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Edited Transcript of OI.N earnings conference call or presentation 5-Feb-20 1:00pm GMT

Q4 2019 O-I Glass Inc Earnings Call

Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of O-I Glass Inc earnings conference call or presentation Wednesday, February 5, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andres Alberto Lopez

O-I Glass, Inc. - CEO, President & Director

* Christopher David Manuel

O-I Glass, Inc. - VP of IR

* John A. Haudrich

O-I Glass, Inc. - Senior VP & CFO

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Conference Call Participants

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* Adam Jesse Josephson

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

* Anthony James Pettinari

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

* Arun Shankar Viswanathan

RBC Capital Markets, Research Division - Senior Equity Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Deborah Anne Jones

Deutsche Bank AG, Research Division - Director

* 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

* Michael James Leithead

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the O-I Glass Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Chris Manuel, Vice President of Investor Relations. Thank you. Please go ahead, sir.

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Christopher David Manuel, O-I Glass, Inc. - VP of IR [2]

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Thank you, Vincent, and welcome, everyone, to the O-I Glass year-end and fourth quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO; and John Haudrich, our CFO.

Today, we will provide key business developments and provide a review and outlook of our financial results. Following 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. Some of the financials we're presenting today relate to non-GAAP measures such as adjusted earnings, adjusted free cash flow, segment operating profit and net debt, which excludes 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 of this presentation.

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

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Andres Alberto Lopez, O-I Glass, Inc. - CEO, President & Director [3]

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Thanks, Chris. Good morning, and thank you for your interest in O-I Glass. O-I made solid progress improving its operating performance over the course of the second half of 2019, despite a very challenging start to the year. While faced with these challenges, the company continues to execute its strategy. This included taking a number of bold structural actions to change O-I's business fundamentals.

As we will discuss shortly, this includes efforts to optimize our business portfolio and capital structure, including critical efforts to address our legacy asbestos liability. Likewise, we initiated a number of important turnaround initiatives to improve our business performance.

With an eye on the long term, we continue to advance MAGMA and create a new business model for glass. We are confident that these efforts will improve our business performance and cash flows in 2020 and beyond.

Turning to some details on Slide 3. Last night, we reported fourth quarter 2019 earnings of $0.50 per share. For the full year, earnings were $2.24 and O-I generated $133 million of adjusted free cash flow. Earnings were at the high end of our most recent guidance range, and adjusted free cash flow exceeded our expectations. Fourth quarter segment profit was down modestly from the prior year and was flat with 2018 when excluding the impact of foreign currency and a few temporary items.

Operationally, the benefit of higher net pricing and sales volumes offset elevating operating costs linked to [rebalance] that's linked to the planned capacity curtailments implemented earlier this past quarter. As I said a moment ago, we ended the year on a positive note with good momentum heading into 2020. At a high level, we expect 2020 adjusted EPS will range between $2.10 and $2.25. Operationally, this is a 3% to 10% improvement adjusted for the impact of divestitures and temporary items. We expect cash flow will significantly improve following actions to address our legacy asbestos liabilities. While 2019 free cash flow was slightly negative we expect to generate $300 million or more in 2020.

On Slide 4, I will expand on my previous comments on the bold actions we are taking to change our business fundamentals. First, we are improving our structure. We are expanding an attractive growing market, supported by long-term contracts with the strategic customers, and we are exiting areas that are not core to our strategy.

We are very pleased with the Nueva Fanal acquisition and recent expansion efforts in South America. Both of these efforts increased our presence in the premium beer segment. As part of our tactical divestiture program, we monetized our soda ash JV at an attractive [valuation]. Likewise, our strategic portfolio review is underway which includes review of alternatives for our Australian/New Zealand businesses.

Recent refinancing efforts have improved our liquidity and financial flexibility. In 2020, we will continue to expand our business in attractive markets and segments. This includes the first brownfield expansion in Europe in the past 20 years and starting the fifth furnace at our JV with CBI early in the year. Likewise, we will advance our tactical and strategic portfolio review. This review includes several aspects of our business, and we expect to have a resolution on ANZ by mid-2020.

In late December, we completed our corporate modernization initiative that supported the Chapter 11 filing of Paddock in January, and set in motion efforts to finally resolve our legacy asbestos liability.

Overall, we are laser-focused on improving our cash flow generation and reducing debt. After our challenges last year, we are highly focused on turning around our operating performance. Fortunately, we did see improving trends in the back half of 2019 and we have momentum heading into 2020. Consistent with seasonal trends of our business, we generated a strong cash flow in the second half of the year, supporting nearly $1 billion of debt reduction by year-end.

Following recent challenges adapting to mix changes in a handful of plants in North America and Europe, I'm happy to report that our focused factories have exhibited marked improvement in recent months. We expect these headwinds will abate over the next few quarters. We have also introduced 3 turnaround initiatives to further boost performance, which I will discuss in a moment. Importantly, we have taken actions in the fourth quarter to shut down capacity in North America to align capacity with demand.

