Ladies and gentlemen, thank you for standing by, and welcome to the O-I Glass third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Chris Manuel, Vice President of Investor Relations. Sir, please go ahead. Thank you, Lawrence, and welcome everyone to the O-I Glass third quarter conference 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 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 Lopez, who will start on Slide 3. Good morning, everyone. I appreciate your interest in O-I Glass. We are pleased to report third-quarter adjusted earnings of $0.58 per share. Despite a number of macro challenges, O-I is once again delivering on its commitments as earnings exceeded our guidance range. Demand for glass containers is strong, yet our shipments were down about 1% in the quarter due to choppy demand patterns, stemming from low inventory levels and ongoing global supply chain issues. On the other hand, production levels rebounded nicely from the prior year, which was impacted by the final stages of mandatory curtailments at the onset of the pandemic. Also, higher selling prices and the benefits of our revenue optimization initiative fully offset elevated cost inflation. Overall, better-than-expected results primarily reflected the strong operating performance and cost management enabled by our margin expansion initiatives. As we will discuss shortly, we're making great progress on our 2021 priorities, including today's announcement of intent to sell our Le Parfait brand and business at an attractive valuation as part of our portfolio optimization programs. We are also accelerating O-I's transformation as we shared at our Investor Day last month. The combination of favorable market conditions for glass containers, O-I's ongoing transformation, and the introduction of MAGMA is building the path to yes. Yes to an agile and resilient company, yes to a new paradigm for glass, and yes to profitable growth. We are confident this plan will enhance value for all our stakeholders and ensure sustainable prosperity for O-I. If you haven't already, we encourage you to view our Investor Day presentation, which can be found on our website. Reflecting good momentum, we are increasing our full-year earnings outlook. We now anticipate 2021 adjusted earnings will range between $1.77 and $1.82 per share, and we expect at least $260 million of free cash flow. We expect fourth quarter adjusted earnings will approximate $0.30-$0.35 per share amid elevated cost inflation, pending price recovery starting in early 2022. Let's turn to Slide 4. As we continue to deliver on our commitments, we are also making very good progress advancing O-I's strategy. On this page, we list our 2021 priorities as well as some highlights on our progress. I'll touch base on each of our three platforms. First, we aim to expand margins. We have targeted $50 million of initiative benefits as well as continued performance improvement in North America. As you can see, we have already achieved our full-year initiative target and now expect benefits will total around $60 million in 2021. Next, we seek to revolutionize glass. Our new MAGMA Generation 1 line has been commercialized in Germany, and our Generation 2 line that is in Streator, Illinois, is being piloted in the second half of 2021. Our glass advocacy and ESG efforts are also gaining steam. Third, we will continue to optimize our structure. This includes a number of efforts ranging from portfolio adjustments, improving the balance sheet, simplifying the organization, and addressing legacy liabilities. Regarding our divestiture program, we have entered into agreements for over $1 billion of asset sales to date, including the recently announced intent to sell our Le Parfait brand and business in Europe. As laid out during our Investor Day, we are investing up to $680 million over the next three years that include up to 11 MAGMA lines to enable profitable growth. Expansion plans are focused on serving our key markets across Latin America, premium spirits in the U.S. and the U.K., and premium beer in Canada. As John will expand upon, year-to-date free cash flow is quite favorable compared to past trends, and we continue to advance other important efforts, including the path out of Chapter 11 process. Overall, we're very pleased with our progress. Moving to Slide 5. We have laid out the key elements of our strategy shared during Investor Day. As I've noted earlier, the combination of favorable market conditions for glass containers, O-I's ongoing transformation, and the introduction of MAGMA are building the path to yes. Yes to profitable growth. Glass is poised to benefit from key mega trends such as wellness, sustainability, premiumization, and at-home living. Reflecting these tailwinds, global market growth is anticipated to average 1.6% a year and higher in the principal regions where we operate. Given the strengths and a revitalized commercial approach, we are investing in new capacity to enable key growth opportunities within our strong organic commercial pipeline. Yes to an agile and resilient company. Our transformation is well underway, and I believe recent performance demonstrates the momentum we are building. We expect significant benefits from our ongoing margin expansion initiatives. We are expanding our portfolio optimization program to realign our business portfolio, fund organic growth, and improve our return on invested capital. Also, we intend to resolve legacy asbestos and pension liabilities that have hamstrung the organization for decades. Finally, yes to a new paradigm for glass enabled by MAGMA. This new