O-I Glass, Inc.

Thank you for standing by and welcome to the OI third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question and answer session. Any instructions on how to do so will be given at the appropriate time. Thank you. Mr. Chris Manuel, you may begin.

Thank you, Em, and welcome everyone to the OI Glass third quarter earnings 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'll host a Q&A session. Presentation materials for this earnings call are available on our 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 will be presenting today will relate to non-GAAP measures, such as adjusted earnings per share, Free Cash Flow, Segment Operating Profit, Leverage Ratio, and Net Debt, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP can be found in the 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 iGlass. I want to start off by recognizing all of our employees and, worldwide, and, in particular, our frontline team in the factories. Our employees have worked hard every day in challenging conditions to ensure we safely manufacture the glass containers needed to keep the food and beverage supply chain operating. With great attention to health and safety, all of our plants are now fully operational and performing well. This hard work by our team produced a strong rebound for the third quarter. Thank you all. Last night, we reported results for the third quarter of 2020. Our adjusted earnings were 41 cents per share and free cash flow was $205 million. Third quarter volume increased nearly 2% compared to the prior year, as shipments were fairly stable across the quarter. Demand was strongest in the Americas, led by our North America business unit. Overall consumption levels haven't changed much over the course of the pandemic. However, demand has shifted from on-premise to off-premise given public health restrictions. Amid this shift, as expected, consumers have maintained a strong preference for healthy, premium, and sustainable glass packaging regardless of the venue. We continue to advance our strategy. Our turnaround initiatives are gaining momentum and improved operating performance substantially offset the impact of lower production during the third quarter. as we seek to optimize our structure proceeds on the sale of our agency business unit were applied to the reduction. All the while, we have continued to develop magma as we seek to revolutionize glass manufacturing. We believe all these actions will create value for our shareholders. On an encouraging note, our business outlook continues to improve. Given a solid quarter, we now expect full year sales volume will be down about 3% to 5% in 2020 compared to 4% to 7% decline in our previous outlook. As conditions have somewhat stabilized, we are reinstating earnings guidance for the quarter, which we expect will approximate $0.30 to $0.35 per share with sales volume comparable to the prior year leverage. With year 2020 cash flow should also compare favorably to the prior year. We are also providing some preliminary thoughts on 2021. where the outlook for earnings and cash flows will improve versus 2020 levels. Of course, the pandemic continues, so any outlook is subject to adjustment as public health trends evolve. Let me provide an update on our achievements trends which have stabilized over the past several months. I'm now on slide four. Consistent with previous presentations, this chart provides two sets of information. On the left, You will see OI's recent shipping trends. On the right, we are presenting key retail purchase trends across several categories and geographies. Let me share some thoughts starting with OI. While our volumes were stable for most of the first quarter, the pandemic abruptly disrupted orders in April and May. As many markets reopened, volumes recovered significantly in June and have been stable to higher each month of the third quarter. With most of October behind us, sales volume this month is up slightly compared to last year. Reflecting recent trends, we anticipate four-quarter shipments will be flat to slightly after the prior year. 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 higher depending on category. This makes sense considering the sharp fall-off in demand at bars and restaurants. While retail trends remain strong, growth has moderated more recently as on-premise locations started to reopen some during the third quarter. Let me make two key observations. First, for why the strong retail activity is generally upsetting the lost sales from bars and restaurants, with consumer consumption trends balanced over all. We are pleased with the ability of our customers and supply chains to quickly adapt, and Glass is doing well with this consumer channel shift. Second, it is not possible for the supply chain to snap back and fully restock inventories immediately after the disruptive second quarter. Frankly, our customers and the overall food and beverage supply chain is not equipped for this type of surge. At present, we believe most end markets are reasonably well served, but the overall supply chain will likely remain in flux for the foreseeable future. So we think demand will continue to improve, but these patterns could remain choppy until fully rebalanced. Bottom line, we are serving our customers' needs well and are confident that our achievement levels will return to pre-pandemic levels and continue to grow off that base, particularly as new product development activity remains at an elevated level. While we contend with the pandemic, we are highly focused on executing Our long-term strategy to create shareholder value. I'm now on slide five. I want to update you on the bold structural actions we have taken to improve the company's business fundamentals. We continue to make great progress with our turnaround initiatives, which have proven to be the perfect platform to help navigate the pandemic. I'm proud to say that our operating performance continues to improve, which reflects the contribution of these turnaround initiatives. Keep in mind, production was down 10% from last year as we ramped up capacity after the challenging second quarter. This was a $46 million earnings headwind, which was substantially offset by operating improvement and plant productivity that is now back to pre-pandemic levels. Likewise, our new brownfield plant in Geroncourt is now operational. I want to thank the thousands of IT members who helped us with these achievements. Magma continues to advance, and we reached several key technical milestones during the quarter. The Magma Generation 1 installation at Holzminden, Germany, remains on track for the first quarter of 2021. This will be an important development to pave the way for broader Gen 1 deployment commencing in 2022 and beyond. Additionally, we recently entered into a strategic collaboration agreement with Krons AG the global leader in food and various processing and filling technologies. Together, we can improve glass filling line speed and efficiency, enhance ability to respond to market trends, and develop innovative and sustainable glass systems. Finally, we aim to optimize our structure by rebalancing our portfolio and strengthening our balance sheet. We have completed a number of divestitures with total proceeds in excess of $870 million, including the sale of A&Z and an attractive multiple during the third quarter. As a result of these transactions and favorable cash flow, we have significantly reduced net debt over the past year. Our tactical divestiture program continues and we expect to complete that program next year with additional proceeds to accelerate further debt reduction. I firmly believe these are the right steps for our customers, our employees and our investors. Furthermore, I remain highly confident in our ability to execute across these fronts and unlock shareholder value. Advancing to slide six, I would like to talk about how we are further elevating sustainability at OI. We are focused on being the most innovative, sustainable, and chosen supplier of brand building packaging solutions. As you know, our sustainability program is aligned with the United Nations Sustainable Development Goals. Consistent with this focus, we are elevating Let me note a few recent steps on our journey. First, we recently appointed our first chief sustainability officer, a position that reports directly to me and will ensure ESG initiatives are advanced. Second, we achieved our vision. We have broadened our sustainability initiatives and goals for next several years. This includes actively developing the U.S. glass recycling system, building on the successful model in Europe where glass recycling outpaces all other packaging materials. Third, we have initiated a glass advocacy campaign initially focused in the U.S. This effort will ensure a balanced public discussion on the inherent sustainable nature of glass. More broadly, the campaign will emphasize the many benefits of our product, including the healthy, premium, and brand-building characteristics of glass. OI is also at the forefront of transformational glassmaking technologies, and our magma innovations will set new standards in the industry in many areas, including lightweighting and sustainability overall. Finally, we are preparing our next sustainability report for 2021, which will have much more detail on these initiatives. Next, let me turn the presentation over to John, who will provide some detail on the finances.

