Q3 2020 O-I Glass Inc Earnings Call
Thank you for standing by and welcome to the <unk> third quarter 2020 earnings Conference call.
Kevin based on mute to prevent any background noise after.
After the presentation, there will be a question answer session.
Structures and how to do so with a big EBITDA properties. Thank you Mr., Chris Manuel you may begin.
Thank you, Jim and welcome everyone to the <unk> third quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO and John Hodulik. Our CFO today, we will discuss key business developments and review our financial results. Following prepared remarks, we'll host acuity session person.
Presentation materials for this earnings call are available on our website at <unk> Dot Com. Please review the safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Some of the financials, we will be presenting today will relate to non-GAAP measures such as adjusted earnings per share free.
Cash flow segment operating profit leverage ratio and net debt, which excludes certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP can be found in the press release and in the appendix to this presentation I'd now like to turn the polar Andre So starting on slide three thanks.
Good morning, everyone and thank you for your interest.
I want to start off by recognizing all of our employees worldwide and in particular, our front line team in the factories.
Our employees have work hard every day in challenging conditions [laughter].
Sure we safely manufactured the glass containers needed to keep that well be able to supply chain operator.
We got that jumped to.
On safety.
Our plans are now fully operational and performing well.
Its hard work by our team probably use it gets stronger you account for the third quarter. Thank you all.
Last night, we reported results for the third quarter of 2020.
Our adjusted earnings were 41 cents per share and free cash flow was $205 million.
Third quarter volume increased nearly 2% compared to the prior year.
Shipments were fairly stable across the quarter.
Their mind was the strongest in the Americas led by our North America business unit.
Oh, it all consumption leveraged helps haven't changed much over the course of different dynamic. However, they mine has cheap debt from on premise to off premise given probably killed restrictions.
I made that shift I suspect that consumers have maintained a strong preference for healthy premium unsustainable glass packaging, regardless of the venue.
We continue to advance our strategy.
Phone erroneous, yet they've started gaining momentum and improved operating performance are substantially offset the impact of lower production during the third quarter.
As we seek to optimize started structure proceeds on the sale of our agency business unit would apply to that we offer.
All the while we have continued to develop magma as we seek to revolutionize glassman factory.
We believe all of these actions will create value for our shareholders.
One encouraging note our business outlook continues to improve.
Given a solid quarter, we now expect full year sales volume will be down about 3% to 5% in 2020 compared to 47% decline in our previous outlook.
That's gonna these films have somewhat stabilized we are reinstating earnings guidance for the quarter.
Which we expect will approximate 30 to 35 cents per share with chase volume compared it won't be a priority or leverage.
We get a 2020 cash flow should also compare favorably to the prior year.
We are also providing some preliminary thoughts on 2021.
What is the outlook for revenue and cash flows when you put all purchased 2020 leverage.
Of course, they fund any convenience so any outlook is subject to adjustment as poverty Hell trying to walk.
Let me provide an update on our chief meant strange.
We try to stabilize over the past several months I'm now going to slide four.
Consistent with previous presentations based sharper likes to say it will be information.
On the left you will see you ice recent chip infringe on the rights. We are presenting kit retained part just strange across several categories and yoder.
Let me share some thoughts starting with oil.
While our volumes were stable for most of the first quarter they've been Danny covered all Pvs rough did orders in April and May.
That's many markets reopened volumes recovered significantly in June and have been a stable.
Higher each month of the third quarter.
With most of authority behind US sales volume. This month is up slightly compared to last year.
Reflecting recent trends, we anticipate fourth quarter treatments, we'd be flat to slightly up versus the prior year.
That's cheap to liquidate patterns on the right.
As you can clearly see a friend he say just have remained elevated seems to pandemic consistently higher depending on category.
This makes sense, considering that sharp falloff in demand at bars and restaurants.
Why did we pay in France remains strong.
Growth has moderated more recently that's on premise locations have started to reopen some.
During the third quarter.
That'd be make two oki observation.
Yes.
For the wide this strong <unk> retail activities generally offsetting the loss age from bars, and restaurants with consumer consumption trends balance, though at all.
We are pleased with the ability of our customers and supply chain to quickly adapt and glass is doing well with these consumer channel shift.
Second it is not possible for the supply chain to a snapback and 40 restock inventories immediately after days Raptis second quarter Frank.
Frankly, our customers and the old fool them better supply chain, he's not equipment for these type of search.
I think at present, we believe most end markets are reasonably well served by the oil supply chain will likely remain in flux for the foreseeable future.
So we think demand we continue to think through this.
These patterns could remain choppy on field fully realized.
Bottom line, we are serving our customers need 12 and are confident that our chief mental areas would return to pre pandemic leveraged and continue to grow off that base, but.
Particularly as new product development activity remains at an elevated level.
Why do we contend with the pandemic, we are highly focused on executing our long term strategy to create shareholder value.
I'm now on slide five.
I want to update you on the ball at the structural actions, we have taken to improve the company's business fundamentals.
We continue to make great progress with our turnaround initiatives, which have proven to be the perfect platform to help navigate different dynamic.
I'm proud to say that our operating performance continues to improve.
Which reflects the contribution of these turnaround initiatives.
Give me mine production was down 10% from last year as we ramped up capacity after the challenging second quarter.
This was a $46 million earnings headwind, which was substantially offset by operating improvement and plant productivity studies now back to prevent damage leverage.
Likewise, our new brownfield slanting Durham cord. He is now operational I want to thank the thousands of IC members, who will help us with these achievements.
<unk> continues to advance and we reached several key technical milestones during the quarter.
The Mac my generation Y. distillation at college mean than Germany remains on track for the first quarter of 2021.
