O-I Glass, Inc. (OI) Q1 2017 Earnings Report, Transcript and Summary

Good day. My name is Jack and I will be your conference operator today. At this time, I would like to welcome everyone to O-I's First Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Now I would like to turn the call over to the presenter for today, David Johnson, Treasurer and VP of Investor Relations. You may begin your conference.

Thank you, Jack. Welcome, everyone, to O-I’s earnings conference call. Our discussion today will be led by Andres Lopez, our CEO; and Jan Bertsch, our CFO. Today, we will review our financial results for the first quarter of 2017, discuss key business developments and walk you through a few trends affecting our business. Following our prepared remarks, we’ll host a Q&A session. Presentation materials for this earnings call are available on the Company’s Web site at o-i.com. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the appendix to this presentation. Now, I’d like to turn the call over to Andres.

Thank you, Dave and good morning. Let's start with an overview of our results on Slide 3. I am very pleased to report that our business is performing as planned, growing our top line, expanding our customer relationships, reducing structural cost, operating effectively and efficiently and exceeding our guidance. Revenue was up 2% as volume growth more than offset a modest currency headwind and essentially glass pricing. Shipments were up nearly 3% year on year, led by Europe and Latin America. And we are starting to see some of our commercial efforts driving new business development. Higher segment profit partially viewed to the benefit of our strategic initiatives helped expand margins by 20 basis points compared with prior year and both corporate costs and interest expense were better year on year. As I think about the guidance we gave you on your last earnings call, the key point is that we delivered solid business performance plus we saw a better incremental help from taxes and FX. Taken together, adjusted EPS of $0.58 was up 21% compared with prior year. And this is the fifth consecutive quarter we have met our guidance by consistent performance since our investor day in early 2016. For the year, we are on track to hit all of our company financial targets, volume growth, margin, adjusted earnings, cash flow and deleveraging. No doubt it takes a strong dedicated team to deliver these achievements. So I would like to recognize all the members of the O-I team on their dedication and high commitment to driving shareholder value. Let's now dig deeper into our key strategic initiatives on Slide 4. I am very excited about what we are doing in the commercial space and how we are interacting with our customers. We continue to retain the key account management program we launched last year. For instance, in the quarter we began to deploy new customer relationship management tools that will help us in several specific ways. Enhance our effectiveness serving our current customer base, increase our [indiscernible] to grow with existing customers, and develop entirely new business. Our commercial program is elevating customer engagement and is helping us more deeply understand their needs. With this round, O-I will be in the forefront of customer service and improve the overall customer experience like never before. While we are in the earlier stages, we have seen some early gains, about 20%, of our volume growth in the first quarter was entirely new business development derived from these efforts. On our last earnings call, I announced that we are measuring our performance through a total system cost approach which fully incorporates end to end supply chain costs. On the manufacturing side, we are replicating best practices across the enterprise in an standardized, disciplined way. Our planned improvements teams are solving our more complex challenges at plans with large upside opportunities. As for global supply chain, we have been analyzing and improving our structural cost related to warehousing, logistics and procurement. In the first quarter, total system cost initiatives are at $8 million in segment operating profit, primarily in Europe and North America. Within [BSE] [ph], energy is a key cost component. We are focused on both procurement of energy and use of energy. On the efficiency side for instance, we are implementing proven energy saving projects as well as new innovative technologies as we rebuilt furnaces. In a recent furnace startup, the team established a new benchmark for energy efficiency as we exceeded our previous best in class performance. For 2017, we continue to expect a $30 million to $45 million benefit through operating profit. Separately, for the year we are on track to deliver the $50 million improvement in working capital, primarily in inventory. Our global supply chain team has been developing an integrated approach to demand and supply planning and leveraging best practices. We are making substantial progress already. In Europe, for example, we have taken down days of inventory a notch or two, which becomes a source of cash and reduces our warehousing cost which favorably impacts earnings. While we see early gains from these strategic investments, we are again building capabilities today to reach the next horizon of our transformation that will bring financial benefits in the coming years. For instance, we are investing in integrated business planning that will further transform our processes. By making substantial improvement in efficiencies and effectiveness across functions, across geographies, we anticipate continuing to grow earnings and free cash flow. I will now like to give you a brief review and outlook of our regions, beginning with Europe on Slide 5. The overall business environment in Europe has not substantially changed and Europeans continue to have a strong affinity for glass. Our European team delivered higher segment operating profit and margin expansion in the quarter compared with prior years. That said, our sales in Europe were down 2% year on year. The benefit from higher sales was essentially offset by the euro which was weaker compared