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

Chris Manuel - Wells Fargo Tyler Langton - JPMorgan George Staphos - Bank of America Al Kabili - Macquarie Debbie Jones - Deutsche Bank Mark Wilde - BMO Philip Ng - Jefferies Scott Gaffner - Barclays Adam Josephson - KeyBanc Alex Ovshey - Goldman Sachs Ghansham Panjabi - Robert W. Baird Anthony Pettinari - Citibank Chip Dillon - Vertical Research.

Good morning. My name is Bath and I will be your conference operator. At this time I would like to welcome everyone to our Fourth Quarter and Full Year 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. Dave Johnson, you may begin your conference..

Thank you, Bath. 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 2014 and discuss trends affecting our business.

Following our prepared remarks, we will host a Q&A session. Presentation materials for this earnings call are available on the company’s website at o-i.com. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.

Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the appendix to this presentation.

In light of the significant amount of information that we have to cover today and our desire to answer, address your questions, we are asking that you limit your inquiry today to one question. Now, I’d like to turn the call over to Al..

Thank you, Dave and good morning. I’d like to start today with a brief summary of our 2014 results and performance and touch on our expectations for 2015. Europe and South America delivered solid results for the year and we achieved our second highest cash flow in company history at $329 million. Like every other U.S.

based global company, our final results were negatively impacted by the strong U.S. dollar. As an example, we experienced a $40 million headwind to free cash flow in the year. On a constant currency basis, free cash flow would have been closer to $370 million higher than the target we established a year ago.

Our adjusted EPS for the year was $2.63 modestly lower than 2013. This reflects our strong performance in Europe and South America and disappointing performance in North America and Asia-Pacific. The underlying demand pattern in the first half of the year was in line with our projections going into 2014.

During the third quarter, however, we perceived a considerable gap between actual volume and our expectations, plus the dollar began to strengthen and we shared this with you in September. On the whole, 2014 was still a strong year for O-I financially, nearly record cash flow, stronger balance sheet and disciplined capital allocation.

Our higher level of financial flexibility was illustrated in 2014 when we used capital to invest for growth in a joint venture with Constellation Brands to supply glass for well-known Mexican beer brands that are exported to the United States. These include the Corona, Modelo and Pacifico brands.

We also signed a separate long-term agreement with Constellation to supply additional bottles. These agreements are great examples of strategic partnerships with our customers and allow us to participate in growing segments in the U.S. This is possible due to O-I’s unique capabilities as the only truly global glass provider.

On Slide 3, I will provide a bit more detail about business performance in each region. Profits in Europe improved in 2014 despite a sluggish macro environment. We are clearly benefiting from our ongoing asset optimization program which delivered an expected $25 million of incremental cost savings in 2014.

In addition, we continued to strengthen our position in the wine and beer segments. I am happy to report that our most senior commercial leader in Europe, Vitaliano Torno has succeeded Erik Bouts as the Managing Director of O-I, Europe.

As one of the architects of our market oriented structure in Europe, Vitaliano provides the continuity we need to keep our European operations strongly moving forward. In South America operating profit margins climbed back to 20%, driven by overall volume growth 4% including record volumes in Brazil.

Our results were boosted by the anticipated recovery in the Andean countries. Currency headwinds dampened operating profit margin in the region, but were essentially offset by considerable productivity improvements.

North America and Asia-Pacific were less profitable year-on-year due to a number of challenges we identified earlier in the year and are working diligently to address. In North America sales volumes were down 2% largely driven by the ongoing decline in the sales of mega beer packaged in glass.

Our difficulties in the region started in the beginning of the year with weather induced supply chain challenges and we ended the year by curtailing production to adjust for demand expectations that did not manifest during the peak season.

In Asia-Pacific our financial performance was impacted by lower sales and production volume, sales volume in China was about half of that of the prior year in line with our deliberate actions to scale back our presence there.

In addition Australian volumes were down double-digits driven by continued weakness in the domestic beer and wine export markets. On the upside, we are well positioned in Southeast Asia to take advantage of ongoing growth opportunities there.

Our management team in Asia-Pacific has responded to the macroeconomic environment aggressively, so we expect the region to stabilize and increase its profitability in 2015. With that, I will turn the call over to Steve to review our financial performance in more detail.

Steve?.

Thank you, Al. Before discussing any specifics, I would like to make a general comment on currency. Given the well documented strengthening of the U.S.

dollar recently, combined with the fact that 75% of our business resided outside of the United States, we will present financial information this morning on a constant currency basis that is using the prior year’s currency rates. Our intent is to allow greater visibility into the actual underlying business performance and trends.