Thanks, and good morning, everyone. I'm now on slide seven. As Andres mentioned, our adjusted third quarter results were 41 cents per share. This compares to 54 cents in the prior year. While segment profit was nearly flat with last year, earnings were down due to the impact of divestitures, higher corporate costs, and an elevated tax rate. We believe stable operating profit is a great accomplishment following the challenging second quarter and over $45 million impact of production downtime earlier in the quarter. Let me walk through our earnings reconciliation on the right. Segment operating profit was $204 million compared to $206 million in the prior year. As noted, FX temporary items in the impact of divestitures was a net headwind. Higher selling prices mostly offset cost inflation, which was elevated due to FX-induced inflation. Sales volume and mix boosted earnings as sales volumes increased about 1.7% from the prior year when excluding the A&Z business. Operating costs were up slightly from the prior year. As Andres noted, the benefit of our turnaround initiatives and cost savings substantially offset the impact of lower production. Non-operating items including higher retained corporate costs, lower interest expense, and a continued elevated tax rate. Higher corporate costs include additional magma spending as well as higher insurance and pension costs. Likewise, technical assistance and royalty income is down given lower engineering activity amid COVID. The higher tax rate includes some catch-up adjustments after the unusual second quarter. Bottom line, after a disruptive second quarter, our segment profit recovered and was comparable with the prior year despite the temporary overhang of lower production levels. Moving to slide eight, let me share a little color on regional performance during the quarter. and the Americas, profit was $113 million, down $10 million from the prior year. Higher selling prices partially offset cost inflation, which was elevated due to FX-induced inflation in Latin America. Sales volume was up nearly 2% during the quarter, and the improvement was most pronounced in North America and Brazil, where both were up around 6%. While down slightly in the quarter, shipments in Mexico and the Andeans improved significantly over the course of the quarter as those markets recovered from major lockdowns earlier in the year. Both Mexico and the Andeans were up low single digits in October. Operating costs were flat in the third quarter as good operating performance and benefits from turnaround initiatives offset lower production. Europe's operating profit was $88 million, up $9 million from last year. Thank you for joining us. Asia Pacific's operating profit was $3 million compared to $4 million in the prior year. Given the sale of ANZ, our 2019 and 2020 financial statements have been reclassified. As a result, the Asia Pacific segment only includes ANZ while our Asia business is included in retained corporate. As you can see, segment results were pretty flat, which again pertains only to ANZ. While dilution in the sale was a headwind, Year over year, the business performed well up to the sale date on July 31st. Let's shift to cash flows in the balance sheet. I'm now in slide 9. As stated in the past, we are following specific capital allocation principles during the pandemic. First, we are squarely focused on maximizing free cash flow. To support this, we have aligned supply with demand and limited capex to normal maintenance investment and magma. We have been making very good progress. Our third quarter free cash flow was $205 million. Cash flows were down from the prior year, but this was due to a prior year shift in factoring activity. On a factoring neutral basis, current year cash flows exceeded the prior year by $96 million. On a year-to-date basis, cash flows were well above prior year levels, reflecting our significant focus on cash and working capital management. Second, we are preserving our strong liquidity. Despite the pandemic, Our committed liquidity continues to improve and exceeded $2 billion at the end of September, well above the liquidity floor we established for 2020. Third, we are reducing debt. As illustrated in the chart, net debt was just under $4.8 billion at the end of this quarter. Debt compared favorably to both the prior year period and second quarter levels. The ANZ proceeds and free cash flow helped reduce net debt by nearly $850 million year-over-year despite currency pressures. Our leverage ratio at quarter end was 4.4 per a bank credit agreement, and we should be around this level at year end. This is well below our covenant limit of 5.0. We are highly confident OI will remain in compliance with this bank covenant. As our tactical divestiture program continues, we remain confident that we will achieve our target of $400 to $500 million in proceeds by the end of 2021. These additional actions will further strengthen our balance sheet. Finally, Paddock continues to proceed as expected. Overall, we're making solid progress on our capital allocation priorities in 2020. Let me wrap up with a few comments on our business outlook. I'm now on slide 10. As we all know, significant macro uncertainties remain given the pandemic. However, we are reintroducing quarterly earnings guidance given more stability lately. Likewise, we are providing some early considerations for 2021. Currently, we expect fourth quarter adjusted earnings will approximate $0.30 to $0.35. As key business conditions continue to stabilize and improve, we expect both sales and production buy-ins will be flat to slightly up during the fourth quarter. Earnings should also benefit from strong operating performance and our turnaround initiatives. Higher selling prices should mostly offset cost inflation, which will include FX pressures. Earnings will reflect the dilution from recent divestitures, a continued elevated tax rate, and higher retained corporate costs. Looking at full-year cash flow, we expect our EBITDA to free cash flow conversion will exceed 10% this year, or $100 million. Keep in mind, this is temporarily skewed by our recent ANZ divestiture. Specifically, we will be reducing AR factoring by $50 to $75 million as we continue to factor between $35 million to 45% of gross receivables, which has been rebased after the divestiture. Likewise, post-closing working capital benefits of around $25 million will be recorded in cash from investing instead of cash from operations. Adjusted for these items, free cash flow conversion would be at least 18% this year or $180 million or higher. This represents a significant improvement from 2019. We anticipate this favorable trend will continue into 2021. Earnings should benefit from higher sales and production volumes as well as continued favorable operating cost performance. Interest expense should be stable. The tax rate should normalize while earnings will reflect recent divestitures. Net price will likely be a headwind. Keep in mind that this is a purely timing issue. As contracted price adjustment formulas reflect minimal inflation 2020, while we would expect inflation will begin to normalize some next year. Bottom line, we expect 2021 earnings will be a measurable improvement compared to 2020. While it's a bit early to provide a detailed view on cash flows, we are focused on improving our EBITDA to free cash flow conversion. We aim to increase our conversion to between 20% and 25% next year, which we expect will continue to improve over time. We anticipate providing more details in 2021 during our year-end earnings call. With that, I'll turn it back to Andres.

