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Owens-Illinois Inc (NYSE:OI)
Q3 2020 Earnings Call
Oct 28, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the OI Third Quarter 2020 Earnings Conference Call. [Operator Instructions] After the presentation there will be a question-and-answer session and instructions on how to do so will be given at the appropriate time.

Thank you, Mr. Chris Manuel, you may begin.

Chris Manuel -- Vice President of Investor Relations

Thank you, Em, and welcome, everyone to the OI 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'll host a Q&A session. Presentation materials for this earnings call are available on our 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 excludes certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP can be found in the press release and in the appendix to this presentation.

I'd now like to turn the call over to Andres, who will start on Slide three.

Andres Lopez -- Chief Executive Officer

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 and worldwide, and in particular, our frontline team in the factories. Our employees have worked hard every day in challenging conditions, to ensure we safely manufacturer 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. These 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 probably held 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 structure proceeds on the sale of our ANZ business unit were applied 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 be down about 3% to 5% in 2020, compared to 4% to 7% decline in our previous outlook. As conditions have somewhat stabilized, we are reinstating earnings guidance for the [Indecipherable] quarter, which we expect will approximate $0.30 to $0.35 per share, with sales volume comparable to the prior year levels. With year 2020, cash flow should also compare favorably to the prior year. We are also providing some preliminary thoughts on 2021, where the outlook for earnings and cash flows will improve versus 2020 levels. Of course, the pandemic continues. So any outlook is subject to adjustment as poverty health trends a lot.

Let me provide an update on our achievements trends, we have stabilized over the past several months. I'm now on Slide four. Consistent with previous presentations this chart provides two sets of information. On the left, you will see O-Is recent shipment trends. On the right, we are presenting key retail purchase trends across several categories and geographies.

Let me share some thoughts starting with O-I. While our volumes were stable for most of the first quarter, the pandemic abruptly disrupted orders in April and May. As many markets reopened volumes recovered significantly in June and have been a stable to higher each month of the third quarter. With most of our quarter [Phonetic] behind us, sales volume this month is up slightly, compared to last year. Reflecting recent trends, we anticipate for quarter shipments will be flat to slightly up versus the prior year.

Let's shift to the retail patterns on the right. As you can clearly see off-premise sales have remained elevated since the pandemic consistently higher depending on category. This makes sense considering the sharp fall off in demand at bars and restaurants. While retail trends remain strong, growth has moderated more recently as on-premise locations started to reopen some during the third quarter.

Let me make two key observations. First, for O-I the strong retail activities generally offsetting the lost sales from bars and restaurants. With consumer consumption trends balanced overall. We are pleased with the ability of our customers and supply chain to quickly adapt and Glass is doing well with this consumer channel shift.

Second, it is not possible for the supply chain to snap back and fully restock inventories immediately after the disruptive second quarter. Frankly our customers and the overall food and beverage supply chain is not equipped for this type of search. At present, we believe most end markets are reasonably well served, but the overall supply chain will likely remain in flux for the foreseeable future. So we think demand will continue to improve, but this patterns could remain choppy until fully rebalanced.

Bottom line, we are serving our customers' needs well, and are confident that our shipment levels would return to pre-pandemic levels and continue to grow off that base, particularly as new product development activity remains at an elevated level. While, we contend with the pandemic, we are highly focused on executing our long-term strategy to create shareholder value.

I'm now on Slide five. I want to update you on the bold structural actions we have taken to improve the company's business fundamentals. We continue to make great progress with our turnaround initiatives, which have proven to be the perfect platform to help navigate the pandemic. I'm proud to say that our operating performance continued to improve, which reflects the contribution of these turnaround initiatives. Keep in mind, production was down 10% from last year, as we ramped up capacity after the challenging second quarter. This was a $46 million earnings headwind, which was substantially offset by operating improvement and plant productivity that is now back to pre-pandemic levels. Likewise, our new brownfield plant in Gironcourt is now operational. I want to thank the thousands of IT members, who helped us with these achievements.

