O-I Glass, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the OI Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Also, please limit your question to 1 and 1 related follow-up questions. If you require any further assistance, simply press star zero. With that, I would now like to hand the conference over to our speaker, Mr. Chris Manuel, Vice President of Investor Relations. Thank you, and please go ahead.

Thank you, Myra, and welcome everyone to the OI Glass Second Quarter Earnings 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 today's call are available on the company's website at o-i.com. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Some of the financials we're presenting today relate to non-GAAP measures. such as adjusted earnings per share, free cash flow, segment operating profit, leverage ratio, and net debt, which excludes certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP items can be found in our earnings press release and in the appendix to this presentation. I'd now like to turn the call over to Andres, who will start on slide three.

Thanks, Chris. Good morning, everyone, and thank you for your interest in I Glass. Let me say thank you to the entire OI team for their agile decision-making and effective execution during the pandemic. Despite many challenges, we continue to protect the health and safety of our employees, which is our top priority, as we deliver high-quality sustainable glass packaging for the critical food and beverage industry. Last night, we reported results for the second quarter of 2020. Our adjusted earnings were one cent per share and free cash flow was $112 million. These results were consistent with our most recent business update as trends improved over the course of the quarter. Despite the most challenging business conditions in decades, we remained slightly profitable, generated a strong cash flow, and positioned the business well for the recovery. I'm proud of our results given significant demand volatility and severe operating disruptions due to the pandemic. In particular, drastic lockdowns across key markets such as Mexico and the Andes. As we managed through the brunt of the pandemic, we continued to advance our strategy by taking bold actions to execute our investment thesis. Results benefited from exceptional execution of our turnaround initiatives. Likewise, we continued to advance magma and we took important steps to optimize our structure. This includes the divestiture of our agency business at an attractive valuation to rebalance our portfolio and help improve our balance sheet. While the second quarter was very challenging and disruptive, business conditions did improve over the course of the quarter. Sales volume was down about 15% overall, yet we exited June down just 3% as markets began to reopen and volumes were up 2% in July. Given the ongoing uncertainties of COVID-19, we are limiting our guidance to sales volume outlook. Reflecting recent encouraging trends, we have revised our full-year sales guidance. We now expect shipments will be down 4% to 7% from last year, which compares favorably to our prior outlook of down 5% to 10%. Likewise, we continue to operate under key guiding principles that prioritize strong liquidity, maximizing free cash flow, and reducing debt. Overall, I believe OI responded to the pandemic with resilience and speed as we continue to execute our long-term strategy despite the challenging backdrop. We are encouraged by recent business trends as markets reopen. If you flip ahead to slide four, you will see some of the steps we have taken to mitigate these turbulent times. Back in March, we established our COVID response plan to focus on cash generation, mitigate the financial impact of the pandemic, and maintain financial flexibility. We swiftly aligned supply with demand to avoid costly inventory growth and you will see that our inventories in June were in line with prior year. Likewise, we have set the right conditions to reduce inventories on a year-over-year basis starting in July and through the second half of the year. As we balance capacity, we optimize our network to manage fixed cost absorption and establish the right flexibility for the business recovery. Our turnaround initiatives have been the perfect platform to ensure we successfully navigate COVID-19. Our revenue optimization efforts have helped us achieve the best possible top line given the pressures imposed by the pandemic. Our factory profitability efforts have improved operating efficiency, including at our focus factories, which were impacted by increased complexity in 2019. Additionally, We have quickly implemented strict cost controls which have generated significant and immediate results. Importantly, we established a new operating model for the company that simplifies the organization as well as improves decision making and execution. We are watching capital like a hawk. During the second quarter, both capex and working capital compared favorably to the prior year period. We reoriented our capital allocation priorities to focus on debt reduction. While we contend with the most difficult business environment in our lifetime, I remain focused on the bold structural actions to change the company's business fundamentals. I'm now on slide six. As indicated, we continue to make great progress with our turnaround initiatives. In fact, this is the best I've seen the company perform in a long time. Magma continues to advance and we remain on track for our first quarter of 2021 Generation 1 installation in Holzminden, Germany. This will be an important milestone which will pave the way for broader Gen 1 deployment commencing in 2022. Finally, we are optimizing our structure as we rebalance our portfolio and improve our balance sheet. Late last year, we divested our Sodash joint venture and reduced debt by nearly $200 million. In January, we initiated the Chapter 11 filing for PATF as we seek a final resolution for our legacy asbestos liability. Last week, we completed the previously announced sale of our agency unit. I strongly believe these are the right steps for OI, our customers, our employees and our investors. Furthermore, I remain highly confident in our ability to execute across these fronts and unlock shareholder value. Let me share additional color on our business trends for context before I turn it over to John who will discuss our final financial results. I'm now on slide six. The charts provide two sets of information. On the left, you'll see OI's recent shipment rates. On the right, we have shared retail purchase trends for key markets and categories for glass. Let me share some thoughts starting with OI. While our volumes were stable for most of the first quarter, the pandemic sharply impacted orders in April and May. On an encouraging note, volumes recovered significantly in June and July as markets reopened. Consistent with the evolution of the pandemic, we realized the contraction and subsequent recovery in Europe first, followed by the Americas. Let's shift to the retail patterns on the right. As you can clearly see, off-premise sales have remained elevated since the pandemic, consistently up between 10% and 35% depending on category. This makes sense considering the sharp fall-off in demand at bars and restaurants. Prior to the pandemic, retail represented about 75% to 80% of our sales, while off-premise was the remaining 20% to 25%. Bottom line, we believe that strong retail activity is generally upsetting the lost sales from bars and restaurants, with consumer consumption trends balanced overall. While consumption was relatively stable, our shipment levels were quite volatile. After a period of disruption, our demand rebounded and supply chains rebalanced for this channel shift. Going forward, we believe glass demand and underlying consumption patterns will eventually converge. but it could be choppy for a while as supply chains adjust and depending on any further developments with the virus. Despite 2020 volumes being down from market disruption, we are confident our glass volumes will return and eventually exceed pre-pandemic levels. Now I'll turn it over to John.

