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Edited Transcript of OI earnings conference call or presentation 6-Feb-19 1:00pm GMT

Q4 2018 Owens-Illinois Inc Earnings Call

PERRYSBURG Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Owens-Illinois Inc earnings conference call or presentation Wednesday, February 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andres Alberto Lopez

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

* David Johnson

Owens-Illinois, Inc. - VP of IR

* Jan A. Bertsch

Owens-Illinois, Inc. - CFO & Senior VP

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Conference Call Participants

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* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Deborah Anne Jones

Deutsche Bank AG, Research Division - Director

* Edlain S. Rodriguez

UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* 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 Bank PLC, Research Division - Director & Senior Analyst

* Tyler J. Langton

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Mary, and I will be your conference operator for today. At this time, I would like to welcome everyone to the fourth quarter 2018 earnings conference call. (Operator Instructions)

I will now turn the call over to Mr. Dave Johnson, Treasurer and Vice President of Investor Relations. The floor is yours.

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

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Thank you, Mary. Welcome, everyone, to O-I's Earnings Conference Call. Our discussion today will be led by Andres Lopez, our CEO; and Jan Bertsch, our Chief Financial Officer.

Today, we will discuss key business developments and provide a review and outlook of our financial results. 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 financials we are presenting today relate to adjusted earnings and adjusted cash flow, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP items 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 & Director [3]

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Thank you, Dave, and good morning, everyone. Let me begin with an overview on Slide 3.

The year 2018 offered plenty of challenges for O-I. Yet it also offered the opportunity to display our improved leadership accountability, new capabilities, improved culture and ability to execute as a single, integrated global enterprise.

Altogether, we are more resilient than ever before. And this year is a clear demonstration of the ongoing success of our transformation, overcoming both external and internal challenges. For instance, coming into the year, FX was projected to be a significant tailwind. By mid-year, it had become a headwind for the full year. We faced a lot of unexpected issues as well; a transportation strike in Brazil, a batch disruption in Mexico, very high freight in the U.S. and a soft wine season in Europe.

Further, in 2018, we took a pause in APAC to emphasize a large incremental asset maintenance program that retrofitted assets to new market needs and added incremental capacity to support growth in emerging markets. As we've said in prior earnings calls, the region hit its 15% margin target exiting the year. In all, this focused effort has helped reset the region for a sustainable improvement trend going forward.

Again, O-I is a resilient company. It is a changed company that can absorb these shocks, meet financial commitments while investing to set up the drivers of future shareholder value creation. And of course, Europe continued to grow year-after-year with 3 consecutive years of triple-digit margin expansion. Europe is the region most advanced in our transformation. They are showing us what is possible, as we properly segment our markets, clearly define where to play and how to win and execute effectively to achieve these high results. They are applying Integrated Business Planning with a rolling 2-year time horizon, focusing on Total System Cost and simplifying the organization to become faster and more effective.

In 2018, our Total System Cost efforts contributed over $30 million, and we continued to optimize our footprint with a closure of the Atlanta plant in the third quarter.

As Jan will talk more about later, we continue to make progress on managing our capital structure and especially capital allocation. In fact, we have initiated a quarterly dividend while continuing to buy back shares.

At our Investor Day, we provided an overview of our strategy and key financial targets, all of which remain on track over the next several years, including our 2019 earnings and cash flow guidance.

Before moving into a review of trends by region, let me provide detailed insight into sales volume, which might be of concern for investors.

As you can see on Slide 4, one of our key takeaways today is that our sales volume growth profile is changing for the better in 2019. Quite simply, the year 2018 is distorted by multiples ins and outs that mask the solid foundation for our volume evolution over the next several years. We have characterized the ins and outs as simple optics; temporary, one-off items that will favorably impact 2019 and beyond and structural factors we have already addressed or we are close to concluding in early 2019. These factors taken together adversely impact 2018 sales volume by about 250 basis points.

First, we have been shifting a large amount of volume from Waco and Monterrey to our JV with CBI. This instantly reduces our top line. While this generates an unfavorable year-on-year comparison effect that is lapping in the second quarter of 2019, it is the right thing to do for a long-term sustainable value creation, which shows in a strong and ongoing equity earnings.

Second, our sales in 2018 were adversely impacted by 50 basis points from several discrete events that won't repeat in 2019. Examples include the great harvest in Europe and Brazil transportation strike.

And third, we couldn't serve some incremental volume last year due to capacity constraints in Europe and Latin America. We are addressing this latter point by adding incremental capacity. We already installed lines in late 2018 in Europe that are now fully operational, and we are adding a few more lines this year.

Also, in the first half of 2019, we are reopening a plant in Brazil and adding lines in Colombia. In Mexico, we are successfully increasing the productivity of existing assets, an excellent and inexpensive way to effectively increase capacity, serve incremental sales and reduce cost. Be mindful that our commercial organization has already tangible incremental volume commitments from customers.

I think it's also important to work through the cadence of volume gains over the course of the year. In the bar chart on this slide, let's focus in on the evolution of O-I legacy volumes, which will drive our reported revenue.

Dynamics in the first quarter are clearly transitory. This is the last quarter. The transfer of O-I volume into the JV impacts O-I revenue. From there, you can really see the year-on-year increase taking hold beginning in the second quarter. Again, this is driven by the combination of various specific events: unwinding the temporary factors from last year, the additional capacity I mentioned and top line growth from customer contracts and favorable market trends.

In all, despite a slight volume decline in the first quarter of 2019, we continued to see full year volume growth of 150 basis points, a combination of core organic growth and new business from strategic customers.

