Chris Manuel - Owens-Illinois, Inc. Andres Alberto Lopez - Owens-Illinois, Inc. John A. Haudrich - Owens-Illinois, Inc..

Anthony Pettinari - Citigroup Global Markets, Inc. Matthew T. Krueger - Robert W. Baird & Co., Inc. Mark Wilde - BMO Capital Markets (United States) Scott L. Gaffner - Barclays Capital, Inc. George Leon Staphos - Bank of America Merrill Lynch Chip Dillon - Vertical Research Partners LLC Gabe S.

Hajde - Wells Fargo Securities LLC Debbie Jones - Deutsche Bank Securities, Inc. Adam Josephson - KeyBanc Capital Markets, Inc. Edlain Rodriguez - UBS Equity Research.

Good morning. My name is Angel, and I will be your conference operator today. At this time, I would like to welcome everyone to the O-I's First Quarter 2019 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.

Now, I would like to turn the conference over to your speaker, Mr. Chris Manuel, Vice President of Investor Relations..

Thank you, Angel, and welcome, everyone, to O-I's first quarter conference call. Our discussion today will be led by CEO, Andres Lopez; and our CFO, John Haudrich. Today, we will discuss key business developments and provide a review and outlook of financial results. Following prepared remarks, we'll host Q&A.

Presentation materials for this earnings call are available on the company's website at o-i.com. Please review Safe Harbor comments and disclosure of non-GAAP financial measures included in those materials.

Unless otherwise noted, the financials we're presenting today relate to adjusted earnings and adjusted free cash flow, which exclude 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 the appendix of this presentation.

Now, I'd like to turn the call over to Andres..

Thank you, Chris. Good morning, and thanks for your interest in O-I. Starting on slide 3, I will like to provide an update on our journey to transform O-I, which we outlined in our most recent Investor Day, a journey that is having a major impact on the company's performance and enabling future profitable growth supported by new capacity additions.

We are confident these actions will drive stronger earnings, cash generation and value creation for our shareholders.

We are proud of how far this company has come over the past three years, stabilizing operations, while improving flexibility, collaborating with our customers to grow their portfolio in glass, focusing on total system cost, developing breakthrough innovations and continuing to allocate our capital in a disciplined way.

As a result, we are entering a new growth phase supported by long-term supply agreements with strategic customers. We are excited by this development, which I will discuss in a moment. While John will take into the financial review and outlook, let me highlight three things.

First, we reported first quarter results of $0.51 per share, which was in line with our guidance. Second, we expect our earnings will progressively improve over the course of the year starting in the second quarter.

This improvement reflects volume growth supported by ascribable customer contracts, specific capacity expansions as well as strategic transactions. Likewise, improving cost and efficiency will continue to accelerate.

Third, for 2019, we are maintaining our guidance of $3 per share of adjusted earnings and affirming $400 million of adjusted free cash flow. Turning to slide 4, we made greatest strides in the first quarter laying out the foundation for growth.

In the Americas, we added a new furnace in Colombia, making this facility one of the most efficient in our network. We also re-commissioned a previously idle operation in Brazil to serve a capacity constrained market. This market has demonstrated broad-based healthy growth over the past two years.

And in the U.S., we continue to reposition capacity to serve the growing spirits, food, NAB and wine segments, while more efficiently and reliably supporting the beer segment. As we increasingly align ourselves with the strategic customers, we announced the acquisition of Nueva Fanal from ABI.

It is a four furnace plant outside Mexico City, with significant future productivity synergies to support growth. The plant serves the fast growing Modelo beer brands to be shipped globally. We consider this is an attractive bolt-on acquisition that will be immediately accretive to earnings and about neutral to O-I's leverage.

Supported by a long-term supply agreement with ABI, Nueva Fanal increasingly aligns O-I with the big growing premium beer market. We anticipate the transaction will close in the second half of 2019, pending regulatory approval. We are adding our first European standalone capacity in at least two decades.

This investment in Gironcourt, France, includes a new furnace and as expected, is supported by long-term supply agreements to serve the premium beer market. Engineering activity is well-underway and incremental sales should come in early 2020. All these projects will generate healthy returns in investment well above our cost of capital.

Importantly, we are making very good progress on key breakthrough technologies like MAGMA, which we introduced during Investor Day. We are hitting all of our key milestones successfully. Our pilot MAGMA operation at the Streator plant is up and running and consistently producing high-quality glass.

We remain excited and encouraged by this R&D effort that promises to redefine the business model for glass. As we pivot to grow, the sequence of our sales patterns will change. On slide 5 we illustrate sales volumes of glass containers across the O-I network.

