O-I Glass Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the OI Glass Second Quarter 2023 Earnings Conference Call. My name is Carla, and I will be the operator of today's call. When asking your question, please ensure your telephone is unmuted locally. I will now hand the call over to your host, Chris Manuel, Vice President of Investor Relations to begin. Please go ahead when you're ready.

Speaker 1

Thank you, Carla, and welcome, everyone, to the OI Glass Second Quarter 2023 Earnings Conference Call. Our discussion today will be led by Andres Lopez, our CEO and John Hodrick, our CFO. Today, we will discuss key business developments Presentation materials for this call are available on the company's website. Please review the Safe Harbor comments and disclosure of our use of non GAAP financial measures included in those materials.

Speaker 2

Now I'd

Speaker 1

like to turn the call over to Andres, who will start on Slide 3.

Speaker 3

Good morning, everyone, and thanks for your interest in O I. We are pleased to announce strong second quarter results despite more challenging macro conditions. Last night, OIB reported adjusted earnings of 0.88 dollars per share, which exceeded our guidance range and represented a 20% increase from prior year results. Adjusted earnings benefited from favorable net price as well as solid operating performance and our ongoing margin expansion initiatives. Suspected, sales volume was down primarily due to a slower consumer consumption and customer inventory destocking.

Speaker 3

Likewise, we did incur some additional cost for temporary downtime to balance supply with demand as well as plant asset project activity. In addition to strong results, we continue to advance our strategy despite more challenging macros. Our margin improvement efforts are well ahead of plan, and all other initiatives remain on track, including our expansion plans, Development of breakthrough technology and deleveraging efforts. Reflecting very good year to date performance, we have tied in our full year guidance And now expect adjusted earnings will range between $3.10 $3.25 per share. We have also provided 3rd quarter adjusted earnings guidance of $0.68 to $0.73 per share, which represents a solid increase From Q3 last year.

Speaker 3

John will expand on our financial performance and outlook a bit later. Let's move to Slide 4 and discuss recent sales trends starting with the chart on the left. OI segment sales increased 7% from the prior year As the benefit of higher selling prices more than offset lower sales volume, which was consistent with our expectation heading into the quarter. Price was up 13% from last year, primarily reflecting structural increases like annual price adjustment formulas And contract negotiations as well as the annualized benefit of prior year pricing actions. Additionally, current year open market increases are offsetting the incremental cost inflation we are incurring this year.

Speaker 3

On the other hand, sales volume was down 9% from the prior year period, which is on the high end of our most recent guidance. We attribute about half of this decline to lower consumer consumption, while customer inventory stocking and our internal constraints accounted for the balance Shipments were down about the same across both the Americas and Europe, but our decline was concentrated In certain categories and geographies, around 30% of our decline was in the wine category, which was more pronounced In Southern Europe and primarily reflects our record low inventory levels. Beer accounted for a little over a quarter of our volume drop, Most notably in Northern Europe, reflecting softer local consumption as well as lower global demand as many of those brands are exported around the world. Additionally, inventory stocking led to lower shipments of beer bottles across Latin America Despite solid consumption trends. Finally, the spirits also represented about a quarter of our decline, With a noticeable drop in Mexican tequila as strong consumption activity has moderated recently.

Speaker 3

As illustrated on the right, Nielsen data indicates mixed consumer consumption trends. Importantly, This data only reflects retail demand, and we believe on premise consumption has been robust. On a year to date basis Consumer retail purchases declined the most in U. S. Wine and European beer, while beer in Mexico and the U.

Speaker 3

S. Was down modestly. On the other hand, a number of markets continued to grow, including beer in both Brazil and Colombia as well as spirits in the U. S. As noted, consumer consumption did show some initial signs of improvement in certain categories in June July.

Speaker 3

Our July sales volume was down, but a bit better than we saw in the Q2. At this point, we anticipate 3rd quarter shipments will be down mid to high single digits with further improvement in the Q4. Overall, we expect volume trends will remain choppy for a while As we exit the stocking phase and our customers calibrate to mixed and evolving consumer patterns. Let's discuss long term glass growth trends on Slide 5. Over the past several years, we have seen some of the strongest glass fundamentals in decades, Reflecting megatrends that benefit glass, including premiumization, health and wellness and sustainability.

