David Johnson - Owens-Illinois, Inc. Andres Alberto Lopez - Owens-Illinois, Inc. Jan A. Bertsch - Owens-Illinois, Inc..

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker) Debbie A. Jones - Deutsche Bank Securities, Inc. Scott L. Gaffner - Barclays Capital, Inc. Lars F. Kjellberg - Credit Suisse Securities Europe Ltd. (Sweden) Adam Jesse Josephson - KeyBanc Capital Markets, Inc. George Leon Staphos - Bank of America Merrill Lynch Ghansham Panjabi - Robert W.

Baird & Co., Inc. (Broker) Mark William Wilde - BMO Capital Markets (United States) Philip Ng - Jefferies LLC Chris D. Manuel - Wells Fargo Securities LLC Brian Maguire - Goldman Sachs & Co. Tyler J. Langton - JPMorgan Securities LLC Chip Dillon - Vertical Research Partners.

Good morning. My name is Karina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Owens-Illinois Third Quarter 2016 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. Thank you. Mr.

David Johnson, Treasurer and Vice President of Investor Relations. You may begin your conference..

Thank you, Karina. Welcome, everyone, to O-I's earnings conference call. Our discussion today will be led by Andres Lopez, our CEO; and Jan Bertsch, our Chief Financial Officer. Today, we will review our financial results for the third quarter of 2016, discuss key business developments, and walk you through a few trends affecting our business.

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

Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which exclude certain items that management considers not representative of ongoing operations. 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. We'll just start on the slide 3. So you can all follow along with our supporting materials. I'm pleased to report that our third quarter results came in-line with our guidance range, demonstrating a steady and solid progress on our strategy to drive shareholder value.

Both GAAP and adjusted earnings were $0.68 per share in the quarter, which on a constant currency basis, represented a 26% increase year-over-year. These were strong results, and I would like to congratulate all the members of the O-I team on their dedication and high commitment to performance.

As expected, the acquisition in Mexico coupled with solid execution on our strategic initiatives continue to drive overall results for O-I this year. We are driving improvements throughout our global network of plants, with efficiencies increasing year-over-year at 60% of our facilities. The quarter unfolded pretty much, as we expected.

Europe and North America were as spot on. Demand in Latin America declined more than we expected. Yet, the management team did an excellent job responding to the challenges and opportunities the market is providing. In Asia-Pacific, the extra boost from favorable currency overshadowed a modest drag on earnings from continued investment in the region.

In all, total segment operating margins and absolute segment operating profit posted nice year-on-year gains. Non-operational performance also benefited from our teams' solid planning and execution. Both corporate expense and taxes were lower than we had previously guided. In all, we delivered a good quarter. Turning to slide 4.

I'm pleased to report consistent execution on our strategic initiatives is paying off. We are on track to meet the strategic objectives we established for 2016. These plans have generated year-to-date margin expansion in our three largest regions.

For the year, we continue to expect overall segment operating margin expansion of greater than 100 basis points. Regarding our volume targets, I know that some of you had been skeptical about whether O-I could grow this year. I am pleased to report that we are growing.

We continue to project 1% annual organic volume growth this year in line with our full year target. Importantly, we are achieving this performance despite macro headwinds dampening demand in selected geographies in Latin America.

Our investment decisions in Asia-Pacific have temporarily restricted near-term growth, yet set us up for improved margin in the future, as we have done in other regions. All included, we are exceeding our company margin targets, volume targets, adjusted earnings and cash flow.

Reflecting renewed business practices at O-I, we are offsetting adverse circumstances and taking advantage of positive ones. Please turn to slide 5. Starting with Europe. As we discussed at an Investor Conference last month, we have seen a modest shift in volume from the third quarter and into the fourth quarter.

So volumes were flat in Q3, and are expected to increase more than 1% in the fourth quarter. As such, we expect to meet or possibly beat our overall volume improvement goal of 1% for the full year.

In the quarter, the strength in wine offset some of the weakness in beer, but we expect both of these important categories to have higher year-over-year shipment volumes for the full year. I'm pleased to report the continued success of the stability and improvement programs we have undertaken in this region.

We are demonstrating that we can leverage global resources, and replicate best practices across our local operations. In fact, you can really see the favorable impact of our strategic initiatives in Europe. Positive traction in our operations more than offset the impact of higher planned downtime in the region from furnace repairs.

Operations are improving and we are achieving higher productivity levels at our focus plants in the region. Year-to-date, about 70% of our European plants have achieved higher efficiency levels, building on the achievements we began to see in late 2015.

