David Johnson - Vice President-Investor Relations Andres Alberto Lopez - Chief Executive Officer Jan A. Bertsch - Chief Financial Officer & Senior Vice President.

George Leon Staphos - Bank of America Merrill Lynch Lars F. Kjellberg - Credit Suisse Securities Europe Ltd. (Sweden) Tyler J. Langton - JPMorgan Securities LLC Debbie A. Jones - Deutsche Bank Securities, Inc. Scott Louis Gaffner - Barclays Capital, Inc. Mehul M. Dalia - Robert W. Baird & Co., Inc. (Broker) Chris D.

Manuel - Wells Fargo Securities LLC Philip Ng - Jefferies LLC Mark William Wilde - BMO Capital Markets (United States) Anthony Pettinari - Citigroup Global Markets, Inc. (Broker) Adam Jesse Josephson - KeyBanc Capital Markets, Inc. Chip A. Dillon - Vertical Research Partners LLC.

Good morning. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the O-I's Fourth Quarter and Full Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question-and-answer session. Thank you.

I would now like to turn the call over to David Johnson, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Keith. Welcome, everyone, to O-I's fourth quarter and 2015 year-end earnings conference call. Our discussion today will be led by Andres Lopez, our CEO; and I'm also pleased to introduce our new Chief Financial Officer, Jan Bertsch.

Today, we will discuss key business developments, review fourth quarter and full year financial results for 2015, and we'll highlight our high-level expectations for 2016. 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 excludes certain items that management considers not representative of ongoing operations.

A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the Appendix to this presentation. Now, I'd like to turn the call over to Andres..

Thank you, Dave, and good morning. I'm pleased to report that our fourth quarter 2015 results were in line with our expectations. We delivered earnings and cash flow that were on target, while moving aggressively to integrate the operations of the recently completed acquisition of Vitro's food and beverage business in Latin America.

In the fourth quarter, we also took steps to begin the process of positioning the company for real, strategic change, which included the final steps in building out our senior leadership team. These efforts took place against a backdrop of ongoing macroeconomic and currency headwinds.

While our global leadership team appreciates the efforts our team members around the global have made to achieve these results, we are still not satisfied with the overall level of performance and know that we as an organization can do much better. That is our focus as we begin 2016. The good news is we closed out 2015 on solid footing.

North America delivered a strong operational performance on the heels of some additional investments in the third quarter. Our Asia Pacific operations performed very well, driven by stronger sales in Australia in the second half of the year. Europe underperformed for the year.

Prices were lower partially due to concessions for long-term contracts with the strategic customers and also due to competitive pricing dynamics in Southern Europe. Europe was also impacted by lower manufacturing productivity across the footprint.

Importantly, we have made – we have already begun to take actions and we saw some initial signs of stabilization exiting the year. Lastly, Latin America was up in the fourth quarter, primarily due to the appreciation that the legacy business turned in fairly solid quarterly performance in light of tough macro conditions in Brazil.

It's also worth mentioning that we are very pleased with business results from the acquisition in the fourth quarter. They delivered a very strong EBITDA margin of greater than 30% and generated positive free cash flow in the quarter. Now, I'd like to spend some time discussing the global economic landscape and our end markets in a little more detail.

Please turn to slide four. From a global perspective, the key trends we face are consistent and stable. Consumers' preferences, particularly in developed countries, are driving increased demand for glass packaging of craft and premium products in both (4:50) wine, spirits and beer.

However, this more upscale pallet (4:57) comes at the expense of megabeer. We will continue to adapt and we see the volume gap from megabeer being offset even more so by growth in these other categories. In fact, we have been investing in the fastest growth segment of beer in the U.S.

through the acquisition in Mexico, our joint venture with Constellation Brands and long-term supply contracts from the U.S. In all, this kind of growth will help upgrade our product mix and lead to higher overall profitability over the long-term.

In looking at macroeconomics factors impacting the global landscape today, we see a mixture of significant cross-currents. In particular, there is a lot of discussion about emerging markets in the financial media these days and much of it is negative. For us, it's more of a mixed picture right now.

In Latin America, despite all the negative news related to Brazil, we are executing well. Our diversity throughout the entire region allow us to perform well when one country or another is under pressure. Currently, growth in the Andean countries and Mexico is compensating for weaknesses in Brazil.

From a packaging perspective and for glass in particular, we see demand trends has been quite resilient. In fact, more than half of our volume in Brazil is in categories outside of beer and these promising categories continue to grow well. Let me pause on glass container demand for beer Brazil, which to be clear is growing, not declining.

For context, note that our sales volume for beer in Brazil is about 11% of all Latin American volumes, important but not the whole story. One very interesting development in Brazil beer though is the strength of one-way premium beer, which is growing exceptionally well, and three quarters of the segment is in glass.

