Hello, everyone, and welcome to the O-I Glass Third Quarter 2022 Results Conference Call. My name is Sam, and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Chris Manuel, Vice President of Investor Relations to begin. Chris, please go ahead.

Thank you, Sam, and welcome everyone to the O-I Glass third quarter earnings conference call. Today, our discussion will be led by Andres Lopez, our CEO; and by John Haudrich, our CFO. Today, we will discuss key business developments and review our 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 our disclosure and use of non-GAAP financial measures included in those materials. Now I'd like to turn the call over to Andres.

Good morning, everyone. I appreciate your interest in O-I Glass. Last night, O-I announced a strong third quarter adjusted earnings of $0.63 per share, which exceeded prior year results as well as guidance. As illustrated on the left, all key measures improved. Segment operating profit and adjusted EPS increased nearly 10%, margins improved 60 basis points, and financial leverage was down more than a full turn. Earnings benefited from higher selling prices, which more than offset cost inflation. As expected, sales volume was up slightly amid record low inventories and capacity constraints in key markets. As we work to commission much needed new capacity, we did incurred some additional costs which were mostly offset by solid operating performance and benefits from our margin expansion initiatives. In addition to a strong performance, we delivered on a number of key transformation initiatives during the third quarter. First, Paddock achieved a fair and final resolution of its legacy asbestos liabilities, and the trust was founded in July. O-I has reached an inflection point, and for the first time in decades, we are focusing all of our strong cash flow on efforts to increase shareholder value. Second, we also completed our $1.5 billion portfolio optimization program in August, which help reduce debt and prefund our expansion investments. Finally, our leverage ratio is now in line with our 2024 Investor Day target, well ahead of schedule and net debt was the lowest level since the O-I Mexico acquisition. Recognizing our significant progress, both Moody's and S&P upgraded our credit rating during the quarter. We have updated our business outlook reflecting a strong year-to-date performance and good momentum heading into the fourth quarter. As you may recall, we did raise our full year earnings and cash flow outlook during an investor conference in September. We now…

Thanks, Andres, and good morning, everyone. O-I reported third quarter adjusted earnings of $0.63 per share. Results exceeded guidance and increased nearly 10% from the prior year despite headwinds from FX, divestitures and interest on funding the Paddock Trust. Segment operating profit was $266 million, up from $243 million last year as margins increased 60 basis points to around 16%. Favorable net price increased segment operating profit by $48 million as higher selling prices more than offset elevated cost inflation. Shipments increased 0.5%, while the net effect of higher sales volume and a change in mix was a slight benefit. Finally, operating costs were up modestly. The Americas reported $130 million of segment operating profit, which was about flat with the prior year on an adjusted basis. Earnings benefited from favorable net price. The combined impact of 1.8% lower sales volume and favorable mix was about flat. Higher costs reflected elevated asset project activity and unplanned downtime, which were partially offset by our margin expansion initiatives. While performance was solid across the segment, we have been focused on addressing future customer agreements to restore margins in North America. And as previously discussed, we are taking proactive measures to rebalance our network, improve mix and enhance earnings. In Europe, segment operating profit was $136 million, up $44 million from the prior year on an adjusted basis, as margins reached 20%. Higher earnings primarily reflected very favorable net price. Results also benefited slightly from the combination of 3.6% higher sales volume and a change in mix. Finally, operating costs were down about $5 million, mostly reflecting the benefit of a subsidy received in Italy to help mitigate the impact of elevated energy costs net of an insurance recovery in the prior year period that did not repeat this year. The chart provides…

Thanks, John. In summary, we are pleased with our third quarter results and continued progress executing our transformation. The company is performing well, and our business outlook continues to improve. In fact, the company has either met or exceeded the strict expectations for 11 consecutive quarters. Importantly, O-I is a much more capable, agile and resilient company, and we expect continued progress in 2023 and beyond. Finally, I believe O-I represents an attractive investment opportunity as we reduce our risk profile, execute our transformation program, enable profitable growth, advanced breakthrough innovations like MAGMA and ULTRA and further leverage our sustainability position to win in the new green economy. We are confident this strategy will create value for all the stakeholders. Thank you. And we are ready to address your questions.