I hope this facilitates a clearer understanding for investors generally. Now, turning to Slide 4, in the fourth quarter of 2014 sales on a constant currency basis declined as price increases were more than offset by a decline in volume.

Please be cognizant however, that much of the volume decline compared with prior year fourth quarter was driven by the footprint adjustments we consciously and proactively made in China where we took out three facilities versus the prior year period.

The strengthening dollar started to significantly take its toll on the top line in the fourth quarter, ultimately causing an approximate 6% decline in sales in. In line with expectations, however, segment operating profit contracted only modestly.

Price increases tracked in line with inflation of $23 million, which is consistent with the trends seen in the prior two quarters. On the whole, our cost containment efforts more than offset the impact of production curtailments. Lower sales volumes and currency rates were clear headwinds.

Turning to adjusted EPS on Slide 5, you will see that while there are various influencing factors, 80% of the decline in profitability in the fourth quarter was due to currency.

Moving to the full year, adjusted EPS on the right, note the correlation between fourth quarter and full year impacts with modestly unfavorable segment and tax results offset by better corporate and interest expense. The one exception is currency, where you may have expected a larger full year impact. Because the U.S.

dollar only really began to quickly strengthen in the back half of the year, the currency impact in Europe, specifically on profitability, was essentially flat for the full year.

Let me shift my comments to GAAP earnings per share for the moment highlighting the items considered not to be representative of ongoing operations, which you can find enumerated in our earnings press release. The annual evaluation of our asbestos-related liability resulted in a $135 million charge in the fourth quarter.

This is $10 million less than the prior year’s charge and is entirely consistent with the underlying trends we have been experiencing for several years. Asbestos remains a gradually declining, though still significant liability for the company. We also recorded pre-tax charges of $92 million in the fourth quarter.

These charges were primarily from our refinancing activity during the quarter plus a non-cash charge for pension liability reduction actions in the United States and Europe, both of which we have been expecting and have previously communicated. On Slide 6, we provide a snapshot of our financial performance for the year.

In line with our owners’ priorities, we remain clearly focused on generating free cash flow. In local currency, we have seen growth for several years. In fact as we have said before, we expected record free cash flow in local currency in 2014 and that’s exactly what we delivered.

Said differently, had we not experienced such strong currency headwinds in late 2014, we would have exceeded the $350 million in free cash flow that we guided to at this time last year. We have been, I believe, quite transparent about how we allocate our cash and the logic underpinning our allocation priorities.

Of our approximately $700 million in cash flow from operations, a bit over half is directed to maintaining and enhancing our manufacturing assets.

To-date, we have used the remaining cash, what we call our free cash flow in a balanced way for anti-dilutive share repurchases, net debt reduction and in 2014 from modest non-organic growth investments via the CBI joint venture.

As such, we continue to make progress reducing our leverage ratio, which stood at 2.4 times net debt to EBITDA at year end 2014. Please note that the weakening euro provided half of the 0.2 year-on-year improvement in the ratio. Otherwise, we would have achieved our expected year end target of 2.5 times.

Moving to the last graph, you can see that our return on invested capital has been consistent for several years and well above our cost of capital. Going forward, we anticipate gradual improvement in returns via the elimination of low return businesses in China and the addition of value-added investments such as our joint venture in Mexico.

Let me now spend a few minutes with our 2015 business outlook on Slide 7. Overall, we continue to expect fairly stable local market environments in 2015 as our base case scenario. In Europe, the asset optimization program is enabling improved productivity, especially at plants in which investments have been made.

In line with our original expectations, the program should deliver an incremental $25 million in cost savings for the full year. Competitive pressures, particularly in the wine segment in Southern Europe, will partially offset the benefit of these cost reductions.

In North America, we anticipate a similar environment with a gradual dissipation of the mega beer demand slowdown. We have not incorporated any upside in our base case scenario from the North American consumers’ potential higher discretionary income emanating from lower gasoline and energy costs.

Although it’s too soon to tell, we are certainly hopeful for a positive impact. We fully expect our business to recover from the supply chain and production problems that impeded 2014 results. In South America, we expect the growth will pause in 2015 after record volume levels were achieved in 2014.

We also anticipate reduced production volume in the Andean countries due to lower buffer stock requirements from Brazil and the United States. We do see some inflation pressure in the region that will likely take time for the market to fully absorb.

For instance, electricity costs in Brazil are increasing substantially as has been referenced by other companies doing business in the region and global commodities that are heavily influenced by U.S. dollar movements, such as soda ash, will certainly be more expensive in 2015.

Turning now to Asia-Pacific, by the end of the second quarter, we expect to lap the sales declines attributed to our early 2014 retrenchment in China. And in Oceania, we expect essentially stable demand albeit at today’s relatively low historical levels.