Returnables have contracted modestly, driven by a sharp, likely temporary drop in on-premise consumption. However, simple math tells the story. A modest reduction in returnables, when factoring in 25 uses to 30 uses and a double-digit increase in one-way premium, leads to significant growth for glass containers, even if aluminum cans gain share.

In fact, for O-I Brazil today, more than half of our beer business is for the one-way premium segment, and within that one-way premium segment, we have the fastest growing packaging in the country in 2015 with double-digit growth. Sure cans can grow in mainstream and primarily in off-premise, yet glass container demand grows as well.

And neither do I nor our key customers are giving up on returnables. We know that returnables are the most economical package, best suited for on-premise consumption, and even several customers are now developing better infrastructure to serve retail. Glass demand is growing in Brazil.

Overall, there will continue to be a lot of noise about emerging markets. But it's important to keep in mind that some of the issues that receive the most attention amount to only a fraction of our business. Again, I feel good about how we are positioned to move forward in this environment.

Turning to slide five, I'd like to briefly review some of the key initiatives we are undertaking, which in today's uncertain world are things we can control. The challenges faced by our business are ones we are meeting head-on. And I'm pleased to report that our initiatives are already beginning to produce results.

We have been active in locking up long-term business, which helps stabilize the entire operations. In fact, we now have the highest percentage of European business under long-term contracts and with good results in 2016, as we expect a modest uptick in sales volume in Europe and North America.

Separately, we launched a platform of initiatives to improve end-to-end supply chain results. This is driven by the recently appointed global leaders of manufacturing, engineering and supply chain in conjunction with the regional presence.

We have not only set performance targets for all of our plants, but the bottom third of our plants have concrete action plans and milestones for accountability. Our efforts include the creation of plant improvement teams, or PITs, that focus on our seven lowest performing plants.

We liberated some of the best manufacturing and engineering talent across the globe to concentrate their efforts on improving these plants. In supply chain, the new leadership is helping us retool the organization to deliver gains in procurement, inventory and logistics costs. We are devoting key resources to address real problems.

To be clear, in year past, we have made – we might have intensified our pressure on the plants, but we did so without really providing the proper knowhow and resources. Today, we have much better monitoring systems and analytical tools that provide much greater visibility into performance.

In all, this comprehensive program, new leadership, organizational capabilities, knowledge transfer, and performance management tools will improve the end-to-end supply chain performance of all of our 80 plants at the same time.

You can see from the chart on the right-hand side of the slide five that North America turned the corner in operations in mid-2015. In Europe, we clearly still have a lot of work to do, but we see a lot of similarities to what we needed to change in North America when I briefly led the region 18 months ago.

I can assure you that we know what needs to be done to move from the stabilization we saw exiting 2015 to broad improvement in performance going forward. Early signs today are very encouraging. For instance, we have devoted global resources to improve our plant in Scotland, and we are seeing results.

It moved from a clear underperformer throughout most of 2015 to highest levels for the region presently. Over these last few months, you heard me talk about building greater stability across our organization. Stability is about consistent execution across all of our geographies and how we work as an enterprise.

We most transform O-I and address legacy issues that have hampered the company for a long time now. And we can now see more clearly that the operational problems of the past are clear opportunities for improvement going forward. This will take strong leaders, and I believe we've built a great team here now.

Among other steps, we have established a strategy and integration function, which is being led by John Haudrich. John is focused on helping every part of the organization work in a more seamless fashion to execute and capitalize on all of our opportunities in a cost effective manner.

As part of that effort, we are looking at performance management, project management and accountability at every level, along with making sure everyone has the right tools to get this done.

We'll be giving more detail on our plans and their financial impact at our upcoming Investor Day in March, so I hope all of you will be able to attend or listen in. With that, I'd like to introduce you to one of our important new leaders. In late November, we announced that Jan Bertsch was joining O-I as our new Chief Financial Officer.

Jan has excellent global and industrial experience and we are fortunate to have her. She has already been exceptionally impactful here at the company. I'd like her to walk through the financials.

Jan?.

Thank you, Andres. I'm excited to be joining the O-I leadership team during this period of transition and tremendous opportunity. Perhaps, you have already had a chance to review my background, so I'll just give you the short version.

I have a long history of working on the financial side of global manufacturing companies, many of which have experienced their own set of challenging circumstances. However, in my short time at O-I, I've been impressed by the global presence and depth of knowledge available to be harnessed.

I've spent my career zeroing in on specific cost factors across large manufacturing footprints, identifying the actions necessary to achieve best-in-class performance across the global asset base. This leads directly to higher margins and improved cash flows, two of my three key mantras.