Speaker 3

Additionally, at home dining Picked up during COVID and remains above pre pandemic levels. While OICE volumes were under pressure in the past, Our shipments, including JVs, increased about 1.5% a year on average during the 2016 to 2022 period, Reflecting these favorable trends, as illustrated on the right, there have been many ups and downs during this period, Given significant ongoing market volatility, shipments were disrupted by the pandemic and rebounded as COVID subsided And customers prioritize security of supply. Yet again, the current economic downturn has disrupted demand. Certainly, we will contend with some short term challenges. However, we expect shipments will be up in 2024, Aided by our expansion projects, which are supported by long term contracts.

Speaker 3

Currently, it is unclear If the improvement will be robust or more moderate, which will depend on the timing and shape of the broader market recovery. Over time, we expect demand will grow between 1% and 3% a year across the markets that we serve, which is consistent with 3rd party projections And the long term trend we have seen since 2016. In summary, we remain encouraged by federal megatrends, Our future expansion plans and our customers' continued strong interest in growing their business in premium, brand building and sustainable glass containers. Let's discuss the status of our 2023 strategic objectives on Slide 6. Overall, our key initiatives are progressing well.

Speaker 3

2nd quarter segment operating profit margins approximated 17.5%, which was a strong improvement from the prior year. Net price is more than double our annual target and our margin expansion initiatives are on pace to exceed our 2023 goal. Our plans for profitable growth remain on target. This includes current year expansion plans and new projects set for next year, Including our first MAGMA greenfield, which should be commissioned by mid-twenty 24. Importantly, MAGMA development is progressing well And we successfully completed market testing and initial qualification of our first ultra barrels, which opens the door to broader deployment of this new light weighting technology.

Speaker 3

Finally, our ESG and glass albocaity efforts are progressing nicely And net debt leverage should end the year comfortably below 3 times. I'm highly confident these efforts will advance our strategy As we continue to transform O I. Now, I'll turn it over to John to review financial matters starting on Page 7. Thanks, Andres, and

Speaker 4

good morning, everyone. OI reported 2nd quarter adjusted earnings of $0.88 per share, which exceeded both prior year results and guidance. As noted on the left, we have posted year over year improvement across all key financial measures. Segment operating profit was up in Europe and about stable in the Americas As global segment operating profit totaled $326,000,000 representing a 27% improvement from last year. As Andres noted, margins approximated 17.5%, up 2 70 basis points from the prior year.

Speaker 4

As you can see on the right segment, operating profit benefited from structural price improvements as well as very good operating performance in our margin expansion initiatives. These benefits more than offset lower sales volume and higher operating costs due to unfavorable inventory revaluation and planned asset project activity. Likewise, we did curtail some production to balance supply with lower demand. The Americas reported segment operating profit of $126,000,000 Which was in line with the prior year. Earnings benefited from good commercial contract execution and solid operating performance, While sales volume was down as Andres noted, higher costs reflected planned project activity, temporary production curtailment And unfavorable inventory revaluation.

Speaker 4

In Europe, segment operating profit was $200,000,000 up significantly from the prior year. Higher earnings reflected favorable net price, which more than offset lower sales volume. Furthermore, solid operating performance and margin expansion initiatives substantially offset the impact of some temporary production curtailment. The chart provides additional details on non operating items, Which were pretty stable except for higher interest expense. Yet again, the company delivered strong earnings and margin improvement despite a highly volatile macro environment.

Speaker 4

Let's move to Page 8 and discuss our business outlook. We have tightened our 2023 full year guidance range reflecting very good year to date performance. We now expect sales will be up substantially this year and adjusted earnings will approximate $3.10 to $3.25 per share, Which represents a significant increase from prior year results and the initial outlook we provided at the start of the year. We expect free cash flow will approximate $175,000,000 which is also an increase from our initial guidance. Keep in mind, this outlook does account for some potential variability in sales volume and working capital trends over the second half of twenty twenty three.