This is the sum of O-I legacy consolidated volumes plus shipments by Comegua and our JV with CBI. As you can see, we expect the combined volumes will improve each quarter, reflecting many of the strategic initiatives that I just outlined. Volumes of the O-I network increased about 1% during the first quarter.

Importantly, the planned shift of sales volume from O-I to our strategic JV with CBI amounted to about 1.5% of global volume. The transfer occurred in the first quarter of 2019. So, at this point, we have cycled through this shift. Excluding this transfer, legacy organic volumes declined about 1%.

Importantly, all of this decline occurred in January, while global sales volumes were up in February and March. This favorable dynamic continued in April. Overall, a number of customers rebalanced their supply chains early in the quarter, especially in Europe and Asia Pacific. And order patterns have normalized over the past few months.

Finally, the Comegua JV added more than 2% to network volumes. Going forward, new capacity in Brazil and Colombia will enable legacy organic volume growth beginning in the second quarter and increasing through the year. We expect legacy organic volumes will increase by about 1.5% in 2019 consistent with our guidance from Investor Day.

Nueva Fanal will represent inorganic growth incremental to what is depicted. Network volumes are expected to increase even more due to the sales volume growth of our JVs in Mexico and Central America. Other projects like the furnace in France and the fifth furnace at the JV with CBI create a pipeline fueling growth for 2020 and beyond.

Clearly, glass is a growing substrate and O-I is taking a large share of this growth, given our successful transformation and global presence. On slide 6, you will see we are well ahead of pace to deliver the three-year target of 10% cumulative volume growth outlined at Investor Day.

In less than six months, we have secured contracts for over 80% of our target. While general market and segment trends are increasingly favorable for glass, we are basing our growth outlook on the ascribable transactions we have mentioned with upside from market trends.

Finally, our commercial pipeline is expanding with high-return organic growth opportunities above and beyond this target. We are confident the foundation for profitable growth exists not only in 2019, but extends well into the future. We recognize profitable growth and improving cash flow stream that comes with it are drivers of multiple expansion.

Turning to slide 7. While first quarter segment operating profit was down as anticipated, we expect earnings will rebound over the course of the year driven by volume, price realization, cost performance, and execution on key strategic initiatives.

Moving to the regions, in the Americas, segment profit declined in the first quarter, given currency pressures and incremental cost to commission new capacity. Despite higher selling prices, cost inflation more than offset price realization. Excluding the impact of transfer volume, Americas' legacy organic growth was up 1%, with beer up 6%.

And currently, U.S. beer trends stabilize and outperform our expectations. Looking forward, we expect year-over-year profits to be modestly higher in the second quarter and improve suddenly in the second half.

This lift will be supported by the organic and inorganic growth initiatives we have discussed, favorable spread, as well as ongoing cost improvements. Turning to Europe, operating profit in the first quarter improved by 18% in constant currency. Benefits from favorable price and higher selling prices were partially offset by cost inflation.

Profit also improved from our total system cost efforts as well as an energy credit that was realized in the first quarter as opposed to the second quarter last year. As expected, sales volumes were modestly lower due to regular planned engineering downtime, and customers rebalancing their supply chain, mostly in January.

Considering the rest of 2019, we anticipate volumes to be modestly higher driven by strength across most segments. As for segment profit, we expect a slight sequential improvement in the second quarter, given the energy credit shift and the stronger dollar.

The full year is expected to be about flat with currency and cost for building new capacity, building higher volume, favorable pricing and cost improvements. Asia Pacific segment profit in the first quarter was higher year-over-year, reflecting improved operating cost, following significant furnace rebuild activity in the prior-year.

For the second quarter, we expect Asia Pacific's operating profit improvement of a similar magnitude to first quarter. Full year segment profit is shaping up to be in a range similar to the 2016 to 2017 period. Now, I'll turn the call over to John for more details on financial matters..

Thanks, Andres, and hello, everyone. Let's start with first quarter earnings on slide 8. As Andres noted earlier, we reported earnings of $0.51. Two developments landed us at the lower end of our guidance range. Currency was an additional $0.02 headwind, and we incurred an additional $0.01 in cost to accelerate the commissioning of new capacity.

Considering these factors, our first quarter performance was in line with our expectations. Let's review first quarter results compared to the prior-year. As illustrated, segment operating profit declined from $224 million in the first quarter of 2018 to $200 million this year. $12 million or half of this decline was due to the strengthening U.S.

dollar. Selling prices increased nicely, but spread was unfavorable reflecting cost inflation. Keep in mind that we are ramping up price increases starting in the first quarter, and we expect that to be concluded by mid-year. As expected and discussed, sales volumes were lower. Overall cost performance reflected a number of moving parts.

Cost initiatives improved results by about $15 million. One-time items improved cost by $3 million. This is the net effect of an $11 million EU energy credit in the first quarter of 2019 and $8 million of non-recurring gains in the same period last year.