While we continue to experience positive momentum in Europe through the end of this year, and into next, we are falling short of our ambitious full year goal of 150 basis point margin expansion, driven by two key factors, as we invest in asset stability, the production downtime needed to effect operational improvements was a bit higher than expected.

And the previously mentioned impact from the weak British pound is weighing on our margins. Still in Europe, earnings are improving and margins are significantly up versus prior year. Turning to slide 6, operating profit for the North America segment show significant year-on-year improvement.

Shipments were up 9% overall in the quarter, benefiting from the contribution and strength of the acquired business and solid performance from our legacy business. In fact, the legacy business in the quarter saw modest volume growth compared with the prior year.

While megabeer has been in decline for several years, we have begun to see some recent slippage in craft beer sales. While some micro breweries continue to grow well, growth from the rather large craft breweries has been recently slowing down. That said, we are perfectly positioned to take advantage of consumer preference for imported beer.

For O-I, beer demand in North America is significantly higher year-on-year, driven by the incremental beer business with CBI, combined this with very strong demand in non-alcoholic beverages. You can see why we are remaining constructive on 1% volume growth expectations for the full year.

Separately, operating profit improvement will be driven by the acquisition and higher operating efficiencies, facilitated by the plant improvement team that is now in Zanesville. Continued progress has been made towards stabilizing this plant, and we expect to see more improvement here going forward. Turning to slide 7.

Latin America operating profit was up significantly, driven, again, by the strong performance of O-I Mexico. The acquired business added incremental $25 million to operating profit on a year-over-year basis. Keep in mind that O-I Mexico generated $13 million of segment operating profit in September 2015. Demand is solid.

Synergies are being delivered and operations continue to improve. Great progress on the acquired business. The legacy business also delivered a solid performance, particularly in the face of continued weakness in the Brazilian market as well as Ecuador. In all, we faced a double-digit decline in legacy shipments this quarter.

Yet, the Latin American management team and our people, more broadly, responded with prudent cost containment and moderating production in-line with demand. The team finalized the sale of a closed plant as well.

Overall, the legacy business posted year-on-year operating profit, essentially, in-line with prior year; truly remarkable, given the external conditions. You can see why we are leveraging the best knowhow from this region across the enterprise.

With respect to the full year outlook, the economic situation in Brazil remains difficult, but we remain cautiously optimistic that there will be a turnaround in the trend in the near future. And to be clear, not all trends are negative in Brazil.

For instance, one-way glass continues to be the fastest growing package for beer in Brazil, up 17% year-to-date, and a large brewer is actively promoting off-premise consumption of beer in returnable containers. In the end, we believe that our own efforts will continue to help minimize the impact of volatility in Brazil in the bottom line.

On the upside, Mexico is expected to continue to be the brightest spot in the regions, underpinned by a solid demand outlook. Throughout the region, we expect our pricing efforts to be in line with cost inflation, and the focus on cost containment would also remain the top priority. Turning to slide 8.

Asia-Pacific is an interesting story with very high potential on the heels of significant investment. Before jumping into O-I developments, know that market trends this year throughout the region are solid and growing, and not just in the emerging markets, but also in wine and beer in Australia and New Zealand.

As we discussed in prior calls, we are undertaking a significant overhaul of our assets throughout the region. In 2016, we will have rebuilt four furnaces compared with several furnaces rebuilt in the prior year. Since production volume is lower due to the rebuilds, we have had to make some difficult commercial decisions.

Smartly, we have opted to preserve higher margin sales in the mature markets, which are on par with prior year. To maintain the sales, we imported product from other O-I factories in the region. In turn, low margin domestic sales in emerging markets in Asia Pacific were temporarily lower.

That said, due to margin impact of the geographic mix of sales in the region, plus the impact of our strategic initiatives on costs, we were able to achieve a modest increase in operating profit in the quarter, despite a 5% drop in sales volume and the additional transportation cost.

This is a good outcome, and now is the right time to strengthen our assets in the region. For the full year, sales and production are expected to be down modestly. However, this masks the healthy demand trends that remain in place across the region.

The planned and accelerating investments in assets this year will improve the flexibility and reliability of our assets and will set the stage for improvement in 2017. With that, let me turn the call over to Jan to review our financial performance as well as our outlook for the fourth quarter and full year 2016.

Jan?.

Thank you, Andres, and good day to all. Let's turn to slide 9, where I would like to focus on segment operating profit compared with the prior year. The some of the parts that Andres discussed led to segment operating profit of $237 million in the quarter.

On a constant currency basis, this represented a healthy 22% increase compared with the prior year period. Currency was modestly negative in the quarter, amounting to $4 million. While the euro and real were fairly constructive, the British pound adversely impacted the company, as expected.

