O-I Glass, Inc. (OI) Q2 2017 Earnings Report, Transcript and Summary

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 Second 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] Thank you. I would now like to turn the call over to Mr. David Johnson, Treasurer and Vice President of Investor Relations. Sir, please go ahead.

Thank you, Angel. Welcome, everyone, to O-I’s earnings conference call. Our discussion today will be led by Andres Lopez, our CEO; and Jan Bertsch, our Chief Financial Officer. Today, we will review our financial results for the second 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 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’d like to turn the call over to Andres.

Thank you, Dave and good morning. In short, we are executing well. We are doing what we set out to: enhancing the customer experience, we're using the structural cost through a Total System Cost approach, operating effectively on efficiency, investing in the next phases of capabilities to drive top and bottom line growth and meeting or beating earnings guidance for six consecutive quarters. In the second quarter, our net sales were down slightly compared with prior year. Price was up about 1%, and sales volume and mix were down about 1.5%, largely influenced by the timing of the Easter holiday as we expected. Year-to-date, shipments were up nearly 1%, driven in large part by our key account teams, which are supported by the entire organization and are driving a customer-centric culture at O-I. As expected, segment operating profit was up 8% in the quarter. Total System Cost initiatives, higher production volumes and higher equity earnings were key contributors. In turn, margins expanded 120 basis points year-on-year. Adding a significant contribution from non-operational items, we've delivered adjusted earnings of $0.75 in the quarter, which is up 15% compared with prior year. And even when excluding the favorable tax rate on which Jan will provide more color, we hit the high end of our guidance, driven by a strong contribution from our business operations. Our year-to-date results coupled with a favorable outlook for the rest of the year led us to increase our earnings guidance for the full year. And here, please let me pause to recognize the vast number of cross-functional O-I teams, squarely focused on meeting and beating their commitments that ultimately generate shareholder value. Let's now dig deeper into our key strategic initiatives on the next two slides. I continue to be excited about the work we're doing in the commercial space. New business development continues to aid our sales growth. Starting with key account management, cross-functional teams across the organization are fully aligned to support our customers, to interact with customers around the world like never before across all segments and tiers of the market. We did a deep cultural and mindset change that will serve our customers and O-I well. Before drilling down on Total System Cost on the next slide, let me mention that with respect to working capital, we continue to make progress towards our targeted year end reduction in inventory. On to Slide 5. Recall that Total System Cost or TSC fully incorporates end-to-end supply chain costs. While we have functional expertise in the various areas that integrate end-to-end supply chain, we need to focus on the interdependencies as we reduce cost, so we avoid any unintended consequences. For instance, again in managing energy might have implications for downstream production efficiencies. So we need a light, nimble organizational structure focused on an integrated view of Total System Cost, that also as specializes in ensuring ideal and effective replication across the enterprise. In this way, we can become the most cost-effective producer of glass containers across the globe. Latin America has been ahead of the curve in this approach, since it serve as the pilot location for the methodology, processes and practices. The team quickly adopted the approach with dedicated resources focused on TSC. Managing costs across the factory, across the region and ultimately, across the corporation has become part of the fabric of the culture. With solid execution, Latin America is showing us the way to favorably impact the bottom line through a TSC approach. Europe and North America as well have fairly well-developed structures, but they are not quite as mature yet. We see significant gains, for instances in areas, where replicating best practices has been driven by the new global supply chain team, particularly in logistics. In this regions, the TSC mentality is taking hold. With respect to TSC in Asia Pacific, they are in the earlier stages. Resources at the plant-floor level are focused on the program, ready to leverage global earnings. So what are we focusing on? Let me give you a few examples. In China, the local team converted the heating process of the layers from high-cost electrical energy to gas burners with a minimum investment. In Europe, the engineering team is reducing the capital requirements in furnace rebuild by leveraging new agreements with a strategic equipment provider. And in the Andean region, our supply chain team is piloting new specifications for pallets to reduce system costs. So you can see that momentum is certainly building, especially as we replicate these and other learnings and best practices across the globe. In the second quarter, total systems costs initiative added an incremental $10 million in segment operating profit, bringing the year-to-date to nearly $20 million, well on our way to achieve the $35 million to $45 million targeted benefit to operating profit for