breakthrough solution provides a host of additional capabilities to build on top of our world-class heritage network. With MAGMA, we can meet the needs of an evolving market and expand our business. These efforts are set to accelerate O-I's transformation through profitable growth, improved financial performance, and value to all the stakeholders. We are excited about the future, and we believe O-I represents a compelling investment opportunity. Now over to John. Thanks, Andres, and good morning, everyone. I plan to cover a few topics today, including recent performance, progress on our capital structure, as well as our current 2021 business outlook. I'll start with a review of our third quarter performance on page 6. O-I reported adjusted earnings of $0.58 per share. As noted during our Investor Day, we expected results would be at the high end or slightly exceed our guidance of $0.47-$0.52. Stronger results reflected good operating momentum as we exited the quarter. Segment operating profit was $243 million, which significantly exceeded prior year. Higher selling prices fully offset elevated cost inflation linked to higher energy and freight costs. While demand remains strong, sales volumes dipped 1% due to choppy demand and ongoing supply chain challenges in several markets we serve. Likewise, favorable cost performance was driven by an 8% improvement in production levels as the prior year was impacted by forced curtailment due to lockdown measures. Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives. The slide includes additional details of non-operating items. Overall, we are pleased with favorable performance trends. Moving to page 7, we have provided more information by segment. In the Americas, segment profit was $133 million, up from $113 million last year. Despite significant cost inflation pressures, favorable net price reflected timely pass-through on costs and the benefits of our revenue optimization initiatives. Sales volume was down 3%. In particular, we have seen some food categories rebound as on-premise reopens, but food volume still remains above pre-pandemic levels. Likewise, we have intentionally mismanaged certain low-value categories given tight inventory conditions and ongoing supply chain challenges. On the other hand, production rebounded 9%, and earnings benefited from good ongoing operating performance as well as our margin expansion initiatives, which offset elevated freight costs. In Europe, segment profit was $110 million compared to $88 million last year. Sales volume was up nearly 2% with strong growth in the wine category, while higher selling prices partially mitigated elevated cost inflation. Significantly lower operating costs reflected an 8% improvement in production levels, very good operating performance, and benefits from our margin expansion initiatives. Keep in mind that we no longer report an Asia Pacific region following the sale of ANZ last July. Let's shift to cash flows in the balance sheet. I'm now on page 8. We are following a specific set of guiding principles for our cash flow and capital structure that are aligned with O-I's strategy to increase shareholder value. We expect significantly higher free cash flow this year, and key working capital measures should be in line or favorable compared to 2020 levels. As illustrated on the chart, our third quarter free cash flow was $213 million. Over the past year, we have improved the consistency of our cash flows, which now reflect the normal seasonality of our business, solid operating results and working capital management. Year-to-date cash flows approximated $181 million, so we are well positioned to achieve our full year guidance of at least $260 million of free cash flow. Second, we preserve our strong liquidity and finished the third quarter with approximately $2.1 billion of committed liquidity, well above the established floor. Third, we are reducing debt. At the end of the third quarter, our net debt was $4.3 billion, the lowest level since 2015, and our BCA leverage ratio was around 3.6 x. Both net debt and our leverage ratio compare favorably to our full year targets. So far this year, we have entered into agreements to sell $128 million of assets as part of our portfolio optimization effort. This includes today's announcement of a binding commitment from a subsidiary of Berlin Packaging to acquire our Le Parfait brand and business for EUR 72 million or about $84 million. EBITDA for this business was EUR 7.5 million in 2020, with a similar performance on a 12-month trailing basis. This represents a compelling valuation in excess of a 9x multiple. We expect the proposed sale will be completed by year-end or early next year. The agreement also includes a long-term supply agreement for O-I to sell glass containers to Berlin to support expansion of this attractive and growing brand. Finally, we intend to de-risk legacy liabilities as we advance the Paddock Chapter 11 process. As previously announced, we have an agreement in principle for a consensual plan of reorganization where O-I will support Paddock's funding of a 524(g) trust. Total consideration is $610 million to be funded at the effective date of the plan. Importantly, the agreement provides a channeling injunction protecting Paddock, O-I, and their affiliates from current and future liability. The Paddock reorganization is proceeding as expected, and timing will be a function of the remaining legal and court actions to conclude this matter. Overall, we continue to improve our cash flow and balance sheet position. Let me finish up with a few comments on our business outlook. I'm