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Edited Transcript of OI earnings conference call or presentation 25-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Owens-Illinois Inc Earnings Call

PERRYSBURG Apr 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Owens-Illinois Inc earnings conference call or presentation Tuesday, April 25, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andres Alberto Lopez

Owens-Illinois, Inc. - CEO, President and Director

* David Johnson

Owens-Illinois, Inc. - VP of IR

* Jan A. Bertsch

Owens-Illinois, Inc. - CFO and SVP

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Alexander Gerhard Hutter

Jefferies LLC, Research Division - Equity Associate

* Anthony James Pettinari

Citigroup Inc, Research Division - VP and Paper, Packaging and Forest Products Analyst

* Arun S. Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Scott Louis Gaffner

Barclays PLC, Research Division - Director and Senior Analyst

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Presentation

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Operator [1]

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Good day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to OI's First Quarter 2017 Earnings Conference Call. (Operator Instructions).

Now I'd like to turn the call over to the presenter for today, David Johnson, Treasurer and VP of Investor Relations. You may begin your conference.

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David Johnson, Owens-Illinois, Inc. - VP of IR [2]

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Thank you, Jack. Welcome, everyone, to OI's Earnings Conference Call. Our discussion today will be led by Andres Lopez, our CEO; and Jan Bertsch, our CFO. Today, we will review our financial results for the first quarter of 2017, discuss key business developments and walk you through a few trends affecting our business. Following our prepared remarks, we'll host a Q&A session. Presentation materials for this earnings call are available on the company's 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. Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the appendix to this presentation.

Now, I'd like to turn the call over to Andres.

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [3]

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Thank you, Dave, and good morning. Let's start with an overview of our results on the Slide 3. I'm very pleased to report that our business is performing as planned, growing our top line, expanding our customer relationships, reducing the structural cost, operating effectively and efficiently and exceeding our guidance. Revenue was up 2%, as volume growth more than offset a modest currency headwind and essentially flat pricing. Shipments were up nearly 3% year-on-year, led by Europe and Latin America, and we are starting to see some of our commercial efforts driving new business development. Higher segment profit, partially due to the benefit of our strategic initiatives, help expand margins by 20 basis points compared with prior year. And both corporate cost and interest expense were better year-on-year. As I think about the guidance we gave you on our last earnings call, the key point is that we delivered solid business performance, plus we saw a bit of incremental help from taxes and FX. Taken together, adjusted EPS of $0.58 was up 21% compared with prior year. And this is the fifth consecutive quarter we have met or beat our guidance by consistent performance since our Investor Day in early 2016. For the year, we are on track to hit all of our company financial targets: volume growth, margin, adjusted earnings, cash flow and deleveraging. No doubt, it takes a strong, dedicated team to deliver these achievements. So I would like to recognize all the members of the OI team on their dedication and high commitment to driving shareholder value.

Let's now dig deeper into our key strategic initiatives on Slide 4. I'm very excited about what we're doing in the commercial space and how we are interacting with our customers. We continue to reap in the key account management program we launched last year. For instance, in the quarter, we began to deploy new customer relationship management tools that will help us in several specific ways: Enhance our effectiveness serving our current customer base, increase our ability to grow with existing customers and develop entirely new business. Our commercial program is elevating customer engagement and is helping us more deeply understand their needs. With this grounding, OI will be in the forefront of customer service and improve the overall customer experience like never before. While we are in the earlier stages, we've seen some early gains. About 20% of our volume growth in the first quarter was entirely new business development derived from these efforts. On our last earnings call, I announced that we are measuring our performance through a total system cost approach, which fully incorporates end-to-end supply chain costs.

On the manufacturing side, we are replicating best practices across the enterprise in a standardized disciplined way. Our plan improvement teams are solving our more complex challenges, has plans with large upside opportunities. As for global supply chain, we have been analyzing and improving our structural cost related to warehousing, logistics and procurement.