the full year. I will now like to give you a brief review and outlook of our regions. Beginning with Europe on Slide 6. The overall business environment in Europe has not substantially changed, with industry volumes growing well and a constructive pricing environment. For O-I specifically, sales in the quarter were down 2%. Currency was still a headwind compared with prior year. Price declined in line with cost inflation as expected, and shipments were on par with prior year, a good result in light of the Easter holiday in the quarter as well as the unusually strong sales volume in the first quarter. Overall, demand in Europe is solid, ending a bit better than the 1% growth rate we targeted for the full year. After adding in benefits from Total System Cost that I just mentioned, plus higher production volumes, the region continues to deliver higher profits and solid margin expansion. And we expect more of the same trends through the back half of the year, which when coupled with the benefits of the plant closure in the Netherlands should drive a strong earnings growth and margin expansion for the full year. Let's move to North America on Slide 7, where industry dynamics remain challenging yet quite manageable. The ongoing low single-digit decline in mainstream beer continues to be more or less offset by growth in beer imports and non-beer segments. And turning to O-I as specifically, despite a 5% sales decline, North America reported higher margins on a stable operating profit. That is, the impact from the sales decline compared with prior year is not as severe as one may initially expect. Temporary timing headwinds include a fewer number of shipping days and our customer managing their returnable flows in Canada. These two items comprise about two-thirds of the sales volume decline. The decline also reflects the conversion of carton sales to bulk sales that we have discussed for over a year. This has practically no impact on the bottom line as we are saving the cost of packing bottles into cartons. It is important to point out that we are combating the ongoing decline in megabeer sales by repositioning the enterprise to better capitalize on the strong growth in American -- in Mexican beer imports through supply contracts and our joint venture with CBI. Our achievements in beer from North America plus Mexico and the JV with CBI are up mid-single digits for the first half of the year. So our strategy is working, but not all of it is seen in top line sales within just the North America region. Further, the team is also squarely focused on TSC with early gains in logistics coming from the distribution footprint rationalization program. In the second quarter, we were able to reduce costs by rationalizing our distribution centers in Canada, yielding a better cost structure and generating a small gain on the sales of a warehouse. In all, North America reported solid profits and healthy margin improvement. In the second half, we expect a stronger year-on-year performance than we reported in the first half. Nonbeer sales are projected to be higher, and the region will benefit from further logistics cost savings. The ramp-up of the JVs third furnace has gone exceptionally well, and we now anticipate a bit higher equity earnings in the back half of the year. Let's turn to Latin America on Slide 8. Regarding the macros and industry outlook in the region, we are a bit more bullish today than we were at the beginning of the year. Brazil seems to have turned the corner economically even as the volatile political environment is likely to remain. Turning to our results in the quarter, Latin America turned in an impressive performance. Revenues increased 7%, driven by both price and volume. Shipments in Mexico are at record levels. Volumes in Brazil turned positive year-on-year in June although our books, our inflows, July was in growth mode, too. As we have mentioned before, cost inflation weighed particularly hard on this region. Over half of company inflation manifest here. That said, we are implementing price increases and expect that price gains in the second half will begin to capture back some of the ground lost through inflation. My earlier remarks on Total System Cost highlighted the efforts and results in Latin America. We can deliver solid growth through a structural cost improvements even in volatile, uncertain conditions. Both sales volume and TSC performance combined to drive outstanding year-on-year margin improvement. As Brazil records in the second half of the year, we anticipate even better year-on-year performance for the entire region, in terms of both absolute operating profit and expanding margins. Turning to Slide 9. Market trends in Asia Pacific remain quite positive, continued growth in emerging markets and also in wine and beer in Australia and New Zealand. Regarding our performance, segment operating profit was essentially flat, in line with our guidance. And we are seeing no substantive change in trends we face. Domestic sales in China are lower year-on-year as production in China continues to be diverted to support sales in Australia and New Zealand, where production is returning to normal levels. And of course, fewer shipping days in the second quarter was a drag on Asia Pacific's overall sales. In the second half of the year, we anticipate that higher local production to support local sales will also reduce logistics costs. In all, we expect a second half that builds upon investments in the first half, allowing for substantial margin improvement for the year. With that update, let me turn the call over to Jan to review our financial performance as well as our outlook for the third quarter.

