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

Anthony Pettinari - Citigroup Global Markets, Inc. Debbie A. Jones - Deutsche Bank Securities, Inc. Lars F. Kjellberg - Credit Suisse Chip Dillon - Vertical Research Partners LLC Edlain Rodriguez - UBS Securities LLC Scott L. Gaffner - Barclays Capital, Inc. Mark William Wilde - BMO Capital Markets (United States) George L.

Staphos - Bank of America Merrill Lynch Ghansham Panjabi - Robert W. Baird & Co., Inc. Adam Jesse Josephson - KeyBanc Capital Markets, Inc. Gabe S. Hajde - Wells Fargo Securities LLC Tyler J. Langton - JPMorgan Securities LLC.

Good morning. My name is Adrian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2018 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.

At this time, I would like to welcome and thank, Mr. David Johnson, Treasurer and Vice President of Investor Relations. Please go ahead, sir..

Thank you, Adrian. 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 and provide a review and outlook of our financial results. 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 financials 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 items 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..

favorable market conditions, O-I securing incremental volume through organic growth of strategy relationships, and O-I selectively adding capacity to meet customer demand in key segments. And be assured that whenever we add capacity, these opportunities are expected to generate solid returns on invested capital.

At the same time, we remain squarely focused on reducing the structural cost. These are sustainable efforts with best-in-class processes, practices and tools now deeply embedded in O-I's DNA.

As we look through year end and into 2019 and beyond, we expect further gains in Europe in volumes, cash reduction and profitability supporting our objective of continuous margin improvement. Turning to the Americas on slide 7, overall trends remain and FX is a considerable headwind.

Across the Americas, the commercial and end-to-end supply chain organizations are collaborating well to meet customers' needs and reduce cost, and prices are keeping up with cost inflation, including higher freight charges. Shipments were down 2% versus prior year, yet are modestly up when incorporating the JV with CBI. Let's first focus on the U.S.

where domestic beer continues to decline, even though at a slower pace in the last few quarters, and the industry has reduced capacity accordingly. It is important to highlight that non-beer categories in the U.S. continue to grow at low-single digits over time.

These categories, food, nonalcoholic beverages as well as wine and spirits, have been high priorities of ours for a few years as an element of our strategy as evidenced through significantly improved customer relationships, commercial and design capabilities, and the conversion of almost 20% of our beer capacity into flexible capacity to meet non-beer customer demand.

Outside the U.S., the remainder of Americas, sales volumes were up 2%, in line with expectations of low-single-digit growth. Similar to a situation in Europe, we see rising market demand in Mexico and Brazil and we have reached high capacity utilization.

We will continue to focus on mix management and we are prudently investing in incremental capacity in the region by bringing our Vitória plant back into operation in Brazil and adding a production line in Mexico to grow with the market and our customers. Overall, we expect the Americas will generate higher sales, profit and margin in the coming year.

Let's turn to Asia Pacific on slide 8. Asia Pacific has played out largely as expected this year. We undertook a massive asset advancement program, similar to what we previously did in Europe and the Americas, with very positive results.

While the program temporarily suppressed our margins, through lower production volumes and higher manufacturing and delivery cost, it is what we needed to do to meet customer needs going forward. In the third quarter, we ramped up production and unwound extended supply chain cost. As we exited the quarter, all these efforts has been finished.

Going forward, our much improved assets are a better fit to market, increasing productivity, reducing costs and increasing capacity to support growth. And although 2018 has been a transition year for the region, you can see sequentially throughout the year, they are making progress on their margins.

Let me turn the call over to Jan to provide details on the financials..

Thanks, Andres. Turning to slide 9, let me start on the left with operating profit in the third quarter compared with prior year. The currency headwind was substantial, enough that if you back out currency, segment operating profit for the company was actually up 2% year-over-year. We continue to see a constructive pricing environment.

While we understand that many corporates are facing high inflation, you can see that our price and sales mix combination are modestly outpacing cost inflation and this is our experience in every region. At the same time, sales volumes declined as we discussed earlier.

