O-I Glass, Inc. (OI) Earnings Call Transcript & Summary

Good afternoon. My name is Kyle White; I'm the lead analyst of Paper and Packaging here at Deutsche Bank. Thank you all for attending our Global Annual Industrials & Materials Conference. Very delighted to have O-I Glass here, John Haudrich, CFO. Format, I think you have a few slides to go through, 10 to 15 minutes, and then we'll jump into some Q&A. If anyone wants to ask a question, feel free to raise your hand, and we'll try to get a mic to you so you can ask your question. But John, thanks for being here, and I'll hand it over.

Great. Thank you. Thanks, Kyle and the Deutsche Bank team for hosting us today. This afternoon, I plan to discuss how O-I represents an attractive investment opportunity. Afterwards, obviously, we'll take your questions and answers. Before we proceed, please review the safe harbor comments on Slide 2 and various disclosures found in our presentation, which are hosted on our website. On Slide 3, you will see a high-level profile of the company. O-I is the global leader in glass packaging. We serve the highly stable and steadily growing food and beverage industry, supporting more than 6,000 customers across the globe. These customers value our dedication to service and our unparalleled production network to meet their needs around the world, recognized by a continuously improving Net Promoter Score. As the industry leader in innovation, we are proud to make glass the most sustainable packaging solution. Likewise, it is the preferred substrate by most consumers given its premium characteristics and their increased focus on health and wellness. Last year, O-I passed an inflection point in its long corporate history. In July, Paddock emerged from bankruptcy after achieving a final and fair resolution of its legacy asbestos-related liabilities. As such, we expect to generate substantially more cash flow each year that will be deployed to expand our business, reduce debt and create value for our shareholders. At the same time, we are developing MAGMA, a revolutionary new glass production process that will augment profitable growth and boost our financial performance. Let's expand on this strategy starting on Page 4. I strongly believe O-I represents an attractive investment opportunity. Over the past few years, we have developed a very good track record on performance. In fact, we've either met or exceeded consensus for 11 consecutive quarters. At the same time, we have reduced risk by resolving legacy liabilities and improving our balance sheet. This improved performance is supported by agile execution enabled by strong capabilities that we have built over the last few years and the bold actions we have taken to transform O-I. Likewise, we are capitalizing on strong glass fundamentals to profitably grow the business over the long term. Importantly, MAGMA represents a breakthrough innovation that creates a new paradigm for glass to meet the needs of an evolving market and to expand our business. Finally, as the most sustainable packaging option, glass is set to win in the new green economy. Let's expand on each aspect a little bit more here. Moving to Page 5. We have delivered consistent earnings and balance sheet improvement over the past several years. As you can see on the left, adjusted earnings per share has increased nicely since 2020. We expect further improvement in 2023, supported by good net price and incremental benefits from our margin expansion initiatives. Looking forward to 2024 and beyond, our ongoing capacity expansion and margin expansion initiatives should enable additional earnings momentum. As shown on the right, we have significantly reduced our financial leverage over the past few years, in addition to resolving Paddock's legacy liabilities last year. We expect continued progress and anticipate leverage should drop below 3x by the end of 2023 with a longer-term target of 2.5x over the next year or 2. Overall, our balance sheet is in the best position in over a decade. I'm now on Slide 6. We've also been hard at work transforming the company. The team started by building a simple, agile and effective organization. We are optimizing our structure. As discussed, Paddock resolved its legacy liabilities, and we completed our $1.5 billion portfolio optimization program well ahead of schedule. We are more cost competitive as a result of our margin expansion initiatives, which have generated more than $350 million of net benefits over the last several years. As a result of these efforts, O-I has been able to overcome elevated market volatility, reduce debt as we increased our adjusted free cash flow conversion to over 35% last year. Now we are squarely focused on advancing MAGMA, which will enable a more flexible, scalable and sustainable production capability as well as increasing our supply chain efficiency. All this will support profitable growth, which I'll discuss more on Page 7. We believe glass has a bright future despite some recent softening due to macroeconomic factors. As illustrated on the left, our sales volume, including JVs, has increased about 1.5% a year on average over the past several years. We do expect sales volumes will be down low to mid-single digits this year, reflecting a moderate recession. However, we anticipate good sales volume growth in 2024 as we bring on much needed new capacity. Over the long term, we expect sales volumes will grow about 1% to 3% a year across the markets that we serve, as shown on the right. This is being driven by a number of factors, including increased consumer preference for premium, healthy and sustainable packaging and structural market shifts as key customers localize production of global brands across many of the markets that we serve. Reflecting these trends, we have a solid commercial pipeline, which represents an opportunity for further growth. On Slide 8, you see the key benefits of MAGMA, which is O-I's new proprietary glass production system, leveraging new breakthrough technology. Our heritage network is a great fit for many of the categories that we have served for decades and will continue to serve it in the future. Given the trends of health, wellness and sustainability, there are significant future opportunities in a broad array of end-use categories, which tend to be more differentiated