David Johnson – Vice President, Investor Relations Al Stroucken – Chairman, President and Chief Executive Officer Steve Bramlage – Senior Vice President & Chief Financial Officer.

Chris Manuel – Wells Fargo Securities Mehul Dalia – Robert W. Baird Albert Kabili – Macquarie Research Debbie Jones – Deutsche Bank George Staphos – Bank of America Merrill Lynch Philip Ng – Jefferies & Co. Adam Josephson – KeyBanc Capital Markets Alton Stump – Longbow Securities LLC.

Good morning. My name is Shirley, and I will be your conference operator today. At this time I would like to welcome everyone to the Second Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. David Johnson, Vice President of Investor Relations, you may begin your conference..

Thank you, Shirley. Good morning, and welcome everyone to O-I's Earnings Conference Call. Our discussion today will be led by Al Stroucken, our Chairman and CEO; and Steve Bramlage, our Chief Financial Officer.

Today we will discuss key business developments, review our financial results for the second quarter of 2014 and discuss trends affecting our business this year. Following our prepared remarks we'll host a Q&A session. Presentation materials for this earnings call are available on the company's website at o-i.com.

Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which exclude certain items that management considers not representative of ongoing operations.

In the second quarter of 2014 and 2013 there were no such items. A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the appendix to this presentation. Now I'd like to turn the call over to Al..

Thank you, Dave and good morning. Earnings per share of $0.80 were in line with our expectations and essentially on par with the prior year. Global volume for the quarter was down 1%. However, if we take out the impact from China, where we shuttered three plants earlier in the year, global volume was actually up 1%.

Although Asia-Pacific volumes were down, volumes in all of the other regions, especially South America were up. This continues the growth that we have seen for several quarters. Beer was particularly strong in Europe and the Americas driven by the World Cup and better weather compared to prior year.

South America delivered strong financial results due to substantial volume growth across the region. This performance was modestly outweighed by lower profitability in the other regions. Now let us turn to Slide 3 for a closer look at Europe and North America.

Volumes in Europe increased by 2% in the quarter, with gains reported in the beer, wine and food categories. Our growth in the relatively flat wine market came primarily from sparkling wine, and our spirits volume was soft as our customers worked through high inventory levels due to demand declines in China. Prices were down about 1% in the quarter.

This was fully offset by tailwinds from cost [inflation] (ph) and the stronger euro. Our asset optimization program in Europe continues apace. We have taken out an additional $5 million in structural costs year-over-year.

This benefit however was masked by comparably lower production volume due to downtime driven by three key factors, the pulling forward of a furnace repair in the UK, engineering work associated with asset optimization, and more changeovers of jobs than average to meet our customers’ shifting demand needs during the peak second quarter.

All in all, European performance was essentially on par with prior year. In North America sales volumes were up 1%. In the non-alcoholic beverage segment we continue to benefit from the strengthening of our customers’ preference for glass.

Premium juices, iced coffees and teas, craft sodas, and Pepsi Twist package being unique, compelling and sometimes retro glass bottles are boosting our sales. Within the beer category, soft mega beer sales were more than offset by continued double-digit growth in the craft beer segment, where O-I has the lion’s share of the market.

Volumes in other categories declined modestly, largely the result of customer inventory destocking. North America’s profitability was adversely impacted by the mix of business, in particular by softness in wine and spirits. The region continued to grapple with higher warehouse and delivery costs and we anticipated the carryover impact of Q1 weather.

This was compounded by additional strain on the supply chain from the higher than anticipated change in the sales mix. In South America – moving on to Slide 4 now, in South America our volumes exceeded initial guidance. We saw double-digit growth in Brazil due primarily to strong beer volume.

In the Andean countries we saw our first positive volume trends since the first quarter of 2013. We were especially pleased to see our beer customers ramp up float replacement purchases in the second quarter, a bit sooner than we had expected.

In addition to higher volume, this quarter’s operating profit benefited from less production downtime during furnace rebuilds. In all, segment margin in the region was up more than 500 basis points in the quarter. By contrast, Asia-Pacific’s performance was disappointing.

Most of this volume decline in the Asia-Pacific region was driven by our retrenchment in China earlier in the year, and we will continue to feel the topline impact of those permanent shutdowns through the back half of 2014. The remainder of the volume decline was due to continuing weakness in the Australian wine and beer markets.

