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O-I Glass Inc (NYSE:OI)
Q3 2021 Earnings Call
Oct 26, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the O-I Glass Third Quarter 2021 Earnings Conference Call. [Operator Instructions]. 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.

Chris Manuel -- Vice President of Investor Relations

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 would now like to turn the call over to Andres, who will start on slide 3.

Andres Lopez -- Chief Executive Officer

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 intend to sell our Le Parfait brand and business at an attractive valuation as part of our portfolio optimization program. 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 these 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 growth 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 4th quarter adjusted earnings will approximate $0.30 to $0.35 per share and with elevated cost inflation pending price recovery starting in early 2022.

Let's turn to a slide 4. As we continue to deliver on our commitments, we are also making very good progress advance in 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 3 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 with 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 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 3 years that include up to 11 Magma lines to enable profitable growth. Expansion plans are focused on our sole markets across Latin America, premium spirits in the US and the UK 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 Paddock 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, the profitable growth, glass is poised to benefit from key mega trends such as wellness, sustainability, premiumization, and harm leaving. Reflecting these tail winds, global market growth is anticipated to rise 1.6% a year and higher in the principal regions where we operate. Given these trends 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 problem 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 span 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.

John Haudrich -- Senior Vice President and Chief Financial Officer

Thanks. Anders, 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 3rd 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 to $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 cost and the benefits of our revenue optimization initiatives. Sales volume was down 3%. In particular, we have seen some food categories rebalance as on premise reopens but food volume still remains above pre-pandemic levels. Likewise, we have intentionally mixed managed 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 cost 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 3rd 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 in 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 preserved our strong liquidity and finished the 3rd quarter with approximately $2.1 billion of committed liquidity well above the established floor. Third, we are reducing debt. At the end of the 3rd quarter, our net debt was $4.3 billion, the lowest level since 2015 and our BCA leverage ratio was around 3.6 times. 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 EUR72 million or about $84 million. The EBITDA for this business was EUR7.5 million in 2020 with a similar performance on a 12 month trailing basis. This represents a compelling valuation in excess of a 9 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 Paddocks 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 3rd quarter results. We now expect free cash flow will be at least $260 million. We anticipate 4th quarter adjusted earnings will approximate $0.30 to $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 buying 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 the recent weeks. Keep in mind that maintenance and engineering activity will be at their highest levels for the year during the 4th 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.

Andres Lopez -- Chief Executive Officer

Thanks, John. Let me wrap up with a few comments on slide 10. Overall, we are pleased with our performance during the 3rd quarter. Importantly, O-I continuously 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 you are ready?

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from the line of George Staphos from Bank of America. Your line is open.

George Leon Staphos -- BofA Securities -- Analyst

Andres. John, Chris. Good morning, everybody. Thanks for the details. My questions will be around pricing related to the choppy volume environment as you termed it. So 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 have lost because of the choppy patterns. And then, as we looked at '22 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 set up on European pricing. Thank you very much.

Andres Lopez -- Chief Executive Officer

Yes. George. So the, 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 input 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 tool. Mexico is the same. In some cases, depending on the mix in North America is also a case. Important to highlight that the food category has been revising 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 and as we mentioned in the opening remarks we are also taking action, mix-managing some business given 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 that we're doing 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 plan for price increases going into the following year. We see a constructive environment for prices in 2022 and we expect to fully recover inflation.

John Haudrich -- Senior Vice President and Chief Financial Officer

George, I would add one other thing that you had asked, what's the impact on the 3rd quarter of these supply chain at, impacts and things like that. We had expected going into the quarter that volumes would be flat to up 2%, they were down 1%. So I think you can attribute that difference of say 2% or 3% differential mostly to these supply chain related issues in one format or another. So it's having a marginal impact but it's noticeable.