and fragmented. MAGMA is a perfect fit to expand in these categories. MAGMA is more flexible, scalable and can be more rapidly deployed. It can be co-located to improve supply chain efficiency, is more cost effective with lower capital intensity. Likewise, MAGMA can be used with ULTRA to allow significant container lightweighting, and MAGMA will enable future use of carbon-free energy sources like hydrogen and biofuels, so it increases convenience and sustainability. MAGMA represents a major leap forward in how glass is produced and will expand O-I's right to win in its addressable markets. Overall, we are targeting returns in excess of 20% for future MAGMA expansion projects. Moving to Page 9. We are very excited about our first MAGMA greenfield plant in Bowling Green, Kentucky, which is on track for initial commercialization in mid-2024. We are designing the plant to be a showcase facility that will demonstrate all of our next-generation capabilities. The new state-of-the-art facility will include the MAGMA melter, a new modular batch system and pilot forming machine that will be fully digitized with a high-performance operating model. This highly scalable plant will eventually include all MAGMA Gen 1, Gen 2 and Gen 3 solutions with the next-generation sustainability features as well as our ULTRA lightweighting system. Located on the Bourbon Trail, the Bowling Green plant will demonstrate the value of near location and will be a key hub for future customer collaboration, investor visits and demonstration of O-I's next-generation capabilities. I invite you to view a video that we created that shows MAGMA in action and further discusses its many important attributes. This slide includes a link to that video. Sustainability is another critical element of our strategy as glass is set to win in the new green economy. Glass is already the most sustainable packaging solution, and I believe you will be hard-pressed to find many industrial companies with so many levers to further improve the sustainability position of their manufacturing network. I encourage all of you to take a look at our sustainability report, which can be found in the company's website. We added a few highlights here on Page 10 with more details in the appendix. We have already achieved 70% of our 2030 emission reduction targets and are implementing new technologies to further reduce CO2. Renewable energy now represents around 30% of our energy sources, and we are well on our way to our 2030 goal. Likewise, we are expanding recycling collection sites and funding numerous projects to expand cullet usage. MAGMA and ULTRA will also provide significant sustainability futures -- benefits in the future. Overall, we are making solid progress, which has been recognized by a number of organizations as noted on the bottom of the slide. O-I has established another set of ambitious and achievable objectives in 2023 to advance our strategy. This is summarized on Slide 11. Higher earnings and margins should benefit from strong net price realization, and our ongoing margin expansion initiatives are off to a strong start this year. As we have discussed, we continue to advance other focus areas, including expansion initiatives, technology development, ESG and capital structure improvement. I'm highly confident these efforts taken in concert will advance our strategy as we continue to transform O-I. Let me touch base on our business outlook. I'm now on Page 12, which recaps our most recent guidance provided during our first quarter earnings call. As noted earlier, earnings have consistently improved over the last few years, and we expect strong momentum will carry forward through 2023. We are reaffirming our financial guidance range for the second quarter despite sales volumes down mid- to high single digits. Destocking started in January, and volumes declined sequentially through April with improvement in May. Importantly, the impact of softer demand has been offset by strong net price realization as well as solid operating and cost performance. While second quarter shipments were softer than anticipated, we continue to expect full year volumes will be down low to mid-single digits. Likewise, we anticipate 2023 adjusted earnings will approximate $3.05 to $3.25 per share which represents a 30% to 40% increase from 2022 levels. Keep in mind, we are taking the necessary steps to drive further upside performance across the operating levers that we can control yet our outlook for the second half of the year is intentionally conservative given elevated macroeconomic uncertainty. Notably, we expect continued earnings improvement in 2024, driven by sales volume growth supported by our capacity investments as well as ongoing margin expansion initiatives. Furthermore, we anticipate segment operating profit should be in the mid-teens this year, increasing to high teens over time. Let me cover our capital allocation priorities. I'm now on Page 13. Improving our capital structure remains our top capital allocation priority. As noted, we expect leverage will end the year comfortably below 3x and we will continue to reduce debt consistent with our glide path to 2.5x leverage over the next year or 2. Our second priority is to fund profitable growth, which includes our current $630 million expansion program. Returning value to shareholders is our final priority. In addition to our current anti-dilutive share repurchase program, we may evaluate additional share repurchases or reinstated dividend as we get closer to our capital structure [ objectives ]. Let's turn to Page 14 for some concluding thoughts. First, the company is performing well and is a much more agile and resilient company as we continue to successfully navigate elevated market uncertainty. Importantly, we have a constructive view on 2023 and expect continued improvement in 2024. As shared, we have consistently taken the bold actions to advance our transformation and O-I has a clear strategy to create value and redeploy capital effectively. Finally, I believe that O-I represents an attractive investment opportunity as we reduce our risk profile, execute our transformation program, enable profitable growth, advance 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 stakeholders. Thanks for your interest in O-I, and Kyle, back to you for questions.