Thank you, Andres. Let's bring this all together in Slide 10. The sum of the parts that Andres discussed led to segment operating profit of $252 million in the quarter and no currency headwind on operating profit. This has been a long time coming. Price was a significant benefit in the quarter, driven mainly by pass-through’s and partial recovery of cost inflation. While currency and price-cost spread were favorable compared with what we saw in the first quarter, sales volume and mix were down as Andres just mentioned. Operating costs also benefited from our end-to-end supply chain strategic initiatives that are ramping up, and we are also seeing good gains from our cost-containment efforts. These coupled with benefits of the distribution footprint alignment that Andres also mentioned, more than offset cost inflation in the quarter. In all, the business is demonstrating resilience by reporting an 8% uptick in segment operating profit. As you have heard me say many time, we continue to focus on margin improvement, reporting margin expansion of more than 100 basis points in the second quarter, with gains in every region. Turning to earnings on Slide 11. Adjusted EPS in the prior year was $0.65. Currency was flat compared with prior year, $0.01 better than what we had expected. Segment operating profit was the key driver for the improved results, adding about $0.10 to earnings. Corporate costs were $0.01 worse, mainly due to a lower contribution from equity earnings in this specific line item. Interest expense added about $0.02 as it benefited from deleveraging and the favorable impact of our refinancing actions over the past year. And the rest of the items essentially offset one another, leading to second quarter adjusted EPS of $0.75, a robust increase of 15% versus the prior year. Before moving to the outlook, I want to drill down on our lower-than-anticipated tax rate in the quarter. We settled a non-U.S. tax audit late in the second quarter. Avoiding costly litigation, we were able to settle this through negotiation for approximately $6 million, which was paid out before quarter end. In turn, we were able to reverse a net liability for the potential tax exposure of about $20 million. Management does not consider this benefit representative of ongoing operations, similar to its treatment when the accrual was established years ago. In light of the settlement, we were also able to reverse $7 million of certain deferred tax liabilities, which benefited adjusted EPS by about $0.04. By the way, the accounting treatment for the $7 million reversal is consistent with how that accrual was established. This reversal is the main driver for the lower-than-anticipated adjusted tax rate in the quarter and for the lower guidance for the full year tax rate in adjusted earnings, which is now expected to be about 23%. Turning to Slide 12. I am pleased to say that every one of the company level metrics for 2017 that we presented at Investor Day in early 2016 is on track to meet or beat expectations. Before drilling down on full year earnings and cash flow guidance on the next few slides, I would like to pause on margins. For the first half, we generated margin expansion of 70 basis points. We expect to gain further momentum in the second half, leading to full year margin expansion that is about double the 40 basis points we had been expecting for the year. This would lead us to a 14% profit margin, our highest level in nearly 15 years. Turning to Slide 13. We have lifted our earnings guidance by $0.15. The business continues to perform well, with upside potential yet some challenges as well. First, our European team has done an excellent job in managing the process to shutter the plant in the Netherlands. When we took the initial restructuring charge in the fourth quarter of 2016, we planned for the closure near year-end 2017, with a large share of the cash payment occurring in early 2018. However, successful execution is allowing the European team to close the plant during the third quarter and disperse substantially all of the restructuring payments this year. On the upside for earnings, we now expect a full quarter's worth of savings from the closed plant, about $4 million to $5 million, in the fourth quarter of 2017. On the downside for cash flow, the restructuring payment through year-end will create some pressure on cash generation this year. In all, the earlier-than-expected closure is a positive step, even if it changes the timing of cash flow a bit. And Andres has already mentioned that enhanced performance by our joint venture with CBI in the second half of 2017 is expected to modestly offset incremental pressure in the North American beer market. While business performance is a modest positive, most of the changing guidance is driven by