Thank you, Anderson. Good morning, everyone. I'm on slide seven. As Andres mentioned, our second quarter results were one cent per share, which was consistent with our most recent business update. Let me walk through our earnings reconciliation on the right. Segment operating profit was $95 million, which compared to $236 million in the prior year. As noted, FX was a $6 million headwind. Higher selling prices offset cost inflation, which was elevated due to FX-induced inflation, especially in Latin America. Sales volume and mix was an $84 million headwind, which was fully attributed to the pandemic. This reflected a 15% decline in shipment levels, plus the impact at our JVs. Operating costs were a $52 million headwind, which is the net effect of lower production and improved operating and cost performance. Production was down 20%, which impacted results by $109 million. The decline in production levels exceeded the decline in sales volume. This reflected our disciplined efforts to align supply with lower demand and control inventory levels as well as the forced curtailment to comply with government decrees to address the virus. In particular, forced curtailment was drastic in both Mexico and the Andes. Lower production was partially offset by $57 million in benefits from our turnaround initiatives and other cost control efforts. We expect the clear majority of these savings will be sustained and benefit future earnings. Non-operating items included lower interest expense following recent refinancing activities. Our tax rate was elevated, reflecting a shift in regional EBIT mix and other factors given lower earnings. We will likely contend with an elevated tax rate for the balance of the year, which will not impact cash in 2020. All of these results pertain to adjusted earnings. The appendix includes more details on items management does not consider representative of ongoing operations. These include charges for employee severance related to our recent reduction in force initiative, refinancing costs as we retire near-term debt, as well as restructuring primarily related to one site in Latin America. We continue to expect 2020 cash restructuring will approximate prior year levels. Bottom line, Adjusted EPS was $0.01 compared to $0.69 in the prior year as earnings were significantly impacted by lower volumes due to the pandemic, partially offset by favorable operating and cost performance. Moving to slide 8, let me share a little color on regional performance during the quarter. In the Americas, profit was $52 million, down $88 million on a currency-neutral basis. Higher selling prices mostly offset cost inflation, which was elevated due to FX-induced inflation in Latin America. Sales volumes were down 18% during the quarter, but improved significantly later in the period, and shipments were down about 8% in June. During June, volumes were about flat in North America and down high single digits across most of Latin America. The exception was the Andean countries, which were still down double digits. In July, sales volume was up low single digits across the Americas, including mid-single digit growth in North America. Second quarter production was down as we balanced supply with demand and complied with government decrees. Improved operating performance and cost controls partially offset the impact of the pandemic. Europe's operating profit was $42 million, down $45 million on a currency-neutral basis. Higher selling prices more than offset cost inflation, which included the benefit of the region's revenue optimization efforts. Sales volumes were down 14% during the second quarter, but improved as markets began to reopen. June sales volumes were up 3% in the region and shipments were down slightly in July. Like the Americas, second quarter production was lower than last year to control inventory and improved operating performance and cost controls helped mitigate the impact of lower volumes. Asia Pacific's operating profit was $1 million, which was comparable to the prior year. As noted, we completed the sale of ANZ last week, which is the clear majority of the Asia Pacific segment. Proforma information is provided in the appendix. Let's shift to cash flows in the balance sheet. I'm now on slide 10. We are operating under a set of specific capital allocation principles amid the pandemic. Let me review these principles and the progress we have made through midyear. First, we are squarely focused on maximizing free cash flow. To support this, we are aligning supply with demand and limiting capex to normal maintenance investment and magma. We have been making very good progress. Our second quarter free cash flow was $112 million, despite this period often being a seasonal use of cash for the business. In fact, cash flow was about $160 million higher than the prior year, Normalize for Changes in AR Factoring Activity. Likewise, the PADAC Chapter 11 process has suspended any asbestos-related payments. All of this reflects a highly disciplined focus on cash and capital management, as our year-to-date cash flows compare favorably to the prior year. Second, we are preserving our strong liquidity. Despite the pandemic, our committed liquidity actually improved during the second quarter and exceeded $1.8 billion at mid-year. This is well above the liquidity floor we have identified for 2020. Third, we are reducing debt. As illustrated on the chart, net debt was $5.4 billion as of mid-year, which compared favorably both to the prior year period and first quarter levels. Our leverage ratio at mid-year was 4.1 per our bank credit agreement, which was just slightly higher than the first quarter despite the pandemic and well below our covenant limit of 5.0. With the completion of ANZ divestiture last week, net proceeds are being used to improve the balance sheet. We have already repaid over $350 million in debt, and the remaining debt reduction will occur in the near future. As our tactical divestiture program continues, we are in advanced stages on the sale of a few closed plant properties. While minor, we expect the transaction should be completed by year end. All these actions will further improve our leverage position, and we are highly confident OI will remain in compliance with its bank covenant in 2020. Overall, we are making solid progress on our capital allocation priorities in 2020, despite the challenges of the pandemic. Let me wrap up with a few comments on our business outlook. I'm now on slide 11. While we believe the worst of the pandemic is behind us, significant uncertainties remain. Given OI's earnings sensitivities to changes in volume, we are not providing specific earnings and cash flow guidance. We will consider reinstating guidance in the future when there is more market and public health stability. However, we are providing our best estimates on demand trends, which could change due to the fluid nature of COVID-19. Reflecting recent favorable trends, we now expect our full year 2020 sales volume will be down between 4% and 7% compared to the prior year. This reflects a more favorable outlook compared to our previous guidance of down 5% to 10% in 2020. Given recent trends, we expect third quarter sales volumes will be flat to modestly lower than prior year. Yet we do expect third quarter production levels will be down 7% to 10% compared to last year as we continue to trim our IDS levels. Most of this rebalancing is complete, and our IDS at the end of July was below the prior year. After this quarter, production should be aligned with sales volume trims. Please note that our sales volume outlook has been normalized for the divestiture of AMZ effective July 31st. We do anticipate providing continued regular business updates during the pandemic that will include our evolving business outlook. With that, I'll turn it back to Andres. Thank you, John.

