O-I Glass, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the OI full year fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host, Mr. Chris Manuel, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Jerome, and welcome everyone to the OI Glass Fiscal Year and Fourth Quarter 2020 Earnings Conference Call. Our discussion today will be led by Andres Lopez, our CEO, and John Hodrick, our CFO. Today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for this call are available on the company's website at o-i.com. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures. Some of these financials we are presenting today relate to non-GAAP measures such as adjusted earnings per share, free cash flow, segment operating profit, and leverage ratio, which excludes certain items that we consider not representative of ongoing operations. A reconciliation of gap to non-gap can be found in Arne's 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.

Good morning, everyone. We appreciate your interest in OIGlass. Let me begin by thanking the OI team for its dedication and agility as we contend with the pandemic and service the critical food and beverage supply chain. Likewise, we are grateful for so many in our communities who are working every day through very challenging circumstances, especially medical and other frontline workers. 2020 really tested our organization. As we concluded the year, I'm proud of how OI has navigated all the short-term implications of the pandemic while advancing long-term initiatives that included several bold and structural improvements. As a result of these efforts, there was a tangible improvement in our ability to execute. As we reported last night, our four-quarter earnings, adjusted earnings were 40 cents per share, which exceeded guidance of 30 to 35 cents. Additionally, we generated free cash flow of $146 million in 2020, a solid improvement from the prior year and ahead of our expectations. Our four-quarter achievements were flat with the prior year, and full-year volumes were down 4%. The deep in demand was concentrated in the second quarter when the initial wave of the pandemic drastically impacted the supply chain. Otherwise, quarterly demand trends were fairly stable. The strong operational performance and cost performance boosted our earnings and cash flows above our original guidance. Despite a disruptive environment, we continued to advance our strategy and I'll expand on this in a minute. Of course, significant uncertainty remains given the course of the pandemic. With that said, we remain optimistic about 2021, and we expect both earnings and cash flows will significantly improve. John will review our financial results and outlook later in his remarks. Let's move ahead to slide four to discuss recent volume trends. As I noted earlier, Chipments were down 4% for full year 2020, but that is certainly not representative of trends during the second half of the year. As shown on the left, glass chipments were pretty stable with the prior year except for the second quarter. While volumes fell sharply towards the end of March, demand rebounded nicely starting in June. As illustrated on the right, retail purchase activities across key and used categories remain relatively strong. which helped mitigate the drop in on-premise consumption. Of course, activity was elevated in the second quarter given significant lockdowns and as a result of pantry stuffing. There are a few important takeaways worth highlighting. First, the significant decline in demand during the second quarter of 2020 was largely influenced by drastic government orders in some countries and large supply chain adjustments. Consumption of products in glass containers improved starting at the end of the second quarter and remained steady through the balance of the year, despite a shift between on- and off-premise channels. Third, glass is benefiting from emerging consumer preferences for premium products at home cooking and consumption, localization of global brands, and conversion from returnable to one-way containers in some markets. And last, Customers are stabilizing and protecting their supply chains from present and future volatility as they leverage the experience gained from the second quarter of 2020. Overall, we expect demand for glass containers will grow in 2021. Nevertheless, glass shipment levels will likely remain a bit choppy and inconsistent across the markets we serve. For example, our total shipments were down about 2% in January. The decline was concentrated in a few markets in Europe that implemented more restricted lockdowns impacting hotels and restaurants. On the other hand, shipments increased in the Americas. Importantly, we are not seeing the drastic lockdowns we experienced in the second quarter of 2020. As I noted, our customers and the supply chain are doing a good job minimizing the impact of any lockdowns by leveraging the experience gained last year. Given these uncertainties, our cost control measures continue, which fully offset the impact of lower volumes in January. Looking at the full year, we expect total shipments will increase 2 to 4 percent in 2021 compared to 2020. This reflects a partial to full recovery back to 2019 levels. Naturally, trends will likely be softer earlier in the year and improve over the balance of the year. Of course, these assume markets gradually reopen as vaccination rates increase. Likewise, these growth projections include a few markets that will remain in an oversold position going forward. As such, we are evaluating expansion opportunities in those markets. 