with the first quarter of 2016. Price declined 1% year on year as expected due to the pass through of 2016 deflation on our long-term contracts. The positive impact from the annual contract season will come into effect in the second quarter. Shipments increased 4%, driven by gains in beer, wine and spirits. While this performance bolsters our confidence in volume growth in the region, we should not yet extrapolate this growth rate going forward. A single quarter does not make a trend and we have an extra shipping day which certainly helped in the year on year comparison. Overall, demand in Europe is solid, right in line with our expectations. Turning to price cost spread. Europe was negative in the quarter driven by the price dynamics I just mentioned. For the balance of this year, we expect changes in price will cover cost inflation. We have better visibility in to price and as we have largely concluded negotiating annual contracts in Europe, I can say that the environment overall remains constructive, leading to my confidence in an improving price cost dynamic in the region. After adding in benefits from our strategic initiatives, the region delivered higher margins year on year. Going forward, Europe will continue building upon these foundations to deliver higher margins due to modest volume gains, flattish price cost spread and cost savings from strategic initiatives. In total, we still expect solid improved financial performance from our European team in 2017. Turning to North America on Slide six. The overall industry and macro environment hasn’t changed much since the last earnings call. Revenue was essentially on par with prior years. Price which over time moves with cost inflation was up 1%. Sales volume declined 2% entirely due to mix of sales. Our sales in bulk are up while our sales of our containers, packing cartons are down. These manifest as a decline in the overall volume of sales even if shipments in tons out the door are flat year on year. While mainstream products like megabeer continue to be under pressure, premium products are performing well across all categories. We continue to be well positioned to benefit from consumer preference for imported beer. In fact, the JV with CBI continues to progress very well. The third furnace will be coming on line later this year, thanks to solid execution of our build out plan. Separately, the regions bottom line is benefitting from our focus on total system cost. For example, our supply chain team is optimizing our warehousing capacity across the region. This effort will use space much more efficiently, allowing us to reduce overall warehouse space and cost. In the quarter, North America delivered a significant step up in operating profit and margins. For the full year, we expect more of the same, although results in the second quarter might be a bit muted due to planned investments in the JV as well as in the core business. By the third quarter North America should really be hitting on all cylinders and for the full year margins should be up more than 100 basis points. Let's turn to Latin America on Slide 7. Regarding the macros and industry outlook in the region, we are incrementally more bullish to it than we were three months ago. There was a fog over Mexico earlier this year. While it is still cloudy there, as we are not certain about the U.S. Mexican relations, the fog has lifted enough that we can see that the domestic economy is doing quite well and there is a lot of activity in our industry. In Brazil, the government released statistics last week that suggest early signs of economic recovery in January and February. And within our industry, we see good developments for glass, particularly in beer. All the key brewers in Brazil are actively expanding their use of returnable glass in supermarkets and premium beer which is three-fourths in glass, continues to grow quarter after quarter for three years in a row. Turning to our results in the quarter. Latin America turned in a solid performance. Revenues increased 9% driven by across the board improvement in volume, price and currency. Our shipments in Mexico and the Andean region increased nicely. Volumes in Brazil were down year on year as expected as the sharp decline last year really began in the second quarter. On our last earnings call we highlighted that there will be a $5 million to $10 million price cost headwind for the quarter, primarily in Mexico. And indeed this was a key driver for the year on year decline in Latin America's operating profit. In fact, almost half of the inflationary pressures we face for the enterprise, manifested in Latin America. Through the rest of the year, price cost spread should be more or less neutral as negotiated price changes come into effect. And we will continue to focus on cost containment efforts which have been very successful today. With respect to the full year outlook, we acknowledge that there is uncertainty. But this isn't really all that new to the region. We expect sales volume growth across the region for the full year led by Mexico and Colombia. Importantly, we envision that sales volume in Brazil will begin to recover in the second quarter. In fact, for the back half of 2017, volumes in Brazil should come close to levels in 2015. For the region as a whole, in 2017 we see higher profit compared with the prior year. Turning to the Slide 8. Market trends in Asia Pacific remain in good shape and the growth is not just in the emerging markets but also in wine and beer in Australia and New Zealand. Net sales were up 9% year on year, driven by strong gains in volume. About half of the 4% increase in sales volume is due to higher tons sold and about half is due to the geographic mix of sales. Stronger local currencies added about 4% to sales while price increased about 1%, more or less in line with inflation. For the quarter, higher operating leverage plus cost containment drove the 90 basis points margin expansion and sets the tone for the year on year improvement expected for the rest of 2017. With that update, let me turn the call over to Jan to review our financial performance as well as our outlook for the second quarter.