Thank you, John. Let me conclude with a few comments. 2020 has presented many unique challenges, which we met with a high level of resilience, speed, and agility. We have remained focused on executing our turnaround initiatives, and our operating performance is strong. The abrupt downturn in demand from earlier in the year has been met by an equally strong rebound as reflected in our improving sales volume outlook. Additionally, Glass has now demonstrated It can excel in both an open and closed market environment, given a strong consumer preference in both channels. We continue to advance our strategy and have been successful in taking bold actions to improve 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 place OI in a stronger position that will benefit the company and his stakeholders in 2021 and beyond. Thank you for your interest in OIGlass, and we welcome your questions.

Okay, Em, I think we're prepared for questions now.

Absolutely. At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your phone. If you wish to cancel your request, please press the pound or hash key. In the interest of time, we're asking you to please limit yourselves to one question and one follow-up only. We'll pause for just a moment to compile the Q&A roster. Once again, star one. And our first question comes from the line of Anthony Pitinari from Citi. Your line is open.

Good morning.

Good morning, Mark.

Andres, John, you gave 4Q volume guidance, but I was just wondering if you could talk a little bit about the trends that you've seen in October by region. And, you know, obviously we've had this Resurgence of cases, certainly in Europe and the United States, you know, how you're kind of factoring that into 4Q volume guidance.

Okay, so I think the most important thing to have in consideration is that we're seeing a good and better than expected performance in off-premise, and this is mostly upsetting off-premise drop. Now, what this means is that our demand is more resilient than we originally expected to chips between these two channels. Now, the performance in October continues to be in line with what we saw ending Q3, so we expect to continue down that same trend. We're seeing very strong performance in Europe in beer, wine, and food, as an example. We were in line in Q3 in Europe. We expect to be flat or slightly up in Q4 in this market. When we look at the Americas, I think the most important thing to highlight is The performance in the Americas has been driven by the North America performance, which has been stronger than we've seen before. And this is driven by multiple categories. And this is a very important point, because we're seeing a strong performance in North America in NAB, in food, in craft beer, in premium beer, in spirits, in an RTV. And I think what that shows is that with pureing from a, let's say, beer-intensive mix to a more broader mix, in this region. We have recovered well in Mexico, Andean countries, and Brazil. And for example, in Mexico, we are back to levels of achievements that are out of prior year. We are seeing very strong demand in that market in food, in beer, and in spirits. And we are also seeing a strong demand in the Andean countries. In this case, beer and food are driving the high performance. Beer is driven by premiumization, which is very strong in the Latin American countries and by global brands. And finally, a comment on Brazil. We recovered well in Brazil through the quarter, in the third quarter. This was driven by strong demand across categories, including beer. And I think an important data point is beer in glass is growing in this market at around 10% annually. And it is only limited now and going forward by capacity. Returnable glass is back because they're reopening bars and restaurants. And then another important point to highlight is when returnable containers convert to one-way containers in Brazil, they're converting to one-way glass and aluminum cans. And what they do is the mainstream convert primarily to aluminum cans. The premium products convert primarily to one-way glass. So when we look at all these trends, we believe with the information we have today, obviously the pandemic impact is uncertain and what the stimulus will be by governments is unknown in terms of scope and timing. But with what we know today, we see a continuation of this trend we've seen in Q3 into Q4. And that is what is taking us to believe that when we go into 21, we're going to be pretty much in line with 2019 levels.