MAGMA continues to advance and we reached several key technical milestones during the quarter. The MAGMA Generation 1 installation at Holzminden, Germany remains on track for the first quarter of 2021. This will be an important development to pave the way for broader Gen 1 deployment commencing in 2022 and beyond. Additionally, we recently entered into a strategic collaboration agreement with Krones AG, the global leader in food and beverage processing and filling technologies. Together, we can improve Glass in line with speed and efficiency, enhance ability to respond to market trends and developing innovative and sustainable glass systems.

Finally, we aim to optimize our structure by rebalancing our portfolio and strengthening our balance sheet. We have completed a number of divestitures with total proceeds in excess of $170 million, including the sale of ANZ at an attractive multiple during the third quarter. As a result of these transactions and favorable cash flow, we have significantly reduced net debt over the past year. Our tactical divestiture program continues and we expect to complete that program next year with additional proceeds to accelerate further debt reduction. I firmly believe these are the righter steps for O-I, our customers and our employees and our investors. Furthermore, I remain highly confident in our ability to execute across these trends and unlock shareholder value.

Advancing to Slide six, I would like to talk about how we are further elevating sustainability ROI [Phonetic]. We are focused on being the most innovative, sustainable and chosen supplier of brand building packaging solutions. As you know, our sustainability program is aligned with the United Nation Sustainable Development Goals, consistent with this focus we are elevating our ESG ambitions.

Let me note a few recent steps on our journey. First, we recently appointed our first Chief Sustainability Officer, a position that reports directly to me, and will ensure ESG initiatives are advanced. Second, we achieve our vision we have broadened our sustainability initiatives and goals for next year -- next several years. This includes actively developing the US glass recycling system building on the successful model in Europe, where glass recycling outpaces all other packaging materials.

Third, we have initiated a glass advocacy campaign initially focused in the US. This effort will ensure a balanced public discussion on the inherent sustainable nature of glass. More broadly, the campaign will emphasize the many benefits of our product, including the healthy premium and brand building characteristics of glass. O-I is also at the forefront of transformational glass making technology. And our MAGMA innovations will set new standards in the industry in many areas, including light-weighting and sustainability overall. Finally, we are preparing our next sustainability report for 2021, which we have much more detail on these initiatives.

Next, let me turn the presentation over to John, who will provide some detail on the financials.

John Haudrich -- Senior Vice President and Chief Financial Officer

Thanks and good morning everyone. I'm now on Slide seven, as 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 an 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 in 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 Andres noted the benefit of our turnaround initiatives and cost savings, safe [Phonetic] substantially offset the impact of lower production.

Non-operating items; including higher retained corporate costs; lower interest expense and a continued elevated tax rate. Higher corporate cost 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 the temporary overhang of lower production levels.

Moving to Slide eight, let me share a little color on regional performance during the quarter. In the Americas, profit was $113 million, down $10 million from the prior year. Higher selling prices partially offset cost inflation, which was elevated due to FX induced inflation in Latin America. Sales volume up -- was up nearly 2% during the quarter and the improvement was most pronounced in North America and Brazil, where both were up around 6%, while down slightly in the quarter shipments in Mexico and the Andean's improved significantly over the course of the quarter, as those markets recovered from major lockdowns earlier in the year. Both Mexico and the Andean's were up low single-digits in October. Operating costs were flat in the third quarter as good operating performance and benefits from turnaround initiatives offset lower production.

Europe's operating profit was $88 million, up $9 million from last year. Higher selling prices more than offset cost inflation, which included the benefit of the regions revenue optimization efforts. Sales volume was up 0.3% and nearly all markets were stable or improved modestly. Like the Americas third quarter production was lower than last year as we ramped up capacity. Improved operating performance and cost controls help to mitigate the impact of lower production, as well as start-up costs at Gironcourt.