In 2020, execution of our turnaround initiatives will be critical to improve performance along with ongoing efforts in the footprint in North America. Finally, our aim is to revolutionize glass. This means addressing the historic constraints that glass has faced and leveraging key trends, like sustainability. These actions should create new growth opportunities.

MAGMA represents the future of glass manufacturing. The technology should enable dramatic reductions in capital intensity, improve speed to market and significantly enhance flexibility. We have achieved all key milestones at our initial pilot plant, and we are expanding MAGMA to a second location in Germany, which should be operational near the end of 2020. Overall, we are taking a number of bold actions as we build on our recent momentum to change O-I's business fundamentals.

Turning to Slide 5. Admittedly, 2019 was not the year we expected as organic sales volumes were down and operating costs were elevated. In response, we initiated our turnaround initiatives to directly address these challenges. In total, we are targeting $35 million to $50 million of net benefits in 2020 from these actions. As we are currently ramping up activity, the run rate savings exiting this year will exceed this net benefit amount. Over the 3 years, we expect the initiatives will generate $150 million or more of net benefit. Revenue and mix optimization is our first initiative. We are taking a holistic approach to growing the top line.

I've already discussed expansion initiatives to grow our business. In addition, we expect to drive higher price and improved mix in select markets and categories, building on the success we have achieved in the past 2 years in Europe. While we have seen good growth in certain markets, we have also experienced base erosion in some pockets of our business. With enhanced focus, we intend to mitigate these pressure points. This focus also applies to customer payment terms, which are essential for improved cash flow generation.

Finally, we are commercializing a suite of new innovative product offerings that can serve a changing market landscape, particularly in North America. Factory performance is our next initiative and built on thorough system cost approach over the past few years. In addition to targeting cost improvements, we are improving operating performance and efficiency across the network. As we've seen with our focused factory effort in the back half of 2019, greater intervention and enablement at the plant level can have a quick and meaningful impact on operating performance. This initiative expands that concept across our network with a clear set of priorities per plant supported by global resources. Likewise, we are evaluating our plant portfolio and will be making footprint adjustments to keep supply matched with longer-term demand trends, primarily in North America.

Cost transformation is our third initiative. Supported by Accenture, we are implementing a zero-based approach to reduce SG&A and evolve our operating structure in line with our current strategy. We are confident that these 3 initiatives will help turn around O-I's performance in 2020 and beyond.

On Slide 6, we have depicted a historic review of our organic sales volume trends. On the top right, you will see O-I's network volumes that have [exhibited] a stable to improving levels over the past 5 years, including 2019. Legacy volumes, which include O-I consolidated operations have been flat to modestly down. Recognizing this challenge, we have seen intentionally -- we have been intentionally building our position in key strategic JVs focused on attractive markets in Mexico and Central America. Each of our regions face their unique market trends with tailored strategies. Europe was able to grow with the market in earlier periods until they became capacity constrained in 2018. As such, the region quite successfully focused on mix optimization towards segment profits. Our brownfield expansion should restore growth in 2020.

The Americas network has posted consistent volume improvement aided by expansion in our strategic JVs and a strong growth in Latin America. However, the Americas legacy trend has been under pressure. This reflects the net effect of a strong growth in Latin America, which has been more than offset by a significant decline in beer across North America.

To put this into perspective, North America we have decline about 14% in 2019 and now represents just 9% of O-I's total legacy volume. We have addressed this head-on by stopping 2 furnaces in the fourth quarter and a total of 5 furnaces since 2015. Likewise, we have closed or repurposed [17] machine lines over the past several years. Overall, these actions have effectively reduced our North American beer capacity by 35%. We stand ready to take further actions as conditions warrant it. As I touched on earlier, we are focused on introducing new product innovations for the changing market needs in North America. As we discussed, key elements of our Asia Pacific region are under strategic review.

Let's advance to Slide 7, where I will outline our expectations for future volumes. In summary, we anticipate 2020 total sales volume will be flat to up 2%, including Nueva Fanal and expansion initiatives. This chart illustrates the sales volume trends by key geographies for 2019, and our outlook in 2020.

For comparative purposes, we have provided market forecast Euromonitor for those geographies. As you can see, we expect our sales volume will be stable or growing across nearly all geographies, and our performance should be in line with market trends. Overall, North America is expected to be down mid-single digits and is the only market we expect to be below the prior year, driven by a double-digit decline in beer. In some geographies, we expect to outperform market trends supported by capacity expansion initiatives, anchored by new supply agreements. Increasingly, our customers see the strategic value in working with O-I as well as the strong brand building and sustainable attributes that glass offers.

Now I would like to turn the call over to John, who will address the specific financials and outlook.

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [4]

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Thank you, Andres, and good morning. By now, I'm sure you've all seen our financial details in the materials posted last night. So I will focus on the key points of our recent performance and 2020 outlook.