now on page 9. We have increased our full year earnings guidance to between $1.77 and $1.82 per share, reflecting favorable third quarter results. We now expect free cash flow will be at least $260 million. We anticipate fourth quarter adjusted earnings will approximate $0.30-$0.35 per share. Fourth quarter results should be down from the prior year as cost inflation peaks. Importantly, we are preparing to implement annual price increases early next year to recapture the impact of inflation. Given ongoing global supply chain challenges, we anticipate sales volume will be about flat with the prior year. Additionally, we expect continued strong operating performance and benefit from our margin expansion initiatives. This outlook is based upon current FX rates, as the dollar has strengthened some in recent weeks. Keep in mind that maintenance and engineering activity will be at their highest levels for the year during the fourth quarter. Also, our outlook reflects current conditions, which could shift given the level of macro uncertainties across the markets we serve. We have also shared some additional themes for 2022, which are consistent with our longer-term outlook shared at our Investor Day. With that, I'll turn it back to Andres. Thanks, John. Let me wrap up with a few comments on Slide 10. Overall, we are pleased with our performance during the third quarter. Importantly, O-I continues to achieve its commitments despite a number of macro challenges and uncertainties. I believe these represent a step change improvement in our ability to consistently perform and deliver. At the same time, we continue to advance our key priorities for 2021. Our multi-year margin expansion initiatives are gaining steam, Magma is advancing, and we continue to improve our structure. We are now a much more agile and resilient organization that is well positioned to accelerate our transformation. Finally, we're building the Path to Yes that we outlined last month at our Investor Day. Thank you for your interest in O-I Glass, and we welcome your questions. Lawrence, we're ready. At this time, if you would like to ask a question, please press star one on your telephone keypad. In the interest of time and to enable everyone on the call to participate, please limit your queries to one question and one follow-up. You may reenter the queue again by pressing star one. Your first question comes from the line of George Staphos from Bank of America. Your line is open. Andres, John, Chris, good morning, everybody. Good morning. Thanks for the details. My questions will be around pricing related to the choppy volume environment as you termed it. You gave us a little bit of color, but could you dig a bit more deeply in terms of what is in fact happening in terms of the supply chain and what it's doing to your volume? What amount of earnings might you have lost because of the choppy patterns? Then as we look to 2022, as you're trying to recover inflation through your pricing, what are the risks that this volume environment prevents you from doing that, particularly as regards Europe? What's the setup on European pricing? Thank you very much. Yes, George. Looking at the supply chain issues, we have external factors, and we have internal factors too. In the external factors, as an example, when customers are facing inputs issues, they don't get their inputs on time, they tend to reduce our orders or delay our orders. When they're facing truck availability issues, the same thing, or labor issues. Internally, we are limited by inventories in several markets. As you know, Andean has been running tight, Brazil too. Mexico is the same. In some cases, depending on the mix in North America is also the case. Important to highlight that the food category has been rising as we have been going through a shift from off-premise to on-premise. Now, it's also important to highlight that for that one, we're seeing the category retaining the gain versus pre-pandemic levels. As we mentioned in the opening remarks, we're also taking action, mix managing some business, giving priority to margin and return. As we go into 2022, we've been very active managing to be able to offset inflation. We're doing it in several fronts. In the procurement side, and we're doing it in the commercial side. From a procurement perspective, we have very solid policies in place and actions to mitigate, and we are executing on them. From a commercial perspective, we already have our plans for price increases going into the following year. We see a constructive environment for prices in 2022, and we expect to fully recover inflation. Now, George, I would add one other thing. You had asked, you know, what's the impact on the third quarter of these supply chain, you know, impacts and things like that. We had expected going into the quarter that volumes would be, you know, flat to up 2%. They were down 1%, so I think you can attribute that difference of, say, 2%-3% differential mostly to the supply chain related issues in one format or another. It's having a marginal impact, but it's noticeable. Yeah. Okay. Going into 2022, just to complement George, the demand fundamentals are very solid. Just referring to Europe, which you asked for, the demand in Champagne and Bordeaux wine is very strong. Demand for Prosecco and Italian wine is also very strong. We're seeing a very good recovery of mineral water as the on-premise channels resume activity. Beer is growing quite well in key markets for us in Western Europe. We're seeing high single digits growth for beer and glass in Italy, France and the U.K., which are very