Okay, that's very helpful. And then, you know, with regards to growing the base in 21, you talked about new product development. I'm just wondering if it's possible to quantify, you know, how much that could add to volumes or just any kind of finer point you can put around that.

Well, difficult to quantify at this point, but what I can mention to you is the level of new product development activity in North America is strong. and I think it is the same in every market. We've seen it in Mexico, Latin American countries and Europe. And I think something that is happening is the performance of glass in off-premise is being stronger than anybody expected and that is increasing the interest by customers to develop new products. So the level of activity is high. We expect this to help 2021 volumes and obviously it will continue into the following years.

Thank you. Next question.

Our next question comes from the line of Dhanshram Punjabi from Baird. Your line is open.

Hey, guys. Good morning. Hope all of you are doing well.

Good morning.

Thank you. Morning. So just kind of judging by your outlook for production volumes, both for 4Q and 2021 relative to the sales outlook, you know, it looks like inventories are pretty well aligned at your end. Can you first off confirm that and if that is the right way to interpret those comments? And second, can you give us your view on supply chain inventories as you kind of think through the various regions? You know, clearly there were customer production disruptions in Mexico, for example, in 2Q that impacted beer. Just wondering how long the inventory replenishment cycle could be for your customers.

Okay, so we're back in food production in our case. Our inventories obviously have been reduced. I would say that they've been optimized primarily. So our expectation is that as we go into the following year, we're going to continue with that level of inventories. The inventories in our customer side, I think the entire supply chain has been obviously working hard to replenish inventories. Now, we've been seeing this level of performance since July. So July through October, these four months now, we've been pretty much at prior year levels or above. So from that perspective, I would expect that the inventories are coming back to a good level in their case. Now, when it comes to disruptions, we experienced a significant disruption in Mexico and the Andean countries. I think that was obviously very impactful, but what I would expect is that going into the quarter, this quarter and the following year, In those countries and across the world, most likely the measures to lock down or shut down won't be as dramatic as we see them in the past.

I would add on that one, Gansham, is our IDS, we're down six days as of the end of September and probably at the end of the year, we're going to be down even a little bit more as we continue to calibrate on things, even though production is now pretty much aligned with the with demand at this point in time. You know, that's about $100 million of inventory that we've taken out of the system. And as Andres mentioned, you know, we intend to sustain that and continue to run at those types of levels.

Okay, that's very helpful. And then the second question, you know, it's been a while since I've seen you call out inflation in your press releases and your comments. You see, you know, freight prices go up in the U.S. You've seen natural gas take up. You know, is there a risk for margin pressure near term? And just kind of remind us, on the lags in North America and your hedging policy specific to natural gas. Thank you.

So I can make a few comments and then John can complement. I think it is important to highlight that overall market environment continues to be fairly constructive. Now, inflation in 2021 is expected to be higher than inflation in 2020, driven by the factors that you just highlighted. So because we have our contracted volume goes up to 56 to 60 percent or so for total volume, we are expecting that we won't recover as high as we would like to in 2021 because we're going to be recording primarily 2020 inflation. But then right after that, we should be in the opposite position. So we should be recovering slightly ahead of inflation.

Yeah, I would say that in North America, what we're seeing right now in the last couple quarters and probably will occur for the next couple quarters here in North America is that we have provisions that allow for either monthly or quarterly pass-through of natural gas prices through our contracts, and most of our business is contracted there. We only hedge at our customers' behest because of the quick pass-through in that regard. We are seeing a situation right now where the prices are showing that pass-through right now, and you saw that we had a little bit of a negative price inflation spread in the quarter, and that's because of those earlier lower prices in NG, for example, are being passed through as we speak right now. Like I said, that'll take a couple quarters to go through. We're also right now seeing some FX-induced inflation. I mentioned that during our prepared comments, and this is because, for example, we buy soda ash and things like that in U.S. dollars in certain Latin American countries. That was about $11 million pressure here in the third quarter. You know, that'll also probably play out for a little bit of time here until that flushes through. Obviously, the whole notion then is to go into the marketplace and reprice and be able to cover that, but it happens on a little bit lag effect. And to the comment that Andres said is that we're probably going to look at a period where, you know, the low inflation for 2020 overall is passed through PAS next year while we see some normalization of inflation. That will life cycle itself probably through the first quarter of 2022 and then start to normalize then. So if you take a look at the outlook that we had for 2021, we did indicate that we do think for temporary window here because of those mechanisms that we're going to have a little price inflation pressure. Thanks so much.