Andres Lopez -- Chief Executive Officer

Going into '22, just to complement, George, the demand fundamentals are very solid and 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 channel resume activity and beer is growing quite well in key markets for us in Western Europe. So we're seeing high single-digit growth for beer in glass in Italy, France, and the UK which are very relevant markets for us. So with those solid fundamentals we don't see any issue for our price increases. We're very confident we're going to fully recover inflation going into 2022.

George Leon Staphos -- BofA Securities -- Analyst

That's perfect. Thank you very much guys. I'll turn it over.

Operator

Your next question comes from the line of Ghansham Panjabi from Baird. Your line is open.

Matthew T. Krueger -- Robert W. Baird & Co, Inc. -- Analyst

Good morning. This is actually Matt Krueger sitting in for Ghansham, how are you doing this morning. So there has 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 the 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.

Andres Lopez -- Chief Executive Officer

Yeah. So at this point in time, we are operating at high utilization levels and that's why during Investor Day we laid out a 3-year plan for capacity expansions. So we believe those expansions are timely, the markets that we are addressing through expansions are by quite strong, and through that plan we expect to address the issue that you highlighted.

Matthew T. Krueger -- Robert W. Baird & Co, Inc. -- Analyst

Great. That's, that's helpful. I guess that's it from me. Thanks.

Operator

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

Bryan Burgmeier -- Citigroup -- Analyst

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 is just a matter of timing to get caught up and how much needs to be recovered in contracts yet to be negotiated.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yeah, I would say that, this is John, between 55% and 60% of our business across the globe is covered under some form of long-term agreement and those long-term agreements include price adjustment formulas. So that part of it is established going into the next year. The other call it 40% to 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 in an annual basis, generally speaking in the very early part of the year here, so that's that -- that's the area that's primary focus on price movement going into the new year in addition to the PAF.

Bryan Burgmeier -- Citigroup -- Analyst

Got it, thanks. That's very helpful. And on 4Q can you parse out the drivers behind the negative price cost between energy, labor, freight, and raw materials and then based on your contract structure which of those buckets is going to be easiest and most difficult to recover next year.

John Haudrich -- Senior Vice President and Chief Financial Officer

So 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 to electricity comes through also, but it's a little bit more modulated. And then 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 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 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.

Bryan Burgmeier -- Citigroup -- Analyst

Got it, thanks. I'll turn it over.

Operator

Your next question comes from the line of Mark Wilde from Bank of Montreal. Your line is open.

Mark William Wilde -- BMO Capital Markets -- Analyst

Thanks, good morning, John. Andres, Chris. I wondered just going back to the 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 and also whether those issues are having any impact on your ability to operate, other words, are you can get natural gas.

Andres Lopez -- Chief Executive Officer

Yeah, 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 is very difficult to know what the winter is going to, now if it is, let's assume that there, it is a normal winter with nothing out of the normal pattern. When we consider the markets in which we are present, the suppliers we have, and the contract 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. But 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.

Mark William Wilde -- BMO Capital Markets -- Analyst

Okay, that's helpful. And if I could, just wanted to know we're hearing these stories on the 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 it wasn't very long ago people across the industry were closing glass plants and so I just curious how much of this you think is kind of logistics issues, how much of this is the some of the duties on imported glass what the all of the issues are and then what you can do to kind of capitalize on the situation in the near term.

Andres Lopez -- Chief Executive Officer

Yeah, so the demand for glass is a strong and it has been increasing continuously, in some cases it comes in peaks that are difficult to serve. Now, 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. So now at this point we are utilizing our capacity as we can. As we mentioned before mixed management is important in the circumstances. So we can support margins and return. And then, we're doing everything we can to improve productivity to be able to support this. And 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 countries depending on seasonality and all that. So all of that is in place to take advantage of the situation in US 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 and we're confident that as we go into '22, we're going to be in a better position, because our inventories are better established to be able to support them through their peaks.

Mark William Wilde -- BMO Capital Markets -- Analyst

Okay, that's helpful. I'll turn it over. Thanks, Andres.

