Hello and welcome to today's O-I Glass Second Quarter 2022 Earnings Conference Call. My name is Elliot and I will be coordinating your call today. I would now like to hand over to Chris Manuel, Vice President of Investor Relations. The floor is yours. Please go ahead.

Thank you, Elliot, and welcome everyone to O-I Glass second quarter 2022 earnings call. Today our discussion will be led by Andres Lopez, our CEO; and John Haudrich, our CFO. Today we will discuss key business developments and review of financial results. Following prepared remarks, we'll host a Q&A session. 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. Now, I'd like to turn the call over to Andres who will start on slide three.

Good morning everyone. I appreciate your interest in O-I Glass. Last night O-I announced a strong second quarter adjusted earnings of $0.73 per share, which exceeded prior year results as well as guidance. Performance improved across all business levers. As expected, glass shipments increased slightly compared to the prior year and the benefit of higher selling prices continued to more than offset cost inflation. Likewise, solid operations, cost performance, and our margin expansion initiatives contributed to this strong quarter and helped offset elevated costs as we ramp up our expansion projects. As illustrated on the left, all key measures improved with adjusted EPS up about 35% from the prior year and debt down significantly. In addition to strong performance, we continue to advance our strategy. Our balance sheet is now in the best position since prior to a substantial investment to build out the Americas network between 2015 and 2019. This includes the acquisition of O-I Mexico and Nueva Fanal as well as JV expansion in IBC and Comegua. Additionally, O-I recently announced the first US MAGMA greenfield facility at Bowling Green, Kentucky, which should start mid-2024. Last but certainly not least, the company has achieved a third and final resolution of Paddock Legacy asbestos liabilities and fully funded the Paddock Trust as of July 2018. O-I has passed an inflection point, and we are developing a track record of consistently delivering on our commitments. I'm proud of the team's agility and strong execution amid the backdrop of unprecedented macro volatility. In a little while, I'll review our revised capital expansion and MAGMA development plan, which has been adapted to better fit the current macro challenges while achieving our Investor Day goals. Finally, John will review our recent business performance, the strengthening capital structure, and improved outlook for 2022, and discuss how O-I is well-positioned to navigate the potential Russian natural gas curtailment in Europe. Let's move to page four as we review recent sales volume trends. Our shipments increased nearly 1% in the second quarter, which comes on top of an 18% improvement in the prior year quarter. Volume was up nearly 1% in both Americas and Europe, with the strongest demand in the Andeans, Mexico, and Southwest Europe. Year-to-date shipments were up 3%, about 5% in Europe and 2% in the Americas. Market trends clearly favor glass, resulting in the strongest market fundamentals in over 20 years. Let me comment on a few of the longer-term secular trends. Across Latin America, a structural shift in demand is driving sustainable growth. Customers and consumers increasingly favor premium products, and our customers are localizing international brands that had been successfully imported to these markets for several years. Premiumization favors one-way glass containers, while consumer affordability and sustainability considerations are prompting greater use of returnable bottles. For example, glass now holds 50% market share in the Brazil beer category as both one-way and returnable glass gain share. As illustrated at the bottom of the page, we have improved our mix in North America by consistently shifting away from beer to other growth categories. In fact, US mega-beer only represents today around 15% of our North America business and 4% globally. In Europe, a large volume of glass historically imported from Russia and Ukraine is no longer available due to the recent conflict, which drives up demand for locally produced glass. Glass has demonstrated a strong performance across markets both on-premise and off-premise over the last few years, redefining long-held assumptions about glass resilience to channel shifts. Finally, strong demand is driving increased new product development in glass, which is up about 10% from pre-pandemic