Turning to Slide 5. Let's step back from just 2019 for the moment to recognize the strongest start we have made on our 3-year plan for volume growth. The pie chart from Investor Day outlines the sources of our expected 10% increase in volume over the next 3 years. The 150 basis points of growth in 2019 I spoke about on the prior slide is a combination of core organic growth and strategic customer agreements, again, leading to a break from a 2018 volume pattern.

We have also locked in most of the other elements that will increase our volumes over 2 years. The capacity I mentioned that we are adding in Europe and in Colombia, for instance, is explicitly linked to growth with strategic customers. Together, this will support an incremental 150 basis points of volume for O-I as they ramp up over the next 6 to 12 months.

Joint ventures will continue to be a key part of our volume story, even if we only formally recognize equity earnings from them. The JV with CBI is adding another furnace at the end of 2019, mainly fueled by higher sales volumes of the Modelo brands, and we also invested in a nearly 50% interest in Comegua in Central America and the Caribbean. Together, incremental volumes are more than 350 basis points. And I hope to share more news with you soon about a few other important opportunities that we are making a lot of progress on.

In all, we are well on our way to lock in the 10% increase in volumes over the next several years.

Now on Slide 5 (sic) [Slide 6], let's take in the full year 2019. In short, we envision higher adjusted earnings and adjusted free cash flow in the year. Fundamentally, we are building upon the investments we have made so far and are still investing for future shareholder value. These investments are in additional capacity, cost reduction, a more flexible and reliable assets in talent and capabilities, like lower procurement and breakthrough innovation and technology.

On the capacity side, we anticipate adding 4 new furnaces, 7 new machines and several line conversions in 2019 to support volume growth. About half of the capacity has been added in the Americas and the other half in Europe. And we envision investing capital within our Total System Cost framework in order to continue to reduce our structural costs in warehousing and logistics, energy and labor, for instance.

Remember, as we mentioned at Investor Day, the capital projects for both growth and cost reductions are expected to generate returns between 12% and 25%.

This volume growth plus continued benefits in our total system cost approach in a constructive price environment will push up our segment operating profit in absolute terms and boost our margins as well.

While Jan will provide more financial details on how we see 2019 unfolding, let me focus on the regional perspective.

Let us start with Europe on Slide 7. Overall, the gas container market in Europe is healthy and continuing to grow at about 1% per year. Glass continues to be a very good fit with customers in this market that value premium products packaged in a sustainable substrate.

Our customers, local, regional and global, are very interested in our support for them to grow and share of glass -- the share of glass in their portfolio. Interest from customers and consumers is clearly on the rise. And we have been adapting our operations and footprint to meet emerging trends, especially to meet the higher-value premium segment, which is growing at mid-single digits, superpremium even grows even faster. In fact, for a few years now, we have been building our capabilities, both commercial and end-to-end supply chain, to take advantage of these trends, which manifest across all of our (inaudible).

Let me pause on O-I sales volumes for a moment. Underlying growth is good. It is positive. Yet O-I Europe's shipments were essentially on par with prior year due to 3 specific issues that temporarily offset the positive translation of the growing segments in 2018. A poor grape harvest in 2017 impacted 2018 glass container shipments, which will rebound in 2019 due to a strong harvest confirmed in 2018.

Lower-margin food sales driven by mix management increases Europe's margin that will lap in early 2019 and the lack of capacity to serve incremental sales in growing segments due to high capacity utilization.

Supported by long-term customer contracts, we added several lines to existing furnaces in late 2018 that will supply incremental capacity across selected segments. Plus, we are adding a few more lines this year. Separately, we plan to build a brownfield furnace to meet increased demand for long-term strategic customers' growth. This furnace intended to come in line in early 2020 is expected to generate a return on capital of more than 12%. Taken together, we anticipate O-I Europe will generate above-market growth in 2019 based on the confluence of key factors: favorable market conditions, incremental volume through growth of a strategic relationships and O-I selectively adding capacity to meet customer demand in key segments.

As we mentioned at Investor Day, these opportunities are expected to generate solid returns on invested capital.

At the same time, we remain squarely focused on reducing structural costs. These are sustainable efforts with best-in-class processes, practices and tools now deeply embedded in O-I's DNA. In fact, in the chart on the right, you can see how Europe is doing more with less, and volumes haven't moved too much over the past few years. And as we explained, this is about to change. So the profit expansion has really been driven by commercial efforts on price and mix management and continued benefits of Total System Cost.

As we look through year-end and into 2019 and beyond, we expect further gains in Europe in volumes, cost reduction and profitability, supporting our objective of continuous margin improvement.

Turning to Americas on Slide 8, FX continues to be a considerable headwind, while overall market trends support low single-digit volume growth over time. That said, 2018 was a challenging year for volume in the region, most of which I have already touched on. However, let me walk through dynamics in the fourth quarter in particular, which saw an abnormally high year-on-year decline in volume. Volumes in the fourth quarter in the U.S. were down around 10%. Five percentage points is due to a shift in production to the JV with CBI, which will begin to lap in the second quarter of 2019; 5 percentage points is due to ongoing mega beer dynamics; 1 customer's harvest impacted by 2 hurricanes; and 1 customer that temporarily stopped purchases and is resuming normal purchases in 2019.

For 2019, we anticipated return to year-over-year growth in the U.S. in the second quarter. We have been focusing on our commercial and operational efforts on premium products across all categories and on securing customer growth. As a result, we expect broad-based growth in non-beer categories will overtake the current mega beer downdraft.