The Australian export wine market, particularly to the US and China continues to lag behind prior year volumes. The Australian mainstream beer market, where we have significant volume, has been losing considerable share to imports. Separately profitability in the region was also dampened by cost inflation as we have mentioned in earlier calls.

Contractual agreements in Australia will allow us to begin passing on higher cost to customers in the back half of the year. Now I will turn the call over to Steve to review our financial performance..

Thanks Al and good morning. Turning to Slide 5, starting with the table on the left, second quarter 2014 segment sales were $1.8 billion, up 1% over the prior year. Price in the quarter was 1% above prior year.

Prices in North America were higher in part due to our contractual pass-through provisions plus our assumption of freight handling for a top customer. Price gains were broad-based across South America and as Al already noted prices in Europe modestly contracted consistent with a slight deflation we have experienced there.

Sales in tons decreased 1% with volume declines in China only partially being offset by gains in Europe and across the Americas. As also mentioned, currency movements impacted sales in every region, Europe was positive and South America, North America and Asia-Pacific negative.

On balance, currency positively impacted overall segment sales by approximately 1% in the quarter. Segment operating profit in the quarter was $262 million, compared with $267 million in the prior year. The impact of price carries over directly from the sales line. The positive impact of sales volume on operating profit may not be intuitive.

You can see that the $24 million headwind on the sales line actually translates into a $3 million tailwind on operating profit. This reflects the varied incremental margin on sales across the globe.

In particular in this quarter, the significant drop in low margin sales in China was more than offset by higher margin volume gains in both South America and in Europe. Within operating costs, inflation abated to more normal levels compared to the first quarter, inflationary spike that was driven by North America energy costs.

While the company suffered from higher supply chain costs in North America and lower production volume in Europe and Asia-Pacific, our continuing efforts to take out structural costs were mitigating factor. I would note also that South America’s results very modestly benefited from a small sale of a non-strategic asset.

Finally, the net impact of currency was a tailwind of approximately $6 million, primary driven by the euro as Al has already mentioned. Let me now address the few moving parts of our earnings bridge on Slide 6. First, as we just discussed, segment operating profit was lower than the prior year.

Second, corporate expense was favorable to prior year driven by reduced pension expense primarily. Thirdly, our effective tax rate was 22%, which was modestly unfavorable due to a low rate in the comparable period. All in all, second-quarter earnings were $0.01 lower than the prior year. Now let's turn to Slide 7 for our third quarter outlook.

In Europe, we expect sales volume to be up modestly over the prior year, driven primarily by beer. European operating profit will also benefit from further asset optimization savings and from higher production volumes as the impact of engineering downtime and the number of job changeovers, which impacted the second quarter, begins to abate.

In North America, we expect sales volumes to be flat with prior year. Higher planned furnace maintenance should lead to lower production levels in the third quarter. As a result, this will manifest itself in lower fixed costs absorption, which will adversely impact the bottom line during the quarter.

Turning to South America, we see several factors coalescing into another positive performance in the third quarter. We anticipate volume recovery in the Andean countries, especially relative to a lackluster comparison period in 2013. In Brazil, we have more modest expectations for growth.

The uncertainty around post-World Cup demand is compounded by a likely tax increase on beer in Brazil that is expected to be announced in the relatively near future.

Recall further that several one-off events in South America dampened profitability in the third quarter last year such as the general strike in Colombia, which created uncertainty in the market and also caused several of our production facilities to halt shipments temporarily.

Barring similar events, we expect a further lift in the region’s operating profit. Finally, let's turn to Asia Pacific where we anticipate lower year-on-year operating profit in the third quarter. Volume is expected to be down again double-digits.

China will continue to be the primary drag on the top line following the plant shutdowns that Al previously referenced. Depressed Australian wine and beer markets are likely to continue to weigh on results during the quarter.

This will be partially offset by fixed cost savings from the furnace that we took out at the end of last year and by higher contract prices as price adjustment formulas, particularly related to energy kick in during the third quarter. We are also intensifying efforts to reduce spending.

We expect corporate costs to be somewhat higher than the prior year due to higher R&D spending and the timing of certain other expenses. The effective tax rate for the quarter and the full year is now expected to be no more than 23%, which is the low end of the previous guidance range.