Yes. Sounds good. I really appreciate that, John. I appreciate all the details. I guess just to start, you didn't have to, but you went all the way to affirm the 2Q guide. So maybe can you talk about some of the puts and takes that you have seen that leads you to give you confidence to kind of affirm it here today?

Yes, exactly. So to your point, we continue to expect our earnings here in the second quarter to approximate the original guidance of $0.80 to $0.85. As I mentioned in my prepared comments, volumes are a little bit softer but we've also seen a very good operating performance of the business. In fact, May was the best year, I mean, the best month we've had in a long time which is following on a streak of very good performance for some time now in our operations. And so those favorable elements are offsetting maybe a little bit of a headwind in [ software sales line ].

Yes. On the volumes, is that primarily in Europe, North America? Where would you say that is geographically? And then is it related to destocking? Or is it a little bit separate?

Yes. Sure. As I'm sure you're hearing from everywhere, the market's a little softer, demand is a little bit softer out there. And consistent with my prepared comments, we saw -- destocking in our business started first in Europe. I mean, it followed a little bit later in the Americas, which is a little bit different from what some others are reporting. But -- what we saw is destocking starting in January and the sequential change in that destocking kind of declined through that April period and then it started to bounce back here in May. Now, one thing I can't say -- you can't say that 1 month makes a trend. So we can talk a little bit about that. But what we're really seeing is a 2-track destocking process, okay. The first track is we got end-use areas, take beer and food that tend to have a very quick cycle time, right? There's not a lot of store shelves, time on the store shelves, for example, and so we saw those areas probably decline quicker than we were originally anticipating. But then hopefully, maybe those are finding the floor or -- well, time will tell in that regard. But the other one, the longer one is the other categories that tend to have more of a life on the shelf. So whether that is spirits or wine and things like that, we didn't initially see any destocking and really only in a couple of pockets here and there are we seeing some softness in that regard. That tends to be more of a shallow longer-term destocking process for the business. But what I would say is despite all that, we, again, feel very comfortable with the financial outlook for the company, for the quarter, for the full year and the momentum going into 2024.