Our next question comes from the line of George Stafos from Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for taking my questions. Good morning. Congratulations on the progress, too. I guess I had a couple of questions on the overall concept of how OI will navigate and flex, given, Andres, as you said, the choppy volume environment that you're going to be in. So I guess the first question is you've done a really good job on taking costs out of the system. You've had the turnaround initiatives, I think, cost saved you $46 million. As business comes back, hopefully into 21, how much of that cost might be reintroduced into the P&L? And right now, just holding your capacity constant, not talking about new stuff that's coming on, magma and so on, how much could you get out of your capacity if you needed to, if there was another surge in volume in a good way, just from productivity and then how to follow on?

Yeah, sure. I can take the first part that, you know, as far as the cost takeout and the turnaround initiative. So I believe you're right. I mean, the organization's done a great job of taking costs out of the business. It's driven by our turnaround initiatives. I would say about 70% of the cost takeout that we've been doing over the last couple quarters here is really systemic, long-term, sustained savings. The other part is maybe more temporary. Nonetheless, we anticipate retaining all of that next year and then getting some additional cost savings next year. It probably won't be the same aggregate amount that we're seeing this year in total because we advanced some of our turnaround initiatives and other cost-saving things, as well as some of them were more temporal. But we got more in the pipeline of those long, sustainable opportunities that, even though some of them are temporary right now, will offset that going forward and then provide additional benefits into the future.

Yeah, and with regards to flexibility, what we experienced this year, George, I think tell us that this organization has improved significantly its ability to respond to flexibility requirements. The ability to adapt in the second quarter was really high. I think we said this before or shared this before with you. We need in a quarter what took us a year before. So we feel very comfortable. We can flex back and forth when required. Now with regards to the turnaround initiatives, I think it's important to mention that we put in place multiple capabilities over the last few years, and it took time to build them and resources to build them, but now they are available for us to apply them and improve performance in top and bottom line. So we see good runway for these initiatives into the following years. Now when it comes to capacity, with the performance we're seeing at this point, and going into the Q4 and 21, we're going to be at high capacity utilization across markets. So that's something that we got to take a look at. And obviously, there are opportunities for growth, too. But as we said before, it's very important that we focus on free cash flow and the reduction. Now, as a result, what we're doing is we're taking an additional look, looking for additional opportunities in tactical divestitures to go beyond the committed targets that we already presented to all of you. Now, if we find some, then that will give us the opportunity to redeploy some cash into growing markets that are more attractive than some of the ones in which we are present today.

Thanks, Andres. My other question, and I'll try to make it a quick one. The system has, for good reasons and for understandable reasons, have been stressed, right? You've had the significant drop-off because of COVID, then you saw the rebound. You're not alone. You cut CapEx. A lot of manufacturing companies are in that same position. How do you maintain the reliability of your manufacturing? And Glass is not the most forgiving manufacturing process. At a time when demand has now picked up, your customers are looking for inventory, and you haven't necessarily been able to maintain or spend Thank you for your time.

But now they're available to deploy and be used. So I feel very comfortable. This organization has learned because of that to deal with complexity. Now we still deal with the limits of technology. And that's why we're designing Magma, because it will just change entirely structurally our ability to respond to those challenges. But I feel very comfortable with where we are. I mean, you wouldn't imagine the amount of capacity we shut down temporarily and brought back up. And it's amazing to see how this organization responded to that and was able to resume performance really quickly and go really high.

Yeah, I mean, just to put a number on that, we restarted 20% of our production capacity over a three-month period of time, which is just an unprecedented level of engineering activity and just underscores what Andres says is just how resilient and capable the organization is at this point in time.

Thank you very much, guys. Good luck in the quarter. Thank you.

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

Hello, Mike. You there?

Why don't we go to the next one in the queue? Mike, are you there? Go ahead, Em.

Our next question comes from the line of Debbie Jones from Doshagang. The line is open.

Hi. Thank you for taking my question. I just had a few follow-ups on some that have already been asked. First, kind of at the tail answer of George's question, you mentioned if you got to a certain point, you would like the flexibility to invest in growing markets. It's a little tough right now with COVID. to see exactly where that might be. And I was wondering if you could elaborate on that and kind of your thought process there. I realize it's not something you're focused on today, but just kind of long-term, where would that be?

Yeah, so there is a significant growth in markets like the Andean markets and Brazil. And the level of activity is quite high. But we're also seeing important developments in North America, for example. I think what I mentioned before, Debbie, which is how all these segments that we normally don't talk that much about are driving growth. So NABs or food or crab beer, premium beer, spirits, RTVs. So this is a lot more than just the beer that normally takes most of the attention. So we're seeing growth in Europe. We just started Gironcourt, and it's operating quite well, and it's chipping all this production. As we said before, it has a long-term commitment for that. So we're looking at these opportunities. As you know, flexibility is not that high, but that's why we're taking a broader look to tactical diverse teachers and exploring opportunities to see how we can better redeploy resources in the company to those markets that are growing.

And clearly, we'd like to sync that up with the early magma opportunities in the business, particularly those markets where there might be more volatility, and it's a great match for that, for the capacity going forward.

Yeah, and with regard to magma, as you know, we are approaching the milestone of Holtz-Minden in 2021. We expect to be running that line by the end of the first quarter. And this is going to give us some confirmation of some of the assumptions that we have. We are optimistic. We're going to get positive results out of that. And what that will do is give us the ability to deploy Gen 1 units in 2022. And that will give us the ability to follow growth a lot easier than we can today with the legacy technology.

