Earnings Call Transcript - OI Q4 2022

Operator, Operator

Hello, everyone and welcome to the O-I Glass Full Year and Fourth Quarter 2022 Earnings Conference Call. My name is Davie and I'll be coordinating your call today. 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.

Christopher Manuel, Vice President of Investor Relations

Thank you, Dave and welcome, everyone, to the O-I Glass full year and fourth quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO; and John Haudrich, 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 3.

Andres Lopez, CEO

Good morning, everyone and thanks for your interest in O-I. We are very pleased with O-I's performance in 2022; our results exceeded guidance and we achieved all of our key commitments. Last night, we reported adjusted earnings of $2.30 per share, which represented more than a 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 levers. 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 fourth quarter results also exceeded our most recent business outlook. In fact, this represents the 12th consecutive quarter we have met or exceeded the 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 regarding 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 4 as we review recent sales volume trends. As expected, shipments increased about 1% in 2022 following significant growth in 2021 when volumes rebounded from the onset of the pandemic. While demand remains healthy, our growth has been limited by capacity constraints and record low inventory levels in key markets. Growth was most notable in the spirits, wine, and NAB categories, while beer and food were slightly down. Shipments increased nearly 4% in Europe and were up across all end-use categories amid a 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, fourth quarter shipments 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 shipment leverage would be flat to up 1% in 2023. The first phase of our expansion program will add much-needed new capacity. However, this benefit will be tempered by record low inventory levels and the impact of higher asset project activity as maintenance initiatives normalize and supply chain dynamics. Stronger shipment levels are anticipated in 2024 as more new capacity comes online. Overall, we have not seen significant changes in demand patterns slightly but will continue to monitor market conditions given the risk of recession. Let's turn to Page 5. On top of the strong recent performance, we also achieved all of our key strategic objectives for 2022. 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 greenfield in Kentucky. Likewise, the full-scale market trial of our new ultra-lightweight solution is proceeding well. Our ESG and Glass Advocacy efforts continue to advance. As discussed, we significantly improved our structure considering legacy asbestos-related liabilities and we wrapped up our portfolio optimization program. I want to thank the O-I team for advancing our strategy and achieving all key objectives in 2022. We have established another set of ambitious and achievable objectives to advance O-I's strategy in 2023, as shown on Page 6. Higher earnings and margins should benefit from a strong net price realization and our ongoing margin expansion initiatives. As you can see, we have increased our annual initiative target to more than $100 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 Colombia 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 2025, respectively. Likewise, we expect to complete the ULTRA 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 O-I brand with decision-makers. Finally, we will continue to improve the capital structure and expect to reduce our net leverage ratio to below 3x by the end of 2023. I'm highly confident these efforts will advance our strategy as we continue to transform O-I. Turning to Page 7, we are very excited about our first MAGMA greenfield plant in Bowling Green, Kentucky, which is on track for initial commercialization of Gen 2 by mid-2024 and Gen 3 by mid-2025. We are designing the plant to be a showcase facility that will demonstrate all of our next-generation capabilities. This new state-of-the-art facility will include the MAGMA melter, new melter batch system, and pilot forming machine. It will be fully digitized with a high-performance operating structure. This highly scalable plant will eventually include all MAGMA generations, with advanced sustainability features as well as an ultra-lightweighting system. Located in the Volvo Trail, the site will demonstrate the value of nearer locations and will be a key hub for further customer collaboration, investor visits, and demonstration of O-I's next-generation capabilities. I invite you to review a recent video that we created that shows MAGMA in action and further discusses these many important attributes. This slide includes the link to the video. Now, I turn it over to John to review financial matters starting on Page 8.