Let me conclude with a few comments. The second quarter presented many unique challenges which we met with high resilience, speed, and agility. Despite these difficulties, we remained profitable and generated a strong cash flow supported by solid operating performance. After an abrupt downturn in demand earlier in the quarter, we've seen an equally strong rebound in demand since June, which is reflected in our improved sales volume outlook. Despite the global pandemic, we continue to advance our strategy and successfully take the bold actions to change our business fundamentals. Let me reiterate what I have said in the past. We remain focused on creating long-term value. I'm confident the steps we're taking today will enable OI to emerge in a stronger position that will benefit the company and its stakeholders in 2021 and beyond. Thank you for your interest in OI Glass, and we now welcome your questions.

Thank you. At this time, we would like to take any questions that we have for us today. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Hey guys, good morning. Good morning.

Okay, so I guess first off, on the July volumes up 2%, can you give us a breakdown by region, and then why are volumes implied to decelerate during the third quarter, just given tight theoretical end-market inventory levels in Mexico and the Andean region?

Yes, Gansham, so sales and shipments were up about 2% year-on-year in July, and North America was the strongest performance, being mid to high single digits. Thank you very much. Peru and Ecuador, very strong. Colombia, still down but recovering well.

And on the other part of the question, which was, you know, why did the quarter, why are we up 2% in July and then declining in the back part of it? You know, I'll kick that off. Yeah, go ahead. Well, I think we're certainly seeing an inventory restocking process going on, right, with... After the dislocation of the second quarter, we're certainly seeing that. The question is, how long will that be sustained and whatnot?