The third relates to the capital allocation process, which is critical to capital-intensive businesses like O-I. In fact, improving our capital allocation decision-making process and execution will be a primary area of focus as we move forward.

While my time at O-I has just begun, I can tell you that I already see a global leadership team where everyone is coming together to effect real change. I also sense a renewed momentum in the employee base to get behind a focused set of initiatives to impact local performance.

As Andres said, we have a lot of work to do together, but I'm excited for the impacts we will have on overcoming our current challenges. Turning to the numbers, let's start with slide six, where I will briefly review fourth quarter results before discussing the full-year performance. Fourth quarter sales were $1.6 billion.

While sales for the most recent quarter were up 1% in aggregate versus the prior year period, there were several moving parts. The largest by far was currency, which reduced sales by 13% in the quarter. Within this, Latin America was impacted the hardest. The strength of the U.S. dollar caused the 28% decline in legacy sales in the region.

We saw a full quarter's worth of sales from the acquisition. It contributed nearly $200 million of revenue in the fourth quarter. Overall pricing was flat versus the year ago period. Gains achieved in Latin America were offset by lower prices in other regions, particularly Europe, as Andres mentioned earlier.

We achieved higher volumes in all regions except for the legacy business in Latin America, which was flat. Lower shipments in Brazil were offset by higher volumes elsewhere in the region. Turning to segment operating profit on the right hand side of slide six, price and margin on higher volumes more than offset the impact of higher operating costs.

Inflation was about 1% for the company, largely driven by currencies impact on U.S. dollar priced raw materials. Production volumes were strong in the quarter, as we did not face the sharp year-end curtailment as we did in 2014.

The acquisition is growing earnings in a very positive way and contributed about 17% of our EBIT in the fourth quarter on only a 12% contribution to sales. This is clearly a good high-margin business that will drive future earnings and cash flow. Turning to slide seven.

You can see the key factors leading to fourth quarter 2015 adjusted EPS on a year-over-year basis. Segment operating profit that I just discussed added $0.19, plus an additional $0.02 from other items such as the impact from our share buyback in early 2015. From there, you see a few headwinds.

Interest expense was higher due to the incremental debt associated with the acquisition. Our effective tax rates stepped up to 31% for the quarter, again, primarily due to the acquisition. As we guided last quarter, the temporarily high tax rate generally offset all of the acquisition's earnings contribution during the quarter.

Overall, earnings were about 25% higher than prior year, excluding the impact of currency headwinds. In fact, on a constant currency basis, these are the highest fourth quarter earnings since the recession began back in 2008. Let me briefly review our GAAP EPS as reported for the fourth quarter.

In the fourth quarter, we reported $263 million of pre-tax charges that were not representative of ongoing operation. The most significant charge of $225 million stemmed from a change in our estimate related to our accrued liability for asbestos-related costs.

Since this appears at first glance to be a significant step-up in the accrual, let me spend a moment on this. Please turn to slide eight.

In conducting our annual review of asbestos-related liabilities and costs, we determined we could reasonably estimate probable future losses for asbestos claims for a period of four years instead of three years, which had been used in the prior year.

Therefore, the $225 million charge represents an accrual period that is one year longer than in the past. Think of this as an average annual charge of about $112 million, which is substantially lower than $135 million charge we recorded in 2014. In the end, there is no real change in trends with respect to asbestos.

The effective annual charge continues to decline, and cash payments for asbestos have declined for eight years in a row and we expect that to continue as we move forward. Now, let's quickly talk about the full year results on slide nine. Our adjusted EPS for 2015 was $2 per share, which was in line with our guidance.

Since the vast majority of earnings are generated outside the U.S., it is not surprising that currency translation caused a $0.56 headwind. Please note that in addition to the translation impact, there is another $0.15 of higher cost inflation from raw materials that are effectively priced in U.S. dollar term.

If you back all of that out, adjusted EPS was up 4% on a truly currency neutral basis. Free cash flow came in 5% higher than our guidance at $210 million for the year.

In a clear positive development, the acquired business was accretive to cash flow in the fourth quarter, despite planned higher than average capital expenditures required to build the new furnace in Monterrey, Mexico. And as a reminder, we repurchased $100 million of our common stock in the first half of 2015.

In fact, share repurchases for the year had a positive impact, contributing $0.05 to EPS. Let's turn to slide 10, one of my favorite slides, given all the green arrows in the 2016 business outlook.

While the global economy has certainly taken a step back recently, we are confident that the initiatives that we began in 2015 will position us to deliver better results in 2016 from the legacy business, and earnings and free cash flow will also benefit from the full year contribution of the acquired business.