Considering all the puts and takes, we expect adjusted earnings per share for the quarter to be up approximately 10% over the prior year. I will now move to Slide 8, and we will discuss the 2014 updated guidance given the fact we have better visibility into the second half of the year.

first the company remains fully committed to delivering improved earnings and generating higher free cash flow year-over-year. Most importantly, our free cash flow target of approximately $350 million remains unchanged. Further, we have not changed our capital allocation priorities for this year.

We will devote approximately 90% of our free cash flow generation to debt repayment and the remaining 10% to anti-dilutive share purchases. Turning to earnings per share, the first half of the year has unfolded within the range of our expectations. Given that plus our clear view of the second half we are narrowing the EPS range for the full year.

Let me highlight the key drivers that have impacted this range change. North America’s higher than anticipated supply chain and expense cost us approximately $0.10, and we are unlikely to be able to recover this in the second half of the year.

By contrast, South America has outperformed our original expectation, driven by volume growth to date in Brazil and favorable volume trends in the Andean countries. Other influences largely offset each other, including better than anticipated European volumes versus ongoing demand weakness in Australia.

Considering all of the moving parts, we’re narrowing our EPS guidance range to $2.85 to $3.05 per share. We believe this demonstrates our confidence in our ability to execute on our strategic priorities in an ever-changing environment. Let me now turn the call back over to Al to discuss our key priorities on Slide 9..

Thanks, Steve. We continued to successfully deliver on the management priorities that we outlined for you at our investor day in 2013. On the operational side, while the regions have made solid progress in taking costs out, we still have more to do.

We must drive the cost reduction efforts to the bottom line by implementing long-lasting structural changes that improve efficiency and productivity across the entire supply chain. On the financial side, we remain disciplined in our capital allocation as Steve mentioned. In fact, during the second quarter, we brought back $12 million of stock.

On the strategic front, we are in the midst of the European asset optimization program with many machine upgrades and other improvements underway. The program continues to generate cost savings in line with expectations. Our new innovation centre has significantly increased the speed with which we move product innovation from concept to customer.

In just a few short months the team successfully produced red glass, the culmination of great efforts by the global innovation team. We are now in discussions with several customers about possibilities to enhance their brands with red glass. Dozens of other projects have moved forward more rapidly because of the new center’s capabilities.

We have also seen beer and spirits containers and black glass from O-I commercialize in North America and Europe. The strong collaboration we are seeing between our global product innovation and R&D teams is leading to more fruitful discussions with our customers. We saw the Helix bottle commercialize in Europe this quarter.

The new twist to open Helix concept combines an ergonomically designed stopper made from cork and the glass bottle with an internal thread finish in the neck, creating a high performing and sophisticated wine packaging solution. And another matter you may have heard that we recently expanded the scope of Andres Lopez’ role.

He is now serving as president of the Americas, taking on the additional responsibility for leading North America. Having Andres in this broader leadership role allows us to capitalize on the success his team has had in South America and he brings a great deal of knowledge and insight to our North American operations.

He has stepped into the role with ease as he has held leadership positions in North America earlier in his career and is very familiar with our North American operations. Thank you and now I will ask Shirley to open up the lines for your questions..

(Operator instructions) Our first question comes from the line of Chris Manuel from Wells Fargo. Your line is open..

Gentlemen, a couple of quick questions for you, first as we look at, you know, some of what is happening down in Latin America, you spoke about the mix beginning to improve there a bit with respect to refillable floats and things getting better, is this something that you kind of look forward at the balance of the year and into next year that you think is sustainable or consistent that we have seen a begining of a turn that, you know, what has looked like an increase in kind of one way packaging around the World Cup is beginning to maybe abate a bit, or what is your view down there on how sustainable, you know, the demand improvement is?.

I would say, when we look at the Andean region, in particular, what we experienced last year was atypical drop-off demand of a normal replacement of floats, and so what we have talked about in past meetings was that we expect this to start again this year and at least first indications on the second quarter of this year are that this is going to happen, and so, in our projections for the second half clearly a replacement of floats is a component of our expected growth that we see in Latin America.