Thank you, Andres. Let's turn to Slide 9 and focus on segment operating profit compared with the prior year. The sum of the parts that Andres discussed led to segment operating profit of $218 million in the quarter. I am happy to say that at the enterprise level currency was quite manageable. The year on year devaluation of the euro was partially offset by the strength of the Australian dollar. The Mexican peso was also a substantial headwind but other currencies in Latin America largely offset that. As Andreas already mentioned, price was a tailwind in the quarter. The year over year dollar impact of sales volume gains was approximately $8 million with more than half of that coming from Europe. Our ongoing end to end supply chain strategic initiatives are ramping up and we are seeing good gains from our cost containment effort. While these were more than offset, like cost inflation in the second quarter that Andres mentioned, we expect improvement in operating cost in subsequent quarters. We continue to focus on margin improvement. We reported a 20 basis point expansion in the first quarter with gains in three of four regions. As Latin America turns the corner in the second quarter and beyond, we feel very comfortable that we will achieve our full year margin expansion target of more than 40 basis points. Turning to Slide 10. Let me connect a few dots that we have already touched upon. While currencies continue to be ever changing, the year on year impact on EPS was negligible. The euro was worse, the Australian dollar has strengthened and within Latin America, the movements essentially offset one another year on year. Segment operating profit, which I just reviewed, was the key driver for the improved results, adding about $0.04 to earnings. Corporate and interest expense added another $0.03. Interest expense benefitted from deleveraging and the favorable impact of our refinancing actions last year. These items together contributed $0.07 to earnings compared with prior year. Separately, the tax rate was low in the quarter, especially compared with the higher than average rate reported in the prior year's first quarter. In fact, the tax rate in the first quarter of 2017 was about 150 basis points lower than our target range for the year, mainly due to the acceleration of certain charge, like the write off of premiums associated with our debt tender in the quarter. For the full year, the tax rate is still expected to be in the range of 24% to 25%. Summing it all up, first quarter adjusted EPS was $0.58, a robust increase of 21% versus the prior year quarter. As I look at our financial results, it should be clear that our overall business performed well at the top end of our guidance, even after backing out FX and tax. Good progress in these. Turning to Slide 11. I am pleased to say that every one of the company level metrics we presented at investor day in early 2016 is on track to deliver. Margins, earnings, cash flow and deleveraging. We debated the merits of increasing our earnings guidance in light of our outperformance in the first quarter and our solid business outlook for the year. However, it is still early in the year and we will continue to evaluate our guidance. Now I would like to drill down on key aspects of our guidance for the second quarter on Slide 12. We see many upsides as well as a few challenges year-over-year. Currency is expected to be only a $0.01 headwind. We see solid execution in Europe with tangible benefits from our strategic initiatives continuing. Sales volumes are projected to be flat do in part to giving back the extra shipping day that benefitted first quarter sales. Price cost spread for Europe is likely to be about flat for the rest of the year, a very good outcome since this has weighed on earnings for the last several years. On balance, we expect higher earnings and margin expansion for Europe in the second quarter. And of course, we continue to focus on margin expansion for the longer term. North America is expected to be on par with prior year in terms of revenue and operating profit. Equity earnings will be higher of course, reflecting the contribution from the JV with Constellation. Planned investments in the region, for instance, to expand flexibility in several plants, will reduce production volume in the second quarter. As such, we anticipate North America returning to year-on-year gains in operating profit and margin in the back half of the year. In Latin America, we are projecting improved performance. We expect the combination of further price increases and cost saving effort to combat ongoing inflationary pressures. Strong sales in Mexico and Colombia are expected to continue. And in Brazil, we expect sales volume to turn positive, particularly in beer, compared to the weaker second quarter shipments in 2016. For the region, top line growth, cost containment and price recovery are expected to translate into higher operating profit and stronger margins in the second quarter. And in Asia Pacific, we expect lower shipments offset by improved operation. For the company, the business is performing well. Segment profit should be up high single digits and margin expansion is expected to be greater than in the first quarter. While corporate costs should be roughly in line with prior year, interest expense maybe slightly better. At the end of the first quarter, we tendered our high coupon 2018 bonds and added to our low coupon euro notes due in 2024. The interest savings from this set of transactions will be partially offset by rising, floating rates in the U.S. Our tax rate is expected to be about 27% in the second quarter. This is substantially higher than the first quarter rates and the rate reported in the second quarter prior year. In all, we are forecasting adjusted earnings per share for the second quarter to be in the range of $0.63 to $0.68. This reflects substantially better ongoing operational performance, as well as the impact of a higher tax rate in the second quarter. And with the financial review complete, I would now like to turn the call back to Andrea.