Thank you. [Operator Instructions] Our first question comes from Ghansham Panjabi from Baird. Ghansham, your line is open. Please go ahead.

Thank you, operator. Good morning, everybody. I guess first off on the backlogs in Europe and in Latin America that you called out is obviously being strong as you head into 2023. Can you just give us a bit more color in that in terms of sizing of that backlog and the visibility you have associated with it?

Yes. So the -- when we look at the markets in Europe, Italy and France specifically are importing a significant amount of wear from various places within Europe and other places. So that provides a buffer, if you will, as we move forward in case of some changes in demand. Now that situation, Ghansham, is also present across other markets. So when we look at the North America market it is importing 1.4 million, 1.6 million tons every year. And when we look at Brazil or the Andean countries, it's the same, that -- those two markets are importing. So that situation of what you call the backlog is present in multiple markets that are very important for us. And when we add up all those imports, that's more than 2.5 million tons. And then we mentioned in a previous call that there is a dislocation of supply happening as a result of the conflict between Russia and Ukraine. And that's more than 1 million tons, more than 5% of the capacity in Europe and that's also adding to that. So it looks to us that we have a pretty good buffer coming out of all those factors as we go forward into 2023. And as a result, we're pretty confident that our pricing position will be very constructive as we go into the following year.

Yes, I would just add, Andres mentioned we got about at least a 5% oversold position in Europe. We're probably looking at double digit oversold positions across Latin America also.

Okay. Perfect. Thank you for that. And then in terms of the margin expansion initiatives, the $50-plus million that you're anticipating for 2023, are the drivers any different than what you've seen in the last couple of years? You've been pretty consistent with that sort of level. I'm just curious if there's anything different for next year.

They're the same. Some of the initiatives are going to or addressing or improving the top line. Some of them are pursuing year-on-year productivity. At this point, we are more mature in terms of our capability to drive those. So we are more and more confident we can achieve what we've been achieving in the previous years. So it's a pretty systematic approach across the organization that is delivering those results.

Perfect. Thanks so much.

Thank you.

Our next question comes from George Staphos of Bank of America. George, your line is now open. Please proceed.

Thanks. Hi, everyone. Good morning. Thanks for the details. You mentioned this, I think, a couple of quarters ago, again, we really appreciate the clarity on the material guys and the guidance, the early guidance on slide 10. On operations, that’s where I wanted to spend my time first. Can you talk about the unplanned downtime that you saw in the Americas? What caused that? What the effect of that was? And then relatedly, we're seeing the capital spending bump up into 2023. What are the key categories and buckets in terms of what's driving that?

Okay. So the -- there are several drivers of unplanned downtime. One of them is unexpected issues that need repair. So we address them right away. But the other part comes from the challenges offered by the supply chain. As you know, it's difficult to get materials and equipment. They get delayed. So every time we get enough equipment to be able to deal with a given repair, we are very proactive moving forward and repairing even if that repair wasn't in the forecast. So that's what make it unplanned. But it's the right thing to -- as we go forward, we are counting on an improvement, and gradual improvement of that supply chain situation. And as that happen, then we expect a higher number of repairs in 2023 as things normalize. And that, obviously, drives the CapEx, but also the inflation that we saw in capital equipment along the year that's considered to continue into the following year, driving up the CapEx number.

Yes. Let me just quantify a couple of those elements. On the costs in the Americas, we did have probably about $15 million of higher operating costs associated with the combination of planned maintenance activity, primarily in Brazil, we had a big furnace rebuild, plus some of the other new capacity additions that we're working on, as well as that unplanned downtime components that Andres was discussing there. That $50 million was partially offset by about $5 million of margin expansion initiatives and there you see the change in the operating costs in the Americas. If you take a look at the capital spending for next year, we're looking at about $725 million to $750 million that is -- we provide in there that $275 million to $300 million of that is associated with our expansion initiatives. A lot of the upfront on that is going to be working on Canada and Colombia, which are the two big projects. But we also will be working on some of the bigger projects going into 2024, which are included in a chart that we had in our previous conference. So we're going to be just continuing rolling out. We've got 11 different projects over the next couple of years. So that's going to span those activities. The remaining component is about $450 million of maintenance spending. We did about $375 million this year and maybe that's kind of a historic average. But I think we're looking at a little bit of an increase right now because of two things. One is we are catching up on some of the maintenance activities that Andres referred to because of the delays in supply chain. But we also are seeing some cost inflation in the CapEx side.

