Q2 2020 O-I Glass Inc Earnings Call
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With that that would now like any confidence over your speaker Mr., Chris Mandeville, Vice President of Investor Relations. Thank you and you just go ahead.
Thank you Mark and welcome everyone to the like last second quarter earnings Conference call. Our discussion today will be led by Andres Lopez, our CEO and John Hardrick. Our CFO today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host the QNX session.
Presentation materials for today's call are available in the company's website at Oded <unk> Dot Com. Please review the safe Harbor comments and disclosure of our use of non-GAAP financial that financial measures included in those materials.
Some of the financials were presenting today relate to non-GAAP measures such as adjusted earnings per share free cash flow segment operating profit leverage ratio and net debt, which exclude certain items that management considers not representative of ongoing operations.
A reconciliation of GAAP to non-GAAP items can be found in our earnings press release in the appendix this presentation.
I'd now like to turn the call over to Andreas who will start on slide three.
Thanks, Chris Good morning, everyone and thank you for your interest the NOI glass.
First let me say, thank you to the entire life theme for the ideal decision, making and effective execution during different damage.
Despite many challenges we continue to protect their health and safety of our employees, which is our top priority as we deliver high quality piece sustainable glass packaging for the critical food on derivatives industry.
Last night, we reported results for the second quarter of 2020.
Our adjusted earnings were one cent per chair and free cash flow was $112 million.
These results were consistent with our most recent business update.
Trends improved over the course of the quarter.
Despite the most challenging business conditions in decades, we remain a slightly profitable generated a strong cash flow and position deviousness well for the recovery.
I'm proud of our will power results, given significant demand volatility and Cvs operating disruptions beautiful if endemic.
In particular drastic lockdowns across key markets, such as Mexico and the audience.
As we manage through the brunt of that pandemic, we continued to advance artist strategy by taking bold actions to execute our investment thesis.
Results benefited from exceptional execution of our tone around initiatives.
Likewise, we continued to advance magma and we took important steps to optimize artist structure.
This includes the divestiture of our agency business at an attractive valuation to rebalance our portfolio and helped improve our balance sheet.
While the second quarter was very challenging and disruptive business conditions did improve over the course of the quarter.
Sales volume was down about 15% or at all yet we exited June down just 3% as markets began to reopen and volumes were up 2% in July.
Given the ongoing on certain things always 19.
We are limited our guidance Crusades volume outlook.
Reflecting recent in coatings ranch, we have revised our full year sales guidance.
We now expect shipments will be down 4% to 7% from last year, which compares favorably to our priority outlook of down 5% to 10%.
Likewise, we continue to operate on their key guiding principles that prioritize the strong liquidity maximizing free cash flow and reducing debt.
Overall, I believe I responded to a pandemic with resilience in the speed as we continue to execute our long term strategy. Despite the challenging backdrop.
We are encouraged by the recent business strange as markets reopened.
If you flip ahead to us like for you always see some of this steps. We are we have taken to mitigate these turbulent times.
Back in March we established our colleagues response plan to focus on cash generation mitigate the financial impact of the pandemic and maintain financial flexibility.
We strongly aligned supply with demand to avoid costly inventory growth and you will see that our inventories in June were inline with prior year.
Likewise, we have said that right conditions to reduce inventories on a year over year basis, starting in July and through the second half of the year.
As we balanced capacity, we optimize our network to manage fixed cost absorption and established that right flexibility for various recovery.
Our turnaround initiatives have been the perfect platform to ensure we successfully navigate coating 19.
Our revenue optimization efforts have helped us achieve that best policy was topline given the pressures imposed by different dynamic.
Our factory profitability efforts have improved operating efficiency, including at our focus factories, which were impacted by increased complexity in 2019.
Additionally, we have quickly implemented a strict cost controls, which have generated significant an immediate results importantly, we established a new operating model. It for the company that simplifies the organization as well as improves disease, who are making on execution.
We are watching capital light Cat Hawk.
During the second quarter, both Capex and working capital compared favorably to hit for your two year period.
Finally, we'd reoriented, our capital allocation priorities to focus on debt reduction.
While we contend with the most difficult business environment in our lifetime why remained focus on the ball the structural actions to change the company's business fundamentals.
Im now on to slide six.
As indicated we continue to made great progress with our turnaround initiatives. In fact this is the best I've seen the company perform in a long time.
Mike My continues to advance and we remain on track for our first quarter of 2021 generation one installation in haulage means in Germany.
This will be an important milestone, which will pave the way for broader game wine deployment commencing 2022.
Finally, we are optimizing artist structured as we rebalanced, our portfolio and improve our balance sheet.
Late last year, we divested our sold some joint venture and reduced debt by nearly $200 million.
In January we initiated the chapter 11 filing for pattern as we seek a final resolution for our legacy asbestos liability.
Last week, we completed the previously announced sale of our AMC unit.
I strongly believe these hard various steps for July our customers our employees on our investors.
Furthermore, I remain highly confident in our ability to execute our close these fronts and unlock shareholder value.