Speaker 4

Looking at the balance of the year, we expect Q3 adjusted earnings will approximate $0.68 to $0.73 per share, Which represents a solid increase from prior year results. We are setting initial 4th quarter guidance at $0.25 to $0.35 per share, Which is down compared to $0.38 in the prior year, primarily due to a higher tax rate, which we estimate could be an $0.08 year over year headwind. Likewise, our outlook remains conservative given elevated macro uncertainty. The chart provides additional details on full year and quarterly guidance. Just as we have seen over the past 3 years, the company continues to manage well through elevated volatility.

Speaker 4

While volume trends remain We intend to manage the leverage under our control and deliver on our business outlook. Overall, we remain optimistic and expect strong performance in 2023 And believe performance will continue to improve in 2024. Moving to Page 9. Certainly, our year to date performance is very strong, Which builds on consistent progress over the last several years. This trend reflects a comprehensive approach to enable sustainable earnings and cash flow performance improvement Across a number of key operating levers.

Speaker 4

The top line is up, segment operating profits and margins are strong, We have improved our business portfolio and our balance sheet is in the best place in over a decade. As a result, we have either met or exceeded Street expectations for 12 consecutive quarters. Importantly, we are confident our efforts will enable sustained earnings, margins and cash flow improvement in 2024 and into the future. Let me wrap up by covering our capital allocation priorities. I'm on page 10.

Speaker 4

Improving our capital structure remains our top priority. As noted, the balance sheet should end the year below 3 times levered and we expect to attain our target of 2.5 times leverage sometime next year. Our second priority is to fund profitable growth, including our current $630,000,000 expansion program. Returning value to our shareholders is our final priority. In addition to our ongoing anti dilutive share repurchase program, we may consider reinstating a dividend and or additional share repurchases As we get closer to our leverage target next year.

Speaker 4

Now back to Andres for concluding remarks on Page 11.

Speaker 3

Thanks, Jan. In conclusion, we are pleased with our 2nd quarter adjusted earnings, which were up 20% from last year and exceeded guidance despite a more challenging macro environment. We are delivering on our commitments, which demonstrates improved agility, resilience and a strong execution. In addition to very good performance, we continue to advance our strategy. With a strong first half, Many of our key initiatives are tracking favorably to plan.

Speaker 3

Likewise, we have tied in our full year guidance and expect adjusted earnings We'll be up a robust 35% to 40% this year. In fact, we are well on our way to delivering our best performance In the past 15 years. Importantly, we anticipate future earnings will continue to improve as we leverage the strong foundation Established over the past several years. Finally, I believe O I represents an attractive investment opportunity as we further strengthen our financial profile, Successfully execute and leveraged our transformation program, enabled long term profitable growth, advanced 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 And support future shareholder friendly capital allocation.

Speaker 3

Thank you. And we're ready to address your questions.

Operator

Thank you. When preparing for your question, please ensure your phone is unmuted locally. Please limit yourself to one question and one follow-up question. If you have any additional questions, you may rejoin the question queue. Our first question comes from Ghansham Panjabi from Baird.

Operator

Your line is now open. Please go ahead.

Speaker 5

Yes. Hey, good morning, everybody. Good morning. I guess, first on from inventory, apart from inventory de A lot of your major customers are calling out point of sale weakness on the volume side in a variety

Speaker 3

of categories, including Diageo earlier this week on

Speaker 5

the Spirit side. Clearly, 2023 is a big reset year for you from a volume perspective as inventories adjust along the supply chain. But at this point, Are you anticipating volume improvement in 2024? And if so, in which categories?

Speaker 3

Yes, Ghansham. So we shared some details during the opening remarks about demand, but I would like to emphasize a couple of things. The first one is there is a general pattern across markets with softer consumer consumption as well as supply chain destocking. So that applies everywhere. Now I would like to highlight 2 markets.