In Brazil, of course, refillable package is still a significant component of the market, but a lot of the volume growth that we saw in the first half of the year was geared towards one way containers because of the short-term nature of perhaps the consumption blip that we expected, but we still see based on the comments that our customers are making that refillable containers are going to be a considerable share of their strategy to hit the pricing points and to get to consumer affordability levels much earlier in the evolution, and so we are quite positive at this point in time with what we can expect with regard to refillable containers.

The uncertainty in Latin America is really derived from the high demand in the first half of the year in Brazil, which was certainly [upheld] by the World Cup, and we do not know how much of a contraction we are going to see in the marketplace, and that is particularly – that uncertainty is particularly exacerbated also by an excise tax that Brazil is considering to implement, but we don’t know the timing nor do we know the size of the excise tax, so that is the only uncertainty at this point in time..

Okay, that is helpful, and then my follow-up has to do with Europe, where there was, you know, a little bit of a shortfall in the year. It sounds like, you mentioned a furnace that went down early.

Could you maybe give us a little color there, was that one that was slated to be closed or was that one that is just a rebuild and then, you know, some of the higher costs for changeovers and things, you know, remind us, aren’t those typically things that, you know, as you are getting orders for changes that you can typically, maybe not in this quarter, but over the next quarter or two recover from, you know, pricing and things of that nature for having new products and having new, the service et cetera?.

Typically, of course, we plan the furnace replacements, but when furnaces come to the end of their lives they very often do not hold on to the last couple of days that we have planned for and so that the level of uncertainty increases, and what we saw in Europe was at a furnace that we had scheduled for rebuild for the third quarter fundamentally needed to be rebuilt a quarter prior, so three months or four months earlier.

Similarly we see such situations happen in other regions as well, and they do affect of course, the region in that quarter-to-quarter comparison, but then typically since they were planned shutdowns anyway, then we would expect a recovery then in the quarter where originally it was planned to be replaced.

So that is also why you see some shift in the quarterly performance in the comments that Steve has made earlier with regard to our projections for the remainder of the year..

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

Hi, good morning. It is actually Mehul Dalia sitting in for Ghansham.

How are you doing?.

Hi, good morning..

Good morning..

Good morning.

Just wanted an update on your free cash flow allocation strategy going forward, you expect about 10% of free cash flow to go towards share buybacks in 2014, what does that percentage look like in 2015?.

Yes. This is Steve Bramlage here. You are correct. In 2014 it will be 10% for anti-dilutive share repurchases. We have not been prescriptive yet on the percentage that 2015 will ultimately deliver for free cash flow.

It will certainly be a higher percentage, a significantly higher percentage based on the balance sheet and the scope of the business that we have now. We are in the midst of our planning and budgeting process.

We are essentially kicking that off now, and so I would expect us to give more detailed guidance on that as we exit the third quarter, but it will be a significant increase because we will be much closer or at our desired leverage level and there simply will not be from our perspective incremental attraction to putting the current level of cash flow towards deleveraging that we are doing this year..

Great, thank you and when reconciling your full year and 3Q guidance, it is implied that 4Q will have a record quarter relative to previous fourth quarters, what gives you that confidence for such a solid 4Q?.

I guess I would start with the production levels in Europe, so back to some of the issues that compress the profitability relative to expectations in Europe in the second quarter were driven by production, the timing of projects in the European asset optimization side.

A lot of that engineering work is happening earlier in the year than in the comparable period last year. So we will be producing at significantly higher levels in Europe on a year-over-year basis, which will drive a large part of the improvement in profitability on a year-over-year basis..

And in addition to that in Latin America we expect stronger sales then we had last year in the third and fourth quarters..

Our next question comes from the line of Al Kabili from Macquarie Research. Your line is open..

Good morning.

I wanted to dig in first on the supply chain issues you highlighted in North America, and Steve maybe you can size up at your vantage point right now, your best guess sort of what that headwind is looking like, it sounds like it is a bit higher than you anticipated?.

Yes. I would – our best guess, best estimate right now is we probably incurred another 7ish million dollars of negative supply chain related EBIT impact in North America that was a carryover from, you know, the weather-related issues in the first quarter. That is a little bit more than we anticipated.

If you recall, we – I think we said it was about 10 million in the first quarter and we thought we would have about half of that flow through in the second. So it has been modestly more.

I think it is somewhere in $17 million, $18 million for the entire first half of the year, and that is the primary reason that we’re lowering the top end of the range. I think it is safe to say that the weather related issues are finished and resolved in the business at this point in time.