levels according to Mintel data. Clearly, there are many important drivers for continued secular demand growth. We expect our full-year sales volume will be up around 1% in 2022, as healthy demand is tempered by record low inventories and capacity constraints across many markets. In fact, our volumes each quarter this year should exceed pre-pandemic levels. Improved production speed and efficiency can support modest stage volume growth for NAV. Long-term, we have several expansion projects underway that will add much-needed capacity in 2023 and beyond. In addition to strong performance, we continue to advance our transformation. Let's turn to Page 5. Our margins are up 130 basis points year-to-date despite unprecedented cost inflation. In April, we successfully raised selling prices for the second time this year, and O-I should exceed its full-year net price objective. Likewise, our margin expansion initiatives are off to a good start, and we have already exceeded our annual target. Amid the strongest glass fundamentals in over 20 years, we have revised and adopted our expansion and MAGMA development plans to better match the macro challenges for further strengthen profitable growth and achieve our financial targets. I'll expand more on the next page. Our ESG and Glass Advocacy efforts are also progressing well. Nearly one-third of our electricity is now being supplied from renewable sources, a big step towards our goal of 40% renewables by 2030. Our Glass Advocacy digital marketing campaign remains in high gear, generating over 650 million digital impressions year-to-date, which supports our growing commercial pipeline. Our current portfolio optimization program should be completed by year-end ahead of schedule. Finally, we achieved a fair and final resolution on legacy asbestos liabilities by mid-2022 as expected. Overall, we are making excellent progress on our key strategic objectives. Advancing to Slide 6. Last fall, we introduced our capital expansion plan to enable profitable growth over the next three years and our corresponding MAGMA development plan. Since then, unprecedented macro challenges have impacted these original plans. We are experiencing delays of six to twelve months as we contend with significant supply chain lags, cost inflation, labor availability issues, as well as COVID-related disruptions. As a result, our original plan no longer meets commercial requirements. O-I is responding to these macro challenges with agility. Today, we are introducing our revised capital expansion and MAGMA development plan, which we believe better meets today's business environment. Importantly, the revised expansion plan enables our 5% to 6% organic volume growth target and sustains the 20% return on investment goal across our portfolio with lower total CapEx. We are planning on a wider range of smaller scale projects that reduce construction cost and complexity, broadens our market reach and fit the timeline required to meet customers' expectations. In particular, the sky-high steel and cement prices and supply chain lags are hampering larger-scale greenfield expansion, whether with legacy or early MAGMA generation technology. So we have reduced the number of greenfield projects in favor of line extensions, reactivating idle furnaces and other similar efforts. The map shows the various projects included in our revised capital plan. There are no changes to the new capacity coming online in 2023. Likewise, initial MAGMA expansion plans will be focused in the US to support the attractive spirits and OIPS distribution business starting with the recently announced MAGMA facility in Bowling Green, Kentucky. MAGMA development is proceeding well, yet progress is slower than originally anticipated due to the same macro challenges. We are focusing our R&D and engineering resources on two MAGMA greenfield lines in the US rather than a larger number of sites based on early generation MAGMA technology. This will help accelerate development of our Generation 3 solution, which includes the full suite of MAGMA capabilities that are best positioned to address key market opportunities. We expect to complete development of our Generation 2 solution by mid-next year, which will be the basis of our new Bowling Green facility. Generation 3 development should be completed by mid-2024, with the first site to follow in 2025. In summary, the revised plan meets today's business environment and supports our Investor Day financial and growth targets. Now, I'll turn it over to John to review financial matters starting on page 7.