relevant market for us. With those solid fundamentals, we don't see any issue for our price increases. We're very confident we're gonna fully record inflation going into 2022. That's perfect. Thank you very much, guys. I'll turn it over. Your next question comes from the line of Ghansham Panjabi from Baird. Your line is open. Morning, this is actually Matt Krueger sitting in for Ghansham. How are you doing this morning? Hey, Matt. Thank you. Hi, Matt. Great. There's been some recent conversation about magnesium limitations causing supply shortages in aluminum, which is obviously a substrate that you compete with directly on several levels. If these shortages were indeed to come to fruition, how equipped is O-I specifically to handle any potential volume that might flow into glass, that's now being serviced by aluminum cans? And have you guys thought about what the potential benefit could be from that angle? Any details or thoughts there as far as capacity, availability would really help. At this point in time, we are operating at high utilization levels, and that's why, during Investor Day, we laid out a three-year plan for capacity expansions. We believe those expansions are timely. The markets that we are addressing through expansions are quite strong. Through that plan, we expect to address the issue that you highlight. Great. That's helpful. I guess that's it for me. Thanks. Your next question comes from the line of Anthony Pettinari from Citi. Your line is open. Good morning. It's actually Bryan Burgmeier sitting in for Anthony. On the price cost recovery in 2022, how much of what you're assuming is already secured via contracts in place, and it's just a matter of timing getting caught up? How much needs to be recovered in contracts yet to be negotiated? Yeah. I would say, this is John, between 55%-60% of our business across the globe is covered under some form of long-term agreement. Those long-term agreements include price adjustment formulas. That's that part of it is established going into the next year. The other, call it 40%-45% is open market that tends to get renegotiated on an annual basis. The most obvious example of that is about 70% of the business in Europe is renegotiated on an annual basis, generally speaking, in the very early part of the year here. That's the area that's of primary focus on price movement going into the new year, in addition to the PAFs. Got it. Thanks. That's very helpful. On Q4, can you parse out the drivers behind the negative price cost between, you know, energy, labor, freight, and raw materials? Based on your contract structure, which of those buckets is going to be easiest and most difficult to recover next year? I would say that clearly the biggest issues that you're seeing is on the fuel side, followed probably by the freight side in that regard too. Electricity comes through also, but it's a little bit more modulated. If you take a look at in particular the fuel side, which is the biggest driver of that, in North America, that is pretty much passed through on a monthly or quarterly basis. One of the reasons we've been able to keep up pretty well with price cost spread year- to- date is because in particular in the in North America you're able to have those quick timely pass-throughs, and in the Latin America markets, you generally see a pretty good timely pass-through inflation overall. I would say in, you know, all of these inputs that we're seeing are ones that are broad-based across the market, where I think, as you can see, the supply chain is organizing around globally to pass through those cost inflation areas. Again, very much square in the price adjustment formulas that we have for our business, and obviously a focus of the negotiations going forward. Got it. Thanks. I'll turn it over. Your next question comes from the line of Mark Wilde from Bank of Montreal. Your line is open. Thanks. Good morning, John, Andres. Good morning. Chris. Hi. I wonder, just going back to this European energy issue, if you can talk about what type of mechanisms you have in place to mitigate the impact of that on the European operations, because it seems like Europe has really been the epicenter for the energy issue. Also, whether those issues are having any impact on your ability to operate. In other words, if you can't get natural gas. Yeah. The, as I mentioned before, from a procurement standpoint, we have policies in place to mitigate these kind of price increases. I think, we are in a good position as a result of that. We've been taking very effective action, and we don't expect any issue because of that move and our commercial position going forward, for which we have a very clear plan. When it comes to supply, it's very difficult to know what the winter is going to do. Now, if it is a, let's assume that it is a normal winter with nothing out of the not normal pattern. When we consider the markets in which we are present, the suppliers we have and the contracts we have in place, we see very little risk for us to have a supply issue going through the winter. If things go extreme, then we'll see what that is, and we'll adjust accordingly. At this point in time, we don't expect for our operations based on our location, and as I mentioned, suppliers and contracts, to have a high risk or any risk really at this point for supply. Okay, that's helpful. Andres, if I could, just one other one. We're hearing these stories on the, you know, public press about the shortage of glass bottles here in North America. Can you just unpack that for us a little bit and sort of how we've come to this point? Because, you