In Brazil, we continued to see very strong market dynamics across all categories, especially in premium products. In the first 9 months of the year, our shipments in Brazil were up double digits. By the third quarter, though, we were already straining our capacity, we had been running very hard. And then the Brazil transportation strike preventing us from building up our inventories, which only strained it further. As such, we actually saw a year-on-year decline in shipments in the fourth quarter, not because of the market, is very healthy, but because of supply chain constraint. Of course, this is why we are presently restarting a plant in the country and leaning on our plants in the Americas, leveraging our integrated supply chain capabilities to meet ongoing growth in Brazil. Even though we are still likely to be somewhat capacity constrained, sales volume growth in Brazil is expected to be up low single digits for the full year 2019.

Despite these transitory issues, there were many bright spots. The JV with CBI continues to perform exceptionally well. The fourth furnace came online in the first quarter of 2018 and helped push equity earnings from the JV higher year-on-year. The fifth furnace is projected to be online by the end of 2019.

Volumes in Mexico were strong in the back half of 2018, driven by solid demand trends and supply through increased -- increasing productivity. Volumes grew modestly in the Andean countries and it strained utilization rates. This justifies the new lines we are adding there in early 2019.

Beyond volume dynamics, prices kept pace with cost inflation, including higher freight charges and the FX impact on raw materials and energy supplies. Across the Americas, the commercial and end-to-end supply chain organizations are collaborating well to meet customer needs and reduce cost. Overall, we expect the Americas will generate higher sales, profit and margin in 2019 and beyond.

Let's finish the regional review with Asia Pacific on Slide 9. The region improved significantly over the course of 2018 and undertook incremental activity in the asset advancement program starting in the fourth quarter of 2017, similar to what we did in previous years in Europe and the Americas with very positive impact over time. As expected, the region exited 2018 with a 15% margin and improvement of over 800 basis points year-on-year. 2019 will bring a year with much improved assets that are a better fit to market with increased productivity and increased capacity to support growth.

With a focus on reducing the structural cost and capitalizing on growth opportunities, APAC's financial profile will continue to improve. We see it evolving similar to Europe over time, where the transformative actions have driven steady profit increases and margin expansion for the last several years. That said, in the first quarter, Asia Pacific has engineering activity consistent with a company-wide rebuild program. And during the first half of the year, the region will be working off relatively high cost important inventory, driven by the prior year's asset activity. For APAC, this translate into a full year 2019 with low double-digit margins, which we then expect to expand by 100 basis points per year for several years.

And now I'd like to turn the call over to Jan to discuss our financial review and outlook.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [4]

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Thanks, Andres. Turning to Slide 10, I want to first remind you of our key metrics, which we presented at Investor Day last November. We've updated the slide for 2018 actuals. In short, we achieved our previous commitments, certainly not without some challenges, and we're excited to move forward to the next phase.

We see 2019 as a pivotal year for the company's transformation. We have momentum and are on track to achieving growth, margin expansion, cash generation and return cash to shareholders over this 3-year plan.

Before jumping forward, though, let me review the EPS bridges for 2018 on Slide 11. Beginning with the full year, on the chart on the left, entering the year, we thought FX would be a tailwind of about $0.10. However, as we look back on the full year, the strengthening U.S. dollar led to a $0.02 headwind for earnings, a $0.12 delta to expectations. And that's just on translation. It's even higher when considering the FX impact on cost inflation, which would add another $0.05 or so. So on a constant-currency basis, adjusted EPS for full year 2018 was up $0.09, with 1/2 of this coming from the business and the other 1/2 from our investment in share buybacks.

As we look at the reconciliation for the fourth quarter on the right, most of the full year commentary holds for the quarter. Currency was a $0.01 headwind, while segment operating profit was higher. Net interest flipped to a headwind as a result of higher variable rates. While the tax rate for the full year was essentially flat, there was a benefit in the fourth quarter due to the favorable impact of closed audits and statute expiration.

Moving on to cash flow on Slide 12. We delivered adjusted free cash flow of $362 million, right in the middle of our guidance range. Cash flow from operations was up 10% compared with prior year, driven not only by higher segment operating profit I just mentioned but also by lower cash restructuring payments. Working capital in total contributed cash of $15 million in 2018, which reflects a lower impact from inventory due to softer sales at the end of the year, as I anticipated on the last earnings call. We gave back some of the increase in cash flow from operations through a higher level of CapEx activity in 2018, up about $25 million compared with prior year. You may recall that we had a high level of outstanding CapEx payables at the end of 2017 due to activity late in the year. We paid that down early in 2018. In turn, the change in CapEx payables was larger in 2018 as reflected on the statement of cash flows.

Still, the average level of CapEx activity for the past 2 years has been about $500 million, in line with our expectations. That said, please see the last page of the appendix for more details on that.

On Slide 13. Let me refresh the 2019 adjusted EPS guidance I presented at Investor Day last November. The temporary items didn't change, which, taken together, would rebase adjusted earnings to just under $2.60 a share. We spoke in great detail at Investor Day about our strategic initiatives and the benefits we expect in the coming years. Specifically, in 2019, we expect 150 basis points of volume growth, both organic and from strategic customers. Andres mentioned the solid price-cost dynamics. Structural cost will also benefit from our Total System Cost initiatives and a much improved Asia Pacific cost base.

Regarding strategic initiatives, we will see a small contribution from our nearly 50% interest in the Central America JV already in the first quarter. Variable interest rates are higher year-on-year, and we expect a higher effective tax rate. We therefore anticipate a headwind coming from nonoperational items in 2019.

And lastly, we have become more active in repurchasing shares, which we expect will add $0.10 to $0.15 to EPS in 2019, depending on the pace of the buybacks.

In all, we have a good line of sight to $3 per share in adjusted earnings for 2019. And while there are many moving pieces to achieve it, we see about 1/2 coming from business performance and 1/2 from share buybacks.