Yes. Your sense here today, are you sensing any kind of slowdown as it relates to the consumer and their buying habits? Are they shifting away from any of the product categories? Yes, just anything that you're seeing from a consumer behavior?

Yes, if you really look at first -- there's a lot of data out there in the first quarter consumer activities. And what we see really is kind of a mixed bag of activities. So for example, mainstream beer in Northern Europe was softer. That was one of the first areas that we had seen a softness kind of mid-single-digit declines. But that was also at the same time that there was some pretty lousy weather up in Northern Europe, there's cold and dank and things like that. We also saw some early on softer volumes around nonalcoholic beverages out of Central America and things like that. But the same token, if you look at categories like wines and spirits, we're completely sold out in wine over in Europe; spirits, we're positive in the demand profile. Premium beer in the U.S. has done very well, including imported beers like the Modelo family that we supply. And in Brazil, even the premium brands, again, that we supply were up 20% in the first quarter. So I think you got a mixed bag of activities in that regard. But I would say as things have been moving out of the first quarter into the current clearly, I think there's a sense that there's softening consumer activities. And prompted by some of the mixed signals in the first quarter and the expectations in the second half, that is what prompted a lot of the inventory destocking activities that we saw from our customers. Now it's -- nobody has a crystal ball to know whether the inventory destocking that's occurred is sufficient to address ultimately what the underlying demand patterns are or whether things will calibrate. Now what I would say is historically in our business, destocking is a couple of quarter type of process. And it'd be hard to see -- I mean, I haven't seen volumes down more than, call it, 4 or 5 quarters in a row in our business given its food and beverage and things along those lines. So right now, things aren't a real surprise. They're kind of following a typical pattern for the business. And we do see some front-end destocking. And then kind of generally, you see a little bit of a sawtooth effect as people try to calibrate. 1 month could be softer, next 1 could be a little bit stronger as people try to calibrate to really underlying consumer demand and then finally an upswing once people feel more confident that the recessionary pressures or slowdown pressures are over with.

Great. And you guys have got out of your way to be a little bit more proactive as it relates to the guidance for the second half and kind of forecast maybe a little bit of a slower economy, if you will. So you have that already kind of baked in, and we'll see if there's downside.

At this point in time, with -- despite the fact that sales volumes are softer here in the second quarter, again, not signaling anything yet for the full year because of what we're hearing from our customers. But even if things were softer, I think we're fine. We got the [ observer ] capability.

Right. You talked about some of the different beer dynamics, Premium beer doing well. You talked about some of the imported beer doing well. Obviously, there's a lot of dynamic situation happening with the brewers. Does that impact you guys at all? What's happening with one of the large brewers here in the U.S. from a volume standpoint or just any type of impact to your business from this?

Yes, of course, we value all of our -- and serve all of the major brewers and frankly, all the brewers here in the United States. I would say that as we look to who we serve, we're probably more indexed to the other major producers. And as a result, I don't see a negative consequence to the company as a result of some of those activities. Of course, it's all disruptive to everybody. I mean, we'd rather not see any of this disruption going on, but I think it will be a nominal issue for us.

Got you. And then sticking with North America, you talked about benefiting from contract renegotiations on the last earnings call. I guess what exactly are you benefiting from? Is this just straight price? Are you getting better contractual terms? And then able to give us a sense of how much of the business was renegotiated and how much renewal is at the end of this year that could potentially be a positive as well?