Let me share additional color on our business Trenched for context before I turn it over to John who will discuss our final financial results.
Im now on to slide six.
The charts provide two sets of information.
On the left you'll see all eyes recent shipment rates.
On the right, we have chair retail purchased trends for key markets and categories for glass.
Let me share some thoughts to starting with a life.
While our volumes were to stable for most of that first quarter that pandemic sharply impacted orders in April and May.
On an encouraging note volumes covered significantly in June and July us markets reopened.
System with the evolution of the pandemic, we realized a contraction and subsequent recovery in Europe first followed by the Americas.
Lets chip to two at retail patterns on the right.
As you can clearly see off premise sales have remain elevated seems the pandemic consistently up between pain and 35% depending on category.
This makes sense considering that chart falloff in demand at bars and restaurants.
Prior to the pandemic, if we paid a represented about 75% to 80% of our states while off premise was the remaining 20% to 25%.
Bottom line, we believe that is strong retail activity generally offsetting the loss AIDS from bars, and restaurants with consumer consumption trends balanced oil.
While consumption was relatively stable our cheapened loads were quite volatile right.
After a period of disruption our demand rebounded and supply chains, we violence for these channel achieved.
Going forward, we believe we lastly man and underlying consumption patterns will eventually convert but it could be choppy for a while a supply chains adjustment depending on any forward the developments we dividers.
Despite 2020 volumes being down for from market disruption, we are confident our glass volumes will return and eventually exceed re pandemic leyritz.
Now I'll turn it over to John.
Thank you Anderson good morning, everyone.
I'm on slide seven as Andres mentioned, our second quarter results were one cents per share, which was consistent with our most recent business update.
Let me walk through our earnings reconciliation on the right segment operating profit was $95 million, which compared to 236 million in the prior year.
As noted FX was a 6 million dollar headwind.
Higher selling prices offset cost inflation, which was elevated due to FX induced inflation, especially in Latin America.
Sales volume and mix was an $84 million headwind, which was fully attributed to the pandemic. This reflected a 15% decline in shipment levels plus the impact at our Jvs.
Operating costs were a 52 million dollar headwind, which is the net effect of lower production and improved operating and cost performance.
Production was down 20%, which impacted results by $109 billion the decline in production levels exceeded the decline in sales volume.
This reflected our discipline efforts to align the supply with lower demand and control inventory levels as well as the forced curtailment to comply with government decreased to address the virus and particular forced curtailment was drastic and both Mexico and the Indians.
Lower production was partially offset by $57 million and benefits from our turnaround initiatives and other can cost control efforts.
We expect the clear majority of these savings will be sustained and benefit future earnings.
Non operating items included lower interest expense following a recent refinancing activities.
Our tax rate was elevated reflecting a shift in regional EBIT mix and other factors given lower earnings we will likely contend with an elevated tax rate for the balance of the year, which will not impact cash and twentytwenty.
All of these results pertain to adjusted earnings. The Appendix includes more details on items management does not consider represented of ongoing operations. These include charges for employee severance related to our recent reduction in force initiative refinancing costs as we retired near term debt as well as restructuring primary.
Related to one site in Latin America, we continue to expect 2020 cash restructuring will approximate prior year levels bottom line. Adjusted EPS was one cents compared to 69 cents in the prior year as earnings were significantly impacted by lower volumes due to the pandemic, partially offset by favorable operating and cost.
Performance.
Moving to slide eight let me share a little color on regional performance during the quarter.
In the Americas profit was $52 million down 88 million on a currency neutral basis higher selling prices, mostly offset cost inflation, which was elevated due to FX induced inflation in Latin America.
Sales volumes were down 18% during the quarter, but improved significantly later in the period and shipments were down about 8% in June.
During June volumes were about flat in North America, and down high single digits across most of Latin America. The exception was the Andean countries, which were still down double digits. In July sales volume was up low single digits across the Americas, including mid single digit growth in North America.
Second quarter production was down as we balanced supply with demand and complied with government decreased improved operating performance and cost controls, partially offset the impact of the pandemic.
Europe's operating profit was $42 million down $45 million on a currency neutral basis higher selling prices more than offset cost inflation, which included the benefit of the region's revenue optimization efforts.
Sales volumes were down 14% during the second quarter, but improved as markets began to reopen June sales volumes were up 3% in the region and shipments were down slightly in July.
Like the America's second quarter production was lower than last year to control inventory and improved operating performance and cost controls helped mitigate the impact of lower volumes.
Asia Pacific's operating profit was $1 million, which was comparable to the prior year. As noted we completed the sale of Anzi last week, which is the clear majority the Asia Pacific segment.
Pro forma information is provided in the appendix.
Let's shift to cash flows in the balance sheet I'm now on slide 10, we are operating under a set a specific capital allocation principles amid the pandemic.
Let me review these principles and the progress we have made through mid year first we are squarely focused on maximizing free cash flow to support this we're aligning supply with demand and limiting capex to normal maintenance investment in magma, we've been making very good progress our second quarter free cash flow was 112.