In the first quarter, total system cost initiatives are at $8 million in segment operating profit, primarily in Europe and North America. With TSC energy -- within TSC, energy is a key cost component. We are focused on both procurement of energy and use of energy. On the efficiency side, for instance, we are implementing proven energy-saving projects as well as new innovative technologies as we rebuild partnerships. In a recent foreign startup, the team established a new benchmark for energy efficiency, as we exceeded our previous best-in-class performance. For 2017, we continue to expect $30 million to $45 million benefit to operating profit. Separately, for the year, we are on track to deliver the $50 million improvement in working capital, primarily in inventory. Our global supply chain team has been developing an integrated approach to demand and supply planning and leveraging best practices. We are making substantial progress already. In Europe, for example, we have taken down days of inventory a notch or 2, which becomes a source of cash and reduces our warehousing cost, which favorably impacts earnings. While we see early gains from these strategic investments, we are again building capabilities today to reach the next horizon of our transformation that will bring financial benefits in the coming years. For instance, we are investing in integrated business planning that will further transform our processes. By making substantial improvement in efficiencies and effectiveness across functions, across geographies, we anticipate continuing to grow earnings and free cash flow.

I will now like to give you a brief review and outlook of our regions. Beginning with Europe on Slide 5. The overall business environment in Europe has not substantially changed and Europeans continue to have a strong affinity for glass. Our European team delivered higher segment operating profit and margin expansion in the quarter compared with prior year. That said, our sales in Europe were down 2% year-on-year. The benefit from higher sales was essentially offset by the euro, which was weaker compared with the first quarter of 2016. Price declined 1% year-on-year as expected, due to the pass-through of 2016 deflation on our long-term contracts. The positive impact from the annual contract season will come into effect in the second quarter. Shipments increased 4% driven by gains in beer, wine and spirits. While this performance bolsters our confidence in volume growth in the region, we should not yet extrapolate this growth rate going forward. A single quarter does not make a trend and we had an extra shipping day, which certainly helped in the year-on-year comparison. Overall, demand in Europe is solid, right in line with our expectations.

Turning to price/cost spread, Europe was negative in the quarter, driven by the price dynamics I just mentioned. For the balance of this year, we expect changes in price will cover cost inflation. We have better visibility into pricing. And as we have largely concluded negotiating annual contracts in Europe, I can say that the environment overall remains constructive, leading to my confidence in an improving price/cost dynamic in the region. After adding in benefits from our strategic initiatives, the region delivered higher margins year-on-year. Going forward, Europe will continue building upon this foundation to deliver higher margins due to modest volume gains, flattish price/cost spread and cost savings from strategic initiatives. In total, we still expect solid improved financial performance from our European team in 2017.

Turning to North America on Slide 6. The overall industry and macro environment hasn't changed much since the last earnings call. Revenue was essentially on par with prior year. Price, which over time moves with cost inflation, was up 1%. Sales volume declined 2% entirely due to mix of sales. Our sales in bulk are up, while our sales of containers packed in cartons are down. This manifests as a decline in the lower volume of sales, even if shipments in tonnes out the door are flat year-on-year. While mainstream products like mega beer continued to be under pressure, premium products are performing well across all categories. We continue to be well positioned to benefit from consumer preference for imported beer. In fact, the JV with CBI continues to progress very well. The third furnace will be coming on line later this year, thanks to solid execution of our buildout plan. Separately, the regions bottom line is benefiting from our focus on total system cost. For example, our supply chain team is optimizing our warehousing capacity across the region. This effort will use space much more efficiently, allowing us to reduce overall warehouse space and cost. In the quarter, North America delivered a significant step up in operating profit and margins. For the full year, we expect more of the same, although results in the second quarter might be a bit muted due to planned investments in the JV as well as in the core business. By the third quarter, North America should really be hitting on all cylinders. And for the full year, margins should be up more than 100 basis points.

Let’s turn to Latin America on Slide 7. Regarding the macros and industry outlook in the region, we are incrementally more bullish today than we were 3 months ago. There was a fog over Mexico earlier this year. While it is still cloudy there, as we are not certain about the U.S/Mexican relations, the fog has lifted enough that we can see that the domestic economy is doing quite well and there is a lot of activity in our industry. In Brazil, the government released statistics last week that suggest early signs of economic recovery in January and February. And within our industry, we see good developments for glass, particularly in beer. All the key brewers in Brazil are actively expanding their use of returnable class in supermarkets and premium beer, which is 3/4 in glass, continues to grow quarter after quarter for 3 years in a row.