Thanks, Andres, and good morning, everyone. O-I reported second quarter adjusted earnings of $0.73 per share, up $0.19 from the prior year. This strong improvement was fully attributed to very favorable net price realization and slightly higher sales volume. All other elements, FX, divestitures, corporate interest, and taxes essentially netted to zero. Segment operating profit was $257 million, up from $232 million last year, as margins improved 60 basis points despite FX headwinds. Favorable net price increased segment operating profit by $42 million as higher selling prices more than offset elevated cost inflation. At the same time, volume and mix added $6 million as shipments increased 0.6%. Finally, operating costs were comparable to the prior year. Segment operating profit improved significantly in both the Americas and Europe despite unfavorable FX and dilution from recent divestitures. The Americas posted segment profit of $130 million, up $14 million from the prior year on an adjusted basis, reflecting modestly higher sales volumes and improved operating cost, while higher selling prices nearly offset elevated cost inflation. Given this situation, we are focused on adapting future contracts to improve this pass-through and margins especially in North America. In Europe, segment operating profit was $127 million, up $33 million from the prior year on an adjusted basis. Earnings benefited from very favorable net price, while operating costs were higher due to elevated asset project activity and import costs. The chart provides additional details on non-operating items. Overall, second quarter results were exceptionally strong reflecting favorable performance across all key business levers. Let's turn to page 8. As discussed, we continue to make very good progress on our key strategic objectives, including the financial priorities you see here. As shown on the bottom chart, our total financial leverage approximated four times at the end of the second quarter. In fact, leverage is at the lowest level since prior to substantial investment to build out the Americas network including the acquisition of O-I Mexico in 2015. Likewise, leverage was down more than a turn since this time last year. Overall, we expect to end the year in the mid to high-3s, which is favorable to our 2022 objective. Let me outline our current capital allocation principles. Reflecting the best glass fundamentals in a generation, our top priority remains investing in expansion, ultimately enabled by MAGMA, which drives profitable top-line growth, higher margins, and greater cash flows. Continued balance sheet improvement is our next priority, which is tracking well. Finally, we will evaluate the return of value to shareholders which may be enhanced as our balance sheet position improves. In summary, our balance sheet is in the best position in years, and we are committed to the appropriate capital allocation for value creation. Let's discuss our business outlook. I'm now on page 9. Overall, our outlook has improved; results for the first half of the year exceeded our original expectation and we have good momentum heading into the second half of the year. We have provided our updated outlook for both the third and fourth quarter as well as full year. Keep in mind, we are absorbing unfavorable FX, dilution on recent divestitures, as well as incremental interest on funding the Paddock Trust. Together, these factors represent around a $0.20 headwind to earnings in the back half of the year. Furthermore, our network is capacity constrained, which will limit volume growth into the second half. However, the addition of new capacity early next year, along with improved productivity, will support 1% to 2% growth in 2023. We expect third quarter adjusted results will approximate $0.55 to $0.60 per share, which is comparable to the prior year. Yet this represents approximately a $0.05 to $0.10 improvement in operating performance when adjusting for FX divestitures and Paddock. We anticipate continued favorable net price and stable or slightly higher shipment levels. Operating costs will likely be higher as we ramp up planned asset project activity, which will be partially mitigated by our margin expansion initiatives. We anticipate fourth quarter adjusted earnings will range between $0.20 and $0.30, which is down from the prior year but potentially up around $0.05 when adjusting for FX divestitures and Paddock. Earnings will benefit from favorable net price. However, we expect sales volume will be down some as shipments grew 5.5% in the prior year quarter and we now contend with low inventories and capacity constraints. Again, operating costs will likely be higher as we ramp up expansion projects, which will add new capacity in early 2023 to support growth. Looking at the full year, we are increasing our earnings and cash flow guidance. We now expect adjusted earnings will range between $2.05 and $2.20 per share and free cash flow should exceed $175 million. Adjusted free cash flow should top $400 million, which is on the high end of historic performance levels and future cash flow growth will be supported by our expansion investments. This outlook assumes $600 million of CapEx this year, which will be concentrated in the second half. Please note that ongoing supply chain challenges could impact project timing some. Of course, we continue to monitor macro trends, including potential recession signals, which may affect our business outlook. Overall, we are much better positioned to navigate a potential recession than in the past, given solid glass demand fundamentals. As we all know, there is a risk of Russian natural gas curtailments over the next several months in Europe, which could be disruptive. Let's turn to page 10 to further discuss this topic. Europe is preparing for potential Russian natural gas curtailments through this next winter. Countries are actively sourcing more gas from other locations, including the US and Middle East, as well as ramping up alternative energy sources such as temporarily restarting idled coal-fired plants. In addition to these actions, the EU has established a plan to reduce NG usage by 15% to mitigate the brunt of potential Russian gas curtailments. Each member country will have a specific plan. Potential drivers include the promotion of consumer behavior changes, government-imposed gas allocations, and safeguarding key industries. We have been tracking and evaluating this situation for some time and preparing our operations. Early in the year, we started to install energy switching capabilities and established agile network optimization plans. To date, 20% of our capacity in the EU is capable of running on oil, and we expect to have 50% covered by year-end. Likewise, we maintain best-in-class long-term energy contracts that protect against volatile spot market prices. Importantly, glass is often regarded as an essential product in many EU markets. For example, Italy and France, our largest markets, currently have taken positions that may protect the glass industry. At this time, it is unclear if meaningful issues will emerge. If this scenario does materialize, we are well positioned to manage the situation, which we believe represents only a slight potential risk to O-I's 2022 business outlook. Now back to Andres.