As we announced, fourth quarter adjusted EPS was $0.50, which was at the high end of our guidance range of $0.45 to $0.50. As illustrated on the chart, total segment operating profit was $200 million. While profits were down from $211 million in 2018, results were in line with the prior year after excluding temporary items that benefited 2018 but did not repeat in 2019, such as the resolution of indirect tax matters in Brazil.

Overall, our average selling prices improved strongly, outpacing cost inflation and added $21 million to segment operating profit. Volume and mix contributed $1 million to profit, which is the net effect of the benefit from Nueva Fanal and the impact of slightly lower organic volumes. Higher net price and volume offset higher operating costs, driven by market-related downtime in the U.S., Mexico and China that impacted results by $13 million.

Looking below the operating line, our tax rate was around 30%, which was up significantly from 15% last year and a more normalized rate of around 25%. The higher rate reflects changes in regional earnings mix. Overall, our operating performance was in line with the prior year, while results were impacted by temporary items and a higher tax rate.

Moving to Slide 9. Let me share a little color on regional performance during the quarter. In the Americas segment profit was $115 million, which was down $12 million from the prior year as elevated operating costs more than offset the benefit of higher net price and sales volumes. Shipments were up 3.5% due to Nueva Fanal, while organic volumes were flat. South America continued its trend of strong growth. However, Mexico was down low single digits due to macroeconomic conditions, and North America was down mid-single digits on continued lower beer demand. While the region made good progress addressing operating mix complexity, higher cost mostly pertained to market-related downtime. Europe's operating profit was $69 million, up $13 million despite headwinds from FX and temporary items. Higher earnings reflected strong price realization in conjunction with the region's mix improvement strategy. Volumes were down nearly 2%, but this is mostly a comparison issue due to customer prebuying in late 2018 ahead of an SAP conversion in January of 2019.

In Asia Pacific segment, profit was $16 million, which was down from $28 million in the prior year. Prices were down slightly amid moderate cost inflation in the region. Shipments were up, there was -- but there was significant market-related downtime in China to rebalance supply.

Moving to Slide 10, let me recap our 2019 performance. For the year, O-I reported adjusted earnings of $2.24, towards the top end of our guidance range. Likewise, adjusted free cash flow was $133 million, which was solidly better than our outlook of approximately $100 million. As illustrated on the chart, our results were down from $2.72 in 2018. Importantly, nonoperational items represented a $0.49 headwind, which was greater than the overall decline in EPS. This includes FX, temporary items and a higher tax rate.

Looking at business performance, the benefit of higher price was more than offset by slightly lower sales volume and elevated operating costs. Higher operating costs impacted results by $0.25, which is made up of 3 factors that are each about equal weight: commissioning costs, operating complexity and market-related downtime. These factors were more than offset by corporate cost control efforts, lower management incentive expense and other items as illustrated on the chart.

Looking at cash flows, the company generated $133 million of adjusted free cash flow in 2019, and as I mentioned, this exceeded our guidance of $100 million. We achieved this higher result despite reducing AR factoring by 10% or $61 million as we rebalanced our liquidity position. By comparison, factoring was a source of cash in 2018. Working capital was an overall headwind to cash flow this past year, yet results were better than we anticipated as we sharpened our focus on working capital management in the second half of the year. We view 2019 as an aberration. As I'll review shortly, we expect significantly improved cash flows in 2020.

Let me spend a moment discussing capital allocation. I'm now on Slide 11. Our priorities remain the same. We intend to improve our balance sheet, fund our strategy and return value to shareholders. With that said, debt reduction remains our top priority, driven by operating cash flow and proceeds from divestitures. As illustrated on the chart, seasonality plays a big role in the timing of cash flow generation. The first part of the year is a use of cash and the second half is a strong source.

As you can see, the company generated over $900 million of adjusted free cash flow during the second half of the year. Strong cash flow as well as the proceeds from divestitures enabled about $1 billion of debt reduction in the second half of 2019. Net debt ended the year at $5 billion, which was favorable to our guidance. As Andres discussed earlier, we continue to advance our tactical divestiture program and strategic portfolio review efforts. While we intend to fund our strategy, 2020 strategic CapEx will be directed to advancing MAGMA, while acquisitions remain deprioritized.

Finally, returning value to our shareholders is essential. In addition to initiating a dividend in 2019, $400 million is available on our share repurchase authorization. However, this will be deemphasized until leverage approaches 3x or to potentially offset the impact of divestiture dilution.

Moving to Slide 12. I will share more details on asbestos. First, let me put this in context. Asbestos-related liabilities have profoundly impacted O-I. Over the past 10 years, cash payments have consumed about 40% of adjusted free cash flow. While we are committed to honoring our responsibility, this cash drain has materially hindered the company's ability to invest in the business. With Paddock's Chapter 11 filing, definitive action has been taken to establish a final, certain and equitable resolution to legacy asbestos-related liabilities. Building on the material shared January 6, let me provide some further information.