Turning to our results in the quarter, Latin America turned in a solid performance. Revenues increased 9%, driven by across-the-board improvement in volume, price and currency. Our achievements in Mexico and the Andean region increased nicely. Volumes in Brazil were down year-on-year as expected as the sharp decline last year really began in the second quarter. On our last earnings call, we highlighted that there will be a $5 million to $10 million price/cost headwind for the quarter, primarily in Mexico. And, indeed, this was the key driver for the year-on-year decline in Latin America's operating profit; in fact, almost half of the inflationary pressures we face for the enterprise manifested in Latin America. Through the rest of the year, price/cost spread should more or less neutral, as negotiated price changes come into effect. And we will continue to focus on cost-containment efforts, which have been very successful to date. With respect to the full year outlook, we acknowledge that there is uncertainty, but this isn't really all that new to the region. We expect sales volume growth across the region for the full year, led by Mexico and Colombia. Importantly, we envision that sales volume in Brazil will begin to recover in the second quarter. In fact, for the later half of 2017, volumes in Brazil should come close to levels in 2015. For the region as a whole, in 2017, we see higher profit compared with the prior year.

Turning to Slide 8. Market trends in Asia Pacific remain in good shape. And the growth is not just in the emerging markets, but also in wine and beer in Australia and New Zealand. Net sales were up 9% year-on-year, driven by strong gains in volumes. About half of the 4% increase in sales volumes is due to higher tonnes sold and about half is due to the geographic mix of sales. Stronger local currencies added about 4% to sales, while prices increased about 1%, more or less in line with inflation. For the quarter, higher operating leverage plus cost containment drove the 90 basis points margin expansion and sets the tone for the year-on-year improvements expected for the rest of 2017.

With that update, let me turn the call over to Jan, to review our financial performance as well as our outlook for the second quarter.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [4]

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Thank you, Andres. Let's turn to Slide 9 and focus on segment operating profit compared with the prior year. The sum of the parts that Andres discussed led to segment operating profit of $218 million in the quarter. I'm happy to say that at the enterprise level currency was quite manageable. The year-on-year devaluation of the euro was partially offset by the strength of the Australian dollar. The Mexican peso was also a substantial headwind, but other currencies in Latin America, largely offset that. As Andres already mentioned, price was a tailwind in the quarter. The year-over-year dollar impact of sales volume gain was approximately $8 million, with more than half of that coming from Europe. Our ongoing end-to-end supply chain strategic initiatives are ramping up. And we are seeing good gains from our cost-containment efforts. While these were more than offset by cost inflation in the second quarter that Andres mentioned, we expect improvement in operating costs in subsequent quarters. We continue to focus on margin improvement. We reported a 20-basis point expansion in the first quarter with gains in 3 of 4 regions. As Latin America turns the corner in the second quarter and beyond, we feel very comfortable that we will achieve our full year margin expansion target of more than 40 basis points.

Turning to Slide 10. Let me connect a few dots that we have already touched upon. While currencies continue to be ever-changing, the year-on-year impact on EPS was negligible. The euro was worse, the Australian dollar has strengthened, and within Latin America the movements essentially offset one another year-on-year. Segment operating profit, which I just reviewed, was a key driver for the improved results, adding about $0.04 to earnings. Corporate and interest expense added another $0.03. Interest expense benefited from deleveraging and the favorable impact of our refinancing actions last year. These items together contributed $0.07 to earnings compared with prior year. Separately, the tax rate was low in the quarter, especially compared with a higher-than-average rate reported in the prior year first quarter. In fact, the tax rate in the first quarter of 2017 was about 150 basis points lower than our target range for the year, mainly due to the acceleration of certain charges, like the write-off of premiums associated with our debt tender in the quarter. For the full year, the tax rate is still expected to be in the range of 24% to 25%. Summing it all up, first quarter adjusted EPS was $0.58, a robust increase of 21% versus the prior year quarter. As I look at our financial results, it should be clear that our overall business performed well at the top end of our guidance, even after backing out FX and tax. Good progress, indeed.

Turning to Slide 11, I'm pleased to say that every one of the company level metrics we presented at Investor Day in early 2016 is on track to deliver: margins, earnings, cash flow and deleveraging. We debated the merits of increasing our earnings guidance in light of our outperformance in the first quarter and our solid business outlook for the year. However, it is still early in the year and we will continue to evaluate our guidance.