But I think it is all so quite unlikely that we’re going to be able to recover that in the second half of the year..

Okay. That is helpful.

I appreciate that and then on the Australian business, the soft, continued soft volumes there, I think you mentioned that China, the declines there, can you help us with the volumes specifically on Australia, you know, what they are doing year-over-year and to the degree they remain sluggish, are there any additional levers that you can – you can do from the cost side?.

Yes that is a constant consideration. Of course, we have to look at whether the trends that we are seeing are permanent trends or just temporary trends.

I think what we are seeing at this point in time with regard to the wine market, it is quite obvious that the Australian wine market, especially their export related business is taking it on the chin I would say through May, export bottle volume in Australia is known about 10%, and that of course has a significant impact.

On top of that one of the large exporters in Australia in wine is going through a major restructuring program, which has an impact on their overall demand profile as they are looking at their inventories and so on. But that is most probably going to be something that is temporary in nature.

Now with regard to beer, it is a question of competitiveness and of price levels, imported beers can be bought into the stores at a lower price than domestically manufactured beer and that is clearly having a dampening effect on domestic production.

I would say that overall most probably beer, as far as domestic beer, is down 3% to 4% or so, and I don’t think that that is likely going to change until currency has an impact on the Australian market.

Now what we have done in the past and what we will continue to do is we will make adjustments then in our installed base to make sure that we have the cost structures that are appropriate for us to still get to the margin levels that we need and that we had projected in our investor conference in 2013 in Australia by 2015..

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

Hi, good morning..

Good morning Debbie..

I have a couple of questions, and the first, you know, it seems your rationale for moving away from the unprofitable business in China is trying to make sense, but I am just curious, what is your long-term strategy at this point in that region because I’ve seen the gross rate for beverage consumption in China is higher than most of the regions where you currently compete, so what would you ultimately need to speed, kind of re-enter and grow your business there?.

Yes, our approach at this point in time is to keep a presence in China in the coastal regions and then we also have a joint venture in Sichuan province because those customers really serve more of the international brand to the customers in China either foreign companies in China or Chinese companies that export a lot and quality requirements and price levels tend to be higher there and allow us to get a decent margin for our business.

It still allows us to keep an eye then on the Chinese market without becoming entirely dependent on the very competitive nature of that market at this point in time. And it also provides us given their locations with the buffer capability for Australia, New Zealand, the west coast of the United States.

So, I think by having a presence for the next couple of years and keep watching the market place it will give us sufficient knowledge about the Chinese market to then make decisions down the road when is the right time to engage at a more substantive level and at the substantive level where we can also get to return on invested capital that we desire..

Okay, thanks that’s helpful.

I guess my follow, you now have some visibility on how your cost savings efforts brought through or will roll through on the back half, comment on your 2015 margin expansion targets, what regions are you most satisfied with your efforts and where am I there be with to the targets you have given, is that correct to Asia Pac is the biggest risk at this point?.

Hi Debbie, this is Steve, I’ll try that. So first thing, we’re not making any changes at all to our communicated target margins either at the NTT level or the individual region as it relates to it to 2015.

I really don’t think the story has changed from when we last commented on this significantly, I think, we’ve already demonstrated an ability to be at the target margin level in the prior year at North America, but for the weather related issues this year, I don’t see any significant impediments to us being able to consistently achieve those kind of margin levels in North America of around 15%.

We’ve very good visibility in South America on a (inaudible) below 20 numbers I don’t see any constraint on our ability to achieve that.

We’ve already at the Asia Pacific margin levels last year of kind a low mid teen, clearly the Australia situation has put some pressure on us this year, but we’ve a very well understood playbook to drive margin improvement there. I don’t think that’s the challenge.

I think our biggest challenge has always been in Europe that’s what we would characterize as the longest – relatively speaking a more competitive environment and it was relatively speaking a larger amount that we need to make up.

But, we’re confident right now based on what we see with the market dynamics there as well as the progress in the asset optimization side.

There is a path for us to get to those approximately 14% margins, but sitting here today, I think Europe is going to be the most significant challenge for us and it’s consistent with the investments we’re making in that region to make sure we’re able to get there..

Our next question comes from George Staphos from Bank of America Merrill Lynch, your line is open..