Andres Lopez -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Mike Leithead from Barclays. Your line is open.

Michael James Leithead -- Barclays Bank PLC -- Analyst

Great, thanks, good morning guys. First, I wanted to follow up on the supply chain side of things, and particularly on the external factors. Are your customers that Andres. I think you laid out, well, like labor, trucking and other material shortages, have your customers giving you a sense or do they even have visibility frankly on how those factors should trend into the 4th quarter of 2002. I'm just trying to get a sense of what is easing or staying the same as we sit here today.

Andres Lopez -- Chief Executive Officer

Yeah, so these supply chain issues are widespread, they're across industries and they are 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, so that give us the ability to respond better and as I mentioned before, because of that work we expect that we will be able to better manage through 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 as we can to support the supply for our customers.

Michael James Leithead -- Barclays Bank PLC -- Analyst

Great, that's super helpful and maybe as a followup for John. Looking at the to 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, should we still think about that kind of 20% to 25% conversion rate from EBITDA before the step up in growth capex, how should we think about that flow through next year.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yeah, yeah, I think, tell you that we are introducing a new measure we call adjusted free cash flow and so 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, is something probably north of 30% on adjusted free cash flow conversion.

Michael James Leithead -- Barclays Bank PLC -- Analyst

Thank you.

Operator

Your next question comes from the line of Kyle White from Deutsche Bank. Your line is open.

Kyle White -- Deutsche Bank AG -- Analyst

Hey, good morning. Thanks for taking the question. 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 home consumption wanes. Thank you.

Andres Lopez -- Chief Executive Officer

So food went up during the pandemic double digits. Right. It was a very strong peak because of at home consumption. What we're seeing right now is that that peak obviously came back down because on-premise channel is already open. However, we're keeping important gains versus pre-pandemic level. So at this point we're seeing between 3% and 4% incremental volume versus those levels. So premium is, excuse me, food is quite healthy because of the focus of the consumers on premium products and this is happening across all categories.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yeah. and the studies we've looked at and reviewed indicated that that is a longer-term trend is that some level of premiumization continue to own at home living focus is going to be there, so most projects some form of continuation of that type of demand structure.

Kyle White -- Deutsche Bank AG -- Analyst

Got it. I'll turn it over.

Operator

Your next question comes from the line of Salvator Tiano from Seaport Research. Your line is open.

Salvator Tiano -- Seaport Research Partners -- Analyst

Yes, thank you very much for taking my questions. Firstly, can you provide the Americas, the final print on your shipments by region by more specific regions and also why despite that shortfall what data points give you confidence that demand is actually vary even though shipments were down 3%.

Andres Lopez -- Chief Executive Officer

Yeah, so in the US. I'll give you a few data points. When we look at both channels on-premise and off-premise through Nielsen data and CGA the statistics, we're seeing interesting performance for example in beer which is up like 2%, spirits up like 13% and premium wine around 10%. So 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 out of and a smaller base. So the impact is going down in our system and international beer brands and premium beer are mostly offset -- 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 and 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 and Mexico, Brazil, in the 3 of those -- in the 3 of them, there is very solid performance across all categories. Mexico in particular, strong local demand for food and NABs. But then exports for beer, tequila, and NABs out of Mexico are quite strong. In the Andean, beer performance is strong due to premium beer and global beer brands and [Phonetic] 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 is back to pre-pandemic levels is 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 [Technical Issues] compared to 6% or 7% before, so it's increasing and premium products are 22% higher than pre-pandemic levels. So those markets are doing really well. We are limited by capacity but as we explained before as part of the 3-year plan, we are adding capacity to all those markets to take advantage of these opportunities.

Salvator Tiano -- Seaport Research Partners -- Analyst

Okay, great. And my second question is on your capex plan. I saw that your strategic investments would be more geared toward 2023 and 2024 and it seems your strategic capex number almost $300 million is 40% of strategic capex you said you'd spread over the 3-year period. So did something change did you decide to spend more capital upfront because you're seeing more opportunities.