This will be an important development to pave the way for broader again, one deployment commencing in 2022 and beyond.
Additionally, we recently entered into a strategic collaboration agreement with Crohns AG, the global leader in food and beverage very just processing I'm feeling technologies to get or we can improve last really lined the speed and efficiency and hands have you need to respond to market range and develop innovative and sustainable glasses.
<unk>.
Finally, we aim to optimize artist structured by rebalancing, our portfolio and strengthening our balance sheet.
We have completed a number of divestitures, we thought of proceeds in excess of $370 million, including to say no vacancy at an attractive multiple during the third quarter.
As a result of these transactions I'm favorable cash flow, we have significantly reduced net debt over the past year Howard.
Our tactical divestiture program continues and we expect to complete the problem next year without eastern of proceeds to affinity for debt reduction.
I fear movie leaf beside the brightest step sort of why our customers our employees on already investors. Furthermore, I remain highly confident in our ability to execute across these fronts and unlock shareholder value.
Advancing to a slight seeks I will like to talk about how we are further elevating still sticking to really be otherwise.
We are focused on being the most innovative so stay anyone on chosen supplier of brand building packaging solutions as you know our.
Sustainability problem is aligned with the United Nations will stay no really sustainable developing golds consistent with this focus we are elevating our he has he ambitions.
Let me know without fuel reason of steps on our journey.
First we recently appointed our first Chief Sustainability Officer April. So you assume that reports directly to me and will ensure you have seen is that these are the batch second we achieve our vision, we have broadened our sustainability initiatives and goals for next year next several years. These include check to develop.
In the U.S. glass recycling system building on the successful mall it in Europe, where glass recycling outpaces all are packaging materials.
Third we have initiated a glass advocacy campaign initially focusing the U.S. you separate will ensure a balance public beach caution on the inherent sustainable nature of glass more.
More broadly the campaign will emphasize the many benefits of our product, including the healthy premium and brand building directories picks up less well.
Well I you saw at the forefront of transformational glassmaking technologies.
I know it might know agents will said newest standards in the industry, many areas, including Lightweighting and sustainability or at all.
Finally, we are preparing our next thing or you could report for 2021, which we have much more to be paid on DC news.
Next let me turn the presentation over to John who will provide some detail on to find us.
Thanks, and good morning, everyone I'm now on slide seven as Andreas mentioned, our third our adjusted third quarter results were 41 cents per share. This compares to 54 cents in the prior year well.
While segment profit was nearly flat with last year earnings were down due to the impact of divestitures higher corporate costs in an elevated tax rate. We believe stable operating profit is a great accomplishment following the challenging second quarter and over $45 million impact a production downtime earlier in the quarter, Let me walk through.
Our earnings reconciliation on the right so.
Segment operating profit was $204 million compared to 206 million in the prior year.
As noted FX temporary items and the impact of the divestitures was a net headwind.
Higher selling prices, mostly offset cost inflation, which was elevated due to FX induced inflation.
Sales volume and mix boosted earnings as sales volumes increased about 1.7% from the prior year when excluding the agency business.
Operating costs were up slightly from the prior year is Andres noted the benefit of our turnaround initiatives and cost savings save substantially offset the impact of lower production.
Non operating items, including higher retained corporate costs lower interest expense.
In a continued elevated tax rate.
Corporate costs include additional magna spending as well as higher insurance and pension costs.
Likewise technical assistance and royalty income is down given lower energy and engineering activity amid cobot the higher tax rate includes some catch up adjustments. After the unusual second quarter bottom line. After a disruptive second quarter, our segment profit recovery and was comparable with the prior year. Despite the temporary.
Overhang of lower production levels.
Moving to slide eight let me share a little color on regional performance during the quarter.
In the Americas profit was $113 million down $10 million from the prior year higher.
Higher selling prices, partially offset cost inflation, which was elevated due to FX induced inflation in Latin America sales.
Sales volume was up nearly 2% during the quarter and the improvement was most pronounced in North America, and Brazil were both were up around 6% Walt.
While down slightly in the quarter shipments in Mexico, and the Indians improved significantly over the course of the quarter as those markets recover from major Lockdowns earlier in the year, both Mexico and the Indians were up low single digits in October.
Operating costs were flat in the third quarter as good operating performance and benefits from turnaround initiatives offset lower production.
Europe's operating profit was $88 million up $9 million from last year higher.
Higher selling prices more than offset cost inflation, which included the benefit of the region's revenue optimization efforts sales volume was up 3% in nearly all markets were stable or improved modestly.
Like the Americas third quarter production was lower than last year, as we ramped up capacity.
Improved operating performance and cost controls helped mitigate the impact of lower production as well start up costs as year on court.
Asia Pacific's operating profit was $3 million compared to $4 million in the prior year.
Given the sale of AMC, our 2019 and 2020 financial statements have been reclassified.
As a result, the Asia Pacific segment only includes AMC, while our Asia business is included in retained corporate as.
As you can see segment results were pretty flat, which again pertains only to AMC well dilution in the sale was a headwind.
Year over year, the business performed well after the sale date on July 30 Onest.
Let's shift to cash flows and the balance sheet I'm now on slide nine.
As stated in the past we are falling specific capital allocation principles. During the pandemic first we are squarely focused on maximizing free cash flow to support. This we have a line supply with demand and limited capex to normal maintenance investment and Magnum, we've been making very good progress our third quarter free cash flow was.
$205 million cash flows were down from the prior year, but this was due to a prior year shipped in factoring activity on a factory neutral basis current year cash flows exceeded the prior year by $96 million.
On a year to date basis cash flows were well above prior year levels, reflecting our significant focus on cash and working capital management.
Second we are preserving our strong liquidity. Despite the pandemic are committed liquidity continues to improve and exceeded $2 billion at the end of September well above the liquidity floor, we established for 2020.
Third we are reducing debt as illustrated in the chart net debt was just under $4.8 billion at the end of this quarter debt compared favorably to both the prior year period, and second quarter levels. The AMC proceeds and free cash flow helped reduce net debt by nearly $850 million year over year, despite currency pressure.
Yes.
Our leverage ratio at quarter end was 4.4 per bank credit agreement and we should be around this level at year end. This was well below our covenant limit of 5.0, we are highly confident Oh I will remain in compliance with its bank covenant.
As our tactical Divesture program continues we remain confident that we will achieve our target of $400 million to $500 million in proceeds by the end of 2021.
These additional actions will further strengthen our balance sheet fine.
Finally pet it continues to proceed as expected.
Overall, we're making solid progress on our capital allocation priorities in 2020.
Let me wrap up with a few comments on our business outlook I'm now on slide 10.
As we all know significant macro uncertainties remain given the pandemic. However, we are reintroducing quarterly earnings guidance given more stability lately.
Likewise, we are providing some early considerations for 2021.
Currently we expect fourth quarter adjusted earnings will approximate 30 to 35 cents as key business conditions continue to stabilize and improve we expect both sales and production volumes will be flat to slightly up during the fourth quarter earnings.
Earnings should also benefit from strong operating performance and our our turnaround initiatives.
Higher selling prices should mostly offset cost inflation, which will include FX pressures.
Earnings will reflect the dilution from recent divestitures akin to a continued elevated tax rate and higher retained corporate costs.
Looking at full year cash flow, we expect our EBITDA to free cash flow conversion will exceed 10% this year or $100 million.
Keep in mind. This is a temporary so this is temporarily skewed by recent NZ divestiture, specifically, we will be reducing air factoring by $50 million to $75 million as we continue to factor between 35% to 45% of gross receivables, which has really been rebased after the divestiture.
Likewise post closing working capital benefits of around $25 million will be recorded and cash from investing instead of cash from operations.
Adjusted for these items free cash flow conversion would be at least 18% this year or $180 million were higher this represents a significant improvement from 2019.
We anticipate this favorable trend will continue into 2021 Arnie.
Earnings should benefit from higher sales and production volumes as well as continued favorable operating cost performance.
Interest expense should be stable the tax rate should normalize will earnings will reflect recent divestitures net price will likely be a headwind keep in mind that this is a purely timing issue.
Its contracted by a price adjustment formulas reflect minimal inflation 2020, while we would expect inflation will begin to normalize some next year, but.
Bottom line, we expect 2021 earnings will be a measurable improvement compared to 2020.
Well, it's a bit early to provide a detailed view on cash flows we are focused on improving our EBITDA to free cash flow conversion, we aim to increase or increase our conversion to between 20 and 25% next year. We should we expect will continue to improve overtime.
We anticipate anticipate providing more details in 2021 during our year end earnings call with that I will turn it back to Andreas. Thank you John Let me conclude with a few comments 2020 has presented many unique challenges, which we met with a high level of Brazilians to speed and agility.
We have remained focused on executing our turnaround initiatives on our operating performance. He is a strong.
Yeah, but up downturn in demand from earlier in the year has been met by an equally as strong rebound as reflected in our improving sales volume outlook.
Finally last has now demonstrated it can excel in both an open and close market environment, given the strong consumer preference in both channels.
We continue to advance our strategy and have been successful in taking bold actions to improve our business fundamentals.
Let me reiterate what I have said in the past we remain focused on creating long term value I'm confident the steps, we're taking to a will place why in a stronger position that would benefit the company and he's a stakeholders in 2021 and beyond.
Thank you for your interest in our glass and we welcome your questions.
Okay am I think we're prepared for questions now.
Absolutely at this time I would like to remind everyone.
Asked a question. Please press star one your phone.
If you wish to cancel your question. Please press the pound or hash key.
Address uptime are asking you to please limit yourselves to one question and one follow up on me, but.
Cost for just a moment to couponing roster once again star one.
And our first question comes from the line of Anthony Pettinari from Citi. Your line is open.
Good morning.
Good morning, Mark.
Andre as John you gave Fourq volume guidance, but I was just wondering if you could talk a little bit about the trends that you've seen in October.
By region and obviously, we've had this resurgence of cases, certainly in Europe, and the United States.
How you're kind of factoring that into Fourq volume guidance.
Okay. So the I think the most important thing to having configuration is that we're seeing a good and better than expected performance in off premise.
And this is mostly offsetting off premise throw up.
Now what this means is that our demand is more resilient than we originally expected.
We achieved between these two channels.
Now the performance in October continuously in line with what we saw ending.
Ending Q3, so we expect to continue down that same trend.
We're seeing very strong performance in Europe in beer wine unfolds as an example.
We were in line in Q3 in Europe, we expect we keep flattish to slightly up in Q4 in this market. When we look at the Americas I think the most important thing to highlight base.
Performance in the Americas has been driven by North America performance, which has been a stronger than we've seen before and this is driven by multiple categories and this this is a very important point because we're seeing a strong performance in North America, you may be in food in craft beer in premium beer and spirits in our TV and.
See what that shows is that we are pivoting from.
Hey, let's say be or intensive mix toward more bundled their makes in this region.
We have recorded whaling back sequel, Andean countries on Brazil, and importing some putting Mexico, we are back to levels of shipments that are our prior year.
We are seeing very strong demand that might can you fold in beer and spirits and we are also seeing a strong demand in the Andean countries in.
In this case being employed are driving the high performance.
Beauty is driven by revenue mutation, which is very strong you that about the American countries by global brands Im final yet comment on Brazil.
We call it well in Brazil for the quarter and beginning in the third quarter.
These were three them by the strong demand across categories, including beer I think important important data point is being glass is growing in this market at around 10% annually.
It's only limited now and going forward by capacity Rick.
We thought our glass he is back because they are reopening bars and restaurants and then another important point will highlight these when reporting our containers convert to one way containers in Brazil. They are converting to one way glass and aluminum cans and what they do is they mainstream convert primarily to.
Aluminum cans.
The premium products convert primarily to one way glass. So when we look at all of these trends we believe with the information we have today obviously.
Pandemic impact these insights on start spending what this stimulus will be why gordmans seasonal known.
In terms of the scope and timing that with.
With what we know today, we see a continuation of this trend we've seen in Q3 into Q4 and that these what is taking us to believe that when we go into two anyone would want now we.
Pretty much in line with 2019 notes.
Okay. That's very helpful. And then with regards to growing the base and 21, you talked about new product development I'm. Just wondering if it's possible to quantify how much that could add to volumes or just any kind of finer point you can put around that.
Well.
Difficult to quantify it at this point, but what I can mention to you is the level of new product development activity in North America is strong and I think it is the same unit revenue in already market. We've seen it in Mexico, Latin American countries on Europe, and I think something that is happening is the.
Performance of glass in off premise. He has been a strong good that anybody expected and that is increasing the interest by customers who develop new products. So the level of activity is high we expect these to help with that.
On the 21 volumes and obviously, we continuing to in following years.
Thank you next question.
Our next question comes from the line of Ghansham Panjabi from Baird. Your line is open.
Hey, guys. Good morning Hope all of you are doing well good.
Good morning, Thank you morning.
So just kind of judging by your outlook for production volumes both for Fourq you in 2021 relative to the sales outlook.
Like inventories are pretty well aligned at your end can you first off I'll confirm that and if that is the right way to interpret those comments and second can you give us your view on supply chain inventories as you kind of think through the various regions. You know clearly they were customer production disruptions in Mexico for example, in Twoq that impacted beer.
Just wondering how long the inventory replenishment cycle could be for your customers.
Okay. So the whereby full production in our case already inventories obviously have been reviews I would say that they being optimized primarily so artist pick days when is that as we go into the following year, we're going to continue with that level of inventories.
They inventories and our customer side I think up there.
The entire supply chain has been obviously working hard to replenish inventories now we've been seeing this level of performance.
Since you like so July through October. These forward months now we've been pretty much at Brio de leveraged auto off so from that perspective, I would expect they that the inventories are coming back to a good level in their case now when it comes to me is Rob since.
We experienced significant disruption in Mexico, and the Andean countries.
I think Dallas, obviously, very impactful, but what I will expect these going that's going to.
The quarter to this quarter then the following year in those countries and across the world most likely the measures to logged on what shutdown won't be as dramatic as we see them.
In the past.
Yes, I would I would add on that one ghansham is our I'd, yes, we're down six days as of the end of September and probably at the end of the year, we're going to be down even a little bit more as we continue to to calibrate.
Calibrate on things, even though production is now pretty much aligned with with.
With demand at this point in time, you know that's about $100 million of inventory that we have taken out of the system and as as Andres mentioned, we intend to sustain that and continue to run at those types of levels.
Okay. That's very helpful. And then second question, it's been a while since I've seen you call out inflation in your press releases and your and your comments.
You see you know freight prices go up in the U.S., you've seen natural gas tick up you know is there a risk for margin pressure near term and just kind of remind us on the lags in North America and your hedging policy specific to natural gas. Thank you. So.
So I kind of make a few comments and then John can complement up I think it is important to highlight that all market environment continues to be fairly constructive.
No inflation money 2020, why do you expect it to be higher than inflation in 2023 them by the fact that you just highlighted.
So because we have already contracted volume goes up to 56% to 60% or so of our total volume.
We are expecting that we won record.
Hi, Yes, we Willis would like to go into a 2021, because we went out we recording primarily 2020 inflation, but then right after that which should be in the oncology proceeds until we should be recording is likely a hedge book in place.
Yeah, I would I would say that in North America. Most most of what we're seeing right now in the in the last couple of quarters and probably will occur for the next couple of quarters here in North America is that we have provisions that allow for either monthly or quarterly pass through of natural gas prices are through our contracts in most of our business is contracted.
There we.
We only hedge at our customers' behalf because of the quick pass through in that regard we are seeing a situation right now where the you know that the prices are showing that pass through right now and you saw that we had a little bit of a negative price inflation spread in the quarter and that's because of those those earlier lower prices and GE. For example are being passed through as we.
Speak right now.
Like I said that will take a couple of quarters to go through were also right now seeing some FX induced inflation I mentioned that during our prepared comments and this is because we for example, we buy soda ash and things like that and U.S. dollars in certain Latin American countries that was about 11 million dollar pressure here in the third quarter that will also probably play out for a little bit of time here until.
That flushes through obviously the whole notion that has to go into the marketplace and reprice and be able to cover that but it happens on a little bit lag effect and to to the comment that Andres said is that we're probably going to look at at a period where.
The low inflation for 2020 overall is pass through PA, Yes next year, while we see some normalization of inflation that will lifecycle itself probably through the first quarter of 2022, and then start to normalize then so if you take a look at the outlook that we had for 2021, we did indicate that we do.
Thanks for temporary window here because of those mechanisms that we're going to have a little price.
Inflation pressure.
Thanks, so much.
Our next question comes from the line of George Staphos from Bank of America. Your line is open.
Hi, everyone. Good morning, Thanks for taking my learning.
Retail congratulation on the progress too.
I guess I had a couple of questions on the overall concept of how I will navigate and flex.
Given andras as you said.
The choppy volume environment that you're going to be and so I guess the first question is you've done a really good job on taking costs out of the system. We've had the turnaround initiatives I think cost saves you 46 million in the quarter.
Business comes back hopefully into 21.
Of that cost might be reintroduced into the plan now and right now just holding your capacity constant not talking about new stuff, that's coming on magma and so on.
Much could you get out of your capacity if you needed to there was another surge in volume and a good way.
From productivity and I had a follow on.
Yes, sure I'll I can take the first part of that you know as far as the cost takeout and the turnaround initiatives. So.
The the I. I believe you're right I mean that the organization has done a great job of taking costs out of the business is driven by our turnaround initiatives I would say about 70% of the the cost take out that we've been doing over the last couple of quarters here is really systemic long term sustained.
Savings the other part is maybe more temporary nonetheless art, we anticipate retaining all of that next year and then getting some additional cost savings next year. It probably won't be the same aggregate amount that we're seeing this year in total because we advance some of our turnaround initiatives and other cost saving things as well as some of them were more temporal but.
Got more in the pipeline of of those long sustainable opportunities that even though some of them are temporary right now, we'll offset that going forward and then provide additional benefits into the future.
Yeah and with.
With regards to flexibility what we experienced this year George I think tell us that this organization has improved significantly so really the tool.
Respond to let's say really could require him into the ability to adapting to second quarter West was really high.
I think we said this before to a charity these before with you.
We need in a quarter what took us a year before so we are we feel very comfortable we can flex back and forth when required now with regards to the turnaround initiatives I think it's important to mention that we put in place multiple capabilities.
Over the last few years and he took time to wielding and resources to wielding but now they are available for us to apply then an improved performance in top and bottom line. So we see good runway for Disney's hit these.
People are following years now when it comes to capacity.
With the performance, we're seeing at this point and going into Q4, and 21, we're going to be at high capacity utilization across markets. So that's something that we've got a pay cut Luca and.
Obviously that opportunities for growth Phil.
As we said before it is very important that we focus on free cash flow and debt reduction.
Now as a result, what we're doing is we're taking out an additional look.
Looking forward to additional opportunities in tactical divestitures.
To go beyond the committed targets that we already presented to all of you.
Now if we find some then that will give us the opportunity to redeploy some cash into growing markets that are more attractive than do some of the ones in which we are present today.
Thanks.
My other question and I'll try to make it a quick one.
Tim as you know for good reasons and for understandable reasons bins.
Been stressed right you've had a significant drop off because of Covidien you saw the rebound.
You're not alone.
Capex a lot of manufacturing company in that same position how do you maintain the reliability of your manufacturing and glass is not the most forgiving manufacturing process at a time when demand is now picked up your customer looking for inventory and you haven't necessarily been able to maintain or spend.
You'd like because of the constraints of Covance, Thanks, and good luck in the quarter.
Yes, George So what we're seeing for example, right now when we look at the performance across the world.
Including all the factories that have been exposed to significant complexity, our performance is significantly higher and.
And I think what that is reflecting the is what I just mentioned before we wield the strong capabilities over the last few years, they took time and resources to wheel, but now they're available to deploy done be below so I feel very comfortable based organization has learn and because of that to deal with complexity. Now we are still deal with the limits of picnic.
Okay, and that's why we're designing magma because you would just change entirely.
It's structurally our ability to respond to those challenges, but I feel very comfortable with where we are I mean do what any margin the amount of capacity we.
Shut down temporarily I'm being brought back up and it is amazing to see how these organization responded to that I was able to resume performance really quickly and gold really high.
Yeah, I mean, just to put a number on that we restarted 20% of our production capacity over a three month period of time, which is an unprecedented level of engineering activity and just underscores what Henri says, it's just how resilient and capable the organization is at this point in time.
Thank you very much guys. Good luck in the quarter and Q.
Your next question comes from the line of Mike from Barclays. Your line is open.
Well, Mike you there.
Why don't we go to the next one in the queue or Mike are you there.
Go ahead Jim.
All right. Our next question comes from dying of Debbie Jones from Deutsche Bank. Your line is open.
Hi, Thank you for taking my question.
I just had a few follow ups on some that have already been.
First kind of at the tail.
Just a question you mentioned if you got to a certain point you would like.
The ability to invest in growing markets, it's a little tough right now with Kobe.
See exactly where that might be and I was wondering if you could elaborate on that.
And kind of your thought process there.
Got something you're focused on today, but just kind of long term.
Where would that be.
Yeah. So the.
There is a significant growth in in markets like the Andean markets and Brazil.
And the level of activity is quite high but we've also seen important developments in North America. For example, I think what I mentioned before today, which is how all these segments that.
We normally don't talk as much about that are driving growth, so and a base or food or craft beer premium beer spirits Rts. So so this is a lot more 10 deals that weird that normally takes the.
Most of the attention. So we're seeing growth in Europe, we just started eurosport and its operating quite well on these cheap in all these products are going to as we said before is it has a long term commitment for that so we're looking at these opportunities to US you know flexibility is not that high but that's why we're taking a broader look too.
Tactical divestitures and exploring opportunities.
To see how we can.
Bettered redeployed resources in the company to those markets that are growing and clearly we'd like to think that up with the early magma opportunities in the business and particularly those markets, where there might be more volatility and its a great match for that for the past.
And with regard to Magnum.
As you know we are approaching the milestone of haulage means any 2021, because we respect we running deadline by the end of the first quarter.
And this is going up you have some confirmation of some of the assumptions that we have.
We are optimistic we're going to get the positive results out of that and what that will do is give us the ability to employ gen. One.
Units in 2022.
And that would give us the ability to follow growth a lot easier than we can today with the legacy technology.
And to reiterate one of andras as earlier points, we're squarely focused on free cash flow and reducing debt. We would do this in the event that we would look at opportunities on other tactical divestitures beyond the current scope that we have right now to fund these and not interrupt that debt that.
That improvement trajectory.
Thank you, it's actually can ask what matters most to thank you for that as well.
My second question would just be around what.
A lot of investors are talking about misstate seeing the metal can grows over the next.
In potentially four or five years or longer in the U.S. and could you help us think through what you have to be concerned about.
They seem to be taking some share I realize that it's not really it seems you more related to new product development.
Which I guess could have some impact on your business as well. So could you just give us your thoughts on how you think about the impact to your business.
Yes. So the there is growth a significant growth in aluminum cans. We all know that now there is something that is very important to take into consideration.
40% of the aluminum can volume is driven by beer or b or adjacent sees and we think that the growth is driven primarily by higher sales or sub these point in time and some of you at the agencies now the presence we have today in that segment is very very very small cell port I see it.
Really on upside I mean, we haven't been totally zero, our chances are that we're going to get some chair in that category.
Now the 60% reach.
Remaining of that total volume of currencies is related to any base now the growth. We've seen daddy's three you in prime Marty by energy drinks bottled water and we are not present in any of those so now there is a point in which we coincide with cheese, primarily North America beard, and he's probably muddy mainstay.
Beer, because even not even into premium beer into premium beer were very strong. So we've got to be mindful of that so obviously there is a lot of activity, but as I explained before look at the amount of categories in which we are growing as we said in the past we were going to people away from Josh beer and into multiple.
Categories that are growing well and what we're seeing at this point in time, he's exactly those categories, playing quite well and our media mix. As a result is pivoting from building to a mix of multiple segments that are performing.
Performing quite well.
Now that's the situation in the United States, but when we go to other markets.
For example, the Andean countries got beer for US he is growing very fast when we go to Brazil, we aren't as Max capacity. If we had more capacity, we could cheap debt capacity today, I'd mentioned that growth in that market, Florida beyond glass is up 10%.
Well he said is pretty healthy and then when we go to Europe very strong performance in fact.
Not only we are performing well at this point in time, where we were before about something that we are seeing is wine in France.
This is higher than he was he preponderant players if you recall, we mentioned that.
Bordeaux wine was soft.
If one dynamic is very strong right now so.
So we're just seeing opportunities across markets and yes aluminum cans are growing but we have opportunities to.
Hi, Thank you for that conducting the quarter. Thank you.
Our next question comes from the line of Mark Landy from Bank of Montreal lines open.
Thanks, Good morning, Andres, John ignoring regulations on a good third quarter.
I wondered on this sustainability topic, if you could talk a little bit about you know what the concrete measures. You are you can take to improve the recycling situation here in North America, because it just it seems like its going the wrong way at the moment with a municipality shutting down.
Our recycling or in some cases trying to exclude glass from the recycling stream.
Yeah, So the I think the.
Got it guys Gotta guide the.
Our view of the potential of glass when it comes to recycling is their performance glass has in Europe.
So if you look at Europe glass is recycling of the highest rate went.
When compared to any all their packaging softs, three and I think that indicates the potential of it now lets you will say they've recycling system in North America, it's needs some work and significant work and we are working on that.
And when we went into a contract to single to stream like Unfortunately that got some of that recycling materials, including glass.
Equal tool.
Manish and that's have been creating a best incentive indices.
Now what we see in Europe is glass has a separate a stream and why we working with many counties at this point in time is to.
Saudi separately, the streams and establish them in a way that they are attractive. So we are in the early days about again.
We have spent we broke in Europe that beats can work really well and we're going to work hard to put in place in the United States now if we do that.
We gotta be mindful that glass has plenty of attributes that make it a very highly environmentally friendly and ideal for DSIC lottery cod.
[noise] can next question.
Our next question comes from the line of Adam Josephson from Keybanc. Your line is open.
Thanks, Good morning, everyone I Hope you and your families are well you do so thanks.
My two questions John in terms of the free cash flow conversion ratios. This year and next can you talk about what assumptions are embedded in there for working capital and Capex.
And regarding your your expectation that that conversion will improve over time beyond 2021 is that all working capital or is there something else in there. The my other question is about the retained corporate costs, you talked about them being a drag year on year in fourq because of R&D. This glad glass advocacy.
I'd be act advocacy campaign and insurance can you talk about where you expect those retained corporate costs to go beyond for Q bearing in mind that.
You saw they NZ and one would assume they're going to decline as a result next year, but any any thoughts there would be helpful. Thank you.
Sure. So on the free cash flow conversion as we as we indicated in the prepared comments, we expect that to be in the in the neighborhood of 20% to 25% next year keep in mind, that's very similar to what we thought it was going to happen. This year. We had we had earlier guided before the pandemic for Twoq 2020 that will be about $300 million of free cash flow.
So on say a database of 121.25 billion EBITDA that would be about 23, 24% a conversion ratio. So in other words, you're trying to return back to that as a first step and then being able to improve off of that so as we look into 2021 in some of the key assumptions behind that.
One is that.
Working capital would be a modest use of cash primarily on the receivable side, because if we're going to recover some of the volume that we was was lost this year. So there will be some build up in receivables at the same time, we expect to manage inventory tightly as well as our accounts payable on the Capex side.
Keep in mind that the number this year is pretty low it's $300 million, we think it will probably be in the range of $350 million to $400 million next year as we talked earlier. The you know the second quarter was very disruptive there was very difficult to get any engineering projects done.
The third quarter was very much focused on ramping up that 20% capacity. So not a lot of projects in that window. So so a couple of projects otherwise we'll start to creep into next year. So maybe your maintenance is closer to $300 million there.
Compared to $275 million to $300 million being kind of a more normalized level that we would expect we'll have a little bit more magna in there and we are looking at some ROI type projects. You know, we always target at least 15% for any growth project and say, 25% or more for the engineering related productivity projects. So those are being evaluated right now we're clearly still in the in the budget.
In process. So that you know is still under under evaluation a couple of the other pieces that we have you know we're going to have a pension expense creeping up a little bit $10 million or so, but we should be getting more equity dividends coming through as we finalize out all the workover at IVC and places like that and then of course and.
Interest expense continues to do better we're paying down debt over the long term that will reduce that will reduce interest expense and allow us to to be one of the drivers for improved conversion over time.
So a mouthful there, but just want to give you a little thank you John Yep pulling in that regard now the other question was corporate retained and be up and you're right I mean historically.
Our corporate retained its been down a 100 $110 million a year, so that's 25% to $28 million or so on a quarterly basis on that is a stair stepping up to probably the basis plus or minus $35 million and then we would have project or other activities off apps. So let me explain at least the rebasing of that one is we.
So Todd which was earnings that was previously recorded in corporate so so that's not there anymore and also we have reclassified a with the divestiture of a and B that our Asia business is now part of corporate and it has as we noted before been in running it a bit of a deficit position between co bid and and the.
The trade wars now we expect that will improve overtime of course. So then building off of that you know we will have some episodic costs associated with magma spending as well as some spending on this what we referred to as glass Atlas advocacy program, which is to get out there you know and and market expert.
Actually social media wise all is good attributes of glass that Andreas talked about and also push the sustainability angle.
More broadly as we believe that we've.
We got a great story to tell and we need to tell the story. So hopefully that provides a little clarity.
So do you expect the 35 to change much going forward, John just the net of all that.
So the 35 will probably be a little bit elevated for the next several quarters, while we ramp up holds mandan because you know those those all get all that startup stuff gets put into into R&D and during the startup window and then we do have is kind of a window, where we're doing the glass advocacy.
So it might step up a little bit of that for the next few quarters.
Thanks, so much.
And our next question comes from the line of Ireland.
From RBC capital markets. Your line is open.
Great. Thanks. Good morning, Thanks for taking my question morning, Aaron I guess I just wanted to get back to the inflation question could you reiterate maybe what you're expecting on a quarterly basis and for how long I think you mentioned 11 million from them, the soda ash and natural gas side.
Or may have just been soda ash, but yeah. Maybe you can just go through a maybe some of the inflationary pressures again.
And how that kind of a march is that for the next quarter too. Thanks.
So I mean I'll take a stab at it of course, a little bit of this is to be determined with with the recovery of the marketplaces, but.
To the point you said that you know what we've talked already about a little bit of the natural gas flushing through and so that's going to be a couple of quarters for the North America component. The FX induced inflation, you know probably starts to comp after the first quarter because in in the second quarter last year with this year was when we ended up having some of the major shifts and the currency at that.
Point in time, so a quarter to something along those lines as far as the ramp up of other input costs you know as referenced earlier some of the natural gas is starting to recover at that point in time.
We are seeing some of the energy and freight costs, you know starting to move to some degree those are probably some of your more initial pieces that that will happen over the next few quarters, and then obviously need to get Comped on up yes on on lagging basis.
Okay. That's helpful. And then maybe we can just get your updated thoughts on consumption patterns.
Finally, you know.
Tumors are asking me drinking more packaged goods.
Even on premise so.
Just curious if there's a silver.
So strains on the system to satisfy increased demand levels I know the can market is still sold out does that.
And also a tailwind for for glass containers.
Yeah.
Well so the.
I think the.
Performance that we're seeing in glass in off premise.
Going beyond any expectation before and he's.
Mostly offsetting the on premise Europe and I think.
That's something that the.
Customers.
We are looking at and as a result, we're seeing a lot of new.
New product development activity in the market at this point that we expect will continue.
Now today, we have the capacity whack, we're serving the market size.
So they are right now and as we see them in 2021, however that.
That are growing markets that we've got to take a look at I think the forever and support blasting some.
Important categories is being heavy then.
As we've been going through all of these processes and we intend to support that.
Preference, obviously with the new product development activity that is very high and then we'll take a look at whether you might take in terms of capacity or.
Thanks.
Our next question comes from the line of sounds like Turkey, I know from Seaport Global Your line is open.
Yes, hi, thanks for taking my questions.
The first one is building on some prior questions in beverage cans.
Oh, Freecell I guess I'm, a little bit differently now, we will but we sure that beverage cans section that you are in short supply.
Especially North America.
Is there a risk that as they ask us for comps catches up some customers that we would have liked to transition to constant kind of do that now will actually do we think the next few years I'd be expansive glass.
Well the well we know at this point is that going to use that shortage and I think that given the opportunity to.
Our customers to put their Branson glass and what we know is consumers love to have their preferred brands in glass.
Now this is going to go for a while this is gonna goal for perhaps the next two years and depending on how plastics conversions go on these my goal for even longer period of time.
Now, we're very active requisitioning glass in the United States, because there are significant opportunities.
For this packaging these market and we expect that that is going to have any impact just to give you an idea.
We mentioned the glass had because he campaign.
I think the last time, we were active promoting lodging to mark and wasn't this haven't.
Sorry, So obviously there is a lot of.
There is lack of 40 formation in these market would we are still the attributes of less and we're very active in the in that area. We expect that he's going to have an impact.