$1. Despite this period, often being a seasonal use of cash for the business.
In fact cash flow was about $160 million higher than the prior year normalized was normalized for changes in a are factoring activity.
Likewise, the paddock chapter 11 process has suspended any us fastest related payments.
All of this reflects a highly disciplined focus on cash and capital management as our year to date cash flows compare favorably to the prior year.
Second we're preserving our strong liquidity. Despite the pandemic are committed liquidity actually improved during the second quarter and exceeded $1.8 billion at mid year. This is well above the liquidity floor, we have identified for 2020.
Third we are reducing debt as illustrated on the chart net debt was 5.4 billion as of mid year, which compared favourably both to the prior year period in first quarter levels, our leverage ratio at mid year was 4.1 for our bank credit agreement, which was just slightly higher than the first quarter. Despite the pandemic and.
Well below our covenant limit of 5.0.
With the completion of Anzi divestiture last week net proceeds are being used to improve the balance sheet.
We have already repaid over $350 million in debt in the remaining debt reduction will occur in the near future.
As our tactical Divesture program continues we are in advanced stages on the sale of a few close plant properties, while minor we expect the transaction should be completed by year end.
All these actions will further improve our leverage position and we're highly confident Oh I will remain in compliance with the its bank covenant in 2020.
Overall, we are making solid progress on our capital allocation priorities in 2020, despite the challenges of the pandemic.
Let me wrap up with a few comments on our business outlook I'm now on slide 11, while we believe the worst of the pandemic us behind us significant uncertainties remain given otherwise, earning sensitivities to changes in volume, we're not providing specific earnings and cash flow guidance, we will consider reinstating guidance in the future when.
There is more market and public health stability.
However, we are providing our best estimates on demand trends, which could change through the fluid nature of Coburn 19.
Reflecting recent favorable trends, we now expect our full year 2020 sales volume will be down between four and 7% compared the prior year. This reflects a more favorable outlook compared to our previous guidance of down 5% to 10% in 2020.
Given the recent trends, we expect third quarter sales volumes will be flat to modestly lower than prior year.
Yet, we do expect third quarter production levels will be down 7% to 10% compared to last year as we continue to trim. Our idea is levels. Most of this rebalancing is complete and our idea at the end of July was below the prior year.
After this quarter production should be aligned with sales volume trends.
Please note that our sales volume outlook has been normalized for the divestiture of AMC effective July 31.
We do anticipate providing continued regular business updates during the pandemic that will include our evolving business outlook with that I'll turn it back to auditors.
Thank you John.
Let me conclude with a few companies.
The second quarter percent at many unique challenges, which we met with high resilience is speed and agility.
Despite this difficulties, we remain profitable and generated a strong cash flow supported by solid operating performance.
After a number of downturn in demand aired during the quarter, we've seen an equally as strong rebounding demand since June which is reflected in our improved sales volume outlook.
Despite the globe pandemic, we continue to advance our strategy and successfully take the ball documents to change our business fundamentals.
Let me reiterate what I have said in the past we remain focused on creating long term value.
Compete in the steps were taken today will enable allied to emerge a stronger full season that will benefit the company and he's a stakeholders in 2021 and beyond.
Thank you for your interest like less and we now welcome your questions.
Thank you at this time, we would like to take any questions from me cancers today and is there any lingering to ask a question you will need to press star one and you tell us selling.
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We have our first question comes from the line of gun shy from job from Baird. Your line is open. Please go ahead.
Hey, guys good morning.
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Hey, So I guess first off on.
On the July volumes up 2% can you give us a breakdown by region.
And then buyer volumes implied to decelerate during the third quarter, just given tight theoretical end market inventory levels in Mexico, and the Andean region.
If you want them. So upsides shipments were up about 2% year on year in July and North America was the strongest performance mean might mid to high single digits.
Year on year Europe.
Yes is slightly down but he is about flat when you put June and July together, so that market is stabilizing quite well in line with prior year in those two months.
Our Brazil was up mid teens, a very strong performance in Mexico is still down bodies significantly improved and in particular, the local market has improved quite well, we're still soft in the export market.
And and the on was about flat, Peru, and Ecuador, various strong Colombia, the steel down by recording will.
And on the other part and the question, which was why did the quarter fiery up 2% in July and then declining in the back part of it I ill kick that off and so yeah go ahead, but I think we were certainly seeing a inventory restocking process going on right with with.
After the dislocation in the second quarter, we're certainly seeing that the question is how long will that be sustained and whatnot. So I understand that so so demand signals ghansham are encouraging across all markets.
Nevertheless, we want to be cautious because there is high volatility and we've seen.
Lots of instability thing the market over the last few months.
Now we got to be mindful that there is uncertainty with regards to ailments future evolution and they impacted my having lockdowns on economies.
Now there is the inventory replenishment that adjustment John just mention.
Now in the inquiry insight when we will kind of branches demand is being a stronger than expected and is being four months four consecutive launch of very high demand and glass has been performing quite a strong enough premise and just giving you a little beta of data related to the United States.