Now I would like to drill down on key aspects of our guidance for the second quarter on Slide 12. We see many upsides as well as a few challenges year-over-year. Currency is expected to be only a $0.01 headwind. We see solid execution in Europe, with tangible benefits from our strategic initiatives continuing. Sales volumes are projected to be flat, due, in part, to giving back the extra shipping day that benefited first quarter sales. Price/cost spread for Europe is likely to be about flat through the rest of the year, a very good outcome since this has weighed on earnings for the last several years. On balance, we expect higher earnings and margin expansion for Europe in the second quarter and, of course, we continue to focus on margin expansion for the longer-term. North America is expected to be on par with prior year in terms of revenue and operating profit. Equity earnings will be higher, of course, reflecting the contribution from the JV with constellation. Planned investments in the region, for instance, to expand flexibility in several plants will reduce production volume in the second quarter. As such, we anticipate North America returning to year-on-year gains in operating profit and margin in the back half of the year. In Latin America, we are projecting improved performance. We expect a combination of further price increases and cost-saving efforts to combat ongoing inflationary pressures. Strong sales in Mexico and Colombia are expected to continue. And in Brazil, we expect sales volume to turn positive, particularly in beer, compared to the weaker second quarter shipments in 2016. For the region, top line growth, cost containment and price recovery are expected to translate into higher operating profit and stronger margins in the second quarter. And in Asia Pacific, we expect lower shipments offset by improved operations. For the company, the business is performing well. Segment profit should be up high single digits and margin expansion is expected to be greater than in the first quarter. While corporate costs should be roughly in line with prior year, interest expense may be slightly better. At the end of the first quarter, we tendered our high coupon 2018 bonds and added to our low coupon euro notes due in 2024. The interest savings from this set of transactions will be partially offset by rising, floating rates in the U.S. Our tax rate is expected to be about 27% in the second quarter. This is substantially higher than the first quarter rate and the rate reported in the second quarter prior year. In all, we are forecasting adjusted earnings per share for the second quarter to be in the range of $0.63 to $0.68. This reflects substantially better ongoing operational performance as well as the impact of a higher tax rate in the second quarter.

And with the financial review complete, I'd now like to turn the call back to Andres.

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [5]

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Thanks, Jan. Turning to Slide 13, OI is in the midst of a comprehensive transformation to derive higher value for shareholders, customers and employees. We know what our ambitions are and we are making consistent progress towards them: A glass container company that is the preferred supplier, the most cost-effective producer and a company that successfully expands in attractive segments of markets. Our mindset has changed substantially and continues to evolve. We are 1 team highly committed and aligned to improve performance, 1 enterprise making decisions best for the whole and executing on 1 plan across the enterprise, leveraging the scale and with very clear shared deliverables.

I mentioned on the last earnings call that we have moved from a stability phase to the agility phase of our transformation. Again, we expect a noticeable difference in our behaviors and actions to affect the plan to deliver results.

I want to take a moment to highlight an area that is foundational to ensuring focus on effective execution. We have a single set of management incentive targets across the company, so as to ensure alignment and deliver results. Today, we all contribute to enterprise irrespective of whether a certain geography will benefit. And this changes the mindset of our people as we work together better to solve the challenges facing us. We're focused on improving customer experience and giving priority to mutually beneficial, long-term partnerships. We're addressing a structural cost across the end-to-end supply chain. We're simplifying the organization across the world and elevating productivity in everything we do. We are making solid progress and becoming a flexible and nimble company, able to more effectively and more quickly adapt to changing conditions. In the end, we are results-driven to add value for our shareholders, customers and employees.

And now, we will open the lines for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Mark Wilde with BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [2]

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I wondered, Andres or Jan, if you can help us a little bit with the North American margin improvement at 180 basis points. Is it possible to kind of parse out how much of that came from the inclusion of the JV earnings versus the improvement in the legacy ops and the cost improvement?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [3]

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Sure. Mark, this is Jan. A substantial percent of the 180 basis points came from the JV. I'd say on a year-over-year basis, we're probably looking at a few million dollars in the quarter. The balance of that, of course, came from what we just had referenced in the script, with the performance, especially on the total systems cost front, where Andres mentioned, that of the $8 million, that primarily came from Europe and North America.