Operating costs were favorable year-over-year, reflecting many structural improvements. A few examples include ongoing contributions from our Total System Cost approach and the benefit from the closure of the Atlanta plant. We did have a few temporary items, which amounted to a minor headwind on a net basis.

For instance, we had planned production downtime from asset activity that Andres mentioned, and there's the mismatch in timing of when Europe received the energy credit in 2018 as compared with prior year.

We monetized some carbon credits in Europe, as we do from time to time, and the Americas benefited from a court ruling in Brazil, which allowed us to recover revenue tax credits from previous years.

And shifting to the chart on the right, EPS in the quarter was in line with our expectations of $0.75, It was down $0.02 from prior year, entirely attributed to the $0.04 headwind from currency, which partially drove the decline in segment operating profit, as I discussed.

Non-operational items, like our corporate tax rate and share count, offset one another. On slide 10, let me discuss our full year guidance. Starting with EPS, entering 2018 we expected to continue the solid earnings growth profile that we generated over the past couple of years.

That said, midyear, we mentioned that our earnings were likely to be on the low end of our initial guidance. In light of many moving pieces, that's now the midpoint of our current guidance range. Currency was by far the most significant headwind.

It flipped from being a $0.10 tailwind to a nickel headwind, a delta of $0.15, which includes a few cents from hyperinflation accounting in Argentina. Plus, we faced temporary soft sales volumes and substantial freight inflation in the U.S. We found several ways to largely offset the incremental downdraft.

For example, through cost containment efforts and share buybacks. So today, with our current business outlook and using end of Q3 FX rates, we are confident we can achieve $2.75, plus or minus a few cents. This would be the third consecutive year of annual earnings improvement and generated double-digit CAGR in adjusted EPS.

As we look into 2019, the top line is expected to grow. Improved structural cost from our Total System Cost approach and footprint actions will help as well. This will be partially offset by the carryover FX headwind and the non-recurrence of some measures that contributed to earnings in 2018.

In all, we remain confident that O-I can achieve $3 per share next year. We will discuss all that and more in greater detail at our Investor Day in two weeks. Let's turn to cash flow on slide 11. Coming into the year, we expected to generate about $400 million in adjusted free cash flow.

With the benefit of three quarters behind us, it looks like our adjusted free cash flow will be lower than original guidance, fundamentally, due to the same drivers that impacted EPS. FX volatility has been greater than expected and it has a stronger impact on our cash flow than on earnings given the seasonality of our cash flows.

Also softer-than-expected sales volumes will impact inventory, which may be a modest use of cash instead of a $35 million to $40 million source of cash. We continue to look for ways to offset these headwinds throughout the balance of the year.

As we look into 2019, we expect adjusted free cash flow will increase year-over-year, primarily due to stronger business performance, continued structural cost reductions, prudent CapEx levels and lower inventories. On slide 12, let me walk through our capital allocation priorities. We will continue to maintain financial flexibility.

A top priority is to invest in the business, through CapEx, through investments in joint ventures and incremental capacity, and through bolt-on acquisitions in emerging geographies, while delivering a favorable return on invested capital. We continue to assess our capital structure.

While we have been in a balanced capital allocation mode, we clearly see the heightened need to review the design of our cash return to shareholders. More to come on this at Investor Day. And speaking of Investor Day, let's turn to the next slide, where Andres will continue..

At Investor Day, two weeks from now, you will have the opportunity to hear from standard team of leaders from O-I. You can expect us to discuss our strategic plan and financial targets over the next 2 years and capital allocation as an integral part of our strategy.

As you heard today, this company has had a few unexpected headwinds this year, but that has not derailed us from pushing forward on our key strategic ambitions and reinforcing our execution discipline to meet our commitments.

We will provide more insight into market trends and how we have a solid foundation to leverage those trends and grow faster than the market, plus explaining how we are structured to consistently and substantially reduce cost through our Total System Cost approach.

We are going to talk more about this rapid technology and innovation and, in particular, how they perfectly align with and support O-I's transformational strategy going forward. Consumers, customers and investors alike have become exponentially more focused on sustainability.