The Mexican peso is also a substantial headwind, but recall that there is only one month of overlap since the transaction closed on September 1 of last year. Despite the currency challenges, the acquired business added $37 million to segment operating profit.

The price inflation spread was modestly positive for the company with gains in the Americas offsetting the headwind in Europe. The year-over-year dollar impact of sales volume declined $8 million, with most of that coming from Brazil and Ecuador.

As Andres mentioned, our ongoing manufacturing related strategic initiatives continue to pay dividends for OI, as we progress through 2016. During the third quarter, these programs delivered approximately $15 million in higher operating profit on a year-over-year basis.

This was partially offset by lower production volumes from furnace rebuilds, and in Latin America rightsizing supply with demand. Year-to-date, these initiatives have contributed a total of $35 million in operating profit, and I'm pleased to report that we're still on target for the $50 million to $70 million we've targeted for the full year.

In all, while the acquisition provided most of the gain in segment operating profit, the legacy business is definitely up year-over-year, despite the challenges Andres talked about elsewhere in Latin America. Turning to slide 10, let me connect a few dots together that we've already touched upon.

Currency was a relatively modest headwind of about $0.03. Segment operating profit, which I just reviewed, was the key driver for the improved results, adding about $0.19 to earnings. Relative to performance last year, non-operational items equated to a $0.05 headwind.

Beginning with corporate, which was a modest headwind in the quarter, year-over-year, even though expenses came in slightly lower than originally projected for the quarter. Interest expense was in line with expectations, given the acquisition related debt.

Partially offsetting these, the tax rate was lower than projected at 24%, in line with our updated full year expectations, which you'll see on the next slide. As I look at our financial results, it should be clear that our overall business is performing well. We faced about $0.05 of external headwinds and one-time items.

These temporary issues were offset by more or less equal contributions from better than expected corporate expenses, a lower tax rate, and minor asset sales. Summing it all up, third quarter adjusted EPS was $0.68. This represents a robust increase of 26% versus the prior year quarter on a constant currency basis.

Actually, even including the currency headwind, earnings were up nearly 20%. Turning to slide 11, let me discuss the outlook for the fourth quarter. We see many upsides as well as a few challenges year-over-year. Currency is expected to be a $0.01 headwind in the quarter.

We see solid execution in Europe, with tangible benefits from our strategic initiatives continuing, and a more than 1% year-over-year increase in sales volume. These should more than offset challenges related to ongoing modest price-cost headwinds, and the continued drag from the weaker British pound.

On balance, we expect higher earnings and margin expansion for Europe in the final quarter of the year. In North America, we expect trends similar to what we saw in the third quarter. Higher volumes, benefits from strategic initiatives, and strong value from O-I Packaging Solutions; in sum, higher operating profit and margin expansion.

In Latin America, strong ongoing performance in Mexico is expected to continue, and we are hopeful volume declines in Brazil will begin to abate, especially as we lap easier comparisons exiting the year. And in Asia-Pacific, we expect low single-digit declines in volume in the fourth quarter to be offset by cost savings effort.

As Andres discussed, 2016 has been a significant investment year for the region, and one of the four furnace rebuilds in the region will take place in the fourth quarter.

Overall, we expect fourth quarter segment operating profit to expand year-over-year driven by anticipated stronger results across North America and Europe, with results in Latin America and Asia-Pacific anticipated to be flat. We expect corporate cost to be roughly in line with the year ago level.

You may recall that our joint venture with Constellation runs through our corporate line, while we are in the heavy construction phase. As expected, with the second furnace now in full operation, equity earnings from the JV will add a few cents to our earnings. Yet, pension expense continues to be a bit higher year-over-year.

Interest expense may be slightly higher than the prior year period, depending on the variable interest rates. The full-year tax rate is now expected to be about 24%, which is about 60 basis points lower than the prior-year annual rate.

Putting this all together, we are forecasting adjusted earnings per share for the fourth quarter to be in the range of $0.46 to $0.51. Turning to slide 12, I would like to discuss our full year outlook. Stepping back for a moment, recall that we began the year with EPS guidance of $2.10 to $2.25.

In April, based on higher expectations for the acquisition plus favorable currency rate, we increased and narrowed the range to $2.25 to $2.35.

While the acquisition is performing exceptionally well, currencies remain quite volatile, both the Mexican peso and British pound have significantly devalued over the last year, and we are seeing weakness again with the euro. That said, our solid fourth quarter guidance leads us to the full year range of $2.27 to $2.32 per share for 2016.