Yes. So for -- so we are in the process. Most of our contracts in North America are anywhere, for example, 4 -- I mean 5 to 8 years in duration. So this year, we actually had about 40% to 45% of our business being renewed. And as you can -- if you go back in time, those original contracts were set during some pretty difficult times, especially when the hard seltzers were coming on and the beer volumes dropped by about 6% as far as consumption activity. So it was a difficult context in which those original contracts were set. They're getting renewed now, and they're getting renewed on much better terms, both price as well as other underlying terms. How do you handle tier sheets and pallets and other compliance factors and things like that, that are ancillary. The big issue though is that there's getting much better pricing. And from a volume standpoint in view and kind of commitment on the volumes, it's better than we've seen in the past. As you've seen historically, our margin expansion initiatives, we said have given us at least $50 million in benefit a year. We've historically been beating that. We raised that to $100 million this year, primarily because of the expect improvement in North America. Now that's these contracts plus a lot of other operating efficiencies and everything. So I think we'll see that benefit is doing quite well, and I think that there's long legs to that for several years to improve North America.

Yes. Shifting over to Europe. It's been a region that's been quite resilient, given all things considered. It's been kind of a bright spot from a price cost standpoint as well. Obviously, volume is a little bit weaker here in this period, just given challenging comps as well. Do you have a sense if we're getting to a point to where it's a little bit too much inflation on the consumer and they're starting to pull back? And are you seeing any kind of price elasticity as it relates to some of the products on the consumer?

Yes. So I think you have a mixed bag out there. And keep in mind, certain categories like beer might be a little bit more sensitive to price elasticity compared to spirits and wines and other areas where the packaging and whatever is a fairly small component of the overall cost equation and things like that. But overall, I mean, I would say our pricing position is firm and stable in the marketplace.

Yes. I think one of your competitors on the last earnings call over in Europe talked about how inflation in Europe was actually a little bit lower than what they anticipated when they went with their annual kind of price increases, and they were potentially analyzing if they should actually give some price relief. Is that something that you guys have thought about over in Europe or not really given that consideration given the inflation that you're seeing?

So keep in mind that several years ago before the Russia, Ukraine war, we actually entered into the long-term energy agreements that extend multiple years. And as we stand here today, extend multiple years okay? And at rates at that time, it was kind of like EUR 20 per megawatt hour. So overall, we are not exposed on that particular element of it to the variations in those spot prices. At the same token, given our position, yes, I mean, consistent with the marketplace, we raise prices. But I think if you look at it, we didn't do it as much as some of the others in the marketplace. So I think we take a very balanced approach and we're comfortable that our position on our pricing and our cost position is appropriate given market competitive dynamics.

In Europe, margin growth has been tremendous over the past couple of years. And so for investors that may be newer to the story, and they just looking at the financials and seeing 20% EBIT margins that you're targeting for this year versus a few years ago, only around 13%. I guess, is that the new normal? How sustainable are those margins over in Europe? What's the risk to those margins?

Yes. What I would say, if you go back in time, the 13% margins you referenced, those are the ones that were probably out of whack. The company was back, call it, 8 years ago, was employing some go-to-market strategies that negatively impacted the margins at that time. Since then, we've been rebuilding those margins. So if you go back over the last, call it, 8 years, 7 out of the last 8 years, we've been improving margins in Europe. It's not a one-shot deal or anything like that. The only year we didn't was the COVID year. And frankly, getting into the 20% range of segment profit margins is actually now entering into what you'd see as the competitive norm over in Europe. And so it's not a blistering pace. It's not overshooting or anything like that. It's actually consistent, we believe, with the profitability of the segment.

Shifting over to South America. Just kind of curious what you're seeing from a consumer standpoint, a little challenging conditions down there from an economic and as well as consumer standpoint. There's also been the thesis put out there by some of your peers that one of the large brewers down there will eventually in the second half shift away from returnable glass into another substrate. Maybe just your thoughts, if you've heard that or seeing that from that customer as well.