know, it wasn't very long ago, you know, people across the industry were closing glass plants. I'm just curious, you know, how much of this you think is kind of trade and logistics issues, how much of this is, you know, the, some of the duties on imported glass, what all of the issues are, and then what you can do to kind of capitalize on the situation in the near term. Yeah. Demand for glass is strong, and it has been increasing continuously. In some cases, it comes in peaks that are difficult to serve. Our inventories are tight, so that's compounding with that. The imported glass in particular from China has been coming down, so that adds to the problem. Now at this point, we are utilizing our capacity as we can. As we mentioned before, management is important in these circumstances, so we can support margins and returns. Then we're doing everything we can to improve productivity to be able to support this. As you know, we also have established a supply network across the Americas, and in some cases, we support the United States out of Mexico or even the Andean country, depending on seasonality and all that. All of that is in place to take advantage of the situation there as we can. Now, from a customer perspective, we've been very actively working with the customers, collaborating with them well to minimize these issues. We're confident that as we go into 2022, we're gonna be in a better position because our inventories are better established to be able to support them through their peaks. Okay, that's helpful. I'll turn it over. Thanks, Andres. Thank you. Your next question comes from the line of Mike Leithead from Barclays. Your line is open. Great. Thanks. Good morning, guys. Morning. Morning. First, I wanted to follow up on the supply chain side of things, and particularly on the external factors of your customers that, Andres, I think you laid out well, like labor, trucking, or other material shortages. Have your customers given you a sense or do they even have visibility, frankly, on how those factors should trend into the fourth quarter or 2022? I'm just trying to get a sense of whether they're easing or staying the same as we sit here today. These supply chain issues are widespread, and they're across industries. They're impacting everyone. I think what is good in our case is our relationships with customers are in a very good place, and our coordination is very strong. That gave us the ability to respond better. As I mentioned before, because of that work, we expect that we will be able to better manage through these situations going into 2022. Also knowing their actual needs based on the growing demand, we can also plan better for this supply across the Americas network, which we are leveraging to the best we can to support the supply for our customers. Great. That's super helpful. Maybe as a follow-up for John, looking at the 2022 outline, and I appreciate it's still early and there's a ton of moving parts, but I wanted to ask about the free cash flow conversion. I guess, should we still think about that kind of 20%-25% conversion rate from EBITDA before the step-up in growth CapEx? Just how should we think about that, flow through next year? Yeah. I think to tell you the truth, you know, we're introducing a new measure we call adjusted free cash flow. That takes and looks just at the maintenance capital. I think when you take a look at that adjusted free cash flow as a percent of EBITDA, you're actually looking at a number higher than that because it's just the maintenance capital component of it. It's something probably north of 30% on adjusted free cash flow conversion. Great. Thank you. Thank you. Your next question comes from the line of Kyle White from Deutsche Bank. Your line is open. Hey, good morning. Thanks for taking the question. Good morning. I think you mentioned about headwinds in regards to your volumes on food, specifically in the United States as at-home consumption wanes. Do you have a sense of how much incremental food volumes you gained throughout the pandemic that could potentially pose a headwind going forward as at-home consumption wanes? Thank you. Food went up during the pandemic, double digits, right? It was a very strong peak because of that home consumption. What we're seeing right now is that peak obviously came back down because on-premise channel is already open. However, we're keeping important gains versus pre-pandemic levels. At this point, we're seeing between 3% and 4% incremental volume versus those levels. Food is quite healthy because of the focus of the consumers on premium products, and this is happening across all categories. Yeah. The studies we've looked at and reviewed indicate that is a longer-term trend, is that some level of premiumization. Yeah. Continued on at-home, you know, living focus is gonna be there. Most project some form of continuation of that type of demand structure. Mm-hmm. Got it. I'll turn it over. Your next question comes from the line of Salvatore Tiano from Seaport Research. Your line is open. Yes. Thank you very much for taking my questions. Firstly, can you provide, in the Americas, a finer print on your shipments by region, by more specific regions? Why despite that shortfall, you know, what data points give you confidence that demand is actually there, even though shipments were down 2%? Yeah. In the U.S., I'll give you a few data points. When we look at both channels, on-premise and off-premise, through these Nielsen data and CGA statistics, we're seeing interesting performance, for example, in beer, which is up like 2%. Spirits is up like 13%, and premium