2020 required a number of short-term actions to successfully manage through the pandemic. Simultaneously, we also focus on long-term efforts to drive value. As a result, we would like to highlight some of the key accomplishments in 2020. I'm now on page five. We divested our A&Z business at an attractive valuation and continue to advance our tactical and strategic portfolio review despite the market disruptions. When fully completed, we anticipate total sales proceeds will exceed $1.1 billion, which are being used to improve our balance sheet. Likewise, we enhanced financial flexibility supported by our free cash flow and sales proceeds. We reduced debt, achieved record high liquidity, and extended bond maturities. We implemented and executed a robust COVID response plan that quickly aligned supply with demand, reduced IDS by nine days, and ended the year at historically low inventory levels, which we expect to maintain. As part of our COVID-19 response plan, we accelerated our turnaround initiatives to improve margins and delivered $115 million of savings, which helped mitigate the impact of lower production. Next, we continue to advance magma as we seek to revolutionize glass. The full-scale Generation 1 line located in Germany will be live within weeks. This will represent a major milestone and pave the way for broader deployments starting next year. Finally, PARAC filed for Chapter 11 in January 2020 to establish a fair and final resolution to legacy asbestos liabilities. Overall, we are pleased with the progress that we made. Many of our efforts are visible, like the accomplishments we just discussed. But just as important, we have been hard at work in creating advanced capabilities that are improving our ability to execute both in the short term and long term. On page six, we have included a number of these capabilities. For the past year, we have shared our renewed focus on capital structure discipline and on portfolio optimization. After nearly three years of implementation, we are now fully utilizing a new management system called Integrated Business Planning, or IBP. This system synchronizes our demand, supply, and financial performance management across a three-year planning horizon. Importantly, IBP is improving our ability to deliver on commitments. Our turnaround initiatives evolve into multi-year margin expansion programs and are fully embedded across OIT. We have significantly upgraded our sales, marketing, and innovation capabilities as we seek to improve the top line. Likewise, we have elevated our ESG leadership with an increased focus on recycling in North America that leverages our experience from the highly successful European glass recycling system. As we advance Magma, we are leveraging a unique third-party developer's network to support faster invention and rapid implementation. Finally, we streamlined the organization model in mid-2020 as we aim to improve agility and performance. In conclusion, I believe we hit an inflection point in 2020, resulting in a step change improvement in our ability to consistently perform. Let me take the opportunity to expand on one of these areas, how we are accelerating ESG at OI. I'm now on page seven. Last quarter, I explained that we were elevating our sustainability ambitions, and let me highlight some key elements. We are focused on being the most innovative, sustainable, and chosen supplier of brand-building packaging solutions. As you know, OI was the first packaging company to issue a green bond, and in 2020, we were the first glass packaging maker to have an approved emissions target from the Science-Based Target Initiative. We also appointed a chief sustainability officer. Now, I would like to take you through some further steps we have taken to continue our leadership in this space and to bring our vision to life. On the governance side, we enhanced the rigor of our board governance on ESG, established a global sustainability network, and created an Executive Diversity and Inclusion Council. As shown on the top of the slide, we expanded our sustainability initiatives to include nine different dimensions and set several new goals. We have refreshed our sustainability web page, which will provide additional color in these areas. And we will have a new sustainability report later this year. Our magma technology will reinvent how glass is made and solve such that the glass sustainability profile will improve across several dimensions. The startup in Holtzminden brings us one step closer to this new future for glass. Our glass advocacy campaign aims to rebalance the dialogue about packaging and, in particular, the sustainability of glass packaging. We have increased our focus on creating and funding glass recycling solutions and are working closely with industry partners towards the goal of increasing U.S. glass recycling rate to 50 percent by 2030. Finally, we continue to engage with our communities by encouraging our employees to volunteer and by giving back, including through our 80-year-old Hawaii Charities Foundation and donations to support COVID-19 vaccination efforts. On slide eight, we have outlined our key priorities for 2021, which build on the accomplishments from 2020 and leverage the capabilities we have previously discussed. Our objective remains the same. We are taking bold structural actions to improve OI's business fundamentals. This includes three platforms. First, we are focused on margin expansion through strong operating performance and cost efficiencies. Our turnaround initiatives have evolved into structural programs that expand revenue, operating costs, and SG&A. During 2020, we accelerated activity and generated $115 million in benefits. 85 million or 75% of these benefits are long-term sustainable savings. On top of this base, we expect around 50 million of additional benefits in 2021. Second, we will continue to revolutionize glass. As noted, we expect to validate magma through the new line in Germany resulting in further commercial line implementations starting in 2022. This revolutionary development will be complemented by repositioning ESG and by expanding our glass advocacy digital marketing campaign. Third, we will further optimize our structure. In addition to completing our original tactical divestiture program, Hawaii is also evaluating growth initiatives which could be funded by incremental tactical divestitures. Likewise, PAROC will continue to advance Next, we intend to accelerate service center capabilities, which aligns with the new organization model implemented last year. Finally, increasing cash flow and reducing debt remain our top financial priorities. We look forward to another successful year advancing the enterprise. Rather than host one investor day, we expect to host at least two investor workshops later this year, to lay out our longer-term plans and discuss magma in greater detail. Next, let me turn the presentation over to John, who will provide some details on the financials.