John Haudrich, CFO

Thanks, Andres, and good morning, everyone. O-I 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 in 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 comparisons. 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 the highly volatile macro environment. Let's turn to cash flow and the balance sheet; I'm now on Page 9. 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 investment. Adjusted free cash flow, which excludes the strategic CapEx, totaled $426 million, an increase from the prior year, demonstrating O-I'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 3.4x at the end of the year, down 1x from last year and 2x from 2020. This improvement reflects higher earnings, solid free cash flow generation, and proceeds from our portfolio optimization program, while funding the Paddock Trust. In fact, we achieved our 2024 Investor Day goal of 3.5x 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 flows improved and our balance sheet is in the best place in a decade. Let's discuss our 2023 business outlook. I'm now on Page 10. Overall, we have very good momentum heading into the new year. 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. Net price realization will likely peak in the first half as earnings benefit from annual price adjustment formulas that recapture prior year inflation and new increases effective in January of 2023. Likewise, we will lap the prior year's three price increases over the course of the year. As such, we anticipate earnings will be up nicely during the first half of the year, while second half results could be more comparable to 2022 levels. You can see that reflected in our first-quarter guidance of $0.80 to $0.85 per share, which is a significant increase from the prior year, reflecting strong net price and the benefit of inventory revaluation due to elevated inflation. Given macro uncertainty and the risk of recession, we are providing base performance levels for full year 2023 rather than an EPS range at this time. We do intend to introduce an earnings guidance range in a quarter or two once there is 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 million 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 3x 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 macroeconomic conditions stabilize. Let me wrap up by restating our capital allocation priorities. I'm now on Page 11. Improving our capital structure remains our top capital allocation priority. As noted, we expect leverage will end the year below 3x. We will continue to reduce debt consistent with our glide path to 2.5x 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-dilutive share repurchase program. Likewise, we may evaluate additional share repurchases or reinstate dividend as we get closer to our capital structure objectives. Thank you, and I'll turn it back to Andres for concluding remarks.

Andres Lopez, CEO

Thanks, John. In summary, we are very pleased with our performance in 2022. Adjusted earnings per share increased more than 25% from the prior year and exceeded guidance. As noted earlier, we have met or exceeded the Street 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 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 O-I represents an attractive investment opportunity as we strengthen our financial profile, execute our transformation program, enable profitable growth, advance breakthrough innovations like MAGMA and ULTRA, and further leverage our sustainability position going into 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.

Operator, Operator

Our first question today comes from Ghansham Panjabi from Baird.

Ghansham Panjabi, Analyst

Andres, looking back at 2022 on a segment basis, I mean, Europe was up 320 basis points from a margin standpoint year-over-year, up significantly versus the pre-COVID level. And obviously, there was a lot of chaos last year with European natural gas and so on and so forth. How do you think this evolves from a margin structure standpoint, specific to Europe if, for example, natural gas prices or energy costs more broadly revert towards pre-war levels?

Andres Lopez, CEO

Thank you, Ghansham. Well, if we look at the demand fundamentals in Europe, they're very solid. In 2022, all end-users, beer, and food, wine, and spirits performed quite well. This is happening across markets in Europe and across end-users. When we look at the wine and beer demand, for example, Champagne, Prosecco, Italian wine in France and Italy, it is particularly strong. And you know these two markets are very large and relevant markets for O-I. Spirits in the U.K. is very strong too. Now along with that, we mentioned before, there is a large shortage of glass in Europe that is driven by all this growth that I mentioned, plus the capacities located that are up to 1 million tons, about 4% to 5% of the total supply. And we believe this is going to take several years to be resolved, right? 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 likely 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 will expect that many users of natural gas bought position in the second half when prices drop a little bit; most likely, they are buying positions today, and that will take care of 2023. So we're out of this year into the following years. But back to the TTF futures, 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 up in earnings, 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.

Ghansham Panjabi, Analyst

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 in 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?

John Haudrich, CFO

Yes, Ghansham, this is John. Regarding the inventory revaluation, we need to accurately represent our inventories on the balance sheet. Due to the higher inflation levels, we are conducting these revaluations. This is adding about $20 million, or nearly $0.10, in the first quarter compared to if we had not made that adjustment. However, it won't significantly affect our full-year outlook as it will balance out over the year. When we consider our margin expansion initiatives, we are aiming for $100 million. We had a target of $50 million for 2022 but exceeded that, reaching $70 million. We're confident we can continue this progress through our revenue optimization activities, which include strategies like value-based pricing and improving plant profitability by addressing cost-related factors. Additionally, we've focused more on activities in North America, which are helping us achieve the $100 million goal. The price resetting efforts that Andres mentioned should provide early benefits towards reaching that target.