And to reiterate, one of Andres' earlier points, we're squarely focused on free cash flow and reducing debt. We would do this in the event that we would look at opportunities on other tactical divestitures beyond the current scope that we have right now to fund these and not interrupt that improvement trajectory.

Thank you. I was actually going to ask about magma, so thank you for that as well. My second question would just be around what a lot of investors are talking about in this space, seeing the metal can growth over the next potentially four or five years or longer in the U.S. Could you help us think through What you have to be concerned about as they seem to be taking some share. I realize that it's not really, it seems to be more related to new product development, which I guess could have some impact on your business as well. So could you just give us your thoughts on how you think about the impact to your business?

Yes, so there is growth, significant growth in aluminum cans. We all know that. Now, there is something that is very important to take into consideration. Forty percent of the aluminum can volume is driven by beer or beer adjacencies. And within that, the growth is driven primarily by hard seltzers at this point in time and some of the adjacencies. Now, the presence we have today in that segment is very, very, very small. So for us, it's really an upside. I mean, having virtually zero, our chances are that we're going to get some chairs in that category. Now, the 60% remaining of that total volume of cans is related to NABs. Now, the growth within that is driven primarily by energy drinks and bottled water, and we are not present in any of those. So now there is a point in which we coincide, which is primarily North America beer, and it's primarily mainstream beer, because not even in the premium beer. In the premium beer, we're very strong. So we've got to be mindful of that. So obviously there is a lot of activity, but as I explained before, look at the amount of categories in which we are growing. As we said in the past, we were going to pivot away from just beer and into multiple categories that are growing well. And what we're seeing at this point in time is exactly those categories playing quite well. And our mix as a result is pivoting from beer into a mix of multiple segments that are performing quite well. Now, that's the situation in the United States, but when we go to other markets, for example, Indian countries, beer for us is growing very fast. When we go to Brazil, we are at max capacity. If we had more capacity, we could achieve that capacity today. I mentioned that growth in that market for beer in glass is at 10%. So it's pretty healthy. And then when we go to Europe, very strong performance. In fact, Not only we are performing well at this point in time where we were before, but something that we are seeing is wine in France is higher than it was in pre-pandemic layers. If you recall, we mentioned that Bordeaux wine was soft pre-pandemic. It's very strong right now. So we're seeing opportunities across markets. And yes, aluminum cans are growing. Thank you for that.

Good luck in the quarter.

Thank you.

Our next question comes from the line of Mark Lawley from Bank of Montreal. The line is open.

Thanks. Good morning, Andres, John, and congratulations on a good third quarter. I wondered on this sustainability topic, if you could talk a little bit about what the concrete measures you can take to improve the recycling situation here in North America. It seems like it's going the wrong way at the moment with municipalities shutting down recycling or in some cases trying to exclude glass from the recycling stream.

Yeah, so I think what got a guy's... Our view of the potential of glass when it comes to recycling is the performance glass has in Europe. So if you look at Europe, glass is recycling at the highest rate when compared to any other packaging substrate. And I think that indicates the potential of it. Now, as you say, the recycling system in North America needs some work and significant work, and we are working on that. And when we went in the country to single stream, unfortunately, that got some of the recycled materials, including glass, difficult to manage. And that has been creating a disincentive in the system. Now, what we see in Europe is glass has a separate stream. And what we're working with many counties at this point in time is to establish separate streams. and establish them in a way that they're attractive. So we are in the early days, but again, we proved in Europe that this can work really well, and we're going to work hard to put it in place in the United States. Now, if we do that, we've got to be mindful that glass has plenty of attributes that make it highly environmentally friendly and ideal for the circular economy.

Okay, next question.

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

Thanks. Good morning, everyone. I hope you and your families are well. You too. Thank you. My two questions. John, in terms of the free cash flow conversion ratios this year and next, can you talk about what assumptions are embedded in there for working capital and CapEx? And regarding your expectation that the conversion will improve over time beyond 2021. Is that all working capital or is there something else in there? My other question is about the retained corporate costs. You talked about them being a drag year on year in 4Q because of R&D, this Glass advocacy campaign, and insurance. Can you talk about where you expect those retained corporate costs to go beyond 4Q, bearing in mind that You've sold ANZ, and one would assume they're going to decline as a result next year, but any thoughts there would be helpful. Thank you.