Thanks, Andres, and good morning, everyone. I plan to cover full-year and fourth-quarter 2020 results, as well as our business outlook for 2021. I'll start with a review of our full-year performance on page nine. OI reported adjusted earnings of $1.22 in 2020 down from $2.24 in the prior year. Like most companies, our results were significantly impacted by the global pandemic, yet very good operating performance and cost management helped mitigate the full impact of lower volumes. The chart on the right compares our current year's results with the prior year. As you can see, segment operating profit was down compared to 2019. FX temporary items and divestitures were headwinds. Net price was slightly positive as higher selling prices offset cost inflation. Sales volume declined 4%, which impacted results by $83 million. Demand was down sharply during the second quarter, about 15%, at the peak of the pandemic. As Andres reviewed, demand was stable in the other periods, including the back half of the year as markets recovered. Operating costs were a $38 million headwind, which is the net effect of lower production levels, and very good operating and cost performance. Production was down 7.5%, again, due to the pandemic, impacting results by $155 million. However, this was substantially offset by strong operating and cost performance driven by our turnaround initiatives that generated $115 million of benefits that helped both pricing as well as operating costs. In addition to lower operating profit, EPS was impacted by higher retained corporate costs and an elevated tax rate. partially offset by lower interest expense. The presentation includes additional color. While earnings were down this year, we are pleased with business trends in the back half of the year, and we are optimistic about 2021 performance. Let me shift to cash flows in the balance sheet. I'm now on page 10. As stated in the past, we are following specific capital allocation principles during the pandemic. As we focus on maximizing free cash flow, we have aligned supply with demand and limited CapEx to normal maintenance investment in magma. Our 2020 free cash flow was $146 million, which was a substantial improvement from the prior year. Likewise, cash flow was well above our guidance of at least $100 million. This represents a 14% EBITDA to free cash flow conversion compared to our expectations of 10% or higher. While CapEx was slightly higher than expected, mostly due to FX, Accounts receivable collections were stronger than anticipated. Likewise, inventory levels were down significantly this past year, approximately nine days in IDS, and we expect to maintain this low inventory position. Second, we preserved our strong liquidity. We finished 2020 with approximately $2.2 billion of liquidity, well above our established floor. Third, we are reducing debt. As illustrated in the chart, net debt was just under $4.6 billion at the end of this quarter. Debt compared favorably to both the prior year period and the third quarter levels. The ANZ proceeds and free cash flow helped reduce net debt by more than $750 million, while FX was a $250 million headwind. Our leverage ratio at year-end was 4.4 times per our bank credit agreement, which is well below our covenant limit of 5.0. Furthermore, we did make discretionary contributions to de-risk our pension liability given the stronger cash generation near year end. Finally, we remain confident that we will achieve our target of $400 to $500 million in proceeds from our tactical divestiture program by the end of 2021. We did complete a number of small sales totaling about $25 million over the past few months. Overall, we made solid progress on our capital allocation priorities in 2020. Likewise, we expect our balance sheet will continue to improve in 2021 due to strong free cash flow, additional divestiture proceeds, and the final payment on the ANZ sale. Let me share a few thoughts on our fourth quarter performance. I'm now on page 11. As Andres mentioned, our fourth quarter results were $0.40 per share. This compares to $0.50 in the prior year. However, earnings were above the prior year when normalized for FX and divestitures. As the schedule on the right shows, segment profit was $200 million in 2020 compared to $203 million in the prior year. Prior year was more like $180 million on a comparable basis considering FX and divestitures. Earnings benefited from slightly higher net price, which more than offset cost inflation. While shipments were flat with the prior year, earnings benefited from improved mix. Reflecting very good operating performance, costs improved $11 million from the prior year. The benefit of margin expansion initiatives more than offset higher plant incentives costs, higher logistics costs, and some inventory adjustments. Non-operating items included higher retained corporate costs due to additional R&D spending for magma, as well as higher incentive costs. The slide has some additional comments. Bottom line, we are pleased with the fourth quarter performance given the challenging business backdrop as earnings benefited from higher prices, improved mix, and lower operating costs. Moving to page 12, let me share a little color on regional performance during the quarter. In the Americas, profit was $127 million, up $12 million from the prior year despite $8 million of unfavorable FX. Higher selling prices partially offset cost inflation, which was elevated due to FX-induced inflation in Latin America. Sales volume was up 2.4% during the quarter, and the improvement was most pronounced in North America and Mexico, which were up between 5% and 10%. Shipments were stable in the Andes and down in Brazil. Reflecting very strong demand, our Brazil business remains sold out. In the past, we have served that market with exports from Mexico and other markets. Due to strong local growth in Mexico, we have halted exports to Brazil for now, resulting in the year-over-year decline. Across the region, very good operating performance resulted in significantly lower operating costs compared to last year. Solid initiative benefits and improved JV performance more than offset higher plant performance incentives. Europe's operating profit was $73 million, up $4 million from last year as earnings benefited from favorable FX. Higher selling prices and mix improvement more than offset cost inflation, which included the benefit of the region's revenue optimization efforts. Sales volume was down 2%, with most pressure in Italy and the U.K., where governments invoked new lockdown measures to combat the virus. Despite benefits from initiatives and improved JV performance, operating costs were up compared to last year. This reflected plant performance incentives, higher logistics costs, and some inventory adjustments. As previously noted, ANZ was sold earlier this year, and our Asia business is now included in corporate retained. Let me wrap up with a few comments on our business outlook, which remains consistent with the initial view that we shared during the third quarter earnings call. I'm now on page 13. As Andres mentioned, we expect our business performance will improve in 2021 as markets stabilize and recover. The chart on the left illustrates our earnings outlook for both the full year and first quarter of 2021, including the key drivers for year-over-year performance trends. Looking at the full year, we expect earnings will improve from $1.22 in 2020 to between $1.55 and $1.75 in 2021. As we have discussed in the past, net price will be a modest headwind in 2021. This is largely a timing issue. Annual price adjustment formulas on long-term contracts will pass through modest inflation from 2020, while we expect inflation will start to rebound some in 2021. Assuming markets gradually reopen over the course of the year, we expect sales and production volumes will make a partial to full recovery to 2019 levels. So, we see sales volume up between 2% and 4%. Importantly, we don't expect a repeat of the 15% decline that we saw in the second quarter of 2020. Costs should benefit from our ongoing margin expansion initiatives, which should add gross benefits of $50 million. Keep in mind, about $30 million of cost savings achieved in 2020 were short-term in nature and will not repeat this year. Likewise, some costs, like depreciation and maintenance expense, will normalize some as activity increases. The slide includes more details on non-operational items. Finally, we have announced a new $150 million share repurchase authorization, which will be used to offset dilution from future incentive awards. For the first quarter, earnings will range between 32 and 37 cents, and volume should be stable with the prior year. Operationally, earnings should be consistent with last year, but we will incur some startup costs for Holds Menden, which will be included in corporate retained. As illustrated on the right, full year free cash flow should approximate $240 million. This is consistent with our target of 20% to 25% EBITDA to free cash flow conversion. We expect EBITDA will be up nicely, partially offset by an incremental investment in working capital as business volumes rebound. CapEx should be $375 million, and other details are provided on the slide. Of course, this outlook is subject to adjustment if there is a meaningful change in the course of the pandemic. Overall, we expect earnings and cash flows will advance solidly from 2020 levels. With that, I'll turn it back to Andres.