Yes. I mean one thing I'd go back is if you take, for example, we serve a lot of different end use categories in Brazil, in particular. But let's stick with beer, which is about half of the business down there. If you take a look at that, the one-way glass container is about 10% of that market, and that's actually serving those premium categories. Those are the categories that are growing in the first quarter, about 20%. And that's what we've been working with our customers on localizing regional brands that they're turning into international global brands down in Latin America. So that's going very strong. About 35%, maybe 40% market share is a returnable, reusable glass bottle, okay? And the remaining ends up being cans or other substrates and things like that. If anything, what we're hearing from our customers is potentially increasing the amount of returnable, reusable. If you think about from an economic standpoint and if you go into a slowdown, the lowest cost product line for packaging is a returnable, reusable bottle. So it's maybe $0.05 per trip as opposed to maybe $0.08 for a can or $0.10 for glass, one-way bottle. And so -- it's by far the most economical option that our customers have if there is a slowdown or if there's a price elasticity element that's kicking in. And so in fact, what we've been hearing more is the more utilization of those product lines.

Price/cost has been a source of upside for you guys throughout the pandemic, done a really good job of driving price to offset the inflation that you've been seeing I think this year, you're targeting $150 million in net price realization. You already got $180 million of..

Yes, we already beat in the first quarter, yes.

So the question, I guess, then are you able to put a finer point on this because certainly, at least in our model that we have, we don't have negative price cost in the balance of the year.

I think price cost will do quite well this year. I can't put a number on it. But it will -- we will life cycle on those comps over the course of the year. Keep in mind, last year, most of the price increases that we put in this year had in relation to the annualization effect of the three price increases we put in last year. And the price adjustment formulas that we picked up on January 1, looking back to recapture the inflation last year, okay? So that was 70% of the price increases. The other 30% really just had to do with the inflation that we're seeing this year in that regard. So as we go through the year, we will comp those 3 bigger price increases last year. So what's not -- the first quarter is not indicative of a full year basis. That's why in the last earnings call, we kind of made a point of it to say, we believe segment profit margins for the year would be more like 15% -- mid-teens or so as opposed to 20% or so that we were seeing in the first quarter. So I think things are a little bit normalized. But again, that's off of a base that's pretty comparable and met margins to 2018, 2017 pre-pandemic, but we expect to be able to increase that over time to the high teens segment profit margin.

On the margin expansion, so initially targeting, I think, $50 million coming in. You raised it to $100 million, some footprint optimization that cost savings that you're realizing. How much more opportunity is there from a footprint standpoint? And then do you also have kind of continued line of sight to at least hitting $50 million in margin expansion in the years to come?

Yes. So one thing, a lot of roads go back to asbestos. And for years, the company was burdened by significant cash going out the door, 40% of the cash flow going out the door. So we don't have those -- that draw anymore. One thing I would say is that there's just a lot of upside opportunity in the performance of the business. And we've been showing over years we've been able to capture that and even accelerating it particularly with the North America work that we have here. I believe we have multiple years left of strong margin expansion initiatives. Like I said, it was $50 million historically. We ramped it up to $100 million here more recently for this year. I think we'll be able to be on the high end of that type of range for a period of time, especially as we continue to improve our position in North America.

I'll take a pause and see if anyone in the audience has a question. I want to shift a little bit to MAGMA, and get the latest update there. Is it -- obviously, it sounds like a great new product and innovation that you're working on. Is it something to where investors have been waiting to kind of see the true benefits of it to be able to evaluate you as an investment case with this new product? Is there something to where they'll have to wait for Bowling Green to come up online and see it for themselves? Or do we have to wait for Gen 3 in 2025? Just maybe what's the latest there?

Yes. So just as far as the development history of MAGMA, which is based upon a new way to melt glass, but is the end-to-end process, right? It incorporates a lot more than that. We have our prototype facility over in our Perrysburg headquarters. We have a pilot facility in the Streator, Illinois, that has all the way up through kind of the elements of Gen 2 running right now. And then we have our facility in Holzminden that's commercialized. So there are a number of elements already in play. But I think the big leap forward is when we're able to do the first true greenfield down in Bowling Green, Kentucky because that will include all elements of it, starting with Gen 2, moving to Gen 3 in 2025 period. So once we get that facility up and running, as I mentioned in our prepared comments, we were hoping to have investors in and be able to kick the tires and take a look at that which, as I mentioned, is going to have a showcase. It's going to have all the cool stuff that we've been working on, including ULTRA and some of the sustainability things that we're working through. So I think it is going to be a great illustration of what glass will look like in the [ future ].