Based on high ROI.
The premium products are performing quite well in off premise.
This is good for glass and the it is good to see that consumers are not trading down.
Now if we look at a specific product categories berating glass is half, 10% whining glasses up 14, a spirits are up 24, and food is up between mid teens on and high that will be just depending on the product line.
The on premise Chantilly has been down and you know that normally it's good for glass now has been operating opt third the love bounced were lifted has been operating at low levels.
Now what that causes these cats are both very low usage.
And because they are up low yields than single serve containers you got to replace that.
And that is very good for less because then.
Our demand increases.
Now it will required the on premise demand to go back to high activity on rotation forecast, we saved the we use otherwise the life of the product is at risk.
Now now that the in the U.S. there is a shortage of aluminum cat and this is favorable to less.
Now we expect the shortage, who is 10 through 2021 of these point.
However, when we look at Europe for example, and we look at Brazil demand for beer is really high.
In fact, we've been keeping all the capacity that we have active at this point in time, why then don't have BCCL with the charted show for aluminum cans in the market.
And I would say that the final factored that we are looking out is there is high new product development activity in the markets. We've we've seen that in North America, we're saving Mexico in Brazil, and the Andean countries.
And we will continue to monitor the convenience again, we see encouraging signals of demand improvement, but we want to be cautious.
Okay, that's very comprehensive thanks, so much.
We have our next question comes into line of Brian Maguire from Goldman Sachs. Your line is building. Please go ahead.
Hi, Good morning, Andreas John and Chris money.
It's a question on the third quarter outlook. So I think the second half of the year outlook I guess in general you're sort of implying volumes will be.
Flat to slightly down in both quarters. It seems like if you triangulate for the the four to seven for the end of the year.
Thanks. The question is it volumes are roughly flat.
Do you think that EBITDA could be flat.
Year over year, and then sort of within that the decremental margin into Q was I think 45% for.
For EBITDA on.
I know you had a tough time sort of adjusting to the changing environment.
And it sort of talked about decremental margins going forward will be not quite that that as you think that it takes some fixed cost actions what kind of decremental margins. You think we could be looking at in in the second half of the here Theres a range or a number you can kind of put on that.
Yeah, Let me that it is China, let me take.
But the habit and some of those points. There. So we look to the back half of the year. Some of the moving parts is FX shouldn't be a very major factor, maybe a little bit of headwind as we get it until later part of the year.
We will probably still be contending with a little bit of FX induced inflation over the balance of the year, we'll be able to pass that through ultimately, but it might take a little bit of time.
Like like you said in a world where the sales volumes are flattish, yes, we should be able to.
Sustain that now we are taking a little bit of production downtime additional production downtime here in the third quarter as I mentioned that 7% to 10% as were bleeding off some of the inventory levels. So that will be a bit of an impact keep in mind, you know, we were down 20% or so and the and the second quarter if were.
Half for a third of that you can kind of calibrate what the net effect is as you saw the.
<unk> costs were up $50 million or so in the third quarter, you know look at half for a third of that in that regard.
And probably at the other key variable our two other variables is taxes, we're going to have elevated taxes, just because of the impact of the second quarter earnings environment will probably be about an average of 40% effective tax rate for the year it could be lower than that if we are able to get volumes kind of flat.
Fish in the back half of the year or it might be creep up a little bit above that and of course than you have the a in the divestiture and there's probably about a nichols worth of.
Earnings loss over the balance of the year from July 31st of the entity or so hopefully that gives you a little bit of color in that regard.
On your question about decremental margins. So if you take a look at the course of the quarter.
We did have as you think as you mentioned something negative 45, or 50% kind of decremental margins during the quarter.
In this and into the second quarter now that really reflects the impact of sales volume obviously was a big piece of that we did have our JV is also down a little bit and that tends to have a little bit a disproportionate impact on the margins.
Now on the production side.
Yeah, you know if you take a look at it I thought we did a really good job because.
We.
Despite the fact that we are taking production down at a rate above.
The decline in in.
Demand, we kept our decremental margins in that 40% to 50% type of range and a world where you're actually now recalibrating on that that probably would have been around 40% decremental or even high thirtys decremental margin given the very good cost reduction that we that we achieved during the business. So as we think about what it should be.
Going forward kind of a normalized gross profit margin decremental or sensitivity on the sale side is about low twentys and then it if we can keep the decremental margin on production at another 15% to 20% or so then you're pushing 35% to 40% decremental margin.
Or incremental margin as we recover for that matter going forward.
Okay. Thanks very much.
Thank you.
We have our next question comes from the line of George Staphos from Bank of America. Your line is open. Please go ahead.
Thanks, Operator, hi, guys. Good morning, Thanks quality Laurel.
Good morning, everybody on the call as well Hey, Andreas I wanted to take a step back and look at what you're finding so far with magma.
What has been the findings at a greater what are the customers been saying.
And importantly, how does this change is the growth outlook, given what you're finding right now.
Looking out to 21 and 22.