Sure. So on the free cash flow conversion, as we indicated in the prepared comments, we expect that to be in the neighborhood of 20% to 25% next year. Keep in mind, that's very similar to what we thought it was going to happen this year. We had earlier guided before the pandemic for 2020 that we would be about $300 million of free cash flow on, say, a date base of $1.25 billion EBITDA, that would be about a 23%, 24% conversion ratio. So in other words, we're trying to return back to that as a first step and then being able to improve off of that. So as we look into 2021 and some of the key assumptions behind that, one is that Working capital would be a modest use of cash, primarily on the receivable side, because if we're going to recover some of the volume that was lost this year, so there'll be some buildup in receivables. At the same time, we expect to manage inventory tightly as well as our accounts payable. On the CapEx side, keep in mind that the number this year is pretty low. It's $300 million. We think it'll probably be in the range of $350 to $400 million next year. As we talked earlier, the second quarter was very disruptive. It was very difficult to get any engineering projects done. The third quarter was very much focused on ramping up that 20% capacity, so not a lot of projects in that window. So a couple projects. Otherwise, we'll start to creep into next year. So maybe your maintenance is closer to $300 million there compared to $275 million, $300 million being kind of a more normalized level that we would expect. We are looking at some ROI-type projects. We always target at least 15% for any growth project and say 25% or more for the engineering-related productivity projects. Those are being evaluated right now. We're clearly still in the budgeting process. That is still under evaluation. A couple of the other pieces that we have, you know, we're going to have pension expense creeping up a little bit, $10 million or so, but we should be getting more equity dividends coming through as we finalize out all the work over at IPC and places like that. And then, of course, interest expense continues to do better. We're paying down debt over the long term. That'll reduce interest expense and allow us to be one of the drivers for improved conversion over time. So a mouthful there, but I just want to give you a little... Thank you, John. Yep. Now, the other question was corporate retained, and you're right. I mean, historically, our corporate retained has been, I don't know, $100 million to $110 million a year, so that's $25 million to $28 million or so on a quarterly basis. That is stair-stepping up to probably the basis plus or minus $35 million, and then we would have project or other activities off that. So let me explain at least the rebasing of that. One is we sold Tata, which was earnings that was previously recorded in corporate, so that's not there anymore. And also, we have reclassified with the divestiture of A&Z that our Asia business is now part of corporate, and it has, as we noted before, been running at a bit of a deficit position between COVID and the trade wars. Now, we expect that will improve over time. So then building off of that, you know, we will have some, you know, episodic costs associated with magma spending as well as some spending on this, what we refer to as Glass Advocacy Program, which is to get out, you know, and market, especially social media-wise, all those good attributes of glass that Andres talked about and also, you know, push the sustainability angle much more broadly as we believe that we've got a great story to tell and we need to tell a story. So hopefully that provides a little clarity.

Do you expect the 35 to change much going forward, John, just the net of all that?

So the 35 will probably be a little bit elevated for the next several quarters while we ramp up Holzminden because all that startup stuff gets put into R&D during the startup window. And then we do have this kind of window where we're doing the glass advocacy. So it might step up a little bit of that for the next few quarters. Thanks so much.

And our next question comes from the line of Arun Vishwanathan from RBC Capital Markets. Your line is open.

Hey, thanks. Good morning. Thanks for taking my question.

I guess I just wanted to get back to the inflation question.

Could you reiterate maybe what you're expecting on a quarterly basis? and for how long? I think you mentioned $11 million from the soda ash and natural gas side or may have just been soda ash. But, yeah, maybe you can just go through maybe some of the inflationary pressures again and how that kind of marches out for the next quarter or two. Thanks.

So, I mean, I'll take a stab at it. Of course, a little bit of this is to be determined with the recovery of the marketplaces. to the points you said. We talked already about a little bit of the natural gas flushing through, and I said that's going to be a couple quarters for the North America component. The FX-induced inflation probably starts to comp after the first quarter because in the second quarter of this year was when we ended up having some of the major shifts in the currency at that point in time, so a quarter or two, something along those lines. As far as the ramp-up of other input costs, As referenced earlier, some of the natural gas is starting to recover at that point in time. We're seeing some of the energy and freight costs starting to move to some degree. Those are probably some of your more initial pieces that will happen over the next few quarters and then obviously need to get comped on PAS on a lagging basis.

Okay, that's helpful. And then maybe we can just get your updated thoughts on consumption patterns Well, so the-I think the

Performance that we're seeing in Glass in off-premise is going beyond any expectation before, and it's mostly upsetting the on-premise drop. And I think that's something that customers are looking at, and as a result, we're seeing a lot of new product development activity in the market at this point that we expect will continue. Now, today, we have the capacity to act. We're serving the market such that as they are right now and as we see them in 2021. However, there are growing markets that we've got to take a look at. I think the preference for glass in some important categories is being evident as we've been going through all this process, and we intend to support that preference, obviously, with the new product development activity that is very high. and then we'll take a look at what it might take in terms of capacity over time. Thanks.

Our next question comes from the line of Salvatore Chiano from Seaport Global. Your line is open.

Yes, hi. Thanks for taking my questions. The first one is building on some prior questions on beverage cans. I'll phrase the, I guess, It'll be differently. Now that we hear that beverage cans actually are in short supply, especially in North America, is there a risk that as capacity for cans catches up, some customers that would have liked to transition to cans and can't do that now will actually do it in the next few years at the expense of glass?

Well, what we know at this point is that there is that shortage, and I think that given the opportunity to are customers to put their brands in glass. And what we know is consumers love to have their preferred brands in glass. Now, this is going to go for a while. This is going to go for perhaps the next two years. And depending on how plastics conversions go on, this might go for an even longer period of time. Now, we're very active repositioning glass in the United States because there are significant opportunities for this package in this market. and we expect that that is going to have an impact. Just to give you an idea, we mentioned the glass advocacy campaign. I think the last time we were active promoting glass in the market was in the 70s. And as a result, obviously, there is a lack of information in this market with regards to the attributes of glass. And we're very active in that area. We expect that it's going to have an impact. developed significant capabilities in innovation over the last few years, and we're putting them to work. And we're seeing the impact of that. So we expect that it's going to open significant avenues. Now, there are categories that are very important that have been growing quite well, in which glass has very little presence, not because it doesn't have a fair share to have, it's because We are just working in the early days of the innovation to be able to get into those categories and be successful. So all those things are going to converge. I think in the meantime, and for the next couple of years, I think there is a very good trend foreseen for Glass, and we're ready to support that.