Andres Lopez, CEO

Yes. And I think it's important to highlight that the resetting of conditions commercially in North America is a long-term move. 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, margins, and returns potential of this very important market. What we're doing on the commercial side, from our perspective, is a long-term move.

Operator, Operator

Our next question is from George Staphos from Bank of America.

John Haudrich, CFO

George, are you there?

Operator, Operator

We're not getting any more you from George, so I'll move on to the next question. Our next question today comes from the line of Anthony Pettinari from Stanton.

Bryan Burgmeier, Analyst

This is actually Bryan Burgmeier sitting in for Anthony. You've been saying capacity in Europe is reduced by about 5% due to the more elevated costs. Have you seen any capacity come back online with nat gas moving lower? And do you have a view on industry operating rates in Europe in 2023 kind of based on the projects announced by O-I and competitors?

Andres Lopez, CEO

So 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, France, 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. From our perspective, the backlog in Europe is quite large. Inventories are still to go up. This situation with capacity in Europe is going to be a long-term issue. I think you can see that when several players, including O-I, are building capacity to keep up with the growth and those circumstances of dislocation of capacity. This is going to take time to be resolved.

Bryan Burgmeier, Analyst

Got it. Thanks for that color. Last question for me. 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?

John Haudrich, CFO

Yes, sure. So we have about 4 or 5 strategic JVs that we have spread across the globe. And we have, in particular, two, one in Europe that caters to the higher-end categories and then one over in Mexico. Those have been doing quite well for the business. Again, a lot of the trends we’ve been seeing over in Europe have buoyed up that joint venture over in Europe. We expect continued good progress in our joint ventures in 2023 also.

Operator, Operator

Our next question is from Mike Roxland from Truist Securities.

Mike Roxland, Analyst

Congrats on a solid quarter and a solid year.

Andres Lopez, CEO

Thank you, Mike.

Mike Roxland, Analyst

My first question is about the contracts in North America that you mentioned, and John also made a comment regarding this. How far along are you in securing those contracts? Do these contracts enable you to recover from previous inflation? I recall you mentioned that they help cover some of that inflation. I'm curious if they fully allow you to recover the inflation experienced last year or just partially. Could you provide more details on your progress in this process?

Andres Lopez, CEO

Well, so we had a plan to reset contracts impacting starting 2023; that's mostly done. It is a sizable percentage of the total business. We expect to record inflation through the PAF. 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 and healthy returns in this important market.

John Haudrich, CFO

Yes. One thing I would add on that one, Mike, is that the contracts that we're referring to in North America have long-term contracts, 5, 7-plus years type of windows. So a number of the ones that we're addressing right now were set, call it 2015, 2018, something like that, which are some of the most challenging environments that we saw in the North America marketplace with what was going on with mega beer at that time as well as the hard seltzer. 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. So we're in a much better place as we set those contracts.

Mike Roxland, Analyst

Got it. And so it doesn't allow, John, for anything retroactive?

John Haudrich, CFO

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

Mike Roxland, Analyst

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

Andres Lopez, CEO

Yes. So with regard 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.

John Haudrich, CFO

Regarding the energy contracts, I’d like to provide some background. For many years, we have employed a sophisticated approach to energy procurement. Consequently, we set up long-term energy contracts that are considered best-in-class years ago, before the recent surge in costs. This long-term strategy extends well beyond the current year, giving us a lasting competitive advantage. We recognize the necessity of this move, not only due to the direct inflation we’re experiencing but also because of SG&A inflation, higher interest rates, and CapEx inflation. Currently, we don’t see a need to enter the marketplace. As mentioned earlier, while natural gas prices in Europe have decreased from their peak, averaging around €120 per megawatt hour last year, they remain high at approximately €60 per megawatt hour, compared to pre-pandemic levels of around €20. Thus, prices are still elevated, and although there may be a slight decrease due to warmer winter conditions, we believe there are ongoing structural challenges in Europe's energy market. Therefore, we do not feel any urgency to enter the market.

