 2023 and maybe

Speaker 3

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 I think that number is available.

Speaker 3

I think it's 16% over in Europe on average for the full year and obviously the exit rate would be bigger than that.

Speaker 2

And with regards to 2023, price negotiations are largely on, not just in Europe, but across the whole market.

Speaker 3

Yes. And to your second question, where do we stand in the pricing process? As most People are familiar, we 100% 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.

Speaker 3

But it's like I said, it's pretty advanced.

Speaker 10

Okay. Thank you.

Speaker 2

Thank you.

Operator

Thank you. We have a follow-up question from Gabe Hajde from Wells Fargo. Gabe, please go ahead. Your line is open.

Speaker 9

Yes. Thank you, guys. Just one quick follow-up. I think I know the answer to this, but there's been some recent headlines in the news on another Case tangential to litigation you guys have had a deal with in regards to asbestos. 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 in the rearview mirror in terms of Funding the trust and something that can't be reopened.

Speaker 3

Yes, yes. Just to be clear that the Paddock Chapter 11 case Is closed. That included a consensual agreement. We funded the trust. We have the channeling injunction fully in place.

Speaker 3

So the Chapter 11 is

Speaker 2

closed. Thank you for that. Thank you. Thank you.

Operator

Thank you. Our last question today comes from Mike Lighthead from Barclays. Mike, please go ahead. Your line is open.

Speaker 11

Great. Thanks. Good morning, guys. A nice quarter. Good morning.

Speaker 11

Real quick on the CapEx outlook, I appreciate, again, we're still Just in the beginning of 2023, but should broadly 'twenty three be the high watermark for CapEx and we should see it Step back down into 24, can you just kind of give us a rough sense of trajectory there?

Speaker 3

Yes. So There's 2 aspects that are driving obviously the CapEx. It's the strategic CapEx investment And then well as the maintenance level. So 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 supply chain issues and things like that with COVID and all the disruptions. So we do think that that is probably a fair level.

Speaker 3

It could ebb and flow in different levels from 1 period to the next, but it's probably a reasonable place to be. And then on the expansion side, we have our $630,000,000 announced program. We spent $190,000,000 of that In 2022, it should be around $300,000,000 this year and then dropping off to the tail end of that $150,000,000 based Our best estimate of time lines now. So that would suggest that crests and goes forward. Of course, then we'll look at any opportunities going forward, but that's what we have announced this particular time.

Speaker 11

Great. And maybe just one quick follow on to that. As we just think about Slide 11, kind of your capital allocation priorities and the potential return to returning value to shareholders. Kind of when should we think about, I mean, if you did Everything you laid out today, you'll be under 3x by the end of this year. Just broad, when do you think you want to Start talking more about that or flushing that out more.

Speaker 3

Yes. So I would say that that second bullet point there that as We were trying to work to this glide path to 2.5 times leverage. And so I think the Emphasis on return of value to shareholders will probably pick up as we get comfortable about our ability to hit that number. Obviously, the economic situation right now, the uncertainty, everything like that, we're trying to see where things will play out in particular the back half of the year and Flow through from that. But I think once we get comfortable about our ability to knock that out in another year or 2 or a couple of years or something along those lines, I think then we'll be able to profile more, the return to shareholders.

Speaker 7

Great. Thank you.

Speaker 2

Thank you. Thank you.

Operator

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.

Speaker 1

Okay. Thank you, everyone. This concludes our Earnings call. Please note our Q1 conference call is scheduled for April 26. And remember, make it a memorable moment by choosing safe, sustainable glass.

Speaker 1

Thank you.

Operator

Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.

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