You know, one thing I would add is, you know, those shortages are obviously a challenge for the customer base. You know, right now we are doing a very good job serving our customers. They like being served, and we're going to continue to serve them well. So I think that that makes a big difference in the long-term capabilities.

Okay, perfect. And for my second question, just to clarify a little bit on volume growth in Q3, some other companies have mentioned that Q3 was exceptionally strong due to pent-up demand. I would assume that may have happened in Brazil and other countries as well. Can you clarify a little bit your plus 1.7% volume growth, how much would be regular run rate demand, and how much would be a pent-up demand from Q2?

Yeah, so what we're saying is, well, North America was up mid-single digits, so that's quite strong. And I think it's in part due to that strong performance in off-premise, and then obviously some performance in on-premise, but it didn't really get too high. Now, Mexico is back to regular performance. It recovered well. We're running currently chipping off prior, and it's driven by demanding food, beer, and spirits. And then there is local market and export market. This market is becoming more focused on exports in some areas, too, which is an opportunity, and it's because of its position in the continent or continents. Now, the Andean country is quite strong, and there is a significant level of activity in those countries when it comes to beer and food. And as you know, there is a large food business in those countries that is driven by local demand and exports demand. And it's a sustainable business, so it's been in place for probably the last 25 years or 30 years. And because of at-home consumption, this is growing in both markets, local and exports. And Brazil is very strong. Frankly, we're very highly utilizing that market. We're selling everything we have. If we had more, we would be selling more. And beer is strong, but other categories are strong too. And as I mentioned before, the conversion out of returnable containers goes to one-way glass and aluminum cans. And that is driving demand for glass. So we see it. This demand improvement across all markets in the Americas, and I explained that Europe, too, is quite healthy, and it's across all markets in which we are present in that region. Thank you very much.

I think we have time for one last question.

Our next question comes from the line of Gabe Hady from WF Securities. Your line is open.

Good morning. I hope everyone is doing well. Thank you. A quick question, kind of I guess maybe revisiting the canned question a different way. Do you have a view if the industry or OI itself benefited from beer that was brewed this year that did not find its way into a keg because of availability issues and or, again, kind of cans being sold out? And then as we kind of transition into 2021, Maybe compare, contrast what your beer volumes have been in North America relative to the trend over the past one or two years, and then what's embedded in, I think, your comment of kind of getting back to or approaching 2019 levels.

Yeah, so the on-premise activity obviously has been down. As a result, the use of kegs is down. Kegs are normally... about 10% share of the beer category, and that's down to three. And then the volume has been moving to single-serve containers, and those are one-way glass and aluminum cans, both. So that dropping share has been shared between the two, and that's been on and off, right? So it's been up and down. And now I think what's important here is The resilience that we've seen between channels. I think that's important because when we're moving down in one channel, we're moving up consistently and quite high in the other channel. So, yes, there is some volume coming from there, but there is a lot more taking place than just that. Now, when we look at the real performance of it all, and in particular mainstream, I think your question is primarily related to mainstream. If nothing else, during this period of time, there has been a slight slowdown in the declining trend of mainstream beer. Now, all other segments, super premium, premium, crab, all of that is growing quite well. In fact, in the off-premise channel, the demand for high-end beer in which glass has a very strong presence has been quite high. and the sales of beer in total in that channel have been up mid-single digits to low double digits along the way in this period of time. Now, very important to have in mind that the conversation should go beyond beer because, yes, beer was very important. It's less important today when it comes to total or its share of the total volume we handle in the United States, but there is a lot more going on. I think our focus over the last few years in other segments is starting to show up because, as I mentioned before, there are at least six to seven categories of products that are growing quite well that are not necessarily mainstream beer.

Thank you, Andres. And then I guess transitioning to Europe, we talked about inflation, I think, in Brazil and then maybe how contracts behave here in North America, but I'd I seem to recall that Europe is more of kind of an annual contract or, you know, maybe they run one to three years. Just sort of when that process starts and kind of the foundation, you know, whether it's supply and demand dynamics, I'm presuming is pretty important there, but input costs, et cetera, that kind of go into that discussion?

Yeah, so clearly the biggest change that we're seeing, whether it's in Europe or any other market, to tell you the truth, is on fuel. You know, fuel was, so natural gas, whatnot, was a deflationary area in 2020, and it's more returning back to more normalized levels, at least that's the thought process right now. So it's not exactly, you know, unique level of inflation. It's just, you know, returning back. Now, you know, in Europe, about 30% of our business is under long-term contract, but the other 70% is open market, which will allow us to, you know, address those issues Thank you, John.

Okay, thank you, everyone. That concludes our earnings call. Please note that our year-end and fourth quarter conference call is slated for February 10th, 2021. And as always, make it a memorable moment by choosing safe, sustainable glass. Thank you.

This concludes today's conference call. Thank you all for joining. You may all disconnect.