O-I Glass, Inc. (OI) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Jeremy and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2015 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. [Operator Instructions] Mr. Johnson, you may begin your conference.

Thank you, Jeremy. Welcome everyone to O-I’s earnings conference call. Our discussion today will be led by Al Stroucken, our Chairman and CEO; and John Haudrich, our acting Chief Financial Officer. Today, we will discuss key business developments and review our financial results for the second quarter of 2015. Following our prepared remarks, we will host a Q&A session. Presentation materials for this earnings call are available on the Company’s website at o-i.com. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the appendix to this presentation. Now, I would like to turn the call over to Al.

Thank you, Dave and good morning. I will begin with a summary of the quarter on slide three. We were able to achieve solid results in the quarter despite sluggish macroeconomic conditions in many markets, a continued strong U.S. dollar, and several major engineering projects in our plants. Our adjusted EPS was $0.60, which was at the high end of our guidance range. Adjusted EPS was down $0.20 compared to the prior year, yet by $0.05 on a constant currency basis. Overall, lower segment operating profit was mostly offset by the effect of favorable non-operating items. Given our global footprint, we had variations in our regional performance. Sales volume increased in North America despite the ongoing decline in mega beer. In Asia-Pacific, benefits from last year’s restructuring in Australia largely mitigated lower sales and production volume. Declines in Europe were caused by lower prices as well as lower output stemming from plant engineering and maintenance activity while volume remained relatively stable. And in South America, the bottom line was impacted by lower sales volume of beer in Brazil. The majority of the drop in beer reflected the record sales volume achieved in the comparison period of 2014 as a result of the World Cup. Brazil’s broader economic weakness contributed to the rest of the decline. We continued to actively manage our capital structure in the second quarter. We refinanced our bank credit agreement, repaid $300 million of high coupon bonds and completed our $100 million accelerated share repurchase program. And due to the hard work of many teams and the status of reviews by the regulatory agencies, we anticipate that our proposed acquisition of Vitro’s food and beverage business in Mexico will close in the second half of this year. Turning now to an overview of our performance by region, beginning on slide four. Weaker results in Europe were significantly impacted by currency headwinds; currency devaluation in the region drove more than 90% of the revenue decline and 40% of the decrease in operating profit. Despite broad uncertainty in the Eurozone, our sales volumes were in line with relatively strong shipments realized in the prior year. Beer volumes even increased 2% as the benefits of our approach to long-term contracts in 2014 began to take hold. As we have previously discussed, our results in Southern Europe were pressured by competitive dynamics in wine that impacted, both price and volume. While cost inflation in Europe remained fairly benign, lower prices in the region led to a price cost gap of approximately $10 million similar to our experience in the first quarter of this year. European profits also were impacted by a higher than normal amount of furnace rebuild activity as well as production downtime related to ongoing asset optimization efforts. While these efforts can impact short-term profitability, they are of course designed to make changes that yield long-term benefits. For instance, we recently celebrated the installation of a gas oxy furnace system in Jarvakandi, Estonia. By using purified oxygen, we can melt glass using less energy. We are installing similar systems in other plants in an effort to reduce overall energy consumption and thereby also significantly reducing our emissions. A final element to note in Europe’s profitability relates to an energy rebate we received we received in the second quarter of 2014. We will receive another energy credit of approximately $8 million this year but not until the third quarter. Summing up the region, Europe’s volume was fairly stable but bottom-line results in constant currency were dampened by roughly equal parts of industry price pressure, production downtime and the timing of the energy credit. Moving on to more favorable results, in North America. Their segment profit was up slightly in constant currency from the prior year. Sales volume was up nearly 2%. A modest decline in mega beer was surpassed by gains across all other categories. Prices in the quarter were slightly lower, mostly due to the contractual pass-through of lower natural gas costs. By design, production volume in the quarter was lower than prior year. Recall that in the second quarter of 2014, we ran our assets hard in anticipation of strong summer sales that then did not materialize. This year, we did a better job balancing production with sales. In fact, we reported significantly improved warehouse and delivery costs, and a double-digit decrease in finished goods inventory. Turning to slide five, similar to last quarter, our results in South America were severely impacted by currency valuation. On a constant currency basis operating profit was lower due to a 10% decline in shipments. Low consumer confidence amid economic uncertainty in Brazil led to lower on-premise consumption where glass is the primary packaging option. Brazil accounted for nearly 90% of the region’s volume decline, almost all of which was beer. As I mentioned earlier, demand was at record levels in the comparable period of 2014 and in fact compared with 2013, Brazil volumes were down low single-digits, which more aptly reflects the underlying market conditions. Inflation in the region picked up considerably in the quarter. As we reported earlier, this was driven by substantially higher electricity costs and the currency impact on dollar denominated purchases of soda ash. The successful efforts of our commercial teams virtually offset all of the inflation. Asia Pacific results improved slightly from the prior year on a constant currency basis. Shipments were down 3% while the Australian wine market began to stabilize the overall beer market may still be a few quarters away from reaching a bottom. Also keep in mind that we now have lapped the unfavorable comparisons resulting from last year’s retrenchment activities in China. Improved results in Asia Pacific mostly reflect benefits from the prior year’s restructuring efforts to better align supply with demand in Australia. With that I will turn the call over to John to review our financial performance.