In Europe, we expect to achieve solid margin improvement. We anticipate margin expansion of about 150 basis points, driven by improvements in our end-to-end supply chain and some upside in sales volume as well.

The three-year asset optimization program is complete and the last projects are running well, and the benefits of our manufacturing initiatives will hit the bottom line this year. We expect better price volume dynamics in 2016.

However, since negotiations of annual contracts is presently in full swing, we don't have the absolute clarity into the full impact. In North America, we will see continued benefit from O-I Packaging Solutions, the acquired distribution business.

We are projecting an uptick in volume from our legacy business, driven by the long-term contract with Constellation Brands and improved product mix from growth in craft and premium products. We will continue to drive improvement in end-to-end supply chain. In all, this should drive higher overall earnings for the year.

In Latin America, we expect continued foreign exchange headwinds on raw materials and energy that is priced in U.S. dollars. We are projecting lower volumes for the legacy Latin America business, primarily due to ongoing softness in Brazil. However, we believe we can offset much of the impact with cost containment efforts.

Clearly, the full year benefit of the acquisition will be much greater than all of these challenges. Therefore, we're expecting a significant improvement in full year operating results for this region on a constant currency basis and including the acquisition.

Turning to Asia Pacific, we will see the beneficial effects of a new beer contract that began in the third quarter of 2015, and volumes also stand to benefit from an increase in Australian wine exports. We do see a headwind from the modest gains in price being more than offset by cost inflation, which is impacted by currency.

Overall, the 2016 business outlook is quite strong on a constant currency basis, with higher operating profit anticipated in every region. On slide 11, we have an update on the Vitro food and beverage acquisition. We are pleased that the acquired business is performing well. Sales are strong. EBITDA margins greater than 30% are excellent.

The integration is progressing well. Synergies are being realized and the new furnace in Monterrey is producing quality bottles, and we see much longer-term potential. For instance, we are exploring ways to adapt our end-to-end supply chain across the Americas. So, the underlying business of the acquisition is in great shape.

And to-date, business performance has gone a long way to overcome currency headwinds. The Mexican peso devalued considerably in the second half of last year. About half of the $15 million impact shown here is translation and the other half reflects the impact of U.S. dollar-based raw material and energy costs.

Separately, we will face incrementally higher than anticipated D&A. Of course, this non-cash charge doesn't impact cash flow or real-value generation.

Before the deal closed, we performed a benchmark analysis of other packaging transactions to provide a preliminary assessment of the value of intangible assets, in our case, primarily the value of customer relationships. Upon completion of the deal, third-party experts assisted us in developing the detailed valuation of intangibles.

We knew that Vitro's customer base was highly valuable, but expected a rather muted formal valuation, since only half of the business is under contract, and contracts are generally only a year or two in duration.

However, the valuations now yield a significantly higher than expected value of our intangible assets compared with the initial benchmarking analysis. In turn, this leads us to a higher annual D&A. In total, D&A is now expected to be about $130 million.

While this is a positive recognition of the strong and long-standing customer relationship, it is nonetheless an approximate $0.08 drag on our expected EPS contribution from the acquisition.

In all, the $0.30 accretion we initially expected from the acquisition in 2016 is now projected to be about $0.23, entirely due to the increase in non-cash amortization. And I must say, there is probably some upside potential here, given the business performance to-date.

The reality is that five months in, we are still integrating the acquisition, still learning from each other. Of course, as we gain more visibility into their markets, we'll share more insights with you. Turning to slide 12, we turn to the acquisition's impact on a critical financial metric, cash flow generation.

As we already mentioned, the acquisition was free cash flow accretive to fourth quarter and full year 2015 results. We are projecting cash flow contribution of approximately $85 million for 2016 after supporting CapEx, higher interest expenses and taxes associated with the acquired business.

The acquisition is still on track to deliver approximately $100 million of free cash flow in 2018. Again, we consider these to be very solid results to date with more to come. Slide 13 gives you our projections for non-operational items in 2016.

With respect to corporate expense, we envision that it will be about $85 million for the year, which is 15% lower than it has been on average over the last several years.

To be clear, it will increase over prior year, as we back out some specific benefits from the prior year and add some benefit from our Mexican joint venture with CBI in the back half of the year. Interest expense will be higher due to debt related to the acquisition.

Taxes are projected to be in the 26% to 28% range, given the effect of the larger Mexican contribution to earnings and the 30% statutory tax rate in the country. Slide 14 puts all of this together for you visually.

Starting with a base of $2 for 2015, we add in better financial performance from our legacy business and then layer in the accretion from the acquisition of Vitro's food and beverage business, including related interests and taxes. Non-operational costs present a modest drag. Adding all this up, core operational items would have been around $2.50.