We had good line of sight of the credit when we provided our first quarter guidance, so it was embedded in that outlook. Keep in mind, the energy credit was received in the second quarter last year and tends to shift around. These favorable items were partially offset by approximately $12 million of higher engineering costs to commission new capacity.

On the right, we provide a year-over-year EPS reconciliation. We already discussed currency and changes in segment profit. As you can see, the net effect of other factors benefited earnings by $0.02 including the impact of share repurchases. Let's shift to our 2019 business outlook on slide 9.

We expect year-over-year quarterly earnings will progressively improve across the balance of 2019. This represents a different earnings cadence compared to historic patterns and reflects a number of positive developments over the balance of the year.

As we show in the left, the benefit of higher sales and production volume should improve over the course of the year compared to the headwinds in the first quarter. Higher volumes are supported by new supply contracts, capacity expansion initiatives, and exiting peak regular furnace rebuild activity.

Regarding currency, we should lap most of the year-over-year pressures by midyear based upon today's rates. Our second quarter outlook reflects these trends as shown on the right. Earnings will benefit from volume growth across all regions, diminishing currency headwinds, favorable price/cost spread, particularly in Europe and the Americas.

Asia Pacific price increases generally get implemented around mid-year. Structural cost reduction initiatives will be largely offset by investments in engineering activities to support growth as well as the shift in the timing of the energy credit.

Finally, the benefit of the company's share repurchase program should essentially offset higher interest and taxes compared to 2018. Overall, we anticipate second quarter results will be between $0.75 and $0.80, which is in line to modestly higher than the prior year on a currency-neutral basis. Moving to slide 10. Let's discuss our full-year outlook.

As illustrated on the left, we faced some year-over-year headwinds due to currency translation and one-time benefits last year that will not repeat this year. With that said, a number of efforts are underway to help maintain O-I's positive EPS trajectory.

Looking at our guidance for $3 per share, we expect positive organic growth beginning in the second quarter in all regions for an annual growth of 1.5%. While a headwind in the first quarter, we expect positive price/cost spread over the balance of the year. Cost performance should improve driven by TSC and exiting peak regular engineering activity.

Importantly, SG&A costs are expected to benefit from actions across the organization to create a simple, agile and cost effective structure. This includes a voluntary separation program completed last month resulting in more than a 12% decrease in future staffing levels at the company's Perrysburg campus.

Strategic initiatives such as Comegua and the completion of Nueva Fanal will also boost results. Finally, the benefit of share repurchases will partially offset additional expense to support breakthrough innovation as well as higher interest and taxes.

Our 2019 outlook is sensitive to a number of timing factors, many of which are not fully in our control. First and foremost, based upon today's rates, currency translation represents an $0.08 headwind compared to the assumptions in our $3 per share guidance.

Of course, currency rates always remain highly volatile, and we strive to offset a modest amount of FX pressure. Closing of Nueva Fanal is anticipated in the second half of the year, but actual timing could create up to $0.05 of variability. We are working on a number of tactical divestitures to be completed by year end.

Our share repurchase program is supported by proceeds on these divestitures as well as cash from operations. We expect share repurchases will be conducted later in the year consistent with seasonal cash flows and divestiture proceeds. On the positive side, we are ramping up additional capacity to on board volumes.

This could represent upside opportunity to our planned 1.5% volume growth. Bottom line, we maintain our guidance of $3 per share of adjusted EPS and we'll update you on these sensitivities as the year progresses. Furthermore, we reaffirm our $400 million adjusted free cash flow guidance.

Turning to slide 11, we believe a balanced approach to capital allocation is important to support growth, de-risk the balance sheet and return value to shareholders. So, let me share some insights in a number of important capital allocation factors. Regarding CapEx, we continue to refine and reprioritize certain projects as we focus on growth.

Currently, we expect CapEx will approximate $500 million in 2019, but this could be less based upon the current FX environment and project refinement. The company continues to de-risk legacy liabilities. Our 2019 asbestos assumption remains unchanged and we are on track to reduce our total liability to less than $250 million by the end of 2021.

During our recent Investor Day, we shared our outlook for strategic investments, which include two near-term inorganic growth acquisitions, namely the Comegua JV and Nueva Fanal. While we will always remain opportunistic, we expect a deprioritized M&A upon the completion of Nueva Fanal.

Our I-Day outlook included $400 million to $500 million of planned tactical divestitures by 2021, which exceeds the $300 million of planned acquisitions I just mentioned. As previously noted, we are actively engaged on several divestiture projects and anticipate proceeds in the second half of the year.