Thanks, Al. Let’s turn to slide six. Due to the very strong impact of foreign currency translation, we are again showing prior year results on a constant currency basis. We believe this provides a clearer picture of our underlying performance. In the second quarter of 2015, sales were $1.5 billion. This is 15% lower than prior year. You can see that $240 million or more than 90% of the decline was attributed to the stronger U.S. dollar. Price was flat at the enterprise level. Higher prices in South America were essentially offset by modestly lower prices in the other regions. Shipments globally were down about 1%. Excluding Brazil, volumes were flat year-on-year. As you can see on the right hand side of the slide, our segment operating profit was $187 million, down from $262 million in the prior year. As expected, the stronger dollar weighed heavily on segment operating profit. Beyond that, price and the margin impact on sales volume carried over from the top-line. Results were impacted by cost inflation, the effect of engineering activity on production, and prior year one-time items that we’ve already discussed. Moving to EPS on slide seven. Second quarter adjusted EPS was $0.60 which compared to $0.65 in the prior year quarter in constant currency. On the whole, the main components of our earnings moved in the direction and on the order of magnitude consistent with the guidance we presented at a sell side conference in early June. Segment operating profit accounted for a $0.19 headwind. The net of non-operational items added $0.14 to our EPS. Corporate costs were favorable and benefited from lower pension expense and higher machine part sales for engineering projects conducted by our licensees. We realized a $0.02 benefit from net interest expense in the quarter driven by the debt refinancing already mentioned. We had an effective tax rate of 17% in the quarter, lower than the prior year rate. That said, we expect that our full-year 2015 tax rate will be between 23% and 25%. The $100 million accelerated share repurchase program that we finished in May reduced our share count and contributed about $0.02 to EPS. For the full-year, we expect about a $0.05 favorable impact on EPS from share repurchases. Let me shift momentarily to GAAP EPS. In the second quarter, we reported $61 million of pretax charges that were not representative of ongoing operations. About half of that charge stemmed from bond redemption premiums and fees related to refinancing activities. Separately, we recognized the impact of modest restructuring activities at several sites around the world. And finally, there were initial one-time costs related to the proposed Vitro acquisition. In all, EPS was at the high end of our range as somewhat weaker than expected volumes in Brazil were offset by a tax rate that was marginally better than expected. Moving to slide eight, we continue to actively manage our capital structure. We renewed our bank credit agreement in the quarter and repaid $300 million in high coupon debt that was due in 2016. Both of these efforts enhanced our credit and liquidity profile. As noted earlier, the strong U.S. dollar negatively impacted our consolidated earnings. However, this trend favorably impacted the considerable amount of non-U.S. dollar denominated debt that we have in our capital structure. Like many other manufacturing companies, we have a large pension liability to manage. In recent years, we have taken actions to reduce that liability including buyouts and converting several major plans to defined contribution plans. Keep in mind that our underlying earnings performance is partially masked by pension accounting guidelines. If you back out the non-cash charge in pension related to the amortization of actuarial loss, for instance, you would see that the business is generating $0.50 per share higher earnings than one sees in a quick review of our financials. On the equity side, our buybacks this year amounted to 4 million shares. We expect to repurchase another 25 million shares by the end of 2015. Turning to the third quarter outlook on slide nine. Currency will continue to be a strong headwind. We