O-I Glass, Inc.

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. If you would like to register a question, please press star followed by one on your telephone keypad. 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.

Thank you, Daisy. And welcome everyone to the OI Glass full year and fourth 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&A session. Presentation materials for this earnings 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. I'd now like to turn the call over to Andres who will start on slide three.

Good morning, everyone, and thanks for your interest in OI. We are very pleased with OI's performance in 2022. As a result, it exceeded guidance and we achieved all of our key commitments. Last night, we reported adjusted earnings of $2.30 per share. which represented more than 25% increase from the prior year results and exceeded guidance. As you can see on the left, we have very good business momentum with consistent adjusted earnings growth over the past several years. The strong results reflected solid execution across all key business layers. Earnings benefited from significant net price, as well as sales volume growth, good operating performance, and our margin expansion initiatives. Importantly, Full-year free cash flow and four-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 first magma greenfield plant. We also significantly improved our structure as a result of legacy asbestos-related liabilities, and we completed our portfolio optimization program. 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 four as we review recent sales volume trends. As expected, achievements increased about 1% in 2022 following significant growth in 2021 when volumes rebounded from the onset of the pandemic. While demand remains healthy, our growth has been limited by capacity constraints and record low inventory levels in key markets. Growth was most notable in the spirits, wine, and NAB categories while beer and food were slightly down. Chipments 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 and Brazil, while we contended with record low inventories across Latin America. Consistent with guidance, four quarter achievements were down about 3% given the challenging prior year comparison when volumes were up a robust 5.4%. 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 achievement levels will 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. Stronger achievement levels are anticipated in 2024 as more new capacity comes online. Overall, we have not seen significant changes in demand patterns lately, but we'll continue to monitor market conditions given the risk of recession. Let's turn to page five. On top of a strong recent performance, we also achieved all 2022 key strategic objectives. Segment operating profit margins were up 110 basis points as we exceeded our targets for both net price realization and margin expansion initiative benefits. As noted, our capacity expansion projects are progressing well as we capitalize on the strongest glass fundamentals in at least 20 years. All magma development efforts are advancing well, and we have broken ground on our first magma green field in Kentucky. Likewise, the full-scale market trial of our new ultra-lightweighted solution is proceeding well. Our ESG and glass advocacy efforts continue to advance. As discussed, We significantly improved our structure as part of Result is 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. We have established another set of ambitious and achievable objectives to advance OI's strategy in 2023 as shown on page six. Higher earnings and margins should benefit from 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 million, 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 one 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. 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 Canada and Columbia 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 first magma greenfield in Kentucky. Additionally, we will advance our magma development efforts that will enable commercialization of both Gen 2 and Gen 3 in 2024 and 2024, respectively. Likewise, we expect to complete the all-track qualification in Colombia that will pave the way for future deployments. We intend to accelerate the use of key technologies to help reduce greenhouse gas emissions on top of a set of initiatives to expand recycling rates. We will advance our glass advocacy campaign and increasingly prioritize B2B connections to build the oil brand with decision makers. Finally, we will continue to improve the capital structure and expect to reduce our net debit leverage ratio to below three 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 seven, we are very excited about our first magma greenfield plant in Bowling Green, Kentucky, which is on track for initial commercialization of Gen2 by mid-2024 and Gen 3 by mid-2025. We are designing the plan 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 plan will eventually include all magma generations with advanced sustainability features as well as ultra-light weighting system. Located in the Bourbon Trail, the Bowling Green Plan will demonstrate the value of near location and will be a key hub for further customer collaboration, investor visits, and demonstration of OI's next-generation capabilities. I invite you to review a recent video that we created that shows Magma in action and further discusses its 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 eight.