The midpoint of our narrowed guidance is unchanged, and implies the year-over-year growth in earnings of 15%. We believe this is a strong achievement given the global challenges and uncertainties in the market. We are maintaining our free cash flow guidance for the year at $300 million.

We already received the Mexican VAT refund related to the acquisition we closed last year. And importantly, I want to remind everyone that our strong free cash flow performance is being achieved despite the burden of $130 million in asbestos related payments estimated for 2016.

Of course, we will continue to make progress on deleveraging our balance sheet. By the end of this year, we expect our leverage ratio will be around 3.8 times, well on our way to our goal of 3 times by the end of 2018. And with the financial review complete, I'd like to return the call back to Andres..

Thanks, Jan. Starting to slide 13. We are executing with discipline on our priorities. Priorities that deliver stability and consistency in our top line, our operations, and our financial results. The financial performance in the first three quarters of the year tells the O-I story.

One team highly committed to improve performance, and one plan across the enterprise supported by diligent execution, allowing us to successfully perform and consistently deliver on commitments to shareholders and other key stakeholders.

We are consistently working to improve our customers experience and establishing long-term strong partnerships with them. We are consistently improving operational and end-to-end supply chain performance.

We are consistently building new and stronger capabilities in key functional areas and across the enterprise, and we have been very consistent with our guidance this year and continue to anticipate meeting these clear financial commitments. We work every day to improve earnings, margins and free cash flow, and in turn de-lever our balance sheet.

We work every day to increase financial flexibility to continue to grow our business and increase shareholder value, and value for all our stakeholders. In summary, we are doing what we said we would. And now, we will open the lines for your questions..

Thank you. Your first question is from Anthony Pettinari from Citi. Please go ahead..

Good morning..

Good morning..

Jan, at the Analyst Day, you laid out some longer term free cash flow goals, and you reaffirmed your 2016 free cash flow target.

I am wondering as we look out to 2017, we obviously don't have the VAT, but you have some lift from the underlying business, and maybe inventories, do you still anticipate being able to hit that $250 million to $270 million that you outlined at the Analyst Day next year, or any updated thoughts on that?.

Yes. Good morning, Anthony. Thank you. Yes, we are still on target. We do expect to see improvements next year in the inventory and the supply chain area that Andres mentioned. While we don't have the benefit of another VAT refund, we do have higher earnings projected, and the business delivering higher value next year.

So, at this point, while we are not providing guidance for 2017, I would say that certainly would be in the range. And, of course, you know that our asbestos liability as well is expected to continue to decline year-over-year..

Your next question is from Debbie Jones from Deutsche Bank. Please go ahead..

Good morning..

Good morning..

Good morning..

I have a question about the LatAm guidance. It would seem that in the third quarter in the region, if I strip out Vitro, you still would have seen slightly higher earnings despite the volume weakness.

So next quarter, I would assume the cost containment would still be there, and then you would get the benefit from kind of lapping Vitro with the synergies and volume growth. So can you help kind of bridge that..

Let me start by making a couple of comments, and then I turn the question over to Jan. As you mentioned, we've seen some lower demand in Brazil, which has been partially offset by good performance in primarily Colombia and Peru along the year. Now, the team has been highly focused on cost containment, and they are expected to continue to do so.

So, they've been working on this, Debbie, as you know, starting very early last year, and I think that's why the region has been doing so well, even though circumstances are so adverse. Now, overall, we continue to see low demand in Brazil. However, we are seeing some very early signs of slightly change in trends.

For example, we are seeing a little bit better trends in beer, which have been quite depressed late in 2015 and early 2016, or we're seeing some macroeconomic indicators that are starting to show at least a inflation point, which is helpful. Nevertheless, at our other areas in which progress is really limited.

For example, the reforms that need to take place in this country are still in the very early days, some of them – one of them is specifically is moving forward, but a lot of them need to take place for this to change. But overall this team is highly committed.

They've been very successful offsetting this downturn in Brazil, and we look forward for them to continue exactly in the same path..

Yeah. I think I would just reiterate what Andres mentioned, and say that we have a fantastic team in Latin America, and they have been extremely focused on finding opportunities to offset the adversity that we've been experiencing with the economy in Brazil.

So, on balance very good performance despite these uncertainties, and they will continue down that path in the fourth quarter..

Your next question is from Scott Gaffner from Barclays. Please go ahead..

Thanks. Good morning..

Good morning..

Good morning..

I just want to focus on Europe for a minute and the margin performance year-to-date, because you did have, I think, some benefit of the asset optimization, you had the PIT teams in there earlier this year and the volume growth is up 1%, and I think you said it was going to be strong rest of the year, or in line with your expectations.