John Haudrich -- Senior Vice President and Chief Financial Officer

No, this is very much in line with I believe what we laid out during Investor Day. What we're going to do is we're going to 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 are realizing are going to ramp up ratably I mean more back-end loaded as the capacity comes on line in the 2023 and 2024 window. So this is all consistent with the planning, nothing has changed. And the thing I would add too is that is also consistent with what we said on I-Day is that the portfolio optimization activities. We'll also be front-end loaded here so that we anticipate having the cash in-house on those transactions before the cash goes out for that the capex that we spend on the strategic capital side.

Salvator Tiano -- Seaport Research Partners -- Analyst

Great, thank you very much.

Operator

Your next question comes from the line of Alton Stump from Loop Capital, your line is open.

Alton Stump -- Loop Capital Markets -- Analyst

Great, thank you for taking my questions. I just wanted to ask, it was pretty clear from your press release and also comes this morning that you had to walk away from some lower margin business here in the US during the 3rd quarter, is that a short-term impact or how much longer do you think that could last for you're not going to be able to satisfy a portion of your customer base.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yeah, so the margin management that we did was primarily due to inventory spots and inventory shortfalls that we had or things are getting a little bit low because of supply chain issues and the strong ramp up after the markets opened up again. And what we're seeing is that in certain categories, in certain parts of the geographies we just don't have the inventories that we would ideally have for that original mix of business. So 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.

Alton Stump -- Loop Capital Markets -- Analyst

Okay, thanks so much. I'll hop back in the queue.

Operator

Your next question comes from the line of Arun Shankar Viswanathan from RBC Capital. Your line is open.

Chris Manuel -- Vice President of Investor Relations

Lawrence let's move to the next one.

Operator

Your next question comes from the line of Adam Josephson from KeyBanc. Your line is open.

Adam Jesse Josephson -- KeyBanc Capital Markets Inc. -- Analyst

Good morning. Andres. John, Chris. Thanks for taking my questions. Just one on earnings and then one on your cash flow outlook. On the earnings. John, just a month ago, you talked about earnings being at the high end or slightly higher than $0.47 to $0.52. It turned out to be a fair bit higher than that. I assume it was not because of volume inflation is obviously not getting any better, so can you just let me understand what led to the pretty sizable beat relative to what you would seem to indicate a month ago that it wasn't on the volume side.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yeah. Yeah, sure. Yeah, exactly. The numbers proved out to be better than we were anticipating that this pointed to September, being a good strong month for the business in particular what we saw was very good labor efficiency, the quality performance of the business was very, very good, and a number of asset projects that we had underway actually ramped up a little bit earlier and a lower cost. At the end of the day than we originally intended. So very good operating performance across those major levers toward the end of the quarter.

Adam Jesse Josephson -- KeyBanc Capital Markets Inc. -- Analyst

Got it. Thanks, John. And just on free cash flow. If I am trying to do a free cash flow bridge for this year, you're thinking in 260 plus maybe call 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 basically negligible free cash, correct me if I'm wrong there. And then in the subsequent 2 years capex will step down a bit, but it will still be call it $640 million. So 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 3 years or so. Am I thinking about it the right way or am I missing something.

John Haudrich -- Senior Vice President and Chief Financial Officer

You know well. For one thing, we're not going to, we're not today, getting into specific numbers on 2022 and 2023 or beyond. But 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. A bit but it will dip some because of the strategic capital and then ramp up, but to the previous conversations we've had is that we do think that additional strategic capital that's in there is fully funded by the portfolio optimization actions that we're doing such as like the sales of Le Parfait business that we announced today and we think the net effect of those actions is about $50 million to $60 million of additional EBIT run rate as we get the improved 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.