Operator, Operator

Our next question today comes from Kyle White from Deutsche Bank.

Kyle White, Analyst

Congratulations on a strong quarter and year. First, I understand you mentioned plans to introduce guidance for the full year as you gain more clarity in the market. What specific factors are you waiting on for that clarity? Is it related to consumer demand or inflation? Any additional details you can share about that decision would be helpful.

John Haudrich, CFO

Yes. I think it has to do with all the macros. I think the first variable that we're looking at more than anything is what is the likelihood of recession in particular in the back half of the year, and the implications. We don't really see any trip wires between now and mid-year in our business. Now we just don't have the visibility into the back half of the year. We've intentionally tapped down our expectations and what we're showing here in the back half of the year because of that uncertainty. Obviously, what happens on interest rates has a big effect on how people view the economy and potential harder soft landing and things like that. So obviously, that's a big determinant of whether we slip into recessionary pressures or not. So we're clearly watching that and of course, the volume activity and sentiment from our customers.

Kyle White, Analyst

Appreciate it. And then on volumes, looking at the Americas, do you have a sense if the decline this quarter was the result of any destocking? Or was it just consumer weakness, given inflation? Just what's your best sense of the driver here? And I would appreciate if you're also giving any kind of target range for volumes for 2023 by the segments or by the region?

Andres Lopez, CEO

Yes. So the demand fundamentals in the Americas are very good. In fact, when it comes to Latin America, we remain with very large backlogs. In those markets, that's why we're building capacity, and we are importing glass as well as other players are importing glass to be able to support those markets. So the Americas North, too, or North America is quite stable. The performance of the mega beer has been stabilizing. The decline has been slowing. The premium beer is growing well and premium products are in a very good place. The issue is that we have very tough comps with Q1 2022. That was the time when we were coming back from the pandemic. Inventories were low, which limited our capabilities to ship anymore, and incremental demand as we did before. So the situation is tight. We have a higher level of asset activity at this point in some of these markets, which is also limiting our ability to ship. All those things come together. We're forecasting. 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.

John Haudrich, CFO

And kind of on the other aspects of your question there. If you look at what happened in the 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. Back to Andres' comments, inventories are at record low levels, and given that activity, it was very difficult to meet the demand. As we look to 2023, overall, we think probably there's 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 the Americas, primarily in Colombia and Canada. That will come online and allow us to have a little bit more growth in the Americas.

Operator, Operator

Our next question today comes from Arun Viswanathan from RBC Capital Markets.

Arun Viswanathan, Analyst

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 number expectations ahead of time in '23 here. Would you characterize the '23 guidance, which is about 15% above where many of the Street expectations are, and you noted that you beat 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, since you're growing now in the 2% to 4% range, even though '23 is going to be below that for macro concerns, would you apply kind of a new margin range on some of this heightened growth? In the out years, would you reach levels in '25? Is that how we can think about it?

John Haudrich, CFO

Yes. What I would say is, and you included in our prepared comments, we had indicated we expect continued earnings improvement in, not only '23 but also in '24. There's a lot of moving parts. We're managing a lot of levers in the business. Of course, we are raising prices, as we've discussed before, but we are profitably growing our business. Most of that capacity expansion will come online in 2024 and 2025. To your point, we're targeting nice categories. Those should be able to inch the margins up in that particular regard. We've got more ongoing margin expansion initiatives with, in particular, we were profiling North America. There's a couple of years' worth of opportunity there that we're going to be focusing on. We're also focusing on the capital structure, as you know and trying to improve that position that will benefit the organization. A little bit longer term while we start in 2024, we've got MAGMA coming online, which starts to change the capital intensity and margin position of the company in a more favorable way. 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 macro.

Arun Viswanathan, Analyst

And then just as a quick follow-up on free cash flow then. How do you see that evolving, say, from the $236 million in '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'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 '23 maybe?

John Haudrich, CFO

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

Operator, Operator

Our next question today comes from the line of Gabe Hajde from Wells Fargo.