Yeah, so demand signals, Gancham, are encouraging across all markets. Nevertheless, we want to be cautious because there is high volatility, and we've seen lots of instability in the market over the last few months. Now, we've got to be mindful that there is uncertainty with regards to the illness, future evolution, and the impact it might have in lockdowns and economies. Now, there is the inventory replenishment that John just mentioned. Now, in the encouraging side, when we look at off-premise demand, it's been stronger than expected, and it's been four months, four consecutive months of very high demand. And Glass has been performing quite strong in off-premise. And just giving you a little bit of data related to the United States based on IRI, the premium products are performing quite well in off-premise. This is good for glass, and it is good to see that consumers are not trading down. Now, if we look at the specific product categories, beer in glass is up 10%, wine in glass is up 14%, spirits are up 24%, and food is up between mid-teens and high double digits depending on the product line. The on-premise channel has been down, and you know that that normally is good for glass. Now, after the lockdowns were lifted, it's been operating at low levels. Now, what that causes is kegs are of very low use. And because they're of low use, then single-serve containers got to replace that. And that is very good for glass because then our demand increases. Now, it will require the on-premise demand to go back to high activity and rotation for kegs to be safe to be used. Otherwise, the life of the product is at risk. Now, you know that in the U.S., there is a shortage of aluminum cans, and this is favorable to glass. Now, we expect the shortage to extend through 2021 at this point. However, when we look at Europe, for example, and we look at Brazil, demand for beer is really high In fact, we've been shipping all the capacity that we have active at this point in time, while then don't have this issue with the shortage of aluminum cans in the market. And I will say that the final factor that we are looking at is there is high new product development activity in the markets. We've seen that in North America. We've seen it in Mexico, in Brazil, and the Andean countries. And we will continue to monitor the conditions Again, we see encouraging signals of demand improvement, but we want to be cautious.

Okay. That's very comprehensive. Thanks so much.

We have our next question. It comes from the line of Brian McGuire from Goldman Sachs. Your line is open. Please go ahead.

Hi. Good morning, Andres, John, and Chris. Good morning.

Good morning.

It's a question on the third quarter outlook. So I think the second half of the year outlook, I guess in general, you're – sort of implying volumes will be flat to slightly down in both quarters. It seems like if you triangulate for the four to seven for the end of the year. So I guess the question is if volumes are roughly flat, do you think that EBITDA could be flat year over year? And then sort of within that, the decremental margin in 2Q was I think 45% for EBITDA and I know you had a tough time sort of adjusting to the changing environment and you've sort of talked about decremental margins going forward will be not quite that bad as you've been able to take some fixed cost actions. What kind of decremental margins do you think we could be looking at in the second half of the year if there's a range or a number you can kind of put on that?

Yeah, let me – this is John. Let me take a – We'll stab at a number of those points there. So if we look to the back half of the year, some of the moving parts is FX shouldn't be a very major factor, maybe a little bit of headwind as we get into later part of the year. We'll probably still be contending with a little bit of FX-induced inflation over the balance of the year. We'll be able to pass that through ultimately, but it might take a little bit of time. Like you said, in a world where the sales volumes are flattish, yes, we should be able to sustain that. We are taking a little bit of additional production downtime here in the third quarter, as I mentioned, at 7% to 10% as we're bleeding off some of the inventory levels. So that will be a bit of an impact. Keep in mind, we were down 20% or so in the second quarter. If we're half or a third of that, you can kind of calibrate what the net effect is. As you saw, the costs were up $50 million or so in the third quarter. Look at half or a third of that in that regard. and probably the other key variable or two other variables is taxes. You know, we're going to have elevated taxes just because of the impact of the second quarter earnings environment. We'll probably be about an average of 40% effective tax rate for the year. It could be lower than that if we are able to get volumes kind of flattish in the back half of the year. or it might creep up a little bit above that. And, of course, then you have the A and Z divestiture and there's probably about a nickel's worth of earnings loss over the balance of the year from the July 31st to the end of the year. So hopefully that gives you a little bit of color in that regard. On your question about decremental margins, so if you take a look at the course of the quarter, We did have, as you mentioned, something like 45% or 50% kind of decremental margins during the quarter. That's the second quarter. Now, that really reflects the impact of the sales volume, obviously, was a big piece of that. We did have our JVs also down a little bit, and that tends to have a little bit of disproportionate impact on the margins. Now, on the production side, yeah, if you take a look at it, I thought we did a really good job because We took, you know, despite the fact that we were taking production down at a rate above, you know, the decline in demand, we kept our decremental margins in that 40% to 50% type of range. In a world where you're actually now recalibrating on that, that probably would have been around 40% decremental or even high 30s decremental margin, given the very good cost reduction that we achieved during the business. So as we think about what it should be going forward, kind of a normalized gross profit margin decremental or its sensitivity on the sales side is about low 20s. And then if we can keep the decremental margin on production at another 15% to 20% or so, then you're pushing 35% to 40% decremental margin or incremental margin as we recover, for that matter, going forward.

Okay. Thanks very much. Thank you.