Shifting a little bit to the balance sheet, capital allocation. Obviously, a bright spot for you now. You guys have definitely revamped the balance sheet. You got rid of some of the legacy, the risk and liabilities, put your foot forward a little bit more offensive as it relates to some of the growth expansions. On the CapEx, you have the $630 million expansion plan through 2024. Once you get past that plan, what do you think is kind of like the new normalized CapEx that investors should expect for O-I?

Yes. What I would say is, yes, we're kind of in a lumpy period right now because we're kickstarting the growth without necessarily having the ongoing EBITDA of that just yet, right? So we got to work through that to get back into a stronger fundamental cash position that we're confident in the next year or 2 we'll get there. So on the CapEx side, on maintenance side, probably something in the $400 million to $500 million a year. We're doing about $400 million to $425 million this year is realistic. And I gave a pretty wide range only because of inflation. We just don't know what inflation is. And we are playing a little bit of catch-up ball and probably need to for a few years -- a couple of years because of the COVID years. So I think you're going to see that type of a level for a period. And I can just give you the sensitivity. To grow consistently with our market share position, including capital investments to grow but also create capacity elements, is probably about $150 million required a year to be able to do that. And of course, you're always evaluating other cost projects and efficiency projects and things like that. But those are some of the core elements. And then on that piece, we would hope that becomes more capital efficient as MAGMA comes online, which we think is going to be at a meaningfully lower capital intensity. So that $150 million, hopefully moderates down as we get more of that technology rolled out.

That $150 million of growth, what kind of long-term growth rate are you underwriting that with?

Yes. Right now, we believe that in the prepared comments, 1% to 3% growth across the markets that we serve. So take 2% as maybe a baseline to be able to grow along those lines. $150 million probably buys you a 1.5% growth and you got about 0.5% creep capacity, by the different things that you do to bridge you up to that 2% to give you a sensitivity there.

And then leverage, another bright spot, really rightsize that. I think at one point, you had leverage 5x or about 5x in 2020. You're now targeting below 3x. I think our model has you almost even reaching 2.5x. I guess, in this interest rate environment, what do you think the right optimal leverage is for the company?

Yes. I think it is 2.5x. Before the kind of the run-up in interest rates here, we thought it would be something in the low to mid-3s. But I think given the higher interest rate environment, mid-2s is the right place to be. The good news is our debt tends to trade well and we punch above our weight usually on pricing and things like that. So being a strong BB for us, I think is the right place to be given how the debt markets usually treat us in pricing. We're really comfortable at that place. And which means we're not far away. And as I said, we should be comfortably below 3x by the end of this year and hopefully, the next year, whatever it is, to get where we want to be and then we can start to really think about how you can shift it away from debt related stuff to, well, the growth that we talked about, but more shareholder-friendly returns of share repurchases are reinstated.

I was going to ask on that. So you get to the 2.5x. That's the number 1 priority now. You're also executing on the growth too, while you're able to delever. So you reached a 2.5x. What's the view on repurchases here? Where the share price is relative to reintroducing a dividend? What kind of dividend yield would you maybe target?

Yes. Well, I mean, certainly, we suspended our dividend, which was about a 1% or so to speak, yield during COVID. I mean clearly, a step forward would be to reinstate that, right? And of course -- and then evaluating just where we want to be relative to that and share repurchases, of course, that's a decision of the Board of Directors. But I think everything are shaping up to move us in that direction.

Sounds good. Well, I think we'll end it there. I really appreciate the participation, John. Thank you for being here.

Thank you.