Thanks, Jan. Turning to Slide 13. O-I is in the midst of a comprehensive transformation to drive higher value for shareholders, customers and employees. We know what our ambitions are and we are making consistent progress towards it. A glass container company that is the preferred supplier, the most cost effective for user, and a company that successfully expands in attractive segments and margins. Our mindset has changed substantially and continues to evolve. We are one team highly committed and aligned to improve performance. One enterprise making decisions best for the while and executing on one plan across the enterprise, leveraging scale and with very clear shared deliverables. I mentioned on the last earnings call that we have moved from a stability phase to the agility phase of our transformation. Again, we expect a noticeable difference in our behaviors and actions to effect the plan to deliver results. I want to take a moment to highlight an area that is foundational to ensuring focus and effective execution. We have a single set of management incentive targets across the company, so as to ensure alignment and deliver results. Today, we all contribute to enterprise EBIT irrespective of where a certain geography will benefit. And this changes the mindset of our people as we work together better to solve the challenges facing us. We are focused on improving customer experience and giving priority to mutually beneficial long-term partnerships. We are addressing a structural cost across the end to end supply chain. We are simplifying the organization across the world and elevating productivity in everything we do. We are making solid progress on becoming a flexible and nimble company, able to more effectively and more quickly adapt to changing conditions. In the end, we are results driven to add value for our shareholders, customers and employees. And now we will open the lines for your questions.

[Operator Instructions] Your first question comes from Mark Wilde with BMO Capital Markets. Your line is open.

I wonder, Andres or Jan, if you can help us a little bit with the North American margin improvement. That 180 basis point. Is it possible to kind of parse out how much of that came from the inclusion of the JV earnings versus the improvement in the legacy ops and the cost improvement.

Sure, Mark. It's Jan. A substantial percent of the 180 basis points came from the JV. I would say on a year over year basis we are probably looking at a few million dollars in the quarter. The balance of that of course came from what we just had referenced in the script with the performance, especially the total systems cost front, where Andres mentioned that of the $8 million that primarily came from Europe and North America.

Your next question comes from the line of Anthony Pettinari with Citi. Your line is open.

Andres, I think you indicated that in Brazil, you expected the second half, maybe you did comparables in the second half of 2015. So I am just wondering if you could remind us what level of volume growth on a percentage basis that would imply and what gives you confidence in that kind of recovery in the second half given the volatility that we have seen in Brazil in the last few years.