reported adjusted EPS of $0.75 per share in the third quarter of last year. Using June 30th rates, prior-year results were more like $0.60, an impact of about 20%. Overall, we do not see material changes from first half of 2015 in the business environment. That said, let me provide some insight on our third-quarter outlook, by region, on a constant currency basis. In Europe, buying should be stable with the prior year and the year-on-year price declines experienced in the first half of 2015 will continue rather than abate, as we had expected. While most of our engineering projects were concentrated in the first half of 2015, we do expect some work to continue into the early part of the third quarter. Production and efficiency should improve over the course of the quarter. We estimate the combined effect of price and production downtime will negatively impact results by nearly $20 million compared to the prior year. However, this should be partially offset by the $8 million energy credit mentioned earlier. For North America, gains in craft beer, spirits, food, and nonalcoholic beverages should counterbalance the continued decline in mega beer. We expect continued performance of our manufacturing and supply chain operations which will compare favorably with prior year largely due to our efforts to better match production with sales. However, this will be partially offset by the costs associated with two more furnace rebuilds than the prior year quarter. Overall, we expect North American profit to be modestly higher than the prior year. In South America, we anticipate that price increases will mitigate cost inflation. We expect sales volumes will be down low single digits, reflecting macro uncertainty, primarily in Brazil. As a result, we see South America generating lower year-over-year operating profit. In Asia Pacific, we expect segment profit will improve modestly from prior year. In sluggish overall market conditions, our volume should benefit from the new beer contract in Australia. The region will also benefit from less production downtime. Non-operational items should be favorable compared to the prior year, lower pension and interest expense will help. Keep in mind that the $0.15 currency adjustment, already noted, includes the translation benefit from interest expense related to our non-U.S. dollar denominated debt. While we see no change in our annual tax rate guidance, the third quarter rate should be at the low-end of our full-year range, plus EPS will benefit by $0.01 or $0.02 from a lower share count. Taking into account all the puts and takes, we expect our adjusted EPS to be in line with the prior year in constant currency terms. Note that the U.S. dollar has strengthened compared to June 30 rates. If current rates hold, the currency pressures would reduce EPS by another $0.03 in the third quarter compared to this outlook. Let’s turn to our full-year guidance on slide 10. We are taking $0.10 off the upper end of our previous EPS guidance, reflecting economic weakness in Brazil and ongoing competitive pressures in Europe. That said, we still expect second half year-on-year comparisons to fare better than those of the first half. Sales volumes, other than South America, are expected to be modestly better year-over-year and production volumes should improve driven by higher sales and more normal levels of engineering and maintenance activity. We have not changed our target for cash flow for the year. Although the midpoint of our earnings guidance is modestly lower, other cash flow sources and uses are tracking with our expectation. Notwithstanding this year’s $80 million currency headwind on cash flow, we remain focused on generating $250 million in free cash flow in 2015. Of course, while we generate cash in local currency, our cash flow is reported in U.S. dollars. Since we make most of our cash in the fourth quarter, exchange rates in that quarter will have a significant impact on full-year results. Please note that this guidance excludes any impact of the proposed acquisition of Vitro’s food and beverage glass container business. At this point let me turn the call back over to Al.