The related question I have what are you finding in terms of the changes if at all in terms of the glass characteristics using magma versus your traditional technologies the product performing.
As expected in line that filling the right way and again tie that back to your growth expectations for 21 and 22. Thank you very much.
Thank you George so magma.
All the.
All the things we wanted to testing is threed or have been tested.
And the outcome has been positive.
The most important part do we want it tool.
Rule or there was the melting and he's been proved so at this point in time, we can melt glass of high quality. We can do it up good efficiency rates up we can foreign battles with no problem at the levels of quality requires made the industry. So that is going well we're waiting for the holidays mean then Mike.
Until we covered we won a concern so moeller.
Data points, if that is confirmed what are going out in a position to deploying mine.
In some specific applications in 2022 and 2023, so customers are very encouraged by that they see how these technology can increase flexibility to significantly SK level at the follow growth better which is part of your question. So they're looking forward to.
Having magma available then disease across end users and usage has been then when we look at growth.
Having magma is an important.
Development, because we counted scale out in a small increments, which is being a concern for the industry on a leap.
Really a constraint.
Although wait to hear so we're going out in a position to follow some of these growth opportunities in smaller increments and then we can complement that with our recent aligns us their volume is the rail.
We weren't expected fully deployed Jan one so so far they put August has been so positive that we are in a position to employ game. One if we get the configurations. We won a host mean that.
Yes quality is good the product. These is good out of the Mac malign. So we're now looking forward to their haulage mean then operation.
Andres just a quickie how many trials have you done it screener since.
Since you started thanks very much and good luck water.
Yes, multiple trials that we've been in operation in that line now for a year and a half two years. So so we go on and off because this is on R&D line. So we continuously test Neal Thanks, and there are plans to test the you in more things seem to any 22.
With regards to R&D development, but this is up in constant activity. So we've been testing multiple kinds of containers in multiple conditions over this period of time.
Thank you very much.
Thank you.
Your next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open. Please go ahead.
Hi, good morning, Thanks for taking my question.
I realize it's really for you had a specific add 20 drilling capex guidance I just wanted to ask related to kind of a co bandwidth temporary scenario.
How long can you deck with kind of maintenance quest magnetic lag my capex.
What are the areas, where you need for additional capex spending.
And then just kind of in the context that he has two businesses now really I realize there Ben but if you don't have age anymore.
And just kind of think about at the moment for each of the two remaining regions going forward.
And kind of what is needed it over the next two or three years into that region.
Hey, Debbie this is John I'll take a.
Some of the number questions on that.
Yes.
We've always said kind of maintenance it around you know to $75 million to $300 million.
Asia, the NZ business would normalize have about $35 million a capex on an annual basis. So so you can kind of deduct that or at least at marked large portion of that for for the capex.
Just thinking about what is what could it looks like going into next year. Obviously, it's very early nonetheless going into this year into 2020, we were guiding 350 to 375, obviously that include and the at that business. So that included the maintenance level that I talked about plus incremental investment we knew we were doing Magnus.
Plus some discrete kind of growth and operating performance related projects, so thinking that as a baseline than the question is what is really what is the next year and that's where we got to understand a little bit topology of the marketplace business opportunities. What is the new normal look like to be able to recalibrate. So yes, I think the the referring.
So there may or difference would be related to.
It's strategic projects and Thats something that we're seeing over the last couple of months sees some customers willing to take neat term to lent long term commitment.
Coming out of defend them make and that so we're looking at that we're looking at the demand capacity violence and.
Trying to the third mean, what might be required from a capacity at some point.
Going into 21, and 22, so that might be the major difference I think the maintenance for Dick.
Critical assets have been covering.
2020.
And then we'd been investing in magma, which we intend to continue going to 21.
Okay. Thank you.
Michael Basket of Hill looking back at.
Green Bond that you guys did last year on thinking about the next couple of years do you guys.
Scenario with lets you wouldn't be able to you.
Significantly lower your borrowing rate.
Haven't given what you're able to do there.
Yes, I mean first of all I you know we thought the Green bond was it was a great success for us I mean, the of the amount of interest that we had lined up especially by SG investors at least 40% is from what we can tell the investors in the Green bond ended up being SG related funds under under either independent or under the.
ROA.
A lot of times companies targeted about it in eight of our percentage point improvement I think we got better than that I think we've got a quarter point or better tally. The true now it's always hard to understand on under any given set of circumstances. What you think that the value of that would be going forward, but we were very encouraged by that green bar.
And I, certainly would look to evaluate doing doing more of those.
Going forward and our average borrowing rate right now is right around 4% or so.
So.
Across the spectrum of the investments so that's a pretty good right now hopefully we can continue to chip away at that but it'll it'll depend on the rates when we get back in the market.
Okay, Great all right. Thank you very much I'll turn it over.
Our next question comes from the line of Mike Willoughby from Bank of Montral. Your line is open. Please go ahead.
Thank you.
Very clear presentation. This morning on that.
No I wondered if you talk about the amount of impacts in the second quarter from one time kind of cost cuts in salary reduction.