This would represent a 25% increase in earnings. However, as we factor in the incremental amortization from the acquisition and the impact of FX on translation and inflation, we arrive at our 2016 EPS range of $2.10 to $2.25. The range allows for reasonable variation in demand and price cost spread.

Now turning to first quarter 2016 guidance, please take a look at slide 15. The previously discussed trends and expectations here are largely similar to those we gave you for the full year. However, the FX impact will be stronger in the first half of the year, mainly due to Latin American currencies.

We expect at least a negative impact of about $0.08 on translation and several more cents on cost inflation. In Europe, the previously discussed carryover effect of lower prices and the ramp-up of planned manufacturing improvements will adversely impact first quarter 2016 results.

We expect a solid contribution and continued momentum from the North American legacy business and the acquired distribution business. In Latin America, the legacy business should be fairly flat, which is very good outcome given lower volume expectations in Brazil, and O-I Mexico and Bolivia will certainly contribute in a healthy way.

While Asia Pacific is operating very well, it is likely to be flat to modestly down in the first quarter. Sales volumes are expected to be higher, yet costs will be as well, driven by currency. Manufacturing productivity has been up year-on-year over the past several quarters.

However, the first quarter will have a higher production downtime due to extra furnace rebuild activity. One of these rebuilds was unplanned. We can expect this to happen from time to time.

However, as we elevate the overall operational performance of the company and better manage the integration of sales and operations' decision-making, we expect fewer events and with less adverse impact. The Asia Pacific team is working hard to offset the impact, which is similar to any furnace rebuild.

By the second quarter of 2016, we fully expect the region to resume the year-on-year gains it posted in the latter half of 2015. Overall, for the company, we project modest improvement in segment operating profit for the first quarter of 2016 on an adjusted basis and measured in constant currency terms.

Factoring higher corporate costs, interest and taxes, we believe adjusted EPS in the first quarter of 2016 should be in the range of $0.37 to $0.42. Slide 16 walks through our global free cash flow guidance for 2016.

As you can see, we expect to drive significant year-over-year improvement in EBITDA from the operations with the full year benefit of the acquisition and our continuous operational improvement efforts. Let me pause for a moment on working capital. Over the past several years, working capital has been a significant source of cash flow.

I believe that we are presently stretched thin with respect to AR and AP levels. In 2016 and going forward, we may even modestly replenish these accounts. Of course, this does not detract at all from the very real opportunities for our business teams to reduce inventories. Still, in 2016, we have a different dynamic.

The working capital benefit is really driven by the refund of VAT payments that we made last year related to the acquisition. The only substantive drags on this improvement are related to the interest and tax costs of the acquisition. We expect free cash flow for 2016 to be approximately $280 million.

Slide 17 describes our capital structure and associated priorities. In 2015, our capital structure changed considerably. In the first half of the year, we refinanced high coupon debt that was due in 2016, and we funded our strategic acquisition at very advantageous interest rates.

As we enter 2016, our cash flow generation remains robust and we project that this will improve going forward. We expect to get back to a balanced approach to capital allocation as soon as possible. However, deleveraging the balance sheet remains our number one priority. We have clear plans in place to achieve this.

We will continue to invest across all of our businesses to drive innovation, position ourselves for long-term growth, create efficiencies, and to find new creative ways to better control our costs. With that, I'll turn the call back to Andres for a few closing remarks.

Andres?.

I'd like to conclude by saying how eager I am to lead this company through such an exciting period of change. We are truly starting anew. Throughout my long career at O-I, I have instituted a great deal of change, so I know we have the ability to transform this business.

We have started by getting the right leaders in place; leaders who have the required expertise and are focused on creating a high-performance culture. We have already began implementing our strategic plans to fully stabilize the business and then to achieve best-in-class performance across our entire global asset base.

We know we have a lot of work ahead of us and look forward to sharing our vision for the future with you at our Investor Day on March 1 in New York City. And now, we will open the lines for your questions..

Our first question comes from the line of George Staphos from Bank of America. Your line is open..

Hi, guys. Just trying to stay to the one question limit that you've placed, so I'll come back. I want to actually go into asbestos. So, as I understand it, you now have visibility to look out four years and the charge you're taking is $225 million. If I divide that by four years, I wind up with a loss per year something north of $50 million.

If I look at last year's charge, which was $135 million for three years, it equates to something more like $40 million, $45 million. So, help me reconcile that, if my methodology is correct, with your view that there's been no change in underlying trend in asbestos. Thank you..

Hi, George, it's Jan. I think maybe the way that you should look at this – I mean, clearly, we don't have any estimate past the four years. So, what we're saying is that, for 2015, the accrual was $225 million. For simplicity, we said just look at that on average would be $112 million a year, but you have seen the decline over time.