non-operational factors. The weakening dollar we have seen this year should increase earnings by about $0.10 versus our initial guidance for 2017. The favorable tax item in the second quarter adds another $0.04 to earnings. And lastly, favorable interest expense is expected to be offset by higher corporate costs in non-controlling interests. We continue to build certainty capabilities such as in the areas of procurement and product innovation that are housed in corporate, and better business performance, particularly in Latin America, will lead to an increase in expense for non-controlling interests. With half of the year behind us and continued confidence in the second half, we are raising our adjusted EPS guidance for the full year to a range of $2.55 to $2.65. Now I'd like to turn to cash flow generation on Slide 14. In light of our higher earnings guidance, it would be natural to expect an increase to an adjusted free cash flow, yet we are confirming, not raising our prior guidance. These are the reasons why? First, about half of the incremental earnings guidance is non-cash. Better earnings performance at our JV with CBI is fantastic and reflects its strong return on capital profile. But recall that cash generated there is being used to build out the fourth furnace, which means it will not favorably impact our adjusted free cash flow this year. While earnings are favorable due to FX, we see an opposite impact on CapEx by about $20 million. That is, the $480 million we originally projected for CapEx now translates into about $500 million. And our cash restructuring for the year will probably be around $60 million. The incremental increase is coming mainly from earlier-than-anticipated plant closure in Europe and consolidation of the service centers in the Americas, among other restructuring efforts. As you know, these are good investments that right size our business and cost structure for the future. Taking this all together, we are confirming our guidance for adjusted free cash flow at $365 million for the full year. Now I would like to focus on third quarter outlook on Slide 15. At a high level, we see the stronger business performance across all of our regions being partially offset by higher non-operational items. The strength of the Euro and Mexican peso should add $0.01 to adjusted EPS at June 30 rates. Andres already mentioned the key trends affecting the region, and I would like to highlight a few nuances helpful for modeling. Europe anticipates receiving the annual energy credit in the third quarter. Recall that last year, we received it right at year-end. So there's just a timing difference as to when we will see the energy credit. Margins in Latin America may well reach 20% in the third quarter on better volumes, improved price-cost spreads and the ongoing benefits from our Total Systems Cost approach. Coupling this with gains in North America and Asia Pacific, total segment operating profit is expected to increase double digits and margins to expand by about 100 basis points year-on-year in the third quarter. We anticipate corporate may run a bit higher than it has the first half of the year, mainly due to lower anticipated machinery sales and higher management incentive accruals. The third quarter tax rate is expected to be a more typical 25%. In all, we are forecasting adjusted earnings per share for the third quarter to be in the range of $0.70 to $0.75, which would lead to the seventh consecutive quarter of increasing year-on-year adjusted EPS. Separately, let me talk about developments with respect to a European subsidiary's arbitration award against Venezuela. As you may recall, this dates back to Venezuela's seizure of the company's assets in 2010. While the award, including accrued interest, exceeds $500 million, collection from Venezuela in the current climate has never been clear. Yesterday, the subsidiary sold to a third party its right, title and interest in the amounts due under the arbitration award against Venezuela. In return, we received a cash payment of $150 million. We also retained a modest upside potential depending upon the ultimate recovery of the award. In the unlikely event that the award is partially or completely annulled, the subsidiary may be required to repay up to the entire amount of the cash payment. From an accounting perspective, this whole matter will be reflected in discontinued operations. So it will have no effect on adjusted earnings or on adjusted free cash flow. However, the cash proceeds will accelerate the company's efforts to deleverage. As usual, we will have more to say about our go-forward capital allocation plans as we finalize our strategic planning process in the fourth quarter. And with the financial review complete, I'd now like to turn the call back to Andres.

