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

George Leon Staphos - Bank of America Merrill Lynch Anthony Pettinari - Citigroup Global Markets, Inc. Scott L. Gaffner - Barclays Capital, Inc. Mark William Wilde - BMO Capital Markets (United States) Debbie A. Jones - Deutsche Bank Securities, Inc. Lars F. Kjellberg - Credit Suisse Securities Europe Ltd. (Sweden) Chris D.

Manuel - Wells Fargo Securities LLC Matthew T. Krueger - Robert W. Baird & Co., Inc. Chip Dillon - Vertical Research Partners LLC Edlain Rodriguez - UBS Securities LLC Arun Viswanathan - RBC Capital Markets LLC Brian Maguire - Goldman Sachs & Co. LLC.

Good morning. My name is Zatania, and I will be your conference operator today. At this time, I would like to welcome everyone to O-I's Fourth Quarter and Full Year 2017 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.

I would now like to turn the call over to Mr. David Johnson, Treasurer and Vice President of Investor Relations. Sir, you may begin your conference..

Thank you, Zatania. Welcome, everyone, to O-I's earnings conference call. Our discussion today will be led by Andres Lopez, our CEO, and Jan Bertsch, our CFO. Today, we will discuss key business developments, review financial results for 2017, and we'll highlight our overall expectations for 2018.

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 and adjusted cash flow, 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, everyone. Let's begin with our summary review and outlook on slide 3. I'm very pleased to report a strong financial performance in the fourth quarter and for full year 2017, once again consistently meeting or beating consensus and the key commitments we laid out at Investor Day in early 2016.

2017 unfolded largely as expected with adjusted earnings at the top end of our guidance range, driven by the approximate 1% growth in shipments which benefits the top line, and also a solid continued contributions to the bottom line from our Total Systems Cost focus.

Cash was robust, reaching $393 million in adjusted free cash flow, substantially higher than our guidance. As we shift to 2018, we expect the positive trends in volumes and Total System Costs to generate higher earnings and cash flow. Our confidence is based on the strong foundation we continue to build upon.

We are materially improving how we serve our customers, generating very favorable feedback and positive impact on sales. We are addressing productivity across all businesses, functions, processes, and geographies through TSC organizational design and best-in-class business practices.

In order to accomplish that, we have one single enterprise plan focused on large-scale global projects and supported by a very capable enterprise-wide project management office. We meet briefly on a weekly basis with our top 70 global leaders on telepresence to track business performance and progress on high-impact initiatives.

We are implementing integrated business planning, and we are putting in place best-in-class organizational and talent development practices. In summary, we are building a very capable, simple, agile, vibrant and high-performance organization. We are focused on organic growth while continuing to explore non-organic growth opportunities.

And we continue to consistently make long-term investments in product innovation and process technology to significantly improve our position within the industry. We believe this strategic focus will drive substantial shareholder value.

Of course, the timing of non-organic opportunities depends on external factors and long-term investments will take time to manifest. So, while our leverage ratio continues to decline, we are pleased to announce a share buyback program. With the high-level review and outlook complete, let's turn to slide 4.

We have been building our critical capabilities and competencies to elevate performance across the company in every function, in every geography. I'm very excited about our investments and improvement in the commercial space where we have already began to see benefits.

One of the key imperatives we strive for at O-I is always treating the customer right, focusing on long-term relationships and customer value creation not just simple quick wins. This is where we are aiming.

Through our strategic customer management platform which includes cross-functional key account management supported by a state-of-the-art customer relationship management system and a customer loyalty measurement program, we continue the journey to improve customer-facing capabilities, customer service, and organic volume.

Based on customer segmentation analysis, the commercial team is further refining its service offerings to deliver what our customers value and will pay for. This includes a pragmatic and results-oriented approach to innovation and for new business development, again, delivering what our customers value and what we can make profitable.

We have made and continue to make significant progress in our entire supply chain.

Our journey in this dimension is focused on taking our nearly 80 factories around the world to a standard work and continuous improvement methodologies while we continue the execution of our asset advancement program which improves the alignment of assets and a dynamic market, as well as set up factories for higher performance.

Then, we layer in supply chain capabilities and practices for product, demand, supply, and inventory and logistics planning led by industry experts that are now applying best-in-class solutions. Logistics costs, for instance, are consistently lowered year-on-year, and we continue to make headway in inventory.

In Europe, for example, inventory day sales were down more than five days in December compared with the end of 2016. More recently, we have built a Global Procurement team that will strategically drive down cost as we deepen our relationships with suppliers and apply best-in-class procurement practices.