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Operator [4]

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Your next question comes from the line of Anthony Pettinari with Citi.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging and Forest Products Analyst [5]

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Andres, I think you indicated that in Brazil you expected the second half maybe being comparable to the second half of 2015. I'm just wondering if you can remind us, what level of volume growth on a percentage basis that would imply? And what gives you confidence in that kind of recovery in the second half, given some of the volatility that we've seen in Brazil in the last few years?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [6]

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Okay. So when I look at Brazil, we are looking at a market, in which we serve beer, wine, food, spirits and NAB. So we normally hear quite significantly about beer, but we don't hear about the other categories. With that said, we are expecting growth, which is mid-to high single digits for the country, with all categories growing through the year. We had obviously a slow start on several comparison for the first quarter, but we're expecting that will improve starting the second quarter and into the other quarters. Now, as general information for you, it is very important to have in mind that beer for us in Brazil is about 35% of the total sales volume for the country. So the other categories have a significant influence in this business, too. Now something we're seeing in this market is that our customers and, in particularly when we talk beer, the 3 largest players in the market are putting significant emphasis on returnable glass containers. And they have made public the information about their emphasis on putting returnable containers in off-premise channels. And the largest player in the country, as an example, is now up to 23% of the on-premise channel in returnable glass. And this is coming from 0. So it is a significant change in the Brazilian market, moving towards returnable containers.

And then the other thing that we're seeing is the emphasis on premium, which has been taking place in the last 3 years. And in those 3 years, this being the third one, one-way glass has been the fastest-growing package in the market, in total, in all substrates. So we're very comfortable that Brazil, as the economy recovers, will offer a fairly positive scenario for glass and for wine. One single data point is Coke, is back in one-way glass in Brazil. We have that same product in Mexico, and is quite successful. So we're looking forward to the evolution of this product in the market.

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Operator [7]

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Your next question comes from the line of Scott Gaffner with Barclays.

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Scott Louis Gaffner, Barclays PLC, Research Division - Director and Senior Analyst [8]

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Jan, you mentioned that you debated the merits of raising the guidance. And Andres said the volume forecast for the full year is now still just 1% after 3% plus volume growth in the first quarter. Can you talk about where the reluctance is on to get excited about the volumes, whether that's channel fill for the new business or just extra shipping day or something and particularly keeps you muted on the volume forecast side?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [9]

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Thanks for the question. We had a strong Q1, as you say, and we are seeing at this point in time, early signals of improving demand in some of the markets we serve. We're also seeing our initiatives progressing quite well and ramping up. We are expecting them to gain momentum as we go into the year. However, there are some external factors that, even though they're showing some signs of improvement, it is still very early for us to conclude that those improvements are going to stay. So as you see, for example, we had some favorable movement of the FX late in Q1. But then as we got into early Q2, they just reversed. And then very lately in the last couple of days another change in the other direction. So it's still to be confirmed. So we prefer to wait, look at this closely. And as we did last year, if we see enough evidence of changing conditions, we're going to move forward and review our guidance.

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Operator [10]

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Your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [11]

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I guess, my question is around Europe, Andres, and Jan. Can you talk about the changing environment, what's causing it in terms of price/cost moving from a negative to being a neutral? And given that neutral is better than negative, are there any conditions, any things that you can look towards in the next couple of years that might make for, in fact, some margin recovery and some [net] positive price/cost? And related to that, how does the volume and macro situation support or not support your comments here?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [12]

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Thank you, George. When we look at price/cost, the first effect that we see in the first quarter is coming from the long-term contracts and the pass-through or PAF provisions that those contracts have. And because of that, we are passing through deflation, which is what we had last year. Now we've been through the negotiation season in the first quarter and we expect those new prices to kick in starting second quarter. So the unfavorable part of the spread for the region is really behind us. It was in the first quarter and it is going to improve. It's going forward, going into the second quarter and the other quarters in the year.

With respect to the margins, as we said back in I-Day, we were to -- to have a very strong focus and continued focus on margin improvement, and we've been doing that. As you see, we had a good margin improvement year-on-year in 2016 for the company as well as in Europe. We are at this point in time comfortable that we're going to be able to have a 40 basis points margin improvement for the company or more in this year, Europe being a good contributor of that. So our focus on increasing margins in this region will continue. We talked before about the closing of Schiedam, which is part of that effort. Our initiatives driving revenue, top line and cost, translating all of them to the bottom line in Europe, are all underway. So we are very confident that we are going to continue seeing margin improvement in Europe over time this year and the following years.