Thanks, John. We are very pleased with our second quarter results and the achievement of several key milestones on our transformation journey. O-I is managing well through market volatility and margins have improved despite significant cost inflation. Likewise, we are executing our revised capital plan that is properly suited for today's business environment. We have increased our full year earnings and cash flow outlook reflecting solid progress year-to-date and good momentum. This represents the ninth consecutive quarter O-I has either met or exceeded guidance and we have consistently increased our full year outlook. In fact, our updated 2022 earnings outlook is approaching our 2024 target from last year's Investor Day. Overall, we are increasingly optimistic about our 2023 performance, provided no significant changes in business conditions. In conclusion, I believe O-I represents an attractive investment opportunity. We are successfully addressing many historic overhangs on the stock and materially improving our capital structure. Likewise, we are delivering on our commitments to generate profitable growth, execute on our plan and advance breakthrough MAGMA technology. We are confident this strategy will continue to create value for our shareholders. Thank you, and we're ready to address your questions.

Thank you. Our first question comes from Ghansham Panjabi from Baird. Your line is open. Please go ahead.

Thanks, good morning, everybody.

Good morning.

Good morning.

So on the European exposure and Slide 10 in your investor deck, with 34 plants there and obviously some are more exposed to Russian natural gas and others, how much flex capacity do you have in your system at current in Europe? I can't imagine it's too high, but just curious as to your ability to flex across your manufacturing footprint, if there were some disruptions in countries such as, for example, the Czech Republic.

Yes. Ghansham, the conversions of furnaces in 20% of our capacity that allow us to use oil already provides that flexibility. Every curtailment level that we have heard about is in the range of 15%. We already have capacity converted up to 20%. We expect to have up to 50% by year-end, and that is going to provide a very good protection for us, to be able to have enough capacity to run without a problem to serve our demand. Now, it is important to consider that the largest markets in which we operate have been having government officials very active highlighting that most likely glass will be characterized as an essential industry. So with that, that very large part of our footprint is protected. We know Germany and Czech have one of the largest challenges. Nevertheless, the situation for them is already improving because they're already implementing measures to reduce consumption and to increase their reserves going into the winter. For example, Germany's stock at this point is at 70%, which is 2.5 to three months of supply; Czech is 80%, which is close to five months of supply. But again, they're actively not only sourcing from different sources in this case, but they're already activating their communities for substantial savings. So we're pretty optimistic that the risk here will be really minimized, if a risk at all. Now, the other country is Hungary, which the government has been focusing the priority on glass supply because there used to be supply coming out of Ukraine into Hungary, which is not available anymore, for a country that has a very large agricultural industry. So the focus is really on supply. So the continuity of our operations over there, in our minds, will be there. So all in all, when we look at all this, even though we watch this very closely on a continuous basis, we feel very comfortable this risk is really low for us.

Okay. That's great. And then in terms of the $47 million price cost segment variance for Europe, how do you think that evolves in the back half of this year? And then on North America, the $5 million decline, is that just a timing issue, given the surge in natural gas prices?

Yes, this is John. We believe that we will experience a long-term favorable net price variance, which includes the latter half of the year. Overall, we recorded approximately $0.16 in favorable net price for the company. In the second quarter, we expect the levels in the third and fourth quarters to remain consistent with that. Regarding the Americas experiencing a $5 million decline, I want to highlight that year-to-date, it is actually up $7 million. While it saw a $5 million decrease in the second quarter, it's worth noting that the Americas, especially North America, have a larger share of long-term contracted businesses with price adjustment formulas. We have been actively working to implement price increases in response to inflation as quickly as possible, although some of it is tied up in annual PAF, which we will have to navigate. Furthermore, as mentioned in our prepared remarks, we are working on making the contract structures in the Americas more flexible.

Yes. And in this case for North America, any spread would not really be impacting this year but will be a positive for 2023.

Yes. And we do expect positive spread in 2023.

Our next question comes from George Staphos from Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for the details. And just some props here too, thanks again for just over the years making the deck clearer and really well outlined, at least in my view. Thanks very much for that. My question is around operations. So, when we think about MAGMA and the shift to the new plan relative to the old plan, how comfortable are you that the constraints on steel, the constraints on concrete, the lead times, all the stuff that we've been hearing about for the last year and a half in the industry overall, not just from you all, makes you still comfortable about the new rollout of the technology and the new capacity expansion plan relative to where you were? What makes your comfort that you won't be having to dial this back another year from now for these same issues? Relatedly, since there seems to be and correct me if I'm wrong, a greater amount of sort of heritage technology relative to I think you're going to have only two new MAGMA lines in the US, what does that mean? What are the implications for ongoing reliability, glass quality, capital intensity? Because I thought MAGMA was in part around reducing the capital intensity footprint and improving the quality of the glass over time, so how does that all shake out? And then a quick follow-on.

Okay. So what we've done with this new plan is changed what used to be greenfield projects, which are highly impacted by the conditions you mentioned, right? All the civil work that is required: cement, steel, and all of that, to projects that require much smaller infrastructure, right? So line extensions, line additions, bringing back the existing capacity that is down. So from that perspective, we are lowering the risk of the whole plant significantly. Now our focus on MAGMA increases because instead of implementing a larger number of lines, we're going to focus on two lines that will allow us to test everything we wanted to test. By the way, we are already testing Gen 2 and Gen 3 capabilities in several places in our footprint. So we will be able to test everything and we'll be able to have the R&D team and the engineering team focus on those two projects, which will be located nearby too. For our purposes, we're going to increase the efficiency of these teams working in these developments, which give us a lot of comfort. Now we are placing all the orders well in advance for everything that is under pressure in the supply chain of today. So with that, we think we are quite well covered. So the whole redesign of the plan is taking into consideration, George, achieving what you're highlighting, which is providing enough time to be able to be successful and get there on time with the deployment in 2024 for this first line and 2025 for the second line for Gen 3. Now Gen 3 is the generation that has all the capabilities we've been describing for MAGMA. We are moving faster towards the entry. So when it comes to serving the markets, we are improving our position, and we are doing that by focusing. Now our markets are quite healthy at this point in time. The demand is high. We cannot even serve the demand in multiple markets. Now it's extremely important to be able to bring capacity on time to satisfy the customer requirements. The kind of projects we're doing are going to do that. The original plan because of all the issues will take too long and we wouldn't be able to deliver on time. Now capital intensity is one of the attributes of MAGMA. It will be there. So we're taking all the actions to improve our value engineering and all that to be able to help offset some of those pressures. And we expect that over time the supply chains will improve too.