On the next slide, let me pause on how we see EPS unfolding this year because it's different than last year due to several specific reasons, which I believe street estimates have not fully incorporated.

The chart on the left shows how 3 key factors are expected to flip from a headwind in the first quarter to tailwinds in the second half of the year. FX moved quite a bit in the second quarter of 2018, so it should not be a surprise that its adverse impact is mainly isolated in the first half of this year based on current FX rates, of course.

Andres already discussed volumes, both production and sales, which are linked. He outlined our capacity adds and how we will resume year-over-year growth in the second quarter. That's what's reflected here.

Now let's move to the chart on the right to drill down on just the first quarter. Partially offsetting the downdraft from FX and volumes, we see some benefit coming from ongoing Total System Cost savings and APAC gains. Overall, nonoperational items are likely to be about flat.

So while we see EPS down $0.05 or so in the first quarter on a year-over-year basis, we have tangible reasons for our confidence of higher earnings through the rest of the year.

Shifting back to cash generation on Slide 15, we are affirming our Investor Day target for 2019 adjusted free cash flow at $400 million. Similar to our adjusted earnings, we've provided additional assumptions in 2019 in the appendix. So I'll just touch on a few. The expected increase in earnings should flow naturally into cash generation. The growth opportunities will allow us to work off the excess inventories from 2018. This, coupled with more focus on increasing inventory efficiencies, should allow inventory to become a source of cash in 2019. We are presently forecasting lower cash restructuring payments in 2019, although this is contingent upon footprint optimization and other OpEx reduction efforts.

Regarding CapEx, we expect it will again be around $500 million. As discussed in detail during Investor Day, maintenance capital will be a bit lower and strategic capital for growth and cost reduction will be a bit higher.

There's always some variability in cash generation. FX rates have a big impact and we'll be sure to properly pace our CapEx expenditures throughout the year.

Turning to Slide 16. We have borrowed another Investor Day slide to highlight how we are managing our debt portfolio. We continue to proactively issue non-U.S. dollar-denominated debt to hedge against foreign currency fluctuations. At the end of 2018, only 1/2 of our debt was denominated in U.S. dollars, whereas it was 3/4 just 3 years ago. We are also very deliberate about the overall level of floating-rate debt, and again, in which currencies we hold it. At the end of 2018, more than half of our floating rate exposure was to Euribor, which has not been on the increase like LIBOR rate.

Regarding our overall leverage, we plan to repay debt and reduce our leverage ratio. In 2018, leverage was relatively flat due to investing in our shares and investments in joint ventures. We are confidently working toward a level of 3x leverage by year-end 2021, even if our net leverage ratio may fluctuate slightly year-over-year.

On Slide 17, you can see the progress we've made in reducing our pension benefit obligations. On a year-over-year basis, discount rates were up, which lowered plan liabilities compared with prior year. For plan assets, however, the relatively weak market performance in 2018 more than offset the positive effect of the discount rates, resulting in an overall increase in unfunded pension liabilities.

That said, the risk mitigation activities we've engaged in over the past several years has cut in half the effect that we would have experienced otherwise. The company has focused on annuitizations and taken the liabilities completely off our books in order to reduce our financial risk, and we will continue to focus on doing more.

Looking into 2019, based on the rate of return assumptions, we expect pension expense as well as cash contributions to be relatively flat to 2018.

Let's review the chart on the right, as I'd like to highlight this occasionally to show that using EPS as the gauge of our business performance does not fully reflect the underlying strength of our business fundamentals because EPS is partially masked by noncash pension accounting guidelines. This was the reason we continued to remind the investment community about the approximate $0.35 noncash charge in pension expense related to the amortization of actuarial loss that is weighing on our earnings. Throughout the year and beyond, we will continue to work on reducing our pension liability so that it is a smaller source of volatility on company earnings.

Now let's turn to Slide 18 and discuss another way in which we have been managing the company's risk profile over time.

The fundamental metrics that we monitor related to our legacy asbestos liability continues to progress in the right direction. The key drivers are the company's 1958 exit from this business and the resulting declining demographic trends. While O-I has been actively defending these demographic trends, this is not the only reason we've seen this decline. The company has long-practiced risk management in this area. Still the environment is volatile, with discrete pockets of litigation, perhaps even in adjacent spaces, potentially creating substantial risk. As I mentioned at Investor Day, we have been actively pursuing some of these proactive risk management strategies to protect the effect of the demographic trends.

We believe the combination of several developing factors, including changes in the law and procedure, renewed attention to dockets of older non-mesothelioma cases and deteriorating litigation dynamics in specific jurisdictions have the potential to put upward pressure on claim values and volumes. Given this situation, the company added $125 million to the accrual and implemented an accelerated disposition strategy to act as a hedge against these potential pressures. For perspective, the 2018 charge is within 15% of the original lifetime estimate we booked in 2015.

The execution of this strategy will likely result in cash payments averaging approximately $150 million in each of the next 2 years. They are expected to drop to the $60 million to $80 million range in 2021 and then declines consistent with historic, demographically driven trends should continue. Based on our current assessment of the landscape, we anticipate the accrual in 2021 will not be more than $250 million. Derisking asbestos, protecting the effect of the demographic trends and managing risk in the litigation environment are areas of key focus, and we will continue to take actions to protect the company from downside risk.

As we hope you can see from the previous few slides, with the backdrop of declining legacy liabilities, we view 2019 as a continuation of our practice of returning cash to shareholders and derisking the balance sheet. Generally speaking, we anticipate that about 1/2 of our free cash flow and 1/2 of net divestiture proceeds over time will be returned to shareholders. First, we will be paying our dividend, in fact, next week. The quarterly dividend is a clear sign of the board's confidence in our 3-year plan. And as of December 31, 2018, we had $550 million remaining in the share repurchase program approved by the board. We expect about $200 million of that will be purchased during 2019 and the remaining through 2021.