I was just trying to find out what are the bridge between the performance and the guidance for 2016 on the margin side. Thanks..

So, Scott, let me start by saying that the work done by the PIT teams continue to be very effective, and we're seeing improvement not only in those factories, but in 70% of the factories in the region. So we are very pleased with the progress. When it comes to volume, the third quarter was a flat year-on-year.

However, we're expecting a year-on-year improvement for the fourth quarter, so there is a shift in volume between the two quarters. So we are not seeing any change in demand for Europe, and we are very pleased with the progress they're making in the operational improvement.

All together, we are expecting a very nice growth year-on-year for margin in this region, and in line with what we expected, and we consider that we have an unexpected situation with the British pound, which is impacting the results in this region through the year.

And we also have a significant impact coming from the strike in France, which we mentioned before, which we've been observing through the year. They are not happening any more, but they happened quite extensively at the end of the second quarter – through the second quarter, and very early in the third quarter.

Jan?.

Yeah. So let me just kind of dimension the commitment and the expectation for the full year on the margin side, Scott. At the beginning of the year, we expected 150 basis point improvement overall for the full year for the European region.

Right now, we're running probably closer to 100 basis points on that front for the year's expectation, so short of what we had anticipated.

However, if you look at the couple of things that Andres mentioned, Brexit, while we never changed our guidance for that phenomena, it certainly had an impact on a full year basis for the EU, probably about 25 basis points.

And then, the strike in France in the second quarter probably had an impact on the full year margin for the EU of about 10 basis points. So that would have elevated their performance to about 135 basis points for the year, much closer to our anticipated 150 basis points.

But even despite the fact that Europe is missing its full year margin expectation from the beginning of the year, the full company is running ahead of its 100 basis points improvement year-over-year on the margin front. So we were able to make it up in other regions of the world..

Your next question is from Lars Kjellberg from Credit Suisse. Please go ahead..

Yeah. Hi. Good morning. I just wanted to stay with Europe for two seconds. So you're obviously somewhat behind your margin targets at this stage. Should we expect you to recover that in 2017? And at the Capital Markets Day or Investor Day, you talked about group margins up an incremental 40 basis point.

Is that still a target for you, given that you're below in a very important region in Europe, and maybe better catch up in 2017?.

Yes. On Investor Day, we indicated that we thought post 2016 that we could achieve about a 40 basis point improvement in Europe. And I think we're still on track to do that from the 2016 level..

Your next question is from Adam Josephson from KeyBanc. Please go ahead..

Thanks. Good morning, everyone. Andres or Jan, you talked about price cost headwinds continuing in the quarter. Can you just talk about when you expect those to abate, and precisely why, and just talk about the different regions? I know you talked about continued such pressures in Europe in the quarter, albeit less intense than before.

Thanks very much..

Sure. I think in the quarter, in the fourth quarter that the price inflation spread will continue, specifically again for the European and North American region, but when I look at a full year performance, I think the challenges that we have in Europe will be pretty much offset in total by North America region.

So between the two, not too much impact on a full year basis..

Yes. The dynamics we observe in price in Europe remain the same as the ones we communicated along the year. So we haven't seen any increase. The region stays with the demand and capacity on balance, which obviously put pressure on price, but we haven't seen any change in that regard.

Now, overall, the Americas have been performing in line with inflation when it comes to price, and those are really the ones that are driving a positive spread in the company..

Your next question is from George Staphos from Bank of America. Please go ahead..

Hi, everyone. Good morning. Thanks for the details. I just wanted to – recognizing it's little early to talk about this, so you now know what I'm going to talk about. You had the benefit this year of Vitro really doing very nicely within your results. Congratulations.

Looking back in hindsight on the acquisition and you've been getting obviously very nice benefits from the Constellation JV as well already. But that is largely at least coming to an end in terms of the anniversary date, specifically with Vitro.

So as we look out to 2017, help us understand what you think will be most contributing to your forward earnings performance and growth, which as Jan what you said earlier, I think talking to Anthony's question on cash flow.

Is it going to be a more stable environment and pricing in Europe? Is it that you expect demand is going to be a bit better in Brazil, and if you can put a finer point on that? Is it going to be further progress in Vitro, or will it be the PIT program? And I recognize it'll be some combination thereof, but if you can provide a little bit more clarity on what you expect will drive your earnings as the acquisition effects are now lapping, that would be great.

Thank you, guys..