We are also very focused on these and we'll present O-I sustainability goals and demonstrate how glass is the clear choice for our planning. And with that, we will open the lines for your questions..

Your first question comes from the line of Anthony Pettinari with Citi..

Good morning..

Good morning..

Jan, I was wondering if it's possible to size in Europe the positive impact of the asset sale as well as the negative impact of the weaker wine harvest.

And then just in Brazil, sorry if I missed this, but is it possible to size the impact of the Brazil court ruling, either in the quarter or going forward?.

Sure. Let me start, and then I'll turn it over to Andres to talk about the wine harvest. First of all, we recorded a $13 million benefit in Q3 related to the Brazil revenue-based tax. So, this was a retroactive benefit due to a favorable settlement of a court case that was originally filed by our company back in 2015.

The settlement was reached in September of this year, of which, of course, we really had no certainty of the timing of that. The key issue was the revenue base for calculating the tax, and the court ruled that value-added tax could be excluded from the revenue as a base for the tax, and therefore reducing the overall tax.

So as with any multinational company, there is many things we don't control the timing of, as I'm sure you can imagine, and we had line of sight to our third quarter earnings, and then experienced a weaker volume scenario in September than we expected.

So, this Brazil tax helped to offset that gap and, obviously, to help us meet our quarterly earnings. Just switching over to the European carbon credits, Europe is subject to trade regulations related to carbon emissions. And the company systematically buys the CO2 allowances to cover the requirements up to several years in advance.

So in September, O-I Europe sold some CO2 allowances that were purchased over time for a gain of about €9.5 million. It was an opportunity to capture the value of a significant price increase at that time, so we monetized it at a high price, and then we actually have layered some back in at a much lower price already.

The other thing that you didn't ask about, but might be helpful, just to remind you, is that we had an energy credit for Europe in the second quarter of this year. Last year, it was in the third quarter. So from a year-over-year basis, we were down in the third quarter because of the timing of that energy credit.

And then, I don't know if Andres, you want to talk a little bit about....

Yeah. So, during the first half of the year, we experienced normal demand for wine in Europe. Now when we got to the third quarter, demand has slowed down quite drastically. Now, this is all driven by the poor harvest in 2017, which was down 15%. It just didn't manifest through that year and it got really strong in the third quarter.

Now, this is going to rebound in our minds in 2019 because the harvest of 2018 is quite strong and we're going to have in favor the inventories that we already have to be able to support that incremental demand as the very good harvest translate into higher demand for wine containers in 2019..

The next question comes from the line of Debbie Jones with Deutsche Bank..

Good morning. Thanks for taking my question..

Good morning..

I just wanted to ask about Asia Pac and volumes there. They're a little lighter than I think you were expecting. And just how to think about that in terms of some of the projects you've been doing down there, because I think that there's an expectation that volumes move (28:46) higher next year.

And then, lastly, on Asia Pac, could you just help us with how to think about the margin in Q4? I think you're expecting to exit mid-teens, but I assume the actual margin for the quarter would be a bit lower than that..

Thanks, Debbie. So, let me start by talking about the work on assets. So, we work to have a significant level of activity this year, which is similar to what we did before in Europe and the Americas, with very good results. We already finished all that we did as planned.

And the last quarter, where we had an influence of the ramp-up, was in third quarter. And in fact, in that quarter, we had still one asset to be worked on. So, all of that is behind us. So, the demand we're seeing is primarily influenced by capacity catching up as required with the different segments.

But when we look at the overall demand for the region, it is the same way it's been before. So, we see low-single digits kind of growth for the overall region. Now as we go into 2019, our capacity is going to be full, is going to be aligned with the segments that are growing, as we said before. So, we're going to have a better fit to market.

We're going to have a better cost. And as a consequence, we are estimating that we're going to have a rebound in Asia Pacific as well..

And talking about the margins, Debbie, we will have a fourth quarter margin that we're expecting of about 15% for the quarter. And next year, we wouldn't expect to go into the year at that level because the fourth quarter is a seasonably high level for APAC selling.

But next year, we would expect to have a full year margin for APAC in the low-double digits, which would be significantly higher than this year..

