Thank you for standing by and welcome to the O-I Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the presentation, there will be a question-and-answer session. [Operator Instructions] Thank you, Mr. Chris Manuel, you may begin.

Thank you, [Em]. And welcome everyone to the O-I Glass third quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO; and John Haudrich, our CFO. Today we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for this earnings call are available on the website at o-i.com. Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Some of the financials we will be presenting today will relate to non-GAAP measures such as adjusted earnings per share, free cash flow, segment operating profit, leverage ratio and net debt, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP can be found in the press release and in the appendix of this presentation. I'd now like to turn the call over to Andres, who will start on Slide 3.

Thanks, Chris. Good morning everyone and thank you for your interest in O-I Glass. I want to start off by recognizing all of our employees at O-I and in particular our frontline team in the factories. Our employees have worked hard every day in challenging conditions to ensure we safely manufacture the glass containers needed to keep the food and beverage supply chain operating. With great attention to health and safety, all of our plants are now fully operational and performing well. This hard work by our team produced a strong rebound for the third quarter. Thank you all. Last night, we reported results for the third quarter of 2020. Our adjusted earnings were $0. 41 per share and free cash flow was $205 million. Third quarter volume increased nearly 2% compared to the prior year as shipments were fairly stable across the quarter. Demand was strongest in the Americas led by our North America business unit. Overall consumption levels haven't changed much over the course of the pandemic. However, demand has shifted from on-premise to off-premise, given public health restrictions. Amidst this shift, as expected, consumers have maintained a strong preference for healthy, premium and sustainable glass packaging regardless of the venue. We continue to advance our strategy. Our turnaround initiatives are gaining momentum and improved operating performance substantially offset the impact of lower production during the third quarter. As we seek to optimize our restructure, proceeds on the sale of our ANZ business unit would apply to every option. All the while, we have continued to develop MAGMA as we seek to revolutionize glass manufacturing. We believe all these actions will create value for our shareholders. On an encouraging note, our business outlook continues to improve. Given a solid quarter we now expect full year sales volume will…

Thanks and good morning, everyone. I'm now on Slide 7. As Andres mentioned, our third - our adjusted third quarter results were $0.41 per share. This compares to $0.54 in the prior year. While segment profit was nearly flat with last year, earnings were down due to the impact of divestitures, higher corporate costs and elevated tax rate. We believe stable operating profit is a great accomplishment following the challenging second quarter and over $45 million impact of production downtime, earlier in the quarter. Let me walk through our earnings reconciliation on the right. Segment operating profit was $204 million, compared to $206 million in the prior year. As noted, FX, temporary items and the impact of divestitures was a net headwind. Higher selling prices mostly offset cost inflation, which was elevated due to FX-induced inflation. Sales volume and mix boosted earnings as sales volumes increased about 1.7% from the prior year when excluding the ANZ business. Operating costs were up slightly from the prior year. As Anders noted, the benefit of our turnaround initiatives and cost savings, say, substantially offset the impact of lower production, non-operating items including higher retained corporate costs, lower interest expense, and a continued elevated tax rates. Higher corporate costs include additional MAGMA spending as well as higher insurance and pension costs. Likewise, technical assistance and royalty income is down, given lower engineering activity amid COVID. The higher tax rate includes some catch up adjustments after the unusual second quarter. Bottom line, after a disruptive second quarter, our segment profit recovered and was comparable with the prior year despite that temporary overhang of lower production levels. Moving to Slide 8, let me share a low color on regional performance during the quarter. In the Americas profit was $113 million, down $10 million from the prior…

Thank you, John. Let me conclude with a few comments. 2020 has presented many unique challenges, which we met with a high level of resilience, speed and agility. We have remained focused on executing our turnaround initiatives and our operating performance is strong. The abrupt downturn in demand from earlier in the year has been met by an equally strong rebound as reflected in our improving sales volume outlook. Additionally, glass has now demonstrated it can excel in both an open and closed market environment, given 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 and comprehend that steps we've taken today will place O-I in a stronger position that will benefit the company and its stakeholders in 2021 and beyond. Thank you for your interest O-I Glass and we welcome your questions.

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

Absolutely. [Operator Instructions] And our first question comes from the line of Anthony Pettinari from Citi. Your line is open.

Good morning.

Good morning.

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

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

Okay, that's very helpful. And then, with regards to growing the base in '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 that at this point. But what I can mention to you is, the level of new product development activity in North America is strong. And I think it is the same in every way in every market. We've seen it in Mexico, Latin American countries and Europe. And I think something that is happening is the performance of glass in off-premise is been stronger than anybody expected. And that is increasing the interest by customers to develop new products. So the level of activity is high, we expect this to help 2021 volumes. And obviously, it will continue into the following years.

Thank you, next question.

Our next question comes from the line of Ghansham Panjabi from Baird. Your line is open.

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

Good morning. Thank you.

Good morning. Thank you.