Thanks, Jan. Turning to Slide 16. We hope you can feel our excitement about the comprehensive transformation we are undertaking to drive higher value for shareholders, customers and employees. We know our ambitions: to be a glass container company that is the preferred supplier, the most cost-effective producer and a company that successfully expands in attractive segments on markets. And we are making steady progress. Our mindset has changed substantially and continues to evolve. We are one team aligned improved performance when enterprise making decisions best for the whole and executing on one plan across the enterprise with clear shared deliverables. Each quarter, I try to highlight a critical element of our transformation. I've talked about integrated business planning, and last quarter, I talked about our single align management incentive system. Today, I want to highlight organizational simplification. O-I has a significant opportunity to become a simpler and more nimble organization across the world to become lighter and more agile. Now with one strategy and one plan for the entire corporation with one management system with an improved culture and understanding of how shareholder values build with communications systems and processes across the world that are at the forefront of existing technology and practices, we have the building blocks to redesign our organization to better fit the requirements of modern times. As a result, we are starting to lay out the groundwork that will take O-I to the forefront of organizational design and capabilities. Clearly, 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, driven to add value for our shareholders, customers and employees. And now we will open the lines for your questions.

[Operator Instructions] And your first question comes from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.

Hello, George. George?

Can you hear me? Okay.

Yes. Hi, George.

Now we can.

Okay. Sorry about that. On pricing, Andres, I know it’s early, but can you give us a little bit of a look underneath a hood in terms of your considerations for next year? What do you see as the ongoing mission of pricing just may perhaps to offset inflation? What opportunities do you have perhaps to create some margin or return from pricing over the next couple of years? And I’m particularly interested in how you view that in Europe, but any color you can share across the regions would be great? Thank you.

Thank you, George. Well, I think the most important part of this question is what to expect about Europe? And what we’re seeing across the year in sales volume or demand is quite positive. So our expectation is that the overall business environment going into next year for Europe is going to be quite constructive. When it comes to Latin America, historically, you’ve seen that this region has been quite diligent in implementing price increases and has been able to offset the inflation quite well. We haven’t seen that so far in the year. We are going to move in the third quarter and fourth quarter into a positive spread in Latin America. So that’s working well, and we expect that to continue going into next year. Our business in North America is pretty much a lot under contract. So it’s all set. Some of them open over time but close to 98% of that business is locked under contract. And the situation in Asia Pacific overall, the demand over there is quite positive. It is – let’s say, flat to positive in Australia and New Zealand, and it’s growing quite well in the rest of the countries in which we operate. So I expect that we are going into a year where the environment for pricing is more constructive that is been in the past.

Thank you.

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

Hi, good morning.

Good morning.

Apologies, if I missed this in the prepared remarks. But can you just reiterate what volumes were in the quarter in Brazil? And I think you said, they were flat in June and then may – maybe are positive in July. Any kind of additional color in terms of what you’re seeing in inflection and volumes in Brazil?

Thank you, Anthony. And I think this – your question on volumes is of high interest for everyone. So let me just take you through the various regions. So we can get a good feel for volume. First, to get a better perspective of what is taking place in volumes across the regions, it’s better to look at the first half altogether, and that’s because in most of the regions, we had some pull forward in shipments into a first quarter. So when looking at the first half altogether, you get a better idea of where it’s heading – where the demand is heading for the balance of the year. Overall, sales volumes increased 1% globally in the first half. So that’s in line with expectation – our expectations and it’s inline with I-Day, too. And then when we look at Europe as specifically, we had a very solid performance in demand across the region. We experienced that pull forward from Q2 to Q1 as I just as expressed. But the first half altogether was 1% up year-on-year. We are expecting a second half that should be solid in demand and slightly better than the first half. So for the full year, we are expecting Europe to be between 1% and 2% growth overall. Now we see the overall business environment for Europe positive, as I just described in the previous question. Let me just talk about North America for a minute, and then I go into Latin America. So the market dynamics, we discussed in previous calls for North America continue. So that means that mainstream beer continues to decline. Now other end users in the region are growing. Q2, in particular, has been impacted in North America by three things that have similar weight. First is shipping days, which is one-third of the decline. Second is the returnable glass shipments in Canada that equate for another one-third and that we expect to record going into the second half. And then you have the mainstream beer decline that is causing a decline in one-third of it. Now O-I strategically is very well-positioned at this point in time, and it’s uniquely positioned, because we have the JV with CBI that is serving the growing segment of imported beer. But also the decision, we’ve made in O-I Mexico is serving the same segment. So when we look at the O-I supply into the North America market, altogether, it is higher in 2017 when compared to 2016 by mid-single digits. Now let me move into Latin America. So we are seeing a strong year-on-year performance for sales volume in the first half of the year. Q1 was up around 4%. Q2 was up about 3%. And obviously, first half was up. Now Mexico sales volume is at record level, so the performance in Mexico is quite strong. That growth is driven primarily by beer, but all end users are growing, and we expect this to continue into the second half. Brazil as specifically, in our opinion, has turned the corner. And even though the economy is still weak and the political environment is quite in certain, we exited the quarter strong. June demand was up low double digits for us, and we are seeing the same dynamics early in the third quarter. Now we all know these recoveries come with a little bit of volatility. But certainly, we’re started the recovery. Now returnable containers in Brazil continue to be – to grow in supermarkets, and this is driven by 300ml containers as well as one-liter containers. Now one-way glass for premium brands in Brazil continue to grow too. And they now equate to 10.5% of market share coming from 3%, six years ago. Now every 100 basis points of increase in market share equate to 400 million units of incremental demand. Now 70% of that demand is glass. So that will give you an idea of what’s going on in Brazil and as I said before in previous calls, we have seen one-way packaging for premium brands growing in Brazil quite healthy over the last few years. In fact, it’s been the fastest-growing package in all substrates in Brazil over the last three or four years. And then APAC, demand in the region is solid. Australia and New Zealand continue to be perform flat or slightly up. And when you see a decrease in demand in APAC, it’s driven by China, just because we are using that supply in China to support sales in Australia and New Zealand and why we record our normal supply in the – in those two countries. But we are expecting that the second half is going to be better than the first half and is going to be positive when comparing year-on-year.