The next question comes from the line of Lars Kjellberg with Credit Suisse..

Thank you and good morning..

Good morning Lars..

Just want to come back a bit to Europe and what sort of delta would you expect this to have when you're writing a space, (31:08) as wine comes back? There seems to be somewhat low visibility on that, but if you can share that with us and also what that means in terms of production volume, which of course feeds to your (31:21) margins.

The other question I had was really on Mexico. Of course, CBI is doing very, very well indeed.

But is that cannibalizing on your Vitro volumes in the country, your own consolidated volumes? Can you shed any light on that?.

the wine, as we just explained; and also that we've been focused on mix management. As we go into 2019, we don't expect that much impact of the mix management anymore. So, what we can assume is that half of the slowdown we just saw is wine driven and that's going to come back as the stronger harvest drive larger demand for glass containers.

Now, I think the question on Mexico is if our growth in beer over there is having any impact on local demand. We're not having an impact on local demand. Remember that in Mexico we have little presence locally in beer. So our production in beer in Mexico is related all to – primarily related to CBI at this point..

The next question comes from the line of Chip Dillon with Virtual (sic) [Vertical] Research..

Hi. We try to keep it real, but good morning, everyone..

Good morning..

Good morning..

I might have missed this, but Jan if you could again tell us what those two gains were. I think you said €9.5 million. But if you could tell us both pre-tax and after-tax that are included in the segments, both the one in Europe and also the one in the court situation in Brazil..

Sure. So the Brazilian tax credit was $13 million benefit. And the European carbon credit was, on a U.S. dollar basis, about a little under $11 million..

Okay.

And those are both reported in those segment numbers that are in your press release right, not in the – neither one are in the tax line or do I have that wrong?.

No, they're both in the segments, you're correct. And also, the Brazilian tax credit is a credit that we will receive over time as we need to use it over the next couple of years..

And how much more is left?.

Is left of the...?.

Of the credit that you'll get over the next two years..

The whole thing right now? I mean, we just received that credit. So, we will use it as needed over the next several years. There's – maybe other credits as well in Brazil, but this one would be incremental to that..

The next question comes from the line of Edlain Rodriguez with UBS..

Thank you. Good morning, guys..

Good morning..

Just one quick one on share buyback. I think so far, you've done $107 million. I think last quarter you said you would do $25 million to $30 million, but you've only done half of that in 3Q.

So, are you done for the year or is like – any thoughts on being more aggressive given where the stock is right now?.

Yeah. So, we have done about $107 million. We did indicate that we would plan to do about $125 million this year. So, I don't believe that we're done.

But just in general, looking at our capital structure, I mentioned in my script here that we've been in a capital allocation mode, but that we see the heightened need to relook at and review the design of our cash return to our shareholders. So, I think that this is a very good topic for Investor Day. We will share more about it in a couple weeks.

And I think it makes sense to do it then because we can talk about it more in the context of the entire company and the plans for the company over the next several years..

The next question comes from the line of Scott Gaffner with Barclays..

Thanks. Good morning, Jan..

Good morning..

Good morning, Andres..

Good morning..

So two parts, just first, Jan, you highlighted the $3 of EPS for 2019 despite some weakness here in 2018.

How much of the confidence around 2019 is really fundamental and operational versus the pension probably just turning to significantly less of a headwind? And then, the second part is just when you look at your footprint and the scale that you have, I mean, what is the – from a scale advantage and from a strategic advantage, what's the need for O-I to be a global glass producer versus a regional glass producers in various region? Thanks..

Okay. Thanks, Scott. Let me first start with your question on the $3 of EPS, but we do feel confident that that's a number that we can achieve next year. Yes, I think the currency market has weakened a little bit for us since we first talked about it, but as we look at our strategic plan here for 2019, we're confident in that number.

We will certainly talk much more about the components of that in two weeks from today. And let me turn it over to Andres to speak a little bit about the footprint..

Yeah. Just in the same question, before I go into the footprint, something that we're going to benefit from going into the following year is some additional capacity that we've been selectively putting in places in various regions of the world.

