O-I Glass, Inc. (OI) Q3 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’s Third 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 our host, Mr. David Johnson, Treasurer and Vice President of Investor Relations. Sir, you may begin.

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 third 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. I’m pleased to report that our operational results in the third quarter were very solid. Our earnings were $0.77, up 13% compared with prior year. Operations delivered in about $0.74, right on top of our guidance and tax added an incremental $0.03. The Company is more resilient than ever. In years past, the natural disasters we have seen, plus unplanned downtime and standard supply chains might well have caused us to stumble. