Q4 2020 O-I Glass Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to day, Oh, I full year fourth quarter 2020 earnings conference call.
This time, all participants are in a listen only be knowledge I'll start the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to had a conference over to your house, Mr. Chris Manuel Vice President of Investor Relations. Thank you. Please go head.
Thank you Jerome and welcome everyone to the O I glass fiscal year and fourth quarter 2020 earnings conference 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 will host a Q&A session.
Presentation materials for this call are available on the company's website at <unk> Dot com.
Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures. Some of these financials. We are presenting today relate to non-GAAP measures such as adjusted earnings per share free cash flow segment operating profit and leverage ratio, which excludes certain items that we consider not representative of ongoing operations a.
Asian of GAAP to non-GAAP can be found on our earnings press release and in the appendix to this presentation I'd now like to call turn the call over to Andres, who will start on slide three.
Good morning, everyone.
We appreciate your interest in O I glass.
You may begin by thanking the whiting for his dedication and agility as we contend with the pandemic on sorry to beat the equity accounts, who was on various supply chain.
Likewise, we are grateful towards so many in our communities who are working every day through very challenging circumstances.
I see on the Medi Cal on all their frontline workers.
2020 really tested our organization as we.
We concluded the year I'm proud of how why has navigated all of the short term implications of the pandemic, while advancing long term initiative that included several balls on the structural improvements.
All told these airports there was a tangible improvement in our ability to execute.
As we reported last night on fourth quarter earnings adjusted earnings were <unk> 48 per share, which exceeded guidance of 30 to 35 cents.
Additionally, we generated free cash flow of $146 million in 2020, a solid improvement from the prior year and ahead of our expectations.
Our fourth quarter two minutes were flat with the prior year and full year volumes were down 4%.
Net eating day man west concentrated in the second quarter when they need see on the wave of the pandemic drastically impacted their supply chain.
Otherwise quarterly them on trains were fairly stable.
The strong operational performance and cost performance boosted our earnings and cash flows above our original guidance.
Despite a disruptive environment, we continued to advance our strategy and all the spend on these.
Of course significant uncertainty remains and of course, it will depend on my word.
With that said, we remain optimistic about 2021 on we expect both earnings and cash flows will significantly improve.
John will review, our financial results and outlook later in his remarks.
Let's move ahead to slide four to discuss the recent volume trends.
It earlier shipments were down 4% for the full year 2020, but that is certainly not representative people strange during the second half of the year.
As shown on the left glass cheap menswear pretty stable with the prior year geared except for the second quarter.
While volumes fell sharply towards the end of March the man rebounded nicely starting in June.
As illustrated on the right we paid purchase activities across key end use categories remain relatively strong which helped mitigate the drop in on premise consumption.
Of course like D V. D was elevated in the second quarter U N significant lockdowns and as a result, the pantry stuffing.
There are a few important takeaways worth highlighting.
First the.
The significant decline in demand during the second quarter of 2020 was largely influenced by the rustic boardman or there's been some countries and large supply chain adjustments.
Second consumption of proud ups and glass containers improve is starting at the end of the second quarter and remained steady through the balance of the year. Despite a shift between on and off premise channels.
Third.
Lastly is benefiting from emerging consumer preferences for premium products at home cooking and consumption localization of global brands on conversion from reporting on what the one way containers in some markets on.
Alaska customers or if it's stabilizing in protecting their supply chains from present on future volatility as they leverage the experience gained from the second quarter of 2020.
If at all we expect demand for glass containers will grow in 2000 on 'twenty one.
Nevertheless class chip mid elevens will likely remain how each off be on inconsistent across the markets we serve for.
For example, our toddler product shipments were down about 2% in January.
The decline was concentrated in a few markets in Europe that implemented Margaret strict lockdowns impacting hotels on restaurants on the Orhan shipments increase in the Americas, Inc.
Fortunately, we are not seeing the drastic lockdowns, we experienced in the second quarter of 2020.
As I noted our customers on the supply chain are doing a good job minimizing the impact of any lockdowns by leveraging the experience gained last year.
U N D. So uncertainties, our cost control measures continue which fully offset the impact of lower volume seen January.
Looking at the full year, we expect total shipments will increase to two 4% in 2021 compared to 2020.
This reflects a partial to full recovery back to 2019 leverage.
Naturally branch will likely be softer earlier in the year and improve over the balance over the year.
Of course, these assume markets gradually reopening that's vaccination rates increase.
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Growth projections include a fuel markets that will remain on overage solid position going forward.
As such we are evaluating expansion opportunities in those markets.
2020 would require a number of short term actions to successfully manage through the pandemic.
Chemo annually, we also focus on long term efforts to drive value.
We saw we will like to highlight some of the key accomplishments in 2020.
I'm now on page five.
We divested our ANZ business at an attractive valuation and continue to advance our tactical and strategic portfolio review, despite the market disruption.
When fully completed we anticipate total sales proceeds will exceed $1.1 billion, which are being used to improve our balance sheet.
Why is we enhanced financial flexibility supported by our free cash flow and sale proceeds.
We've reduced that achieved record achieved record high liquidity under standard bond maturities.
We implemented on executed a robust COVID-19 response plan that quickly aligning supply with them on reviews ideas by nine days and ended the year at historically low inventory levels, which we expect to maintain.
As part of our COVID-19 response plan, we accelerated our turnaround initiatives to improve margins and delivered 100 on $15 million of savings, which help mitigate the impact of lower production.
Next we continue to advance magma as we seek to revolutionize glass.
They put escape generational one line located in Germany will be life within weeks.
This will represent a major milestone on paved the way for broader deployments are starting next year.
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Overall, we are pleased with the progress that we made.
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Many of our efforts are visible light via our company's accomplishments, we just discussed.
But just as important we have been hard at work in creating advanced capabilities that are improving our ability to execute both in the short term and long term.
On basics, we have included a number of these capabilities.
For the past year, we have share our renewed focus on capital structured disciplined and on portfolio optimization.
After nearly three years, hoping that the pace of implementation. We are now fully utilizing a new management system called integrated business planning or IBP.
This system synchronizes tower to demand supply and financial performance management.
It's a three year planning horizon importantly, IBP is improving our ability to deliver on commitments.
Our turnaround in ECM fees, they will all have into multiyear margin expansion programs on a fully embedded across Hawaii.
We have significantly upgraded our sales marketing on innovation capabilities as we seek to improve the top line.
Likewise, we have elevated our ESG Lear cheap we'd on increased focus on recycling in North America that leverages, our experience from the highly successful European glass recycling system.
As we advance magma we are leveraging our unique third party developers network to support faster reinvention on rapid implementation.
Finally, we have streamlined the organization mode in mid 2020, as we aim to improve ideally fee on performance.
In conclusion, I believe we hit an inflection point in 2020, resulting on a step change improvement Leonardo ability to consistently perform.
Let me take the opportunity to expand on one of these areas. How we are accelerating ESG at Hawaii.
Now on page seven.
This quarter I explained that we were elevating our sustainability ambitions and let me highlight some key elements.
We are foreclose on being the most thing the weighted sustainable on chosen supplier of brand building packaging solutions.
Oh I was the first packaging company to issue a green bond and in 2020, we were the first glass packaging maker to have on our proven emissions target from the science based target initiative.
We also appointed a chief sustainability officer.
Now I would like to take you through some further steps we have taken to continue our leadership in visa space and to bring our vision to life.
On the Gordon on side, we enhanced the reward of our board governance on ESG established a global sustainability network and created an executive diversity and inclusion council.
As shown on the top of the slide we expanded our sustainability initiatives to include nine different dimensions and set several new goals, we have refreshed our sustainability webpage, which will provide additional color in these areas.
And we will have a new sustainability report later this year.
Our Americas technology will reinvent how glass he is married and salt. So it's just that the glass sustainability profile will improve across several dimensions.
Startup enhance meaning brings us one step closer to these new future for glass.
Our glass advocacy campaign aims to rebalance the dialogue about packaging and in particular, the sustainability of glass packaging.
We have increased our focus on creating them funding glass recycling solutions on our working closely with industry partners.
The goal of increasing U S glass recycling rate to 50% by 2030.
Finally, we continue to engage with our communities by encouraging our employees to volunteer by giving back including through our 80 year old Hawaii charities foundations and donations to support COVID-19 vaccination April.
On slide eight we outline our key priorities for 2021, which build on the accomplishments from 2020 on leverage the capabilities. We have previously discussed.
Our objective remains the same we are taking all the structural actions to improve <unk> business fundamentals.
These include three platforms first we are focused on margin expansion through our strong operating performance on cost efficiencies.
Our turnaround initiatives have evolved into a structural problems that has spanned revenue operating costs and SG&A.
2020, we accelerated activity on generated 100 on $15 million in benefits.
$85 million or 75% of these benefits are long term sustainable savings.
On top of these base, we expect around 50 million of additional benefits in 2021.
Second we will continue to revolutionize glass as noted we expect to validate magma through the new lining gear money, resulting in further commercial line implementations starting in 2022.
These revolutionary development will be complemented by red positioning ESC on by your spending hourglass advocacy digital marketing campaign.
Third we will further optimize our cost structure.
Soon to completing our reported there's tactical divestiture program.
<unk> is also evaluating growth initiatives, which could be funded by incremental tack detailed divestitures like.
My wife's paddock will continue to advance.
Next we intend to accelerate share service center capabilities, which aligns with the new organization model implemented last year.
Finally, increasing cash flow and were using that remain our top financial priorities.
We look forward to another successful year in advancing the enterprise.
Wired then host one Investor day, we expect to host at least to invest third workshops later this year too low.
<unk> out our longer term plans and these cosmetic Ma in greater detail.
Next let me turn the presentation on over to John who will provide some details on the financials.
Thanks, <unk> and good morning, everyone I plan to cover full year and fourth quarter 2020 results as well as our business outlook for 2021.
I'll start with a review of our full year performance on page nine.
Oh I reported adjusted earnings of $1.22 in 2020 down from $2.24 in the prior year.
Like most companies our results were significantly impacted by the global pandemic, yet very good operating performance and cost management helped mitigate the full impact of lower volumes there.
The chart on the right compares our current euros results with the prior year as.
As you can see segment operating profit was down compared to 2019.
FX temporary items and divestitures were headwinds.
Net price was slightly positive as higher selling prices offset cost inflation.
Sales volume declined, 4%, which impacted results by $83 million demand was down sharply during the second quarter about 15% at the peak of the pandemic.
As <unk> reviewed demand was stable in the other periods, including the back half of the year as markets recover.
Operating costs were a $38 million headwind, which is the net effect of lower production levels and very good operating and cost performance production.
Production was down seven 5% again due to the pandemic impact on your results by $155 million. However, this was substantially offset by strong operating and cost performance driven by our turnaround initiatives that generated $115 million of benefits that help both pricing as well as operating costs.
In addition to lower operating profit EPS was impacted by higher retained corporate costs and an elevated tax rate, partially offset by lower interest expense. The presentation includes additional color.
While earnings were down this year, we are pleased with business trends in the back half of the year and we are optimistic about 2021 performance.
Let me shift to cash flows on the balance sheet I'm now on page 10.
As stated in the past we are buying specific capital allocation principles during the pandemic as.
As we focus on maximizing free cash flow, we have align supply with demand and limited capex to normal maintenance investment and Magna.
Our 2020 free cash flow was $146 million, which was a substantial improvement from the prior year. Likewise cash flow was well above our guidance of at least $100 million. This represents a 14% EBITDA to free cash flow conversion compared to our expectations of 10% or higher.
While capex was slightly higher than expected, mostly due to FX accounts receivable collections were stronger than anticipated likewise inventories inventory levels were down significantly this past year, approximately nine days and ideas and we expect to maintain this low inventory position.
Second we preserved our strong liquidity, we finished 2020 with approximately $2 $2 billion of liquidity well above our established floor.
Third we are reducing debt as illustrated on the chart net debt was just under $4 $6 billion at the end of this quarter.
That compared favorably to both the prior year period, and the third quarter levels.
The ANZ pro sales proceeds and free cash flow helped reduce net debt by more than $750 million, while FX was a $250 million headwind.
Our leverage ratio at year end was four four times per our bank credit agreement, which is well below our covenant limit of 5.0.
Furthermore, we did make discretionary contributions to derisk, our pension liability given the stronger cash generation near year end.
Finally, we remain committed confident that we will achieve our target of $400 million to $500 million on proceeds from our tactical divestiture program by the end of 2021, we did complete a number of small sales totaling about $25 million over the past few months.
Overall, we made solid progress on our capital allocation priorities in 2020.
Likewise, we expect our balance sheet will continue to improve in 2021 due to strong free cash flow additional divestiture proceeds proceeds and the final payment on the ANZ sales.
Let me share a few thoughts on our fourth quarter performance I'm now on page 11 is.
As Andres mentioned, our fourth quarter results were <unk> 40 per share this.
This compares to 50 in the prior year, However earnings were above the prior year when normalized for FX and divestitures.
As the schedule on the right shows segment profit was $200 million in 2020 compared to $203 million in the prior year. Prior year was more like $180 million on a comparable basis, considering FX and divestitures.
Earnings benefited from slightly higher net price, which more than offset cost inflation.
While shipments were flat with the prior year earnings.
Benefited from improved mix.
Reflecting very good operating performance cost improved $11 million from the prior year.
<unk> of margin expansion initiatives more than offset higher plant incentives costs higher logistics costs and some inventory adjustments.
Non operating items included higher retained corporate costs due to additional R&D spending for magma as well as higher incentive costs. This slide has some additional comments bottom line. We are pleased with our fourth quarter performance given the challenging business backdrop has earned us earnings benefited from higher prices improved mix and lower operating costs.
Moving to page 12, let me share a little color on regional performance during the quarter.
In the Americas profit was $127 million up $12 million from the prior year, despite $8 million of unfavorable FX.
Higher selling prices, partially offset cost inflation, which was elevated due to FX induced inflation in Latin America.
Sales volume was up two 4% during the quarter and the improvement was most pronounced in North America, and Mexico, which were up between 5% and 10% shipment.
Shipments were stable on the ambience in down in Brazil.
Reflecting very strong demand, our Brazil business remains sold out in the past we have served that market with exports from Mexico and other markets due to strong local growth in Mexico, we have halted the exports to Brazil for now resulting in the year over year decline.
Across the region very good operating performance resulted in significantly lower operating costs compared to last year.
Solid initiatives solid initiative benefits and improved JV performance more than offset higher plant performance incentives.
Europe's operating profit was $73 million up $4 million from last year as earnings benefited from favorable FX.
Higher selling prices and mix improvement improvement more than offset cost inflation, which included the benefit of the region's revenue optimization efforts sales volume was down 2% with most pressure in Italy, and the U K, where government invoked new lockdown measures to combat the virus.
Despite benefits from initiatives and improved JV performance operating costs were up compared to last year.
This reflected plant performance incentives higher logistics costs and some inventory adjustments as previously noted ANZ was sold earlier this year in our Asia business is now included in corporate retained.
Let me wrap up with a few comments on our business outlook, which remains consistent with the initial view that we shared during the third quarter earnings call I'm now on page 13.
As I just mentioned, we expect our business performance will improve in 2021 as markets stabilize and recover.
The chart the chart on the left illustrates our earnings outlook for both the full year and first quarter of 2021, including the key drivers for year over year performance trends.
Looking at the full year, we expect earnings will improve from $1 22, and 2022 between $1 55, and $1 75 and 2021.
As we have discussed in the past net price will be a modest headwind in 2021.
This is largely a timing issue annual price adjustment formulas on long term contracts will pass through modest inflation from 2020, while we expect inflation will start to rebound some in 2021.
Assuming markets gradually reopened over the course of the year, we expect sales and production volumes will make a partial to full recovery in 2019 levels. So we see sales volume up between two and 4%.
Importantly, we don't expect a repeat of the 15% decline that we saw in the second quarter of 2000.
Cost should benefit from our ongoing margin expansion initiatives, which should add gross benefits of $50 million.
Keep in mind about $30 million of cost savings achieved in 2020 were short term in nature wound world will not repeat this year.
Likewise, some costs like depreciation and maintenance expense will normalize some as activity increases.
Slide includes more details on non operational items.
Finally, we have announced a new $150 million share repurchase authorization, which will be used to offset dilution from future incentive awards.
For the first quarter earnings will range between 32, and 37 cents and volume should be stable with the prior year operationally earnings should be consistent with last year, but we will incur some startup costs for holzman, and which will be included in corporate retained.
As illustrated on the right full year free cash flow should approximate $240 million. This is consistent with our target of 20% to 25% EBITDA to free cash flow conversion we.
We expect EBITDA will be up nicely, partially offset by incremental investment in working capital as business volumes rebound.
Capex should be $375 million and other details are provided on the slide.
Of course this outlook is subject to adjustment if there was a meaningful change in the course of the pandemic.
Overall, we expect earnings and cash flows we will advance solidly from 2020 levels with that I'll turn it back to Anders. Thank you John.
To conclude with a few comments.
We all face unique challenges in 2020, well I was no different.
Proud to say, we navigated the pandemic well, we had a high level of agility and resiliency.
At the same time, we advance hardest strategic conditions.
We are squarely focused on our 2021 priorities of margin expansion revolutionizing glass on optimizing our structure.
Fortunately, we are well positioned for the future you, India advanced capabilities build over the past several years.
Consumers have repeatedly indicated that preference for food embarrass backed in glass vs.
It's through regardless of this aged channel.
So we are not surprised that our volumes to stabilize on recovered over the second half of 2020.
While demand trends, we likely to remain choppy given the ebbs and flows of the global pandemic sheepman leverage to improve us markets gradually reopening.
As a result of volume on cost plus region, we look forward to significantly improve the earnings and cash flows in 2000 and on 'twenty one.
Let me again reiterate what I have said in the past we remain focused on creating long term value.
I'm confident the steps we have taken have placed <unk> in a stronger excuse me.
Position that will benefit the company and its stakeholders in 'twenty 'twenty, one and beyond thank.
Thank you for your interest you know eyeglass and on.
And we welcome your questions.
Yes.
Ladies and gentlemen, as a reminder to ask a question. Please press Star then one on your Touchstone telephone please limit to one question and one follow up.
Your first question comes from the line of Ghansham Panjabi from R. W. Baird you May now ask your question.
Hey, guys. Good morning, Thank you.
It's first Geoff Andres in your prepared comments you were talking about January volumes being down slightly skewed lower by Europe.
Just kind of.
What kind of embedded operating backdrop do you have baked into your volume assumptions of 2% to 4% in context of the 4% decline last year and the fact that <unk> was just going to have a very easy comparison I'm just kind of curious as to the phasing of volumes as the year progresses by region.
Thanks, Ken it's Jim So looking at Europe.
We had a solid amount in Q3, we had a pretty solid demand through most of Q4. It at the very end of December.
Demand has slowed down and I think he was because the lockdowns accelerated.
Now they remain high in January we relief in the day.
Generally performed unless he is primarily where you and buy a correction on remit parties, because we're seeing a improved policies when he parity with now back to where we were in Q3 Q4. So.
Most likely at this point in time as these lockdowns are removed are lifted we're going to see a better performance in Europe are very important to how we mind that demand in Europe.
Beer is very strong and if we look at the Nielsen statistics.
Which reflect the repaid performance are.
There is a very strong performance in western Europe for glass.
And I'll give you a couple of example, France glasses up 10%, which outpaces any packaging alternative if you look at Italy glasses up 8% for the year, sorry up but what I'm talking about full year numbers. So western Europe is quite as strongly supports the best man, we made in Europe core, which is going to give us incremental volume tool.
For these various strong now what's happening in Europe. These results of the Lockdowns right now on is impacting primarily one category of products, which is the sparkling water.
As soon as consumers go back to our hotels and restaurants were gonna see.
Water back on the table and the volume is going to have a U box. So you say is a pretty resilient volume wise, we've looked on the lockdowns are removed the.
On the auto category that we are on having sub 30, French wine, which is being softer along the way. So that's that's not new.
Now on Americas are very strong and we mentioned that Mexico on the United States are leading that.
Volume performance.
The performance even in the U S has been solid you'll note that we've been the <unk> fine.
Our product mix and the performance in food and in a BS in us spirits any wind was strong.
Why not spurious III by premium performance and day, we already is performing better than before so a decline spot on.
A slower rate and that's driven by premium beer the performance of premium beer in retail has been quite as strong as being up.
Around low teens or very high though.
Single digits.
So that's the situation in the America, Mexico, very strong is driven by local demand local consumption is high as well as exports and categories like beer food experience on NAV are very strong in this country and then the performance all day out again in Brazil, while they are limited by being fully utilizing capacity.
<unk> day.
Performance of beer in those two markets. These various strong and there is something very important to have in mind.
Performance of glass in those two markets is driven by the focus on premium is focus is moving by localization of global brands is driven by the comparison of returnable containers into one way containers. Those are very solid trend. So we're counting on those two markets.
We sold out a four day here and then wherever on waiting opportunities for expansion and wasteful funded while we keep our priorities of free cash flow and debt reduction.
Hey, Ghansham. This is John I can add a little bit on the assumptions of the range between 2% and 4% so 4% would be your scenario that we exit from these lockdowns here in the next few weeks or months or something like that and then we ratably get better.
And then 2% is if we see some periodic.
Resurgence of the virus have to go from some periodic lockdowns in different markets and things like that which institutes more choppy demand and inevitably some level of supply chain corrections that follow from there. So those are kind of the book end assumptions on the 2% to 4%.
Very clear thanks, John and just a quick follow up on the paths in terms of the quantification of the impact on 'twenty one versus 'twenty and then also you mentioned in the accounts receivables.
Performance, there that boosted free cash flow for 2000, twenty's or a partial reversal in 2021 as well thanks so much.
Yeah, I can I can I can discuss a little bit of the price adjustment formula components. So we.
We had about $60 million of inflation in 2020 and that this business historically averages $100 million to $125 million inflation per year or something along that line. What we really saw was that natural gas in particular became deflationary on many economies and that started to reverse.
As the markets got better and we would anticipate in all likelihood that we'll continue to move move in that regard. So the price adjustment formulas are working through this kind of switchover of say if we thought inflation was $60 million last year. We think it might go back up to 90 million net not back to historic levels, but still some some type of improvement so you're talking.
$30 million or so worth of price adjustment formula pass through and that's kind of the spread differential you know maybe $20 million to $30 million that we're talking about this year that will be absorbed again, just a temporary timing item. We worked through that pass through and we get back I mean, if you look at the business over the past four years, we've been able to successfully pass through inflation.
Consistently to some level or another we think this business is capable of doing that this is just a timing issue.
Yeah.
Your next question comes from the line of George Staphos.
From Bank of America Merrill Lynch, you May now ask your question.
Thanks, very much hi, everybody good morning, and good morning, all the details.
Wanted to piggyback on my first question was.
Similar to Ghansham.
And to me.
Our research and even what you're saying here that if we were having this conversation back a few months ago and.
In recognition of what the normal inflation is for your business the up to $125 million that you discussed.
That there is a fair amount of.
Work for lack of a better phrase in terms of trying to close that gap relative to what the lag would normally be on on the price adjusters to the extent that it's possible to talk about this live mic.
Can you talk about what you might have been doing in that regard to synch upset that GAAP that probably could have been a bigger number going into the year and then I had a quick follow on.
Yes, So George I think in general you are right I mean.
And that's consistent with our commentary that we made last quarter. When we kind of first flagged. This issue we were looking at a a GAAP there that was bigger than this this this GAAP that we're talking about now $20 million to $30 million you know obviously, we go into.
This time of the year is the price you know.
In the negotiation period for a lot of different markets that we serve that in particular that aren't served by the multi year long term contracts. So obviously, that's a big focus obviously.
Obviously, we are seeing a little bit of inflation picking up right now as I mentioned before which creates a little bit of a better dynamic for those discussions.
And I would just say that you know we talked about our margin expansion initiatives and we have you know a price on revenue optimization initiative within our commercial optimization that is solely focused on on value pricing and really extracting the value that we get out of our business and that's at an account by account basis.
And you see some of those benefits coming through and starting to be able to mitigate some of that what would otherwise be spread pressure on.
As you say George there is a strong focus on the organization to close that gap.
Understood.
A quick sort of point of clarification on that comment John and then the second question. So.
If you are in this process now where you're really selling value based pricing where would you say the organization has in terms of implementing this.
Proverbial.
Ending ninth inning, we should be heading to the parking lots you know where do you stand in terms of using that tool and then on my second questions.
About $155 million impact from the seven 5% lower production.
How much if any of that can you get back.
If you don't actually produce at levels above shipments and build inventory. Thank you guys and good luck on a quarter.
So with regards to the.
<unk> pricing George that's been in implementation now for two or three years. So it is quite mature in the organization and we mentioned in the opening remarks that.
Many of the capabilities, we were developing over the last few years are now available to us which improve our ability to execute this is one of them. So.
Very well organized in the commercial organization.
Our approach is well understood that pool is widely used and that's why.
The initiative that John mentioned revenue up the mutation is part of the margin expansion.
It's going to help us to close these to these GAAP between price and inflation.
In the year.
On your other question George of how much of the $155 million impact of say the decremental margin on production that we saw this last year, how much can we get back kind of volume neutral well first what I would point to is as we have those are margin expansion initiatives the $50 million that we're targeting is really fun.
On the mental cost savings efficiency improvements productivity looking at every corner of the of the of the company to find those opportunities. So so that happens irrespective really of the volume movement of the company. So you can point to that then the question is as we bring capacity back and we've been doing that and we're pretty much back.
Where we need to be what can we do to improve our pack our efficiencies in that regard there are opportunities and generally speaking we have.
You know a half a percent to 1% kind of creep capacity opportunities per year just by <unk>.
<unk> to reengineer better that fix it factors into the situation.
One thing I would point out as you know we were down seven 5% of volume last year, we expect that to recover in tandem with with improvement in sales volume now the increase in production volume will be above the rate at which we are increasing.
Sales volume because we won't have the impacts of the lockdowns on everything that Theyre ASIC lockdowns in the second quarter, so anywhere between 2% to 3% higher production recovery above the rate of what we're seeing on sales volume. So let's say they were up 4% on sales volume, we probably should be up 7% or so on the production volume.
And it was slide with that scale.
Your next question comes from the line of Anthony.
Pettinari from Citigroup.
Ask your question.
Hi, This is actually Brian Bird Meyer sitting in for Anthony.
Is it possible to quantify the potential benefit to Oi, if tariffs on spirits, where to be listed and can you remind me how much Oh why was impacted by tariffs and they were initially put in place.
Well, we don't have any numbers that we can offer it to you at this point. This is all evolving right now and.
We're tracking it closely but we don't have any position to give you right now with regards to expect any impact on that.
I would say that you know tariffs affected us in two different directions, right I mean, and one is as you had like the spirits are you referring to but you also had the tariffs on Chinese goods and so you know glass is imported from China.
The U S. In particular on the West coast and the tariffs did impact that demand now what we're also saying is there's probably been a little bit of a structural shift and and you know where our supply.
Hi chains have moved in particular on the West coast of the U S and avoiding those in particular, we've seen incredible increase in transportation costs coming from Asia to the U S, which probably keep a lid on some of those pressure points, but as Andres mentioned, it's very hard to quantify on and it's very early to understand what could happen with things moving.
Got it thanks, that's helpful and then.
E Commerce in the grocery bolt on very well during the pandemic do you have an idea of how much of a wise product ends up being sold through E commerce channels and.
What are some of the strengths and weaknesses for glass trying to compete and key grocery environment.
Yes, so the.
We've seen very good performance in off premise.
For glass in 2020, a lot better than we anticipated.
Now fulfillment of E Commerce orders is being a highly.
By us towards local fulfillment.
And in those circumstances, that's quite favorable to last at what we see is glass is preferred by consumers. They want to see that preferred brands, Inc. Glass.
There is a convenience factor that has been discussed before with regards to their use of glass.
<unk> E commerce.
Solve this issue because of the E commerce is taking the product to the consumers door.
Now if it is primarily driven by local fulfillment, which is happening in multiple cat.
Categories. It is going to lead from our perspective quite favorable to last.
Okay.
Your next question comes from the line of Mike on Whitehead from Barclays.
Ask your question.
Great. Thanks, Good morning, guys.
First just first question on magma from.
From the commentary it appears to be moving forward quite well as you expect but sometimes from the outside when we get questions from investors as it can be a bit hard to track. So could you maybe help us with a few mile markers, we should look out for over the next year or so maybe when we should start being able to see the success of magma either in the results of the Capex just kind of.
Timetable investors should start seeing concrete numbers there.
Okay. So we are making.
Very good progress in hopes mainland the line expected to going to heat up at the end of day month and be in operation in March.
We expect that line to give us validation of R&D assumptions very important on R&D assumptions and then we're going on moving to training.
Planned personnel and transferring the lines to them over the next three months or so in such a way that by the middle of the year. This line is going on <unk> comercio.
Now with that we open opportunities for further deployment of Gen. One is starting in 2022.
We're actively developing the pilot for again tool and we are expecting that pilot to go into operation in the second half of this year. So that's on all that important milestone we die within one those deployments in 'twenty two 'twenty three shoot combined capabilities from day one on Gen. Two.
The art on the team is highly focused on developing gen. Three at this point the expectation is that we are going to conclude the invention on development by 2023, we are going to start deployment by 2024.
Now on <unk>.
This point, we are engaged with third party advisors and we are working on defining the reason, it's more weighted toward magma.
The finding the business case and day deployment plan.
And on our plan is to get together with the strength and we'd all of you to present our.
Our approach to Magna on going forward all of those critical milestones and the value that we expect will be revealed through magma for the shareholders on all our stakeholders.
Great that's super helpful.
And then maybe just a follow up question on sustainability on Jason I think you phrased. It on one of your slides about rebalancing the packaging dialogue I assume that means you don't think glass is getting its fair recognition today. So I was hoping you could expand upon that maybe frame, where you think glass isn't getting its fair credit and the sustainability conversation today.
Yeah, so the yeah.
Yeah, we're actively focus on on rebalancing dialogue, because we have a great product industrial reality, we have a great product. It is made of three pure and inert natural ingredients.
It can be recycled indefinitely.
You can see that it has the highest recycling rates of any packaging in Europe are those rates are low in the United States. That's a fact, but we are squarely focused on working on improving that and there are ways to do it because the product itself is highly recyclable.
And we're leveraging the experiences that we have in Europe on other markets.
If we look at the consumer perspective, and interact the integrity of products glad. He is the only package that doesn't have any plastic material or any plastic liner inside that is in contact with the problem, but that's extremely relevant now we've been quite positive in our communications about day, Attributor glass and we really.
We have a great product so we're going to take on Actavis statutory balance that dialogue because he's being somehow it's cute over the years and we really we have a fair place to have this sustained work now.
Now this is not a binary discussion it's not on either or I think we have a very important characteristics that make the product.
Hi, Lee.
And we intend to take on active role communicating that.
Your next question comes on the line of Gabe Haiti.
From Wells Fargo came on and ask your question.
Andres John Chris Good morning, Hope you guys are in the world.
My first question was on I guess building on sustainability and thinking about the infrastructure that might be necessary in.
In the United States. So I'm curious number one if you've kind of had initial discussions and explored.
Whether it's co investments or otherwise how you can kind of expand recycling rates here in the U S and ensure that the call. It does in fact find its way to yourself.
So that's kind of question number one and then.
Is it baked into.
Sort of on the capex levels or would it be some other form of I guess investment.
I'm looking at it relative to some peers. It looks like you guys are spending around 6% of revenue on Capex.
Versus maybe 8% for others.
Yeah.
Yeah. So we are actively engaging with partners to develop a recycling in the United States. The product has the characteristics. We believe we can put together.
A separate stream and we're going to move forward first with a pipe one pilot that then we can use.
To leverage in future experiences, we can put in place a system by which not only with recycled glass, but we.
Create a positive impact in the communities in which we recycled glass.
Now we also believe that <unk> will change the possibilities over the last recycling, we relieved that it will create the ability to be more favorable and we're also focusing that dimension. So we are working on multiple avenues is not a easy problem to solve but it is not a something that we're going to elevate from one day to day next.
But the most important part is we have the product that is 100% recyclable without any loss of product quality no no product can do that right. So we are intending to leverage the great product. We have on we're taking on reactions to that.
But one thing I can add on that gave US just as an example, and you can take a look at that debt.
Call it.
Recycling value stream in the U S here, probably one of the areas that as well.
Where we're short on overall is in Cullet treatment capability right, so taking the cola and treating it so they can go into the into the furnace correctly.
And so there's just a handful of pockets within Europe, and the United States. If you expanded that capability you would be able to have access of good quality coal that they can go into the furnaces that that's not to say that there's a lot going on the value stream, but that's a particularly simple and clearly we've been in dialogue with the people in the organizations that run and operate those.
Could it take the form of small JV as our investments are co investment or something.
Yeah I think these are relatively small investments overall the two two.
Unconstrained this but of course, that's just one example across the whole value stream.
Alright, Thank you guys for that and the second one on can you remind us maybe quickly.
On the tactical divestitures, where you're at on the $4 million to $500 million.
And then really more importantly, you talked about potentially funding some expansion capital I'm, assuming that's in Latin America, Brazil, specifically.
Just timing.
If youre expecting to be done with the four to 500 million by the end of 2021.
I'm, assuming you can kind of redirect that pretty quickly.
Such that you can expand capacity in 2022.
Any kind of just order of magnitude and would that be on a line additions or a greenfield project.
Yeah sure I mean, so where we stand right now is we for our $4 million to $500 million in the call. It. The original tactical divestiture program current Canticle Divesture program, we about $228 million completed on that on.
Thats included that soda ash JV that we sold while back plus the $25 million of additional projects. We've done here in the last few months so call. It halfway in the overall number so to speak.
We do have irons in the fire on a few more items that we think are around the corner hopefully.
And so we feel confident about wrapping that up in 2021 here Okay now.
Now on the other side of the fence.
The expansion and then let me just be clear with all of that those proceeds on that are going to be used for debt reduction to continue on our.
Deep deep on our deleveraging path now the other side is more of.
Looking at tactical divestitures as a way through.
Optimizing our structure portfolio.
To exit either again, some shutdown facilities properties that still need to be sold or some other smaller discrete operations that are just non core and redirect those funds into expansion and you are right. It's mostly in the Latin America market, where we had already indicated we're capacity constrained in many ways.
The good news is that we have the pipeline.
Pipeline of those tactical divestitures identified.
And stage to go and we're working through the business cases, right now on the expansion initiatives. So while it might ultimately be lumpy you know with the timing of the actual proceeds on divestitures versus the timing of money going out the door for the expansion.
We think that we can execute on those simultaneously as far as the scale of these it's kind of hard to know we're working through the business case, right now, but I would say.
On the scale of the expansion is probably more on the greenfield side rather than on on a line extension per se given given what we're what we're looking at from demand in those particular marketplaces, but again.
We don't anticipate any of this activity interfering with our debt reduction plan, because we would use the proceeds from wonder if on the other.
Okay, something that is very important to look at that I mentioned before that but I would like to highlight it again.
The trends that we're seeing in premium.
Those markets that are driving.
Roto categories, including Birr day localization of brands as well as the conversion from Brito on our glass to one way containers, where glass has a chair and I'll turn up the packaging half share tool.
Those are driving what we're seeing.
Greenfield is on option there are options tool for brownfield.
And there are options for issuance.
Now in Mexico as an example, the man is taking place as we speak and while we're doing here is that we're relocating some lines to increase output and that's something that is ongoing because these minority investment.
As John described we are taking a look at all the dates were evaluating the business cases would make their choices.
We intend to we.
<unk> all in the solutions, we put in place on hold so it'd be very proactive to be able to reported a customer's brokerage.
And your net cost next question comes from the line of Adam Josephson from Keybanc Capital markets. You May now ask your question.
Thanks, Good morning, everyone. John one good morning on dress John just two for you want to follow up on <unk> first question about the your shipment expectations through the year I'd like to ask just about the first quarter, specifically, so if youre down to in January.
Thinking it'll be flattish for the quarter. How quickly are you expecting the European situation on improved such that you would get back to flat.
<unk>.
Yeah. So what we're hearing is.
Some of the Lockdown the initial lockdowns were more pronounced in the U K and Italy and my understanding is that that's coming to the later stages or has already done on Theres some talk about.
Some additional markets, maybe doing a little bit more here in February, but we're really not hearing anything beyond that window.
It's not for me to judge, but obviously that the number of cases are starting to come down which is obviously a good good sign for for so many things in the world.
So ideally you know you.
You get out of this January February window, and then March is a little bit cleaner keep in mind for our business January and February generally pretty light months, and so February and March is probably a much bigger window for us from a total volume standpoint, and keep in mind just from a comp standpoint is that starting in mid March.
Last year things really fell off in Europe, given the start of the pandemic. So.
When you look at the overall trajectory on those elements that gives us the confidence you're looking at kind of a return to flat.
Yes, I appreciate that and just on some of the costs that you mentioned for fiscal 'twenty, one John So you'll have benefit obviously from higher.
Production in volumes and then you have your net margin expansion and it should initiatives, partially offsetting those are higher depreciation.
Net insurance pension R&D incentives can you quantify some of those costs and just explain why some of those are up specifically pension insurance.
R&D incentives et cetera.
So so so to give you an idea.
Kind of other costs like depreciation incentives in insurance whatever is about $30 million, it's about $10 million each for depreciation incentives in insurance in those buckets. The depreciation increases is mostly FX.
And and as well as in we do have share on core coming on line, Okay and.
Incentives.
Given the performance in 2019 that there wasn't any incentives this year in 2020, we expect a modest incentive and then so we're modeling in kind of a return to a kind of a normalized incentive structure in 2021.
And then on the insurance side I don't know if you heard it from other companies, but it's pretty much a hard market for insurance right now given given everything that's been going on.
Actual disaster wise whatever in the world over the last several years and so there's just overall increases in insurance costs.
So those are the big buckets going through those the operating cost line.
So.
One thing I would say is depending on where those volumes end up.
Whether more short term belt tightening would be done I think that kind of depends on whether you're on the 2% range of the 4% range. Obviously, we're trying to be conservative coming out of the gate here in the beginning of the year to make sure that we're keeping a lid on on some of those temporary items.
And then on on the retained corporate side, we do have obviously that day.
Holds them and in commissioning costs, that's primarily going to be centered here in the first quarter. So that's probably $5 million to $10 million there alone and we're probably also having our glass advocacy cost kind of maybe a little bit elevated in the beginning of the year. So those are some of the big moving pieces to be mindful of got it. Thanks, a lot channel.
And your next question comes from day line, It Arun Viswanathan from RBC.
Capital markets you May now ask your question.
Great. Thanks for taking my question.
That's on the progress on 'twenty and I guess, just first off real quickly you guys are you went over the asset sales program.
I guess, what do you expect to finish our fiscal 'twenty, one from a leverage standpoint.
Including those asset sales and maybe any others.
Yes, exactly so.
I think in the high threes again, I'm using BCA leverage calculation, okay. So probably in that 3837 range.
That would be kind of within the Zip code.
Depending on the scope and scale of that and timing of the divestitures on things like that.
Okay, Great and then.
That's that's going down from four four to $3 738.
Great and then just real quickly on that.
20% to 25% of your volume that is on premise where do you.
How do you see the evolution there I know that you know you expect some recovery as vaccinations rollout, but.
Where are you now versus normally you say, 20% below normal there are maybe 40% and get back to you know kind of normal levels by the end of the year, while the channel itself has been down 15% to 20% and it remains at that level now remembered that over the last year, we've been with no lockdown.
And with very strict lockdowns and we'd beat.
Let's say you know what conditions so far.
So as that.
China recovered, we're going to have some volume positive volume impact there, but I think there are some emerging trends that are to stay tool when it comes to what's going through retail so at home control on consumption on cooking is something that is going on.
So on changes in demand.
From our perspective.
Focus on premium has been very early on in this past year, and that's going to impact the ultra low amount. So we're looking at all of those trends closely but.
As markets reopen we should have a boost in volume.
Thanks.
Thank you I think that wraps up our call.
Please note that our first quarter call is scheduled for April 29.
And as always make it a memorable moment by choosing safe sustainable glass. Thank you.
Thank you for sensors and thank you ladies and gentlemen.
That concludes our full year fourth quarter of 2020 earnings Conference call you may now disconnect.
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