On balance though, our actions to regain beer business, market share and restructure assets in Australia, are expected to more than compensate for the sales and production declines we project for the first half of the year. In other words, the second half should be better year-on-year than the first half.

For the company overall, we expect higher segment operating profit for 2015 on a constant currency basis driven primarily by productivity gains in North America and continued asset optimization benefits in Europe. Moving now to Slide 8, in 2015, we will incur the brunt of the strong U.S. dollar on full year earnings.

We have updated our currency expectations here since our last communication in December, as the U.S. dollar continues to strengthen particularly against the euro. Clearly, the volatility is not over with the U.S. dollar index just reaching another approximately 12-year high late last week.

Currency rates are expected to reduce translated sales by nearly 10% in 2015. As it relates to segment operating profit, in early December, we calculated the adverse year-on-year impact of currency at roughly $50 million. Using current rates with the key currencies listed in the slide, it is now double that amount.

This includes the decoupling of the Swiss franc from the euro, which happened in mid-January with the cost structure of our Switzerland-based headquarters largely denominated in Swiss francs for our EU business. Our European region now faces an incremental $10 million to $15 million headwind from this change alone.

As our budget process for 2015 is now behind us, we can also see more clearly the impact of currency on local inflation expectations. In particular, the price of certain raw materials such as soda ash, are de facto based on U.S. dollar pricing.

This has led to an approximate $20 million headwind that will manifest itself in lower segment operating earnings, particularly in South America, but also partially in Asia-Pacific. For long-term contracts with price adjustment formulas, we will ultimately recover this, albeit with a 1 -ear lag.

Even though our local production and sourcing business model, our non-U.S. debt and modest medium-term euro hedging program mitigate significant amounts of currency risk. We still envision that foreign exchange will negatively impact earnings per share by approximately $0.40 at this time.

Given the sensitivity and magnitude of currency movements on our reported earnings, we will continue to provide timely updates to the investment community as needed with revised expectations of currencies impacts on our consolidated results.

Turning to our non-operational performance on Slide 9 now, corporate expense ought to be on par with that of 2014. Pension expense, which I will discuss on the next slide, is roughly flat with prior year. This is a clear improvement over our earlier expectations.

While we will continue to invest in research and development and technology, I expect any increases there will be offset by cost containment elsewhere. With regard to interest expense, we will benefit from debt refinancing and lower overall leverage levels. And finally, our tax rate is still projected to be in the range of 23% to 25%.

Let me now turn to pension on Slide 10, where there have been many moving pieces. First of all, I am pleased to say that the final impact of lower discount rates and the adoption of new mortality tables in the United States were not as severe as we had feared.

This is exclusively attributable to the aggressive actions we took to deal with the real economic liabilities within our pension plans. These actions have allowed us to reduce our pension liability by $750 million since 2012. We took a major step forward in 2014 when we were able to reduce our economic liability by approximately $600 million.

We achieved this by closing all major plans and converting them with one exception to define contribution plans, most recently for salaried North American employees.

By completing the buy-outs of nearly all term vested participants in the United States and by effectively annuitizing the pension in the Netherlands, where we merged our plan into a national multi-company fund, these transferred assets and liabilities completely off of our books.

On the asset side, we have consciously channeled approximately $225 million in discretionary funds to our pension plans over the past several years. In addition to being accretive to earnings, these payments have eliminated the need for us to contribute to our U.S. pensions, which are our largest for the foreseeable future.

In all, we now expect pension expense to be essentially flat in 2015 and pension cash contributions to be approximately $10 million lower than in 2014 in light of a global reduction of rates anywhere between 75 to 100 basis points during the year plus the implementation of actuarial tables, which broadly increase longevity assumptions for retiree mortality in the United States.

Flat pension expense is a tremendous outcome for the company. After thoroughly examining the various pros and cons of accounting methods for pension plans the company intends to maintain its current accounting methodology.

As a rule, we tried to avoid changing our accounting practices if the changes would not reflect an underlying change in actual economics. However, as with all significant accounting assumptions and estimates, we will continue to assess this practice on an ongoing basis.

I do believe it is important however to continue to be very clear as to the impact of non-cash, non-service related charges in GAAP pension accounting on the company’s results. Amortization of historical actuarial losses, for instance do not reflect day-to-day operations nor do they have any relationship to cash funding requirements.

Yet if you back-out this single item, our earnings would be approximately $0.50 higher per share, which is almost 20% of our adjusted earnings. On Slide 11, I would like to bring together the key pieces of our earnings outlook.

As I indicated earlier, on a constant currency basis, we see improved operational and non-operational performance allowing for our normal lack oppressions 12 months into the future, adjusted earnings would be $2.60 to $3 on a constant currency basis per share.