As for remaining funds, we plan to allocate them amongst deleveraging, funding strategic investments that have returns in excess of our weighted average cost of capital and repurchasing shares.

And now I'd like to turn the call back over to Andres.

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

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Thanks, Jan. I trust you can see that we will continue to build on what we have accomplished over the past few years, not just stabilizing the business, but elevated it and investing in capabilities to grow it further.

As I described on Investor Day, in the next 3-year planning horizon, there are several value platforms that will unlock shareholder value. The first is grow and expand. O-I's plan is to leverage newly developed capabilities and translate several market trends into grounded, ascribable top line growth opportunities will help us grow and expand with the strategic customers. Next is structural cost improvement. We believe Total System Cost is a best-in-class approach to structural cost reduction and will contribute to our bottom line for years to come.

Our third area of focus is sustainability. Given the very real global traction of sustainability, O-I will exert even more focus on this dimension moving forward.

We have also made substantial progress on innovation and developing breakthrough technology. The MAGMA pilot is running well in our Streator facility. We are on a schedule, successfully and timely clearing important milestones. The progress is very encouraging, exciting and has generated tangible interest by key stakeholders. We will continue to provide updates in every earnings call, even if brief, like this one.

And Jan just mentioned capital allocation and how the risk in O-I's balance sheet, coupled with increasing the return of cash to shareholders, will drive value to our owners for years to come.

Now that we have completed our remarks, we are happy to take 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 the line of Mark Wilde from BMO Capital Markets.

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

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I wondered if you could just give us a little more color on sort of the volume in particular regions around the Americas in the fourth quarter and what you're expecting in '19? And then also, given the declines you mentioned in the U.S., whether you have any plans for potential footprint moves over the next year or 2?

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

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Okay. So the situation in the Americas is as follows. We see a solid demand across the region with the exception of mega beer. So we continue to see the same decline rates we talked about before. We already factored them in at current decline rates. Now beyond that, everything else we see is quite solid. Now if we talk about U.S. and when we look at all product categories in the market, all of them are offering opportunities for growth. And as you know, we have been focused on those categories for 3 years now, and we've been adapting the footprint in those 3 years too, and now is the moment to start enjoying even more the benefits of that work that we did over the last 3 years. When you look at particular areas that are growing quite fast for us, products like kombucha, it is growing double digit, and it's been sustained, so it's quite solid. We're seeing a double-digit growth in carbonated RTD teas too, and we're seeing situations like one very important food customer that moved the product some time ago to B-Tea coming back to glass this year, 2019. So that's quite a successful story there. So bottom line, U.S. mega beer declines, run rates are already reflected in forecast as we noted today, other categories growth, and we've been focused on this for 3 years and that's why we're confident we're going to see this performance in 2019 as we move forward. When we look at Brazil, very strong demand across all categories. Premium beer demand is growing really fast. It's 14% of the total business in Brazil at this point. Customers want glass to be part of that portfolio for premium beer. So they already asked to be able to supply enough for them. And as we reflected in the opening remarks, we were able to grow really well from Q1 through Q3 in Brazil at double-digit rates. Now we reached a high utilization of capacity in Brazil towards the end of the year. Inventories were already low. So what happened is, we ended up moving from growth of -- double-digit growth in the first 3 quarters to decline in the fourth quarter and that's why you see this fourth quarter so low for the Americas, because a driver of growth, which has very solid demand in the country, couldn't grow in that particular quarter, and then U.S., as I explained before, and I can't give more color on that. Now Brazil is going to receive new capacity, as we mentioned, which is going to just make this country to rebound back to growth, and that's all in the plant. Now you see, and it's at its low Q1 in particles of that because we are deploying capacity in Brazil and in Colombia, and that, obviously, cost some money, but also has some ramp-up, and that's impacting the quarter operation. When we look at Mexico, very solid demand too. We're seeing growth opportunities in premium products, specifically beer, premium tequila and NABs, and we're emphasizing productivity in that country. We started last year, we've been successfully increasing output, and we continue to sell. So that's going to help us to support incremental demand this year. And we will also have the production that we lost last year from [Queretaro's] issues in 2019. So that's going to support our growth starting in the second quarter. You're going to see that we're going to have positive rates in Mexico. Now when we look at Colombia, it's having very strong demand in beer premium, and we are adding lines in this country too. And we expect that to be operational as we go into second quarter and third quarters. So that's why we're confident we're going to have this growth impacting the Americas in 2019. Altogether, we see a single-digit growth for the Americas in 2019.

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Operator [4]

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Your next question comes from the line of 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 [5]

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Andres, I want to take -- and Jan, a step back, perhaps. We appreciate all the color on volume and the outlook and your confidence there. If we go back a few years ago, one of the mantras within Owens-Illinois was around stability and bringing stability back to your organization both from an operating standpoint and a volume standpoint. One, can you comment a little bit in terms of how you feel you progress there? Relatedly, when we look at the Americas, there was about a $48 million negative year-on-year variance in operations. I'm assuming a lot of that was the one-off stuff that you talked about on a quarter call just now, but how much of that was manufacturing and maybe was under your control that you could have done a better job on and, hopefully, will improve on in the future? And then around stability, when we look at cash flows in asbestos, Jan, can you give us a little bit more color in terms of why it's prudent to proactively pull these claims forward as we think about the stability in the cash flow?