Thank you, John. Let me conclude with a few comments. We all face unique challenges in 2020. OI was no different. I'm proud to say we navigated the pandemic well with a high level of agility and resiliency. At the same time, we advanced our strategic ambitions. We are squarely focused on our 2021 priorities of margin expansion, revolutionizing glass, and optimizing our structure. Fortunately, we are well positioned for the future given the advanced capabilities built over the past several years. Consumers have repeatedly indicated their preference for food and various packed in glass. This is true regardless of the sales channel. So we are not surprised that our volumes stabilized and recovered over the second half of 2020. While demand trends will likely remain choppy, given the ebbs and flows of the global pandemic, shipment levels should improve as markets gradually reopen. As a result of volume and cost position, we look forward to significantly improved earnings and cash flows in 2021. Let me again reiterate what I have said in the past. we remain focused on creating long-term value. I'm confident the steps we have taken have placed OI in a stronger position, a position that will benefit the company and its stakeholders in 2021 and beyond. Thank you for your interest in OIGlass, and we welcome your questions.

Ladies and gentlemen, as a reminder, to ask a question, please press star, then 1 on your touchstone telephone. please limit to one question and one follow-up. Your first question comes from the line of Gansham Punjabi from RW Baird. Himino, ask your question.

Hey, guys. Good morning. Thank you. I guess first off, Andres, in your prepared comments, you were talking about January volumes being down slightly, you know, it's getting lowered by Europe. Just kind of, you know, what kind of embedded operating backdrop do you have baked into your volume assumptions of 2% to 4% in context of, you know, the 4% decline last year and the fact that 2Q is just going to have a very easy comparison. I'm just kind of curious as to the phasing of volumes as the year progresses by region.

Thanks, Gancham. So looking at Europe, we had a solid demand in Q3. We had a pretty solid demand through most of Q4 at the very end of December. Demand is slowed down. And I think it was because the lockdowns accelerated. Now, they remain high in January. We believe the January performance is primarily driven by a correction in inventories because we're seeing an improved position in February. We're now back to where we were in Q3, Q4. So most likely at this point in time, as these lockdowns are removed, are lifted, we're going to see a better performance in Europe. Now, very important to have in mind that demand in Europe for beer is very strong. And if we look at Nielsen statistics, which reflect the retail performance, there is a very strong performance in Western Europe for glass. And I'll give you a couple of examples. France, glass is up 10%, which outpaces any packaging alternative. If you look at Italy, glass is up 8% for the year. Sorry, I'm talking about full year numbers. So Western Europe is quite strong. This supports the investment we made in ,, which is going to give us an incremental volume, too. Food is very strong. Now, what's happening in Europe is a result of the lockdowns right now, and it's impacting primarily one category of products, which is the sparkling water. So as soon as consumers go back to hotels and restaurants, we're going to see water back on the table, and this volume is going to be back. is a pretty resilient volume once the lockdowns are removed. The other category that we are having softer is French wine, which is being softer along the way, so that's not new. Now, Americas are very strong, and we mentioned that Mexico and the United States are leading that volume performance. The performance in the U.S. has been solid. You know that we've been diversifying our product mix. And the performance in food and NABs and spirits and in wine was strong. Wine and spirits driven by premium performance. And the beer is performing better than before. So it declines, but at a slower rate. And that's driven by premium beer. The performance of premium beer in retail has been quite strong. It's been up around low teens or very high single digits. So that's the situation in the Americas. Mexico, very strong, is driven by local demand. Local consumption is high, as well as exports. And categories like beer, food, spirits, and NAB are very strong in this country. And then the performance of the Andean and Brazil, while they're limited by being fully utilizing capacity, the performance of beer in those two markets is very strong, and there is something very important to have in mind. Performance of glass in those two markets is driven by the focus on premium, is driven by localization of global brands, is driven by the conversion of returnable containers into one-way containers. Those are very solid trends. So we're counting on those two markets to be sold out for the year, and then we're evaluating opportunities for expansion and ways to fund it while we keep our priorities of free cash flow and debt reduction.