wine around 10%. What that means is even with the channel rebalancing, the demand for those products is quite good, and those products are very well aligned with glass. Domestic beer decline has improved. We are at half the rate we used to be overall and a smaller base. The impact is going down in our system. International beer brands and premium beer are mostly offsetting that decline. Now, we continue to diversify away from domestic beer, and we've been successful doing that. That's why we're seeing the growth in food as an example. As I mentioned before, the imports from China are lower than before, so that's also increasing local supply. When I look at the Andean countries, Mexico, Brazil, in the three of them, there is very solid performance across all categories. Mexico in particular shows strong local demand for food and NABs, but then exports for beer, tequila, and NABs out of Mexico are just as strong. In the Andean, beer performance is strong due to premium beer and global beer brands, and one-way glass is growing. Also food is strong out of the Andean countries driven by exports. In the case of Brazil, we're seeing good performance of returnable glass. It's back to pre-pandemic levels. It's 40% of the total beer category. We're seeing new products in returnable glass in Brazil, which is a very good indication of how premium products are important for these markets. One-way glass is up at 9% of category as share compared to 6% or 7% before, so it's increasing. Premium products are 22% higher than pre-pandemic levels. Those markets are doing really well. We are limited by capacity, but as we explained before, as part of the three-year plan, we are adding capacity to all those markets to take advantage of these opportunities. Okay. Great. My second question is on your CapEx plan. I thought that your strategic investments would be more geared towards 2023 and 2024, and it seems your strategic CapEx number, almost $300 million, is 40% of strategic CapEx you said you would spend over the three-year period. Did something change? Did you decide to spend more capital upfront because you're seeing more opportunities? No. This is very much in line with, I believe, what we laid out during Investor Day. What we're gonna do is we're gonna see CapEx ramp up here in 2022, kind of peak in 2023, and ebb off in 2024 on the strategic capital side. I think what we're referring to is the sales volumes that we're realizing are going to ramp up ratably. I mean, you know, more back and loaded as the capacity comes online in the 2023 and 2024 window. This is all consistent with the planning. Nothing has changed. The thing I would add too is that, I guess also consistent with what we said in Investor Day, is that the portfolio optimization activities will also be front and loaded here, so that we anticipate having the cash in-house on those transactions before the cash goes out for the CapEx that we spend on the strategic capital side. Great. Thank you very much. Your next question comes from the line of Alton Stump from Loop Capital. Your line is open. Great. Thank you. You know, thanks for taking my questions. You know, just wanted to ask, it was pretty clear from your press release and, you know, also comments this morning that you had to walk away from some lower, you know, margin business here in the U.S., you know, during the third quarter. Is that a short-term impact or, you know, how much longer do you think that can last where you're not going to be able to, you know, satisfy a portion of your customer base? Yeah. The margin management that we did was primarily due to, you know, inventory spots in inventory shortfalls that we had or things are getting a little bit low because of supply chain issues and the strong ramp up after, you know, the markets opened up again. What we're seeing is that in certain categories, in certain parts of the geographies, we just don't have the, you know, the inventories that we would ideally have for that original mix of business. What we're doing is we're managing the mix of our business to be able to take advantage of the inventories that are in the system and be able to capitalize on the strong demand for glass. This is a transitory issue, but it's not something that goes away in one quarter, for example. Okay. Thanks so much, John. I'll hop back in the queue. Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is open. Hello? Lawrence, let's move to the next one. Your next question comes from the line of Adam Josephson from KeyBanc. Your line is open. Good morning, Andres, John, Chris. Thanks for taking my questions. Good morning. Good morning. Just one on earnings and then one on your cash flow outlook. On the earnings, John, just, you know, a month ago, you talked about earnings being at the high end or slightly higher than $0.47-$0.52. Yeah. Turned out to be a fair bit higher than that. I assume it was not because of volume. Inflation's obviously not getting any better. Can you just help me understand what led to the pretty sizable beat relative to what you would seem to indicate a month ago if it wasn't on the volume side? Yeah, exactly. The numbers proved out to be better than we were anticipating. This pointed to September being a good, strong month for the business. In particular, what we saw was very good labor efficiency. You know, the quality performance of the business was very good. A number of projects that we had underway actually wrapped up a little bit earlier and at a lower cost at the end of the day than we originally intended. Very good operating performance across those major levers towards