Last year, our Total System Cost approach delivered nearly $40 million in segment operating profit. In 2018, we expect to see about $30 million of incremental benefit after taking into account higher spending associated with the engineering activity and factory money leveraged (07:55) to meet evolving customer requirements.

Over the course of this year, I expect to spend more time talking about talent and organizational design. Simple and networked organizations are fundamental to work more effectively on our – an excellent environment in which to support, develop and grow talented employees.

Today, we are successfully operating through a global network that identifies and replicates best practices efficiently. As you know, this is how a successful growing corporation needs to operate to leverage scale and global presence.

One way we are becoming a more networked organization is by implementing Integrated Business Planning, IBP, which is a key enabler of O-I's transformation. IBP is a proven process that will allow O-I to evaluate and revise its business projections on an ongoing basis with a 24- to 36-month horizon.

It systematically integrates demand/supply product and portfolio changes into a resulting financial plan that facilitates alignment, effective decision making and execution. For O-I, this effort will structurally support growth at a lower cost and will increase transparency and accountability. Let's switch gears to geographic lands (09:24) on slide 5.

The U.S. continues to be undergoing change.

While mega beer sales continue to decline, we are optimizing our position and approach to beer by increasing our exposure to beer imports, the fastest-growing category in the beer segment, assessing and developing our distribution channels, more deeply addressing customer needs such as flexibility and innovation and reducing Total System Cost in beer.

This approach is allowing O-I to have a better portfolio of beer sales than it had in the U.S. just a few years ago. On the other hand, non-beer categories continue to grow with wine, spirits, premium food and non-alcoholic beverages being a good opportunity for growth.

For instance, I hope you have already tried the very successful (10:23) glass or some of the premium pasta sauces in glass that have been launched recently. In all, I will characterize underlying sales in the U.S. as essentially flat in 2017, including sales in the joint venture with CBI.

The region's Total System Cost approach is gaining traction as it becomes more embedded in the organization. In 2017, warehousing cost continued to trend down driven by better space utilization, as well as a reduction in the absolute number of warehouses.

For the year, North America's glass containers business generated a record $318 million in segment operating profit, and expanded margins by 120 basis points. Latin America turned in a strong performance led by a 4% increase in shipments. Mexico led the pack with high-single digit gains for the full year.

This was followed by a record in Brazil that flipped from lower year-on-year shipments in the first quarter to low-single digit growth in the second quarter and double-digit growth in the second half, clearly, a very good trend exiting 2017.

While prices increases across the region, we're unable to completely recover inflation, the significant impact from Total System Cost, coupled with volume growth, drove Latin America's margin expansion of about 30 basis points, reaching a 19.1% for the full year.

Latin America continues to be a great example of best practices and solid execution that drives performance. This will be a catalyst for synergies for the Americas. In Europe, we entered the year anticipating 1% organic growth, and we hit the mark. We have been gradually moving into a more constructive price cost environment.

In the back half of 2017, price cost was neutral for the region. (12:38) the partial year benefits from the plant closure in Netherlands plus the improvement in the structural cost from TSC, you can see margins improved a healthy 80 basis points. Good results and you will hear later how these positive trends sustained into 2018.

I'm pleased with Europe, very positive evolution, and how the region is also turning into a benchmark of best practices for O-I. Turning to Asia Pacific, the bottom line trended down in 2017 on improving sales revenue. As noted in previous earnings calls, asset disruptions resulted in higher supply chain cost to serve this growing and changing demand.

To fundamentally address the situation, we began substantial asset investments in fourth quarter 2017 to improve the supply chain scenario. These activities will continue into early 2018. While temporarily disrupting earnings, it's the right thing to do to sustainably improve the region's earnings profile.

Asia Pacific, while small today, represents a good top line growth opportunity for O-I, and we are devoting the time and resources to set it up for success. Turning to slide 6, let me briefly cover our business outlook for 2018. Before jumping into a region-by-region view, I want to mention the higher level of asset investments in 2018.

Given the confluence of asset repurchase needs in the year and having in mind demand seasonality, it just made good business sense to invest in Europe and the U.S. early in the year.

While it might be more convenient from a quarterly earnings perspective to shift investment later into the year, we prefer to repair ahead of the high demand season and see the bottom line benefit from lower cost of operating through the rest of the year.

In addition to repairing assets and enhancing their flexibility and reliability, we are also making prudent strategic investments in our footprint that dramatically enhance our ability to meet rising and changing customer needs at a more sustainable value-generating cost point.

In Colombia, for instance, we will shut down one plant and are presently consolidating capacity at another plant within the country. The Zipaquira plant will emerge as an incredibly flexible plant producing beer, NAB, spirits and food across our whole slate of colors.