Hi everyone, good morning, thanks for all the details. I wanted to take my two questions and get back to volumes and production levels and competitive trends.

In Australia and New Zealand are you seeing any effect from market share loss versus the other producer in the region and overall were the volumes and productions levels as you would have expected broadly in the region or did export issues and the other factors to mention Australia really provide the negative variance? The second question that I had in Europe, you mentioned that you’re pulling forward some engineering work, you had the set went down little bit early and that was an issue in terms of your production, taking a little bit differently, did any market softness that materialize in 2Q cause you to say, hey let’s take advantage of this and pull forward our engineering and furnish rebuild work to hopefully get ahead of it and get a bigger uplift in the second half? Thank you, guys..

Let me start with the Europe question first, then I’ll hand it over to Steve to talk about Australia a little bit. Clearly, what we’re seeing in Europe is a strengthening demand trends in general and that has significantly helped overall by beer demand as we already had indicated, wine was more flattish, food was pretty strong.

So, there is a regional differentiations still in Europe with regard to what demand profiles look like and some of our smaller competitors that reported on the Southern region of Europe indicated that the market is still a bit soft.

But overall, looking at a total volume of the European market, I think the market is recovering, is on a bath forward and I believe that some of the pricing dynamics which were also driven by a very low inflation rate at this point in time in Europe will eventually dissipate.

With regards to our projections going forward, we’re confident that the overall volume evolution that we’ve seen over the last three or four quarters is going to continue and that has really given us the confidence to make sure that we stay within timelines of the restructuring program and in fact, whenever we need to make sure that we repay our facilities perhaps a little bit sooner to be ready for that increased demand as we go into next year.

They will also help us in the second half of the year, of course to build up some inventory which has been run down quite a bit over the last six months in the European market because of that construction activity and that’s going to help the projected numbers for the second half of the year as well..

And related to the Australian to your question George, I would, I guess I would start with New Zealand and add Indonesia and Persia. Over the last 12 months we’ve gained share in several segments wine and beer in New Zealand over the last year, we’ve also gained share in Indonesia as we’ve added some incremental capacity and capabilities.

Australia is a little bit more of a mixed bag, I think as it relates to the sole domestic competitor that we’ve there, I think its, we’ve picked up some and we’ve lost some, but over the last couple of months or the last first six months of the year I don’t think there has been a significant net change then I’m aware with the domestic competitor.

We’ve lost a little bit of share to some imported where coming into Australia on a temporary basis, we’ve re-secured that share of loss starting at second half of 2015 for I think in other six or seven years, but there will be a 12 month period a time, a little bit longer than 12 month period a time or we’ve ceded a little bit of share to some imported ware in Australia that’s probably the most significant negative share change in that region..

And our next question comes from the line of Philip Ng from Jefferies & Co., your line is open..

Hi guys, one of your competitors in North America is shutting some capacity, is that an opening for you to pick up some of that business and how should we think from the margin standpoint as well?.

Well, I assume we would only have arrived at that conclusion if that business had already been lost and we haven’t picked up business. So, I cannot really comment further on that.

Then, what our perspective is, at this point in time, but I do not think that that provide us with an opportunity to pick up additional work, certainly we would have been in discussions right now..

Got you, that’s helpful.

And then, Asia Pac is from a demand perspective, it’s been pretty weak for some time now even you ship out China, it’s encouraging to hear you’re going to pick up some new business next year, but when you look at your footprint is there a need to right size that a little bit and can you give us a sense where capitalization is checking out in Asia Pac at this juncture?.

Well, as you know, we’ve been taking care of some of our infrastructure, as I said earlier we shut down three facilities in China, late last year, early this year and you also are aware of the restructuring that we went through in Australia.

I think if we really find that some of these volume evolutions are going to meet more permanent in the nature we’ll still look at our installed base and make the adjustments that are necessary to remain at a competitive price and cost structure in that market because one of the attractive features of course of the Australian and New Zealand market is, are relatively high market share and I think solid and stable domestic consumption normally, which of course, at this point in time is a little bit turn out of filter by the huge changes that we’ve seen in exchange rate over the last couple of years.

But, this as you know is a fairly long term business, so we’ve to be careful when we make our adjustments because once we shut down an operation or take out capacity, it will become extremely difficult to correct that if we guess to the wrong side.