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

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Okay. So the -- George, when we look back, we said achieving the stability in operations and volume was very important for us. And I think we've made very good progress. It's quite solid. So we're counting on that stability to build our growth that we are seeing into the future. I think the work that we've done with customers is creating stability in the volume side. I'm going to talk about the Americas in a minute for the fourth quarter. And the operations are more and more stable over time. And obviously, that's a long-term effort. However, our stability today is significantly higher than before. Now what that caused is, we have now the chance -- and we had the chance over the last couple of years to focus on building this new demand. And when we were in I Day, we proposed that we will grow 10% in the following 3 years, and that's because we have very [assignable] opportunities, very specific opportunities in specific segments already identified that we've been working with our customers for quite a while that we are starting to close. So when I look at the position we had when we were in I Day, based on that stability and the growth momentum, at that point in time, we were confident and we were optimistic, and I would tell you, I'm, today, even more confident and more optimistic because we made substantial progress on the agreements we needed to put in place to be able to secure the demand for the following 3 years. Now when I look at the fourth quarter, the demand in the fourth quarter wasn't good, and it was a disappointing quarter, but it has quite a few things in there. So it's driven by the Americas. Within the Americas, half of it is with the United States, half of that is the transfer of that volume to the JV, which is going to lap now, so we won't have that issue with that comparison anymore. The other half is mega beer, which we already know, it is already factored into our forecast at the run rates we know. Now the other portion is those specific issues with the customer that was exposed to hurricanes that lost the demand altogether and that other customer that stopped buying, but is resuming purchases. So it's 2 very specific issues, very unfortunate, but they don't define the demand pattern for us going forward. And the other situation is Brazil. We were growing very strong for the year, and it became a -- decreased year-on-year for the fourth quarter. That -- all the reason for that is capacity. So we need to implement capacity in Brazil. We already have plans for that. We're making very good progress. We are about to start that plant that we (inaudible) -- that we mentioned before, and we continue to evaluate alternatives to driving capacity up in Brazil.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [7]

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And George, let me clarify here. I think if you're talking about the operating costs in Americas that you see on, I think, it was Slide 27, of negative $48 million costs, that is cost inflation, but the price-cost spread is relatively flat. So the driver of decline is volume, which Andres mentioned. Let me go to the second part of your question, when you were talking about asbestos. But before I do that, I just want to mention one other thing. We talked -- Andres talked about the stability. We also tried to put a lot of emphasis over the last several years on the stability of our balance sheet. And whether it was renegotiating our bank credit agreement or changing our debt profile to reduce the exposure, the currencies, spreading out the maturities or annuitizing more pensions that we have, it was all with the goal of developing a stronger balance sheet and balancing our risk -- reducing our risk for the company. Another piece of that, of course, is asbestos. And to get into the last part of your question, it's probably best if I set some context for the broader topic of asbestos to really answer your question thoroughly. All of the fundamental metrics that we monitor related to our legacy asbestos liability continue to progress in the right direction. I mean, the key drivers are the company's 1958 exit from this business and the resulting declining demographic trends. And from 1948 through 1958, this company-owned an insulation business that produced and sold materials containing asbestos. And then on 9th April of '58, the company sold the business unit and, therefore, the time frame appropriately reflects the mortality of current and expected claims. But it's 30 years of asbestos liability -- litigation, rather, has shown us it's volatile in many external variables outside the companies or any other asbestos defendants control can do and will affect the litigation environment. This is why another key driver of O-I progress is its long-standing strategy to proactively manage emerging risks so as to protect the favorable demographic trends. And one example of such a strategy would be the use of administrative claims handling agreements. At our Investor Day last November, I mentioned that a couple of these risks that were materializing, such as changes in the law, increases in judicial resources, unfavorable jurisdictional dynamics and even new bankruptcies. As you know, bankruptcies by other prominent asbestos payers create additional risk for companies like ours, who remain in the litigation. As we have for many years, when we gain more information on these risks, we believe it's prudent to implement strategies to mitigate them. For some of these matters, accelerating the disposition of some claims is a good way to hedge against some future risk and volatility. Like any other type of hedge, the near-term cost may be a bit higher than average but operate to prevent inflationary factors in the future. That's the situation with our strategy here. We'll have some higher near-term costs and need to adjust our accrual to account for them. But to keep a proper perspective, the accrual increase, like I mentioned, is about a 15% adjustment to the estimated lifetime liability recorded back in 2015. So let's also keep proper perspective on the lifetime estimate. Even though we've booked a projected lifetime asbestos accrual on our balance sheet for the past 3 years, the litigation environment continues to be active. And as we've mentioned, evolving factors could develop in a way that would cause us to adjust our asbestos reserve. This is why we have long disclosed that the point estimate of the lifetime accrual could be higher. Importantly, we think that this charge and the resulting higher payments we'll make over the next couple of years to dispose of these claims is appropriate to incur now to mitigate a greater risk that may develop in the future. Of course, we'll continue to closely monitor changes in the asbestos environment and may implement additional derisking strategies in the future to mitigate new risk before they grow. As I mentioned at Investor Day, we still anticipate that our lifetime asbestos accrual will be less than $250 million at the end of the 3-year period ending in 2021. And our expected annual payments in 2021 will be in the $60 million to $80 million range we anticipate and then likely continue to decline thereafter, consistent with the demographic effect. So I hope that helps with your question.