Okay. So when I look at Brazil, we are looking at a market in which we serve beer, wine, food, spirits and NAB. So we normally hear quite significantly about beer but we don’t hear about the other categories. With that said, we are expecting growth which is mid to high single digits for the country with all categories growing through the year. We had obviously had a slow start and unfavorable comparison for the first quarter but we are expecting that to improve starting second quarter and into the other quarters. Now, a general information for you is, it's very important to have in mind that beer for us in Brazil is about 35% of the total sales volume for the country. So the other categories have a significant influence in this business. Now something we are seeing in this market is that our customers and in particularly when we talk here, the three largest players in the markets are putting significant emphasis on returnable glass containers. And they have made public the information about their emphasis on putting returnable container in off-premise channels. And the largest player in the country as an example is now up to 23% of the on-premise channel in returnable glass. And this is coming from zero. So it is a significant change in the Brazilian market moving towards returnable containers. And then the other thing that we are seeing is the emphasis on premium, which has been taking place in the last three years and in those three years, this being the third one, one way glass has been fastest growing package in the market in total, in all substrates. So we are very comfortable that Brazil, as the economy recovers, will offer a fairly positive scenario for glass and for O-I. One single date point is, coke is back in one way glass in Brazil. We have that same product in Mexico and is quite successful. So we are looking forward to the evolution of this product in the market.

Your next question comes from the line of Scott Gaffner with Barclays. Your line is open.

Jan, you mentioned that you debated the merits of raising the guidance and Andres said, the volume forecast for the full year is now still just 1% after 3% plus volume growth in the first quarter. Can you talk about where the reluctance is on to get excited about the volumes? Whether that’s channel fill for the new business or is it extra shipping day or something in particular that keeps you muted on the volume forecast side.

Well, thanks for the question. We had a strong Q1, as you say, and we are seeing at this point in time there are signals of improving demand in some of the markets we serve. We are also seeing our initiatives progressing quite well and ramping up. We are expecting them to gain momentum as we go into the year. However, there are some external factors that even though they are showing some signs of improvement, it is still very early for us to conclude that those improvements are going to stay. So as you see, for example, we had some favorable movement of the FX late in Q1 and then as we got into early Q2, they just reversed. And then very lately in the last couple of days, another change in the other direction. So it's still to be confirmed. So we preferred to wait, look at this closely. And as we did last year, if we see enough evidence of changing conditions, we are going to move forward and review our guidance.

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch. Your line is open.

Thanks for all the details. I guess my question is around Europe, Andres and Jan. can you talk about the changing environment. What's causing it in terms of price cost, moving from a negative to being a neutral. And given that neutral is better than negative, are there any conditions, anything that you can look towards in the next couple of years that might make for, in fact some margin recovery from that positive price cost? And related to that, how does the volume and macro situation support or not support your comments here? Thank you.

Thank you, George. When we look at price cost, the first effect that we see in the first quarter is coming from the long-term contracts and the pass-through or [PAF] [ph] provisions that those contracts have. And because of that, we are passing through deflation, which is what we had last year. Now we begin through the negotiation season in the first quarter and we expect those new prices to kick in starting second quarter. So the unfavorable part of the spread for the region is really behind us. It was in the first quarter and is going to improve going forward, going into the second quarter and the other quarters in the year. With respect to the margins, as we said back in I Day, we work to have a very strong focus and continued focus on margin improvement. And we have been doing that. As you see, we had a good margin improvement year on year in 2016 for the company as well as in Europe. We are at this point in time comfortable that we are going to be able to have a 40 basis points margin improvement for the company or more in this year. Europe being a good contributor of that. So our focus on increasing margins in this region would continue. We talked before about the closing of Schiedam, which is part of that effort. Our initiatives are both driving revenue, top line and cost, translating all of them to right on line in Europe or all underway. So we are very confident that we are going to continue seeing margin improvement over time this year and the following years. When it comes to volume, we saw a positive environment in beer, in wine, and spirits in this quarter. Overall, we are seeing the region stable in its demand. We see that the premium products are gaining traction in Europe. Which is a territory for glass and we are also seeing the emergence of craft beer gaining popularity and traction in the region. So we are tracking that closely. But overall, we are very pleased with the Q1 performance and we are looking forward to the evolution of this quarter to see what are signs of changes in dynamics in the regions we see.