Thanks, John. Now, turning to slide 11. As you know, in May, we announced an agreement with Vitro, the leading glass container producer in Mexico and Bolivia, to acquire their food and beverage glass container business. From a financial perspective, we expect the transaction to be immediately accretive to earnings and cash flow. In the third year after closing, we anticipate EPS accretion will reach approximately $0.50 per share as we deliver on the rising impact of highly achievable, low-cost synergies. By that time, we also expect the transaction will add at least $100 million in incremental free cash flow. The Mexican glass container segment is strong and has continued to demonstrate healthy demand trends. We presently expect to close the transaction in the second half of 2015, earlier than our original expectations. In early July, the waiting period under Hart-Scott-Rodino expired without any action taken by the Federal Trade Commission. The transaction is still subject to approval from the Mexican Federal Competition Commission and the National Foreign Investment Commission. And we are working with these agencies as appropriate to support their reviews and to come to their conclusions. Internally, teams from both companies are appropriately collaborating to achieve a successful integration. As we stated at the outset, the leadership of the Vitro business including the plants will largely remain intact. While we have identified specific ways in which we believe we can add value, we absolutely want to capitalize on Vitro’s proven track record of meeting customer needs and serving local markets. Andres Lopez is playing a critical role in the Vitro acquisition and he has been heavily involved in integrating the planning and will ensure that we meet critical milestones in this transaction. We are deep into preparation for the financing of the deal so that we can access the credit markets soon and timely enough to be ready for a closing this year. We believe the transaction represents a significant opportunity to create shareholder value, extend our global franchise in glass and cement and build upon our position as the world’s leading glass packaging company. It provides access to a strong and growing market in which we have virtually no presence. It also allows us to grow with our multinational customers as they tap into Mexico’s market. And seen together with our joint venture with Constellation, the Vitro business enhances our position to participate in the growing segments of the U.S. market served by Mexico. As I wrap up on slide 12, I want to highlight a couple of our priorities for the second half of 2015. The CEO succession process is progressing smoothly and Andres Lopez is primed to assume the CEO role by the end of this year. He has been actively shaping his future leadership team. In the quarter, he was able to hand over his Latin America and North American leadership responsibilities to Miguel Alvarez and Sergio Galindo, respectively. Tim Connors, formerly the General Manager of Australia and Asia Pacific CFO, succeeded Sergio as President of Asia Pacific. In addition, we hired Suley Muratoglu as our Chief Marketing Officer. He brings a wealth of rich packaging experience to the company. Andres and his team are developing the company’s short and long-term strategy which he will present to the board later this year and he is also actively engaging with our shareholders and the broader investment community with several events scheduled for the back half of the year. He intends to discuss the company’s new strategic and financial plan with investors in the first quarter of next year. We are continuing with the CFO selection process. We expect to announce a decision on the role before our next earnings call. Despite a backdrop of uncertain macros, we feel that the volume stability in North America, Europe and now Asia Pacific are positive signs. Although the evolution of volume in Brazil is difficult to predict, typically we have seen a V-shaped recovery in the past and this may well be the case again. Our engagement in Mexico is a very positive step forward. And with all the work we are doing to improve our operations and cost position, we are setting a firm foundation on which the new leadership of O-I can build. And now I will ask Jeremy, the operator, to open up the lines for your questions.