We have our next question comes from the line of George Staffas from Bank of America. Your line is open. Please go ahead.

Thanks, operator. Hi, guys. Good morning. Thanks for all the details. Morning, everybody on the call as well. Hey, Andres, I wanted to take a step back and look at what you're finding so far with Magma. What have been the findings out of Streeter? What have the customers been saying? And, you know, importantly, how does this, What are you finding in terms of the changes, if at all, in terms of the glass characteristics using magma versus your traditional technologies, the product performing as expected in line, is it filling the right way, and again, Thank you, George.

So, Magma, all the things we wanted to test in Streeter have been tested, and the outcome has been positive. The most important part we wanted to The proof over there was the melting, and it's been proved. So at this point in time, we can melt glass of high quality. We can do it at good efficiency rates. We can form bottles with no problem at the levels of quality required by the industry. So that is going well. We're waiting for the Holtzman and then Milestone to be covered. We want to confirm some other data points. If that is confirmed, we're going to be in a position to deploy Milestone in some specific applications in 2022 and 2023. So customers are very encouraged by that. They see how this technology can increase flexibility significantly, scalability, follow growth better, which is part of your question. So they're looking forward to having Magma available, and this is across end users. Then when we look at growth, Having magma is an important development because we can scale up in small increments, which is being a concern for the industry and really a constraint all the way to here. So we're going to be in a position to follow some of these growth opportunities in smaller increments, and then we can complement that with additional lines as the volume is developed. We weren't expected to deploy Gen 1. So far, the progress has been so positive that we are in a position to deploy Gen 1 if we get the confirmations we want in Holtz-Minden. Glass quality is good. The product is good out of the magma line, so we're now looking forward to the Holtz-Minden operation.

Hey, Andres, just a quickie. How many trials have you done at Streeter since you started? Thanks very much, and good luck in the quarter.

Yeah, multiple trials. We've been in operation in that line now for a year and a half, two years. So we go on and off because this is an R&D line, so we continuously test new things. And there are plans to test even more things in 2022 with regards to R&D developments. But this is in constant activity. So we've been testing multiple kinds of containers in multiple conditions over this period of time.

Thank you very much.

Thank you.

We have our next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my question. I realize it's really for, you know, kind of specific 2021 CapEx guidance, so I just wanted to ask related to kind of a COVID recovery scenario, you know, how long can you stick with kind of maintenance plus magma CapEx? You know, what are the areas where you would see a need for additional CapEx spending? And then just kind of in the context of you have two businesses now really, I realize they're big, but you don't have Asia anymore. You know, if you just kind of think about the maintenance for each of the two remaining regions going forward and kind of, you know, what is needed over the next two or three years in each of those regions.

Hey, Debbie, this is John. I'll take some of the number questions on that. We've always said kind of maintenance is around $275 to $300 million. The ANZ business would normalize to have about $35 million of CapEx on an annual basis. So you can kind of deduct that or at least a large portion of that for the CapEx. Just thinking about what could it look like going into next year, obviously, it's very early. Nonetheless, going into this year, into 2020, we were guiding 350 to 375. Obviously, that included A and Z at that business. So that included a maintenance level that I talked about, plus incremental investment. We knew we were doing magma, plus some discrete kind of growth in operating performance-related projects. So thinking that as a baseline, then the question is, What is the need next year? And that's where we've got to understand a little bit of the topology of the marketplace and business opportunities. What does the new normal look like to be able to recalibrate?

Yeah, I think the major difference will be related to strategic projects. And something that we're seeing over the last couple of months is some customers willing to take midterm to long-term commitments coming out of the pandemic. So we're looking at that. We're looking at the demand capacity balance and trying to determine what might be required from a capacity standpoint going into 21 and 22. So that might be the major difference. I think the maintenance for the critical assets has been covered in 2020, and then we've been investing in magma, which we intend to continue going into 21.

Okay, thank you. And John, if I could just ask, you know, kind of looking back at the green bond that you guys did last year and thinking about the next couple of years, do you think there's a, you know, a scenario with which you would be able to, you know, significantly lower your borrowing rates just, you know, kind of given what you were able to do there?

Yeah, I mean, first of all, we thought the green bond was a great success for us. I mean, the amount of interest that we had lined up, especially by ESG investors, at least 40% is from what we can tell of the investors in the green bond ended up being ESG-related funds under either independent or under the umbrella. You know, a lot of times companies target about an eighth of a percentage point improvement. I think we got better than that. I think we got a quarter point or better, to tell you the truth. Now, it's always hard to understand under any given set of circumstance what you think that the value of that would be going forward. But we were very encouraged by that green bond, and I'd certainly look to evaluate doing more of those going forward. And our average borrowing rate right now is right around 4% or so. So across the spectrum of the investments. So that's a pretty good rate. Hopefully we can continue to chip away at that, but it'll depend on the rates when we get back in the market.