Gabe Hajde, Analyst

Congrats on the year and the quarter. I just had, I guess, two quick questions. One, regional specific to Brazil. Just trying to compare and contrast what we saw in the last couple of months of the year on beer production down in Brazil relative to some, call it, political instability down there and then sort of what you're seeing with your customers as they're managing the different pack mix down there. Maybe in tougher economic times, folks go back to reusable. Any insight into where you think the fleet might be on the resalable 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.

Andres Lopez, CEO

Yes. So we have data for Brazil through November year-to-date 2022 for beer. 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 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 neighboring 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 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 an 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, and they're doing it for those two reasons, driving a sizable incremental demand in that market too. All in all, the outperformance 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.

Gabe Hajde, Analyst

All right. Regarding Europe, I understand there are challenges with visibility. However, could there be potential effects from the reopening in China? We discussed on-prem and off-prem consumption during the pandemic. If there’s another active year of travel for individuals in China who have been restricted for some time, along with increased sales of spirits through duty-free, are your customers expressing a desire to prepare for that, or is that just my imagination?

Andres Lopez, CEO

The on-premise channel is recovering, particularly in the Horeca sector, which includes hotels, restaurants, and catering. This is generating strong demand. Over the past three years, we have learned that glass packaging shows great resilience whether in on-premise or shifting between on-premise and off-premise consumption. No matter the direction, glass is expected to perform well. With the anticipated reopening in China, we need to assess its impact, as there are expectations for increased activity. Additionally, we need to consider energy prices, which will also affect costs, alongside water issues and storage levels that are influencing prices in Europe. Overall, demand in Europe remains robust for both on-premise and off-premise. Furthermore, we expect at-home consumption to continue; it has actually increased compared to pre-pandemic levels, and we have performed well in that channel.

John Haudrich, CFO

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

Operator, Operator

Our next question is from Michelle Filipe from Jefferies.

Unidentified Analyst, Analyst

I have just 1 question. It's similar to what has been asked before but is now focused on your European business. Can you refresh us on your sales price increases through 2022, both in terms of rough quantum and timeline? And also, if you can share insights on price negotiations entering into 2023 and maybe expectation for later in the year?

John Haudrich, CFO

Yes. 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 obviously 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. 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.

Andres Lopez, CEO

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

John Haudrich, CFO

To your second question about the pricing process, 17% of our business in Europe is either open market or annual agreements, which typically get reset at this time of year. We are mostly through that process, though it's not completely finished. We are continuing with that effort, which is quite advanced.

Gabe Hajde, Analyst

I have a quick follow-up. I believe I know the answer, but I wanted to address the recent news regarding another case related to the litigation associated with asbestos. I want to clarify that you all have a bilateral agreement among all parties, and that pertains to funding the trust, which cannot be reopened.

John Haudrich, CFO

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

Operator, Operator

Our last question today comes from Mike Leithead from Barclays.

Mike Leithead, Analyst

A nice quarter. 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, so we should see it step back down into '24? Can you just kind of give us a rough sense of trajectory there?

John Haudrich, CFO

Yes. So there are two aspects that are driving obviously the CapEx. It's the strategic CapEx investment and also the maintenance level. We have 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. 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. On the expansion side, 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 the tail end of that $150 million based upon our best estimate of timelines now. 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.

Mike Leithead, Analyst

Great. As we consider your capital allocation priorities and the potential return of value to shareholders, when can we expect more discussion on this? If you achieve everything you outlined today, you'll be under 3x by the end of this year. When do you think you would want to elaborate on this further?

John Haudrich, CFO

Yes. I would say that the second bullet point there that is we're trying to work to this glide path to 2.5x leverage. I think the emphasis on return of value to shareholders will probably pick up as we get comfortable about our ability to hit that number. Obviously, the economic situation right now, the uncertainty, everything like that, we're trying to see where things will play out in particular the back half of the year and flow through from that. Once we get comfortable about our ability to knock that out in another year or two, or a couple of years or something like that, I think then we'll be able to profile more the return to shareholders.

Operator, Operator

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

Christopher Manuel, Vice President of Investor Relations

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

Operator, Operator

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