First, the Chapter 11 core proceedings are progressing as expected. Second, in conjunction with our annual review process, we did update our year-end 2019 asbestos-related liability. The estimate now stands at $486 million, and we expect this will remain fixed until there is a final court determination.

Third, Paddock was deconsolidated after the January filing. For modeling purposes, the deconsolidation of Paddock's cash will be reflected in the investing section of the cash flow statement. Finally, all asbestos-related settlement payments are suspended pending the outcome of the Chapter 11 proceedings. 2020 will be the first year in decades that all of the company's free cash flow is available to fund value for the company and its shareholders.

As I mentioned, debt reduction remains our capital allocation priority. Shifting gears, let me touch base on our 2020 outlook as depicted on Slides 13 and 14. Overall, we expect 2020 adjusted earnings will be between $2.10 and $2.25 per share, and full year free cash flow should be approximately $300 million or greater. While our earnings outlook is at or slightly below our 2019 results, we do face about $0.20 of known headwinds, including temporary items in foregone earnings from sold assets. Absent these items, we expect base earnings will improve about 3% to 10%.

Earnings will benefit from continued favorable net price, sales volumes that are flat to up 2% and improved operating costs. Shipments will benefit about 1% from a full year of Nueva Fanal and inorganic volumes should be plus or minus 1%. While we still see some residual effect of mix complexity and commissioning costs, the benefits from the turnaround initiatives will more than offset these ongoing costs. Nonoperating items include lower interest expense, given recent refinancing as well as higher corporate cost to support MAGMA advancement in resetting of management incentives.

Shifting to cash flows. Overall, we expect free cash flow of approximately $300 million or greater. It's important to note that starting in 2020, our guidance will include free cash flow and not adjusted free cash flow since asbestos payments have been suspended. This represents a significant improvement from the prior year, as illustrated on the chart. Higher cash flow reflects no asbestos payments and lower CapEx, which should be in the range of $350 million to $375 million.

Working capital will remain a use of cash, given the ongoing shift in regional and customer mix that affects accounts receivable levels. However, it will be less of a drag, representing a benefit of $75 million or more on a year-over-year basis. Overall, we expect better core earnings and significantly improved cash flow generation. Additional regional details are on the next page.

Let me conclude on Slide 15 with our perspective on first quarter. Overall, we expect first quarter adjusted earnings will be in the range of $0.40 to $0.45 per share. While this is down from $0.51 in the prior year, results should be in line with last year adjusting for divestitures and temporary items, such as the Italian energy credit. We expect higher prices will more than offset cost inflation and volume should be flat to up 2%, supported by Nueva Fanal.

Elevated operating costs will continue through the first quarter, but moderate thereafter as we absorb some market-related downtime and our furnace maintenance activity is skewed to the first half of the year.

We will also incur some commissioning costs at Gironcourt ahead of the second quarter start-up. With that said, these elevated costs will be partially offset by continued improvement in addressing mix complexity and the initial benefits from turnaround initiatives.

As we all know, the coronavirus outbreak could potentially affect economic activity. Fortunately, our plant in Southern China is currently operating without issue. However, this is a fluid situation, which could impact our outlook as events unfold.

In summary, the first quarter results will be muted by temporary items and elevated operating costs, but we are setting the stage for improved results in subsequent periods.

Now I'd like to turn the call back to Andres to make a few closing remarks.

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Andres Alberto Lopez, O-I Glass, Inc. - CEO, President & Director [5]

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Thank you, John. Let me conclude today's discussion by reiterating the bold structural actions we are taking to change our business fundamentals. First, we are optimizing our structure. This includes ensuring we have the right business portfolio for evolving markets. After a few recent acquisitions geared to increase exposure to attractive growing markets, we are now focused on divesting assets that are not core to our strategy. Proceeds from divestitures, along with decisive actions to address legacy liabilities, will improve our balance sheet health. All of these actions are well underway. Second, we are focused on turning around our business performance. Executing our turnaround initiatives is a top priority in 2020. In total, we expect $35 million to $50 million of net benefits will be achieved this year with a run rate totaling $150 million or more to be unlocked in coming years.

Considering unfavorable secular beer trends in North America, we expect continued footprint adjustments as well as introduction of innovative new products. Success will be measured by generating higher free cash flows redeployed for debt reduction. Third, we intend to revolutionize glass and MAGMA will be a game changer in our business. Coupled with important trends like sustainability, glass is well positioned for future growth.

Thank you for your interest in O-I Glass. We will now welcome your questions.

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Christopher David Manuel, O-I Glass, Inc. - VP of IR [6]

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Thank you. Vincent, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First 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 [2]

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Hey, Andres, as you consider further North American capacity optimization, I guess, how are you preparing for the inevitable increase in manufacturing complexity related to some of the production struggles you've had post previous closures in North America?

And then second, on the CapEx of $350 million to $375 million, that would be the lowest level since 2014. And after 2014, CapEx stepped up quite a bit. Just trying to get a sense as to whether the CapEx you're citing for 2020 is sustainable going forward?