The midpoint of this range suggests an underlying earnings growth rate of approximately 5% to 6%, but of course and unfortunately, we must take into consideration the strong U.S. dollar, which as mentioned before we estimate will provide about a $0.40 headwind at this time. That brings us back to an adjusted EPS range of $2.20 to $2.60.

Keep in mind that we believe the core business is quite stable and we are not anticipating any fundamental shifts in volumes or price cost spread, which have been key sources of historical volatility in our business.

Moving to Slide 12 given our full year outlook and recognizing sales and production patterns in 2014, it should come as no surprise that we expect that the first quarter of 2015 will be down year-on-year followed by improving performance later in the year. Let me step to the regions, first on a constant currency basis.

In Europe, the results are expected to be considerably lower due to project timing and the asset optimization program, which will temporarily reduce production volume and increase cost during the quarter. There will also be sharpening competitive pressures as I mentioned before in the wine segment in Southern Europe.

In North America, we expect to see a $15 million benefit in logistics cost. This will partially be offset by lower beer sales. In South America, profits will be dampened by inflation induced by the impact of local currency devaluation on U.S. dollar priced raw materials and some major local issues such as the spike in electricity costs in Brazil.

We will also face difficult comparables in the first half of the year in Brazil due to the volume uptick related to the World Cup in 2014. Asia-Pacific is likely to be flat as the actions to right-size production with sales volumes take hold.

The impact from currency in the quarter is expected to be approximately $0.07 maybe $0.08 mainly reflected in Europe and South America. In all, adjusted earnings should be in the range of $0.40 to $0.45.

Summarizing the delta from prior year first quarter, close to 40% is currency related, 40% is related to sales and production volumes as well as project timing and most of the remainder is due to the higher expected tax rate of 4% to 5% we will see in the quarter.

Let’s turn back to the full year with a more detailed look at free cash flow on Slide 13. In short, we expect to generate $300 million in free cash flow again in 2015. We have already mentioned improved operating profit in local currency terms.

The year-on-year impact of foreign exchange on cash flows will be substantially lower than on earnings, because we typically generate our cash flow in the latter half of the year. Because the stronger dollar already significantly impacted 2014 cash flows, its impact in 2015 should be less pronounced.

Working capital has been a source of cash for the past few years, but in the coming year, we expect it to be balanced neither as source nor use of cash. Payments for asbestos and pension together are expected to be $15 million to $20 million lower.

Together, capital spending and restructuring should approximate our 2014 spending levels, which is approximately equal to the total depreciation and amortization.

Cash flow is expected to benefit from the lack of several outlays that we have made consistently over the past few years, such as for abnormally high returnable packaging levels and payments related to a non-income tax matter. When we put all the pieces together, we expect free cash flow to be $300 million.

You can be certain that we will continue to focus on cash generation and that we will continue to prudently deploy cash we earned in a value-added way as I would like to discuss on Slide 14.

We will continue to invest over half of our cash from operations into CapEx in order to maintain and rebuild our assets as well as to enhance our productivity and improve our flexibility. As we have increased our cash flow in recent years, we have enhanced our financial flexibility and enabled ourselves to pursue value-added strategic investments.

Even as we invest in the business, we remain disciplined in the allocation of cash to our capital providers. While we have focused on reducing debt in recent years, lower interest rates and the strength of our balance sheet have brought us to a significant inflection point with respect to capital allocation.

Namely as we have been consistently foreshadowing, we are poised to return more cash to our shareholders in 2015. We have regularly discussed with our Board of Directors and have solicited input from both investors and advisors on the best way to do this without compromising our financial flexibility.

As we consider our debt and asbestos obligations as well as opportunistic non-organic growth investment commitments, we strongly prefer the flexibility of share repurchase at this time versus other legitimate alternatives such as a dividend. Our Board has recently authorized a $500 million share repurchase program.

Within the next week or so, we intend to enter into an accelerated share repurchase agreement with a financial institution to repurchase $100 million of our stock. Over the course of the year, we expect to purchase at least another $25 million. For certain, we will be disciplined in our capital allocation.

We will continue to invest in the business in order to sustain its cash generating ability, return cash to shareholders and modestly de lever over time. Thank you for your attention. Let me now turn the call back over to Al in order to wrap up..

Thanks Steve. The path that we have been on for last the 2 years or 3 years continues into 2015. We will maintain many of the same priorities such as strengthening our manufacturing capabilities and reducing costs. And as you heard, we will be making some adjustments to our capital allocation process.

We will also continue to focus on the CEO succession process. Our Board of Directors has always viewed CEO succession as one of their most critical responsibilities. We launched a robust and detailed process several years ago.