Hey, Ganshan, this is John. I can add a little bit on the assumptions of the range between 2% and 4%. So 4% would be your scenario that, you know, we exit, you know, from these lockdowns here in the next few weeks or months or something like that, and then we radically get better. And then 2% is if we see some periodic resurgence of the virus, have to go through some periodic lockdowns in different markets and things like that, which institutes more choppy demand and inevitably some level of supply chain corrections that follow from there. So those are kind of the bookend assumptions on the 2% to 4%.

Very clear. Thanks, John. And just a quick follow-up on the PAPs in terms of the quantification of the impact on 21 versus 20. And then also, you mentioned accounts receivables, outperformance there that boosted pre-cash flow in 2020. Is there a partial reversal in 2021 as well? Thanks so much.

Yeah, I can discuss a little bit of the price adjustment formula component. So, you know, we We had about $60 million of inflation in 2020, and this business historically averages $100 million to $125 million inflation per year or something along that line. What we really saw was that natural gas in particular became deflationary in many economies, and that started to reverse as the markets got better, and we would anticipate in all likelihood that will continue to move in that regard. So the price adjustment formulas are working through this kind of switchover of, say, if inflation was $60 million last year, we think it might go back up to $90 million, not back to historic levels, but still some type of improvement. So you're talking about $30 million or so worth of price adjustment formula pass-through, and that's kind of the spread differential, maybe $20 million, $30 million that we're talking about this year that will be absorbed. Again, just a temporary timing item. We work through that, pass through, and we get back. I mean, if you look at the business over the past four years, we've been able to successfully pass through inflation consistently to some level or another. We think this business is capable of doing that. This is just a timing issue.

Your next question comes from the line of George Stappas from Bank of America, Maryland. You may now ask your question.

Thanks very much. Hi, everybody. Good morning, and thanks for all the details. I wanted to piggyback. My first question was similar to Ghanshyam's and it seemed to me from our research and even what you're saying here that if we were having this conversation back a few months ago and in recognition of what the normal inflation is for your business, the up to $125 million that you discussed, that there is a fair amount of work, for lack of a better phrase, in terms of trying to close that gap relative to what the lag would normally be on the price adjusters. To the extent that it's possible to talk about this live, Mike, can you talk about what you might have been doing in that regard to cinch up that gap that probably could have been a bigger number going into the year? And then I had a quick follow-on.

Yeah, so, George, I think in general you're right. I mean, you know, and that's consistent with the commentary that we made, you know, last quarter when we kind of first flagged this issue. We were looking at a gap there that was bigger than this gap that we're talking about now, $20 million to $30 million. You know, obviously we go into... This time of the year is the price, you know, in the negotiation period for a lot of different markets that we serve that in particular that aren't served by the multi-year long-term contracts. So obviously that's a big focus. You know, obviously we are seeing a little bit of inflation picking up right now, as I mentioned before, which creates a little bit of a better dynamic for those discussions. And I would just say that, you know, we talked about our, you know, margin expansion initiatives, and we have a price and revenue optimization initiative within our commercial optimization that is solely focused on value pricing and really extracting the value that we get out of our business, and that's an account-by-account basis. And you see some of those benefits coming through and starting to be able to mitigate some of that what would otherwise be spread pressure.

As you say, George, there is a strong focus in the organization to close that gap.

Understood. Quick sort of point of clarification on that comment, John, and then the second question. So, you know, if you're in this process now where you're really selling value-based pricing, where would you say the organization is in terms of implementing this? Are you the proverbial second inning, ninth inning, we should be heading to the parking lots? You know, where do you stand in terms of using that tool? And then on my second question, you know, when we think about the $155 million impact from the 7.5% lower production. How much, if any, of that can you get back if you don't actually produce at levels above shipments and build inventory? Thank you, guys, and good luck in the quarter.

So with regards to the value-based pricing, George, this has been in implementation now for two or three years, so it's quite mature in the organization. And we mentioned in the opening remarks that many – of the capabilities we were developing over the last few years are now available to us, which improve our ability to execute. This is one of them. So we're very well organized in the commercial organization. This approach is well understood. The tool is widely used, and that's why the initiative that John mentioned, revenue optimization as part of the margin expansion, is going to help us to close this gap between price and inflation in the year.