So, we have to be bit careful, but there still levers available to us to make sure that we get to the margins that we desire in the region..

Our next question comes from the line of Adam Josephson from KeyBanc Capital Markets, your line is open..

Thanks, good morning everyone..

Good morning..

My two questions, one is just on wine and spirits you mentioned in North America was soft. Can you discuss, what you think contributed to that and you expect that to continue? And the other question is related to your free cash flow guidance, obviously you maintained the guidance despite taking down your EPS guidance a bit.

So, can you talk about how you’re able to maintain that cash flow guidance? Thank you very much..

I’ll let Steve handle cash flow.

With regard the demand and that is the demand of products from us into the wine industry because if you look at the overall wine consumption, in North America it was flattish in the first half, it was not a significant downtrend, it really, we believe is de-stocking on the part of our customers that is really affecting in the first part of the year.

We expect that that is going to recover as we move forward after they have gone through this process, but the long term trend for wine in North America really has really has not changed and that has continued growth for the foreseeable future..

And as it relates to cash flow, we put out the guidance at the beginning of the year around cash flow with the expectation we would have in earnings number within the range that we had initially 280 to 320 we’re still within that range.

We’ve narrowed the range and so there would be no reason for us to change the cash flow, it’s very consistent with the broader earnings range that we had anticipated and as you know there are – and there are many, many levers related to cash flow, capital expansion etcetera and those are all generally tracking quite consistent with our expectations at the beginning of the year and I’m very confident that we’re well positioned to deliver on that number..

Thanks Steven, I appreciate it..

Our next question comes from the line of Alex Ovshey from Goldman Sachs, your line is open. Alex Ovshey, your line is open. Our next question comes from the line of Tyler Langton from J.P. Morgan, your line is open..

Yes, good morning thanks. This is Martin.

Just as South America, can you talk a little bit about what drove the double digit increases in Brazilian shipment, I think you said it was mostly beer, but I think sort of just beer production in return about the last was I think down or flattish slightly for the industry, so I was just wondering if you’re getting share or kind of what drove the strong increases on your end?.

What we have to keep in mind is that we also participated in the one-way beer sales and Latin America, which we’re really not that far off from the increase in the can beer sales as far as growth is concerned.

Now, as you know, one way bottles is a smaller share of the total volume but I think we saw very solid double digit growth in the one way beer segment.

The growth in the returnable container was a little bit lower, one additional factor which impacted us last year and which has not seen this year is that one of the larger customers in Brazil last year had procured significant volume from Venezuela on an imported basis and the second and third quarter of last year which is not happening this year likely because that volume is not available for export and that of course added an additional boost to our volume increases in the Brazilian market.

And I think that by itself is of course not reflective of overall demand, just reflective of a changing supply line and that has helped us well..

Okay, got it, thanks.

And then, just with Asia Pacific could you add, quantify to the impact in the quarter, the delays in sort of passing through cost inflation and then just for the second half of the year, do you still expect to kind of recover fully what you have lost in first and second quarter?.

The primary delay relates to energy cost, energy inflation in Australia, we incurred about a $5 million squeeze in the first quarter and I think the squeeze was comparable in the second. So, I think we’ve had about a $10 million headwind in the first quarter related to that.

We will start to recover that in the third and fourth quarters, I’m not sure we’ll recover quite all time based on the timing of the past years, but I would expect us to recover the majority of that in the second half of the year..

Our next question comes from the line of Chip Dillon from Vertical Research, your line is open..

Hi guys, this is Brian, then filling in for Chip. Just a question, looking at OI’s compact situation – sorry can you guys hear me now. This is actually Brian Lynch filling in for Chip Dillon.

Looking at OI’s income tax situation, as the company analyzed the benefits of possibly re-domiciling outside the U.S., say in Europe?.

This is Steve, I’ll do that. The answer is yes, of course, obviously we read the paper just like everybody else.

The reality is our particular situation so called in version type of a transaction for us, we’re not a large domestic payer of taxes at this point in time in the United States largely due to our legacy asbestos liability which has created significant net operating losses for us in the U.S. and we do not anticipate being a U.S.

tax payer of any substance for the foreseeable future. So the merits of that sort of transaction really don’t fit our particular fact profile here for the near future..

Okay.