The return on investment is substantial, in the mid to high teens, yet within 2018 specifically, the region will bear an incremental $10 million headwind from production downtime, direct expense, and ramp up cost before generating higher earnings and cash in 2019.

This is just one more example of how we are making bold investments now in assets, capabilities, talent, and meeting our financial commitments, plus setting the stage for higher earnings and cash flow going forward. Now, let's begin the regional outlook with Europe, where we expect continuing improvement in financial performance.

Shipments should be flat to slightly up for the quarter and the year. You may have heard that the wine grape harvest in Europe last year was quite low. While this might present some downward pressure on our sales in this segment, usually the impact is rather muted.

This is because the grape juice is allocated away from lower margin products to the highest and best value uses, which is clearly premium wine in bottles. While we are early in the annual contract negotiation season, we expect prices and inflation to move in tandem.

And on the upside, benefits from Total Systems Cost and footprint adjustment are projected to more than offset the impact of higher engineering activity in Europe compared with 2017. Taken together and not adding favorable currency year-over-year, we envision Europe generating a double-digit increase in segment operating profit in 2018.

Let's turn to the Americas. Recall that we combine North America and Latin America consistent with how we are with running the business today. We expect shipments in the Americas to be up low-single digits for the year. Really, no new trends here at all.

Brazil is expected to be the leading driver as we are seeing positive trends across all glass packaging segments. In the U.S. where all sales are projected to be flat to positive, reflecting continued growth across all of our non-beer segments plus beer shipments sourced through the JV with CBI will increase.

To complete the thought, the use O-I glass containers in the U.S. should be higher year-on-year for all segments combined as well just beer alone. As we bring together the Americas as a more cohesive operating unit, we anticipate further gains from Total System Cost as well as from synergies in how we approach execution and performance.

It is important to note that equity earnings for the Americas is likely to be flat or even slightly lower for the year. While the JV with CBI continues to perform very well, our investment in – our JV with MillerCoors (18:34) in Colorado will temporarily weigh (18:36) on equity earnings.

There, we are replacing two furnaces with a single very large furnace that will operate much more productively and cost efficiently in the long run. That said, in all, we anticipate both higher absolute profit and expanding margins for the Americas in 2018.

And finally, in Asia Pacific, which comprises less than 10% of our business today, we expect higher profitability and margin expansion driven by higher shipments across the entire region as well as improved cost structure. The intense engineering activity in Asia Pacific will dampen profitability through the second quarter.

However, we expect second half performance to more than offset the declines in the first half and to position Asia Pacific for solid performance in the future. Summing up then for the full year 2018, all regions are expected to be more profitable and expand margins.

This is expected to generate high-single digit growth in segment operating profit and at least 40 basis points of margin expansion. In all, the business is operating quite well. Now, let me turn the call over to Jan to pull this together from a financial perspective..

one in Colombia and the other, our JV with MillerCoors. Plus, we continue to invest in key capabilities, especially commercial, procurement and technology that will drive long-term shareholder value, and headwinds and interest and taxes that I will discuss in a moment.

In all, for 2018, we are continuing to deliver higher year-on-year earnings with the midpoint of our $2.75 to $2.85 guidance suggesting a 12% CAGR over the three-year period, quite a bit better than our 10% Investor Day target. Staying with the full year, let's move to cash flow generation on slide 10.

Overall, we see modestly higher adjusted free cash flow in 2018, reaching about $400 million which is right in line with Investor Day expectations and on top of an improved 2017. I've already discussed how earnings are projected to be higher in 2018, so that is a clear source of cash.

Plus, we will continue work on our inventory levels, further reducing our IDS by year end. Our total cash restructuring payments are likely to be a tailwind as well, as the level of activity in 2017 was relatively high.

Regarding CapEx, we anticipate approximately $500 million in 2018, a bit higher than the $485 million level of CapEx activity we undertook in 2017. From a strict cash flow perspective, with recognized spending of only $441 million in 2017, we anticipate a sizeable increase in cash outflows for CapEx in 2018.

As we sum things up, we are on track to generate adjusted free cash flow of approximately $400 million in 2018, reflecting the capability of the business to generate cash. Let's turn to slide 11 where I wanted to complement Andres' discussion on the business outlook with a view of non-operational items for the full year 2018.

Remember some context here, as 2017 was an exceptional year for these items. Corporate expenses were lower year-on-year, excluding equity earnings from our JV with CBI, interest expense was lower, and our effective tax rate was exceptionally low due to audit settlement.

With that backdrop, let's shift to 2018 in which these items are a headwind for reasons I will explain. Corporate expense is expected to be $115 million to $120 million for two reasons.