Asia Pacific's operating profit was $3 million, compared to $4 million in the prior year. Given the sale of ANZ, our 2019 and 2020 financial statements have been reclassified. As a result, the Asia-Pacific segment only includes ANZ, while our Asia business is included and retained corporate. As you can see segment results were pretty flat, which again pertains only to ANZ. While dilution in the sale was a headwind year-over-year, the business performed well up to the sale date on July 31.

Let's shift to cash flows in the balance sheet. I'm now on Slide nine. As stated in the past, we are following specific capital allocation principles during the pandemic. First, we are squarely focused on maximizing free cash flow, to support this we have aligned supply with demand in limited capex to normal maintenance investment and MAGMA. We have been making very good progress. Our third quarter free cash flow was $205 million, cash flows were down from the prior year, but this was due to a prior year shift in factoring activity. On a factoring neutral basis, current year cash flows exceeded the prior year by $96 million. On a year-to-date basis, cash flows were well above prior year levels, reflecting our significant focus on cash and working capital management.

Second, we are preserving our strong liquidity. Despite the pandemic, our committed liquidity continues to improve and exceeded $2 billion at the end of September, well above the liquidity flow we established for 2020.

Third, we are reducing debt. As illustrated in the chart, net debt was just under $4.8 billion at the end of this quarter, that compared favorably booked to both the prior year period and second quarter levels. The ANZ proceeds and free cash flow help reduced net debt by nearly $850 million year-over-year, despite currency pressures.

Our leverage ratio at quarter end was 4.4 per a bank credit agreement and we should be around this level at year-end. This is well below our covenant limit of 5.0. We are highly confident O-I will remain in compliance with this bank covenant. As our tactical divestiture program continues, we remain confident that we will achieve our target of $400 million to $500 million in proceeds by the end of 2021. These additional actions will further strengthen our balance sheet. Finally Paddock continues to proceed as expected. Overall, we're making solid progress on our capital allocation priorities in 2020.

Let me wrap up with a few comments on our business outlook. I'm now on Slide 10, as we all know significant macro uncertainties remain given the pandemic. However, we are reintroducing quarterly earnings guidance given more stability lately. Likewise, we are providing some early considerations for 2021. Currently, we expect fourth quarter adjusted earnings will approximate $0.30 to $0.35, as key business conditions continue to stabilize and improve, we expect both sales and production volumes will be flat to slightly up during the fourth quarter.

Earnings should also benefit from strong operating performance and our turnaround initiatives. Higher selling prices should mostly offset cost inflation, which will include FX pressures. Earnings will reflect the dilution from recent divestitures, a continued elevated tax rate and higher retained corporate costs.

Looking at full-year cash flow, we expect our EBITDA to free cash flow conversion will exceed 10% this year or $100 million. Keep in mind, this is a -- this is temporarily skewed by our recent ANZ divestiture, specifically we will be reducing AR factoring by $50 million to $75 million as we continue to factor between 35% to 40% of gross receivables, which is been rebased after the divestiture.

Likewise, post-closing working capital benefits of around $25 million will be recorded in cash from investing, instead of cash from operations. Adjusted for these items, free cash flow conversion would be at least 18% this year or $180 million or higher. This represents a significant improvement from 2019.

We anticipate this favorable trend will continue into 2021. Earnings should benefit from higher sales and production volumes, as well as continued favorable operating cost performance. Interest expense should be stable, the tax rate should normalize, while earnings will reflect recent divestitures. Net price will likely be a headwind. Keep in mind that this is a purely timing issue, as contracted price adjustment formulas reflect minimal inflation 2020, while we would expect inflation will begin to normalize from next year. Bottom line, we expect 2021 earnings will be a measurable improvement, compared to 2020.

While it's a bit early to provide a detailed view on cash flows. We are focused on improving our EBITDA to free cash flow conversion. We aim to increase our conversion to between 20% and 25% next year, which will -- expect will continue to improve over time. We anticipate providing more details in 2021 during our year-end earnings call.

With that, I'll turn it back to Andres.