Okay, great. All right, thank you very much. I'll turn it over.

Our next question comes in the line of Mark Ruby from Bank of Montreal. Your line is open. Please go ahead.

Thank you. It was a very clear presentation this morning. I want to note that. I wondered if you could talk about the amount of impact in the second quarter from one time kind of cost cuts and salary reduction and what the timing on any of that is coming back.

Yeah, Mark, you cut out a little bit there, but I think your question was what was the impact of cost cuts in the second quarter and how much is sustainable and whatnot. So we had indicated that we had $57 million of cost reduction in the second quarter. About $32 million of that, or about close to 60% or so, was really under our turnaround initiatives. That's improved efficiency, effectiveness at the factory level, things like that. That is very sustainable. The other $25 million or so has to do with other cost reduction activities that we had across the business. Under that pocket, some of it is sustainable. So we had indicated we had a reduction in force activity in the quarter. That component will be sustained. So let's say half of that is a sustainable or so type of savings. Some of it is situational. I mean, the fact that, you know, that volumes were down, production was down, even access to labor was down. So maybe maintenance level spending was a little bit lower during during the second quarter. You know, a lot of people have been obviously working at home, so the OPEX levels or the spend are a little bit lower. But I would say overall, about 70% or more should be sustainable types of savings for the business.

Okay. And just as a follow-on, John, can you guys talk about sort of how you're managing the production reductions in the third quarter? Is it shutting down lines, shutting down furnaces, just slowing back lines? and if there are any footprint moves contemplated.

So at least on the last part first, we came out and we identified the restructuring items. We had the one facility in Latin America. Any other future decisions would be obviously in the future. We've got to understand the landscape of the business as time progresses. But looking at The production management during the quarter, it was about 50% lines down and 50% furnaces down. Going into the second quarter, it was substantially lines down, and obviously that has a higher fixed cost absorption. We did be able to blend that down to about 50-50 towards later in the quarter. That's about what occurred in the July period. Also, that's a good place between the sweet spot between minimizing cost absorption and but also having operational flexibility as demand comes back online. So that's kind of the mixed bag that we were looking at. And as we indicated in our prepared comments, with IDS getting in line to where we want it to be, we'll start tailing off on the production activities kind of mid-quarter here or so and then get back into production more aligned with sales volume activity. Okay, very helpful.

We have our next question. It comes from the line of Anthony Pettinari from Citi. Your line is open. Please go ahead.

Good morning. You know, you talked about the strength in North America, and I'm just wondering, as some states are pausing or in some cases rolling back reopening plans with COVID cases increasing, Is it possible to say what your full-year shipment guidance assumes in terms of on-premise consumption? Is that expected to kind of improve sequentially through 3Q and 4Q with on-premise coming back? Or are you kind of assuming maybe kind of a current level of activity?

So we had a strong July. At this point in time, we're sold out in beer in North America. We expect that to go through the balance of the year. What we're seeing in on-premises, in off-premises, is something that we've got to monitor closely. There has been a significant increase, and I would say taste for at-home consumption and cooking, and that's changing some trends. There are some emerging trends that we've got to go monitor. Initially, we expected that off-premise was going to be Very punctual. It was going to have a very punctual increase, but in reality it's four months now and it continues to be very high. So we've got to see where that is going to sit at the end. And on premise, it's got to go back up. It's important to monitor at what pace and to what level. And I think the use of KX is something to monitor closely because it has a significant impact. The volume of kegs equates to about 6.4 billion units of single-serve containers, so it's a pretty sizable share. So we are monitoring that closely. We expect the North American market to continue in a good pace, but we might be limited by capacity in beer, because at this point in time, we're placing all the capacity we have in the market

Okay, that's very helpful. And then just with regards to the shortage of beverage cans, just so that I understand this and I heard it correctly, I think you indicated North America, you are seeing those shortages maybe impact the market through 2021, but you're not seeing them to the same degree in Brazil and Europe, if I heard that correctly. And then I guess, is it possible to quantify how much volume maybe you were able to pick up, whether it's a point or more? Is this volume that you're able to kind of block up into multi-year contracts or does this maybe just kind of go back, you know, next year or any kind of color there?

Yeah, so what we're seeing over here is obviously an increasing demand for glass as a consequence of that shortage. We are seeing very strong demand in Brazil for beer. In reality, we're sold out in Brazil at this point. One-way containers have been performing well in off-premise, and returnable containers are now coming back because restaurants and bars are opening in the large cities. So Brazil is performing strong. We're going to be constrained by capacity. Europe is having a very strong demand in beer. It doesn't have the shortage that we are seeing in the United States for aluminum, but it has a very strong demand for beer. So that's the current situation. Again, we're monitoring this closely. We expect that as consumers have more glass in their hands and knowing that consumers like to consume their preferred brands in glass, this is going to have a positive impact over time in glass demand.