When it comes to volume, we saw a positive environment in beer and wine and in spirits in this quarter. Overall, we are seeing the region is stable in its demand. We see that the premium products are gaining traction in Europe, which is a territory for glass. And we're also seeing the emergence of craft beer gaining popularity and traction in the region. So we are tracking that closely. But overall, we are very pleased with the Q1 performance and we're looking forward to the evolution of this quarter to see what are the signs of changes in dynamics in the regions we see.

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Operator [13]

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Your next question comes from the line of Ghansham Panjabi with R. W. Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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Just following up on George's European question, Andres in your comments, just in terms of the comments in your slide deck about exports in the region from Europe improving. Can you just give us some more context on that? Is that just a function of your customer mix? And do you have a sense as to which specific markets perhaps those exports are actually improving towards?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [15]

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This is primarily related to wine. So wine exports have been quite positive. Obviously, that drives glass container consumption. So that's what the comment refers to.

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Operator [16]

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Your next question comes from the line of Adam Josephson with KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [17]

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Jan, just a 2-part question. On the guidance side, I think you have about $0.07 FX cushion relative to your previous full-year guidance on account of FX. Can you just talk about why -- all else equal, why you wouldn't have boosted your guidance appreciating that it's still early in the year? And just the other part is, lower management incentive accruals in the quarter are $4 million. What was that related to? And was that embedded in your previous guidance?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [18]

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Yes. Thank you, Adam. First question related to FX. I think you have it pretty right there, $0.07 FX, $0.02 was from the first quarter, probably about a nickel going forward based on our calculation. I think, Adam, really it's nothing more than the fact that we think it's early in the year and this currency environment has been highly volatile. And so, we want to be cautious here, not pull the trigger too early, will make an assessment, I think later in the second quarter. And we'll come back and talk to you about guidance again. With the management incentive accrual, yes, that was in the guidance on the first quarter.

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Operator [19]

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Your next question comes from the line of Philip Ng with Jefferies.

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Alexander Gerhard Hutter, Jefferies LLC, Research Division - Equity Associate [20]

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This is Alexander on for Phil. Volumes are very strong in Europe in the quarter. You cautioned not to extrapolate that into the full year and that there was an impact of a shipping day. But it seems that the trends are coming in stronger than expected. What should we be extrapolating for the year? What's a reasonable expectation now at these levels, if you kind of factor out all the moving pieces?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [21]

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So I would say that at this point, with the information we have, it will be fair to consider up to 1% growth for the year for Europe.

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Operator [22]

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Your next question comes from the line of Chip Dillon with Vertical.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [23]

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One thing I noticed on the slides -- if you could just talk a little bit about the volume -- is that on the press release, it looks like the volume change or volume mix was plus 1.7% and you mentioned 3%. So I guess if you could just illuminate that. Does that mean mix was negative? Why is there a difference in the slide; it says 3% and the dollar amount of volume impact being 1.7%?

And then secondly, could you talk maybe more broadly about where you see the whole company's volumes year-over-year in '17 versus '16?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [24]

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So let me start with the volume question first. So overall we had a good quarter. We just talked about Europe. We're seeing growing focus in this region in the premium market and we've seen craft beer emerging. Beer, spirit -- excuse me. Mainstream beer, wine and spirits, they continue to perform and they're driving most of the performance that we saw at this point in Q1.

When we look at Latin America, we're seeing a very strong demand out of Mexico and this is driven by beer, by NABs and by spirits. In the case of NABs, they're driving returnable glass containers consumption, which is good for us. In the case of spirits, this tends to be a premium segment, so it also drives glass primarily. When we look at the Andean countries, they are performing well. Beer is quite strong in those countries as well as NABs. And again in the case of NABs, it's returnable glass containers. Then, we are expecting that premium beer is going to be an opportunity going into the future for the Andean countries, because this segment is underdeveloped in the countries. Just to make a comparison, the size of the growth rate of this, the share of this category in Brazil may be 10x what it is in the Andean countries. So there is a significant upside as those markets update more in line with the markets around them. When we look at Brazil, I just comment -- made comments before, we are seeing a significant emphasis on glass and returnable glass by the largest players in beer. We are seeing good growth in all the categories we serve. Remember, beer is 1, but we also serve wine, food, spirits and NABs in these countries.