Andres Lopez -- Chief Executive Officer

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 of speed and agility. We have remained focus on executing our turnaround initiatives on our operating performance is strong. We have brought down to earning demand from earlier in the year has been met by an equally a 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. I'm confident the steps we're taking today will place O-I in a stronger position that will benefit the company and is a stakeholders in 2021 and beyond.

Thank you for your interest in O-I Glass, and we welcome your questions.

Chris Manuel -- Vice President of Investor Relations

Okay, and I think we're prepared for questions now.

Questions and Answers:

Operator

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

Anthony Pettinari -- Citigroup -- Analyst

Good morning.

John Haudrich -- Senior Vice President and Chief Financial Officer

Good morning, Mark [Phonetic].

Anthony Pettinari -- Citigroup -- Analyst

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 United States. How you're kind of factoring that into 4Q volume guidance?

Andres Lopez -- Chief Executive Officer

Okay. So the -- I think the most important thing to -- having consideration is that we're seeing a good and better-than-expected performance in off-premise and this is mostly offsetting off -- on-premise drop. Now what this means is that our demand is more resilient that we originally expected to choose between these two channels.

Now the performance in October continues to be in line with what we saw and in 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 to 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 a stronger that 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 glass beer, in premium beer, in spirits and [Indecipherable]. And I think what the shows is that we're pivoting from a -- let's say beer-intensive mix toward 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 achievements that are of prior year. We are seeing very strong demand in that market in food and 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've 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 beer in glass is growing in this market at around 10% annually, and it is only limited now and going forward by capacity. We turn our glass is back, because they are reopening bars and restaurants. And then another important point to highlight is when we turn our containers convert to one-way containers in Brazil, they're converting to one-way glass and aluminum cans. And what they do is they mainstream convert primarily to aluminum cans, the premium products convert primarily to one-way glass.

So when we look at all these trends, we believe with the information we have today, obviously the pandemic impact is uncurtaining what the stimulus will be by government [Phonetic] is unknown and 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.

Anthony Pettinari -- Citigroup -- Analyst

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?

Andres Lopez -- Chief Executive Officer

Well, difficult to quantify 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 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 has 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 these to help 2021 volumes and obviously it will continue into the following years.

Chris Manuel -- Vice President of Investor Relations

Thank you. Next question?

Operator

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

Ghansham Panjabi -- Robert W. Baird -- Analyst

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

Andres Lopez -- Chief Executive Officer

Good morning. Thank you.

John Haudrich -- Senior Vice President and Chief Financial Officer

Good morning. Thank you.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Good morning. So just kind of judging by your outlook for production volumes both for 4Q and 2021 relative to the sales outlook, you know, it looks like inventories are pretty well aligned at your end, can you first confirm that? And if that is the right way to interpret those comments?

And second, could 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 wondered how long the inventory replenishment cycle could be for your customers?

Andres Lopez -- Chief Executive Officer

Okay, so the [Indecipherable] in food production in our case. Our inventories obviously have been reviewed, I will 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 overall. 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 I will expect is going -- that's going into the quarter -- this quarter and the following year in those countries and across the world, most likely the measures to lockdown or shutdown won't be as dramatic as we see them in the past.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yes, I would add on that one Ghansham, is our IDS 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 calibrate on things even though production is now pretty much aligned with demand at this point in time. That's about a $100 million of inventory that we've taken out of the system and as Andres mentioned, we intend to sustain that and continue to run at those types of levels.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Okay, that's very helpful. And then the 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 US; you see natural gas tick up. Is there a risk for margin pressure near-term and just kind of remind us on the lags in North America and your hedging policy specific to natural gas? Thank you.

Andres Lopez -- Chief Executive Officer

So I can make a few comments and then John can complement. 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% or so of our total volume. We are expecting that we won't recover as high as we will -- we like to in 2021, because we are going to be recurring primarily 2020 inflation. And then right after that, which would be in the opposite position. So which would be recurring slightly ahead of inflation.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yes, I would say that in North America most of -- what we're seeing right now in the last couple of quarters and probably will occur for the next couple of quarters here in North America, is that we have provisions that will allow for either monthly or quarterly pass-through of natural gas prices through our contracts in most of our business is contracted there. We only hedge at our customers -- 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 ANZ, for example are being pass-through as we speak right now.