Your next question comes from the line of Ghansham Panjabi with R.W. Baird. Your line is open.

Just following up on George's European question, Andres, and your comments. Just in terms of the comments in your Slide deck about exports in the regions from Europe improving. Can you just give us some more context on that? Is that just a function of your customer mix and do you have a sense as to which specific markets perhaps those exports are actually improving towards? Thanks.

Yes. This is primarily related to wine. So wine exports have been quite positive. Obviously that drives glass containers consumption. So that’s what the comment referenced.

Your next question comes from the line of Adam Joseph with KeyBanc. Your line is open.

Jan, just a two part question. On the guidance side, I think you have about a $0.07 FX cushion relative to your previous full year guidance on account of FX. So can you just talk about why, all else equal, why you wouldn’t have boosted your guidance appreciating that it's still early in the year. And just the other part is the, lower management incentive accruals in the quarter of $4 million, what was that related to and was that embedded in your previous guidance. Thank you.

Yes. Thank you, Adam. First question related to FX. I think you have it pretty right there. $0.07 FX, $0.02 was from the first quarter. Probably about a nickel going forward based on our calculation. I think Adam really it's nothing more than the fact that we think it's early in the year and this currency environment has been highly volatile and so we want to be cautious here not to pull the trigger too early. We will make an assessment I think later in the second quarter and will come back and talk to you about guidance again. With the management incentive accrual, yes, that was in the guidance on the first quarter.

Your next question comes from the line of Philip Ng with Jefferies. Your line is open.

Volumes were very strong in Europe in the quarter. You cautioned not to extrapolate that into the full year and that there was an impact of a shipping day. But it seems that trends are coming in stronger than expected. What should we be extrapolating for the year? What's the reasonable expectation now at this level if you kind of factor out all the moving parts?

So I would say that at this point, with the information we have, it will be fair to consider up to a 1% growth for the year for Europe.

Your next question comes from the line of Chip Dillon with Vertical. Your line is open.

One thing I noticed on the slides, if you can just a little bit about the volume. On the press release it looks like the volume change or volume mix was plus 1.7 and you mentioned three. So I guess if you could just illuminate that. Does that mean mix was negative? Why is your difference in the Slide is just 3% and the dollar amount of volume in fact being 1.7. And then secondly, could you talk maybe more broadly about where you see the whole company's volumes year-over-year in '17 versus '16. Thanks.

So let me start with the volume question first. So overall we had a good quarter. We just talk about Europe. We are seeing growing focus in this region in the premium market and we have seen craft beer emerging. Mainstream beer, wine and spirit, they continue to perform and they are driving most of the performance that we saw at this point in Q1. When we look at Latin America, we are seeing a very strong demand out of Mexico and this is driven by beer, by NABs and by spirits. In the case of NABs, they are driving returnable glass containers consumption which is good for us. In the case of the spirits, these tend to be a premium segment, so it also drives glass primarily. When we look at the Andean countries, they are performing well. Beer is quite strong in those countries as well as NAB. And again, in the case of NABs, is returnable glass containers. Then we are expecting that premium beer is going to be an opportunity going into the future for the Andean countries because this segment is underdeveloped in the countries. Just to make a comparison, the size of the growth rate of this -- the share of this category in Brazil might be ten times what it is in the Andean countries. So there is a significant upside as those markets update more in line with the markets around them. When we look at Brazil, I just made comments before. We are seeing a significant emphasis and returnable glass by the largest players in beer. We are seeing good growth in all the categories we serve. Remember beer is one but we also serve wine, food, spirits and NABs in these countries. When we look at North America, the same dynamics we saw in 2016 continue. So mainstream beer continues to decline. Craft beer growth, a slow down last year, early in the year, very early in the year. That continues the same. So the beer category is really driven by imported beer and we are very well positioned to supply that category. Now there is another dynamic taking place in North America which is premium spirits and wine are taking share away from beer. Now we are also very well positioned to serve those segments. And when we look at APAC, Australia wine is up high single digits and this is driven primarily by exports to China. Australia beer is flat, which is an improvement versus two years ago. 2015 is what's really declining, the kind of plateau in '16 continues flat at this point in time. New Zealand wine is up high single digits and that’s driven by the exports to U.K. and U.S. And then New Zealand beer is up mid single digits. Now Indonesia, which we very seldom mention, is a very healthy growing market and is being driven by beer and food, as well as Malaysia, which is also growing quite well and is driven by beer, food and NABs. So that’s kind of the overview of our volume situation.