Speaker 3

Southwest Europe is the one with the largest drop in volume year on year, That is driven primarily by low inventories in OI, which last year we had available to serve incremental demand and this year we don't. So that creates unfavorable year on year comparison. However, this market is quite healthy. And wine, which is a very important segment over there, is quite strong. And the oil market is the Andean market as well as Brazil, where overall consumer consumption is good.

Speaker 3

The challenge there is that because of the supply chain constraints over the last 2 years, customers imported a large amount of empty glass And now they're using the glass, reducing the demand for the local supply, which is a very temporary situation. So the market is good. In fact, just as an example, in Brazil, glass is growing year to date 4.4% and is ahead of every one of the So pretty healthy markets. They're going just through a temporary adjustment. Now The overall sales volume obviously is choppy.

Speaker 3

It's difficult to predict. However, we saw some improvement in July. Now, if we look at the best information available today, we're seeing improvement in the second half in 80% of the markets we serve. Now, some markets will improve along the second half. Some will start to improve in Q4.

Speaker 3

This improvement is going to carry into 2024. So, I think we're going through a temporary adjustment, But we're seeing some signs of starting some recovery and move up as we go later in the year and into 2024.

Speaker 4

And building on that Ghansham is we do have our expansion programs coming online substantially next We have our first two projects this year, 1 in Colombia and 1 in Canada that are coming on and that will be in full swing next year. And then we have additional expansion underway in Peru and Brazil, Scotland and as well as in Kentucky with our first Magma facility mid 2024. So all of those, if you take a look at that, that's embedded probably about 3% plus or minus type of growth on a year on year basis of just additional volumes coming And as we've said many times in the past, that brings in once they're fully in scope on an annualized basis about $115,000,000 to $120,000,000 of profit for So that'll be a good shot in the arm on top of the recovery that Anders was talking about next year.

Speaker 5

Okay, terrific. And then in terms of Curtailment impact on operating profit, what was that number in 2Q? And I'm sorry if I missed that if you gave that out. What are you also embedding for the back half And I'm just trying to get a sense as to why 4Q EPS, just based on what you've guided to, would be the lowest since the mid-2000s?

Speaker 4

Yes. Just so one thing just on that last part on the Q4. Keep in mind, I put it in the prepared comments is We will have a fairly high tax rate in the Q4, in the probably the mid-30s. It's just a matter of The timing of various elements withholding taxes and regional earnings mix. So that's about an an impact on the Q4.

Speaker 4

If you normalize for that operating profit, it's going to be pretty consistent with last year's, just to give you a sense in that regard. So keep in mind, it's a little bit of an aberration there. But if we take a look at the curtailment costs, we had about $25,000,000 plus of curtailment costs in the second quarter. It was skewed to the Americas and that's why you would see some of the higher operating costs hit there in the second quarter. Just as a sense of sensitivity on curtailment, every 1% that we adjust Our production levels to correspond with sales volume adjustments is anywhere from a $3,000,000 to $7,000,000 impact EBIT on a quarterly basis and it really depends whether you're taking lines down or cold furnaces and things like that.

Speaker 4

But as we take a look in the back half, You probably took to rebalance the inventories from that started to build up to the first half of the year and also to address some of that Sales volume pressure that we see in the back half of the year. You're looking at anywhere from, call it, dollars 30,000,000 in the Q3 that will be absorbed and that Is absorbed in our outlook and then we might have a similar level in the Q4 that's also absorbed in our outlook. But I'd say again, there could be some swing factors as We get a better understanding of the sales volume in the back half of the year. So despite obviously absorbing not the sales volume as well as The curtailment costs, we're actually posting pretty good numbers in the back half of the year.

Operator

Thanks, Gensham. Our next question comes from George Saphos from Bank of America. Your line is now open. Please go ahead.

Speaker 6

Hi. Thanks for the details and hope you're all having a good morning. I guess if we go to Slide 4 And Anders, you talked about some of the curtailments excuse me, some of the constraints that you had. Is there a way by within wine in Europe and you mentioned also in South America, What the effect of constraints were in some of your most important markets? You had it in total, For example, the 2% you said overall, but how did that break down in terms of some of your more important categories?