Uh huh.
Hi.
Yes.
Yeah, Mark you cut out a little bit there, but I think your question was what was the impact of cost cuts in the second quarter and how much is sustainable and and whatnot.
So we had indicated that we had $57 million of cost reduction in the second quarter about $32 million of that are about close to 60.
For center, so was really under our turnaround initiatives, that's improved efficiency effectiveness at the factory level things like that that is very sustainable. Okay. The other $25 million are so has to do with other cost reduction activities that we had across the business under that pocket. Some of it is sustainable. So we had indicated we had a reduction in four.
Worse activity in the quarter that component will be sustained so lets say half of that as a sustainable or so type of.
Savings some of it is situational I mean, the fact that you know that volumes were down production was that you can access to labor was down so maybe maintenance level spending were little bit lower during during the second quarter lot of people have been obviously working at homes, the opex levels or the spend or a little bit level, lower but I'd say overall about 70% or more should be sustainable.
The types of savings for the business.
Okay, and just as a follow on John and you guys talk about sort of how you're managing the the production reductions in the third quarter is that shutting down line shutting down furnaces.
Just slowing back lines.
And a third its footprint the moves contemplated.
So so at least on that.
Last part first we came out and we identify the restructuring items. We had we had the one facility in Latin America.
Any other future decisions, what would would be obviously in the future. We got to understand on understand the landscape of the business I guess time time progressive but.
But but but looking at.
The production management during the quarter it was about 50% lines down and 50% furnaces down we going into the second quarter. It was substantially lines down and obviously that has a higher you know fixed cost absorption, we did be able to blend that down to about 50 50 towards later in the quarter that's about what.
Occurred and the July period of also that's a good place between you know that sweet spot between minimizing cost absorption, but also having operational flexibility. The demand comes back online. So thats kind of the mixed bag that we were looking at and as we indicated in our prepared comments you know with ideas getting in line to where we want it to be no we'll start tailing off.
Auction activity is kind of.
Mid quarter here, So and then get back into production more aligned with sales volume activity.
Okay very helpful.
Hi.
Okay.
We have very next question comes from the line of Anthony Pettinari from Citi. Your line is open. Please go ahead.
Hi, good morning.
You talked about the strength in North America, and I'm, just wondering as some states are pausing or in some cases rolling back reopening plans with cobot cases, increasing is impossible to say what your full year shipment guidance assumes in terms of on premise consumption is that expected to kind of improve sequentially.
Through Threeq and Fourq, you with on premise coming back or you kind of assuming maybe kind of current level of activity.
So the.
We had a strong July.
At this point in time, we're sold out in beer in Americas in North America.
We expect that to go through the balance over the year, while we're seeing on premise is enough frame you see something that we got to monitor closely.
There has been a significant increase and I would say taste port at home consumption and cooking and that's changing some trains. So there are some emerging trends that we gotta go money towards.
Initially we expected that off premise was going through we are very potential.
What is going to have a very bunch on increased but in reality. These four months now any continues to be very high.
So we got to see where data is going to see IDN and on premise.
Got to go backup is important to monitor or at what pace and to what level and I think they use okay actually something to monitor closely because he has a significant impact.
The volume of cakes.
Equates to about 6.4 billion units of single serve container so is it pretty sizeable.
Chair. So we are monitoring that closely the up.
We expect the marry their north American market to continue.
Hey, good pace, but we might be limited by capacity to in beer because at this point in time would placing all the capacity we having the mark.
Okay. That's very helpful. And then just with regards to the shortage of beverage cans just on that I understand this and I heard correctly I think you indicated North America you are seeing those shortages may be impact the market through 2021, but you're not seeing them. It to the same degree.
In Brazil, and Europe, if I heard that correctly, and then I guess is it possible to quantify.
How much volume, maybe you were able to pick up whether it's a point or more and is this volume that you're able to kind of block up into multiyear contracts into this maybe just kind of go back.
The next year or any kind of color there.
Yes, so the.
What we're seeing order here to you. So obviously, a an increasing demand for.
Yes, as a consequence of that shortage, we're seeing very strong demand in Brazil for beer.
In reality, we're sold out in Brazil at this point.
Why wait containers have been performing well in off premise and returnable containers are now coming back because restaurants and bars are opening in the large Cds. So regardless, it's performing a strong we're going to be constrained by capacity Europe is having a very strong demand in beer. It doesnt have that shortage that we are seeing in the United States.
For aluminum body of has a very strong demand for beer.
So that's the current situation way again, we're monitoring that these closely.
We expect that as consumers.
A half more glass in their hands and knowing that consumers like to consume that preferred brands in less.
This is going to have a positive impact or timing in glass demand.
Okay. That's helpful I'll turn it over.
We have a next question comes from the write off.
I'm, just saying from Keybanc. Your line is open. Please go ahead.
Thanks, Good morning, everyone. Good morning.
John to test slow questions for you first is you went into this year. Thank you do 300 million plus.
Partly because you're not making as best as payments and then obviously, we had a pandemic such that your earnings are going to be much lower.