Deleveraging is a top priority, and we expect our leverage ratio will improve to the mid-3s by year-end 2019 and about 3 times by the end of 2021. Looking at share buybacks, we repurchased $38 million in January at an average price of $18.28. We have approximately $500 million remaining in authorization.

Overall, these actions will grow our business, derisk the capital structure, and return value to our shareholders. Now, back to Andres..

EXPRESSIONS leverage digital printing to boost the brand-building power and premium nature of glass. We deeply believe that glass is the number one product for building brands, premiumization and sustainability. We intend to win the fight for glass and that is exactly what we are doing. Thank you. This concludes our prepared remarks.

And we are happy to take your questions..

And your first question comes from the line of Anthony Pettinari from Citigroup. Please go ahead..

Good morning..

Good morning..

Good morning..

John, you indicated timing of divestitures could impact the $3 full-year EPS guidance.

So, I guess my question is, does the $200 million in planned divestitures still on pace with your expectation set out at the beginning of the year and anything more about the timing? I know you said, second half, but just wondering if it's sort of as expected at the beginning of the year..

Yeah, yeah. Just to bring it back, back at I-Day, back in November, we laid out that plan and which would hit that $400 million to $500 million of divestitures over the next three years. We did expect a big component of it to occur in 2019.

Approximately, $200 million of proceeds, that we are working as I mentioned earlier on a number of projects actively engaged on those. Of course, there's always the timing factor because you're working with other counter-parties and things like that.

But I would say that the energy is high on those activities, and we continue to look for those in the back half of the year. So, what I would also say is linking the divestitures with the share buybacks, relative to our earnings, keep in mind that while these divestitures are not strategic for us, they are generating earnings.

So, there's going to be a matching of the share buyback value creation, as well as the loss of the accretion from the divestitures. We think that is a net accretion to the company, but you've got to look at it in a net basis.

So all of those together, it's kind of fairly muted effects from the initial get-go, so it's not a major variable as we look to the full year..

And your next question comes from the line of Ghansham Panjabi from R. W. Baird. Please go ahead..

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

Good morning..

Just wanted to – good morning.

Just wanted to ask, can you provide some added detail on the factors that give you confidence in your ability to reach the overall volume growth targets for the year-end context of the light 1Q 2019? And on that note, what have you seen from a volume perspective, as it relates to early 2Q, and what sort of traction do you have there?.

Okay. So, when we look at the fact of the reasons why we are projecting the volume we are projecting, I think we've got to look at two things, projections going forward and the ways we are using and you are seeing to compare our future growth. So, I'm going to cover the two.

The first one is, the volume projections that we are seeing going forward are the product of the work that we've done over the last three years. As you recall, we were to focused as one of our priorities in the strategy that we presented to you three years ago on redoing entirely the go-to-market approach.

And that has been done and has been successful. And now, all of that has translated into long-term agreements that we have already in place. Now, we are supporting that with incremental capacity. And we, for example, put new capacity in place last year at the end of the year in Europe.

And we did the same in APAC, when we were doing all the work with assets, as we describe in every one of the quarters, as we went through the year. And this year, we are adding capacity in Colombia, as an example, we just did it. We added capacity in Brazil by bringing back this factory, Vitória, that is already in operation.

And we are adding more capacity in Europe, a few lines, up to four lines this year. Now, very important to have in mind that we highlighted along the way that we were converting line in the United States for three years in a row to be able to serve all end users.

It's very important to consider that all end users, other than beer, in the United States are growing, and they've been growing for three years in a row. So, we're going to enjoy that too. Now, very interesting, there is something that we haven't seen before, which is the amount of countries that are growing simultaneously going forward.

So, we're going to experience growth in Brazil. We're going to experience growth in Colombia. And we can explain that in more detail, in Peru, in Mexico. We're going to have – we're experiencing growth in Canada right now. U.S. is stabilizing and we expect that to be about flat for the year.

And then, we have the emerging countries in Asia Pacific growing. And they've been growing before, but now we have the capacity to be able to enjoy that. And we're seeing a very solid market in Europe, which is generating some growth too and, with the capacity in place, it will generate the volumes we are projecting.

Now, all of these coming together represents 1 million tonnes of capacity that is going into operation late last year when – into operation late last year or is going into operation through this year. Now, between 9 and 12 months later, these million tonnes of capacity are going to be in place.

And this is matching 1.1 million tonnes of incremental sales that are the results of all these work we've done and the long-term agreements that we have in place. Now, you may ask why is it that glass can grow now, and it didn't grow before.

And the reason for that is a megatrend that we've been covering extensively over the last few quarters, which is the focus on premium. Premium products are the focus of our customers across end users and across regions. That is a very strong megatrend that is supporting the growth of glass.

And we are really prepared for that because of all the transformation we work on over the last few years, and because of all the work we did with our customers. So, we feel quite comfortable with the projections we have and, obviously, those projections are out of pattern, because we didn't have that growth before.