First, as Andres already mentioned, due to investments and capability building, promising technology and products innovation; and second, we lowered our assumption of the expected rate of return on our pension assets globally by about 50 basis points, leading to an incremental $8 million or so in pension expense in 2018.

Interest expense is projected to be up due to higher variable rates in the States and the strengthening euro. Our effective tax rate should be between 23% and 25%. This rate is much more like what we saw in 2016, which didn't have as much benefit from tax audit settlements as we had in 2017. And I'd like to mention just a few items related to U.S.

tax reform. In 2018, we continue to have loss carryforwards and tax attributes in the U.S., which eliminate most of our U.S. cash taxes. And we have an accounting valuation allowance on our U.S. deferred tax attributes, which eliminate most of our U.S. book taxes. So, the tax reform is not expected to have an immediate impact on our 2018 tax position.

On a long-term basis, however, the lower corporate tax rate and the ability to more efficiently manage our global cash will be beneficial to O-I when compared to prior legislation. Turning to pensions and asbestos on slide 12.

Regarding pension, we are executing transactions that derisk our pension plans converting from defined benefit plans, and annuitizing plans for instance. Since 2012, we have reduced our pension benefit obligations by $1.8 billion or about 40%. And we remain highly focused on continuing on this path.

These actions have significantly reduced our sensitivity to changes in discount rates, and rate-of-return assumptions. For instance, today, a 50-basis-point in the expected rate of return on pension assets has only half the impact it had five years ago.

And while pension accounting is quite technical, we want to highlight that O-I has a significant non-cash element flowing through our earnings. In 2018, the amortization of actuarial loss reduces our earnings by approximately $0.35 per share. On the asbestos front, overall trends for O-I continue to be favorable.

The average age of claimants continues to increase. Annual cash payments have been decreasing and are expected to decline to about $100 million in 2018. And we completed the annual review of our asbestos accrual and no adjustment was needed. In all, we continue to make progress on reducing our legacy liabilities.

On slide 13, I would like to drill down on the earnings in the first quarter. There aren't any unique or broad trends that we haven't already discussed. Currency will add $0.03 to $0.05. In the commercial space, ongoing sales volume trends remain favorable.

Shipments are likely to be slightly up and we expect a favorable price cost spread in Q1, mainly driven by carryover pricing. The impact of engineering activity is quite large. And as we've discussed, yet our Total Systems Cost approach and footprint actions should offset much of that decline.

Lastly, the investments in strategic capital and capabilities as well as interest and taxes should be a headwind consistent with the full-year outlook. In all, we see adjusted EPS in the range of $0.55 to $0.60 for the quarter, a solid outcome given our high level of investments in the first quarter.

Turning to slide 14, I'd like to walk you through how we think about using our free cash flow. We will continue to invest in our business. In 2018, cash contributions to our joint ventures will be up a bit due to the ongoing furnace construction in Mexico and the furnace rebuild in the states that Andres mentioned.

We will continue to look for bolt-on acquisitions that complement our global footprint and product portfolio. Given the stability of our earnings and cash flow generation and the ongoing efforts to reduce our legacy liabilities, we believe a leverage ratio in the low 3s is a prudent level over the longer term.

Since we closed 2017 with a leverage ratio a bit lower than 3.5 times, we plan to shift to a more balanced approach to capital allocation in 2018, just slowing the pace of deleveraging while we return capital to our shareholders. Our board recently announced the share buyback program of up to $400 million.

We plan to execute about $100 million this year. We will also continue to monitor the M&A landscape for value-added opportunities that play to our core business strengths and expand our geographic reach. With the review and outlook complete, let me turn the call back to Andres..

Thanks, Jan, and let's turn to slide 15. We are meeting the financial commitments we set two years ago. As a result, segment profit margins, EPS and adjusted free cash flow reflect a growing trend. We continue to invest in specific capabilities intended to sustain these trends and that will meet the needs of our key stakeholders in the future.

And by sustain, we mean more than just in the financial or environmental sense of the world.

While manufacturing air-friendly products is at the heart of who we are and our commitment to improving our environmental footprint remains unchanged, we believe even the smallest steps in improving all important factors such as health, safety, communities, diversity and more, ultimately leads to making the world a better place.

These focus areas combined with our financial strength enable O-I to thrive as a sustainable enterprise. And now, we will open the lines for your questions..

Zatania, do you want to give people the instructions again for the Q&A?.

Your first question comes from the line of George Staphos from Bank of America Merrill Lynch..

Hi, everyone. Good morning..

Good morning, George..

Good morning..

Congratulations on the year and thanks for the details. My question is on the outlook in Europe and the U.S.

and recognizing that you're folding in North America to the Americas overall, Andres, can you comment at all on what you're seeing in North American beer and what was leading to what looked to be destocking by distributors in the quarter and whether any of that can be alleviated in the first quarter? And then the related point, can you comment on the price cost outlook in North America and Europe? You said Europe was constructive.