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

Hi, guys, good morning. Andres, on your comment on mass-market beer in North America and the offset from higher demand for imports of beer out of Mexico and the U.S., does that dynamic, at some point, mirror the way we think about your capacity footprint in the region as you sort of think about it more holistically together?

Yes. I think, that’s a great point. And one of the reasons why we made the acquisition in Mexico is because of the synergies that take place across the whole geographies. So what we’re seeing is the impact of that because that operation is supplying CBI, and obviously, it’s supplying this growing market into North America. That is also complemented by our position in the JV, which is 100% supplying these markets. So the two of them together are really causing us to have a larger presence today in the North America’s supply than we had before. Even though mainstream within North America supply by North America’s specifically is declining. So that’s why I highlighted before, that these two moves that we made before are not only strategic in nature, but they’re unique. Because we are the only company positioned that way.

And your next question comes from the line of Chris Manuel from Wells Fargo. Please go ahead.

Good morning folks. It’s actually Gabe Hajde sitting in for Chris.

Good morning.

A similar line of questioning for Europe – appreciating of years of taking out the one facility in Netherlands. Can you talk about, I guess utilization in that region and maybe with growth being a little bit better now, any areas where you may need to just – adjust capacity or move it to certain other regions that are growing would be helpful? Thanks.

Thank you. Well, as we described before in previous calls, with this move, our demand and capacity are balanced. And this is helping to reduce the unbalance – at the beginning, just looking at run rates at the beginning of the year by one-third. Obviously, we’re seeing an improved demand condition in the region. So I’m thinking that this gap that existed in the European market is closing beyond the point we described before. So before, we were expecting to close one-third, obviously, that positive impact remains, but the improved demand is going to close partially the remaining portion of the gap. So altogether, I think the European market is getting more imbalanced and therefore, more constructive moving forward.

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

Thanks, good morning Andres and Jan.

Good morning.

Good morning.

My question is really focused on Brazil, Mexico. Andres, you mentioned, you were seeing better industry and macro trends in Brazil. I was hoping maybe you could just parse out some of the better macro data and the O-I data that you’re talking about because it stands somewhat stark contrast to other companies in the region. And then just on Mexico, some of the data we’ve seen shows a slowdown in beer imports from Mexico to the U.S. if you could just talk about your views there? Thanks.

Okay. So the – what we’re seeing is the private spending in Brazil it’s starting to come up. The employment numbers has started to turn the other direction. So they’ve been – unemployment has been increasing continuously for several years. Now we saw a plateau, and it turned the other way. The private spending and consumption is increasing, and demand is increasing. So I think our customers overall across the end-users, they are experiencing higher demand just exiting the second quarter and going into the third quarter. Even the numbers, we’ve seen lately experienced by some of our largest customers are quite encouraging in the third quarter too. So there is a long expected change in direction in this economy that we’re seeing. Now as you know, the political environment is quite unstable, and that will remain. And that’s going to cause some of this volatility that I’ve mentioned before, but what we’re seeing in Brazil today is very different. It differs quite significantly with the business environment we were seeing late last year and early into this year. And I think that’s something that has been expected for quite a while overall, and I think we are starting to see that turnaround taking place. Then when it comes to Mexico, our numbers show that these achievements are very strong in glass. We are selling all of the capacity we have. I think, if we had more, we will be able to sell it, too. So I don’t know what statistics you have available at this point in time, but our numbers show very strong achievements and again if we have more capacity, it will be demanded at this point.

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

Thanks. Good morning Andres, good morning Jan.

Good morning.

Good morning.