Now, that takes me to the next point. If you look at the previous quarters and you use them as base (00:31:56) they won't be a proxy for what is coming. And there are many reasons for that and we highlighted all these reasons along the calls. But let me just bring them back to your attention.

Remember, we've been transferring volume from O-I to the JV with CBI. That is lapping in the first quarter of 2019, so that the impact of that is over. We won't see that going forward and it is a significant impact.

Remember that we experienced soft demand in Europe in wine, because of the soft harvest that's going away, because now we are going to have the impact of a very strong harvest last year. We worked on mix optimization in Europe, which reduced our volumes that is done for the most part now. We've been refeeding the assets in Asia Pacific.

Now, they're ready to produce and support the growth that happens in that region. We had the (00:32:53) issue with Queretaro in Mexico last year. Now, that becomes a favorable comparison. We had the strike in Brazil, the transportation and general strike, that is also a favorable comparison this year.

We had capacity constraints in Europe and Brazil, so we couldn't experience that growth in the previous quarters. Now, we have incremental capacity.

Now, we just implemented ERP in Europe at the end of the year, which caused some dislocation of volume from the first quarter of this year into the fourth quarter of last year, because customers – because of their blackout period, wanted to secure themselves with volume, so they bought some in advance to be able to protect themselves.

And then, we are increasing prices in Europe, because this is the first year we're having this inflation situation. Last year, we had deflation and the years before, so because of the price increases, some customers were buying advance, just to enjoy the situation before the price increases.

So very important to take into consideration, previous quarters are not a good proxy for what's coming in terms of volumes in O-I..

Angel, we're ready for the next question..

And your next question comes from the line of Mark Wilde from BMO Capital Markets. Please go ahead..

Yes. Andres, I wondered if we could talk just briefly about sort of recycling and how this plays into sustainability. I've noted that some U.S. municipalities are taking glass out of the recycling stream and I just wondered what you're doing to support glass recycling so that you can make a strong sustainability argument..

Okay. So I think we got to look at the global picture, not only U.S. When you look at Europe, as an example, we have very high recycling rates. And as you'll remember, all this emphasis on sustainability and the pressure on plastics has started in Europe.

Now, as a consequence of that, we're seeing emphasis on glass packaging in Europe, for example, in waters. So we are actively working (00:35:22) new designs for customers that already have water in glass, because they are looking at to expand that.

But we are seeing also customers, very important customers actively working on conversions back to glass, because of the same sustainability reason as well as the premium emphasis across categories. Now, in the U.S., we have a different situation when it comes to recycling.

And we are actively working with multiple stakeholders to improve the system in the country. In our capital plan that we presented in I-Day, there is some money allocated to be able to create these recycling capabilities in the country. Now, the premium trend is the most dominant trend, megatrend driving packaging right now.

And it's followed by the sustainability one, which is emerging. So we are preparing to enjoy that, as we do this work that I just mentioned within the U.S..

Your next question comes from the line of Scott Gaffner from Barclays. Please go ahead..

Thanks. And good morning, Andres, and thanks for all the detail so far..

Good morning..

I just had two quick parts on this premiumization trend that you've been discussing.

So, first part of it is really when you look at, or you think about the cyclicality of the business going forward, how does premiumization of the business impact go-forward cyclicality for the company? And the second part of that, which is also on premiumization, in South America, one of your competitors, which happens to be a can manufacturers, specifically stated in their release this morning that they're in South America seeing a shift in packaging mix from returnable glass to aluminum cans.

So, I'm wondering if that – when you say glass is taking share in South America, if we're talking about one-way premium glass there. Maybe you could provide some details there because it feels like we're comparing apples to oranges a little bit in the region. Thanks..

Yeah. So, I think we brought up this point before. I think you're referring to Brazil. In Brazil, the mainstream volume in returnable glass is moving into one-way glass and cans, both. And that's the reason why we are growing in glass in Brazil. Our growth in glass for beer in Brazil in the first quarter was 13%, right? So, we are growing.

Now, we are growing also because the premium is growing really fast in Brazil. It used to be around 3.5% of the total volume of beer; it's now 14.5%. And we have the vast majority of that volume. Glass is a very good fit for premium. But let me just share another example with you.

Colombia, which is a country in which premium hasn't been developed, is now having a major emphasis on premium by the two breweries that are there. And I just mentioned too, there is a new brewery that just entered Colombia. A new brewery is in place, is now operating, so that is making of this market a very dynamic one.

We are expecting the full capacity of Colombia that we're putting in place to be shipped, but we also have in Peru, shipping into Colombia. When you look at the two countries together, we are expecting growth for those markets in the high-teens. So, very healthy. And this trend continues to expand.