Could you provide a bit more color on both regions? Thank you for the time..

Okay. Thank you, George. When looking at the Americas, when we look at the beer trends, we expect to continue with the same trends we had through 2017. Nevertheless, as you mentioned, there was a slowdown in decline, in Q4. And what we're seeing is coming into the first quarter, we are seeing an slightly better demand than we were expecting to for beer.

Now, as you know, the growth in beer is driven by the imported brands and by super premium, and we are very well-positioned to supply the growing brands in this segment. So now, when we look at the North American market, we are also very well positioned to supply wine, food, spirits and NAB segments which are all growing.

So, when you look at our numbers in the fourth quarter and just going into 2018, you got to factor in the growth of those categories.

And specifically in the fourth quarter, our volumes were supported quite a bit by new business development which kicked in in that quarter as well as growth in those categories which, as you know, we've been developing for quite a while now.

We always mention about our focus on not only expanding in those categories, but adapting our footprint to be able to serve them better. And we've done so. Now, when it comes to pricing, we are continuing to see a constructive environment in Europe. And as you know, this is the season in which we negotiate.

So, in this quarter, we are negotiating all these deals. So, we're going to know more about the final outcome of this as we go into the second quarter. But I think the conditions are very constructive. Our expectations is we're going to recover inflation in Europe this year. I think it's long due. As you know, in previous years, we couldn't.

And I think this is the year in which we're going to get this recovery in place. So that's our consideration. And everything we see in the market today indicates that. It's very important to take into consideration that demand in Europe is very, very solid. We've seen that through 2017. We are seeing the same as we start the year.

An important data point is beer production and consumption is at the highest level in nine years in Europe. So, we are enjoying that. And we are seeing good demand in Italy, in France, in the UK, in Eastern Europe; Portugal and Spain which are very important for the dynamics of pricing are also growing.

And what that means is glassware (38:05) is going to be cheap from these two countries into France, if any, which means the remaining capacity is going to be more balanced in that country. Therefore, the pricing conditions are going to be more constructive.

But all in all, we would see the European market, when it comes to demand and capacity, balanced. And with that, then, the whole environment is going to be more constructive. Specifically for us, we're highly focused on new business development activity, and our pipeline is quite healthy in that region..

Your next question comes from the line of Anthony Pettinari from Citigroup..

Good morning..

Good morning..

I was wondering as you look beyond kind of modestly higher CapEx in 2018 where we could see kind of long-term run rate CapEx shaped out at? And then, how much of the $70 million that you expect to spend on the fifth furnace for Constellation – how much of that is baked into this year? And then, I guess, just a last question on CapEx, baked into your 2017 number, you talked about the $44 million from payables related to CapEx in the reconciliation.

And it's too soon to tell on 2018, but I don't know, Jan, if there's some kind of way that we should think about CapEx payables in 2018? Any color you could give on those would be helpful..

Sure. Anthony, let me start first with your general question about CapEx beyond 2018. I think the $500 million type of number that we're using for 2018 is probably an appropriate number to think of for next year as well. So, I would just keep that pretty flat.

Related to Constellation, as you all may remember, we had – we have a $140 million investment in the fifth furnace that'll be split equally between the two partners, so our share will be $70 million. It's spent over two years, 2018 and 2019. So, I would guess somewhere around $30 million this year. We don't know for a fact yet.

And in the first four furnaces, we also were able to underspend slightly to targets. So, we're hoping that that may be the case as well. So, I would assume about $30 million this year. And then lastly, related to the payables issue at year end. So we had a pretty remarkable year end, I think, on the CapEx front.

We had a lot of spending backloaded into the year there. And in December, $44 million of that activity ended up in the payables area. So, I don't believe that we would expect that same level of activity in 2018 back end, but we do have – we do expect to see that fleshing out clearly in the first quarter here.

So, when I look at 2018, adjusted free cash flow of $400 million, that's comprised of year-over-year growth earnings. Again, lower levels of inventory, probably similar to 2017 at a few days of IDS. We have lower restructuring payments down from the $62 million last year. I would assume those will be coming down around $15 million to $20 million.

So, closer to the $40 million, $45 million level for 2018, and that will be mostly offset by this higher CapEx cash spending that we see because of the phenomena at year end. at a few days of IDS.

Your next question comes from Scott Gaffner from Barclays Capital..

Thanks. Good morning..

Good morning..

Andres, you talked a lot about the pricing side of the equation and the strength in European market, but obviously energy inflation, particularly in Europe, has been relatively – has been a pretty decent headwind recently.