So, we've been approaching high utilization in markets like Europe, Brazil, Mexico and Colombia, and in some segments in the United States. And we've been, as I just mentioned, adding capacity selectively. So, that's going to come online for 2019 and all of this is related to long-term agreements, so we have secured volumes.

So please factor that in as you think about 2019. Now, as you know, since we started our strategy, one of the areas of focus is changing how O-I approach customers, how it goes to market and how because of the way it supports the customers can be a long-term partnerships.

And those long-term partnerships, to a large extent, are related to global accounts, so global customers. And with these customers, as we interact with them, we identify solutions that they can move around the world. And that has a significant value for them.

So, our ability to be the only global player in the glass industry is a differentiating factor. And I think as we go into I-Day, you're going to be able to appreciate even more what I am just describing.

How – when you establish these relationships, in fact, you can become a strategic supplier for these customers because you can deliver solutions around the world pretty much simultaneously and support their growth better than anybody else can do.

So, it is our perspective that the global position of O-I, the way we're using it, working as one single enterprise, which has been a significant change in our culture and way to operate, is becoming a strong differentiator of this company versus every other glass producer in the world..

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

Good morning, Andres. Good morning, Jan..

Good morning..

Good morning..

Andres, I wondered if you could give us any color on where you expect volumes to come out region by region in the fourth quarter, and whether you expect any benefit as we go into 2019 from, prospectively, higher duties on Chinese glass imports?.

Okay. So, let me just put volumes in perspective a little bit, because what we lived through in Q3, and some of it will continue into Q4 because wine, for example, it would extend too, makes very difficult for you to assess the underlying strength of our demand at this point in time. And here is why.

So, the wine part, I already explained, in our opinion, this is going to rebound. So, it's going to be a benefit in 2019, well-supported by the inventories that today are a pressure for us.

Now, the APAC as it work, while it was a substantial pressure in this year and reduced sales in 2018 is going to be exactly the opposite going into a following year. I just talked before about approaching the high utilization of capacity in various markets through adding some selective lines or capacity, which we've been doing proactively.

Just in the United States, for example, we already work on realigning or retrofitting almost 20% of the footprint over the last two years. So, all of that is going to help us over there. We know that we've been focused on mix management, which is the right thing to do in Europe.

As a consequence of shutting down the plant in the Netherlands, around one-third of that capacity or that sales volume was to be addressed through mix management. The remaining portion went to lower cost facilities, which improved margins. Now, mix management is improving our margins, as you've seen in the region at this point in time.

And also, we're handing at this point in time, all the reallocation to CBI, which is going to lap early 2019. So, that is a substantial volume that is being relocated to the right facility, which can produce this significantly more efficiently, that is distorting all our numbers. So, it makes it very difficult for you.

In our opinion, the underlying demand of this business is quite solid. And as we go into 2019, we're going enjoy the rebound of all these things that today are pressures, but are going to be benefits as we go into the following year. Now when it comes to tariffs related to China, for us, there are a couple of things we've got to look at.

First is the inputs and this has potential influence in molds or mold equipment, because we source from China. And then we're implementing a few mitigation actions to be able to reduce the net impact of this. At this point in time, we estimate it's going to be a small and is going to be very manageable.

Now, I think your question go, more specifically, to potential incremental volume coming from the implementation of tariffs with China. So then, there might be some volume coming through that and we see some customers looking for alternative sourcing at this point in time. Now, I would like to clarify something.

The reason why these imports exist today is primarily because the local producers in the past, all of us, didn't really supply that kind of business, because that business is extremely fragmented, it's very small rounds and is different from a supply chain perspective to serve. Therefore, it went to be sourced from China.

So while it can be repatriated, it takes footprint changes, significant footprint changes, supply chain changes, is a different way to business, which can be done. Now, in our opinion, there are many other opportunities in the United States for growth.

There are many segments in this country growing and we're going to show you in I-Day some similar charts to the ones we just show you about Europe that will most likely change your view with regards to the potential of the U.S. market for glass.