Speaker 6

And again to Ghansham's question, should we expect that that reverses next year?

Speaker 3

Yes. So the You know that the Andean market as well as Brazil are very important for us. And what we're seeing in both markets, it's a pretty healthy demand. So Now you would imagine the imports of empty glass were quite substantial because of how tight the supply chain was over the last 2 years. So That got to be consumed and it's been consumed at this point.

Speaker 3

Now we're seeing some recovery, for example, in the Andean countries Coming back to supply the 3 products that are growing in that market in the premium segment, again, and we expect this to normalize over the next 2, 3 months. So that market should contribute well, Brazil to Southwest Europe. Once we get into more favorable comps, we won't see this Drop that we're seeing at this point in time. The North America market, it's been Doing fairly well. And I think in part because we've been diversifying away from beer into growth categories.

Speaker 3

And even the mega year, it's been flat. It's been lower in Off premise and higher in on premise fully offsetting each other. So we see a strength in the markets. I think we are in a transition Point right now. And as we go into the second half, we should start seeing these important markets starting to rebound and then continue all that into the 4th Quarter and 2024.

Speaker 4

Yes, and to build on that, Andrew.

Speaker 6

I guess, John, I would say that the 2% Negative from capacity and inventory constraints for total. Can you give us a number for some of the bigger end markets or regions? That's kind of what I was getting at there.

Speaker 4

Yes. It was almost all wine in Southwest and Southeast Europe, okay, basically Southern Europe. That's where we had our Strength, it was record low inventory specifically in those markets. If you go back to the Q1, we had issues in the West Coast of the U. S.

Speaker 4

Because of weather and Strikes down and civil unrest down in Peru and things like that. That did not translate over into the Q2. So our issue from a constraint standpoint was Specifically in wine in Europe. And what I would say with some of the softness that we're seeing right now, we are able to catch up On some of the lower inventories and as a result, I think that we're being in a much better position in the second half of the year to serve wine. And into your other question into next year, I think we again should be in much better position.

Operator

Thanks George. Our next question comes from Anthony Pettani from Citi. Your line is now open. Please go ahead.

Speaker 7

Good morning.

Speaker 4

Good morning, Carla. Just following up on Good morning, Carla.

Speaker 7

Hey, just Following up on Ghansham's question and I guess George just a little bit. On the previous earnings call you talked about Continued improvement in 24 in earnings and free cash flow. I guess 3 months later, Some things have changed and there's some puts and takes. I'm just wondering if you could talk about level of confidence about year over year earnings growth in 2024 And maybe what could get you to sort of a higher end of earnings growth or what could cause earnings to maybe not grow next year?

Speaker 4

Yes, yes, sure Anthony. I think there's 3 primary levers as we look into next year, 2 of which I think that we believe are more or less in our control and we have good confidence around the other one is a little bit more macro. The first one is on sales volume. Back to our expectation next year, we feel pretty confident about the growth of the new Expansion capital, which let's say plus or minus 3%. So that's something in our control.

Speaker 4

It's contracted business with our customers and things like that. Not to mention, what is the shape of the recovery, right? I mean, at this point in time, we don't know whether it will be, as we said in the comments, A V shaped recovery, which would have a robust recovery in the overall volumes next year because of the expansion plus the recovery Or whether it would be more moderate with the expansion of driven by the expansion of our business and a slower macro recovery. So That's a little bit of a swing factor I think between whether it is a moderate or a robust benefit to the performance next year. The next area again within our control is our margin expansion initiatives.

Speaker 4

We've done really good on those. As you know within the past we were targeting about $50,000,000 a year. We're targeting $100,000,000 this year and should exceed that with a lot of focus on North America. We believe that that program has legs And including more progress in North America that we're doing this year and next year, which gives us some good annualized benefits. So I think that that's a good shot in the arm too.