Thanks, George. So, as you know, we are still finalizing the two-year plan and budget, and we still got to present that at the very end of the year for board approval as we go into 2017. Overall, we expect to be in line with our I Day targets for 2017. So I think that that's a good assumption for you to make.

Now, we expect the initiatives to continue to contribute going into 2017. We continue to gain momentum. Those initiatives will go into the year.

Now, as we continue to increase flexibility and we continue to deploy our new global supply chain agenda, we expect inventories to come down and that's going to impact also our warehousing and logistics cost in that year. Inventories, of course, will be a large source of cash.

We continue the acquisition – we continue to believe the acquisition will deliver strong performance in 2017. We see upside potential in productivity in that operation and sales volume continues to be very healthy, and we expect the same to continue into 2017.

Now, when we look at pricing in Europe, at this point in time, we don't have any reason to believe that will change versus what we've seen this year. So it will continue with the same dynamics. Now, we'll see as we go into the first quarter, as we normally do, if a change takes place in the market, but at this point, we assume it will continue.

Demand in Latin America is really about Brazil and Ecuador to recover. We're seeing better conditions in Brazil, at least early indications of a different scenario as we go into the future. Now many things got to fall into place for this economy to be back on track.

But at least some of the very strong downtrends that we saw in late 2015 and early 2016 are starting to change at this point in time, like for example, beer, or industrial production, or confidence, even the consumer confidence is up in this country, retail sales are up. Now many things are still to be changed.

Unemployment is high, and it doesn't really improve. The ability of the government to make changes, reforms that are requiring this country for – the economy to change are still to take place.

So, we are taking a very cautious approach with regards to Brazil, but in the meantime, our team is doing everything they have within reach to be able to improve cost and offset those effects. Now, we're going to focus, or increase our focus as we go into 2017, in the structural cost reduction, which is very important for the company.

And we continue to explore investments that could accelerate that process, going into following years. And we continue our focus to renew our approach with customers and a customer experience camp has been deployed. We're seeing a very positive evolution there, so we are expecting that that will start to impact in a positive way at some point in 2017.

And overall, we're maturing how we work as an enterprise. We are becoming better and better at replication of best practices across the company and sustaining them. I will say that we are becoming more nimble, more efficient and more effective, so that will all help 2017.

And we continue to evaluate opportunities for investment on, to support organic growth opportunities to as they present.

Jan, any comments – any additional comments on that?.

Maybe I'll just wrap it up and say that the discussion that we had in Investor Day regarding volume and our growth due to the initiatives and improvement in margins, our bottom line EPS kind of growth in line with the 10% CAGR, the discussion we had on inventory reductions, helping to improve our working capital for the company, are all still intact, and all expected to deliver as we said in Investor Day.

I mean, 2016 we've been very focused on keeping our strides on all of those fronts being very consistent and delivering on what we've said we would do, and I think that's going to serve us well going into 2017. And also lastly, I think our investments in our assets in the region this year, we had 11 furnace rebuilds in 2015.

We have 14 rebuilds this year plus two rebuilds in Mexico, so 16 rebuilds in 2016. Andres mentioned the key account management, and certainly our focus on global supply chain is all going to help us deliver to those targets in 2017..

Your next question is from Ghansham Panjabi from Baird. Please go ahead..

Hey, guys. Good morning..

Good morning..

Good morning..

Andres, just kind of following up on your comments on pricing. There are some signs of inflation picking up, including obviously the increase in crude oil for example, and several other raw materials.

So, first off, do you expect raw material inflation for 2017 as the year progresses, and if so, how will that factor into your pricing decisions for next year to kind of minimize the risk of getting even further behind on the price-cost curve? Thanks..

Okay. Well, when it comes to Europe, we've been taking a very balanced approach to price. We intend to continue to do so. We're going to evaluate how the environment looks as we go in through the first quarter.

Now this year, we've been operating with a significant deflation, which is obviously not conducive to price increases, but our intent is to take a balanced approach in that region, as we move forward. In the Americas, we've been recovering inflation well. We intend to continue to do so.

Remember that we have more than 90% of our volume in North America under contract. So we have pass-through provisions for every one of those agreements. And in Latin America, we have close to 40% of our business under contract, and we expect to continue to be able to recover inflation or offset inflation, as we've done so far.

Asia-Pacific is 50% under contract, so we expect that we'll be able to recover through pass-throughs in that region. Probably, the most difficult aspect for us to recover is the FX driven inflation when it takes place, and that really impacts primarily APAC and Latin America..

Your next question is from Mark Wilde from BMO Capital Markets. Please go ahead..

Good morning, Andres. Good morning, Jan..

Good morning..

Good morning..