So if you interpolate that, it's probably a better scenario than taking a simple average number. So, it's two years. I mean, it's two years not one year, correct? So, we put a third year and a fourth year in front of you and the trend would be going downward is our expectation..

Our next question comes from the line of Lars Kjellberg from Credit Suisse. Your line is open..

Thank you. I just have a question on your volumes. I mean, last year, you had a steady progression of your volume from significantly negative starting point and ended up with a positive year-on-year in the legacy business. That was based on various contracts that you had in place.

Can you share with us if you have a similar visibility as you roll out contracts or win contracts in 2016 versus 2015 or do you just see a general market growth that you would participate in?.

Thank you, Lars. Most of the activities securing long-term contracts took place in 2014 and some of it in 2015. As we go into 2016, our expectation is that we're going to see a slight growth in volume in North America and Europe.

We are expecting also positive volume in Asia Pacific because of a long-term contract that is kicking in through the year, as well as a better than before demand in the wine segment.

The demand in Latin America will be slightly down because we are facing this situation with the economic downturn in Brazil, which is partially offset by the strong demand in the Andean countries..

And our next question comes from the line of Tyler Langton from JPMorgan. Your line is open..

Yeah. Good morning. Thanks. Andres, could you just talk about, I guess, what you think are some of the biggest risks hitting your EPS and free cash flow guidance for the year? I think in the release, I mean, you seemed to call it European pricing and Brazil as a risk, but I just want to see if there's any other factors added to the upside or downside..

Well, when we look at the European pricing, the situation over there is, I will say, a bit better if you compare year-on-year. Now, the trends overall, they continue. So, the pressure continues. It will be a better situation comparing 2016 with 2015 that we lived through in 2015 comparing with 2014 that that situation still continues.

Overall, we see a very good momentum in all the initiatives that we're putting in place. And we don't have at this point in time enough visibility to know the magnitude of the impact and the timing of that impact because all of this is just ramping up, but we're very pleased with the traction we're gaining and the momentum that is building.

So, we tend to see more of a positive scenario. When we look at Mexico, the performance is quite strong and the acquisition overall is very strong when we include O-I PS and Bolivia.

We've had this business for five months now and every one of those months have been quite a very pleasant surprise when we look at the actual results we're getting of this operation.

Again, because we are in the transition and we are still integrating processes and systems, we don't have enough visibility to reflect what the performance is going to be in the upside for that operation over the year, but we will as soon as we continue evolving in our integration..

And we continue to look for synergies, of course, with the new acquisition, and even if those synergies mean that we change the basic O-I way of doing business because we found some very good business practices in the company as well..

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

Hi. Good morning. I think in the past, you guys have talked about a combination of CapEx and restructuring in the range of about $450 million per year.

I was just wondering how to think about that going forward with the Vitro acquisition? And then, if I could ask also how should we think about the CBI investment going forward as well?.

Okay, Debbie, I think from a year-over-year basis, you should think that CapEx and restructuring will be relatively flat. I mean, last year, we had CapEx a little over $400 million, but restructuring was a little over $60 million. This year, we're going to see a different mix of that.

So, we'll see more CapEx and less restructuring, but the total should be about the same. And for CBI, we're looking at about an $80 million investment this year. It's consistent with the totals that I think the company has talked about in the past. The portion this year should be about $80 million..

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

Thanks. Good morning. Just focusing on the free cash flow for a minute, because if I heard you correctly, you have got $135 million VAT refund built into your free cash flow guidance, so year-over-year cash flow actually looks like it would be down, if you take the refund out.

Can you talk about – Jan, you mentioned AR, AP going significantly higher, but can you talk about – is it reducing the status is (45:28) an opportunity to change your working capital situation? Maybe if you could just give us a little bit more color on that so we could look at it properly..

Sure. So, when you think about it, I think working capital have been contributing close to $100 million in free cash flow over the last several years.

And this year what we're thinking is that we'd like to keep working capital a little more flat and really focus on the things that change the business, like focusing on our inventory levels and things like that.

We think this is just a prudent way to plan and a good way to start on this trend considering that the VAT refund is planned to be coming in this year..

When we look at inventories, we just mentioned that we appointed a lead for global supply chain. So, we intend to leverage best practices and systems across the world going forward. And this is going to help us drive inventories down contributing to working capital cash generation, if you will..

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

Hi. Good morning. It's actually Mehul Dalia sitting in for Ghansham.

How are you doing?.

Good. Thanks..

Great.

Given there is a quite a bit of beverage can capacity being allocated in Mexico and it all seems to be biased towards the same customer, how do you view the risk of overcapitalization in the region?.

Could you elaborate a little bit more in your question?.