Thanks, Andres, and good morning, everyone. OI reported full-year adjusted earnings of $2.30 per share, which exceeded guidance and increased 26% from the prior year. In fact, performance improved across several key financial measures, as illustrated on the left. Earnings improved in both the Americas and Europe, as segment operating profit increased to $960 million, reflecting strong net price realization as well as modest sales volume growth and solid operating performance despite higher asset project expense. Turning to the fourth quarter, we reported adjusted earnings of $0.38 per share, which was up from the prior year and exceeded guidance. Results increased 36% from the prior year when adjusting for FX divestitures and interest on funding the Paddock Trust. Fourth quarter segment profit was $206 million, up more than 25% on an adjusted basis as margins increased 100 basis points. Strong net price boosted earnings, and as expected, sales volume was down about 3% given challenging prior year counts. Finally, operating costs were up, primarily reflecting elevated asset project activity. The Americas reported $83 million of segment operating profit, which was down from the prior year on an adjusted basis. Earnings benefited from favorable net price, while sales volume was down 6% amid elevated project activity. As expected, higher operating costs were partially offset by our margin expansion initiatives. In Europe, segment operating profit was $123 million, up $52 million from the prior year on an adjusted basis. Very favorable net price boosted earnings while operating costs were up, as noted. The chart provides additional details on non-operating items. Yet again, the company delivered strong earnings and margin improvement despite a highly volatile macro environment. Let's turn to cash flow in the balance sheet. I'm now on page four, rather, page nine. As shown on the left, we reported free cash flow of $236 million, which exceeded guidance, yet was down from the prior year due to higher CapEx given expansion project investments. Adjusted free cash flow, which excludes the strategic and capex, totaled $426 million, an increase from the prior year demonstrating OI's improved operating performance. In fact, our cash flow conversion was around 36%, well ahead of our 25% to 30% goal. At the same time, we have significantly improved our balance sheet position. As shown on the right, total financial leverage was around 3.4 times at the end of the year, down one turn from last year and two 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 three and a half times leverage well ahead of schedule. Recognizing our progress, both Moody's and S&P increased our credit rating this year, and we now have one of the better balance sheets in the rigid packaging sector. In summary, core operating cash flow has 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. 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 $1.37 billion, an increase of 15% from 2022. Full year adjusted earnings should exceed $2.50 per share, reflecting very good EBITDA improvement, partially offset by elevated interest expense. Overall, we expect earnings will be front loaded in 2023. Ed Hoffman, Net price realization will likely peak in the first half is earnings benefit from annual price adjustment formulas that recapture prior year inflation and new increases effective in January of 2023. Ed Hoffman, Likewise, we will add the prior year three price increases over the course of the year. Ed Hoffman, As such, we anticipate earnings will be up nicely during the first half of the year, while second half results could be more comparable to 2022 levels. You can see that reflected in our first quarter guidance of 80 to 85 cents per share, which is a significant increase from the prior year, reflecting strong net price and the benefit of inventory reevaluation 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. We do intend to introduce an earnings guidance range in a quarter or two once there's greater market clarity. Adjusted free cash flow should increase to at least $450 million, and free cash flow should be at least $150 million, which is down from the prior year due to elevated CapEx approximating $700 to $725 million. 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 three times as we continue to focus on balance sheet improvement amid a higher interest expense environment. Overall, we are optimistic as we enter 2023 and expect continued positive momentum despite ongoing macro uncertainty. While intentionally cautious on the back half of the year, we are well prepared to manage through elevated volatility as we have done over the past three years. Importantly, we have already achieved all of our key 2024 financial 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 is stabilized. Let me wrap up by restating our capital allocation priorities. I'm now on page 11. Improving our capital structure remains our top capital allocation priority As noted, we expect leverage will end the year below three times. We will continue to reduce debt consistent with our glide path to two and a half 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 million expansion program. We do anticipate continued modest portfolio optimization as we seek to increase ROIC, which could also help with debt reduction or expansion. Returning value to shareholders is our final priority. We will continue our anti-diluted 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 Andres for concluding remarks.

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 As noted earlier, we have met or exceeded a strict consensus for 12 consecutive quarters. In addition to 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. 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 and beyond. Finally, I believe OI 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, and we're ready to address your questions.

Thank you. As a reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad. Please kindly only ask one question and one follow up to allow others the chance. If you would like to withdraw your question, please press star followed by two. And when preparing to ask your question, please ensure you are unmuted locally. So that's star followed by one on your telephone keypad to register a question. Our first question today comes from Gancham Punjabi from Baird. Gancham, please go ahead. Your line is open.

Thank you, ma'am. Good morning, everyone. I guess, you know, Andres, looking back at 2022 on a segment basis, I mean, Europe was up, you know, 320 basis points from a margin standpoint year over year. It's up significantly versus the pre-COVID level. And, you know, 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, if, for example, national gas prices or energy costs more broadly revert towards pre-war levels?