the end of the quarter. Got it. Thanks, John. Just on free cash flow. Trying to do a free cash flow bridge. This year, you're thinking 260 plus, maybe, you know, call it 280-ish. CapEx plus working capital, I would think would be about a $300 million drag year- over- year, such that if earnings are up a bit, you're talking about flattish or basically negligible free cash. Correct me if I'm wrong there. Then in the subsequent two years, CapEx will step down a bit, but it'll still be, call it $640 million. I'm just wondering, can you help me with what you're thinking free cash-- not adjusted free cash flow, but actual free cash flow over the next three years or so? Am I thinking about it the right way, or am I missing something? You know, well, for one thing, you know, we're not gonna, you know, we're not today getting into, you know, specific numbers. Sure. on 2022 and 2023 beyond. I think what we're saying here is that the reported free cash flow will dip some here in the next couple of years. We expect it to remain positive, okay? It'll dip some, because of the strategic capital and then ramp up. To the previous conversations we've had is that we do think that that additional strategic capital that's in there is fully funded by the portfolio optimization actions that we're doing, such as like the sale of the Le Parfait business that we announced today. We think the net effect of those actions is about $50 million-$60 million of additional EBIT run rate as we get the improved, you know, margin management as a result of those businesses, as we ramp up to something where it's more self-sustaining going forward on incremental growth driven by MAGMA over the longer term. Got it. Thank you, John. Sure. Your next question comes from the line of Michael Roxland from Truist Securities. Your line is open. Thanks very much. Good morning, Andres, John, Chris. Good morning. Thanks for taking my questions. Hi. Just quickly on the revenue optimization initiatives you mentioned and how that has impacted pass-throughs. Obviously, the company has done a lot of work around upgrading its sales, marketing, and innovation capabilities. The company's obviously going through and analyzing each account to make sure it receives, you know, the appropriate value for its products. Just wondering, can you talk about what you've done specifically in the quarter and how those revenue optimization initiatives actually benefited the pass-through? Yeah. As you mentioned, this is one of the margin expansion initiatives. It is really about leveraging the capabilities we built over the last few years to improve our top line. What happens in the fourth quarter is really the product of the work that we've done over the quarters, and frankly over time, setting up things to be able to capitalize better on the top-line opportunities. We have quite sophisticated tools in place. At this point, we have processes that are also very well established. There is lots of rigor and discipline around that top line, and that's what helped us with Q4. Yeah. I would just for good- Q3, sorry about that. Just for good clarity, I mean, our margin expansion initiatives has three major projects. Revenue optimization, which we're discussing here. In the quarter, there was probably between $5 million and $10 million of benefits associated with that helped through the spread, and it's consistently been performing very well. We also have on the cost side, our factory performance as well as our cost transformation, which is more in the SG&A side. All of those added incremental benefits too. Of course, we net those against things that are working against us. For example, freight was about a $10 million headwind in the quarter. You know, we had about $10 million of net, you know, margin expansion initiatives out of those three buckets when you net it off against that incremental freight cost. We wanna try to make sure that we're looking at something that's a net benefit to the organization. Got it. Just one quick question on the mix management. Obviously, given you, John, mentioned the inventory tightness and telling that you expect this mix management to ultimately correct. Is it also a matter of fact that maybe given the supply chain, given how tight your inventory is, as you look at all the accounts, your customer accounts, are you walking away from certain businesses that just aren't profitable at this point, given if your customers want your product, maybe they need to pay you for it. At this point, given the inventory tightness, you're saying, "You know what? You're not giving us appropriate value. We don't need your business. We gonna go elsewhere. Maybe this is a permanent shift in your business to a higher quality mix than you had historically. Yes. Yeah, that's the focus. We're giving priority to margin and return. As we navigate through all these various challenges, that is a very important criteria we're using to define what is a priority for us. Yeah. I think you got all of the above going on. There's some places where you're looking at the inventories, right, and saying, "Hey, I don't have that specific inventory, and I'm gonna shift away to this other category because we do have the inventory." Some that are permanent changes in mix. I mean, in America, you know, North America, we've commented over time. We've actually transitioned about 35% of our beer capacity to other categories over the last several years, to spirits, to wines, to food categories, and things like that. That is always ongoing to make sure that we can continue to shift our capacity to better margin business. Thank