Like I said, that will take a couple of 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 for example, we buy soda ash and things like that in US dollars in certain Latin American countries, that was about $11 million pressure here in the third quarter that will also probably play out for a little bit of time here until that flushes through. Obviously, the whole notion then is to go into the marketplace and reprice and be able to cover that, but it happens on a little bit lag effect.

And to the comment that Andres said is that we're probably going to look at a period where the low inflation for 2020 overall is pass-through PAFs next year, while we see some normalization of inflation, that will lifecycle itself, probably through the first quarter of 2022 and then start to normalize them. 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.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Thanks so much.

Operator

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

George Staphos -- Bank of America Merrill Lynch -- Analyst

Hi, everyone. Good morning, thanks for taking my questions and thanks for the detail. 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 Andres, 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 have the turnaround initiatives, I think 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 then I had a follow-on.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yes, sure. I can take the first part of that. As far as the cost take out and the turnaround initiatives. So the -- I believe you're right, I mean the organization has done a great job of taking cost out of the business, it's driven by our turnaround initiatives. I would say about 70% of the cost take out that we've been doing over the last couple of quarters here is really systemic, long-term sustained savings. The other part is maybe we're temporary. Nonetheless, we anticipate retaining all of that next year and then getting some additional cost savings next year. It probably won't be the same aggregate amount that we're seeing this year in total, because we advance some of our turnaround initiatives and other cost saving things, as well as some of them are 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.

Andres Lopez -- Chief Executive Officer

Yes, and with regards to flexibility, well we experienced this year George, I think, tell us that this organization has improved significantly, its ability to respond to flexibility requirement. The ability to adopt in the second quarter was really high. And I think we've said this before or shared this before with you, within 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 the multiple capabilities over the last few years and it took time to building and resources to building, but now they are available for us to apply then -- and improve performance in top and bottom line. So we'll see a good runway for this initiatives 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 is very important that we focus on free cash flow and the reduction. Now as a result, what we're doing is we've taken out 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 the -- some of the ones in which we are present today.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thanks, Andres. My other question, and I'll try to make it a quick one. The system has, you know, for good reasons and for understandable reasons been stressed, right? You've had -- you had a significant drop-off, because of COVID when you saw the rebound, you're not alone, you cut capex a lot of manufacturing commensurate in that same position. How do you maintain the reliability of your manufacturing and Glass is not the most forgiving manufacturing process at a time when demand is now picked up, your cost for -- 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.

Andres Lopez -- Chief Executive Officer

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 as opposed to significant complexity. Our performance is significantly higher, and I think what that is reflecting is, what I just mentioned before, we will -- the strong capabilities over the last few years, they took time and resources to build. But now they are available to deployed [Phonetic] and being used. So I feel very comfortable this organization has learned and because of that to deal with complexity. Now, we are still dealing with the limits of technology and that's why we're 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, [Indecipherable] imagine the amount of capacity we shutdown temporarily and bring -- and brought back up and is amazing to see how this organization responded to that and was able to resume performance really quickly and go really high.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yes, I mean just to put a number on that. We've 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 Andres says, it's just how resilient and capable the organization is at this point in time.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you very much guys. Good luck in the quarter.

Andres Lopez -- Chief Executive Officer

Thank you.

Operator

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

John Haudrich -- Senior Vice President and Chief Financial Officer

Hello, Mike you there?

Chris Manuel -- Vice President of Investor Relations

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

Operator

Alright. Our next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open.

Debbie Jones -- Deutsche Bank -- Analyst

Hi, thank you for taking my questions. And could you tell a few follow-ups on some of that have already been asked. First kind of the [Indecipherable] answer of George's question, you mentioned, if you got to a certain point, you know, you would like the flexibility to invest in growing market, it's a little tough right now with COVID, to 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?