Thank you, Gansham. Well, if we look at the demand fundamentals in Europe, they're very solid. In 2022, all in uses, beer and AB, 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. And you know these two markets are very large and relevant markets for wine. 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 capacity dislocations that are up to 1 million tons, about 5% of the total supply. And we believe this is going to take several years to be resolved. So from a demand standpoint, we see this continuing. When we look at the gas prices, we're continuously looking at the TTF futures. And when we look at those futures, They suggest to us that this is going to be a multi-year dynamic. And today we're dealing with a milder winter. There is still winter to go. We will be facing replenishing the storages. Most likely dynamics are going to change at that time. So I think we've got to see how this unfolds. But you would expect that many users of natural gas bought position in the second half when prices dropped 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 multi-year dynamic. 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.

That's very helpful. And then for the first quarter, can you quantify the inventory revaluation benefit? And then also related to that, you're pointing towards 100 million 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?

Yeah, 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 million or almost 10 cents in the first quarter of this year relative to if we did not have that adjustment. But keep in mind, you know, that that really doesn't affect the full year. It just kind of flushes through over the course of the year. So it doesn't contribute meaningfully to our full year outlook for the businesses. And as we look at the margin expansion initiatives, $100 million, if you look at that, we had a target in 2022 of $50 million. We came in at $70 million. So we've been doing well in this, and we feel confident that we can continue to do well through the combination of our 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 OPEC 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 million. In particular, the price resetting activity that Anders mentioned should give us some initial benefits that will bring early benefits to getting to that number.

Yeah, and I think it's important to highlight that the – Resetting of conditions commercially in North America is a long-term move. So this has been a market under significant pressure over the last few years, and we're working on 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.

Thank you so much.

Thank you. Our next question is from George Stappos from Bank of America. George, your line is open. Please go ahead.

George? George, are you there?

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.

This is actually Brian Bergmeier sitting in for Anthony. Thanks for taking the question. You know, you've been saying capacity in Europe is reduced by about 5%, you know, due to the war and elevated costs. Have you seen any capacity come back online with net gas moving lower? And do you have a view on, you know, industry operating rates in Europe in 2023, just kind of based on the projects announced by OI and competitors?

There is a shortage of capacity of 1 million 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 Italy and France, as an example, and even North Central Europe are all importers at this point in time. So beyond that 1 million 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 are building capacity to be able to keep up with the growth and those circumstances of dislocation of capacity. This is going to take time to be resolved.

Got it. Thanks for that, Kohler. Yeah, last question for me. You know, equity earnings were up quite a bit in 4Q. I guess just what do you attribute to that growth, and do you have any thoughts on equity earnings in 2023?

Yeah, sure. So, you know, we have about four or five strategic JVs that we have spread across the globe. And we have in particular two, one in Europe, and that caters to the higher-end categories, and then one over in, you know, 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, you know, that joint venture over in Europe. We expect continued good progress in our joint ventures in 2023 also. Got it.

Thanks. I'll turn it over. Thank you.

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

Thanks, Andres, John, Chris. Congrats on a solid quarter and a solid year. Thank you. First question I had, Andres, you mentioned, and John, you made a comment as well, in terms of resetting the contracts in North America. How far along are you in doing that? And do those contracts allow you to recover previous inflation? I think Andres, you made the comment that it allows 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 resending those contracts and if you're able to recover anything historically.

Well, so we had a plan to reset contracts impacting starting 2023. That's mostly on. And it is a sizeable percentage of the total business. We expect to record inflation through the PAFs. 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 in this important market.

Yeah. One thing I would add on that one, Mike, is that the contracts that we're referring to is, you know, North America has long-term contracts, five, seven plus years type of windows. So a number of the ones that we're addressing right now were set, call it 215, 218, 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 seltzers. 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 America. And so we're in a much better place as we set those contracts.

Got it. And it doesn't allow, John, for anything retroactively.

Yeah, 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 price in terms of these new agreements is 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 attribute it to more value creation. But it is a step up in the overall value that we're getting on that business.

Got it. And then my second question, just can you provide us with an update on the progress you made in adding the energy flexibility to your plants? I think you were targeting either late last year or early this year. 50% equipped with that energy switching flexibility. And then just, you know, as the energy contracts that you've already entered into, say, pre-COVID or likely will offer in the 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?

Yeah, 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. The circumstances have been improving, so that gives us a little bit more relief in that process. But we started very early last year, and we're in a very good place at this point in time to be able to respond if that is necessary.