Understand. I get that. I guess – and I appreciate all the color there. Just correct me, if I'm wrong the fact that with the revised plan you'll only have two MAGMA greenfield additions relative to what had been up to 11, and you have a lot of legacy and brownfield additions. Three to four years from now on an ongoing basis, let's assume everything goes as you expect, will the new O-I, if you will, have a greater capital intensity than you would have otherwise had with the first plan? Why or why not? And then just a quickie because we've got some questions on this. Can you give us a bit more color in terms of why the volume is down in the fourth quarter? Is it purely capacity constraints, or are there other weaknesses showing up in the business? Thank you and good luck on the quarter.

George, this is John. Just on the capital intensity comment. Keep in mind that Generation 1 and Generation 2 were always going to have kind of the legacy look of a large factory structure and things like that, right? So the capital intensity of those were still relatively high, a little lower than legacy, but still relatively high. It's Generation 3 that allows you to get to that 40% lower capital intensity that we talked about during Investor Day, which we still see as the target. And keep in mind everything that we were going to do in the original plan over the next three years was either going to be what we call Generation 1.5 or Generation 2, still relatively high in the capital intensity environment. Now, we're leapfrogging a lot of that activity, right? We're going to be going to Generation 3 quicker. So I don't think this overall changes our capital intensity picture by resequencing things much at all. And then on your later question, on the fourth quarter, that is all a comp issue, okay? We were up 5.5% last year. Our production wasn't up 5.5%. We were serving that out of inventory. Of course, inventories now are at record lows. It's just a matter of capacity constraints; relatively low inventories and a tough comp in the fourth quarter. But again, all that just ultimately gets taken care of earlier part of the year when we bring new capacity online first in Colombia and then Canada.

And just to complement that, our perspective on the MAGMA potential remains intact. And the goals that we had in our plan, we presented to you last year, also remain intact. And the good thing is the plan we put together can help us to achieve both.

Our next question comes from Mike Roxland from Truist Securities. Your line is open. Please go ahead.

Congratulations to Andres, John, and Chris on a strong quarter and positive outlook. Thank you for addressing my questions. You mentioned having 20% flex capacity for oil. Does that transition incur a higher cost? Additionally, you've done an excellent job hedging natural gas in Europe, but I'm curious if you've been able to hedge oil in a similar manner to prevent a significant increase in energy costs if you switch.

Yes, Mike. As I mentioned, we have the ability to increase our flex capacity from 20% to 50%. This allows us to operate on oil and also provides blending options between gas and oil. So, we won't have to commit fully to one or the other. Regarding fuel oil, it is more expensive, but it's not nearly as costly as the current spot markets for natural gas. If we do face that higher cost, we would look to pass it on to the marketplace, just as we have successfully done throughout this period.

Got it. I appreciate that, John. Just one quick follow-up. One of your European competitors recently admitted that it has lost market share due to tight inventories, and also noted that other players have not been as aggressive in implementing price increases in the market. Can you discuss any market share you may have gained in Europe? Was that share gain due to pricing or other factors?

Let me just give you one perspective on that. We've been measuring Net Promoter Score, NPS for several years now. And the improvement in that NPS, which means how the customers see us, has been material. And material is material. And it is quite high in multiple customers. So, I think O-I is built today as a strategic partner, and customers come to us because of many reasons, one of them being that. Now, inventories are tight in the system. They're tight for us too, but our planning processes have improved significantly. So, we have become a lot more effective and efficient working with lower inventories in terms of service.

Yes. And I would add on that as relative to the competitive environment question out there. Obviously, every company is a little bit different, have a different book of business, different markets that they serve, things like that. But I’ll tell you what we’re trying to get done. We’re trying to increase the topline, increase our prices, increase the volume of the business, increase our segment profits, increase our margins, and increase the profitability of the business. We accomplished all of those.