Okay. Thanks. I just wanted to sort of look under the hood on that point. And so, are you -- and that's what I was getting at. Or is there anything troubling in the unplanned outages that you're seeing, i.e., you've been stressing the furnaces, you've been pulling at a pretty great rate, and you're starting to see unplanned outages crop up more frequently? Or is it -- there's nothing really that we should be worried about there from your vantage point? And then related, just can you give us a bit more color on how the MAGMA mile markers are going? You said everything is on track. But what's the next thing we should be sort of asking about holding you to in '23? Thank you.

Those issues that I mentioned at the first category driving the unplanned repair happen every year. So it's not unusual. When they appear, then we just addressed them and keep going. But we're very proactive at this point. Every time we have an opportunity to get an asset in a better condition we will do so. And -- but there is nothing really concerning other than the regular activities we got to continue keeping us in very good place.

Maybe one thing to add on that is, since the big projects have been harder to do incrementally because of the supply chains, we've been doing more small projects. And that's to give the -- to keep the assets in good conditions. But we do them more episodically and that shows up in unplanned downtime because you do those activities. They buy you a couple of years, but all of those go through expense rather than capital. So I think it's somewhat a little bit of a reallocation of where you're seeing some of the money coming through.

And with regards to MAGMA, we're doing well. We continue to make very good progress, developing the technology for Generation 2 and 3. And at this point, we have three pilot centers in which we are piloting components of that technology. One is the innovation center, the other one is Streetor, Illinois, and the other one is Holzminden in Germany. And we're making very good progress to -- and in line with meeting the time lines for our first line in Kentucky.

All right, guys. I’ll turn it over. Thank you.

Thank you.

And our next question is from Mike Roxland of Truist Securities. Mike, your line is now open. Please go ahead.

Thanks, Andres, John, Chris. Congrats on another strong quarter. Just following up on George's question, just -- could you just outside of some of the unplanned downtime, are there other issues John, that you mentioned about closing the margin weakness in the Americas? And maybe can you expand upon some of the initiatives that you're pursuing to restore margins in that region? And then just quickly though, in Europe, how sustainable are those 20% margins?

Yes. So in the Americas, keep in mind, if you take a look at our book of business, about -- we have about 55% of our business as long-term contracts. It's more like 30% in Europe, but it's more like 75% in the Americas. And as you know, a lot of those contracts have price -- a lot of them have price adjustment formulas. And while we can pass through energy costs quickly in North America, most of the other basket of goods get picked up through the annual price adjustment formula. In this case, it should go in more or less in January of this next year. So the Americas does have a little bit more of a lag effect than what you see in Europe and its ability to recover all the significant cost inflation this year. So that's going to be a natural element, Mike, that will help out the margins and the overall performance in the Americas next year, for example. In Europe, as far as the strong margins, and I think we've mentioned it before, we take a very long-term position structural position on our energy contracts and we believe we have the best-in-class procurement positions on a long-term basis on energy. So as it pertains to margins in the future in Europe, especially in a world where we have this elevated environment of energy risk and costs. We're well positioned on a long-term basis. But for competitive purposes, we aren't extending beyond that.

Yes. And I think it's important to highlight that the work on the margins in Europe has been going on for several years. So what we see today is the product proposal work. The margin expansion initiatives are contributing, the mix improvement is contributing and also what we've done over the last year on their current inflation, the very high inflation that we're facing is, we have very strong capabilities in procurement, we have very strong capabilities in commercial, and we are planning well ahead of time. And that gave us the confidence last year that we were going to fully recover inflation, protect the margins and even have a positive net price. It is the same position what we have today. We are very confident, and we are going to perform well in 2023 for the same reasons.