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

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

Yet, I would I would add on that one Ghansham, is our ideas were 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 on things even though production is now pretty much aligned with - with demand at this point in time. That's about $100 million of inventory that we've taken out of the system. And as Anders 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 comments. You see, freight prices go up in the U.S., you've seen natural gas pick up, is there risk for margin pressure near term and just kind of remind us on the lags in North America and your hedging policy specific to natural gas? Thank you.

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

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

Thanks so much.

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

Hi, everyone. Good morning. Thanks for taking my questions.

Good morning.

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

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

Yeah, and with regards to flexibility, what we experienced this year, George, I think tell us that this organization has improved significantly its ability to respond to flexibility requirements, the ability to adapt in the second quarter was really high. And I think we've said this before or chatted this before with you. We live 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 it took time to build them and resources to build them. But now they are available for us to apply them and improve performance in top and bottom line. So we see a good runway for these initiative into the 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 got to take a look at. And obviously there are opportunities for growth, though. But as we said before, it's very important that we focus on free cash flow and their reduction. Now as a result, what we're doing is we're taking an additional look, looking for additional opportunities in tactical divestitures to go beyond the committed targets that we already presented to all of you. Now, if we find some, then that will give us the opportunity to redeploy some cash into growing markets that are more attractive than some of the ones in which we are present today.

Thanks, Anders. My other question, and I'll try to make it a quick one. The system has, for good reasons and for understandable reasons, been stressed, right? You've had - you had a significant drop off because of COVID, then you saw the rebound. You're not alone, you cut CapEx, a lot of manufacturing companies are in that same position, how do you maintain the reliability of your manufacturing and glass is not the most forgiving manufacturing process. At a time when demand has now picked up, your customer looking for inventory and you haven't necessarily been able to maintain or spend like you'd like because of the constraints of COVID? 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 I think what that is reflecting is what I just mentioned before, we build the strong capabilities over the last few years, they took time and resources to build but now they're available to deploy and be used. So I feel very comfortable. This organization has learned, and because of that, to deal with complexity. Now we still deal with the limits of technology. And that's why we are designing MAGMA, because it will just change entirely, structurally, our ability to respond to those challenges. But I feel very comfortable with where we are. I mean, you wouldn't imagine the amount of capacity, we shut down temporarily, and we brought back up. And it's amazing to see how this organization responded to that and was able to resume performance really quickly and go really high.

Yeah, I mean, just to put a number on that, we restarted 20% of our production capacity over a three-month period of time, which is just an unprecedented level of engineering activity, and just underscores what Anders 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.

Thank you.

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

Hello, Mike. You're there?

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

All right. Our next question comes from 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 asked. First kind of at the tail answer of George's question, you mentioned, you've got to a certain point, you would like the flexibility to invest in growing markets. It's a little tough right now with COVID. Do you see, exactly where that might be? And I was wondering if you could elaborate on that and kind of your thought process there? I realize it's not something you're focused on today, but just kind of long-term, where would that be?

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

And clearly, we'd like to sync that up with early MAGMA opportunities in the business.

Yeah.

And then particularly in those markets where there might be more volatility, and it's a great match for that for the capacity going forward.

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

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

Thank you. I was actually going to ask about MAGMA, so thank you for that as well. My second question would just be around what a lot of investors are talking about in this space, being the metal can growth over the next 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 to be more related to new product development, which, I guess could have some impact on your business as well. So can you just give us your thoughts on how you think about the impact to your business?

Yes, so there is growth, significant growth in aluminum cans, we all know that. Now, there is something that is very important to take into consideration. 40% of the aluminum can volume is driven by beer or beer adjacencies. And within that, the growth is driven primarily by hard seltzers, at this point in time and some of the adjacencies. Now, the presence we have today, in that segment is very, very, very small. So for us it's - is really an upside. I mean, we having virtually zero, our chances are that we're going to get some share in that category. Now, the 60% remaining of that total volume of cans is related to NABs. Now the growth within that is driven primarily by energy drinks and bottle water. And we are not present in any of those. So now there is a point in which we coincide which is primarily North America beer. And it's primarily mainstream beer because even - not even in the premium beer. In the premium beer we're very strong. So we got to be mindful of that. So obviously there is a lot of activity. But as I explained before, look at the amount of categories in which we are growing. As we said in the past, we were going to pivot away from just beer and into multiple categories that are growing well. And what we're seeing at this point in time is exactly those categories playing quite well. And our mix as a result is pivoting from beer into a mix of multiple segments that are performing quite well. Now, that's the situation in the United States but when we go to other markets, for example, the Andean countries, beer for us is growing very fast. When we go to Brazil, we are at max capacity, if we had more capacity, we could achieve that capacity today. I mentioned that growth in that market for beer in glass is at 10%. So it's pretty healthy. And then when we go to Europe, very strong performance. In fact, not only we are performing well at this point in time where we were before, that's something that we are seeing is wine in France is higher than it was in pre-pandemic levels. If you recall, we mentioned that Bordeaux wine was soft pre-pandemic, is very strong right now. So we're seeing opportunities across markets and yes, aluminum cans are growing but we have our opportunities too.

Okay. Thank you for that. Good luck in the quarter.

Thank you.

Our next question comes from the line of Mark Wilde from Bank of Montreal. Your line is open.