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

We have our next question. It comes in the line of Adam Josephson from KeyBank. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Good morning. John, two cash flow questions for you. The first is you went into this year thinking you'd do $300 million plus, partly because you're not making as best as payments, and then obviously we had a pandemic such that your earnings are going to be much lower than what you initially thought, and then you sold the A&Z business recently. So given all these changes and given whatever your economic expectations are for the foreseeable future, What do you think is a reasonable normalized level of free cash flow? When I say normalized, I mean in a year in which working cap is neither a major source or use, and when your capex is comfortably above the maintenance level that it'll be this year.

I would say a normalized level of capex still remains above that $300 million range for the business. Again, thinking a more normalized level and thinking of some of the moving pieces in that regard, you know, you can come up with your own kind of EBITDA view. Keep in mind, you know, we lose about $80 million or so of the EBITDA out of A and Z, but we also have the follow-on of the $35 million lower of CapEx spending and then the savings of the interest payments themselves on the debt. So the net leakage there is about $30, $35 million or something along those lines. In a world where we continue to see working capital as maybe a very slight, modest use of cash, restructuring in this kind of $40 million range or thereabouts, and really kind of bringing that capex, if you just kind of assume this 375, understanding that we may have numbers that swing either way on the side of that, then adjust it down for the A and the Z, brings it down to a little under 350. So what you have there is an environment that supports over $300 million of cash flow for the business. And then, of course, that's what we'd like to grow the base off of and improve it from there.

Thanks. And just a related question is, if that's a normalized level, that's what you were guiding to for this year, of course, before COVID and before you sold ANZ. Can you talk about your working capital expectation for this year, just given your efforts to reduce inventories, given... Whatever your AR factoring is compared to last year, et cetera.

Yeah, let me just talk about that a little bit. So going into this, remember last year working capital was a fairly large use of cash, about $150 million, and we had indicated going into 2020 that should be reduced to something like a $75 to $100 million use. Now, what we're also seeing right now is a couple moving pieces. Some of the harder hit areas are some of the markets that have the longer payment terms and things like that. So that's a little bit of a recalibrating effort. Plus the fact that we've also really focused on the working capital side ourselves internally, whether it's receivables or inventory management, etc., So I think we should be, in a world we're kind of in the middle part of that range that we were talking about, you should be comfortably below that $75 to $100 million range, but it's still a modest use of cash. And so that's probably what I'm thinking about this year. Now on the factoring side, factoring we don't think is going to be either a source or use of cash this year, assuming the markets are what they are. We had about, you know, Thank you for joining us. It's basically reporting elements, and we will make those elements very clear for the investment community going forward.

Thank you, John.

We have our next question. It comes from the line of Mike right here. Your line is open. Please ask your question.

Great. Thank you. And just one for me. Andre's question on the U.S. beer dynamic that you talked through with cans sold out. Curious if this shift or this increased demand you're seeing in glass, if it's more driven by, say, your traditional canned beer customers who they're seeing tremendous demand and they're trying to get more product on the shelf, so they're moving back towards more bottled beverages versus, say, consumers that are just kind of trading towards different brands, quality or more premium, traditionally glass products. I think we're seeing both.

I think customers are interested in developing new products, and we're seeing that activity picking up. And as consumers get the opportunity to have their brands in glass, which they like, I think we're going to see a pickup on demand just because of that. Clearly, there is a shortage in aluminum cans right now, but there is an improvement in the interest in glass by its own rights, too.

Yeah, I think this is also evidenced by you see that a lot of interest in the new product development that we talked about earlier is a lot of our customers are coming to us looking about ways that we can launch and revitalize brands and bring it forward in a different way. and that's a good sign that there's a fundamental interest in Glass as a product.

There are a number of premium products growing in the market and Glass is a very good fit for premium products and branding so that's what we are observing in the market taking place. Great, thank you.

We have our next question comes from the line of Gabe Heide from Wells Fargo. Your line is open. Please go ahead.

Good morning, gentlemen. Hope you're all well. I was curious, can you discuss at all, I guess, the competitive landscape in Europe and maybe more specifically the Iberian Peninsula? We've read some reports of heightened imports in France, particularly, and others removing capacity in the market, though I think you guys kind of added a furnace. I know that was kind of spoken for for a premium beer product, if I remember correctly. So I'm curious if that furnace is operational at this point. and then, you know, as it relates to magma, I seem to remember that was going to be kind of on schedule for second half 2020 and I appreciate, obviously, it's difficult to get engineers and different folks in the plants and factories, but being pushed to Q1, is that just a result of the pandemic or is there something else there?