Andres, is there any way that you can give us just a little tighter sense of what the North American megabeer volumes are for you? And also what’s going on the craft beer side of the equation?

Yes. So the megabeer trends, they continue about the same as we described before, a little bit of a further slow down because of the lower consumption during the holidays. But overall, it’s the same trend. It goes up and down. Some quarters are lower than others, but it’s the same trend in which we’ve been. We described before in the previous calls that the craft beer industry is slowed down in its growth, and that continues to be the case. So obviously, we’ve been experiencing that, too. And that was described in the previous call. Those two situations – in those two let end users, if you will, or sub segments of the beer industry remain the same as we described before.

And your next question comes from the line of Tyler Langton from JPMorgan. Please go ahead.

Yes. Good morning, thanks for taking my question. Just on the CBI JV, could you just give any details on what it contributed in 2Q? And then just going forward, it sounds like the contribution is a little bit better than you expected. Is that largely just because the third furnace is coming on sooner? Or just overall, do you expect the better contribution from the JV?

The contribution, Tyler, was about a little under $4 million for the second quarter. That’s opposed to a little under $1 million a year ago. We’re definitely on track with the timing, and the – it’s been a very solid ramp up and launch and just really good performance by the JV. So it’s a little bit better than expected but not significantly.

Yes. I think the process we’ve seen in this operation in the JV is quite encouraging because we’ve been implementing new furnaces one after the other. We are about to start the third one, and it’s been a pretty smooth process, and I think that talks pretty highly about not only technology, but the know-how of this company to be able to support this new operations, put them in place and bring them up into operation successfully. So we’re quite pleased with the process that we’re going through, and this is to continue over the next few years.

Yes. The first half of the year contributed about $9 million, and the second half will be a step up from that based on the new furnaces coming in.

And your next question comes from the line of Phil Ng from Jefferies & Company. Please go ahead.

Good morning Andres, Jan and David. This is Alex Hutter on for Phil.

Good morning.

It’s encouraging the volumes in Europe are looking stronger in the second half. Can you give some color what’s driving acceleration and demand? Is it more under beer side, wine, spirits, exports or is it from weather? And then also the pricing side in Europe, is the better pricing environment more a function of better growth? Is it more from rational behavior? Or is it from the capacity actions that you guys are taking? Thanks.

Okay. So volume growth drive this could be – beer has been strong. Obviously, it’s been driving a good portion of the growth. But wine has been quite strong, too. It’s been the case for Europe that the wine category is being driven primarily by exports. So that’s been a trend for a couple of years from three years now. So that continues to be in that mode. Now the pricing environment’s constructive because we are seeing a larger demand overall. I think you can appreciate that in the various reports that have been made public by various companies. So the – we see higher demand. We’re not seeing unreasonable positions out there in the market. Everybody appears to be quite pleased with the performance they have. I think that volume performance obviously support a more constructive pricing environment going into the following year.

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

Thanks, good morning. Jan, just one question on the Venezuela situation. The $115 million, is that pre-tax or after-tax? And just with respect to the likelihood that the arbitrator will not annul the award. Can you just help us – do you sound confident that the arbitrator will not do so. Can you just help us understand why?

Sure, Adam. First of all, it is a pre-tax number, and we’ll be determining what the tax impact of that is as the year progresses. That tax bill will not be due in 2017. So it’ll become a 2018 event. In relation to the annulment hearing, first of all, the hearing is scheduled to be in late September. I think it’s impossible for us to really acknowledge how long we think that may take to get through the results of that hearing. But we honestly believe that it’s unlikely that – that will be annulled. And so we feel confident that $115 million will stay with the company. But of course, anything can happen. We plan to use that money right now to deleverage our balance sheet, and we’ll come back to you and talk more about capital allocation plans for the company later in the year.

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

Hi, good morning. I wanted to ask about the PIT improvement program, as you kind of look across the next year, where do you think from a regional perspective the biggest opportunities are for you? And then just kind of a slight pivot here, but as we think about CapEx and restructuring with the pull forward a bit this year, should we expect that to go down in 2018?