Can you talk about sort of your view on inflation in Europe, in particularly on the energy side, and your ability to hedge out some of that inflation on a go-forward basis? How much of that's built into the guidance? Thanks..

Yes. So, the – there is inflation in the commodity portion of the energy in Europe, there are other components like transportation and other components like ranch (42:44) that kind of met the actual inflation you get. So, I will say what we're getting is, it's moderate.

And as we look at that in the context of a more constructive pricing dynamics in the region, we're very confident we're going to be able to recover through price that earning in energy inflation. So, at this point in time, we don't have any concerns about that. I think we are in a good position.

And for Europe, all in all, not only for energy, we are expecting to recover inflation. But I wanted to add also that for North America, we are in a positive position too because the PAF provisions coming from 2017 will have a carryover effect. So now, in 2018, we're going to have a better recovery of inflation.

So for that region, we're also confident we're going to be able to recover inflation quite well. And I will complement that with – that is our expectation for our global operations. So, I think this year, all in all for O-I, across the world, it's going to be quite constructive in that dimension..

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

Good morning, Andres. Good morning, Jan..

Good morning..

Morning..

Jan, I wondered if you could just help us a little bit on the share repurchase. Can you give us any sense of kind of cadence for – through the year? It sounds like they might be kind of weighted to the back half of the year.

And then can you confirm that there's no benefit from repurchase in your EPS guidance?.

Yes. True, Mark, there is no benefit baked into the EPS guidance that we shared with you today. And it's true that we generate most of our cash in the latter part of the year, but we'll be doing – we'll be discussing this internally and sharing more information as the year goes out.

But I think it's – we're shifting to this more balanced approach to capital allocation and there's lots of things to take into consideration that we're looking at for the year. This is one of them.

And clearly, we think the right move forward as we're continuing to evaluate improvement in shareholder value through accretive acquisitions or growth investments or this move here to begin the share repurchase program that we actually had before the Vitro acquisition that we are re-energizing again here for the company..

Your next question comes from Debbie Jones from Deutsche Bank..

Hey. Good morning..

Good morning, Debbie..

Congratulations on the role (45:35) execution, it does seem like things have been a lot more consistent in recent years. I want to just focus on Asia Pac, if I can for a second. It does seem that's the one exception and there has been a disproportional amount of capital spent in that region (45:50) 2016.

Can you comment on what was spent in 2017 and kind of what do you think the level is needed going forward and just what you think the earnings improvement you could see would be?.

So, I can start with a couple of comments. What we're seeing in APAC is temporary, is primarily concentrated in Q1 – Q4, Q1 and part of Q2. And what we have in that region is twofold. We – as we implement the asset advancement program around the world, you always have a number of assets that are due for repair in any given calendar year.

In the case of this region, we have a concentration of those beverage (46:33). So, that's one aspect of it. So, we want to address that because once we repair those assets, we're going to enjoy the cost at improvement – manufacturing cost improvement that will result from that.

But the other part of it is this market has been changing, and we are serving a different mix. There is emphasis in different segments than, like, compared to what it used to be. So, we're taking advantage of these repairs to adapt these assets to better serve this market.

So, our expectation is that as we clear this in the first half which is totally under our control. We got to execute those projects. We know how to do them. We're doing them well. We're going to leave them behind.

As we go into the second quarter, we're going to enjoy the cost reduction that this is going to generate as well as the better fit to market that we're going to have as result of that. So, for all purposes, we're making a pause in this region, and we're setting this region really well for success right after we pass this middle-of-the-year point..

And , Debbie, I think our capital expenditures over the last several years between 2015 and 2017 were in the range of $50 million to $60 million per year. So, they might be up a bit in 2018. But I think it's just a little bit more visible now given the result of the region..

Your next question comes from Lars Kjellberg from Credit Suisse..

Hey. Good morning. I just want to....

Good morning..

...follow-up – good morning. Just to follow-up a bit on the – sorry, the CapEx and the impacts that we should see in 2019. I guess, you alluded to it's probably going to be the same amount of CapEx, i.e. around the $400 million number.

But should we see these sort of discrete items that is weighing on EPS performance this year? Should they gradually go away, i.e.

that you start to see the net benefits of this program overpowering these negatives? And equally so, if you look on the performance in 2017 you had, of course, called out – you raised your guidance for the margin expansion from 80 basis points – from, sorry, from 40 basis points to 80 basis points, you ended up at 60 basis points.

You're staying 40 basis points for the current year.

What happened in that 20-basis-point shortfall and why is that not following through into 2018?.