So, when it comes to premium, I think this is a trend that is here to stay. If you look at the CPG companies, the business model has been changing. They need to trade up their products, the brands to be able to make the earnings and margins that they used to make or need to make going forward.

And in that process, the glass is a very good fit and that's what we're seeing. I mean, this is being translated into long-term contracts that have a very solid foundation. We are building capacity right after that, just following those long-term contracts.

And in fact, I think we are enjoying the growth going forward, the growth that we all wanted to see. You wanted to see this company and industry growing. We wanted to see it growing. It is going to grow..

Scott, you also asked about seasonality in effect and then change on premiumization on that. I think there's two important points there.

One is as more categories are focusing on premiumization, whether it's food or NAB or other categories like that, you'll start to see it over the time more of a smoothing out over the seasonality rather than necessarily just peak summer months and things like that, because those type of products are – the demand cycles are consistent throughout the year.

But also importantly, as premium products perform better over the course of the cycle, so even if there is a softer marketplace out there, premium tends to outperform other category. So as we shift more premium, that provides more stability and growth opportunity as well as margin opportunity to business..

Yeah. And one way to compliment the point of returnables, when people look at fill-ins and they consider that the returnable glass is going out, those fill-ins are going out of glass. However, because of the change into one-way glass, for us, is significant volume growth. So we are growing, cans are growing. They're not mutually exclusive..

And your next question comes from the line of George Staphos from Bank of America Merrill Lynch. Please go ahead..

Hi, everyone. Good morning. Thanks for the details. I wanted to – especially in terms of your thoughts on the growth outlook and the likes, I wanted to ask a two-part question, if you will, on operations.

And I guess, the first easier part perhaps is can you comment about what was behind the incremental $0.01 in terms of re-engineering of capacity that you've occurred in the quarter relative to what your expectations were? What was beyond – behind that, anything that is less surmountable than you like? It seems minor, but wanted to check into that.

And the other question related to this, when I go to slide 9 of your deck this quarter, where you talk about the outlook, and I look at the bar charts, and compare that to the comparable one last quarter, what we see this quarter is more production volume relative to sales volume in the third quarter. I don't know how much because there's no scale.

If I compare that to the last quarter's slide, they were flipped, and there was more sales volume relative to the production volume bar. Again, I don't know how much because I don't have the scale. What causes that differential? Thank you, guys..

Yeah. George, let me take your first question there, the $0.01 associated with additional commissioning costs. As we mentioned in the prepared comments, what we are looking at is accelerating some of the activities. So in particular, the activity in Brazil, we try to do that earlier – as early as we could.

And so, what that means is, we incurred a little bit more cost on the front end, so that we have that capacity given, as Andres mentioned, 13% growth on the country. It doesn't point to an extra cost per se. It's just that we have accelerated and pushed that forward. So, you also had the question of the change in the production volume per se..

And I think we are commissioning capacity and sales are picking up. They're not necessarily exactly tying with each other. Now, seasonality influences that. That's what I can correlate with your question, if I understood your question correctly..

Yeah. And George, I would also say, looking at the details here, there has been some adjustment as we're looking to commission, et cetera, on some of the repair schedules, because we're trying to balance off a lot of the engineering work. I think that appears to be as much of the cause as anything else..

And your next question comes from the line of Chip Dillon from Vertical Research. Please go ahead..

Yes. Hi. Good morning..

Good morning..

And congratulations, John, on your new position..

Hey, Chip. Thanks..

Yeah. A question I had was, talk a little bit about the changes in technology as you rebuild your furnaces. It seems like that's prompted perhaps some of your customers to decide to get out of making their own bottles or at least being totally in control. Obviously, you've noted a few deals since then.

And I guess as you look out three to five years, will the cost for rebuild go up or down or will you get benefits from it? And do you think you'll see more actions from customers that might want to joint venture with you like we've seen in the past several years?.

So, the acquisition that we have an agreement for – of Nueva Fanal, that just relates to the decision of the customer to focus all the resources, growing their beer business. And we are the best partner to focus on dealing with the glass business. So that's the reason for that.

Now, that investment is related to premium beer, which is growing really fast around the world. So that's linked to that. And it's very good for us, because it has the strong synergies potential, which we are to evaluate, when this transaction is concluded. Now, when we look at technology, that has the potential to change many things.

And one of them being the capital intensity of building new or rebuilding or repairing. In reality what is expected is that, that technology will require significant less maintenance than the current technology, so that's an advantage.

But it's also very flexible for deployment, which means, we can follow growth in the event that we have that technology in the market. We can follow growth really well today. It's difficult, because it takes very long to build capacity and it requires large volumes to justify that capacity.