Speaker 4

And then when it comes the third variable is kind of what happens with net price. At this point in time, we are Just anticipating neutral net price. If you look at how that works in our business, 55% of our business is under long term agreements with price adjustment And we are still incurring 6% to 7% inflation this year, which will be substantially recovered in that book of business next year. So that's a pretty substantial amount of net price against probably what is a declining inflationary environment over time, Which ultimately would suggest maybe higher net price, but let's just call it even because there might be some softness in the open market That business with the softer volumes. Again, it's too early to tell that that comes together more later in the year.

Speaker 4

But those are the 3 variables we look at, 2 in our control and we're pretty confident about being able to deliver those into next year and the other one a little bit more macro driven.

Speaker 7

Okay. That's very helpful. And then maybe just one quick follow-up. The 2% to 3% headwind from customer destocking, Is it possible to just to give a sense of how much inventories you think customers may be carrying? Is this sort of like a 1 quarter impact or 2 quarter impact, I'm just trying to get a sense of customer inventory levels.

Speaker 4

Anthony, what I'd say is that we serve Many different end use categories, all of which have different approaches on inventory. You go to beer and there's only a few weeks, generally speaking, of finished goods in the Shane and that tends to correct pretty quickly. You're talking into foods maybe a little bit more moderate, spirits and other categories a little bit longer, right? So And some of the ones that ship internationally end up having much longer value chains and different levels of inventory. So I don't know if there's a simple answer to that, but we believe that at this point in time, we're starting to see a transition kind of Shifting out of the destocking phase and translating into what probably is much more associated with fundamental consumer consumption patterns, Which we think as you see with the Nielsen data and whatever is down a few percent fundamentally.

Speaker 3

Yes. And looking at the Andean countries, that Inventory has been pretty much consumed. When we look at Brazil, we should Have finalized consuming that in the Q3, seeing a positive impact in the forward.

Operator

Thanks, Anthony. Our next question comes from Mike Roxlands from Truist Securities. Your line is now open. Please go ahead.

Speaker 2

Thank you, Andres, John, Chris. Congrats on a good quarter despite the backdrop. Thanks. Thanks, Mike. Just wanted to follow-up on some of these questions about the destocking.

Speaker 2

Can you talk about the cadence of destocking in 2Q? It Sounds like it started in January. Volumes declined sequentially through April. I think you saw some improvement in May, if I recall correctly from your last call, And then starting to soften again in June. So can you talk about what happened during 2Q itself?

Speaker 2

And you mentioned July has improved. How much is What can you quantify that improvement in terms of destocking on a sequential basis as well?

Speaker 4

One thing I would say, it's difficult for us to Quantifying a month to month of destocking cadence per se. I mean what we saw in our overall volumes is that April was a tough month probably Down low double digits. We saw May kind of bounce back to kind of minus 6%, minus 7%. And then you saw June down that high single digits and things like that. So it's been really choppy And that's what makes it a little bit difficult to read through everything.

Speaker 4

But I'll tell you what, destocking tends to be a pretty Choppy environment, especially when it's at the tail end and people are starting to calibrate from destocking over to fundamental demand patterns. So that kind of gives us some sense That we're probably in the later stages of the destocking phase. Yes.

Speaker 3

And as we mentioned before, we're seeing About 80% of the markets we serve showing some form of improvement at this point, some of them starting in Q3, some of them in Q4 And for sure going into 2024.

Speaker 2

Got it. Thank you for that. And just one quick follow-up On the 2024 outlook, John, appreciate the color you gave in terms of in your control and out of your control. If I try to quantify it, so price cost Possibly, look, some neutral maybe plus some tailwinds there. You get incremental EBITDA growth through your expansion projects, call it, $115,000,000 to 120,000,000 And then you get the MDI benefits of $100,000,000 Is that the right way to be thinking about sequential or year over year improvement in EBITDA On a quantitative basis?

Speaker 4

Yes, Mike, I don't want to get into specific numbers. We haven't really provided 2024 Guidance per se, what I would say is, is if you take a look at on the expansion projects, it's a total of about $20,000,000 over the life of it on a run rate basis. I don't know if we're going to get all of that next year because we had some this year, we'll have some Next year and then we'll have a follow into 2025. I think you're probably right about the margin expansion initiatives. I think we're looking at a robust number there.