Andres Lopez -- Chief Executive Officer

Yes. 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 that are driving growth. So NABs or food or craft beer, premium beer, spirits [Indecipherable]. So this is a lot more [Indecipherable] the year that normally takes most of the attention.

So we're seeing growth in Europe, we just started Gironcourt and its operating quite well and is cheap in all these production and as we said before is -- 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.

John Haudrich -- Senior Vice President and Chief Financial Officer

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

Andres Lopez -- Chief Executive Officer

Yes.

John Haudrich -- Senior Vice President and Chief Financial Officer

And appreciate clearly those markets where there might be more volatility and it's a great match for that -- for the capacity [Indecipherable]

Andres Lopez -- Chief Executive Officer

Yes and with regard to MAGMA, as you know, we are approaching the milestone of Holzminden in 2021, this -- with respect to Iran in 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 the positive results out of that and what that will do is give us the ability to deploy Gen 1 units in 2022, and that will give us the ability to follow growth a lot easier than we can today with the legacy technology.

John Haudrich -- Senior Vice President and Chief Financial Officer

And to reiterate one of Andres's earlier points, we are squarely focused on free cash flow and reducing debt that 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.

Debbie Jones -- Deutsche Bank -- Analyst

Thank you, I was actually going to ask what MAGMA, so thank you for that as well. My second question would just be around what a lot of investors are talking about in the State seeing the metal can growth over the next in potentially four, five years or longer in the US. And could you help us think through what you have to be concerned about as, you know, 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 could you just give us your thoughts on how you think about the impact to your business?

Andres Lopez -- Chief Executive Officer

Yes. So the -- 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 we think that the growth is driven primarily by hard shelters 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 is -- it really an upside, I mean, we're 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 bottled 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 is 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've said in the past we were going to pivot away from just beer and into multiple categories we are better growing well, and what we're seeing at this point in time is exactly those category is playing quite well. And our mix -- as our 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 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 cheap that capacity today, I mentioned that growth in that market for beer in glass is at 10%, so is pretty healthy. And then when we go to Europe, very strong performance, in fact not only we are performing well at this point in time, where we were before, but 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.

Debbie Jones -- Deutsche Bank -- Analyst

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

John Haudrich -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

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

Mark Wilde -- BMO Capital Markets -- Analyst

Thanks. Good morning, Andres, John [Speech Overlap]

Andres Lopez -- Chief Executive Officer

Good morning.

Mark Wilde -- BMO Capital Markets -- Analyst

And congratulations on a good third quarter.

Andres Lopez -- Chief Executive Officer

Thanks.

Mark Wilde -- BMO Capital Markets -- Analyst

I wondered on this sustainability topic, if you could talk a little bit about what the concrete measures 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 the municipality shutting down our recycling or in some cases trying to exclude glass from the recycling stream?

Andres Lopez -- Chief Executive Officer

Yes, so the -- I think the -- what Ghana [Phonetic] guys, if a Ghana guy would be -- our 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 that recycling system in North America is make some work and significant work and we are working on that. And when we went in the contract of singular stream like unfortunately that got some of the recycled materials, including glass difficult to manage and that have been creating a best incentive in the system.

Now what we see in Europe is glass has a separate stream and while 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 have 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 rule 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 circular economy.

Chris Manuel -- Vice President of Investor Relations

Okay, next question?

Operator

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

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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

John Haudrich -- Senior Vice President and Chief Financial Officer

You too.

Andres Lopez -- Chief Executive Officer

Well. Thank you, Adam.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

My two questions. John, in terms of the free cash flow conversion ratios this year and next. Can you talk about what assumptions are embedded in there for working capital on capex? And regarding your expectation that the conversion will improve overtime 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, this glass advocacy campaign and insurance. Can you talk about where you expect those retained corporate cost 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.

John Haudrich -- Senior Vice President and Chief Financial Officer

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% [Indecipherable]. 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 date base of $1.25 billion EBITDA, that would be about a 23%, 24% conversion ratio. So in other words, we're trying to return back to that is a first step and then being able to improve off of that.