On your other question, George, of how much of the $155 million impact of, say, the decremental margin on production that we saw this last year, how much can we get back kind of volume neutral? Well, first, what I would point to is we have those margin expansion initiatives, the $50 million that we're targeting. is really fundamental cost savings, efficiency improvements, productivity, looking at every corner of the company to find those opportunities. So that happens irrespective, really, of the value movement of the company, so you can point to that. Then the question is, as we bring capacity back, and we've been doing that and we're pretty much back to where we need to be, What can we do to improve our PAC, our, you know, efficiencies in that regard? There are opportunities, and generally speaking, we have about, you know, half a percent to one percent kind of creep capacity opportunities per year just by, you know, continuing to re-engineer better. That fix it, you know, factors into the situation. You know, one thing I would point out is, you know, we were down seven and a half percent of volume last year. We expect that to recover in tandem with the improvement in sales volume. Now, the increase in production volume will be above the rate at which we are increasing sales volume because we won't have the impacts of the lockdowns and everything, the drastic lockdowns in the second quarter. So anywhere between 2% to 3% higher production recovery above the rate of what we're seeing on sales volume. So let's say that we're up 4% on sales volume. we probably should be up 7% or so on the production volume side, and it would slide with that scale.

Your next question comes from the line of Anthony Pettinari from CD Group. He's going to ask your question.

Hi, this is actually Brian Bergmeier sitting in for Anthony. Is it possible to quantify the potential benefit to OI if tariffs on spirits were to be lifted? And can you remind me how much OI was impacted by tariffs and they were initially put in place?

Well, we don't have any numbers that we can offer to you at this point. This is all evolving right now, and we're tracking it closely, but we don't have any position to give you right now with regards to expected impact on that.

I would say that tariffs affected us in two different directions, right? I mean, and one is you had like the spirits you were referring to, But you also had the tariffs on Chinese goods. And so, you know, glass is imported from China to the U.S., in particular on the West Coast, and the tariffs did impact, you know, that demand. Now, what we're also seeing is there's probably been a little bit of a structural shift in, you know, where supply chains have moved, in particular on the West Coast of the U.S., and avoiding those. You know, we've seen an incredible increase in transportation costs coming from Asia to the U.S., which will probably keep a lid on some of those pressure points. But as Andres mentioned, it's very hard to quantify, and it's very early to understand what could happen when things move.

Got it. Thanks. That's helpful. And then, you know, e-commerce and e-grocery have both done very well during the pandemic. Do you have an idea – of how much of OI's product ends up being sold through e-commerce channels and what are some of the strengths and weaknesses for Glass trying to compete in an e-grocery environment?

Yeah, so we've seen very good performance in off-premise for Glass in 2020, a lot better than we anticipated. Now, fulfillment of e-commerce orders is being highly bias towards local fulfillment. And in those circumstances, that's quite favorable to Glass. What we see is Glass is preferred by consumers. They want to see their preferred brands in Glass. There is a convenience factor that has been discussed before with regards to the use of Glass. Now e-commerce solves this issue because the e-commerce is taking the product to the consumer's doors. Now, if it is primarily driven by local fulfillment, which is happening in multiple categories, it is going to be, from our perspective, quite favorable to glass.

Your next question comes from the line of Mike Lighthead from Barclays. He's going to ask your question.

Great. Thanks. Good morning, guys. Good morning. First question on magma. from the commentary it appears to be moving forward quite well as you expect but sometimes from the outside when we get questions from investors it can be a bit hard to track so can you maybe help us with a few mile markers we should look out for over the next year or so maybe when we should start being able to see the success of magma either in the results or the capex just kind of timetable investors should start seeing concrete numbers there okay so we we are making uh

Very good progress in Holzminden. The line is expected to going to heat up at the end of the month and be in operation in March. We expect that line to give us validation of R&D assumptions, very important R&D assumptions. And then we're going to move into training the plant personnel and transferring the line to them. over the next three months or so in such a way that by the middle of the year, this line is going to go commercial. Now, with that, we open opportunities for further deployment of Gen 1 starting in 2022. Now, we're actively developing the pilot for Gen 2, and we are expecting that pilot to go into operation in the second half of this year. So that's another important milestone. With that and with Gen 1, those deployments in 22 and 23 should combine capabilities from Gen 1 and Gen 2. The R&D team is highly focused on developing Gen 3 at this point. The expectation is that we are going to conclude the invention and development by 2023. We are going to start deployment by 2024. Now, at this point, we are engaged with third-party advisors, and we're working on defining the business model for Magma defining the business case and the deployment plan. And our plan is to get together with the streets and with all of you to present our approach to magma going forward, all those critical milestones and the value that we expect will be revealed through magma for the shareholders and other stakeholders.

Great, that was super helpful. And then maybe just a follow-up question on sustainability. Andres, I think you phrased it in one of your slides about rebalancing the packaging dialogue. I assume that means you don't think glass is getting its fair recognition today. So I was hoping you could expand upon that and maybe frame where you think glass isn't getting its fair credit in the sustainability conversation today.

Yeah, so we're actively focused on rebalancing the dialogue because we have a great product. That's the reality. We have a great product. It is made of three pure and inert natural ingredients. It can be recycled indefinitely. You can see that it has the highest recycling rates of any packaging in Europe. Those rates are low in the United States. That's a fact. But we are squarely focused on working on improving that. And there are ways to do it because the product itself is highly recyclable. And we're learning the experiences that we have in Europe and other markets. If we look at the consumer perspective and the integrity of products, glass is the only package that doesn't have any plastic material or any plastic liner inside that is in contact with the product. So that's extremely relevant. Now, we've been quite positive in our communications about the attributes of glass. And we believe we have a great product. So we're going to take an active stance to rebalance that dialogue because it's been somehow skewed over the years. And we believe we have a fair place to have in the sustainability world. Now, this is not a binary discussion. It's not an either-or. I think we have very important characteristics that make the product highly sustainable, and we intend to take an active role communicating that.