So in our opinion, it's better to focus on those opportunities than in that business that is highly complex to adopt. We will adopt some, but it's not like, you can adopt it all pretty easy..

Maybe I'll just step in here because we've talked a lot about temporary volume pressure in the third quarter. And I just want to say that there were few temporary items that we highlighted already on this call, and on a net basis, they really largely offset one another.

For example, the production downtime that we talked about that's coming back next year; timing of the energy credit for Europe that was just a timing item for third quarter versus third quarter last year; the CO2 credit monetization that we've already covered much of our needs on that now for next year already as the price has declined in the market; and then there's Brazil tax credit.

And I just want to clarify we booked a credit from the court ruling. So, this is a credit. So, we will use it to offset cash taxes over a period of time in Brazil. So, those things, on a net basis, largely offset one another..

The next question comes from the line of George Staphos from Bank of America Merrill Lynch..

Thanks everyone. Good morning..

Good morning..

Thanks for all the details. I wanted to ask a multi-part question on growth, Andres, if you can, and mostly focused on Europe. So, first of all, as we look at the wine harvest and the effect that we saw on demand this year, and it seemed like there was a lag effect relative to the weak harvest last year.

Could there also be a lag benefit in terms of when the wine glass volumes show up in 2019 or would you expect to see that pick up immediately? Secondly, when we look at chart – what chart is it? Chart 5, where you show the percentage year-on-year change in glass versus total packaging, the growth in glass really hasn't begun until 2017 and 2018.

So in prior years, it was flat to down. We're seeing a pickup in growth later in the cycle. What do you think is driving that? Could it be just a late-cycle move to premium or do you think it's more sustainable.

And how do you manage your capital allocation and your projects against the risk, so that it's maybe just a later-cycle move to volume? Thank you guys and good luck in the quarter..

Thank you, George. So, we experienced pressure on wine this year 2018. It is all the impact of 2017. I think what was a little bit misleading for us was that the first half was totally normal, Q3 just slowed down dramatically. So now, we know it is hitting the year. It will hit through the remaining of the year. It's already in our projections.

Now, this will just rebound as we go into 2019 according to a normal seasonality of the wine business. Now, I think the good part of this is while these inventories today are becoming a significant pressure for us, they will become a significant positive as we go into 2019.

So, we're very comfortable we're going to be in a very good position with wine going forward. Now chart 5, as you mentioned, there is kind of a change in pattern starting in 2016. You can even argue that 2015 is very, very small growth. But what's happening in 2016 and 2017 – in 2017 and 2018 is really driven by growth in several categories.

It is spirits, it is food, it is beer, it was wine before, right. This year has the harvest, but it's going to come back, too. And all of that, as you mentioned, has one common pattern, which is premium products are becoming extremely relevant. And for those products, glass is a very good fit.

Now, the other part that is related to that, that is emerging lately, is the sustainability relevance, which is taking customers to make different decisions, and it's taking consumer to make different choices.

It is very interesting to see that with all the movement that started very early in the year, we're seeing if you look at the statistics in several countries in Europe, you're going to find a very important growth for glass ahead of every other packaging.

And if you look at the statistics in UK or the Netherlands, or Spain, or Portugal, and this is standing (49:36), they're showing that glass is, in fact, taking a leading role. And this is not different in other countries.

Let me just make a comment with regards to the United States, because we normally – when we look at capacity and sales, historically, we consider the United States to be a – for O-I, to be highly oriented to mainstream beer. Now when I look at capacity and sales, in reality, O-I is becoming over-indexed to premium.

And at this point in time, we are like 1.2x in premium for beer in the United States, which differs significantly from the past. And this is going to move to 1.5x and then 1.7x. So, I think your question is right on. If we want to look at glass, we need to look at premium, which is a significant change in trend in the world.

Now one more point for Europe, on every one of the regions in which we operate. The value chain has changed dramatically over the last couple of years. And as a result, our customers need to trade up their brands, and they need to do it to be able to deal with their financials, as they normally do.