When we look at North America, the same dynamics we saw in 2016 continue. So mainstream beer continues to decline, craft beer growth, a slowdown last year, early in the year, very early in the year; that continues the same. So the beer categories really driven by imported beer, and we are very well positioned to supply that category. Now there is another dynamic taking place in North America, which is premium spirits and wine are taking share away from beer, and we are also very well positioned to serve those segments.

And when we look at APAC, Australia, wine is up high-single digits, and this is driven primarily by exports to China. Australia, beer is flat, which is an improvement versus 2 years ago. In 2015, it was really declining, kind of plateaued in 2016, and continues flat at this point in time. New Zealand, wine is up, high-single digits, and that's driven by the exports to the U.K. and U.S. And then New Zealand beer is up mid-single digits.

Now Indonesia, which we very seldom mention, is a very healthy growing market and is being driven by beer and food as well as Malaysia, which is also growing quite well and is driven by beer, food and NABs. So that's kind of the overview of our volume situation.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [25]

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So, Chip, if I just summarize, I think the difference is mix. It's really North America, like Andres mentioned in the script, where the bulk shipments are up but the cartons are down. So sales volumes look down about 2%, but in the end, the shipments in North America are quite flat.

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Operator [26]

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Your next question comes from the line of Arun Viswanathan with RBC Capital Markets.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [27]

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I just had a question on Latin America. It looks like the pricing was a little bit below us. Was that kind of a deflationary issue or FX or what happened there? And then how does that translate to the margin performance and your outlook for the year?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [28]

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So, when we look at Latin America, the Q1 is really a negotiation season also for prices. So we are not seeing prices going through the Q1 numbers in Latin America. Starting in Q2, well, we're going to see those price increases taking place. And with that, then the spread for the region is going to move into flat territory. And so for all purposes, the largest part of the unfavorable spread for Latin America is behind us. It was to take place in Q1.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [29]

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This is Jan. If I can just add a little bit on the margin front. We anticipated and talked about the expectation that the margins would be down for Latin America in 2017. On the other side, Andres had mentioned previously that European margins would continue to expand. And, in fact, I think they will end up outpacing the company average for the full year. North America should be about 100 basis points improvement year-over-year and Asia Pacific significantly higher based on their 2016 performance. So all in all, a good year on the margin front. We should exceed our 40 basis point target for the full year.

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Operator [30]

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Your next question comes from the line of Brian Maguire with Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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Just a question on Mexico. You've obviously been making a lot of capital investments in new glass capacity there. You got a competitor now building a glass bottle facility in Mexico as well. Just wondered if you're seeing or you would worry about any impact on pricing -- probably down the road question -- but as some of these contracts get reset -- I know demand has been strong today. But do you have any concerns about pricing down the road in the country or any worry about overcapacity in the region?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [32]

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Thank you, Brian. The information we have is imported beer, which is really what is related primarily to this capacity you're talking about, is really the segment driving the beer market in the U.S. It is presenting a very healthy growth. And in our case, the capacity that we have in our JV is under a long-term contract, and the capacity is fully sold. So as we mentioned before, at this point in time we're building a third furnace, which is going to go into operation at the end of the year. So we're very comfortable that this demand will be there. Our pricing is secure for these contracts. We don't have any concerns with regards to volume coming out of this JV. So for our purposes, we are very pleased with the performance of this segment in Mexico, and we see a very positive outlook for that.

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Operator [33]

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Your next question comes from the line of Mark Wilde with BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [34]

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Just a couple of follow ons on volume. One, in Asia Pacific, you guys have picked up a new beer contract I thought last year in about the third quarter, but you're pointing to kind of weaker volumes, sounds like, in the second quarter. So I wonder if you can just help us reconcile that?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [35]

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Yes. So we have -- those contracts are in place. At this point in time, we don't see any changes in the Australian market. The volumes are being primarily impacted by China, decreasing volumes. So the volume decrease you see is really related to China, not to the APAC demand.

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Operator [36]

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Your next question comes from the line of Scott Gaffner with Barclays.

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Scott Louis Gaffner, Barclays PLC, Research Division - Director and Senior Analyst [37]

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Just had a follow-up on working capital and really the 2 impacts; 1, the impact of raw material inflation and the other really around better volumes and new business wins. Do you think with those 2 items that you can still generate $50 million of positive working capital from inventory in 2017?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [38]

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Yes. Scott, its Jan. Yes, we do. The most impact that we are going to see on working capital in this year is as expected, in our improvement in our inventory. Clearly, the raw material is a headwind but on a net-net basis I think we're going to improve working capital by about $50 million for the year.