Hey, Andres, I wondered if you could give us some sense of what you're seeing down in the overall Mexican beer market, in terms of glasses market share, because we're seeing a lot of can plants being built down there along with your new furnaces.

And I wondered if you could give us a bit of the same for kind of the craft beer markets here in North America..

Okay. So, when we look at Mexico, as you mentioned, we've seen some activity building can capacity in the country, and is primarily focused on supporting the beer that is exported into the U.S. Now, we've been building capacity also. So there is always a natural share of cans and glass in every market.

So we moved ahead, put in capacity in place in Mexico. Now, cans are put in capacity. Now, we continue to expand. And I'm positive more expansions will come as our customers continue to match the improved demand for imported beer in the U.S. As you know, this is the fastest growing segment in beer in the country.

And that's really the one that is taking the largest share improvement in the country versus the mainstream beer primarily, and a little bit of the slowdown of the big players in the craft industry. When we look at craft, it's been slowing down in the growth. In our case for glass is we see a flat performance in craft.

Now, again, we are very well-positioned to take advantage of the imported beer demand, which is really the segment that is growing. And we have been also putting a lot of emphasis in beer (47:16) end users. And this has been going on for quite a while now.

So I think at least for year-and-a-half, we've been making sure we take advantage of the growth in segments like spirits, like wine, NABs, which is quite healthy in the country..

Your next question is from Philip Ng from Jefferies. Please go ahead..

Asia-Pac margins were pretty impressive despite softer volumes, which has actually previously shown pretty steady growth the last few quarters. Can you just talk about what's driving the weakness? How should we think about the outlook going forward, and is there still good runway on the cost containment front? Thanks..

Yeah. So, when we look at APAC, the operational performance has been positive. They are following the same trends as the balance of the company. They're deploying the same initiatives, they're making very good progress on that, they've been observing good discipline when it comes to cost.

Now, when we look at demand in that geography, the mature markets have been experiencing some positive evolution. Wine is back to growth. It is primary driven by exports into China. We're seeing some repatriation of wine due to the change in FX in the mature markets, and we are seeing stability in beer. We see growth in the emerging markets.

So demand is positive. We are not enjoying the demand growth at this point in time, because we made a conscious decision to invest in our assets. And we've done so in other regions before with very positive results. So at this point in 2016, is a year in which we took advantage of having the opportunity to invest. That's influencing demand for us.

As we go into 2017, we're going to have a positive effect on the investment we've made in assets, and will be able to enjoy the natural trends of the market in that region, which are positive..

Phil, another comment is we are experiencing pretty flat segment operating profit year-over-year despite the challenges that the APAC region has had. So, really, I think on the transportation and warehousing that we incurred because of some of this is really what harmed the margin too.

And so we look for next year with this investment in assets to have certainly a much greater year..

Your next question is from Chris Manuel from Wells Fargo. Please go ahead..

Good morning, guys..

Good morning..

And I just wanted to kind of, if I could, focus in a little bit on Brazil. So we've been running down quite a bit there, 10% to 15% volumes now for chunk. And it sounds like you said you remain relatively cautious yet on the region.

At what point do you need to kind of take a step back and do a strategic look at the footprint, and maybe rationalize a bit? So can you talk about some of the dynamics going on now? I know on the can side, it's still been relatively steady, or even showing little bits of growth yet, while you've had some degradation.

Can you talk about maybe what's happening mix between one-way and refillable and how your performance is vis-à-vis the market acceptance down there? (50:37).

Okay. Thanks. When we look at Brazil, obviously demand has been down. Now, one-way glass is the fastest growing package in Brazil, with 17% growth year-to-date. That is a very meaningful aspect to look into this business. You mentioned cans as the growing segment.

In reality, the fastest growing segment in this market is one-way glass and it's been driven by premium demand, which the breweries in this country are promoting very intensively. Now, there is something very interesting. Our demand in the returnable containers had been quite stable.

Now, there is one very large brewery in this country, which is promoting glass demand for off-premise consumption. This is quite interesting. In fact, they're investing on setting up the infrastructure, beyond the PIT stops that they did before that we mentioned in previous calls. They're investing in equipment, they're putting in the supermarkets.

At this point in time, they already invested in 1,200 supermarkets to be able to collect back automatically the returnable containers. So it's really returnable containers which are moving forward in this country along with one-way glass for the overall industry.

Now, I think it's important to have in mind that returnable containers are the most profitable package for a brewer. And this is quite strong. Look at that, cans are approximately six times higher cost per transaction for the breweries when it comes to packaging, and they are 30% lower price to consumer compared to a can alternative.