Than what you initially thought and then you sold the business recently, so given all these changes and given whatever your economic.
Expectations are for the foreseeable future. What do you think is a reasonable kind of normalized level of free cash flow on I say normalize I mean in a year and rich working cap is neither a major source or use and when your capex is comfortably above the maintenance level that it'll be this year.
Yeah, I would say.
Our normalized level of Capex still remains above that $300 million range for the business. Okay. So again thinking a more normalized level and the thing some of the moving pieces in that regard you know you can come up with the room kind of EBITDA of you keep in mind, we lose about $80 million or so of the EBIT the Adam.
The but we also have though the follow on of the $35 million lower if capex spending and the savings of the of the on the interest payments themselves on the debt. So that the net league as there is about 30 $35 million or something along those lines.
In a world, where we continue to see working capital is maybe a very slight modest use of cash restructuring in this kind of $40 million range or thereabouts.
And really kind of bringing that that capex. If you just kind of assume this this 375 understanding that we may have numbers that swing either way on on the side of that then adjusted down for the and as he brings it down and Mike Little under 350.
So what you had there is an environment that supports over $300 million a cash flow for the business and then of course, that's what we'd like to grow the base off of and improve it from there.
Thanks, and then just related question is if that's a normalized level.
What you were guiding to for this year of course before covert and before you sold a and b.
Can you talk about just your working capital expectations for this year, just given your efforts to reduce inventories given whatever your whatever you're a are factoring as compared to last year et cetera.
Let me, let me just talk about that little bit so going into this remember last your working capital was a fairly large use of cash about a $150 million than we had indicated going into 2020 that should be reduced to something like a 75 to 100 million dollar.
Now what we're also seeing right now is a couple of moving pieces. One is we aren't saying I mean, it's some of the harder hit areas or some of the markets that have the longer payment terms and things like that so so that's that's a little bit of a recalibrating effort plus the fact that we've also really focused on on.
Working capital side ourselves internally, whether its receivables and inventory management et cetera.
So I think we should be in a world we're kind of in the middle part of that range that we're talking about you should be comfortably below that $75 million to $100 million range, but it's still a modest use of cash.
And so.
That's probably what I'm thinking about this year now on the factoring side, you know factor and we don't think there's going to be either a source or use of cash this year, assuming the the markets are what they are.
We had.
About.
You know, 45% or so of our gross receivables factored at the end of last year.
We always try to keep that between the 35, and a 45% range and it tends to be a little bit higher the ended the year given the seasonality of the business in the needs of cash in the going into the first quarter in that regard now one thing I'd say the caveat for free cash flow. This year is it is going to be a little bit messy because of the divestiture of a and C and the fact that some of these things.
I will come through working capital adjusters through cash flow from financing activities.
Basically reporting elements and we will make very make those elements very clear for the investment community going forward.
Thanks, John.
We haven't next question comes from the line of Mike that hit your line is helping please ask your question.
Great. Thank you and just one for me Andres question on on the US beer dynamically talk through with canceled out curious if.
This shift or this increased demand you're seeing glass is more driven by saying or traditional can be or customers, who they are seeing tremendous demand and they're trying to get more product on the shelf. So so they're moving back towards more bottled beverages.
Beverages versus say consumers that are just kind of trading towards different brands call. Your more premium traditionally glass beer demand.
Because everything else is sold out just how have your conversations with your customers kind of evolved given these dynamics.
Yes. So the I think we are we're seeing both I think customers are interested in developing new products on we're seeing that activity picking up.
And as consumers get the opportunity to have their brands in glass, which they like I think we're going to see a pickup on on demand because of that just because of that.
Clearly there is a shortage.
The minimum cash right now, but there is a improvement in the interesting glass by its sound right still.
Yes, I think this is also evidenced by you see that a lot of interest in the new product development that we talked about earlier is a lot of a lot of our customers are coming to us looking about ways that we can launch in revitalized brands and bring it forward in a different way.
And that's a good sign that Theres, a fundamental interest in glass products and that out a number of premium products being.
Growing into market and glass is a very good feed for premium products on branding. So that's what we ought to have certainty into markets that completes.
Great. Thank you.
You have any next question comes from the line is key Hi from Wells Fargo. Your line is open. Please go ahead.
Good morning, gentlemen, ill go alone I get.
I was curious.
Can you discuss at all I guess, the competitive landscape in Europe, and maybe more specifically the Iberian Peninsula, we read some reports of heightened imports in France, particularly and others removing capacity in the market.
No I think you guys kind of added a furnace I know there was kind of spoken for for premium beer prototype remember correctly. So I'm curious if that furnaces operational at this point and then.
As it relates to magma I seem to remember that was going to be kind of on schedule for second half 2020, and I. Appreciate obviously, it's difficult to get engineers and different folks in the.
Plants in factories, but.
Being pushed to Q1 is that just original pandemic or there's something else there.
Okay. So the.
The competitive situation Oh.
Of.
Companies in France, or excuse me this pain or Portugal's cheapening to France has been a long time as situation now what we're seeing at this point is France.