you. Good luck in the quarter. Thank you. Your next question comes from the line of Gabe Hajde from Wells Fargo. Your line is open. Andres, John, Chris, good morning. Good morning. Morning. I wanted to come at the inflation question, I guess, from a couple different angles. The first is, I'm assuming the answer is yes, but have you guys kinda gone through sort of the total cost of ownership calculations, kinda taking into account a new baseline of where raw materials are today? I'm kinda thinking about obviously aluminum that's almost doubled when we include, you know, aluminum premiums, warehousing, etc. And then, you know, again, I'm kinda asking in the context of these dual control policies that China might be putting into place that could imply kinda structurally higher aluminum costs go forward. You know, and I guess to the extent that it makes glass packaging a more cost competitive alternative, then, you know, is that something you guys have been looking at? I guess corollary to that, you know, MAGMA in theory should improve that even more. You know, what has initial customer response been since you guys kind of announced this aggressive expansion? Yeah. Let me just give you one perspective on that, and John can comment too. One of the advantages of glass is that the supply chain for glass is mostly local. That has two very important impacts. One is cost, the other one is environment. When you look at the dynamics that you described, they're related to longer supply chains that are very large in nature, that support those substrates, that are demanded from multiple places and are creating those pressures. That's not the case of glass. As you know, we melt glass in the same facility in which we convert it to containers. Our supply chain is very integrated with very important implications on cost and very important implications on sustainability too. Yeah. You know, as far as. I guess. I'm sorry. No, go ahead, John. Sorry. John. Sorry. I was just gonna add one point there, Gabe, to your original question, is that, you know, how do we go and price, how do we look at the opportunities in the marketplace? We clearly price based upon market. We're not a cost plus producer, so clearly we look at the competitive landscape across opportunities to make sure that we price accordingly to get value relative to the competing opportunities. Then, you know, the other question you had was, you know, what has been the initial customer reaction on MAGMA? I would say it's been very good. You know, with the intent to expand our business, I think that's been very well received by customers. In many markets we've talked about for some time as we've run against capacity constraints. Everybody is very encouraged that there's you know new opportunities coming around the corner. I think they've responded very well to the capabilities that we're laying out on the table with MAGMA because it just fits so well with the market realities that all of our customers are facing in today's world. One more aspect on MAGMA. MAGMA will help glass production and supply to become even more local because we can co-locate or near locate, and we can also scale down that capacity to be able to follow growth, but at the same time protect the economies of the scale, which is a significant change for the industry. Thank you, guys. I'll hop back in the queue. Okay. I think this will be the last question, Lawrence. Yes, sir. We have a follow-up question from Ghansham Panjabi from Baird. Your line is open. Hi. Thanks a lot for letting me hop back in the queue. This is Matt Krueger, in for Gansham. Understanding that the tight capacity situation can mitigate the opportunity here a little bit. I wanted to touch on what you're seeing in the hard seltzer market. We're starting to see some marketing campaigns and advertisements come out with glass as a packaging substrate in that market. Obviously, there's been a lot made about the slowdown there on the canned side of things. Can you just talk about what your penetration level is in the hard seltzer ready-to-drink market and maybe what you see the opportunity being moving forward across your business? Yeah. The hard seltzers category is only an upside for glass. Our current share is very, very small. However, the attributes of glass, which makes it very good for branding, is a perfect fit for what is going on in that category, which there is a significant proliferation of presentation confusing the consumer. That's one of the things that we're seeing the customer doing, and that's why the new products. The category is slowing down. Obviously, that's lower demand than previously expected by the suppliers that are supplying currently that category for the most part. When it comes to where the capacity of cans go and the capacity of glass go, it's very important to highlight what we brought up during Investor Day. Glass and aluminum cans play in different lanes of product categories. The products that are driving the demand of aluminum cans are products in which we are not present. If anything, our upside for us if we get into them, but there are several other categories that are really driving the demand for glass, and in particular, the move towards premium in all those categories. Great. That's helpful. Thank you. Thank you. All right, thanks. That concludes our earnings call. Please note that our fourth quarter and year-end call is currently scheduled for February 2, 2022. Remember, join Team Glass by making a memorable moment and choosing safe, sustainable glass. Thank you. This concludes today's conference call. You may now disconnect.