So Chip if I just summarize. I think the difference is mix, it's really North America like Andres mentioned in the script. Where the bulk shipments are up but the cartons are down. So sales volumes down about 2% but in the end the shipments in North America are quite flat.

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open.

I just had question on Latin America. It looks like the pricing was a little bit below. Was that kind of a deflationary issue, or FX, or what happened there? And then how that does translate to the margin performance and your outlook for the year. Thanks.

So when we look at Latin America, the Q1 is really the negotiation season also for prices. So we are not seeing prices flowing through the Q1 numbers in Latin America. Starting in Q2, we are going to see those price increases taking place and with that and the spread for the region is going to move into flat territory. And so for all purposes, the largest part of the unfavorable spread for Latin America is behind us is what took place in Q1.

Yes. This is Jan. And I would just add a little bit on the margin front. We anticipated and talked about the expectation that the margins would be down towards Latin America in 2017. On the other side, Andres has mentioned previously that European margins would continue to expand and in fact I think they will end up outpacing the company average for the full year. North America should be about 100 basis points improvement year-over-year and Asia Pacific significantly higher, based on their 2016 performance. So all in all, a good year on the margin front and we should exceed our 40 basis point target for the full year.

Your next question comes from the line of Brian Maguire with Goldman Sachs. Your line is open.

Just a question on Mexico. You have obviously been making a lot of capital investments in new glass capacity there. You got a competitor now building a glass bottle facility in Mexico as well. Just wondered if you are seeing or would you worry about any impact on pricing, probably down the road question but as some of these contracts get reset, demand has been strong today. But do you have any concerns about pricing down the road in the country or any worry about over capacity in the region. Thanks.

Thank you, Brian. The information we have is imported beer which is really what is relayed at primarily to this capacity you are talking about. It's really the segment driving the beer market in the U.S. It's presenting a very healthy growth and in our case, the capacity that we have in our JV is under a long-term contract and the capacity is fully solved. As we mentioned before we are at this point in time, building a third furnace, which is going to go into operation at the end of the year. So we are very comfortable that this demand will be there. Our pricing is secure for this contract. We don’t have any concern with regards to volume coming out of this JV. So for our purposes we are very pleased with the performance of this segment in Mexico and we see a very positive outlook for that.

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

Just a couple of follow-ons on volume. One, in Asia Pacific, you guys had picked up a new beer contract I thought last year and about the third quarter, but you are pointing to kind of weaker volumes, sounds like in the second quarter. So I wonder if you can just help us reconcile that.

Yes. So we have those contracts are in place at this point in time. We don’t see any changes in the Australian market. The volumes are being primarily impacted by China decreasing. So the volume decrease you see is really related to China, not to the APAC demand.

Your next question comes from the line of Scott Gaffner with Barclays. Your line is open.

Just had a follow-up on working capital and really the two impacts. One, the impact of raw material inflation and the other really around better volumes and new business wins. I mean do you think with those two items that you can still generate $50 million of positive working capital from inventory in 2017.

Yes. Hi, Scott, Jan. Yes, we do. I mean the most impact that we are going to see on working capital is this year is as expected in our improvement in our inventory. Clearly the raw material is a headwind but on a net-net basis, I think we are going to improve working capital by about $50 million for the year.