Thanks. Good morning Andres, John. Congratulations on a good third quarter.

Thanks.

Thanks.

I wondered - and it's a sustainability topic, if you could talk a little bit about what the concrete measures you are - you can take to improve the recycling situation here in North America because just it seems like it's going the wrong way at the moment with municipality shutting down recycling or in some cases trying to exclude glass from the recycling stream?

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

Okay, next question.

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

Thanks. Good morning, everyone. Hope you and your families are well?

You, too.

Well, thank you.

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

Sure. So on the free cash flow conversion, as we indicated in the prepared comments, we expect that to be in the neighborhood of 20% to 25% next year. Keep in mind, that's very similar to what we thought it was going to happen this year, we had earlier guided before the pandemic for 2020, that would be about $300 million of free cash flow on say a data base of $1.25 million EBITDA, that would be about a 23%, 24% conversion ratio. So in other words, we're trying to return back to that as a first step and then being able to improve off of that. So as we look into 2021, and some of the key assumptions behind that, one is that working capital would be a modest use of cash primarily on the receivable side, because if we're going to recover some of the volume that we - was lost this year, so there'll be some buildup in receivables. At the same time, we expect to manage inventory tightly as well as our accounts payable. On the CapEx side, keep in mind that the number this year is pretty low, it's $300 million. We think it'll probably be in the range of $350 million to $400 million next year. As we talked earlier, the second quarter is very disruptive. It was very difficult to get any engineering projects done. The third quarter was very much focused on ramping up that 20% capacity, so not a lot of projects in that window. So a couple projects otherwise will start to creep into next year. So maybe your maintenance is closer to $300 million there compared to $275 million, $300 million being kind of a more normalized level that we would expect. You'll have a little bit MAGMA in there. And we are looking at some ROI type projects. We always target at least 15% for any growth project and say 25% or more for the engineering related productivity project. So those are being evaluated right now, we're clearly still in the budgeting process. So that is still under evaluation. A couple of the other pieces that we have, we're going to have pension expense creeping up a little bit, $10 million or so but we should be getting more equity dividends coming through as we finalize out all the work over at IVC and places like that. And then of course, interest expense continues to do better. We're paying down debt, over the long term, that'll reduce that will reduce interest expense and allow us to be one of the drivers for improved conversion over time. So a mouthful there but just want to give you a little color -

Well, thank you John.

Yeah, color in that regard. Now, the other question was corporate retained, and -

Yeah.

And you're right. I mean, historically, our corporate retained has been around $100 million to $110 million a year. So that's $25 million to $28 million or so on a quarterly basis. That is stair stepping up to probably the basis plus or minus $35 million and then we would have project or other activities off that. So let me explain at least the rebasing of that. One is we sold Tata, which was earnings that was previously recorded in corporate, so that's not there anymore. And also, we have reclassified with the divestiture of ANZ, that our Asia business is now part of corporate. And it has, as we noted before, been running at a bit of a deficit position between COVID and the trade wars. Now we expect that will improve over time, of course. So then building off of that, we will have some, episodic costs associated with MAGMA spending, as well as some spending on this, what we refer to as glass advocacy program, which is to get out to end market, especially social media wise, all those good attributes of glass that Andres talked about and also push the sustainability angle much more broadly, as we believe that we got a great story to tell and we need to tell the story. So hopefully, that provides a little clarity.

I appreciate. So do you expect for $35 million to change much going forward, John, just the net of all that?

So that $35 million will probably be a little bit elevated for the next several quarters, while we ramp up Holzminden because a lot, those all get recovered, all that startup stuff gets put into R&D during the startup window. And then we do have this 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 quarter.

Thanks so much.

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

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

Good morning.

Morning.

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

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

Okay, that's helpful. And then maybe we can just get your updated thoughts on consumption patterns, obviously consumers are drinking more packaged goods even on-premise. So, just curious if there's, still strains on the system to satisfy increased demand levels. I know the can market is still sold out. So is that also a tailwind for glass containers? Thanks.

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

Thanks.

Our next question comes from the line of Salvator Tiano from Seaport Global. Your line is open.

Yes. Hi, thanks for taking the questions. The first one is building on some prior questions on beverage cans. How's refill? I guess a little bit differently. Now we've - that we hear that beverage cans actually are in short supply, especially in North America, is there a risk that as the - as capacity for cans catches up some customers that would have liked to transition to cans and can't do that now, will actually do it in the next few years at the expense of glass?

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

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

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

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

I think we have time for one last question.

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

Hi, good morning. I hope everyone is doing well. Thank you.

Good morning.

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

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

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

Yeah, so clearly, the biggest change that we're seeing whether it's in Europe or any other market, to tell you the truth, is on fuel. Fuel was, so natural gas, whatnot is - was a deflationary area in 2020. And it's - 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, you know, unique level of inflation is just returning back now. In Europe, about 30% of our business is under long term contract, but the other 70% is open market, which will allow us to address those 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're seeing the inflation starting to shift now for that open market and allows us to be a little bit more timely addresses than if it happened in a different window of the year.

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 you.

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