Internal succession candidates were identified and given expanded responsibility and external candidates were hired into key leadership roles. External firms were hired to help assess, track and coach all of the candidates with late 2014 targeted as the time in which a decision would be made whether to proceed with a candidate.

In December of last year, the Board determined that we did indeed have a strong internal candidate in Andres Lopez. As the next planned step in the process, Andres was promoted to President of Glass Containers and Chief Operating Officer of O-I.

Andres has proven himself as a strong and creative business leader with extensive knowledge of the industry and a deep understanding of manufacturing. After leading our South American operations to record, record volumes over a 5-year period, Andres assumed responsibility for the North American operations in the fall of 2014.

He has shaped and reinvigorated that business already and will hand over the reins of North America to a new leader soon. Andres is now working to more deeply familiarize himself with our businesses in Europe and Asia-Pacific. We are anticipating that we will complete the CEO transition process by the end of 2015.

In and around that time, I expect the new CEO will update the investment community on the company’s long-term plans and its related financial targets. With regard to my role as Chairman of the Board, I intent to relinquish that role at our Annual Meeting in May 2016, at which time a non-executive Chairperson will be chosen by the Board.

Our Board has clearly defined the company’s expectations of succession, and I look forward to working with my team to ensure a smooth and orderly transition during the process. Now before we take your questions, let’s turn to Page 16 where I would like to summarize our outlook. Local market conditions and demand will remain largely unchanged.

Of course, while this means ongoing competitive pressure in certain areas, our volumes stand to benefit from the long-term contracts we have locked in with most of our multinational partners. Our cost structure will improve through our restructuring activities, asset optimization, improved logistics and operating models.

Non-operational items are also in good shape. Interest expense will be lower and pension expenses flat in the phase of lower discount rates. Our cash flow generation will remain strong in local currency terms. Of course, the stronger U.S. dollar will affect our reported results.

Yet, we are focused on improving our underlying business to deliver value for the long-term. And lastly as stewards of our owners’ investments, we are acting now to increase our share buybacks, yet preserving the flexibility to invest in value added opportunities. Thank you.

And now I will ask Bath to open up the lines for your questions?.

[Operator Instructions] Our first question comes from Chris Manuel, Wells Fargo. Your line is open..

Good morning gentlemen, congratulations on good free cash flow here in 2014..

Good morning, Chris..

Good morning, Chris..

Wanted to – I believe this is the last year or is the finishing up the European restructuring and I think you got maybe $25 million or so left from it.

What’s the next phase, as I look across the businesses, your returns in the regions still aren’t where you necessarily want them to be, is there a next phase of restructuring or anything you built into your cash flow guidance for further restructuring as we look forward?.

Well, we are constantly looking of course at our footprint and to make sure that we are appropriately located for the customer base and for the cost structures that are required to be competitive and to get to the margins that we are targeting.

I would say 2015 is most probably going to be influenced by some of the movements that we are seeing in ownerships in the European market so that adds a certain level of uncertainty.

But as far as we are concerned certainly I think for the next couple of years, we have put a lot of things in place that will help us to get to the improvements that we have foreshadowed through our restructuring programs.

Steve?.

Chris, I would just remind you, the next phase is really 2015 where we are still going to spend incrementally $75 million or so of asset optimization capital in 2015.

So there is a lot of work to be done in the current year in order to achieve that $25 million expected savings and I would expect as we have said several times based on the phasing of some of the engineering work. The reality is some of the final construction or work will probably leak into the first quarter or so of 2016 realistically..

Your next question comes from Tyler Langton, JPMorgan. Your line is open..

Yes. Good morning, thanks.

Yes, just with North America I guess operating profit was down $27 million, I guess volumes had some impact, I guess I was just wondering if I guess some of the supply chain and production challenges had an impact and then also just for ‘15 if you could quantify sort of the magnitude of the productivity and supply chain improvements you are looking to capture for 2015 there as well?.

I will start with that Tyler on your second question, you know the easy ones to identify we have already referenced $15 million we would expect not to re-incur in the first quarter of this year, which was weather/supply chain related in 2014.

We also took approximately $10 million or so in the third quarter of 2014 that were operational related items, we clearly would not expect those to repeat in that quarter as well..

Yes. And I think if you look back at the fourth quarter, about half of our underperformance was due to lower volumes being sold. So lower demand from mega beer in particular.

And the other half was caused by lower production to reduce our inventories because we had anticipated the higher volume requirement in the peak season of the year, which they did not materialize..

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

Hi, everyone. Thanks for taking my question. And thanks for all the details. Good luck on the upcoming year. My question is on North America and what you are seeing in terms of beer volume.