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch. Your line is open.

Thanks for taking my follow on. Andres, as we come back to Europe in terms of our questions, can you talk about what you think supply demand looks like in the region? And do you think as contracts come up for renewal and volumes hopefully improve, does the opportunity to build into your next adjust there is some improvement in margin beyond cost, or at this juncture do you think just keeping flat with inflation is the best we should expect. Thanks and good luck in the quarter.

Thank you, George. So we see a situation in supply and demand in Europe the same as we have seen that one in 2016. There is a little bit of over capacity. As you know, we are moving forward to shut down one factory in Netherlands. That is going to help that situation. And in our case, the case of why we are thoroughly balanced we do that. So we don’t have an imbalance in our system. We see a more constructive pricing environment in the region. As we see those contracts coming up, we are going to know more about those dynamics that lately we see stable conditions. That’s why we can see at this point.

Your next question comes from the line of Chip Dillon with Vertical. Your line is open.

I just had a quick follow up on two things that you could help us with. One is, are there more debt new financing opportunities. I know you have done a pretty solid job in the last year. I don’t know if there is any particular obvious callable bond say in the next year or two that you are eyeing right now. And then secondly, just on the asbestos front. I know you are calling it for to be down 10 million to 15 million this year and yet it was up a million in the first quarter. You might have addressed that but I just didn’t know if you still expected that to, the payout to be 10 million to 15 million and if you are still comfortable with the 600 million kind of present value number you put out at the end of last year.

Yes. Hi, Chip, it's Jan. On the debt financing piece, your know your next large slug of debt really becomes due in 2020. So there is probably not as much as we can do at this moment. However, just in general, on de-risking of our balance sheet, this has become a very important part of what we are looking at on a day by day basis here. So not only you know the recent bonds that we called, the refinancing we did last year which didn’t do a lot for interest rate improvement but actually slopped floating into fix at a very attractive interest rate and then helped with our distribution of debt on a currency basis. We continue to look for opportunities all the time. We are focused very heavily on continuing to de-risk our pension funds. So we might see a little bit more activity on that front this year. Like we have done in the past, structures that are good for the company, good for our employees, we are continuing to look at that. So a lot of focus on the de-risking front. Related to asbestos, we feel comfortable in the $10 million in to $15 million reduction that we had planned for in the year as well as our remaining liabilities that we have on our books. We recently in the fourth quarter did a very exhaustive analysis of that, like we will continue to do at the end of this year as well or before if there is any reason to do that.

Your next question comes from the line of Adam Josephson of KeyBanc. Your line is open.

Jan, just a quick follow up for you. How much are you investing in the Constellation JV this year versus last and what do you expect your dividend to minorities to be this year. Thank you.

Last year, I believe we contributed near $55 million to the JV. This year we are focused on about $40 million. And last year we received $8 million earnings and this year about $16 million earnings. Last year of course was more heavily weighted to the later part of 2016.

The final question comes from George Staphos with Bank of America Merrill Lynch. Your line is open.

One last one. Andres, can you talk a little bit about the supply chain cost initiatives that you are finding fruit with in North America and kind of key buckets and sustainability over the rest of the year. Thank you again and good luck in the quarter.

Thank you, George. So we continue to ramp up our initiatives, as we talked last year we work to implement global supply chain. We did it. It is now operating and is helping us across the company. So in North America specifically there is a strong focus on warehouse and delivery, improvement we are seeing some positive evolution in that front but we are also improving how the demand planning and supply planning in the company across the enterprise. So I am very pleased with the progress in supply chain. Not only in North America but in Europe and across the company. And I think this is an area where we are expecting a good upside this year, obviously as we continue to ramp up but also going into the following years.

So, thank you everyone. That concludes our earnings conference call. Please note that our second quarter conference call is currently scheduled for August 1. As you know we appreciate your interest in O-I and remember to chose glass. It's safe, it's sustainable and it's well loved by choosing consumers. Thank you.

This concludes today's conference call. All participants may now disconnect.