So, let me just talk about the assets first. We've been quite disciplined in executing on the asset advancement program and I think we're making very good progress. As we look forward, we anticipate that we're going to accumulate enough critical mass in all this activity to start moderating the level of activity around 2020, 2021.

So, we should have that in mind. So, we're going to be consistently doing this at what has been the, let's say, the historical rate. I mean, I think this year is higher because of this confluence of beverage, but that doesn't mean it builds a trend. It's not a trend. It's just a year. So, that's what we see there.

When it comes to margins, as you know, we were dealing with the recovery of Brazil, and that has a significant impact in how far we can go. And I think we did quite well, but that was a pretty unstable and volatile situation anyway into the second half.

We're seeing that country now doing better and better, the demand sustained and increased as we were going farther into the year. And as we go – we came into this year, we are seeing even a stronger demand coming out of that country. So, things like that change our ability to deliver the margin.

But you got to take into consideration that we ended up, in any case, higher than the original guidance we had. So, we had 40 basis points, we went to 80 basis points, we ended up in 60 basis points..

Right. And I think the changes that caused the change in the margin, which we discussed a little bit at the conference that we were at the end of November when we settled in closer to 60 basis points, it's largely in our control.

I mean, we made the decision to invest more in the fourth quarter and in the first, second quarter this year, as Andres had mentioned in his dialog up front, so that we could get ahead of the season and so that we could enjoy the benefits of that better performance throughout the balance of the year..

So, we touched essentially on Asia Pacific, and I think that conscious decision, obviously in the fourth quarter, impacted the margins, right? But I think we're doing the right thing and we're going to enjoy the benefits as we go into a later part of the year..

Your next question comes from Chris Manuel from Wells Fargo..

Good morning, and congratulations on the good progress here in 2017. It looks like you're going to have another terrific year in 2018..

Thank you. Thank you, Chris..

I just wanted to ask one question around kind of shifting gears a little bit towards M&A in your strategy. That was something that you indicated you've got some stuff it seems like you're looking at, but yet you're going to pick up some share repurchase.

Could you maybe give us a little color as to how you're looking at outside opportunities? Are they big ones? Are they smaller bolt-ons? Or they're more regions or technology, or how you're thinking about looking at inorganic opportunities?.

Yeah. So, as you know, we continually explore opportunities around the world, and this company is, as you know, present in 60% of the glass market in the world. It's not present in 40%. And obviously here in – within the regions or markets in which we are present, there are specific areas in which we are not that high in shares.

So, we are continually exploring for opportunities. We see that there are opportunities out there that make strategic sense and will increase shareholder value. Now, they won't be, in any case, of the size or magnitude of Vitro. So, to your question, they're going to be more modest.

However, they're going to be very good strategically and from a shareholder value creation, if we ever get there. But at this point in time, we contemplate that there are opportunities in the horizon. The timing of those opportunities is uncertain. That's an important consideration. So, we just got to monitor that, see when they come.

And in the meantime, we think it is the right thing to move into a share repurchase program to be able to add shareholder value through 2018..

So our next question comes from Ghansham Panjabi from R.W. Baird..

Hi. Good morning. This is actually Matt Krueger sitting in for Ghansham.

How are you doing this morning?.

Good morning..

Good morning..

Hi, Matt..

Hi.

Can you give us a sense of your current capacity utilization by region with a particular focus on any areas of excess capacity? And then on a related note, how do shifts in customer mix and demand away from products such as mega beer impacted how you view this production network and supply chain in the context of that capacity utilization?.

Okay. So, when we look at capacity utilization, I think it is expected to be quite high in 2018. In Europe, we shut down the plant in Netherlands. So in our case, we are balanced. So we're going to be using our capacity at a very high rate in Europe. But I think it is the case around the world, too.

So, we are seeing the same situation in North America even though there is a shift in mix. But you know that for the last two years we've been sharing with you while on the calls that we are investing on adapting the footprint to be able to serve the growing users (54:46). So, I think we're going to be fairly balanced in the U.S.

I think we're going to have in high utilization across the Latin American countries and in APAC, too. So, this is a year of high utilization for us. When it comes to the shift in mix, we have been working on that on an ongoing basis, and this is something that we will continue to do.

It's only a positive to make sure we adapt in a continuous basis, our footprint, to be able to serve the growing end users which are, in fact, very profitable end users for us..

Your next question comes from Chip Dillon from Vertical Research..

Hi, good morning..

Good morning..

Good morning..

Good morning..

Just a couple of quick ones. I noticed the asbestos expectation, the rate of decline seems to be slowing down, $125 million, $110 million, now, $100 million.

If you can just give us a rough guess of what 2019, 2020 might look like there? And then, I guess on the second point, just to clean this up, I think you mentioned that you're going to contribute about $30 million to the CBI joint venture this year.