Speaker 4

And then again, it's a little early to call the net price and like I said, at this point in time, we're just assuming it's neutral.

Operator

Thanks, Mike. Our next question comes from Arun Viswanathan from RBC Capital. Your line is now open. Please go ahead.

Speaker 8

Great. Thanks for taking my question. I just wanted to ask about the demand environment. I think during the quarter, you guys did note some softening in certain markets, maybe some of the higher velocity or sorry, just the lower velocity Yes, spirits, markets and some other areas where you've seen some strength before. Could you just give us an update maybe on what you're seeing across Some of your major categories that we expect over the rest of the year?

Speaker 8

Thanks.

Speaker 3

Yes. So, when we look at Categories, the largest impact that we've seen so far is in wine. And as we mentioned before, it's Closely related to low OI inventories. So it's not as much the market itself. It's those inventories, which makes it very temporary.

Speaker 3

We've seen a decrease in beer in North Central Europe, and that's been primarily Driven by lower consumption, and we've seen some impact in spirits, in particular in Mexico, Coming from a slower growth of the tequila category, still growing, but not as fast as it was growing before.

Operator

Thanks, Aaron. Our next question comes from Gabe Paige from Wells Fargo Securities. Your line is now open. Please go ahead.

Speaker 9

Andreas, John, Chris, good morning.

Speaker 5

Hey, Gabe.

Speaker 9

I wanted to Johnny, you left the door open a little bit. So I want to try to ask the question. In terms of For the more open market business that you referenced, obviously outside of the 55% that's sort of on long term contract. Can you maybe break it out by geography, sort of what your exposure there is? And then just Sort of thinking about the supply demand dynamics in the different regions, we had some capacity come out of the market here in North America.

Speaker 9

So I feel like that market should be Relatively snug. Similar comment in Brazil, but different. It's growing. It should be pretty tight there. Europe is the one area where I think a lot of people are focused.

Speaker 9

It sounds like you do have some capacity coming back online and then yourselves and some others I think the stuff that's coming back online is trying to more localize production. But just sort of how you're thinking about, I guess the potential supply demand dynamics going into 2024 and then like I said your kind of exposure to that open market business.

Speaker 4

Yes. Okay. So just to start with the mix of our contract base, okay. Again, 55% of our business globally is under long term agreements that have price adjustment formulas And 45% is open market that tends to be 1 year type of agreements that get reset generally between November February of each year in most cases. So if you take a look at that regionally, in Europe, we have about 30% fixed and 70% open market.

Speaker 4

It's this one SKU to the open market thing. I think a lot of wineries right and smaller customers in that regard. Over in North America 90%, 95% Whatever is under long term agreements, multiyear contracts with very small amount into the open market. And if you get in down into Latin America, in that area, it's probably fifty-fifty, maybe scoot a little bit more towards contracted business. And then I think there's a it's just a natural process of working through price with the open market activities given the history of inflation in that region.

Speaker 4

So that's kind of the mix of that category. I'll make some initial comments on capacity and see if Andres wants to jump in on that too. But on the capacity side, if you take a look globally, we operate in Europe and the Americas, which is about a 40,000,000 ton demand system, that's 40,000,000 tons of glass is consumed each year. Over the next 3 years to our understanding, there's about 2,000,000 tons of announced New capacity coming online, and it's split all over the different markets. But That's calling at 1% to 2% 1.5% to 2% of new capacity coming online on an annual basis if you just kind of straight line it across And that's kind of in line with the overall fundamental growth position of the marketplace.

Speaker 4

And so yes, some new capacity is coming along. We're about a third of that. And some of it's actually replacing automotive capacity, so it's not necessarily all incremental expansion. But if we take a look at that over the longer arc of multiple years, We think that it's a very responsible level of capacity relative to the expected growth profile of the marketplace.

Speaker 3

Yes. Perhaps to complement, With regards to the new capacity coming in line at the end of the second half and in 2024 OI, Part of that capacity is in the Andean countries with a strong consumer demand still and the premium category growing really well. So that's a Pretty good investment over there. Brazil, I mentioned before that glass is up year to date 4.4%. Premium beer, which is our index to glass, is up 15.5%.