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Andres Alberto Lopez, O-I Glass, Inc. - CEO, President & Director [3]

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Well, thank you. With regards to complexity, we've been working along -- in the last few years in putting together things like global manufacturing fundamentals, we have in place a standard work system for factories, which we are deploying. We have about 30 factories at this point in time implemented. So we are very quickly increasing the number of factories that have it in place.

We are deploying resources globally. We are increasing visibility of performance. We improved reporting. We improved the accountability in the system. We have better governance overall. So we feel that after having the issue we had last year, we've been able to bring together all the things that we developed over the last few years to be able to better sustain and improve performance in factories that are exposed to complexity.

Now over the last 2, 3 years, we onboarded a large volume within North America of diverse mix to be able to offset beer. We have a slowdown that -- [on-boarding] lately so we give the factories the chance to improve too. So at this point in time, we feel very comfortable we have the right system in place. We have the right resources. We are deploying them to the largest opportunities and we should be able to sustain operations going forward even though complexity will continue to increase because of the changes in the end markets.

When it comes to the CapEx, I think the most important thing to watch is the asset stability and asset stability has improved over the last few years. We monitor this very closely. And we feel comfortable for the 2020 period. This is the right level of cash to be deployed to assets and -- in the maintenance side. And we will evaluate as we get closer to 2021 the needs of CapEx for that particular year.

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [4]

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I would add here, Ghansham, is that in our system, we spend about $300 million a year on maintenance-related capital, and we will continue to do that this year, too, so that the reduction we would see on a year-over-year basis, as I mentioned before, is more on the strategic capital side. So that's $50 million to $75 million of strategic capital. And most of that, as we said, is MAGMA and wrapping up some projects we were doing such as Gironcourt and other things.

And important to note is, going forward, as MAGMA evolves, we would look for potentially deployment of that down the road, and we do expect that to be at lower capital intensity than legacy assets and furnaces.

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Operator [5]

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

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [6]

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And actually, really appreciate some of the reconciliation table that you had in terms of [rev] bridging to '20 and the quarter. I want to piggyback a little bit off of Ghansham's question. We've all been covering the company for a long time. And there are always these episodic plans to improve operations, performance, volume. I mean, I think you touched on it a little bit, but what 1 or 2 things, Andres, tangibly make you confident about the fact that this turnaround program will actually lead to sustained improved performance as opposed to, in a few years we'll have to true it up again? What 1 or 2 things tangibly make you positive on volumes for O-I, which have never been something that can be -- growth has never been able to be sustained for the company, and that's maybe the biggest issue for the company?

And when we think about that transformation and the buckets, how do the 3 contribute both to '20's numbers and then over the rest of the $150 million program?

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Andres Alberto Lopez, O-I Glass, Inc. - CEO, President & Director [7]

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Okay. So the -- when I look at complexity, we had the issue we had last year. As I mentioned before, we've been developing several tools and several approaches to our production process that we're now deploying across more factories to be able to [evaluate] complexity better. What gives me confidence is the progress we're making. We're, in fact, seeing quite a good progress in what we call the focused factories, which are the ones directly impacted by complexity.

So that's going quite well. We have the right system. We have the right people in the right roles. We have the right reporting system in the company, the right analytics, the right accountability. So I feel comfortable we're making good progress. And I think we're going to be able to deliver in our commitments for 2020 in that regards.

When it comes to volume. Again, 2019, we had quite a few issues, many of them functional issues. You -- we saw [there were] issue in Europe. We saw the slowdown of wine in France, in exports to China, slowed down in Mexico in NAB's. We saw a slowdown in the U.S. in NAB's growth too.

Now when we look at this year, there are 3 assignable things that we are considering as we look at our volume performance for the year. There are inorganic volumes kicking in and there are organic volumes. Inorganic is Nueva Fanal, which is now going to have a full year. Organic, we have increased sales in Brazil because now we're enjoying the capacity that we added last year. We have increased volumes, too, in Colombia. We're seeing incremental volume in Mexico. Mexico is exporting in 2020 to various countries in Americas and in Europe, and that is supporting our volumes. And we are having the incremental capacity in France, which is going to kick off in the second quarter. So that should give us incremental volume, too.

And one more item that we're factoring in is the incremental line -- production line that we put in place in Europe in the last quarter of the year. So now we're going to enjoy that capacity, too, to move forward.

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [8]

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I can build on that on the back half of that question, George. I mean just to piggyback on what Andres was saying. I mean, on the volume side, when we invest in growth in capacity-constrained markets like we did in Brazil and Colombia this year, we see that solid growth coming through, double-digit growth in some cases. However, it's when we don't have the capacity for growth that, that is when we hit headrooms in that regard and then there's exposure to some other markets that are more pressured.

So going forward, having the ability to keep on top of that and ideally down the road with MAGMA to do that at less capital intensity, will allow us to be able to fund growth and keep ahead of that curve as opposed to behind it.