Al, you referenced mega beer and the volume issues there and that’s certainly been born out in the scanner data, but the can industry seems to be growing in the beer segment.

So, what do you think is going on between cans and glass? How long do you think it will be sustained? And what are the ultimate implications for Owens-Illinois given it’s still a very large piece of your North American mix? Thanks..

Yes. George, it’s very difficult of course to be predictive, but what we have been seeing so far is clearly a lot of push to move volume of mega beer despite changing trends in the marketplace.

And the best way to move volume is of course to move volume through supermarkets or large volume offerings and typically cans of course are better suited for that type of offering. And that is I believe some of the emphasis that we have seen over the last year and a half or last 2 years.

Generally, expectations would be if consumption picks up a little bit that the brewers would tend to favor the more premium beer brands again and that’s where you see a higher percentage of glass. So, we have gone through these cycles before in the past.

It’s very difficult to predict how long they will last, but I think also we have seen a significant offset through our sales and continually increasing double-digit growth in the sales to the microbrewers..

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

Hi, thanks. Good morning. And I just wanted to ask a question on North America as well and if you could update us on your largest customer there and the contract renewal situation there and how that’s gone if that’s now complete and any impact you anticipate on 2015 from that? Thanks..

Yes. Hey, good morning Al, this is Steve.

I would say that for all of the major contracts in North America there essentially complete very consistent with our expectations, we do not envision for us or anybody else frankly in the market significant share changes as a result of any of those contracts nor do we expect any significant margin change to happen.

There is not going to be a price step up that drives margin expansion certainly, but generally speaking, the contract volumes consistent with what they were previously and the cost recovery aspects of the contracts via pass-through adjustments etcetera, all very consistent with what we have had historically..

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

You highlighted the raw material inflation in South America and Asia-Pac, can you talk about the financial impact of higher electricity in Brazil and then when should we expect some of this pass-through to roll through and how much of your business is on long-term contracts in these regions?.

Yes. Hi, Debbie, this is Steve. Specifically with electricity in Brazil, we would expect it to be $7 million to $10 million of incremental expense over the course of 2015. We would ultimately expect to recover a portion of that. However, I do not expect us to recover any of it in 2015 that the amount we recover will be certainly in 2016.

And then related to the question around what percentage is under long-term contract, I don’t think that percentage has really changed. The vast majority of North America is under long-term contract, less than half of the European business is under long-term contracts probably closer to 30%, 35%.

The majority of the Asia-Pacific business certainly in Oceania is under long-term contracts, which have all been agreed to and our largest customers in South America are long-term contracts, but the percentage is probably less than half in terms of the number of customers..

Your next question comes from the line of Mark Wilde, BMO. Your line is open..

Good morning, Al. Good morning, Steve..

Good morning..

I wondered you flagged out the increased competition in Southern Europe, I wondered if you could just give us a little bit of color on what’s going on there?.

Yes.

And it may just be caused by the uncertainty concerning the transactions that are pending at this point in time or that have been announced, clearly, there is increased activity in the marketplace to gain volume to perhaps improve the overall performance of the items or of the units that are out for sale which is causing some additional pressure.

Now, we will have to see how this is going to evolve over the next couple of weeks because on the other hand, we believe that the lower euro will provide a boost to the wine industry volume for exports, number one.

And number two also we had a particularly good harvest last year, so eventually the wine customers will have to start filling relatively soon, so that may temper a little bit of the pricing pressures that we are seeing..

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

Hi, good morning.

How should we think about price costs overall this year, I know energy should probably be a tailwind, but you kind of flagged out soda ash, but I do appreciate you got some fixed price contracts in Europe?.

Yes. Phil, hi, this is Steve. I do not think it will be even in terms of the spread, I think we will have some modest pressure related to the spread in general from a price cost standpoint. So we will clearly not recover some of the inflation in Brazil as we had talked about previously.

We have got about $20 million or so of currency related inflation that again, we won’t recover via pass through until 2016. And then probably on the margin, I think Europe will be $15 million to $25 million negative spread due to some of the sharper competitive pressure that Al referenced earlier..

Your next question Scott Gaffner, Barclays. Your line is open..

Thanks. Good morning..

Good morning..

Steve, just going back to pension for a minute, if we go back to the third quarter, it was about $0.35 headwind and it sounds like a lot of these actions that you talked to mitigate the pension expense headwinds occurred in prior years, can you maybe talk about if that’s true or were some of those items more near-term and what sort of changed between now and then.

And then also talk about funded status of the pension plan?.

Yes. I mean Scott, no, I would actually say the majority of our actions we were referencing were executed in the late part of 2014. The planning for them had been underway for obviously quite some time, but the offloading of the plant to the Dutch government was a late third, early fourth quarter, actually the early fourth quarter action.