What should that be next year or short of ongoing, if anything? And, secondly, you mentioned $500 million in CapEx, but you used to combine that with restructuring.

Is there a separate restructuring number in their cash number that we should expect for this year or next year?.

Okay. Let me try to tackle those, Chip. On asbestos, we indicated that we expect about $100 million paid in 2018. We really don't speculate going forward. However, we've had a long trend going back that has been relatively consistent in its rate of decline over the last eight or nine years.

CBI, yeah, the total investment for our portion of the fifth furnace is $70 million, spent over 2018 and 2019. We estimate about $30 million this year, but it could be slightly higher or lower. We just don't know yet.

So, the balance of it next year and if we're able to fund that fifth furnace for under $140 million in total for both parties, that would be a good thing, too, that we're looking forward to. And then lastly with CapEx, you asked about restructuring.

Restructuring was about $62 million in 2017 and I'm estimating at this point with what we have baked into our plan, it should be $15 million to $20 million lower than that for 2018..

Your next question comes from Edlain Rodriguez from UBS..

Thank you. Good morning..

Good morning..

Just one quick one.

On the margin uplift you expect in Asia from the asset improvement investment, and do you still believe that you could get margins there to be in that 12%, 14% this year?.

So, we have a few things that are going to drive margin up. At this point in time, obviously, we'll see in the low point in Q4 and we'll see it in the early part of the year. However, manufacturing cost is going to be impacted by the investments we're making. So, it's going to be improved.

But also, we are prioritizing serving customers at this point and that's extremely important for us. So, our cost to serve is higher. As we go into the second half, that's going to go down, so that's going to be an improvement.

And the other part of this is, as we retrofit those assets to better fit market, we're going to see a mix improvement in the emerging market and that's going to help our margins, too. So, we should be moving from these low margins in the early part to fairly high margins in the second part.

And all together, it will end up being a positive margin evolution for the year..

Your next question comes from Arun Viswanathan of RBC Capital Markets..

Great. Thanks. Good morning. I just wanted to ask a question about the non-mass beer in North America.

How much does that make up of your North American business? Do you have a target mix for that in 2018, 2019, 2020? I mean, as you provide (59:34) the next couple of years? And can you make those targets with existing CapEx or would you have to shut, convert, or even make acquisitions just given your comments there? I'm looking at non-organic opportunities.

Are you looking at things outside of – in the food and wine and spirits area? Thanks..

So, we've been – well, we're seeing the decline over the years in that category. At this point in time, it is about 25% of the total volume. We've been adapting our footprint in a continuous basis, I will say, for the last three years. So, I – we see this as an ongoing activity. No, a massive activity at some point in time.

How far down this is going to go? It's to be seen. So, at least the latest information we see is a little bit more encouraging than we saw before, but that's only for Q4, and then very early Q1. But we don't envision any major activity to restructure anything at this point. We are not considering type of M&As at this point in the region either.

I think we are very well-established with the footprint we have, and we don't have any plans for that..

Your last question comes from Brian Maguire from Goldman Sachs..

Yeah. Thanks for taking my question and congrats on the progress so far also. I just want to focus on one....

Thank you..

...one country in particular. I know Mexico is not your largest country, but it does contribute a disproportionate amount to the growth of the company.

So, now that we've gotten NAFTA back in the headlines and I know there's a presidential election coming up this summer, it seems like the volatility there might be picking up after a period where it's been pretty tame for the last couple of years. Just wondering if – how you're thinking about those two political events.

And are you baking in any kind of disruptions or change in the economic environment in your forecasts either for 2018 or as you go out further?.

Okay. So, at this point, what we expect out of Mexico is a solid performance with growth in the low-single digits. This operation has opportunities for us in the Total System Costs, productivity. So, we will continue working on them. This would all should be also beneficial.

And I think as part of the political dynamics, they're not any different than the ones we normally face in emerging markets and our operations continue moving forward. I think you have the best example today of Brazil, which has a very, very unstable political scenario. Now, in those circumstances, our growth is in the mid-teens if you will.

So, we are doing quite well. You see Colombia which is facing a similar situation as Mexico and we're seeing a good outlook, positive outlook for Colombia. Same situation happens in Peru, Ecuador. So, we're used to that. That's emerging markets. But I think we think that our outlook is quite positive. NAFTA, it's still to be seen.

There are some aspects of it that have been positive in the evolution. We're tracking that closely, but we just got to be – got to see what the final outcome of that is..

Thank you, everyone. That concludes our earnings conference call. Please note that our first quarter conference call is currently scheduled for April 24, 2018. And, folks, remember, when faced with a packaging choice, have class, choose glass. Thank you..

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