We also developed significant capabilities in innovation over the last few years that were putting them to work and we're seeing the impact of that so we as fact that he is going to open significant avenues. Now there are categories that are very important that are been growing quite well.
Wage glass has very little precedent not because he doesn't have a third chair to half is because we are just working in the early days of being no Asia until we are able to get into those categories and be successful. So all those things are going to convert I think in the meantime on for the next couple of years I think there is a.
A very good trend.
Foreseen for glass and we're ready to support them.
One thing I would add is as you know the shortages are obviously a challenge for us.
Customer base you know.
Right now we're doing a very good job serving our customers.
They like being served and we're going to continue to serve them well. So I think if that makes a big difference in the long term capabilities.
Okay, perfect and for Oh, My second question, just to clarify a little bit on.
On volume growth in Q3, some other companies have mentioned that Q3 was exceptionally strong due to pent up demand I would assume that may have happened in Brazil, and other countries as well can you clarify I will be your last one 1.7% volume growth.
How much would be regular run rate demand and how much would be a pent up demand from Q2.
Yeah, I think so what we're saying is well North America was up mid single digits. So that's that's quite as strong and I think it is in part due to that as strong performance in off premise.
And then obviously some performance in on premise, but you didn't really get too high.
Now Mexico is back to regular performance record well.
We're running currently chipping off prior and is driven by demanding food beer on the spirit and then there is local market on export markets. This this market these becoming more of a.
More focus in exports in some areas, which is an opportunity and he's because what he's positioning in the continent continents.
Now the Andean countries quite a strong and there is a significant level of activity in those countries. When it comes to be aired on full. It then that's as you know there is a large foot business in that in those countries studies driven by local demand and exports of the mine and he is a sustainable business. So he's been in place for.
Probably the last 25 years or 30 years and because of I phone comes on from a this is growing in both markets low kind of an expert Ambrose he is already a strong frankly were.
Very high highly utilizing that market, we're selling everything we have if we had more we will be selling more.
And be already is strong but the other category. He started strong too and as I mentioned before are we the cumbersome out off <unk> torno containers.
Goes to one way glass and aluminum caps.
And that is driving demand for glass. So we see this demand improvement across all.
All the up markets in the Americas, and I used plane that Europe tool is quite healthy and it's across all the markets in which we are present in that marketing industry.
Tim I think I think we have time for one last question.
Our next question comes from the line of game Hayden from Dundee Securities. Your line is open.
Good morning, I hope everyone is doing well thank you Barney.
A quick question, Ken or I guess, maybe revisiting the canned question a different way.
Do you have a view of the industry or OHAI itself benefited from.
Beer that was brewed this year that did not find its way into a keg because its availability issues and we're again kind of cans being sold out and then as we kind of transition into 2021, maybe compare and contrast, what your beer volumes have been in North America relative to the trend.
Over the past one or two years and then whats embedded in I think your comment of kind of getting back to we're approaching 2019 levels.
Yeah. So the.
On premise activity, obviously has been down as a result, they use of Capex is down.
Next our Laura.
Normally about 10% share.
Of the beer category and that's down to three.
And then the volume.
Has been moving to single serve containers and those are one way glass and aluminum taxable so that dropping charities being shared between the two and that's been on and off right. So it's been up and down.
And now I think what's important here is the up resilience that we've seen between channels I think thats important because when were moving down in one channel we're seeing.
Recently, and I'm quite high in dealer channel. So yes, there is some volume coming from there, but there is a lot more taking place than just that.
Now when we look at the year performance so it all.
And in particular to mainstream I think your Europe question is primarily related to mainstream.
The if nothing else during this period of time. The there has been a slight this slow down in the declining train of mainstream beer.
Now all other SEC mean segments Super premium premium drop all of that is growing quite well in fact in.
In the off premise channel demand for high in beer.
In which glass has a very strong presence has been quite high.
And the assays will be here in total in that channel has been up.
Mid single digits to low double digits, along the way in this period of time.
Now very important to how we mine that the conversation to go beyond the year, because yes be it wasn't very importantly is less important to the eight when it comes to taught out.
He is chair of the total volume we handle in the United States, but there are there is a lot more going on and I think our focus over the last few years in all our segments is starting to show up because I thought you mentioned before they're not at least six to seven categories of products that are growing quite well that are.
Not this is hardly mainstream view so.
Thank you Andres and then I guess transitioning to Europe, we talked about inflation I think in in Brazil.
And then maybe how contracts behave here in North America, but.
I I seem to recall that Europe is more of kind of a an annual contract or maybe they run one to three years.
I'm, just sort of when that process starts and kind of the foundation you know whether it's in supply and demand dynamics I'm presuming is pretty important there but.
Costs et cetera that kind of go into that discussion.
Yes, so clearly the biggest change that we're seeing whether it's in Europe or any other market tell you the truth is on fuel.
Fuel was so natural gas whatnot has was a deflationary area in 2020 and as Rick <unk>, It's more returning back to more normalized levels at least at least that's the thought process right now so it's not exactly.
Unique level of inflation is just.
Returning back now.
In Europe about 30% of our business is under long term contract for the other 70% is open market, which will allow us to address those input.
Input cost increases on a more timely basis compared to maybe some other marketplaces. So that process usually starts right around year end and continues into say.
The February March window of next year, so it's pretty timely in the sense that we are seeing the inflation starting to ship.
A shift now for that open market and allows us to be a little bit more timely addresses and if it happened in a different window.
Sure.
Thank you John.
Okay. Thank you everyone that concludes our earnings call. Please note that our year end and fourth quarter Conference call is slated for February 10, 2021, and as always make it a memorable moment by choosing safe sustainable glass. Thank.
Thank you.
This concludes today's conference call. Thank you all for joining you may all disconnect.
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