Speaker 3

So this market is pretty solid, and we'll have some capacity coming up in 2024 over there. Capacity goes to the U. K. To serve the Scotch market. We have a factory that is right at the center of that region, So very well located with very good long term prospects for growth.

Speaker 3

The investment in Canada is under contract For localization of a volume that is already there, so it's a pretty low risk. And the other one is in Kentucky to serve the growing U. S. Local market and export market in the spirits business. So we are in a good very good place from a new capacity coming up for OI.

Speaker 9

Thank you both for that. The second was that I wanted to dig in a little bit on Altra and I feel like this is maybe, I don't know a topic that's misunderstood or sort of glossed over. We had an opportunity to talk about it in the Q2, but It looks like you qualified some of that, those bottles down in Colombia here during the Q2. Can you just talk about what you guys are doing there And then maybe the opportunity to leverage that across your system. It seems like it's a little bit less capital intensive than Magma.

Speaker 9

So I just want Maybe how quickly you can deploy something like that across some of your other factories and things like that?

Speaker 3

Yes. So we've been very successful qualifying Ultra in Colombia, which is where we did it Recently, we are planning other investments, in this case, in Europe, where there is a strong interest in that. [SPEAKER CARLOS GOMES DA SILVA:] As you mentioned, the capital intensity of that investment is low, so that's quite good. And Today, what we have is quite good. That is the early horizons of that.

Speaker 3

Remember that we are planning to go as high as 30% We're going to be fairly soon talking about For the investments in Ultra, which will help to position the glass container a lot stronger from a sustainability standpoint in

Speaker 4

the future. And Gabe to your point, I think the good aspect of Ultra is it can be scaled up quicker at lower capital intensity. So As we work on Magma, which we think is the ultimate tool to address the marketplace, bringing in Ultra in a medium term We'll really be able to give us a boost, as we really lay the foundation for broader magnet deployment down the road, which will also include Ultra. The good news about Ultra is it can be retrofitted to our current base as well as being able to be used in Magna going forward. So it's a great tool.

Operator

Thanks, Gabe. Our next question comes from George Staphos from Bank of America. Your line is now open. Please go ahead.

Speaker 6

Thanks very much. Just a quick follow on. In terms of the $59,000,000 or so Of cost $56,000,000 in the Americas segment, you said $25,000,000 I think or so was curtailment. Can you parse the rest by category? And then just a quick follow on on the commentary about the imports of glass.

Speaker 6

I think you said Andres into the Andean region. All of that glass from your vantage point would be one way glass or is anybody importing returnable glass? And then if How do we think about that relative to what your demand should be for next year? Thank you.

Speaker 4

Yes. So George on your first question, the Breakdown of the $50 some odd 1,000,000 in the unfavorable or higher costs in the Americas. $20,000,000 of it was inventory revaluation, which I think we identified during the previous call. About $10,000,000 was elevated cost for asset project activity. Again, that was something that I think that we was included in our guidance before.

Speaker 4

And the other And the other $20,000,000 or thereabout is associated with, the temporary curtailment downtime. That's the one thing that was not Our original guidance, obviously, that was additive in the quarter.

Speaker 3

And the imports of glass, George, are primarily one way, but there is a lot of new product development Both in one way and returnable in Andean as well as in Brazil. If we look at Brazil, returnable glass is growing 3.5% 3.1 percent year to date and it's even going into premium products, which It's fairly new. So it's supporting the growth of premium. So it's we're seeing growth in both. The imports are primarily related to one way.

Operator

We have no further questions. With that, I will now hand back to Chris Manuel for final remarks.

Speaker 1

Thank you, Carla. That concludes our earnings conference call. Please note that our Q3 call is currently scheduled for November 1. And remember, make it a memorable moment by choosing safe, sustainable glass. Thank you.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect your line.

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Earnings Conference Call
O-I Glass Q2 2023
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