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Operator [8]

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

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [9]

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Just a quick question about the asbestos situation. I do know that you had a slide from Investor Day that talked about the potential to do the derisking accelerated payments. I don't recall, though, and maybe I just missed this, that there would likely to be an increase to the cumulative reserve, which was $125 million. And so my question is, was that increase something that you either [mentioned] or you -- maybe you just didn't -- that you knew was going to happen? Or is it something that is a result of a recent development since November? And then as you go out, how high is your confidence level that we won't have to see another increase in the reserve?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [10]

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Okay. So Chip, at Investor Day, we were in the midst of executing our strategy to mitigate future risk, but we hadn't finished negotiations. And with much of that behind us, we have more clarity about the asbestos-related payments over the next few years. So that's why we think about $150 million on average for the next 2 years, before falling back to a lower level of $60 million to $80 million for the last year of our 3-year range and then declining thereafter, makes sense. And it's consistent with the demographic trends as we see them today. Of course, we'll continue to review our asbestos accrual and liabilities on an annual basis or more frequent if we need to, just like we mentioned back in 2015 and have done ever since. But I hope you see this as a more aggressive way to continue to tackle this very difficult situation and to help hedge against future increases and to be able to overall reduce the risk of this company, which has been a strong focus, especially in the last several years.

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Operator [11]

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Your next question comes from the line of Debbie Jones from Deutsche Bank.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [12]

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I have a question on your guidance, where you're pointing to modest growth for the year in the region. I was just wondering if you could talk about some of the buckets there. I'm sure you've got FX as a negative and volume growth has been as a positive. But how should we model in the cost side of things? I mean, then specifically, in Q1, can you elaborate on the comments that you made around some of the temporary items?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President & Director [13]

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So let me just make a comment on Q1 and one of the major reasons why we're seeing a number that is below prior year. And that is we are installing capacity, and as you would expect, that comes along with the spending. And we've got to hire people, we've got to train people, we've got to have expenses to put the capacity in place and then we've got to ramp up. So that's part of what we're seeing, at least from an operational perspective, impacting Q1, which in fact is very positive, as you look at the following quarters, but we've got to go through that quarter to be able to get to the higher performance quarters. So from an operational perspective, that's what's taking place.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [14]

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Yes. And Debbie, maybe I can share a few numbers with you. When we look at Europe for the first quarter, we see a pretty balanced price-cost spread, maybe slightly positive. We see, from a volume standpoint, things pretty on track versus prior year. FX, looks like it's, in the first quarter, going to be a headwind in Europe, I would say $5 million, $6 million or so, is what we're looking at based on the January 31 rates when we compare it to last year. You can see the big movement between the euro in that [comparatable] -- comparison area. But that's where I see the biggest changes overall, really -- relatively flat for Europe in the first quarter.

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Operator [15]

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Your next question comes from the line of Gabe Hajde from Wells Fargo.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

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I was wondering if you could comment at all, Andres, just, I guess, bigger picture on your expectation for volumes given where we are, sort of, in the economics like war climate. Any slowdown potential from any consumers or travel-related spend for some of the higher-end, I guess, liquors and stuff like that? Do you have a sense for maybe where customer inventories are and how that could impact sales if, in fact, something materializes on the slowdown side?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President & Director [17]

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Well, at this point in time, what we're seeing is, across the world, when we look at all end-users, the only segment really that chose weakness and decline is mega beer in the United States, which we have fully factored. When we talk with customers, they continue to see a good outlook for their businesses. We haven't seen any change in that regards, and we continually test that. We see a premium product category to be the driver of our growth going forward. This is a category of products that has proved to be quite resilient even when you have some downturns. And we tested that in Brazil. We've been able to grow in that premium beer over the last 3 years or 4 years even though the economy was in a very bad situation. I highlighted the mega beer before. It's important to have in mind that even though that subsegment declines, it is only 5% of the total O-I volume. Now at the same time, premium beer grows very fast in the United States, and we are very well positioned to serve that segment, as you know, because of the JV that we have with Constellation Brands. So in all, I think demand is quite healthy around the world. We haven't seen any change in that. The primary focus for us right now is to be able to finalize some of the initiatives and agreements that we've got to have in place. Some of them are already finalized. We continue to be focused on the others, and we are focused on the execution around installing capacity, which we have started last year in Europe with the addition of lines, and we continue this year with addition of lines in Brazil, in Europe, with the addition of capacity in Colombia, with increasing productivity in Mexico. So that's where we've got to go right now.

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Operator [18]

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Your next question comes from the line of Tyler Langton from JPMorgan.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [19]

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Jan, I just had a question on the divestitures. I think you mentioned on Investor Day that you expected net proceeds, I think, $400 million to $500 million through 2021. So can you just, I guess, talk about how that process is going and just what you're seeing in general?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President & Director [20]

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Yes. So we continue with the same expectation. We identify the potential businesses that we can deal with or part of businesses that we can deal with to do that, and we are just moving forward with all the steps that you would expect we've got to go through. So we're actively executing on that.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [21]

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Yes. So let me just add, Tyler, since you ask about that. I think that's an important part of the conversation related to the cash for the company because we anticipate, based on where we are today, and -- in our plan to reach adjusted free cash flow of $400 million for the company this year. We've talked about asbestos being $150 million, $160 million payment this year. So that reduces the free cash flow to about $240 million. If we just add the cash component of these divestitures on, just for the sake of conversation, we have about $440 million available to invest in the company, deleverage or return value to our shareholders. And based on our plan, we would take about 1/2 of that, over $200 million, to return value to the shareholders through a combination of a dividend, which will cost us about $30 million this year, and then a couple of hundred million of share buybacks that we talked about. So you can clearly see the merits of the kind of tying our proceeds from the divestitures with our share buyback plan. It's an important component of it, and we're taking it very seriously. And then on the other side, we have another couple hundred million plus for -- to pay for minority dividends, about $20 million for the year, and then our investments in joint ventures, specifically like our joint venture with Constellation Brands as well as RMBC and the remaining component of that, $150 million, $170 million, we will primarily use for deleveraging or strategic capital for the company that yields very solid returns on capital. So there is our balanced approach of investing in the business, paying down debt, reducing our leverage and returning value to the shareholders.