Adam Jesse Josephson -- KeyBanc Capital Markets Inc. -- Analyst

Got it, thank you John.

Operator

Your next question comes from the line of Mike Roxland from Truist Securities. Your line is open.

Michael Roxland -- Truist Securities -- Analyst

Thanks very much. Good morning, Andres. John, Chris, thanks for taking my questions. Just quickly on the revenue optimization initiatives you mentioned and how those impact pass-throughs. Obviously, the company has done a lot of work around upgrading its sales, marketing and innovation capabilities, the Company is obviously going through analyzing each account to make sure it receives the property value for its products. I was just wondering if you talk about what you've done specifically in the quarter. How does the revenue optimization and this has actually benefited pass through.

Andres Lopez -- Chief Executive Officer

Yeah, so 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. So what happens in the top 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 on the top line opportunities. We have quite sophisticated tools in place at this point, we have processes that are also very well established, so there is lots of rigor and discipline around that top line, and that's what helped us with Q4, Q3, sorry about that.

John Haudrich -- Senior Vice President and Chief Financial Officer

Just a good clarity. I mean, our revenue. I mean our margin expansion initiatives have 3 major projects revenue optimization, which we're discussing here and in the quarter there was probably between $5 million and $10 million of benefits associated with that 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 is more on the SG&A side, all of those added incremental benefits too but then of course we net those against things that are working against us. For example, freight was about a $10 million headwind in the quarter. So we had about $10 million net margin expansion initiatives out of those 3 buckets. When you netted off against that incremental freight cost. So we want to make sure that we're looking at something that's a net benefit to the organization.

Michael Roxland -- Truist Securities -- Analyst

Got it. And then just was the question on the mix management. Obviously. Can you, John mentioned the inventory tightness, seeing that you expect this inventory this mixed management ultimately correct. It's also a matter of fact maybe given the supply chain, given how tight your inventory is as you look at all the accounts, your customer accounts. Is it, are you walking away from certain businesses that just aren't profitable at this point given a customers wanting your product, maybe they need to pay you for it at this point given the inventory tightness you're saying no you can't give us appropriate value, we don't need your business, you can look to go elsewhere. And maybe this is a permanent shift in your business to more of a higher quality mix than you had when you had historically.

Andres Lopez -- Chief Executive Officer

Yes. So, yeah, that's the focus. So we are giving priority to marginal return. And as we now you go through all of these various challenges that is a very important criteria we're using to define what is the priority for us.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yeah, I think you got all the above going on. There are some places where you're looking at the inventories right and saying, hey, I don't have that specific inventory and I'm going to shift away to this other category because you do have the inventory and some that are permanent changes in mix. I mean in in North America we commented over the 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 and that is always ongoing to make sure that we can continue to shift our capacity to better margin business.

Michael Roxland -- Truist Securities -- Analyst

Thank you.

Operator

Your next question comes from the line of Gabe Hajde from Wells Fargo. Your line is open.

Gabe Hajde -- Wells Fargo -- Analyst

Andres. John, Chris. Good morning. I wanted to come at the inflation question I guess from a couple of different angles. The first is, I'm assuming the answer is yes, but have you guys kind of gone through sort of the total cost of ownership calculations kind of taking into account a new baseline of where raw materials are today, I'm kind of thinking about obviously aluminum has almost doubled when we include aluminum premiums warehousing, etc. And then again I'm kind of asking in the context of these dual control policies that China might be putting into place that could imply kind of structurally higher aluminum costs go forward. So it gets us to the extent that it makes glass packaging a more cost competitive alternative. Then, is that something you guys have been looking at and I guess corollary to that, MAGMA in theory should improve that even more, what is initial customer response has been since you guys kind of announced this aggressive expansion.