So, that brings branding to the center of the action, going forward. And when you think about branding, glass is a perfect choice. I mean, you can see it in every market. We just made the comments about beer in Europe and how it differs from the rest of the world. It is all about branding and that's what's happening. It is a very good emerging trend.

Now, we will present a very good set of statistics and all the conceptual framework about all these in I-Day.

I think as you can attend that I-Day, you're going to get a very good broad picture of what's happening in glass, which in our opinion requires a very different look versus what has been the traditional look and understanding of this industry..

The next question comes from the line of Ghansham Panjabi from R.W Baird..

Yeah. Hi. Good morning..

Good morning..

Andres, just given the weaker second half 2018 volumes and your related efforts to adjust inventories, will that inventory adjustment be fully done by 4Q 2018 or will that spill over into the first quarter as well? And then, just separately, just a technical question.

Why is the Brazil tax benefit ruling sort of flowing through on the operating profit line versus an adjustment on the tax line item? Thanks..

Yeah. So, let me just start on the inventory first. So, it will reduce over time through 2019 as we hit the various seasonal peak demands in the various markets in which we operate. So, this is primarily concentrated in Europe and the U.S. Then it will just be reduced according to that seasonality, but it will be reduced.

We're very comfortable with that for the full-year 2019..

Okay. And just your question related to the Brazil tax. This was an indirect tax. It was actually a cost in the P&L for several years..

The next question comes from the line of Adam Josephson with KeyBanc Capital Markets..

Thanks. Good morning, everyone. Jan, just a two-part question, on your guidance for this year, midpoint is now $2.75. I assume that is inclusive of the $0.11 of benefits from the Brazil tax credit and the European asset sale, correct me if I'm wrong there.

So really the starting point, as I look at it, is $2.64 and you're talking about getting to $3 next year. That seems to be quite a bit of growth 2018 to 2019 given the volume difficulties that you're having. So just help me understand why are you so confident in hitting that $3 number, if in fact $2.64 is really the right base.

And then question Ghansham asked about the Brazil tax credit in the adjusted earnings, the European asset sale, why is that flowing through adjusted EPS if that's just a one-time asset sale gain? Wouldn't that be excluded from adjusted EPS, typically? Thank you..

Okay. So, let me first address the $3 versus this year's guidance. Yes, those items were inclusive in the $2.75 midpoint range. I just want to bring you back to what happened in 2018. We had a year with significant foreign currency movement of $0.15 on our original guidance for this year. U.S. freight inflation, I think, was about $0.07 for the year.

There was a Brazilian transportation strike that was several cents. Volume was down a bit and we had a batch upset in Mexico that we don't intend to repeat. We absorbed a lot of APAC investment this year that manifested itself in lower earnings. And I think we mentioned several times that we also absorbed greater spending in R&D this year as well.

So, there were a lot of headwinds this year. Yeah, there were a couple of tailwinds. We talked about two of them today; the carbon credit and the Brazilian tax credit. We also had a lot of management actions in both, better performance in OpEx. We're running a little bit higher in TSC for the year.

So when we look at the mix of all this, we really had a lot of positive movement in the company, operational and not. So, we feel very confident that we'll hit that $3 target for next year (55:55)..

Let me add a comment with regards to a point that we didn't touch so far that will impact next year positively. So, this is Brazilian market demand. So when we look at the overall demand for O-I so far in the year, so year-to-date it's up 17%. Now, when we look at beer sales volumes, they're up 27% for the quarter and it's all driven by premium beer.

And this goes back to the previous question, this premium beer, in fact, making a significant difference. Now, we know we're limited in capacity in Brazil right now and this is going to influence our performance for the balance of the year, it's been already.

Now, we know too and we've commented on this in the previous call that we're bringing back the plant called Vitória and this is going to be in operation at the end of Q1 2019. So, this is going to be helpful for us to have higher earnings next year.

And just to complement my comments on premium before, you know from the statistics that are public about the Brazilian market that the beer consumption in the market, because of many – various dynamics, our total beer consumption in the industry for the quarter was down 2%.

But look at the importance of premium, even for a market that has a very challenging economy, premium beer is growing and total glass for premium beer in the country is growing 25%. Returnable glass for premium is growing 33% and one-way glass is growing 19%. And all of this is Nielsen data, which is public.