[Operator Instructions] Your first question comes from the line of Tyler Langton from JP Morgan.

I just had a quick question on I guess your guidance for the year. Assuming the $0.60 in the third quarter, I guess you need a pretty strong fourth quarter to hit the top end of the guidance. Could you just talk about the factors that maybe -- that could drive sort of earnings for the year to the top end of the range?

Yes, I would say the major difference from last year and I think you see that reflected in comments from other packaging companies as well, is that last year saw a significant volume drop-off in the second half of the year which we really do not expect this year which then led to inventory reductions and inventory curtailments towards the end of the year. And they were particularly concentrated in the fourth quarter. That’s not going to happen this year. And also in Europe, we really had underproduction in the first half of this year because of the construction projects and we need to make sure that we have a sufficient level of inventory as we go into next year. So, those two factors and it’s really all mainly production related, combined of course with some expectations of volume stability, which we have seen evolving over the last couple of months, is going to be a significant factor for the differentiation in the performance in the second half of the year. Perhaps John can add one or two comments as well on specifics.

Yes, I would say the expectation is we have seen this pricing pressure in Europe which is continuing as we would expect into the third quarter. As we get into the next year negotiation period in the fourth quarter, we would anticipate that being a stabilizing effect for the pricing environment in the fourth quarter. On top of that, we do have a handful of contracts coming on line that Al included in his prepared remarks, in a couple of different geographies across the country. Those will be in full swing by the fourth quarter. So those represent tailwinds as we go into the fourth quarter.

Our next question is from George Staphos from Merrill Lynch.

Thanks for the details. I wanted to get into with our question South American volumes in a two part question here. Shorter-term, Al, can you help us parse what you think the effect of the World Cup swing and what the effect of the macro is in that decline being driven by Brazil is? I kind of remember last year’s overall South American volumes as being up only about a couple of percent in aggregate. Correct me if I’m wrong on that comparison. And then the other part of the question is back in the late 1990s when you had a lot of similar factors at work, emerging markets declining, the dollar being strong, you saw some very interesting trade patterns in glass, one way glass, returnable glass and one way packaging. How do you see those playing out here in this potentially comparable cycle?

If I look at last year compared to the previous year, we saw a double-digit increase last year in volume in the second quarter. So that clearly was impacted by the World Cup. And also it was very close to double-digit in the first quarter of last year. So both of these factors of course give you some perspective as to what really the underlying economic impact was. Comparing to 2013, the volume reduction is really single-digits and mid-single digits I would say, and so I think that is more reflective of the economic impact. I believe that given the overall currency evolution in the region because this also applies to Colombia, this applies to Peru, this applies to Brazil of course, is going to be beneficial for economics in the manufacturing process for our customer base and the packaging base that they supply to the marketplace. So typically we would expect that a lower value of the currency will lead to a greater drive to economics and packaging which would favor returnable packaging, which I believe answers the question at least tangentially that you have with regard to the potential impact on the mix of one-way versus returnables.

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

On George’s Latin American questions, the other thing that we saw I guess about five or six years ago was a stretching out in the float down in Latin America when things were soft. And I wondered if you are seeing any evidence of that right now?

No, we are not seeing that at all. In fact, again, given the economies and having the ability to have pricing points in the marketplace is really the stronger driving factor at this point in time. And what we also saw last year and you will recall, I think it was also in the second quarter of last year, we had some float renewals in Colombia already that we were not planning to have this year. So, I think as far as the trends are concerned with regard to returnable containers, we are presently on track with what our expectations were and we expect that the economic conditions and the currency in particular will even help us and sustain that. Because ultimately the question of whether eventually a float gets replaced is a different question from okay, how can we access markets that we can no longer access perhaps with one-way containers economically because that is adding to the need for a float rather than just replacing the float.

Our next question comes from the line of Philip Ng with Jefferies & Company.

Glad to see the Vitro acquisition closing sooner than expected. But just curious to get your thoughts with the Mexican peso down about 15% since you announced the Vitro deal, how are you offsetting some of that because you reiterated the free cash flow targets you set forth initially? And I think based on what you are guiding for year one implies like 29% EBITDA margin. How sustainable is that profitability level?