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Operator [39]

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Your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [40]

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Andres, as we come back to Europe in terms of our question, can you talk about what you think supply/demand looks like in the region? And do you think as contracts come up for renewal and volumes hopefully improve, there is the opportunity to build into your next adjuster some improvement in margin beyond cost? Or at this juncture, do you think just keeping flat with inflation is the best we should expect? Thanks and good luck in the quarter.

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [41]

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Thank you, George. So we see a situation in supply and demand in Europe, the same as we've seen that one in 2016. There is a little bit of overcapacity. As you know, we are moving forward to shut down 1 factory in Netherlands; that is going to help that situation. In our case, the case of why we are high -- we are thoroughly balanced after we do that. So we don't have an imbalance in our system. We see a more constructive pricing environment in the region. As we see those contracts coming up, we're going to know more about those dynamics. But lately, we see stable conditions; that's what we can see at this point.

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Operator [42]

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Your next question comes from the line of Chip Dillon with Vertical.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [43]

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I just had a quick follow-up on 2 things that you could help us with. One is, are there more debt refinancing opportunities? I know, you've done a pretty solid job in the last year. I didn't know if there is any particular obvious callable bonds, say, in the next year or 2 that you are eyeing right now.

And then secondly, just on the asbestos front. I know you are calling for it to be down $10 million to $15 million this year, and yet it was up $1 million in the first quarter. You might have addressed that. But I just didn't know if you still expect the pay out to be $10 million to $15 million and if you're still comfortable with the $600 million kind of present value number you put out at the end of last year?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [44]

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Chip, its Jan. On the debt financing piece, our next large slug of debt really becomes due in 2020. So there's probably not as much as we can do at this moment. However, just in general, on derisking of our balance sheet, this has become a very important part of what we're looking at on a day-by-day basis here. So not only the recent bonds that we called, the refinancing we did last year, which didn't do a lot for our interest rate improvement but actually swapped floating into fixed at a very attractive interest rate and then helped with our distribution of debt on a currency basis. We continue to look for opportunities all the time. We are focused very heavily on continuing to derisk our pension fund. So we might see a little bit more activity on that front this year, like we have done in the past; structures that are good for the company, good for our employees, and we're continuing to look at that. So a lot of focus on the derisking front.

Related to asbestos, we feel comfortable in the $10 million to $15 million reduction that we had planned for in the year as well as our remaining liability that we have on our books. We recently, in the fourth quarter, did a very exhaustive analysis of that, like we'll continue to do at the end of this year as well or before if there is any reason to do that.

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Operator [45]

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

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [46]

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Jan, just a quick follow-up for you. How much were you investing in the constellation JV this year versus last? And what do you expect your dividends to minorities to be this year?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO and SVP [47]

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Last year, I believe we contributed near $55 million to the JV. This year, we're focused on about $40 million. And last year, we received $8 million earnings, and this year, about $16 million earnings. Last year, of course, was more heavily weighted to the latter part of 2016.

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Operator [48]

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The final question comes from George Staphos from Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [49]

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One last one. Andres, can you talk a little bit about the supply chain cost initiatives that you are finding fruit with in North America and kind of key buckets and sustainability over the rest of the year?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President and Director [50]

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Thank you, George. So we continue to ramp up our initiatives as we talked last year. We worked to implement global supply chain; we did it. It is now operating and it's helping us across the company. So in North America, specifically, there is a strong focus on warehouse and delivery improvement. We're seeing some positive evolution in that front. But we're also improving how we do demand planning and supply planning in the company across the enterprise. So I'm very pleased with the progress in supply chain, not only in North America but in Europe and across the company. And I think this is an area where we are expecting a good upside this year, obviously as we continue to ramp up, but also going into the following years.

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David Johnson, Owens-Illinois, Inc. - VP of IR [51]

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So thank you, everyone. That concludes our earnings conference call. Please note that our second quarter conference call is currently scheduled for August 1. As you know, we appreciate your interest in OI and remember to choose glass. It's safe, it's sustainable and it's well loved by choosy consumers. Thank you.

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Operator [52]

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This concludes today's conference call. All participants may now disconnect.