Got you. That's very clear. Just one quick follow-up on MAGMA capacity. Of the new capacity you're bringing online in Kentucky, can you talk about how much of that capacity is already committed to customers and how much maybe you're leaving for spot volume? And the reason I'm asking is that, one of your peers is planning to increase capacity by about 400,000 tons by 2024. So I'm just wondering if you -- with Kentucky coming online and starting production in mid-2024, do you have 80% committed, 90% committed? And should we be concerned about any increased competition from one of your larger peers?

Yes. So there is no concern about placing that capacity in the market. There are two big blocks driving that demand. One is the, let's say, the fragmented market that is all supplied primarily through imports. That's 1.6 million tons. Once we have capacity in the country to be able to supply that with MAGMA, which is a very good fit for that, it will be a natural fit. So there is no issue with that. We have a growth plan in that market. It's a multiyear plan, and MAGMA is a part of it. Now we will supply spirits customers out of that too, with which we have long-term agreements. So that will be secured. And that capacity is going to be right where the demand is. So it's very -- it's going to be very close to demand and still going to be in a unique position versus other capacities that might be available in the country.

Got it. Thank you. Good luck at the balance of the year.

Thanks, Mike.

Thank you.

And our next question comes from Anthony Pettinari from Citi. Anthony, your line is now open. Please go ahead.

Hi, god morning. I was wondering is it possible to say what percentage of net capacity you're bringing online in 2023 as a percentage of your current footprint? And then just from a high level, all of the beverage can makers are canceling projects and shutting down plants in some cases. Are you seeing any of this weakness or do you think glass is just rapidly gaining back share? Just wondering if you could talk about what you're kind of seeing on a high level from -- in the US, Brazil and Europe?

Yes, Anthony, I'll touch base on the first one. Over the next three years, part of our expansion program, we're adding capacity to support about 6% growth, okay, over -- and that's over the three year period of time. We believe, on a run rate basis, we're installing capacity that equals about 1.5% additional new capacity in 2023, but it might be between 1% and 1.5% realized, because we're implementing it and rolling it in. Now, we go into 2024, we're going to see more coming online. It's probably our peak new capacity onboarding in that period of time with it starting to trail off a little bit in the subsequent period there. So Anders, do you want to touch base on the second part?

Yes. So as we shared before during the Investor Day and in some of the previous calls, aluminum cans and glass play in different lanes. So our growth is driven by premium products in spirits, in wine, in food and NAB and beer. And their growth is driven by carbonated soft drinks, energy drinks, sport drinks, bottled water and hard seltzers. So what's happening to in the aluminum industry at this point is related to their position versus those segments, which are different from the segments that are driving our growth. So for our purposes, those two things are separate things. That's why we are growing the way we're growing, and you see our performance the way it is.

Okay. That’s helpful. I will turn it over.

Thank you.

And our next question comes from Mark Wilde of Bank of Montreal. Mark, your line is now open. Please go ahead.

Thanks. Good morning. Andres. Good morning, John.

Good morning.

Any way to help us size the cumulative impact on container prices over in Europe once this third price increase is in? Just order of magnitude, what would it do to the cost of a wine bottle if we stack all of these increases on top of each other?

You know, what I can indicate for you, we are not providing forward guidance per se on the current price increase that we have in the marketplace. But if you look at our European numbers in the third quarter, they were up about 18% on a year-over-year basis. That's the cumulative effect of the price increases that we have year-to-date. Obviously, the third price increase would be additive to that to give you a sense of the direction that we have going on here.

Okay. That's helpful. And then, Andres, just for my follow-on, I'm kind of curious, you mentioned the ULTRA light-weighting initiative. Is there any way to quantify the savings from both a cost standpoint, but also just what it does to the weight of the container?