If you look at the history of Vitro’s packaging business over the years and I think I commented on that when we made the announcement, it has despite variations in the currency, remained fairly stable and fairly strong. And again, I think Vitro came out a day ago or two days ago with their results. And even though of course the top line is impacted by the currency, the reported EBITDA was very strong and showed a very strong evolution or a very strong growth in reality. So, I believe the processes are in place and a significant portion of the Mexican business is also in the United States. And of course clearly some of the cost structures in Mexico are based on U.S. dollars, so there are pass-through provisions that would make sure that that is going to not burden the results and the profit generation capability in the future. I believe as we have said that what we are seeing at this point in time from published information, it’s very much on track and on track with what we assumed when we made the deal, when we announced the deal to you and we are very encouraged by what we’ve seen so far. And I would expect that the strength of the profitability profile is really driven by a variety of factors. First of all, it’s the distribution of the customer base which is very similar to Latin America where we also tended to have fairly high margins over a series of years because the customer base is a much more distributed customer base. And secondly, I believe also that the contracts that Vitro engaged in with regard to supply of Constellation, have added additional earnings generation on an existing cost base which really I believe give us a pretty good assurance that these margins are sustainable for quite a while.

I would add a couple of points here. First of all, when we gave our outlook for the expected potential accretion of the deal, we had kept some conservative assumptions to accommodate any chance of the FX movement, post closing adjustments, things like that. So at today’s rates, we believe we can still hit the numbers that we talked about before even with an elevated stronger dollar versus the peso. And specifically on that, I would add that up to 40% of the business in Vitro is actually outside the United States -- I’m sorry outside of Mexico, such as the United States, Caribbean, et cetera, that would be priced in U.S. dollars. So, there is a reduction in the exposure to the peso in that regard. We are also considering other tax planning strategies. And not to mention that there is a robust hedging market for the peso, much like the euro that we may consider in the future from time to time.

Our next question comes from the line of Chris Manuel from Wells Fargo Securities.

First, let me come back to -- you made some comments about inventories, but if we kind of continue at present corporate sort of down a percent or so volume levels, how are you feeling about where inventories sit today? You mentioned about building some inventories heading into 2016 but what would change? So kind of a couple of questions within there, I mean one, where are inventory levels today, are there any regions where you feel you might need to take an adjustment? And then two, what would change next year with volumes that would make you want to build some inventory ahead of that?

I think I had commented in my prepared remarks that in North America, we have seen a 10% reduction in inventory. So that’s indicative of what we have been doing so far this year. I believe also what we will see is this considerable draw of inventory still in the third quarter, which is the peak quarter in Europe. And of course with the lower output that we had in the first half of the year because of the construction projects and the start up of the plants and investments that we have made, that is going to lead to a need to build up inventory as we go into next year to be able to supply our customers in a fashion that allows us to be on time and to deal with the demand profile that we expect at this point in time to come next year.

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

Just shifting to North America for a minute, sales volume was up 2% in the quarter. Can you talk about the other categories where you saw some strength? And then as you move into 3Q, I think you said volumes are going to be stable, is that indicative of those being one-time sales or maybe there is something else going on there as we move into 3Q?

No, I think it is really trending in a similar fashion to what we have seen and it’s driven by nonalcoholic beverages, it is spirits that are offsetting some of the pressure that we see in mega beer and of course, also micro-brewers are still growing at a pretty decent clip. So I think it is a combination of those three factors. And we have been working on of course on getting position in those segments for quite a while over the last couple of years as we have seen the trends in mega beer and we believe we are positioned pretty well at this point in time to continue with this trend for the remainder of the year.

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

Would you mind talking about the non-operational items that you expect to offset lower cash flow from working capital and operations, and are there other such non-operational items that you might be able to realize in the event FX rates stay below where they were as of June 30th?

I think John can most probably give you some more details on the specifics. But I believe there are several categories. Last year, we had significant outlays for packaging that I recall; pension expenses are most probably going to have an impact. And John, do you want to comment on the third?