Andres Lopez -- Chief Executive Officer

Yeah, so let me just give you one perspective on that. And John can complement tool. One of the advantages of glass is that the supply chain for glass is mostly local and that has two very important impacts, one is cost and the one is environment, so when you look at the dynamics that you described that related to supply chains that are very large in nature that support those substrates that are demanded from multiple places and are creating those pressures, but that's not the case of glass. As you know, we melt glass in the same facility in which we convert it to containers. So our supply chain is very integrated with very important implications on cost and very important implications on sustainability. [Speech Overlap]. No go ahead John.

John Haudrich -- Senior Vice President and Chief Financial Officer

I was just going to add one point there, Gabe to your original question, is that how do we go in price, how do we look at the opportunities in the marketplace. We clearly price based upon market, we are not a cost plus producer. So clearly, we look at the competitive landscape across our opportunities to make sure that we price accordingly to get value relative to the competing opportunities. And then the other question you had was what has been the initial customer reaction been on MAGMA. And I would say, it's been very good. With the intent to expand our business, I think that's been very well received by customers and many markets we've talked about for some time as we've run against capacity constraints. So everybody is a very, very encouraged that we're working with that there are new opportunities coming around the corner, and I think I think they responded very well to the capabilities that we're laying out in 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.

Andres Lopez -- Chief Executive Officer

And then one more aspect on MAGMA. MAGMA will help glass production and supply to become even more local because we can collocate 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 scale, which is a significant change for the industry.

Gabe Hajde -- Wells Fargo -- Analyst

Thank you, guys. I'll hop back in the queue.

Chris Manuel -- Vice President of Investor Relations

And I think this will be the last question Lawrence?

Operator

Yes, sir. We have a follow-up question from Ghansham Panjabi from Baird. Your line is open.

Matthew T. Krueger -- Robert W. Baird & Co, Inc. -- Analyst

Hi, thanks a lot for letting me hop back in the queue. This is Matt Krueger againg on for Ghansham. Understanding that the tight capacity situation can mitigate the opportunity here a little bit, but 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 packaging substrate in that market and obviously there's been a lot made about the slow -- the slowdown there on the can 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.

Andres Lopez -- Chief Executive Officer

Yeah, so the hard seltzers category is only an upside for glass. So 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, so that's one of the things that we're seeing the customer doing and that's why the new products. Now the category is slowing down, obviously that's lower demand and previously expected by the suppliers that are supplying currently that category for the most part. Now, when it comes to where the capacity of cans go and the capacity of glass go is very important to highlight what we brought up during I-Day. Glass and aluminum cans play in different lanes of product categories and the products that are driving the demand of aluminum cans are products in which we are not present. So if anything our upside for us. If we, if we get into it, but there are several other categories that are really driving the demand for glass and in particular, the move toward premium in all those categories.

Matthew T. Krueger -- Robert W. Baird & Co, Inc. -- Analyst

Great, that's helpful. Thank you.

Chris Manuel -- Vice President of Investor Relations

All right, thanks. That concludes our earnings call. Please note that our 4th quarter and year-end call is currently scheduled for February 2, 2022 and remember join Team Glass by making a memorable moment and choosing safe sustainable glass. Thank you.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Chris Manuel -- Vice President of Investor Relations

Andres Lopez -- Chief Executive Officer

John Haudrich -- Senior Vice President and Chief Financial Officer

George Leon Staphos -- BofA Securities -- Analyst

Matthew T. Krueger -- Robert W. Baird & Co, Inc. -- Analyst

Bryan Burgmeier -- Citigroup -- Analyst

Mark William Wilde -- BMO Capital Markets -- Analyst

Michael James Leithead -- Barclays Bank PLC -- Analyst

Kyle White -- Deutsche Bank AG -- Analyst

Salvator Tiano -- Seaport Research Partners -- Analyst

Alton Stump -- Loop Capital Markets -- Analyst

Adam Jesse Josephson -- KeyBanc Capital Markets Inc. -- Analyst

Michael Roxland -- Truist Securities -- Analyst

Gabe Hajde -- Wells Fargo -- Analyst

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