So, premium products are important catalyzers for the glass industry..

And Adam, I think I owe you a question then also on the carbon credit. So, we buy these and sell these in normal course over time. And the accounting treatment is what we have done in the past. In this quarter, we took advantage of the high market price to monetize them.

And like I said, we've already replenished some of them already, albeit at lower prices. And this also will be reflected in the segment operating profit over time. So, it's a very consistent treatment..

The next question comes from the line of Gabe Hajde with Wells Fargo Securities..

Yeah. Thanks for taking the question, guys. Good morning. One on, I guess, looking at the SG&A line, it came down sort of on a sequential basis and I was curious if there was any sort of backing out of incentives that is occurring maybe this quarter and the fourth quarter..

Sorry, Gabe, can you....

The SG&A line is coming down, because our OpEx spending is coming down a bit. We adjust our compensation accruals on a regular basis to align with where we are in our forecast for spending. So that – I think most of it is a tighter spending in the OpEx line..

I would like to make one more comment related to previous questions. So, inflation has been a concern across the industries over the last few months. It's been a concern within glass. Now, when we look our situation in the various regions, we are confident that we're going to be able to recover inflation in all the markets in which we operate in 2019.

So, I think that's an important consideration when you look at the outlook of the company going into a following year..

Your final question comes from the line of Tyler Langton from JPMorgan..

Good morning, Andres and Jan. Just had a question on the....

Good morning..

Hi..

Good morning. On Americas, I know volume growth was down 2% and it sounds like most of that was in the U.S. with growth in most of the regions. Could you just provide some details on sort of volume growth in the U.S., Mexico, Brazil and other areas, and then just some details, I guess, I think you mentioned the U.S.

growth was hurt by sort of a delay in the ramp of new customers and then just the reallocation of business to the JV. So, any kind of details on the impact of that on the U.S. growth..

Okay. So when we look at the Americas volumes, and because of the relevance of premium that we've been explaining through the call, it is very important to include the JV, which is a significant investment. We've been building one furnace per year.

Now when you look at Americas, without the JV, it is down, at this point in time, year-on-year 150 basis points, that's expected to be for the full year. Now, if you include the JV, it is up 150 basis points year-on-year. When we look at the U.S. market, specifically, including the JV, O-I is slightly up year-on-year for the U.S.

market, which outpaces the market significantly. Now, we've been talking about the conversion of capacity that we've been working on, which is important. 20% of the footprint has been addressed.

This is going to give us the ability to continue serving the market that is growing quite well, which is the other categories that are non-mainstream beer, because the premium beer is being served out of the JV and is growing really well. So, that's the situation within the U.S. market.

Very important to highlight, we are on over-indexed to premium already. We have a lot more capacity on sales in premium beer than we do in mainstream beer. Now, Brazil, I just comment on that, I think, is a very healthy market. We're adding capacity to Brazil. If we could add capacity faster, it will be beneficial.

But we're doing the best we can with the pace. Mexico is about flat year-on-year and it's been limited by capacity utilization. So, this is a market where we are adding a line and we're going to recover the capacity that we lost this year because of the (1:02:13) issue and there will be more to come for this market.

And when we look at the Andean countries, Colombia is growing approximately for the year 300 basis points. So, we are in fact adding capacity in Colombia that we expect to come in line in the first half of 2019. Peru is growing 100 basis points year-on-year. Ecuador is growing 760 basis points. So, very healthy demand across the Americas.

Again, very important to look at the JV together as part of our total volumes because of the relevance of premium in the development of the glass business..

Thank you, everyone. That concludes our earnings conference call. Please note that our Investor Day is going to be held in New York City on November 14 and fourth quarter conference call is currently scheduled for February 6, 2019. Folks, this is Halloween. Don't be afraid of your packaging choice, fearful of what might be lurking inside of package.

Choose transparent glass, the clear, the safe choice. Thanks. Have a great day..

This concludes today's third quarter 2018 earnings conference call. You may now disconnect..