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Operator [22]

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Your next question comes from the line of Edlain Rodriguez from UBS.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [23]

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Just one quick one on the EPS guidance. I mean, should we make anything about the slight change in tone from $3 plus to approximately $3? Like, has anything changed at all since the Investor Day, plus or minus?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [24]

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I'm glad you asked that question. I thought it came up several times in the commentary last evening. The answer is no. Please don't overanalyze that. When I read it several times, I was actually surprised. Our goal is to hit that $3 handle. Obviously, we'd like to be a bit higher than $3. We are working on everything we can to be that way, but we're sticking right now with our $3 a share. So please don't look any deeper into the minor wording change that was made between last November and last evening in the release.

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Operator [25]

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

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Scott Louis Gaffner, Barclays Bank PLC, Research Division - Director & Senior Analyst [26]

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Just a quick question, Jan, going back to the thoughts on share buyback. A couple of things there. Can you talk about, in the context of derisking the balance sheet, as you mentioned, $240 million of free cash flow after you subtract out the pension -- sorry, the asbestos payment. So first would be, should we think about the share buyback being more weighted towards the second half once you finally finish some of these divestitures? The second part being, should we think about divestitures and share buyback being more neutral to earnings on a go-forward basis? And then just lastly, on the capital spend in Europe, you said 12% return on capital for brownfield. Are you getting later in the cycle and seeing lower return on capital from new investments on a go-forward basis?

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [27]

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Okay. Let me first talk about the share buybacks. I mean, we already did in January about $40 million of share buybacks. So we've started this year. We also had about an equivalent amount last December. So you think about it that way, we probably have close to $160 million more to do the balance of this year. We always said that we would time it and make sure that it made sense with other demands on cash in the company, including CapEx and everything else and the proceeds of the -- from our divestitures. So we'll continue to try to match that up, saying that -- Andres mentioned that we're on target on very clearly looking at our open land that we have available for sales as well as some other divestitures that we're looking at. And so I think we're on target this year to execute that entire $200 million, and I think it's a little bit premature to give you by quarter how much that is, but we'll share that as we go forward. And you also asked about is it more neutral to earnings going forward. And we do have a program as of the end of last year of $550 million on share repurchases. So if we execute $200 million of those this year, you can think that we'll have a remaining balance to do through the next couple of years of our plan as well. I think we have a good return in excess of 12% for our brownfield in Europe, and it clearly adds value over time. We look at each one of these opportunities that we have standing on its own as well as in conjunction with what else we're doing in the region or for the company, and so we'll continue to be very prudent and very disciplined on making decisions that make sense for the company.

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Operator [28]

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

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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I guess, going back to Europe, 3Q 2018 volumes were a bit sluggish, I believe, relative to your initial expectations. I guess, did 4Q '18 sort of benefit from any sort of catch up? I'm just trying to understand the volume increase. And then related to that, just looking at Europe on a full year basis, volumes were basically flat. How are we at this point where we're capacity constrained in Europe from your vantage point? And then just separately, Jan, Comegua, how is that going to be accounted for in the P&L?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President & Director [30]

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So we installed some additional lines in Europe late last year. So they helped at the very end, and they're helping across the full 2019. We've got a little bit of improvement in wine demand at the very end. When the 2018 harvest was confirmed to be very strong, you will expect that the dynamics in the market changed from that point on. So we saw some improvement due to that. And we continue to focus on the premium segments. They have opportunity for growth. So as we make capacity available, we're confident we're going to see improvement in demand in Europe, and that's why we're putting in place this -- we're planning to put in place this brownfield that will start operation in Q1 2020.

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Jan A. Bertsch, Owens-Illinois, Inc. - CFO & Senior VP [31]

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Okay. And you also asked about Comegua. That's a nonconsolidated joint venture. So we'll see the equity earnings of that will be reflected in the Americas segment operating profit.

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Operator [32]

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

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Just wanted to go back to the Americas. Obviously, we've been experiencing these declines on U.S. [mass beer] for a while. Just wondering -- I think you've, obviously, reduced that exposure. Do you think you've kind of found a steady state on other categories or will mass beer continue to decline? And if so, what kind of percent of the portfolio would that become and what would the other categories become?

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Andres Alberto Lopez, Owens-Illinois, Inc. - CEO, President & Director [34]

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So the mega beer, in our assumptions, continues to decline and continues to decline at the current run rates. We're not assuming that, that's going to stop anytime soon. It could, but it's difficult to predict. So our assumption is it continues to go down. And as you know, we've been working on the other categories of products for 3 years now, both commercially and from a capacity standpoint. So I think we're going to see more and more opportunities materializing as we go through 2019. Now we've got to take into consideration the volume that we are gaining through a JV because we are, in fact, with larger presence of O-I containers in the U.S. market, when you put together what we sell within the U.S., made with U.S. capacity plus the JV. So the -- we think the growth of the other categories and when you consider the joint venture too, it's going to have the total U.S. market for us growing through 2019.

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David Johnson, Owens-Illinois, Inc. - VP of IR [35]

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Thank you, everyone. That concludes our earnings conference call. Please note that our first quarter conference call is currently scheduled for May 2, 2019. We appreciate your ongoing interest in O-I, and a gentle reminder to choose glass packaging made from natural ingredients. It's safe, it's pure and 100% recyclable.

Thanks, and have a great day.

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Operator [36]

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

You may now disconnect.