So, it's more difficult to follow the ramp of volume increases that the customers have. With that technology, we will be able to install the capacity very quickly, and really add up to smaller volumes, and even large volumes, if required. So, many things will be changing in our business model, if this technology is implemented..

And your next question comes from the line of Gabe Hajde from Wells Fargo. Please go ahead..

Good morning, gentlemen. Thanks for taking the questions..

Good morning..

I was curious about sort of interest levels in some of the tactical divestitures that you talked about. And I'm sort of asking in the context around Nueva Fanal and valuation there.

So, two-part question, one is, is there anything peculiar or unique to that transaction that seemingly it's towards the lower end of the scale of what we might see in terms of transactions.

And then, John, you made some commentary about, on a net basis, any tactical divestitures would be accretive would seemingly imply something closer to what maybe what you guys got for or entered into for Comegua. So, just trying to understand where indications of value are, sort of, for that and recognizing it's a delicate situation..

Yeah, yeah. So, let me address those points there. If you go back to what we announced with Nueva Fanal, the multiple would suggest something between 4.5 and 5, which as you indicated is the lower end of the range.

So, as we bring that operation online and looking at the sequencing of furnace rebuild activity that's associated with that, there will be some furnace rebuilds in – over the next couple of years or so. Importantly though, when we look at our three-year plan, we all incorporated that.

So, the guidance that we provided back in November and of CapEx levels and all that stuff were fully inclusive of that item.

Now, once you factor in those, for example, on a net present value basis, you will end up in more closer to a 6 type range, which I think is very similar to what we did with Comegua and probably pretty attractive for the relative market. And then, the other question was about multiples or share buybacks and the net accretion..

And divestitures, yeah..

Yeah. So, let me just clarify that. So, if we have continued through share buybacks on a ratable basis through the course of the year and did that $200-million-or-so that we're talking about for the year, that would add about $0.05 to earnings on the share buyback side.

Okay? But at the same token, when we do the divestitures, obviously, those are earning income associated with those operations, those earnings will be foregone. As a result, when you look at the net accretion to the business, it will be more muted in the full $0.05.

It'll still be positive because we believe that these are still the right choices to make. They're not strategic for the business, but it will be a fairly nominal amount of impact on their earnings outlook for the business.

But of course, it positions us properly, so that we can deploy capital appropriately down the long-term to the core of our business, where we think we have the best returns to make..

And your next question comes from the line of Debbie Jones from Deutsche Bank. Please go ahead..

Hi. Thank you for taking my question..

Good morning..

One actually – John, I was hoping you could just elaborate a bit on what might drive your CapEx refinement comments. And then, I had a question on price/cost.

If I kind of put everything together, I know you went to the different regions, should I expect that to be a neutral from 2Q and beyond? And is there any possibility that you can recover the $9 million from Q1?.

Yes. So, let me address the price/cost spread real quick. So, if you take a look at our price implementation process, we started at the beginning of the first quarter and it pretty much comes on line by the second quarter. By the end of the first quarter, we had implemented about 70% of our price increases, very normal.

And then, we remain – expect the remaining component to come through and fully being placed by the second quarter. So, that will be a boost in that regard.

And if you take a look at inflation, first quarter was our peak year-over-year inflation period, because really, what we saw was an increase in energy prices, et cetera, starting to hit mid-year or so last year.

So, when you take a look on a comp basis, the exit of inflation by the fourth quarter is less than half of the inflation that we saw during the first quarter. So, when you put those two dynamics together, what you see is price/cost inflation being a definite positive impact over the balance of the year..

Yeah. Pricing is very constructive all around the world for us across regions..

Yeah. And the other question, Debbie, that you had was around CapEx refinement. So, as we mentioned at the beginning of the year in the previous call, we anticipated $500 million of CapEx for the current year. That's still our current guidance. Within that, I think there's a couple moving parts.

One is, as we land these agreements that Andres has spoken about, we have a better sense and we continue to refine where we need to put capital in. This is a combination of bringing on new furnaces like we're doing in Colombia, recommissioning capacity, but we're also installing a lot of different machine lines across the business.

So, we got, in addition to those two plants that have multiple machine lines associated, we're putting six more machine lines in across the business. So, to some degree, that is the refinement that I'm talking about.

In order to be able to do that though, we're also looking at some planned projects that we're actually deprioritizing because we think there's the opportunity to push productivity better to be able to get the same capacity adds without the investment, great way to make money. And so, we're looking at that.

You throw that net effect of refinement in with the FX which at this point in time would be an offset to some of the capital costs for the year; that's why we think there could be a net CapEx number that is below the $500 million level..

As an example, growth in Mexico is supported to productivity improvement. And that is then avoiding the need for increasing capacity through CapEx at this point..