And then on the transformation, the 3 buckets, to put them in a level of financial priority for 2020, the factory profitability is probably the largest of those 3 buckets. It's really building on the TSC work that we've already been doing, but also a lot more intensity at a profitability at the plant level. The cost transformation is probably the next largest bucket, but it will take a little bit of time to ramp up because those are newer initiatives that are kicking off.

And then the revenue optimization side is the third bucket. And that has more to do with more price and mix management and ultimately trying to work the volume pipeline that we've been building over a period of time.

Over time, that will continue to progress, where I think the cost transformation elements will start to pick up steam on a relative basis to the whole population.

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Operator [9]

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Next question comes from the line of Brian Maguire from Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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Just wanted to get some more details on the cash flow guidance. And also kind of related to that, the $150 million of turnaround improvement. It wasn't clear if the $150 million was an EBITDA, EBIT number or a free cash flow number? Just wondering if there are some maybe onetime working capital benefits included in that? But on the cash flows, it seems like the working capital will be a big use of cash again in 2020, I think about $100 million use of cash, it sounds like, if it's down $75 million year-over-year. Wondering if there's also some onetime restructuring cash costs in there that may go away or, I don't know, if maybe they recur again in '21, but just getting a sense of like that free cash flow guide if there are some unique onetime items in there for 2020?

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [11]

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Sure, sure. Let me build it out a little bit further. But on the first point, on the $150 million of turnaround that is targeting EBIT. And so it's not mixing and matching EBITDA, free cash flow or anything, that is an EBIT number.

And so on the free cash flow, and if I believe on Page 13 is where we have the full year guidance, we work off of where we started in '19, and then we have kind of a subtotal there of $95 million, which includes the adjustment for things: discrete items, Tata, the soda ash divestiture as well as the Paddock.

So building off of that, obviously, you can model in your own view of operating performance, but we would expect some level of EBIT improvement. CapEx if -- at $350 million to $375 million is something like a $50 million to $75 million year-on-year improvement to cash. Working capital, as we mentioned before, is going to be $75 million or higher. You are right, working capital was a use of cash this last year. It will be less of a use of cash.

Importantly, what I would say is that factoring was historically a source of cash as factoring was increasing. We elected to reduce factoring this year to rebalance our liquidity position. So there was actually a $61 million hit to working capital, so to speak, in our numbers this year.

So then moving down the levers, dividends, we do expect will be higher, say, $20 million to $30 million more. Some dividends and our joint ventures were suspended in the last year or 2 because of building out of furnaces and things like that.

We did a lot of refinancing this last year. So interest is down from an expense standpoint, but also, say, $30 million to $40 million on the cash side, given especially the timing of payments. Now on the flip side, we expect cash taxes to be up a little bit higher, $10 million to $20 million. We'll have about another $15 million of higher pension contributions.

And there are a number of other things that are, say, $30 million in total, how much we spend on returnable pallets, things like that, that will also flip over a little bit in the next year. So hopefully, that gives you a little bit of color on some of the details behind free cash flow movement into next year.

The last question you had was on restructuring. We spent a little over $50 million of restructuring in 2019. This model assumes that, that remains flat and that takes care of what we said is -- we would anticipate footprint activities as well as ongoing other restructuring activities within the business.

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Operator [12]

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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 [13]

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I wanted to focus on Slide 7 and some of the growth highlights that you mentioned. Very specifically, can you talk about what you're seeing in Europe that supports the low single-digit growth rate that the market is expecting, and I'm assuming for you, it's contracted volume from a line extension that's shown in that slide? And then for Asia Pacific, could you just remind us what's kind of holding back the Australia/New Zealand market? And then just kind of the disconnect between your 2020 outlook of low single-digit growth in the market, which is a bit higher?

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Andres Alberto Lopez, O-I Glass, Inc. - CEO, President & Director [14]

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Yes. When we look at Europe, we are expecting solid demand in this region. So we're expecting the volumes to be flat to up 100 basis points. Beer expected to be quite strong because we are going to enjoy the new capacity. We have a long-term agreement in place for that capacity. So that is going to kick in, in Q2.

Wine is expected to be slightly positive for the year. The [demand in] wine -- of wine in Italy is very strong. France is a little softer, but it's still in a very good level of demand. Important to watch closely, if there is any change in tariffs with the United States going forward because that might imply changes in France, but at this point in time, we're very comfortable this will be a big -- normal year for France.

And the spirits demand in Europe, expected to grow around mid-single digits. So that is going to support our volume. So all in all, we have additional capacity for Europe, which we're going to enjoy now, and demand remains very solid over there.

When we look at APAC, demand is around flat -- about flat for every one of the geographies in which we are, including Australia/New Zealand, they're pretty much flat. China, which has growth potential, obviously, has been impacted by the economy. And now we have the coronavirus that is kind of slowing down activity over there, too. So we won't be able to enjoy that growth at this point in time.