Your next question comes from the line of Gabe Haiti from Wells Fargo. He's going to ask a question.

Andres, Karen, Chris, good morning. Hope you guys are all well. My first question was on, I guess, building off sustainability and thinking about the infrastructure that might be necessary in the United States. So I'm curious, number one, if you've kind of had initial discussions and explored, whether it's co-investment or otherwise, how you can kind of expand recycling rates here in the U.S. and ensure that The cullet does, in fact, find its way to yourself. So that's kind of question number one. And then, you know, is it baked into sort of the CapEx levels or would it be some other form of, I guess, investment? Because looking at it relative to some peers, it looks like you guys are spending around 6% of revenue on CapEx versus maybe 8% for others. Yeah. Mm-hmm.

Yeah, so we are actively engaging with partners to develop recycling in the United States. The product has the characteristics. We believe we can put together a separate stream, and we're going to move forward first with one pilot that then we can use to leverage in future experiences. We can put in place a system by which not only we recycle glass, but we create a positive impact in the communities in which we recycle that glass. Now, we also believe that magma will change the possibilities of glass recycling. We believe that it will create the ability to be more circular, and we're also focused in that dimension. So we are working on multiple avenues. It's not an easy problem to solve, or it's not something that we're going to elevate from one day to the next. But the most important part is we have the product that is 100% recyclable without any loss of product or quality. No product can do that. So we are intending to leverage the great product we have, and we're taking all the actions to do that.

One thing I can add on that, Gabe, is just as an example, and you take a look at that recycling value stream in the U.S. here. Probably one of the areas where we're short on overall is in cullet treatment capability, right? So taking the cullet and treating it so they can go into the furnace correctly. And so... there's just a handful of pockets within the United States. If you expanded that capability, you would be able to have access of good quality colors that can go into the furnaces. That's not to say that there's a lot going on in the value stream, but that's a particular example. And clearly we've been in dialogue with the people in the organizations that run and operate those. Could it take the form of small JVs or investments or co-investment or something? Yeah, I think these are relatively small investments overall to unconstrained this. But of course, that's just one example across the whole value stream.

All right. Thank you guys for that. And the second one, can you remind us maybe quickly, John, the tactical divestitures, where you're at on the $400 to $500 million? And then really more importantly, you talked about potentially funding some expansion capital. I'm assuming that's in Latin America, Brazil specifically. Just timing, if you're expecting to be done with the $400 million to $500 million by the end of 2021, I'm assuming you can kind of redirect that pretty quickly such that you can expand capacity in 2022. Any kind of just order of magnitude, and would that be a line additions or a greenfield project?

Yeah, sure. I mean, so where we stand right now is, you know, for our $400 million to $500 million, you know, call it the original tactical divestiture program, current tactical divestiture program, we have about $220 million completed on that. That's included that soda ash JV that we sold a while back, plus the $25 million of additional projects we've done here in the last few months. So call it halfway in the overall number, so to speak. You know, we do have irons in the fire on a few more items that we think are around the corner, hopefully. And so we feel confident about wrapping that up in 2021 here. Okay. Now, on the other side of the fence, you know, the expansion, and let me just be clear, all of that, those proceeds on that are going to be used for debt reduction to continue on our, you know, our deleveraging path. Now, the other side is more of, you know, looking at tactical divestitures as a way through optimizing our structure portfolio to exit either, again, some, you know, shutdown facilities, properties that still need to be sold or some other smaller discrete operations that are just non-core and redirect those funds into expansion. And you're right, it's mostly in the Latin America market where we had already indicated, you know, we're capacity constrained in many ways. The good news is that we have the pipeline of those tactical divestitures identified and staged to go, and we're working through the business cases right now on the expansion initiative. So while it might ultimately be lumpy at the timing of the actual proceeds on divestitures versus the timing of money going out the door for the expansion, we think that we can execute on those simultaneously. As far as the scale of these, it's kind of hard to know. We're working through the business case right now. But I would say the scale of the expansion is probably more on the greenfield side rather than on a line extension, per se, given what we're looking at from demand in those particular marketplaces. But, again, we don't anticipate any of this activity interfering with our debt reduction plan because we would use the proceeds from one to fund the other.

I think something that is very important to look at that I mentioned before, but I would like to highlight it again, is the trends that we're seeing in premium across markets that are driving several product categories, including beer, the localization of brands, as well as the conversion from returnable glass to one-way containers where glass has a share and other alternative packaging have share, too. Those are driving what we're seeing Greenfield is an option. There are options, too, for brownfield, and there are options for line additions. Now, in Mexico, as an example, demand is taking place as we speak, and what we're doing here is we're relocating some lines to increase output, and that's something that is ongoing because it's minor investments. But as John described, we are taking a look at all this. We're evaluating the business cases. We'll make the choices. We intend to be flexible in the solutions we put in place and also be very proactive to be able to support the customers properly.