The closing of United States and Canadian plants or the freezing of those plants were communicated in the fourth quarter as well, so that $600 million liability reduction that we referenced that was all effectuated by actions taken in the fourth quarter generally.

And as it relates to funding status in general, as we had indicated, overall pension funding expectations are modestly lower for 2015 than they were in 2014. We do not have any near-term funding requirements in the United States or in Canada.

Our North American plants being our largest, we continue to have relatively consistent funding requirements in the United Kingdom and in some smaller country specific plans in Europe, but of the $20 million or so we are going to be putting in, in 2015, it is I think almost all in European-related plans..

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

Thanks. Good morning Al and Steve..

Good morning Adam..

Steve, in terms of the first quarter guidance and comparing that to the full year guidance which of the drags that you are expecting in the first quarter on a constant currency segment EBIT basis will dissipate thereafter aside from the lower plant production in Europe and the easier volume comps in South America? Thank you..

For sure, production volume in general globally will be a larger proportional headwind for us in the first quarter, so the European stuff we had referenced before, we will also have more production off-line in North America for some continuation of the inventory control actions that had impacted the fourth quarter.

And I would expect that to be complete going into the high season in North America. So there is production downtime in North America, a little bit more in South America due to project timing as well.

And then on some of the volume part of our volume headwind in the first quarter in North America is a comparability issue, where we are lapping the rollouts of blue and black glass, where we benefited from them in the first quarter of North America in ‘14, which gave us a stronger than market performance in that quarter, those are rolling off and now we are looking at a weaker than market performance on the volume side in North America as well..

Your next question comes from the line of Alex Ovshey, Goldman Sachs. Your line is open..

Good morning..

Good morning, Alex..

Good morning..

Can you talk about the impact of lower Brent oil prices on the business? Thank you..

Well, over the last couple of years, we have moved a lot of our production facilities in Europe to natural gas and we have been hedging quite a high percentage of the natural gas prices, especially when we were in the middle of the year and the uncertainty concerning Ukraine became a big issue. So, it was important for us to be covered.

So, I don’t think that Brent by itself is going to impact directly as much as it used to be in the past when we are still using heavy fuel oil in some of our facilities.

Steve, any additional comments?.

Yes, we will enter – we did enter 2015 about 80% hedged by design in Europe specifically.

So, do we have some upside if energy stays where it is? Yes, modest, over the course of the year, maybe that’s $10 million or so relative to what we are currently expecting again if it stays where it is, but if the bigger benefit for us would really be entering 2016, whereas we roll into fixed positions in ‘16, we would be reflecting lower energy rates, but I think it will be modest as Al said in 2015..

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

Hey, guys. Good morning. .

Good morning, Ghansham..

Good morning..

Hey, I guess, my question relates to whether the Asia-Pacific business makes sense as part of the portfolio for the company long-term, this region has been a problem for O-I. For most of the past few years and I guess is Asia-Pac as a whole as attractive for you as it once was? Thank you..

Yes. Certainly, given the significant drop off that we have seen in line volumes that are being bottled in Australia and New Zealand, the market has shifted and has changed and similarly have we. We have adjusted our footprint to the market conditions.

I believe with the local production in Australia and in New Zealand and a fairly high market share in those markets, it’s an enviable position to have despite the fact that we have seen some trends in the last 2 years or 3 years that have been pretty negative, but I believe also what we are seeing with the currency going down and I just saw this morning, the Australian Reserve Bank reduced their rates and so the currency is now at 76 or 77, I believe the Australian business starts to become more competitive again.

And having a local position in Australia and as well as in New Zealand by extension, I think makes a lot of sense. And also the focus that we have in Southeast Asia through joint ventures, I think is a good position. Where we have made a correction as you very well know is in China.

I think that was a bridge too early for us to cross and we have taken the steps to correct that situation..

Your next question comes from the line of Anthony Pettinari from Citibank. Your line is open..

Good morning..

Good morning..

Regarding the CEO succession, I was wondering to the extent that you can comment, what are the qualities the Board really focused on when trying to identify a CEO candidate? And from a big picture perspective, when you look at the challenges and opportunities O-I might face over the next 5 years, 10 years, what do you think are the most important skills for the next CEO of O-I to have?.

Well, as you can very well imagine, there is a whole list of more than 50 or so items. But if we really bring it down to the more critical issues, it was to fundamentally understand the dynamics of this business and to have a very solid manufacturing background in general, because as you know, this is a very high fixed cost oriented business.

The other parts that were extremely important is to have courage.