Yes. So I can share with you what the target is. So it's reduction of weight up to 30%. So it's very significant. And when we are already seeing some of those battles that are coming out of the innovation center it is really impressive how light those are. And they're going to have not only a cost impact, but a sustainability impact, which is very significant. So the Co2 emissions by container is going to go down. We're going to start the first trial production -- commercial trial of that at the end of this quarter. And then we'll work along with the customer over the first quarter next year to get ready for commercialization in the second of the very first container under those conditions. I cannot share cost reduction targets at this point. But obviously, 30% reduction in weight is quite intact.

One thing I would add to it is that, another real benefit, Mark, is that as you lightweight and you have furnace pull, right? You can actually get creep capacity out of this so that you'll have more capacity out of any individual furnace because you're using less product in each bottle. So that's another way for us to be able to support the really good growth on a pretty low capital intensity basis going forward.

Okay. That’s helpful. Thanks, John. Thanks, Andres.

Thank you.

And our next question comes from Kyle White of Deutsche Bank.

Hi, good morning. Thanks for taking the question. On volumes, was there any noticeable difference in how demand or volumes trended throughout the quarter? We've seen some other packaging peers talk about a slowdown later in the quarter, but it doesn't seem like you're seeing anything of that nature.

So the cadence was positive along the quarter. July was softer, if you will, August and September were stronger. And as we look at October, we're seeing that in line with our expectations. Obviously, as you know, the current quarter when compared to prior year, that was an out-of-patent year will be lower, but it's higher than pre-pandemic levels. So it's about 2% higher than the pre-pandemic level. So our volumes are just fine.

Got it. And then on Europe, how much of your energy needs there is already secured for next year? And where are you at regarding the strategy of switching 50% of your capacity to oil versus nat gas? And then longer term, do you think there could be any potential opportunity for share gains from maybe some smaller players that aren’t as protected from the higher energy costs going forward?

So the -- we are doing very well, preparing the capacity to take various fuels. We are planning to be ready with 50% of the capacity by year-end. So that's progressing well. Now the situation of natural gas in Europe has improved quite a bit since our last call. So the consumption reduction measures have been quite effective. That's one thing. The weather has been milder at this point in time. So that's helping or contributing to balance the storage. Now the liquid natural gas handling capacity is up, so that's helping the supply. And as a result, the storage levels are pretty high. So they're all in excess of 90% and even in high 90s across countries. So if the situation at this point looks a lot better than before. Nevertheless, we are prepared with capacity rate [indiscernible].

And on the energy contract question, I would say, as I mentioned earlier, we take a long-term approach on our energy contracts that were well established for 2023 before the run-up in the environment that we have right now. So we are in a pretty good position there. For competitive purposes, we don't quantify that. But I would say we continue to see the -- despite that very good position, there's a lot of inflation in the environment through indirect costs and things like that. So we do need good net price realization to cover that, not to mention other inflationary situations like SG&A, interest, CapEx as I mentioned before. So we really manage our net price for the company on a cash basis. to make sure that we maintain the strong cash flow needed to continue to support the investments in the company.

Yes. There is something that we don't mention very often, which is, how is our position with customers evolving? When we look at our position from a quality service perspective and overall performance with our customers measure through Net Promoter Score, it has been improving significantly over time. And we are, in some places, in some markets at very high levels at this point. So there has been a very solid evolution in our relationship and service with customers, which put us in a good position going forward.

Sounds good. I’ll turn it over.

Thank you.

And our next question comes from Gabe Hajde from Wells Fargo. Gabe, your line is now open. Please go ahead.

Andres, John, Chris, good morning.

Good morning.

I was hoping maybe you could help us understand, I guess, or maybe compare contrast sort of what might be a recession, because I feel like some of the pattern is consistent with 2008, 2009, and some of it is different. Obviously, the price in which -- or the inflation that's hitting the consumer is occurring for different reasons versus a strategy that was employed by O-I 14 years ago or so. So maybe why you think the negative impact might be limited to 1% to 3%? And again, I appreciate, I think the market was down around that magnitude during the global financial crisis. But again, just if we're kind of sitting here with maybe a little bit of a critical eye, the consumer getting hit with a lot of inflation. Why might not -- why we may not see the similar drawdown in volumes that we did in '08, '09 versus what you guys are proposing here today?