Okay, so the competitive situation of Thank you very much. Thank you. The furnace in Gironcourt, which you're referring to, is going to start in September. So we're finalizing the construction, and we're ready to go September. It got a little bit delayed just by the pandemic. As you will imagine, it was difficult to move people across borders, and we needed to slow down. With regards to magma, it's the same thing. So we were expecting to conclude by the end of the year, by the fourth quarter, and we needed to move this a couple of months because we couldn't. Thank you. And I recognize that you guys are kind of managing the business real time and 2021 feels like a far way away today, but

Assuming obviously we don't have kind of lockdown measures in Q2 and we kind of have some sort of a volume recovery in 2021, how should we be thinking about production levels next year? Again, kind of particularly given you guys are trying to manage inventories pretty tight this year.

Yeah, I think as we said before, there is lots of volatility at this point and uncertainty. So we're monitoring all these various I think there are encouraging signs in demand, as I described before. They're having an impact right now. Some of them have the potential to go into the following year, but again, it's too early to give you a given estimate of 2021.

I would just add, I mean, again, back to our prepared comments, is that, you know, we're at the point getting close to having our production aligned with demand. So, you know, of course, we'll have to look at how much, you know, what is the inventory at the end of the year and how much progress we want to make and further after that. But by and large, we're doing the heavy lifting very quickly. I mean, you know, we were able to achieve in a couple months what it took the company over a year to do back during the Great Recession. So I think we acted very quickly. to right-size the inventories, which we think is absolutely the right decision for cash and positions us quite well going forward.

Great. That's what I was looking for. Thank you. Thank you.

We have our next question. It comes from the line of Lars Schellberg from Credit Suisse. Your line is open. Please go ahead.

Thank you, and good morning. I just have one question left. Just looking at your slides, Your margins in the most comparable region, they're still tracking your peers in the range 500, 600 basis points. So the question is, what sort of leverage do you have to pull to narrow that significant dividend margin gap? And what sort of role do you think MAGMA can play in that?

Let me start with just making reference to the turnaround initiatives. I mean, a lot of that focus goes to cost reduction. and something that we've done during the pandemic is accelerating those efforts. So I think we're building a pretty solid foundation for margin improvement going into the following year under comparable conditions. Magma is expected to have a lower total cost of ownership when we get to Gen 3, a lower capital intensity too. So it's going to have a, we expect it to have a positive impact in margins as we can implement Gen 1 and Gen 2 and after that and then Gen 3.

Yeah, just one follow-up. In terms of the furnace activity, was that a meaningful sort of delay from the first half into the second half and is that also weighing on the second half production level?

The rebuild schedule?

Yes. Yeah, well, we needed to have a little bit of delay in some of the reveals we had High level of activity scheduled for Europe when the year started. We had some delay, but we are moving all those projects forward. So we already started most of them. So that's pretty much covered. In other parts of the world, we didn't have an issue because we didn't have the restrictions to move people across. So we've been performing according to our schedule as we came into the year.

I would say is that, you know, the capital spending as we look through the balance of the year is pretty evenly balanced between the third and the fourth quarter, and both of them will be favorable to the prior year levels.

Got it. Thank you.

We have time for one last question.

We have one more from R.N. Viswanathan from RBC Capital Markets. Your line is open. Please go ahead.

Great, thanks for taking my question. I just have one maybe higher level question. When you think about all the changes you've made over the last couple of years and now selling ANZ and also I guess maybe thinking about some of the shifting demand dynamics, how are you thinking about the footprint now globally? Are there any regions where maybe there's opportunities to consolidate plants? Do you think that's necessary within the industry? Thanks.

Yeah, so we've been looking at footprint, having the right balance between demand and capacity across the world for a couple of years now. The market in which we had demand decreases, which is North America, is a market in which we've been adjusting capacity. Now we're seeing an increase in demand, so we've got to see where that is going to take us with regards to requirements of capacity. But other than that, I think we are well positioned. In markets like Brazil, there is a significant demand, so we've got to look at incremental capacity over time. But for the most part, we've been balancing demand and capacity well. We're continuously looking at assets. We want to make sure we are always focused on the and other assets that have high margins and very good returns. But that's an ongoing exercise that we've been doing and will continue in the future.

Okay. Thank you, everyone. That concludes our call. Please note that our third quarter call is currently scheduled for October 28. And as always, make it a memorable moment by choosing sustainable glass. Thank you.

ladies and gentlemen this concludes today's conference call thank you all for participating and you may now disconnect have a great day