Our next question comes from Anthony Pettinari from Citi. Your line is open.

Hi, good morning. You've been active on divestitures, but I think you're still around $200 million away from the $1.5 billion target. Can you comment on the remaining incremental opportunities there? Are those more likely to come through divestitures or sale leasebacks? Also, has the strength you're seeing in glass led you to reconsider divestitures? Thanks.

Yes, sure. So for clarity, we've completed about $1.3 billion of our $1.5 billion program. We have $200 million left, that's one final sales leaseback that we expect to accomplish here in the relatively near future. As we look to the opportunities going forward, we've been fine-tuning our portfolio now for a couple of years. That's filed after a period of, as we indicated, expanding in the Americas. Now we've been fine-tuning our network, etcetera. I mean I think we're at later stages in that; there are always opportunities that we will continue to evaluate. But we also need to understand the receptivity of the best marketplace to be able to get the best valuation for any divestitures that we have. But as I said, the market is really good. We're liking how our business is looking now. Of course, there are opportunities to fine-tune, but we're more focused now on operating our company.

That's very helpful. I have a follow-up to Mike's question regarding the potential switching from natural gas to oil. You mentioned that it might come with higher costs, but you plan to recover those costs in the market through price increases. Will this higher cost impact the full-year outlook, or is it something that you believe will only affect the margins, and are you confident you can recover that within the year?

Yes. I consider it a minor issue for the company at this time. In our prepared remarks, we indicated that we believe the situation poses relatively limited exposure. Currently, the EU aims to reduce consumption by 15%, and a significant portion of this can be achieved through changes in behavior. For instance, in Germany, we see measures such as halting the heating of swimming pools and encouraging people to lower temperatures in offices and homes. For example, a one-degree centigrade adjustment in facility heating can lead to a total consumption reduction of about 6%. Such consumer behavior changes can have a considerable impact. Coupled with the favorable reception of our product across various markets, especially considering the essential nature of glass, we believe that the overall effect of allocations and related factors is quite low. Regarding those allocations, if adjustments are needed involving oil, the exposure remains limited, and we can return to the marketplace to offset those costs. That summarizes our perspective on the various components at play, and I hope this information is helpful.

Our next question comes from Kyle White from Deutsche Bank. Your line is open. Please go ahead.

Hey good morning. Thanks for taking the question. I'm just curious if you guys are seeing any kind of consumer spending or behavior changes because of inflation that is potentially impacting demand for glass products? Any kind of impact from price elasticity yet?

Yes. So far, we haven't seen any impact of a change in behavior in the consumer side on our demand. Now, it is important to highlight that our demand is driven by fundamentals and underlying drivers that are beyond what we can serve today. So just to give you an example in the Andean markets in Brazil, there is localization of international and global brands, that is volume that is already in those markets got to be transferred to local production. When you put that together with the healthy demand of all end users in a market like that, plus other factors, we cannot serve those markets today. And there are plenty of imports going into that market, and others don't buy us or even the customers or competitors which provide a cushion for demand. So, let's assume that consumer behavior changes in the future. The kind of cushion we have in those markets in Europe because of the displacement of more than 5% of the capacity, because of the conflict that now are going to be produced locally in Europe, provides a cushion of protection for our demand. So that's why we feel so comfortable about the balance of the year. And even 2023, it's the underlying demand. It's the new capacity that is going to come online that John mentioned can help us to have support substantial growth next year, but it's also our performance with the multi-year margin expansion initiatives and our positive perspective on the spread. So all these things are coming together to help us expect a pretty good performance for the balance of the year and 2023.

One thing I would add is we did go back and looked at what happened to the behavior and the performance of our business back in the Great Recession in 2008 and 2009, and what we really found is a lot of those premium categories did fine. In fact, they’re affordable luxuries and held up quite well. The one category that was under pressure was the US mega-beers. As we all know and as Andres indicated that's down to 4% volume for the company right now. And in fact, we've mixed managed ourselves more to more attractive categories. And so all in all, that would suggest in addition to the very strong market fundamentals that it's a different landscape than maybe we've seen in the past.

Even in the US market there is localization of international and global brands. And we are going through one of those localizations right now and into the first half of the next year, which is going to help volumes in North America.

That's very helpful. And then on your energy needs in Europe, are you able to say how much of your energy needs for next year is already secured and contracted or hedged if you will going into 2023?

For competitive purposes, we don't throw out numbers in that regard. But what I would say is we're very comfortable. We take a long-term structural approach to managing gas energy overall. We've been doing that even before the pandemic. So we're in good shape there. Again, what I would say is we're confident of having favorable spread again in 2023.