Okay. So just to comment on 2008, 2009, and the difference with this time. There are multiple reasons why this is different. Let me start with the pricing, which is what you suggest. At this point in time we're priced within market. At that point in time, we weren't. And those two positions are very different. Now there are multiple reasons why to expect better performance. The short answer to that is, glass demand fundamentals are very solid in all markets, and they're very different when compared to the time that you referred to in which glass was considered to be in secular decline. That's not the case anymore. So that's been solved. Now the demand drivers today in several markets are not that GDP-sensitive, and let me give you one example, localization of global brands, which is happening across markets. That's not sensitive to GDP. And like that, there are other examples. The capacity location in Europe of more than 1 million tons creates a condition in which securing supply is important for everyone. Now I mentioned before that in several key O-I markets, those markets are importing a significant amount of wear that adds up to more than 2.5 million tons. And it's in -- all in key markets for O-I, Italy, France, North America, Andean and Brazil. Now the other thing is class today and as a consequence of what we lived through in the last three years has demonstrated that it's very resilient to channel shift on-premise and off-premise. And what is expected if we go into a recession is that, a home consumption is going to go up. And if that happens, glass performs very well in those conditions. And the last point is the new business opportunities pipeline that we have today adds up to 1.7 million tons. That was impressive at that point in time. So none of these conditions and many others, but obviously, we will take a long time to describe all that are very different than what we lived through back in '09 -- '08 and '09.

And I would just add two things to that. One is, over the last decade we've seen a more increase -- improvement in our mix to more premium categories. And in fact, those are considered affordable luxuries. So even if things are a little tough out there, you still go buy that bottle of bourbon or whatever, and that's improving out over time. In fact, over in '08, '09, we saw those same categories grow when other more mainstream commodities actually declined. In fact -- and we mentioned before in the prepared remarks, mainstream beer is only 3% of our global volume in [indiscernible]. That was the category that took the biggest hit during the global recession in '08 and '09. So we're a bit less exposed in that regard.

No, I appreciate the thorough answer. We tend to agree with you. I just want to tee some of that. All right. And then can you quantify for us, given that you take a mile type thing on the '23 view, just where corporate expense you expect that to land this year and sort of if there's something, I guess, maybe nonrecurring in nature there, why it would be down next year? And then the, I guess, rebuild activity if you can quantify that for us just to help us kind of build the bridge.

Yes. So corporate expenses this year are elevated. We expect them to be around $220 million this year. That is a $50 million increase year-over-year. There is two main drivers for that. One is, it's been a good year. So management incentives are up about $30 million in that regard. The other $20 million is just cost inflation kicking out -- higher level cost inflation kicking out than we've seen in the past, in particular, in insurance costs. And one thing to keep in mind is, we do have about $60 million of elevated R&D costs embedded in that number for higher MAGMA, ULTRA cost, those will be with us for a few years, but once Gen3 and ULTRA are commercialized, then those start to rebase some. So just understand the pattern of corporate expense. And as far as next year, rebasing management of census alone is $25 million to $30 million, let's say, of a reduction. And we'll give more clarity in the year-end call about the total position on corporate expenses. As far as rebuild activity, as we mentioned before, we are probably getting back into a more normalized level. The typical environment is about 12 to 14 furnaces a year. And so that's what we would be returning to.

Thank you. Good luck.

And our next question comes from Arun Viswanathan from RBC Capital Markets. Arun, your line is now open.

Great. Thanks for taking my question. I guess I just wanted to ask first on the earnings bridge. So you called out about $0.25 of headwinds. And then you've also discussed price mix, volume and -- price and then volume mix and so on as potential tailwinds. How would we kind of parse that out? I guess, is it mostly volume mix as the variable factor? Or what would you say is kind of the biggest uncertainty if you look forward into '23?