So, if we take a look at our cash flow overall, I mean if we did $330 million of cash flow last year there is -- as I mentioned in the prepared comments, there is about an $80 million FX component going on there. So, in last year’s turns, we were at about $250 million thereabouts which is close to what we think we are going to be doing this year our target. At the same time, we are looking at fairly stable earnings. So, the moving pieces within that is, working capital will be a benefit, it won’t be as much of a benefit as we had last year. But as Al mentioned, we expect we can have better performance in packaging costs as inventory levels were higher in North America last year which required more palettes and tear sheets and things like that. We don’t expect that type of spending. We expect restructuring costs to be down overall. We expect asbestos payments to be down as well as the pension that Al mentioned before. And of course as we have discussed in the past, the Italian VAT litigation was actually requiring cash outlays in the last couple of years; it now becomes a cash source this year, as we get some money back there. So overall, we feel comfortable that all those puts and takes, brings us to the $250 million in cash flow for the year.

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

As you transition to the corporate level from a leadership standpoint, I guess the question is how are you thinking about footprint adjustments ahead of that, if at all, for 2016 for some of the more challenged markets that you are operating in, such as Europe?

I think we are making quite a significant investment in footprint adjustments in Europe, and have been working at it for the last two or three years. And it really has been addressing misalignments of where we have manufacturing facilities, where we have capacity to where the market strengths have been. So that is going to continue. And I believe that at this point in time it’s very well balanced with what we are seeing in the overall volume evolution and demand profile. In North America, we constantly are looking at adjustments here and there. And I think as you saw in the note one items, we did some light restructuring in North America to make some adjustments for the volume changes that we’re seeing. But again, it’s really addressing more a change in the demand pattern than a decline in overall volume because I believe if you look over the last couple of years, our sales in North America have remained fairly stable. And then of course in Latin America, again, in the quarter, we made some adjustments to the capacity in Latin America because of the reduced demand. And there is no need to keep this capacity in the bands and you know our rule or our approach has been particularly in Brazil that we want to make sure that in Brazil we don’t have an overcapacity because of the high manufacturing costs that we typically have in that country. And so we have taken the steps there. So I believe it is an ongoing process, Ghansham. And I think that looking down the road we are in pretty good position at this point in time with regard to our balance of supply and demand or capacity and demand as we go into the next year.

Our next question comes from the line of Anthony Pettinari with Citigroup.

Regarding price pressure in Europe continuing rather than abating as maybe you had expected, I was wondering if you could give any color on kind of what the key surprises were relative to maybe three months ago. Is it on the demand side or maybe a change in behavior from your competitors, or I was wondering if you could just give any color there?

I think it really, from our perspective, has more to do with logic because as you could tell from our comments, volume in Europe despite last year being a pretty strong second quarter was fairly stable this year. We have seen some of our competitors, particularly those that are active in Southern Europe, showing some slight increases in volume between 2% and 3%, which really would indicate to me that demand is pretty solid which typically would not be an environment where you would see a lot of price competition. I believe it really had to do with the transaction that is pending at this point in time in Europe where the seller most probably wanted to optimize the profile of the company and that of course has led to an instability in the marketplace. Once that instability is there, it takes a while to dissipate, to eventually get out of the system. And we were possibly a bit too optimistic that the stronger demand profile we are gradually seeing evolving in Europe would counteract some of the price pressure. And at least it hasn’t happened yet. As John indicated in his comments, we expect that as we go into the negotiation for next year with our customers that that will have a more positive effect on pricing because it gives people an opportunity to reset as we go into those discussions.

Our next question is from the line of Chip Dillon with Vertical Research.

If you could talk a little bit about what’s going on specifically with the beer contract in Australia. And maybe just remind us of are you still seeing some improvement in the wine business after I know years of decline, you had mentioned I think on the last call that maybe that’s stabilizing or even improving.