So as we look into 2021 in some of the key assumptions behind that; one, is that working capital would be a modest use of cash are 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 inventories tightly, as well as our accounts payable. On the capex side, keep in mind that the number this year is pretty low, it's $300 million, we think it will probably be in the range of $350 million to $400 million next year. As we talked earlier, the -- you know, the second quarter was very disruptive that 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 of projects, otherwise we'll start to creep in next year, so maybe your maintenance is closer to $300 million there, compared to $275 million, $300 million being a more normalized level that we would expect, you'll have a little bit of more 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, you know, 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 workover at IDC and places like that. And then of the course interest expense continues to do better, we're paying down debt over the long-term that will reduce interest expense and allow us to be one of the drivers for improved conversion over time. So a mouthful of there, but just want to give you a little color...

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thank you, John. Yes.

John Haudrich -- Senior Vice President and Chief Financial Officer

Color in that regard. Now the other question was corporate retained and...

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Yes.

John Haudrich -- Senior Vice President and Chief Financial Officer

And you're right, I mean, historically our corporate retained has been -- I don't know $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 base is plus or minus $35 million, and then we would have project or other activities of 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've noted before been running at it -- 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 adequacy program, which is to get out -- and market especially social media wise all those good attributes Glass that as Andres talked about and also push the sustainability angle much more broadly as we believe that we've got a great story to tell and we need to tell a story. So hopefully that provides little clarity.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Do you expect the $35 million to change much going forward, John, just the net of all that?

John Haudrich -- Senior Vice President and Chief Financial Officer

So the $35 million will probably be a little bit elevated for the next several quarters, while we ramp up Holzminden, because those all get -- all that start up stuff gets put into R&D and during the start-up 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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks so much.

John Haudrich -- Senior Vice President and Chief Financial Officer

Yes.

Operator

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

Arun Viswanathan -- RBC Capital Markets -- Analyst

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

Andres Lopez -- Chief Executive Officer

Good morning.

John Haudrich -- Senior Vice President and Chief Financial Officer

Hey, Arun.

Arun Viswanathan -- RBC Capital Markets -- Analyst

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, yes, maybe you can just go through -- maybe some of the inflationary pressures again? And how that kind of market is after the next quarter or two? Thanks.

John Haudrich -- Senior Vice President and Chief Financial Officer

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 point you said and that's you know, what we've talked already about a little bit of the natural gas flushing through and I said, that's going to be a couple of quarters for the North America component. The FX induced inflation probably starts to comp after the first quarter, because in the second quarter 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 quite a few 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 are 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 our PAS on lagging basis.

Arun Viswanathan -- RBC Capital Markets -- Analyst

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 is still strains on the system to satisfy increased demand levels. I know the can market is still sold out. So is that -- and also a tailwind for glass containers? Thanks.

Andres Lopez -- Chief Executive Officer

Well, so the -- I think the performance that we're seeing in glass in off-premise is going beyond any expectation before and it's mostly offsetting the on-premise at all, 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 [Indecipherable] we're serving the markets as they are right now and as we see them in 2021. However, there are growing markets that we're going to take a look at. I think the -- for reference support glass in some important categories is been evident as we've been going through all these 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 they -- we might take in terms of capacity overtime.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

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

Salvator Tiano -- Seaport Global Securities -- Analyst

Yes. Hi, thanks for taking my questions. The first one is building on some prior questions on beverage cans. I'll phrase -- I guess it will be differently, now if -- that we should have beverage cans actually are in short supply, especially in North America. Is there a risk that as capacity for cans catches up some customers that would have like to transition to cans and can do that now? Will actually do it in the next few years at the expense of glass?

Andres Lopez -- Chief Executive Officer

Well the -- what we know at this point is that there is [Indecipherable] and I think that given 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 repositioning 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 that we're -- 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 being growing quite well. In which glass has very little present not because it doesn't have a third chair to have is 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 convert. I think in the meantime and for the next couple of years, I think there is a very good trend for simple glass and we're ready to support that.