Yeah. It seems like there's a lot of beverage can capacity being allocated towards the same customer in Mexico, the same customer that you guys are serving as well. So, I was just wondering how you view the risk of overcapitalization in the region, just given all of the capacity additions that is coming online..

Yeah. We've been investing in our joint venture as well as the new furnace in Monterrey, which is all geared towards supporting this customer. The customer is growing very well in the U.S. All of this volume is under long-term contracts.

And we're seeing this category of business, which is driven by this customer, as the fastest growing segment category in beer in the U.S. Now, as it happens in every market, there is a natural split between glass and cans.

So, a capacity that has been built is just coming together to be able to take care of that share of cans of – share of volume that are in cans as it is in any market. So, that doesn't imply that it's going to reduce volume from our operations or our sales in the – our current investments..

And our next question comes from the line of Chris Manuel from Wells Fargo Securities. Your line is open..

Good morning. Just a quick question, Andres, to help me understand, talk a little bit about some of the changes in refillable and one-way containers down in Latin America.

Can you just maybe give us a little color, as you sit today, what is your mix across several other regions, whether it's South America, Asia, Europe, et cetera, for one-way versus refillable? And is your kind of thinking about that, is that perhaps – as we're seeing that mix increase to one-way in Latin America, does that potentially account for a chunk of the degradation perhaps in margin over the last three, four, five years? I'm presuming that, of course, refillable carried a higher margin than one-way that I think as you told us over the years?.

Okay. Well, let me touch on two markets specifically, which are the ones that call the most attention. One is Brazil and the other one is North American mainstream beer. So, when I look at Brazil, Brazil beer is 11% of the total volume we sell in Latin America. Now, one-way premium beer is growing at double-digit rates in Brazil.

That's the fastest growing package in the country and that is around 80% glass. Now, returnables, which are the most economic package in the country, are dropping slightly driven by the channel. And what that means is on-premise consumption is dropping because of the economic conditions and is moving into off-premise.

And when it happens, then some of the demand that will be in returnable containers goes to one-way containers, some of it goes to cans, some of it goes to glass. Now, that's all driven by the channel not by consumers. It's just a situation of the economy at this point in time.

Now, when we add the growth of one-way glass for premium beer, when we add the migration of returnable into one-way glass, which is happening, when we add the migration of mainstream beer, either packaging cans returnable for one-way glass into premium one-way glass, glass sales are growing in this country.

Obviously, they're impacted by the economic situation right at this very point. However, they've been growing over time. So, even though, we hear very often that the share of cans is growing, glass volume is growing, too.

And I think the most important support point for that is, over the last five years, O-I sales grew by 2.4 times in the total business and they grew two times in beer. So, that's the areas that the calculations that come out of share not necessarily reflected of the volume in glass. Now, that's not really the driver of margins.

I mean, there are many other pressure that are taking place of margins that you highlighted before. When we look at North America, 45% of our business in North America is beer. Now, 25% of our sales are mainstream.

And what that means is 75% of our business in this region is integrated by craft beer, premium beer, super premium spirits, and (52:09) food and wine. And all of those segments in the 75% are growing. So, if you look at our sales back in 2014, they were flat year-on-year. In 2015, they were flat year-on-year, too.

And in 2016, we are expecting a slight increase in our sales versus 2015. So, I think this will reflect also that the dynamics that are explained around mainstream, even though they're there, they're not so influential (52:37) in our total volume because it is only 25% of our business, while the 75% of our business remaining is growing.

And with that, then we can offset the volumes. As I mentioned before, we are expecting a positive scenario in demand in Asia Pacific, and Europe is expected to be slightly up also for 2016..

Our next question comes from the line of Philip Ng from Jefferies. Your line is open..

Hey, guys. FX and D&A was a bigger drag relative to your 3Q guide for Vitro, but operationally, it looks like things improved. Can you provide some color on how trends are shaking out and how the integration process has come along? Thanks..

Let me talk about the integration for a moment. It is progressing really well. We've been able to get into the operations, understand the current state, and then put in place the improvement programs that we're expecting to be able to get up to our synergies as planned.

We are in the process of finalizing integration of systems, which is important for us to be able to improve the accuracy of our forecasting going forward, but we are very pleased with what we've seen in this operation. It's very well structured. It has very good technology, very good knowhow, very good people.

So, we are very pleased and we look forward to having better visibility of the actual impact of this operation into the year..

And it's very nice to see that the favorability in the operations has helped a long way to offset the currency drag from the peso..

Our next question comes from the line of Mark Wilde from BMO Capital Markets. Your line is open..

Thanks and good morning. Jan, I noticed that you changed the debt covenants.

And I wondered if you could tell us a little bit more about that and maybe give us a sense of any cost that was involved there for O-I?.