Indonesia, they had some growth. But altogether, we are expecting that we'll have from flat to slightly up volumes in APAC going forward.

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Operator [15]

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

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [16]

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Andres, I wondered if you could just give us a little color on what we might expect in terms of just downtime in 2020? And then maybe if you could talk about kind of the retrenchment in both North America and whether there's anything further to come in China?

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Andres Alberto Lopez, O-I Glass, Inc. - CEO, President & Director [17]

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Okay. So we're expecting a normal year in downtime. We're seeing a little bit of a heavier-than-normal quarter this time in Q1 when it comes to asset repairs but it's just timing within the year, but for the total year is expected to be the same. When it comes to capacity in the United States, we already took the actions we needed to take. The capacity that is needed to be down is down already.

So we are balanced at this point in time, but as we said in the opening remarks, we're going to watch this closely. If something warrants a change, we will move forward with that change, but everything we have at this point in front of us in terms of information tell us we're balanced for the year.

When it comes to China, we just got to watch closely what's emerging over there and see what that implies. As you know, many businesses have been shutting down because of the coronavirus. In our case, our business is operating, but we need to, again, monitor that very closely.

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [18]

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The only thing I would add on the downtime on the front end of the comments is that we have a -- we have different types of rebuild activities, major rebuild activities where every 10 to 15 years, we replace the furnace. And then we also have these minor repairs that periodically go in and extend the life of the furnaces. The schedule this year of those major furnace rebuilds is very ratable over the course of the year. It's the minor rebuilds that are a little bit front-end loaded in the year, and that's why we're seeing a little bit of expense here in the first quarter.

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Operator [19]

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

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [20]

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I'll try to attack the capacity question from a different angle. You mentioned in the prepared remarks and the presentation, you've closed about 5 facilities since 2015. And I think that somewhat coincides with the number of furnaces that have been opened up in your joint venture down in Mexico. So I was curious if you can give us maybe a sense for what the net capacity adjustment has been within your legacy system? And then maybe where utilization is today? And if we continue to see kind of beer decline, I think you put it again in your prepared remarks, maybe upper single digits, what that would imply in 2020 and 2021?

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Andres Alberto Lopez, O-I Glass, Inc. - CEO, President & Director [21]

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So the -- well the capacity that is being shut down over this period of time all relates to the local demand in the United States. The share of the various tiers of the beer categories, obviously, has changed over time. The category has moved towards premium. Premium is made up of several brands, Corona is a very important brand there. So that has an influence in the total demand in the United States. When it comes to the JV with CBI, we already built 4 furnaces. The fifth furnace is going to go into operation early this year. And with that, that's the -- this all we have planned.

Now there is no direct connection right now between that furnace and the capacity within the United States. So for our purposes, we are balanced right now. We're going to have the last furnace going into operation in Mexico for CBI, and we'll continue watching very closely, the capacity here. And if something changes beyond what we have reflected, which is the fastest decline rate we've seen so far is what is reflected in our projections right now, then we'll make a change, but we don't expect any of that at this point.

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [22]

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Just to give you a sense of sensitivity here is, for example, if there would be another follow-on 10% to the decline in North American beer, that represents about 1 large furnace of volume, just as far as the sensitivity of the degree of activity.

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Operator [23]

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(Operator Instructions) Your next question comes from the line of Anthony Pettinari from Citi.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [24]

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I have a follow-up question on complexity. I think on the last call, you talked about a $0.10 to $0.12 hit from complexity issues for full year '19, a $0.10 hit from start-up costs. I'm just wondering if you could talk about the extent to which you expect those costs to drag into 2020? How much of a hit do you anticipate them being? Or how much of a hit do you have to offset in other places?

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [25]

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Yes. I can touch base on that, is -- with where things ended the year, we had profiled in one of our charts, a $0.25 EPS hit for operating costs for the full year, of which about 1/3 of it each was around complexity, commissioning costs, and then market-related downtime. So that number ended up being a little trimmed down from that previous estimate there.

Now keep in mind that we are also doing the turnaround initiatives that are looking to address this. So understanding the turnaround initiatives are something like $35 million to $50 million, but we're also going to have some of this residual complexity and other commissioning costs coming through. We probably think that the net improvement in that operating cost line in understanding those moving parts is probably $0.10 to $0.15, so to speak, on a net-net basis. That means that we get the turnaround benefits, and then you have some of that residual effect of complexity still there and some residual commissioning costs with Gironcourt.

So hopefully that provides a little bit of context.

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Operator [26]

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Next question comes from the line of Mike Leithead from Barclays.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [27]

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Just a quick just a quick question on divestiture program, I believe you're targeting, call it, $400 million to $500 million and the soda ash sale gives you about $200 million. So I guess for the remaining $250 million or so that you're targeting, can you just give us a rough updated time frame of when you would expect to execute on that? And should we expect it to be another 1 to 2 sizable announcements like soda ash or are we talking 5 or 6 smaller things left?