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. 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, and And keep in mind, you know, we do believe we need this. It's not only just the inflation that we're seeing, you know, directly, but we have SG&A inflation, higher interest rates, CapEx inflation, and things like that. So at this point in time, we don't feel the need to get into the marketplace. And, you know, 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, you know, euros per megawatt hour last year. It's still quite elevated at around 60 euros per megawatt hour compared to maybe pre-pandemic numbers of 20 euros per megawatt hour. So at this point in time, it's still quite elevated. And of course, we're seeing probably a little bit of a lower window given the warm winter, but we believe that there's still a structural challenge over in Europe on energy. So again, I think we don't feel any pressure to get into the markets. Thanks very much and good luck in the year. Thank you.

Thank you.

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

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 in the future as you gain more market clarity. What are you waiting on here to get more clarity on? Is it consumer demand? Is it inflation? Just any more details you can provide behind that decision.

Yeah, I think it has to do with all the macros. I think that 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, the implications. We don't really see any tripping any wire between Now, 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 of the year because of that uncertainty. And so obviously, you know, 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 that's a big determinant of, I think, whether we trip into recessionary pressures or not. So we're clearly watching. watching that and, of course, the volume activity and sentiment from our customers. Appreciate it.

And then on volumes, looking at the Americas, do you have a sense if the decline this quarter was, you know, 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 regions.

Yeah, 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 to support those markets. So the Americas, North America is quite stable. uh the performance of the mega beer has been stabilizing the decline has been slowing the premium beer is growing well and premium products and are in a very good place the issue is that we have very tough comes with uh with q1 2022. that was the time when we were coming back from the pandemic uh inventories were revealed. There was a price increase in the second quarter of 32 that increased purchases in the first quarter of 21. So we're dealing with that. On top of it, our inventories are low, so we cannot ship anymore out of inventories for incremental demand as we did before. So the situation is tight. And then we have a higher level of asset activity at this point in some of these markets, which is also limiting our ability to ship. So 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.

And Kyle, on other aspects of your question there, if you look at what happened in Americas where the volumes were down 6% in the fourth quarter, that was attributed to our own maintenance activity. We had significant rebuild activity going on both in Brazil and North America. And back to Andres' comments there, you know, 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 opportunity 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. So that will come online and allow to have a little bit more growth in the Americas. Sounds good. I appreciate the details.

Thank you. Thank you.

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

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 24. numbers, expectations ahead of time in 23 here. So would you characterize the 23 guidance, which is about 15% above where, you know, many of the street expectations are, and you noted that you beat, you know, those 12 quarters in a row, would you characterize your 23 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, you know, since you're growing now in the 2% to 4% range, even though, you know, 23 is going to be below that for macro concerns, would you just apply kind of a new margin range on some of this heightened growth? And so maybe, you know, in the out years, you know, you'd reach 25 and 24 and, you know, 26 levels in 25. Is that how we can think about it? Thanks. Thanks.

Yeah, what I would say is, I mean, and included in our prepared comments, we had indicated we expect continued earnings improvement in not only in 23 but also in 24. You know, there's a lot of moving parts. We're managing a lot of levers in the business. You know, of course, we are raising prices, as we've discussed before, but we are profitably growing our business. Most of that capacity expansion will come more online in 2024 and 2025 than And to your point, you know, we're targeting profit, you know, nice categories so that those should be, you know, be able to inch the margins up in that particular regard. You know, we got more ongoing, you know, margin expansion initiatives with, in particular, we're profiling North America. I think there's a couple years worth of opportunity there that we're going to be focusing on. We're also focusing on the capital structures, you know, and trying to improve that position that will benefit the organization. And, of course, a little bit longer term, at least starting in 2024, we've got magma 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've got a lot of levers, a lot of arrows in the quiver to be able to continue to drive improvement going forward. At this point in time, we're not providing necessarily long-term guidance and things like that, and we'll reintroduce those once we see a little bit of stabilization in the macros.

Thanks, John. And then just as a quick follow-up on free cash flow then, so how do you see that evolving, say, from the 236 and 22? Working capital, I would imagine, could be a slight positive in 23, just given some of the pullback in some of the raw materials, or is it the other way that, you know, you're still building inventory and that's going to be a drag? Is there a possibility for free cash flow to approach $400 million in 2023? In 23, maybe?