And your next question comes from the line of Adam Josephson from Keyback Capital Markets. He may now ask your question.

Thanks. Good morning, everyone. John, one good morning, Andres. John, just two for you. One to follow up on Gontram's first question about your shipment expectations through the year. I'd like to ask just about the first quarter specifically. So if you're down two in January, you're thinking you'll be flattish for the quarter. How quickly are you expecting the European situation to improve such that you would get back to flat for 1Q?

Yeah, so what we're hearing is some of the lockdowns, the initial lockdowns were more pronounced in the UK and Italy, my understanding is that's coming to the later stages or is already done. There's some talk about some additional markets maybe doing a little bit more here in February, but we're really not hearing anything beyond that window. I mean, it's not for me to judge, but obviously the number of cases are starting to come down, which is obviously a good sign for so many things in the world. So, ideally, you know, you get out of this January, February window, and then March is a little bit cleaner. Keep in mind, you know, for our business, January and February are generally pretty light months. And so, March is probably a much bigger window for us from a total volume standpoint. And keep in mind, you know, just from a comp standpoint is that starting in mid-March, last year things really fell off in Europe given the start of the pandemic. So, you know, when you look at the overall trajectory and those elements, that gives us the confidence you're looking at kind of return to flat.

Yeah, I appreciate that. And just on some of the costs that you mentioned for fiscal 21, John, so you'll have benefit obviously from higher production and volumes, and then you have your net margin expansion initiatives. Partially offsetting those are higher depreciation costs, maintenance, insurance, pension, R&D, incentives. Can you quantify some of those costs and just explain why some of those are up, specifically pension, insurance, R&D, incentives, et cetera?

Yeah, so to give you an idea, you know, the kind of other costs like depreciation, incentives, and insurance, whatever, is about $30 million. I mean, it's about $10 million each for depreciation, incentives, and insurance in those buckets. The depreciation increases is mostly FX and as well as we do have Girancourt coming online. Incentives, you know, given that performance in 2019, there wasn't any incentives. This year in 2020, we expect a modest incentive. And then so we're modeling in kind of a return to kind of a normalized incentive structure in 2021. And then on the insurance side, I don't know if you've heard it from other companies, but it's pretty much a hard market for insurance right now, given everything that's been going on, natural disaster-wise, whatever, in the world over the last several years. And so there's just overall increases in insurance costs. So those are the big buckets going through the operating cost line. One thing I would say is depending on where those volumes end up, you know, whether more short-term, you know, belt tightening would be done, I think that kind of depends on whether you're in the 2% range or the 4% range. Obviously, we're trying to be conservative coming out of the gate here in the beginning of the year to make sure that we're keeping a lid on some of those temporary items. And then, you know, on the retained corporate side, you know, we do have obviously the – the Holzman and commissioning costs that's primarily going to be, you know, centered here in the first quarter. So that's probably five to $10 million there alone. And we're probably also having our class advocacy costs kind of maybe a little bit elevated in the beginning of the year. Um, so those are some of the big moving pieces, uh, to, to be mindful of.

Got it. Thanks a lot, John.

Yeah.

And your next question comes from the line at Arun Viswanathan from RBC, um,

capital markets you know ask your questions great thanks for taking my question um congrats on the progress in 20 and i guess uh just first off uh real quickly um you guys uh you know you went over the asset sale program um i guess what what do you expect to to finish uh fiscal 21 uh from a leverage standpoint um including those uh asset sales and maybe any others yeah exactly so um you know

I think in the high threes, again, I'm using BCA leverage calculation, okay, so probably in the 3.8, 3.7 range, you know, that would be kind of within the zip code, you know, depending on the scope and scale and timing of the divestitures and things like that.

Okay, great.

You know, that's going down from 4.4 to 3.7, 3.8. Great.

And then just real quickly on that 20 to 25% of your volume that is on premise, where do you, how do you see the evolution there? I know that, you know, you expect some recovery as, as vaccinations roll out, but where, where are you now versus normal? You say 20% below normal there and, or maybe 40% and get back to, to, you know, kind of normal levels by the end of the year.

Well, the channel itself has been down 15% to 20%, and it remains at that level. Now, remember that over the last year, we've been with no lockdowns and with very strict lockdowns, and we've been in all conditions so far. So as that channel recovers, we're going to have some positive volume impact there. But I think there are some emerging trends that are to stay, too, when it comes to what's going to retail. So at-home consumption and cooking is something that is going to create some changes in demand from our perspective. The focus on premium has been very evident in this past year, and that's going to impact also demand. So we're looking at all those trends closely. But as markets reopen, we should have a boost in volume. Thanks.

And thank you. I think that wraps up our call. Please note that our first quarter call is scheduled for April 29th. And as always, make it a memorable moment by choosing safe, sustainable glass. Thank you.

Thank you, presenters. And thank you, ladies and gentlemen. That concludes OI Full Year Fourth Quarter 2020 Earnings Conference Call. Give me that disconnect.