Recording World. So line is coming back to.
Pre pandemic levels remembered that wind was a little soft thing the order, though area before we went into a pandemic.
And then I mean, the company that might dynamic remains the same.
Yeah with regard to.
They farnesene year on Port, which is referring to is going to start in September. So we're finalizing the construction and we're ready to go September you got a little bit delay just by Dick on the condemning Julie imagining what the people to move people across borders that we needed to slowdown with regards to maximize is this.
Same thing so we were expecting to conclude by the end of the year by the fourth quarter and we did it for movies have couple of months because we couldn't.
Sent people too.
This will flyers too for the construction of equipment or we could and.
Advance the up the construction, but at this point in time everything is back to normal and we expect to.
Have this.
Up and running in Q1.
Okay. Thank you and I recognize that you guys are kind of managing the business real time in 2021 feels like a far way away today, but.
Assuming obviously, we don't have kind of walk down measures in Q2, and we kind of have some sort of a volume recovery in 2021.
Howard how should we be thinking about production levels next year.
Again kind of particularly given you guys are trying to manage inventories pretty pretty tight this year.
Yeah, I think the as we've said before.
There is lots of 11 volatility at this point then on turret took the so we're monitoring all these various.
Factors that we described before very closely and we expect to be able to provide more color on study for anyone later in the year.
I think that Aarding coating silencing demands as I described before.
They are having an impact right now some of them have the potential to go into the following year, but again, it's too early to give you a you in estimate of 2021.
I would I'd just add EMEA again back to our prepared comments is that we are at the point getting close to having our production aligned with demand. So so.
Worthwhile to look at how much what are the inventoried in here and how much progress we want to making further after that but to.
By and large we're doing the heavy lifting very quickly I mean I you know we were able to achieve in a couple months would it took the company over a year to do their back during the great recession. So I think we acted very quickly.
To rightsize inventories, which we think is absolutely right decision for cash and positions us quite well going forward.
Great that's I'm looking for thank you.
Q.
We have the next question comes from the line of Lars Sheldrake from Credit Suisse. Your line is open. Please go ahead.
Thank you and good morning, just one question left just looking at your Q margins in the most comparable to reach and they're still talking you appears in the range by 600 basis points.
Question is what sort of level leverage do you have to to pull to to narrow that.
Significant EBITDA margin gap.
And what sort of roll do you think Matt Matt can play in that.
That is starwood, the dose, making reference to the turnaround in use if something a lot of that focus goes to cost we auction.
And something that we've done during the pandemic is celebrating those efforts. So I think were bad building a pretty solid foundation.
For margin improvement going into the following year on their compared to what conditions.
Magma is expected to have a lower total cost of one or chip when we have to it when we get to again three.
Lowered.
A copy telling fancy too so he's going to have a we expected to have a positive impacting margins as we can implement.
In one and didn't tool in after that and engine three.
Yes, just one follow up in terms of the furnace activity.
Yes.
Well outside of meaningful.
Sort of delay from the first half into the second half on site also weighing on the second half production level.
The rebuild schedule.
Yeah, Yeah, well, the we needed to have a little bit will delay in some of that really is we had a high level of activity is scheduled for Europe when the year started.
We had some delay but we are moving all those projects forward. So we already started most of them. So that's that's pretty much cord.
Yeah.
Parts of the World, we didn't have an issue we could we have the restrictions to move people across so we've been we've been performing according to artist casual.
As we came into a year.
Yeah, I would say is that you know that capital spending as we look through the balance of the year is pretty evenly balanced.
Between the third and fourth quarter and both of them, we'll be favorable to the prior year levels.
Got it thank you.
Okay.
We have time for one last question.
You have one more from wind investment also from RBC capital markets. Your line is open. Please go ahead.
Great. Thanks for taking my question I just have a one maybe higher level question. When you think about all the changes you've made over the last couple of years, a and now selling and Zee.
And also I guess, maybe thinking about some of the shifting demand dynamics.
How are you thinking about the footprint now globally are there any regions, where you know maybe there's opportunities to consolidate plants. You know do you think that's necessary within the industry Ah. Thanks.
Yes, so we've been.
Looking at footprint.
How is that right balance between demand and capacity across the world.
For a couple of years now.
The marketing, which we had the mind decreases we choose to North America.
It's a marketing, which we've been adjusting capacity now we're seeing a increasing demand. So we got to see where data is going to take us with regards to requirements of capacity, but other than that I think we are well position a.
In markets like Brazil, there is a significant demand so we got a little cat incremental capacity over time.
But for the most bar, we'd been balancing the amount of capacity will.
We're continuously looking at assets, we want to make sure we are always focus on.
Mark asset stuck half a high margins and very good returns.
But that's kind of going exercise that we've been doing and will continue into future.
Okay. Thank you everyone that concludes our call. Please note that our third quarter call is currently scheduled for October 28.
And as always make it a memorable moments by choosing sustainable glass. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you all sorry participating and you may now disconnect have a good thanks.
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