So, you know, first of all, I would say that we expect continued progress in our adjusted free cash flow. I mean, you know, that takes out the wows due to the changes in capital allocation expansion investments. So, you know, the big drivers there, obviously, is a continued improvement in EBITDA. The CapEx, as we've noted, at least with the planned activities we have right now, you know, 2023 has $300 million of CapEx. Considering what we did in 2024, that leaves about $150 million of CapEx for expansion in 2024. So that's a drop-off, right? And so that should go and benefit the cash flow position of the business. Some other levers, you know, interest expense obviously is up quite a bit this year. Hopefully that stabilizes at its particular level, or 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. You know, just to reinforce, the adjusted free cash flow this year will be $450 million or higher, and that's an improvement over what we saw in 2022. Thanks.

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

Andres, John, Chris, good morning. Congrats on the year and the quarter. I just had, I guess, two quick questions, one regional specific to Brazil, and just trying to, I guess, compare contrast what we saw in the last couple months of the year on beer production down in Brazil and I guess relative to some called 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.

Yeah, 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. 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. The returnable containers are doing quite well because of two reasons. One is they generate better affordability for consumers. and they're better for 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 art performance in Brazil is quite good. There is capacity being built. So we expect that to come online, and it's going to help our volumes there. And we'll continue from there.

All right. Thank you, Andres. And one on Europe, and just I know it's challenging in terms of visibility, but maybe knock-on effects from China reopen. And, you know, 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 I don't know, made up in my head.

Well, the on-premise channel is back. The Horeca, what they call Horeca channel, which is hotels, restaurants, and catering is back. So that's driving very good demand. Something that we learned over the last three years, different when compared to what we used to believe, is that the resilience of the glass packaging in both on-premise or The resilience to shift, even on-premise to off-premise, is very good. So any direction it moves, I think glass is going to perform well. With regards to China, we've got to see where this goes, but there is an expectation for reopening and higher level of activity. That's something that we 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. 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 a reminder, about 40% of what we actually make in Europe ultimately gets exported 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.

Thank you.

Thank you. As a reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad. Our next question is from Michelle Filipic from Jefferies. Michelle, please go ahead. Your line is open.

Good morning. Thank you for taking my line. I have just one question. It's similar to what has been asked before, but 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 timeline? And also if you can share insights on price renegotiations entering into 2023 and maybe expectation for later the year. Thank you.

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

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

And to your second question, where do we stand in the pricing process? As most people are familiar, about 70% of our business in Europe is open market, or at least annual agreements, and those tend to get reset at this time of the year. We are largely through that, but not complete. And so, you know, we continue with that effort, but it's, like I said, it's pretty advanced.

Okay, thank you. Thank you.

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

Yep. 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, you know, tangential to litigation that you guys have, you know, had to 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 rear view mirror in terms of, you know, funding the trust and something that can't be reopened.

Yeah, yeah. Just to be clear that the Paddock Chapter 11 case is closed. You know, that included a consensual agreement. We funded the trust. We have the channeling injunction fully in place. So the Chapter 11 is closed.

Thank you for that. Thank you. Thank you.

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

Great. Thanks. Good morning, guys. A nice quarter. Good morning. Real quick on the CapEx outlook. I appreciate, again, we're still just in the beginning of 2023, but should broadly 23 be the high watermark for CapEx and we should see it step back down into 24? Or can you just kind of give us a rough sense of trajectory there?

Yeah, so there's two aspects that are driving, obviously, the CapEx. It's the strategic CapEx investment and then as 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. It could ebb and flow in different levels from one period to the next, but it's probably a reasonable place to be. And then on the expansion side, you know, we have our $630 million announced program. We spent $190 million of that in 2022, should be around $300 million this year, and then dropping off to, you know, the tail end of that $150 million based upon our best estimate of timelines now. So That would suggest that that crests and goes forward. Of course, then we'll look at any opportunities going forward, but that's what we have announced at this particular time.

Great. And maybe just one quick follow-on to that. As we just think about slide 11, kind of your capital allocation priorities and a potential return to returning value to shareholders, kind of when should we think about, I mean, if you hit everything you laid out today, you'll be under three times by the end of this year. Just... Greg, when do you think you'd want to start talking more about that or fleshing that out more?

Yeah, so I would say that, you know, that second bullet point there that as, you know, we were trying to work to this glide path two and a half times leverage. And so I think, you know, the emphasis on return of value to shareholders will probably pick up as we get comfortable about our ability to hit that number. You know, obviously, you know, 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 two or a couple years or something along those lines, I think then we'll be able to profile more of the return to shareholders. Great.

Thank you.

Thank you. Thank you.

Thank you. This is all the questions we have time for today. So I'll now hand back over to Chris for any closing remarks.

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

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