John Haudrich -- Senior Vice President and Chief Financial Officer

One thing I would add is, you know, 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 if that makes a big difference in the long-term capabilities.

Salvator Tiano -- Seaport Global Securities -- Analyst

Okay, perfect. And for my second question, just to clarify little bit on volume growth in Q3. Some other companies have mentioned that Q3 was exceptionally strong, due to pent-up demand. I would assume that may have happened Brazil and other countries as well. Can you clarify a 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?

Andres Lopez -- Chief Executive Officer

Yes, I think -- so what we're seeing is, while North America was up mid single-digit, so that's quite a strong. And I think is in part due to that strong performance in off-premise and then obviously some performance in on-premise, but if you didn't really get to the high. Now Mexico is back to regular performance, it recovered well, we're running -- currently chipping our off prior and is driven by demand in food, beer and the spirit. And then there is local market and export market, this market is becoming more of -- more focus in export into [Indecipherable] store, which is an opportunity and is because of its position in the continents.

Now the Andean countries quite a 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 is a sustainable business, so has been in place for probably the last 25 years or 30 years and because of that [Indecipherable] this is growing in both markets, local and exports.

And Brazil is very strong, frankly we're very high -- highly utilizing that market, we're selling everything we have, if we have more, we will be selling more. And beer is strong, but other categories are strong too. And as I mentioned before the conversion out of return our containers goes to one-way glass and aluminum cans, 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 markets in which we are present in that region.

Salvator Tiano -- Seaport Global Securities -- Analyst

Thank you very much.

Chris Manuel -- Vice President of Investor Relations

I think we have time for one last question.

Operator

Our next question comes from the line of Gabe Hajde from Wells Fargo Securities [Phonetic]. Your line is open.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Good morning. I hope everyone is doing well. Thank you.

Andres Lopez -- Chief Executive Officer

Good morning.

John Haudrich -- Senior Vice President and Chief Financial Officer

Hi, Gabe.

Gabe Hajde -- Wells Fargo Securities -- Analyst

A quick question, kind of, I guess maybe revisiting the can question in 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 the 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 getting back to or approaching 2019 levels?

Andres Lopez -- Chief Executive Officer

Yes, 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 3%. And then the volume has been moved into single serve containers and those are one-way glass and aluminum cans both, so that drop in share has been 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 old channel. So, yes, there is some volume coming from there, but there is a lot more taking place then just that.

Now when we look at the year performance so at all. And in particular mainstream, I think your question is primarily related to mainstream. The -- if nothing else during this period of time the -- there has been -- and a slight slowdown in the declining trend of mainstream beer. Now all other segments super premium, premium trap 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, is less important today when it comes to total or each 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, which is highly mainstream beer, so...

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you, Andres. And then I guess transitioning to Europe, we talked about inflation, I think in Brazil and then 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 cost etc, that kind of go into that discussion?

John Haudrich -- Senior Vice President and Chief Financial Officer

Yes. So clearly the biggest change that we're seeing, whether it's in Europe or any other market tell you the truth is on fuel. Fuel was also natural gas, but not -- was a deflationary area in 2020 and it's more returning back to more normalized levels, we put with that the thought process right now. So it's not exactly unique level of inflation, it's 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 address it than if it happened in a different window of the year.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you, John.

Chris Manuel -- Vice President of Investor Relations

Okay, thank you everyone. That concludes our earnings call. Please note that our year-end and fourth quarter conference call, is slated for February 10th, 2021. And as always make it a memorable moment by choosing safe sustainable glass. Thank you.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Chris Manuel -- Vice President of Investor Relations

Andres Lopez -- Chief Executive Officer

John Haudrich -- Senior Vice President and Chief Financial Officer

Anthony Pettinari -- Citigroup -- Analyst

Ghansham Panjabi -- Robert W. Baird -- Analyst

George Staphos -- Bank of America Merrill Lynch -- Analyst

Debbie Jones -- Deutsche Bank -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Salvator Tiano -- Seaport Global Securities -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

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