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [28]

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I'll address that. So you're right. So we have something like $200 million to $300 million left in that program. When we originally initiated that program, which was at our Investor Day over a year ago, we said it was a 3-year program, of which we're going to get $200 million in the first year.

We have a number of irons in the fire, probably the largest individual one did represent the soda ash transaction, although there are a few more in there that are of size. It's going to be a combination of noncore elements, kind of like that soda ash transaction is a good example, but there's also a number of property sales that are underway right now. In fact, we have a number of them that are getting inked up as we speak, that are going to be probably spattered across the time horizon.

I do think we'll probably make good progress here in 2020, but I don't want to commit to a specific dollar amount because it affects the negotiating position of the company.

So again, good progress this year, a number of different items in the hopper right now.

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Operator [29]

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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 Senior Equity Research Analyst [30]

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John, just a couple on cash flow. So assuming you -- your asset sales go as you expect over the balance of the year and given your earnings forecast, your cash flow forecast, what do you expect your net leverage to end the year at? So is it 4 at year-end '19, what are you expecting roughly at year-end '20?

And just on a related topic, you talked about you're reducing your factoring in '19 to rebalance your liquidity, and I'm not sure what exactly you mean by that? Obviously, factoring means debt, so maybe you didn't want to increase your debt, I'm not sure, but can you just kind of in plain English talk about why you reduced your factoring last year after addressing the other question about net leverage.

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [31]

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Yes, sure. So first on the net leverage. So with what's laid out here in the outlook, which does not have any divestitures in it, that brings the leverage down to around 3.8x versus 4.0 at the end of 2020. Obviously, anything that is incremental to that as far as divestitures will continue to bring that down. And obviously, our longer-term goal is to bring it down to 3x leverage through the combination of these divestitures as well as operating cash flows, obviously.

So we think that will end the year if we're able to execute these divestitures and the strategic reviews as we've been talking about with making more progress obviously than that 3.8 number, but I don't want to give a specific dollar amount to that.

So let me touch base on liquidity. So as you may recall, around mid-2019, we renegotiated our bank credit agreement. That increased our line of credit from $1 billion to $1.5 billion. And then we also were taking a look at other things that were out there and factoring was one of them. So factoring at the end of 2018 was around $600 million or in excess of 50% of total receivables. And so taking a look at how -- what is the total liquidity on lines as well as uncommitted lines of credit, for example, as factoring represents, we wanted to rebalance that off and we ended the year in 2019 making about a 10% reduction or around 40% of receivables being factored.

So it's really just kind of balancing that off. Also keeping in mind that on factoring, it's, in many ways, the lowest cost of debt that we have in financing for the company, but we also want to make sure that we don't find ourselves factoring in higher cost to markets that obviously increase the interest cost of the business. So I think where we landed right now is a pretty good place for balancing that off.

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Operator [32]

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

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

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I just had another question, I guess, on the longer-term cash flow outlook. When you think about that $300 million or better, and then you mentioned the fair amount of maintenance CapEx, I mean, looking out a couple of years, how do you expect CapEx and cash flow to trend? Would you consider 2020 kind of the inflection point to continue free cash flow growth?

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [34]

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Yes. I would say that it will be intentionally meant to be an inflection year to growth. So as we look at the operating leverage of the business, and we've spent a fair amount of time talking about the turnaround initiatives, things like that. So that's an important component of improving the operating performance of the business. The capital levels, we -- again, this $300 million on the maintenance-related side of the fence is one piece of the pie. Ultimately, we will probably need to put some more capital into strategic growth, but as we go even to longer-term in the future, as I talked about before, as MAGMA comes online that becomes at a lower capital intensity, not only for the maintenance side of the house, but also to be able to do more on the strategic side of lower capital intensity.

So obviously, as we look to reduce debt, interest payments and things like that will also go down. The working capital management practices that we've been talking about and focused on that should yield fruit also.

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Christopher David Manuel, O-I Glass, Inc. - VP of IR [35]

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I think we have time for one last follow-up, Vincent.

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Operator [36]

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Next question comes from the line of George Staphos from Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [37]

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Really quickly, can you update us on what the next steps for the Paddock process are?

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John A. Haudrich, O-I Glass, Inc. - Senior VP & CFO [38]

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Yes, yes, George, as you can imagine, right now, there's -- the process has started. It's proceeding as expected, the initial motions and the formation of the creditor community activities. I think what we're going to go into is a period of a lot of administrative activities that require setup and things like that.

So there's probably not a lot that we can update for the time being, although it's following as we would expect. And obviously, we intend to be constructive through the process as we've noted.

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Christopher David Manuel, O-I Glass, Inc. - VP of IR [39]

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Thank you. I would like to note that -- thank you for participating in O-I's call today. Our first quarter conference call is scheduled for April 29, 2020, and it's always an exciting day to choose Glass. Thank you.

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Operator [40]

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This concludes today's conference call. You may now disconnect.