Our next question comes from Mark Wilde from Bank of Montreal. Your line is open. Please go ahead.

Thanks. Good morning. Good quarter and good progress on the whole range of initiatives over the last few years. I wanted to just chase down Kyle's question a little bit further if I can. To what extent do you feel like you're benefiting at the moment in Europe and the fact that some of your peers are not as well hedged on gas as you are and really don't have any choice around raising prices? I know you need to be careful about this for competitive terms, but it does seem like it's probably one element in the mix right now?

I mean, I would say, Mark, our sales volumes were up 5% or so in Europe in the first half of the year. And again, they were up more like 0.6% or 0.5% or something like that in the second half of the year. This is not an environment where there's massive market share changes going on. I think the market overall was oversold. We've actually been supplementing a little bit with imports from Asia in that regard. But I think at the end of the day, the ability to do massive movements in share just isn't there given the supply-demand dynamics.

Repairs that were supposed to take place earlier in the year did not happen, resulting in furnaces being down. This contributes to the shortage originating from Ukraine and Russia, which amounts to over a million and is close to 5%. Additional factors are spread throughout the area and add to the overall situation.

We now move to Adam Josephson from KeyBanc Capital Markets. Your line is open. Please go ahead.

Hey, Andres and John, good morning.

Good morning, Adam.

Good morning.

John, one question on the price cost comments you made about next year that you're confident you'll be price cost positive next year irrespective of what happens to nat gas, oil, etc. Implicit in that, is that there wouldn't be severe demand destruction in Europe, if everyone is tracking up prices substantially I assume. Is that in fact what you're assuming that even if Europe goes into a major economic downturn that glass demand is going to hold up well? And if so, why would you expect that?

Our projections are based on a reasonable level of normal business, acknowledging that unexpected significant events can occur. Currently, Europe is planning for a 15% reduction in natural gas demand, but the overall impact on our business is moderated due to changing behaviors. We're also noticing slight adjustments in the cost and supply structure in the marketplace. While we cannot predict unforeseen events in Europe that may alter this situation, we feel confident about maintaining a positive spread for the relevant outlook period.

Yeah. And we continuously model several scenarios that includes all the drivers of demand up and down, and we include price elasticity. And when we put all that together, we see a very small risk of that demand being impacted in an important manner. Remember the fundamentals we described in the opening remarks, and we highlighted in answering some of the questions are pretty strong. And they're not necessarily driven by GDP; they are actions that either customers or consumers are taking that are significantly larger than the glass supply can serve. And all of that comes as a caution. We've got to go through all that first before we go into a negative. And so we got to model all that together. And, for example, replacing the one million tons in Europe is a pretty challenging thing for the industry. It won't be around the corner.

I appreciate that, John. Let's get back to the capital and MAGMA plan. You're mentioning how constrained your capacity is and that your inventories are at record lows, yet you're postponing these projects by about a year. You're citing cost inflation, labor availability, and supply chain issues as some of the reasons. If cost inflation is the main factor, I would expect you to proceed with the projects anyway since you can't meet demand. So, could you clarify the main reasons for these delays, especially considering your stated supply constraints?

First of all, this change allows us to bring smaller projects to completion more quickly than we could have otherwise. The larger greenfield projects are experiencing delays due to issues like the availability of steel and labor. To clarify, we will still achieve the growth we initially planned, but it wouldn't be possible if we focused solely on a few larger greenfield projects that are being delayed by these factors. For instance, if a significant part of a large project is missing because of delays in China, the entire project comes to a halt due to that bottleneck. In contrast, with several smaller projects, we can more easily acquire the necessary parts and navigate less complexity, allowing us to bring them to market faster. Our current situation isn't about changes in demand or our capability to execute; it's focused on overcoming the bottlenecks that are impacting larger, more complex projects compared to smaller ones.

Something that is quite positive is all the projects that support the incremental capacity for 2023 are in good course, a very good course.

Does that make sense, Adam?

Yeah.

Our next question comes from Gabe Hajde from Wells Fargo. Your line is open. Please go ahead.

Hi, Andres. John, Chris, good morning. Thanks for taking the question.

Good morning.

I was curious if you can address a competitor who mentioned last week that they are considering a portfolio review or potential restructuring of their North American operations. It seems that there have been multiple indications of dissatisfaction with the pricing environment, which is puzzling to me since the market is fairly consolidated. So I have a two-part question. First, do you believe there is a similar level of mispricing across your business? Based on the results so far, what is your perspective? And if there is mispricing, do you see opportunities for improvement in terms of repricing your business moving forward?