So in this economy, returnability is going to continue to be very strong. Now you mentioned the rationalization of the footprint. So a couple of things are relevant.

The first one is we made a decision to emphasize Mexico at this point in time, given the weakness in the economy in Brazil and the process we thought we saw we were going to go through based on the trends of that market. So we made a conscious change some time ago, which is serving us extremely well.

Now when you look internally in Brazil, you're going to see that we've been rationalizing capacity for a year-and-a-half now. So we took, I will say, the earliest action of any player in packaging in the country to be able to make sure we wouldn't have excess cost in this system as we were going to go through this downturn in the economy.

So we're very pleased with the progress. As you can see, our team down there has been able to really protect the results of the region despite of this very large downturn in the country..

Your next question is from Brian Maguire from Goldman Sachs. Please go ahead..

Hey, good morning. Thanks for taking my question. Andres, I know you are only updating the scorecard twice a year, and this is not the quarter where you typically would do it, but just wondering in the interim you could just provide some high-level thoughts on how that's trending through the year. Thanks..

Yes. We continue to make very solid progress in all the initiatives. I think we're gaining momentum. We're getting better organized. And as I said before, we're learning to work as a total enterprise to be able to replicate ourselves, which is really what you get the benefit.

You got to be able to move your best knowhow very quickly to every place in the company, all the time, to the best of what you know. And that's where we are focused on. Now for the quarter, the initiatives delivered approximately $15 million of incremental segment operating profit. So that's quite positive, and year-to-date we are up to $35 million.

So our expectation is that we are going to be in line with our initial guidance for that, which is to be within $50 million to $70 million of impact to the bottom line at the year end. When we look at manufacturing productivity index, which is one of the indexes, the PIT teams continue to do very well.

Not only we're doing well, but we are continuously working to improve how we apply those things, because we want their productivity to go up. We want them to be able to cover more ground per year, so we can accelerate the process. Now, beyond the PIT teams, we have a special focus on 24 factories. And those factories are improving quite well.

They have a special agenda, so they go up. And then we have a global agenda for the total set of factories in the company where we see 60% of them improving performance, which is close to 15 factories that are moving up in performance across the world. So we're very pleased with the progress.

We're making equal progress, very positive progress in quality, which where we had a quality index, as you will recall. The asset stability index is on track with what we expected and things like the investment we're making in APAC at this point in time, certainly will help the stability of the assets in this region as we go into the following years.

And we're on target to meet our IDS target for the inventory. So, we're very pleased with the progress. We continue to adjust our organization to be able to act more and more as a product company leveraging the scale of the company, that's very important. So, it's all very positive. We're going to be able to have a update on this in our next call.

And certainly, we'll be able to provide more details..

Your next question is from Tyler Langton from JPMorgan. Please go ahead..

Good morning. Thanks. Just a question on North America, your volumes there have been doing well.

Do you have a sense, is that mainly from Constellation, or are there other factors? And then, do have a rough sense in terms of how much Constellation is contributing to volumes overall?.

Yeah. We are seeing a very positive progress coming from CBI, which is the way we positioned the company before to be able to take advantage of the imported beer growth, which is the one that is really taking the share gain in the industry. We're seeing very positive performance in the NABs too.

And as I mentioned before, wine is performing well as a category, spirits is performing well, so all of those are helping to have the positive demand that we are seeing at this point..

We have time for just one more question, and that question comes from the line of Chip Dillon form Vertical Research. Please go ahead..

Yes, and good morning, Andres and Jan..

Good morning..

Good morning..

My question, if you could just update us on the interest rate sensitivity, if we start to see short-term rates go up, and where that stands. And then secondly, is there any reason we would expect the combined CapEx and restructuring amounts, which I believe are in the 500s when you add them together.

Should that change very much next year?.

Well, as we said before, we are at this time in the process of putting our three-year business plan and budget together to get the board approvals towards the end of the year. So, at that point, we're going to know exactly where we are going to be, and we'll be able to answer your question with regards to CapEx implication.

But overall, as I said before, we remain in line with what we said in the I-Day. We are acting consistently with that, and that's our current expectation..

And your other question, Chip, regarding the interest rates, we have about $2.5 billion in floating rate notes and about 10 basis point movement is about $250,000 or so. But as you know, we continue to always look for ways to de-risk ourselves and we continue to do so at this front too..

Thank you, everyone. That concludes our earnings conference call. Please note that our fourth quarter conference call is currently scheduled for February 2. We appreciate your interest in O-I, and remember this about glass, it's safe, it's pure and it's sustainable, make it your top choice. Thank you..

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