And regarding the asbestos exposure, just a quick question on that as well, as you work towards the year end accrual, how much do you feel the charge will change versus 2013 stats?.

It’s a little bit early for us to obviously to handicap exactly what that will be, so I’ll fall back to the fact that the underlying fact pattern has not changed. We continue to receive modestly diminishing numbers of claims on a year-over-year basis, the folks you’re filing claims against the organization continue to get older albeit at a slow pace.

So, our guidance is on the cash side that number will come down $5 million to $10 million of cash for each of the next several years based on the demographics and the trends that we see. And obviously, the annual charge we take is a three year look forward, so it should be reflective of that modest continuing step down.

I don’t see a change in the fact pattern in terms what will impact the charge this year once we go through those mechanics..

Our next question comes from the line of (inaudible) from Bank of Montreal, your line is open..

Good morning Steve, good morning Al.

Just a couple of questions, first one on pricing, I wondered if you could touch on pricing both in Europe where you had said you’ve seen heads and weakness and then in Latin America and then I had a follow on?.

Okay. Well, overall pricing in Latin American of course, also given the inflation rate has always very solid, we were at about 5% to 6% or so of price movement in the first half of the year in Latin America.

And in Europe as we had indicated we saw some softness, we’ve seen some weakness in pricing but that’s in my view largely driven of course by the fact that inflation is very mild at this point in time and given some softness still in some of the volumes and certain regions of Europe, there was not a lot of appetite to actually drive for price increases in the marketplace.

I would say given the underlying trends, strengthening trends of the economy whatever is impacting us from an overall supply demand balance may disappear because demand will most probably arise a lot of those issues.

The question still forward is what is inflation going to do? And then, of course, the biggest factor in this is going to be energy and energy as you very well know, of course on the discussions in many countries with regard to the impact of the rusher on the overall energy supply for next year.

So that will most probably, if that becomes a little bit clearer as we go forward will make or will have a significant impact on what the pricing stands going forward is going to be for next year..

Okay, alright.

And then, just on a follow on, this craft beer story has been great for you guys over the last several years, I’m just curious seeing more this going in the cans, do you have any sense in the craft beer market right now, sort of what mix looks like percentage wise between kind of cans and bottles?.

I would have to really take a wild guess because I only have anecdotal information at this point in time. When we talk to the brewers there is a desire for them to be represented in venues to be sporting events, to be on the beaches and so on and of course glass does not allow them to that which is one of the driving factors.

And so, they look at it as one additional model of having products available to a customer base that desires of drinking their products in a variety of venues. But, I would say, and I’ve to take a guess, I think overall the share of cans in that segment is less than 10%..

Our last question comes from the line of Alton Stump from Longbow Research, your line is open..

Just two quick questions.

First half, if you look at stat obviously hasn’t been as strong as Northern Europe, if I recall the harvest for grapes for wine with weak last year, but maybe looking better heading into the back half of this year, any color on how the harvest is looking in for the near, for back half?.

We typically don’t see the harvest influencing our demand as much because Europe also imports a lot of juice and fundamentally then still has the same amount of wine available that they can bottle and the bottling is really the key to us. So, we really have not seen significant variation.

The only difference that we see sometimes is if the harvest and Champaign is weak then we see an impact on the overall volume, but that typically with the couple of years delay because the wine needs to be fermented and needs to be stored and so it takes a while until we see the impact.

But I would say we had a similar story two years ago or three years ago when the wine harvest was weak and we really did not see a significant impact on the overall demand on bottles..

Okay, thanks. And then, I guess, one quick follow up, on the U.K.

plant issue in the quarter, any color on how much of an impact that was of profitability in 2Q and also is that now done with or is there any more that we see bleed into quarter?.

Alton, this is Steve. I can’t give you a specific number, I mean, it would be a couple to several million dollars of an impact from above the downtime associated with it as well as the downstream supply chain implications and I would not expect it to be a significant number going forward as Al said.

We’re executing the exact same plan, we’ve always had in mind for that facility, just the timing is a little bit different..

Great. Thank you everyone that concludes our second quarter earnings conference call. Please note that our third quarter 2014 conference call is currently scheduled for Wednesday, October 29, 2014 at 8:00 a.m. Eastern Time. We appreciate your interest in OI and remember everything takes better in glass, so choose glass, thank you..

This concludes today’s conference call, you may now disconnect..