We began about six years ago to diversify from mega beer, which involves expanding our presence in growing categories such as food, spirits, non-alcoholic beverages, and premium beer by shifting our focus. We have been consistently investing in this transformation each year. Concerning commercial conditions, we have been actively addressing them, especially over the past three years, amidst significant changes in the market. We will continue to pursue these efforts in the coming year. We have taken a proactive approach to adapt to a market that has changed rather significantly. As a result, mega beer now accounts for only 15% of our North America business, which is about half of what it used to be. This indicates that our North American market is not as heavily dependent on mega beer anymore. In fact, we are seeing strong performance in several growth categories, particularly premium beer, which is experiencing very good growth.

Okay. And then, I guess maybe this is a too simplistic way to look at it. But I think kind of on a year-to-date basis, you're kind of positive I want to say plus 60 on price cost. You talked about similar things, John, for the second half. So, I mean, should we kind of just extrapolate that out? And then, just because you kind of teased us with it, looking out into next year, can you give us a preliminary view on if we freeze input cost as they are today appreciating obviously Europe is volatile. Would you expect something similar, lower or more next year? And then, any kind of view into start-up costs? Because it looks like a lot of this project activity is going to be ramping up next year; I think Colombia was delayed by maybe six months or so. So just maybe an order of magnitude on what you expect kind of start-up costs and rebuild activity would be like.

Yeah. Sure. Let me unpack a few of those elements in there. So first of all, on the net price realization, don't extrapolate the first half to the second here; use the second quarter and continue that for each of the quarters. Because we were in ramp-up mode with price; we had two price increases over the course of the first half. So I think the second quarter is a better illustration of the run rate that we would expect to have in both the third and fourth quarter, which obviously is a little bit more than just annualization of the first half of the year. And then 2023, I can't be too specific on dollar amounts, nor should we at this particular point in time. But overall, we think just looking at the year you're looking at 1% to 2% kind of volume growth. As we included in our prepared comments, we do anticipate positive spread; not in a position to quantify that just yet. And we expect continued margin expansion initiatives continuing on as we've been able to quite successfully achieve. So the one thing that we do have out there to your comment is we do have more asset enablement costs, a lot of the start-up costs; there's maintenance and engineering and labor costs and everything that go on the front end of that. If we take a look at that this year, there's probably something in the tune of $35 million to $40 million probably call it $0.15 to $0.20 worth of elevated costs that we're incurring as we ramp up these particular types of projects. Now, next year is going to be another robust year of activity for these projects and things like that, so I don't see that going down. Maybe it goes up marginally. But obviously we've taken a big step up in that in this particular year, including the second half of the year when we have peak activity. Hopefully that provides you the information you're looking for.

Our next question comes from Jay Mayers from Goldman Sachs. Your line is open. Please go ahead.

Good morning everybody. Thank you for the time this morning and all the details in the slide deck. I had a quick kind of follow-up on the last question about the North American market. I was wondering if you could just kind of talk about some of the premium demand drivers. And to the extent that we do see the competitor that was mentioned kind of try to shift its mix more towards the premium products that you guys have seen driving demand growth there. Like, how do you feel about the kind of current demand situation that is out there to the extent you see kind of increased competition from a large competitor in the market?

Yes. I think the growth of the premium beer is quite important. And the growth of the imported and global brands is very important too. And it is important to highlight that what has been produced abroad has been localized in the United States, which provides a volume opportunity and we're seeing that obviously impacting our numbers. Our focus on diversifying away from mega beer the past six years now, so this is a process that takes time, and we've been consistently every year working on that. But we also have OIPS, which is the distribution business, which we continue to develop. And that's very important because that business has to add up to 2.3 million tons that are all imported. And through this, and matching that through OIPS and MAGMA, we will have very good access to that market that is quite a premium market. By the way, the Kentucky first-line is going to be serving OIPS volume as well as spirits, which is also a premium market. So we've been working actively on this for years now, and we feel we're making good progress. And there is a lot to be done still, and we'll continue to focus on that.

Got it. Thank you. And then John just a quick housekeeping item for you. In terms of the Paddock funding, so was the cash actually moved to the Paddock Trust this quarter? And if so does that also imply that you guys drew down on the delayed draw?

Yes, on both accounts. On July 18, we fully funded the Paddock Trust with $610 million. The $600 million of that came from the delayed draw, so we pulled on that. And so that's where we stand right now.

We have no further questions. I'll now hand back to Chris Manuel, Vice President of Investor Relations for final remarks.

Thank you everyone. That concludes our earnings call. Please note our third quarter call is currently scheduled for November 2. And as a reminder, make it a memorable moment by choosing safe sustainable glass. Thank you.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.