And your next question comes from the line of Adam Josephson from KeyBanc Capital Markets. Please go ahead..

Thanks. Good morning, everyone..

Good morning..

Morning..

John, welcome. Just, John, one on asbestos. I know Jan got a couple questions about this last quarter, when you said the payments were going up pretty significantly in 2019 and 2020. I've gotten a few questions about that since.

Can you just go over again, John, precisely what is driving that uptick in 2019 and 2020 in asbestos payments? And then, just more broadly, over the years, asbestos payments have tended to surprise to the upside rather than the downside, even though obviously the average age of your claimants has been going up every year.

So one would think that the payments would be coming down over time. It hasn't necessarily worked out that way.

So, can you just go over again precisely what happened last quarter and what gives you confidence that, post 2020, these payments will indeed come down appreciably thereafter?.

Yes. So, understanding that asbestos litigation process has been going on for decades. And as we know the – as you mentioned, some of the demographics are obviously working in our favor over the longer term here.

But as we get into these later stages, there's probably a little bit more focusing on the remaining cases as well as certain jurisdictional trends and activities that when we take a look at those in certain pockets across the nation, we see that there's a potential for future inflation on some of the claims that are still out there in the population.

We believe it's a good use of cash to be able to inoculate some of that risk on the front end here, and to avoid that potential inflationary pressures down the road.

So, what you saw – what we laid out for the year is $150 million, $160 million of payments to take out certain tranches of those claims well in advance of some of these particular pressures. Obviously, we did a big piece of that in the first quarter. We had over $70 million of payments. It'll be lumpy throughout the year.

Usually, most of this goes out towards the end of the year, so I suspect what you'll see here is a big piece in the beginning of the year, and then a little bit bigger component towards the tail end of the year. This was all planned, so you know, all through the discussions with all the attorneys.

And so, this was well-orchestrated and we believe it's going to trend us down to that what I mentioned below $250 million by the end of 2021.

And then, with a lot of this taken out in front end, you get into appreciably lower payments, especially in a couple years when you're down there with even more benefit from the age-related aspect of the litigation..

Thank you. Angel, I think we have time for one more question..

Thank you. And your final question comes from the line of Edlain Rodriguez from UBS. Please go ahead..

Thank you. Good morning. Just two quick ones. One, in Europe, you had a benefit from an energy credit.

Can you remind us again, maybe I missed it, like how much was that and how much more should we expect going forward? And the next question was as you look towards the next three quarters, like what do you see risk in achieving the $3 target? Is it FX, volume, like how much – like what do you see enable risk in there (00:56:56)?.

Sure. Let me focus on your questions here. Okay. So, the European credit that you're referring to – just a moment on that. So this is a process in Italy and what it is is it normalizes transactional energy costs over a period of time.

So it results in an energy credit on an annual basis, and it occurs whenever the authorities inform us of the credit, so as a result, it bounces around. It was $11 million this year and it was $9 million last year. And this is something that we receive in arrears from the normalization for the prior year. This is the last year of that mechanism.

Going forward now and into the future, the transactional prices are more indicative of market prices and so there's no need for this credit anymore. As I mentioned before, we had included that in our guidance during the first quarter call.

We had good line of sight on this, but it is something as we look to the second quarter, we have to understand on a year-over-year basis, it was second quarter last year. So we just got to understand that as the outlook for the next quarter.

As far as the risks associated with the outlook that we had, I think they're articulated pretty well on the right-hand side of page 10 of our materials. But just to recap that, we do have, as we look here today, $0.08 headwind against the assumptions that we included earlier in the year for the $3 per share.

So we had used at that time January 31 rate. So if you look at April 30 rates and apply that to the $3, that represents $0.08. Of course, FX is very volatile. It's very early in the year, so it's hard to just nail that one exactly down. And then, really, the other activities that we identify there are more timing of initiatives.

So, the closing of Nueva Fanal, the timing of divestitures which also affects share repurchases. And as well as this ramp-up of capacity in onboarding of new customer agreement.

So, right now, we anticipate something like 25% of that volume coming on in the second quarter and another 35% in the third quarter, and the remaining balance coming in the fourth quarter. That is what we have in our agreements, that was what we're planning for.

The commissioning of the new capacity is a little bit front-end loaded to that, so that we have the capacity to bring that on.

But of course, we're working with counterparties in all of these, whether they are people – whether it's the authorities on Nueva Fanal, the justice review, divestitures counterparties as well as our customers on onboarding on this volume.

So it's a unique period for us, it is exciting period for us, but also, there is some timing aspects that we have to be aware of..

All right, that ends our call. Thank you, everyone. That concludes our call. And remember, it's another exciting day to choose glass. Our second quarter conference call will be scheduled for August 1st. Thank you..