Okay. Sure. Yes, we started working with our banks a short while ago. We just thought that it was prudent in light of the foreign currency volatility that we experienced last year to address the debt covenant to allow ourselves a little bit more headroom should we continue to experience that in 2016. The banks are very supportive.

We increased the leverage ratio to five times for the next three quarters and then 4.5 times after that until third quarter of 2017. And the fees that were involved were actually very minimal and did not include any step-up in pricing if the leverage – if we should increase our leverage ratio..

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

Hi. Good morning. I was wondering if you could talk a little bit about the European optimization program.

And specifically, how should we reconcile the completion of this major three-year program with operating performance falling through 2014, 2015, if I'm reading slide five right? And maybe, how does the supply chain improvement efforts you're planning for the future, how did those activities differ maybe qualitatively from the optimization you've already completed in Europe?.

Okay. We finished the asset optimization program in Europe. And as we mentioned before, we had some issues last year coming from the complexity of those projects, which caused a difficulty for start-up and then stabilization, but this is behind us at this point in time.

So, we expect that once we don't see the negative effect of performance, we're going to see, I think, the positive effect of this program in Europe. When we talk about supply chain, we see important opportunities in procurement, in inventories reduction and logistics cost reduction.

Now, when we talk about inventories, we've got to increase our flexibility in the manufacturing operations first. We're seeing a very good momentum in that improvement. And as we do that, we will be able to add more flexibility to the factories. And with that, we're going to be able to lower the inventories in the system.

And as we are able to put in place all the processes and practices across the world, we are expecting that we're going to get also some improvements out of procurement and logistics cost..

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

Thanks. Good morning, everyone. Jan, welcome. Just one clarification on the tax refund; I know Scott asked you a question, but I was a bit confused by your answer. So, you'll get that benefit in 2016 and you're saying it's going to be mostly offset by working capital.

I'm just trying to understand what the bridge from 2016 to 2017 is because that tax refund goes away presumably.

And then, what are you saying with respect to working capital 2016 versus thereafter?.

Okay. Sure. Well, we do expect to get our tax refund in 2016 calendar year. So that will be good news for us. What the point I made about the working capital is that we have had working capital favorability in the last couple of years of about $100 million a year.

And when I look at our accounts payable and receivable levels, I think we're pretty stretched at this point and that it makes sense for us to try to really focus on those controllable things that we can focus on in the company to enhance our free cash flow and our working capital.

And so, we will be focusing very strongly on the inventory side of the business, and Andres mentioned that we have new plans in place and new people in place to help drive that this year.

And also, we will be focused very clearly on Vitro and some of their operating practices, too, so that we can benefit from some of the things that they do very favorably and they can benefit from some of ours. So, that's really our focus for the year is where can we enhance our working capital..

And we have time for one more question today and that question comes from the line of Chip Dillon from Vertical Research. Your line is open..

Yes. Hi. Good morning. I had a quick question regarding the CBI investment path, which you've previously disclosed as you go out to 2017. I know you mentioned that this year you'd spend the $80 million.

And I guess the question is, if I look at your free cash flow guide and take away the investment for this year, obviously the minority interest dividends aren't discretionary. And you assume in 2017, let's just project you don't get the $135 million, your free cash flow would be down to about $45 million or less than 1% of your net debt.

So I'm just wondering, given the environment, is there any thought to maybe slowing down some of that, or are there other things that you're planning so that we see the free cash flow net of whatever you put into constellation go up, given your debt load?.

Yeah. I think the real key here is continuing focus on our inventory levels. There's a lot of opportunity in this area and I don't think that we've had the strong focus on this in the past, and all areas are working on this now to really focus on the performance of the business of the company that will help drive this cash flow.

Obviously, we will make investments internally and through organic – and for organic growth for the company, but the key is that we really have to generate the cash to be able to do that and we're extremely focused on this area right now. One thing, Keith, if you don't mind, I would just like to reiterate a comment on asbestos.

I think, George, you asked a comment earlier, and I think it's probably worth repeating because this is a change for the company. I mean, historically, each year, we added one additional year of asbestos liability. So, for example, and that was the third year, so in 2014, we added $135 million. Think of that as for 2017.

Recently, we came to the conclusion that we could forecast four years of visibility. And so our charge was larger. It was $225 million because it included – it was essentially for 2018 and 2019.

So, if you take that $225 million and try to more annualize that, it's a much lower number than that $135 million was for a year and it's actually a very nice trend that we continue to see in this area. So, I hope that helps..

So, thank you, everyone. That concludes our earnings conference call. Please have a great day and we'll see you in New York on March 1. Remember, we appreciate your interest and to choose glass. It's safe, it's pure and it's sustainable. Thank you..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..