Okay. When it comes to the PIT teams, they continue to operate. We assigned them to the factories that are getting the largest complexity. We have them focused on factories in the U.S. and Europe. So that’s an ongoing process that we have in place. Now as we described before, we’re taking a broader approach now with TSC because the PIT impacts primarily the productivity side of the factories in which we have them operating. And obviously, they had a very good impact in 2016. But now we’re taking a broader approach, more structure and discipline. That goes very deep into the organization and covers all the cost of goods sold category for the company. And that process, TSC is building momentum for us. It was higher impact in Q2 versus Q1, and we are expecting that this momentum will continue to really into a second half. So PITs continue to operate. I think TSC has given us a broader advantage to take cost out of these operations and focus everyone on margin improvement.

Debbie. Hi, it’s Jan. On the CapEx levels, we were running very close to our expectation this year at $480 million. The FX is really what’s driving that number up to $500 million. So I think next year, we would expect something very similar to the $480 million for us, depending on what FX does. I suppose that could change that. But I think year-over-year, very similar type spending with the exception of the FX impact.

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

Yes. Good morning everyone.

Good morning.

If you could tell us a little bit – maybe this is more for Jan. What the gain was? You mentioned you sold a warehouse in Canada. I assume that was probably embedded in the North American profit. And then if you could also just – I don’t think you directly addressed this. I apologize, if you did. But what do you see in terms of kind of the general level of cash restructuring expense going forward versus what it’s been the last few years? Thank you.

Sure. The gain on the North America was somewhere in the low single-digits, $3 million-ish or so. At any given time, we’re looking for opportunities to improve our footprint and things. So it’s possible in the future, you’ll see more things, especially since we have a much deeper focus on logistics right now in the company. Related to cash restructuring, this was a bit of a heavier year on that front with the closure of the Netherlands plant. So it was a bit higher. We did feel with the opportunity to shutter that plant sooner versus later, it was a good decision for the company, and that drove higher restructuring payments expected in 2017 versus next year. But again, like everything else we continue to look for operations to improve the efficiency of the company, and it’s a little bit too soon to comment on 2018 plans right now. But we’ll be getting back to you sooner versus later on that as we start rolling out 2018 expectations.

And your next question comes from the line of Arun Viswanathan from RBC Capital Market. Please go ahead.

Great, thanks. Good morning.

Good morning.

Just had a question on Slide 13 the guidance. It looks like the arrows for the weakening U.S. dollar and the favorable full year tax rate imply those were the larger factors to increased guidance. The way we calculate, it looks like $0.04 from the tax rate and then maybe $0.10 or so from the FX. Is that right? And is that also the positive factor that led to price-cost reversing the FX? Thanks.

On the first part of your question, I think you’re right on there. The favorable tax rate is about $0.04 on the full year. The weakening dollar is about $0.10. The solid business performance, I’d tack a couple of cents on to that one, the first arrow there, and then lastly, the corporate interest and expense is probably down $0.01. So that’s kind of the walk from the initial guidance to the $2.55 to the $2.65.

And your final question is a follow-up from George Staphos from Bank of America Merrill Lynch. Please go ahead.

Hi, thanks. Andres, taking a bigger picture on North America and recognizing that imports – and particularly from Mexico are perhaps the biggest driver of demand trends you’re seeing right now in the environment. If you look back in the 1990s in North America and the 2000s, there was always something that came out of the North American market, particularly the brewers that you stimulated that next uplift in glass volume. And again, I recognize maybe Mexico and Mexican beers are the driver here. But do you see anything on the horizon in North American product, particularly in beer that could be that next catalyst? Because from where we sit right now, really not seeing it. Craft seems like it’s moving more and more to cans. Please comment as you would. Thanks very much and good luck in the quarter.

Thank you, George. Yes, we see quite a positive activity in new product development in the region. We see it across end users. So it’s for beer, let’s call mainstream beer, but it’s also for craft, and it’s also for all the other categories. And as you know, we’ve been strengthening our new product development aspect of the business. I think we’re making good progress on that, and we’re going to see new products coming into the market that are going to help offset would be decline, we’re seeing over the last few years, as dynamic in the mainstream beer. So there is quite a good level of activity. I just cannot comment in the specific projects because of the confidentiality they have. But yes, there is activity.

So thank you, everyone. That concludes our earnings conference call. Please note that our third is currently scheduled for October 24. We appreciate your interest in O-I, and remember that packaging makes a difference. So choose glass, the clear choice that doesn’t collapse in your hand. Thanks, and have a great day.