Yes. The latest trends are basically confirming what we discussed already at the last conference call that wine exports are strengthening. And that is certainly driven by the currency situation to a very large extent, making it possible for our Australian customers to reach the pricing points that they need to be placed on the shelves in the overseas markets. So that trend is continuing. Also you will recall that last year, midyear we lost a significant wine contract. So, we are also now basically overtaking that impact that we saw in the first two quarters of this year, which leads to a strengthening of the comparables. And then as we have signaled already, since last year, we had an agreement for a significant beer contract to bump up volumes in the second half of this year, which is also most probably going to set us a little bit apart from the general trends that we still observe in the market as I said in my comments where the overall market in beer is still soft. But clearly in our portfolio, beer will look stronger year-over-year in the second half of the year.

Our next question comes from the line of Debbie Jones from Deutsche Bank. Debbie your line is open.

I actually have a follow-up on that Asia-Pac question. You had a lot of changes over the last few years. Could you just help us frame what the current business mix is for you in Asia-Pac now with the contract change coming out of China? And then kind of what the future is I guess for glass there on pack mix basis?

Well, I think John has some details with regard to the product mix but overall, clearly Australia and New Zealand always have had a very strong beer component to it but that is also true for China. So, I don’t really think we have seen a lot of mix change in the last two years. I think most of that change really happened when we saw the considerable decline in locally packaged wine containers shifting to bulk shipments where we saw that shift. But overall, I believe in the last year and a half or two years, the overall volume distribution in Asia Pacific has not really shifted too much. And John, you can perhaps give a bit more on the ratios.

Yes. Overall, I mean beer remains over 40% of the business in Asia Pacific, which has been where it has been over the last several years. Wine is closer to 25%. Again, fairly stable overall. So I just reiterate to Al’s point that we haven’t seen a major shift. Keep in mind, China was more 50% beer. And as that becomes a smaller footprint, you do shift a little bit away from beer to some of the other categories but if we’re just talking a couple of percentage points.

Our final question comes from the line of George Staphos.

Thanks for taking my follow-up question. Al, just more from a technology and manufacturing standpoint, two things, one, can you tell us how the rollout of the new technology is going? My guess would be that it will be a number of years, maybe five years down the pike before we start seeing a more material impact in terms of your fleet of furnaces, but if you could comment on that. And the related question, oxy fired furnace has been around for a long time. Is there a reason why we are starting to see a greater pick-up in their use maybe just related to the fact that you have rebuilds hitting now but if you can comment on those two things that would be great and good luck on the quarter.

I believe with regard to some of the insights that we are achieving in our research and development, we are already applying them into our existing infrastructure. And I mentioned the investment that we made in Jarvakandi; equally, we are making a significant investment in Bogota, [ph] which really is using a combination of technologies. And as you said, oxy-fired has been around for a long time but the way we are applying it is in a combination of factors that has not been really used that way in the glass industry or in the glass container industry. It is a combination of using waste heat much more efficiently to save energy, to generate additional components that are needed for the process or to be able to reduce waste heat also to reduce the energy input into the furnace. I think those are the factors that really have quite a significant impact. And I believe that will progress as we make investment, particularly in the case of Europe where in Europe the energy component of the manufacturing cost is twice as high as the energy component of manufacturing cost in the United States. So, it really make sense to do it in Europe. With regard to the broader and longer term technology aspects that we have talked about in the past, as I have said, we will not see a major impact until the end of this decade. So that’s four or five years out at this point in time. But I certainly would say that we will see a progression of events that we will, when it’s appropriate at that point in time, then talk about. But certainly it has focus, it has the attention of the organization and you have the opportunity to see our facilities. I think we are very well-equipped to really deliver on the promise of a new approach as we go forward.

Thank you everyone. And that concludes our earnings conference call. Please note that our third quarter 2015 conference call is currently scheduled for Wednesday, October 28, at 8 am Eastern time. We appreciate your interest in O-I. And remember, when faced with the choice of rigid packaging, make the smart choice, choose glass. It is safe, pure and sustainable. Thank you.

This concludes today’s teleconference. You may now disconnect.