Well, I was saying, as we look to '23, and you're looking on, I guess, page 10 in the directional areas we have. The biggest lever that we have will continue to be net price in this environment. Volume and mix will be, as we say, kind of up to maybe flattish. So it's going to be more muted in that regard. So the two levers, it’s the net price is the biggest now, we'd look at things that are more variable out there. Obviously, what is the pace of cost inflation, that is always one that's a little bit harder to pin down. We are expecting in this -- under the set of assumptions remaining elevated cost inflation, maybe not 2022 levels, but still quite a significant amount of cost inflation, in particular as the higher costs that we've all been seeing flushed their way through the value chain, still higher raw material costs and labor costs, and in particular being up. So those are the probably -- that's probably the biggest unknown. And of course, when it comes to volume, we gave a sensitivity there, maybe 1% to 3% of span there of any recessionary pressures. Of course, we don't see that right now, but we just wanted to give you a sense of that sensitivity as we see things right now.

And just to clarify, so do you believe that 1% to 3% or say or some kind of in the low single-digit range is the more long-term growth rate that we should expect in the glass containers? Is there anything that would maybe push that up as far as substrate conversion or anything else? And then the other question I had was, when do you expect that $700 million plus of CapEx to kind of come down? And if so, what level do you think that is really sustainable over the long term? Thanks.

Yes. Yes. As far as long-term growth, don't equate the 1% to 3%, that's our sensitivity to any type of recessionary pressures. But if you go to page four of the materials, we give the projected long-term growth, which is anywhere from, say, 2% to 4% of sales volume growth in applicable markets that we operate in, okay? So that we believe is the long-term growth rates. And in fact, we've been growing at about 0.5% this last quarter. But the feeling behind it is still low single-digit type of demand environment out there, just obviously we're capacity constrained in that regard. And as far as the CapEx, obviously, 2023 will be the most elevated environment for the expansion capital. That's the biggest driver there, but we aren't giving views on CapEx levels, for example, in 2024 yet.

[Operator Instructions] And our next question comes from Adam Josephson from KeyBanc. Adam, your line is now open. Please go ahead.

Andres and John, good morning. Thanks very much for taking my questions. Anthony asked earlier about -- Anthony was asking earlier about can versus glass demand. And I think you mentioned that cans are used for soda, sparkling water, hard seltzer, energy and consumption of those products is being affected by price increases and falling disposable incomes, et cetera. I guess I'm still kind of confused by why demand for premium products would be holding up better than demand for soda and sparkling water if we're going into a recession? I would think demand for premium products, if anything, would be getting hit harder than for things like soda. So can you help me understand that dynamic and what gives you confidence that demand for premium products will hold up perhaps better than that for soda?

Yes. So the consumers of premium products can afford those products, and they tend to stay in that -- in those categories during recession. It's been demonstrated across several recessions already. So this is something that we've seen in the past, and we expect to happen today. You've seen that there has been a lot of focus on identifying or trying to identify if there is trade down taking place. And so far, it's not that clear that there is trading down. Now what you mentioned happens at a lower tier. So it is -- there is the pure commodity type of products and the ones that go to just above that, those will trade off, because that consumer is more sensitive to those issues. Now let me just make a comment with regards to how our markets have changed. So, mainstream beer has been really a point of pressure for us in demand over the years, as you know. And when you look at our growth numbers or our performance in every year, it has been highly influenced by mainstream. Now we shared with you before that we have been focused for several years now on diversifying into growing categories, which are premium products in nature like food, NAB, premium and spirits. Now as a consequence of that, mainstream that used to be around 40% in North America is down to 13%. But globally, mainstream is only 3%. So when we look at our performance going forward, we got to take into consideration that the most vulnerable category is becoming really small. So that's important. The other part is in the United States, as an example, there are imports that go up to even 1.6 million tons per year. And you might recall that we acquired a distribution channel -- an distribution organization with [Vitro] (ph), which is called OIPS. And we've been developing that organization quite substantially, and we're growing quite well with that, which give us access to all that volume, which we didn't have before. So that's in favor of our performance as we navigate challenging times.

Thanks, Andres. And John, just on the Italian subsidy. Can you -- that's the first I've heard of a subsidy in Italy. Can you talk about what that -- why you received that? Were you expecting that? Do you expect more such subsidies? Any details around that, I'd appreciate.