To have the courage of a difference of opinion, to have the courage of moving other people along and that the individual would have a very high level of attention to talent development to make sure that the individuals that eventually are in the organization and in responsible roles can move up without a lot of lead time and be ready to take on additional responsibilities.

I believe that beyond that, of course, it also was very important that a leader was able to learn and keep on learning and adjusting their strategy and their approaches to changing market conditions, to changing environments and I believe all of that comes very well together in Andres and I think also the track record of course was an important aspect.

And we have seen now over quite a number of years, 6 or so years, how that has developed and how many innovations Andres has brought into his businesses in Latin America that eventually finds their duplication and other regions of the world as well.

So, I think clearly a very broad range of capabilities, but a very strong focus on particularly this business and understanding this business..

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

Yes, good morning.

On the joint venture deal that you all have with Constellation, I know that you all have remained in an initial investment obviously, but there is some quite a bit of expansion at that location planned and could you talk a little bit about how the cash or the timing of the cash flow is going out to that and will it all be equity financed that is where you will contribute cash or will the venture itself be borrowing money so that the draw on capital from O-I will be limited?.

Yes, good morning, Chip. This is Steve. Let me try to answer that. The expectation currently for all the guidance we have made, we said about $275 million investment or so. We assume that all of that is essentially equity financed by the two partners for purposes of communication.

Certainly, the $50 million or so incrementally that we are planning on putting in, in 2015 will initially go in via an equity injection from partners, whether the joint venture ultimately project finances itself is something that we will obviously in conjunction with Constellation be talking about, but I think our ideal scenario for both partners is that the project becomes self-financing to a large extent, right, there is an operating furnace there now.

There will be two operating furnaces early in 2016. Those furnaces are generating revenue. And so while our guidance assumes there is no self-financing aspect of it certainly beyond 2015 that would be the ideal scenario for us..

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

Thanks everyone. Thanks for taking the follow-on. Taking a step back and maybe a bigger picture question, recognizing that over the last number of years, pension has turned into a major headwind or had been up until ‘14 certainly foreign exchange has been pretty pernicious here looking out into ‘15.

Al, when we look at earnings, it’s they have been relatively flat over a number of years, more or less somewhere in the low to mid $2 range.

Going forward, what do you think is going to make for – what one or two things is going to make for a more sustained level of improvement in earnings and cash flow as well has been flat to non-trending? What’s going to make for better sustained earnings and cash flow improvement going forward? Thanks and good luck in the quarter..

Well, thanks George. I believe clearly what’s going to make a huge difference is the general economy and the general economic environment. As you know very well certainly in 2008, 2009 all the way to 2011 and ‘12, North America had a significant impact in consumption because of the financial crisis and eventually economic crisis.

I think Europe is going through the same phase with a 2-year to 3-year time delay behind it. That does have a significant impact on demand. And as you know from our discussions in the past, a 1% variance in demand has a significant impact typically is around what $40 million of profit contribution.

So, I believe if we are going to see some general economic confidence returning into the marketplace, then the battle that we have been fighting to hold on to our volume will be alleviated, will be getting some support from demand profiles and that will have a significant impact.

The other part that we have been working on for quite a number of years is in research and development to get to a different process of manufacturing glass and to get to a much lower cost manufacturing approach as we go forward.

That’s still a couple of years down the road, but we are already at this point in time taking lessons that we have learned and putting it in place in facilities. We just opened a facility in Järvakandi in Estonia, which is using some of those insights. We will have another plant coming on stream in, I think April or May of this year in Italy.

So, I believe we are going to get some benefit in the margin and margin expansion as well from technology and technology improvements aside from the overall demand profile improving, with a general economic environment improving..

Bath, we have time for one more question..

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

Hi, thanks for taking my follow-up.

Just a quick question on the cash flow guidance, you mentioned the lower spending returnable packaging, is that – was that investment in Brazil in 2014 or what was that and what was the financial impact?.

No, Debbie, this is Steve. It was more a function of the inventory build that we made in North America in 2014, which ultimately then led to some of the inventory curtailments we took at the end of the year. Al’s earlier comments that volume expectations were more bullish in 2014 than were what actually eventuated.

And so there was an inventory build, most of that was done or sourced via imports from O-I operations in South America. So, we spent more on packaging to move bottles from South America to North America, $40 million or so strikes me as a ballpark number.

And now that the inventory reduction effort has been undertaken by North America, we would not expect to need to import that kind of wear into the United States again..

Thank you everyone. That concludes our earnings conference call. Please note that our first quarter 2015 conference call is currently scheduled for Wednesday, April 29 at 8 AM Eastern Time. We appreciate your interest in O-I and remember to choose glass. It’s safe. It’s pure. It’s sustainable. Thank you..

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