Yes, sure. We were aware of a potential subsidy heading into the third quarter, yet it wasn't fully quantified or confirmed until later in the quarter in September. The subsidy was about $13 million, which was probably about $6 million higher than we originally estimated, but we did incur at least $10 million of more cost inflation than originally forecasted in Europe. So the net effect is rather muted compared to our original guidance. And historically, we have -- Italy has issued a lot of credits over the year. They manage things through that. We've had things called white certificates in the past. It's how they manage a lot of these different things. It's one way that they also incent development and expansion within industries and things like that through this process. So this is not particularly a surprise. It's actually included in -- it's a legislative item in Italy. So in fact, I think in the last quarter call we had indicated that even with the energy situation building up that we had some pretty firm positions through some of the governments like Italy and elected position -- official positions in France that would be supportive of the industry. So not a huge surprise, a little bit bigger than we expected, but so was cost inflation.

Thanks, John.

And our next question comes from Jay Mayers from Goldman Sachs. Jay, your line is now open. Please go ahead.

Hi, everybody. Thank you for getting me in here. I was wondering if you could just kind of decompose the minus 2% shipment number in the Americas. How much of that was these kind of unexpected downtime impacts versus outright just demand in Latin America/Brazil and North America? I mean, you do note that you have maintained a sold-out position in Latin America, no comment on North America. Is there anything kind of fundamentally you're seeing from a demand perspective in North America?

Yes. I would say that there is two primary drivers for the 2% down. It was down in Brazil, where we had, as I mentioned earlier, a large furnace rebuild. So that was the driver for that, the sole driver for that. In fact, if it wasn't for that, there's strong double-digit demand backed up in that marketplace. So whatever we can produce we can sell in that market. And then the other reason was in North America, I think it was a combination of two factors. One is we did have some incremental unplanned downtime. Same situation, inventories are relatively low, if there's a little bit of lower production than anticipated that impacted sales. The only area where we saw a little bit of weakness across our global network in the quarter was in beer in North America, and that was probably fundamentally from a demand standpoint, a couple of percent down from what we anticipated. But it wasn't a major driver of the overall performance for the company.

And Just to complement that, looking at Brazil and the Andean, that market is characterized by customers' focus on growing premium. That category was very, very small. They have a significant opportunity ahead of them. So they've been focused on premium and business across categories. But they're also localizing global brands in those markets. And there is a conversion taking place between from returnable containers into one-way containers, glass containers. And that's related to the convenience of -- for some consumption occasions. So that's moving quite well, as well as the user return our containers for affordability and for sustainability resource. Now, all-in users are growing there. We're limited by capacity today. Obviously, our inventories don't contribute to adding capacity and -- but we're building -- that's why we're bit incremental capacity in those markets.

That's helpful. Thank you. And then, John, just a quick follow-up. On some of the leverage comments you made targeting kind of low three’s by the end of next year, but it did sound like you were talking about longer term getting below that three number. Can you talk a little bit about just kind of how you're thinking about long-term leverage on the business? Like what is the right number? And why is it that number?

Yes. I think we believe in this business being a strong BB corporation is a good place to be, obviously, in a world where interest rates are rising. Our view of the target leverage is dropping some, right, and it passes kind of mid to high -- mid to low three’s would be kind of a good place to be. But with higher interest rates, we do below -- we believe being below 3 times leverage is the right answer for the company. And I think it's a good balance between being able to allocate our capital for creating value as well as a good healthy balance sheet and being very mindful of the interest rate environment that we're into. And we're also being mindful of being a position that has an appropriate spread in the interest rate funding position for the company.

Thank you very much.

Thank you.

And there are no further questions. I would like to hand the call back to Chris for any closing remarks.

Okay. This concludes our earnings call. Please note that our year-end call is currently scheduled for February 1, 2023. And remember, make it a memorable moment by choosing safe sustainable glass. Thank you.

This concludes today's call. Thank you for joining, you may now disconnect.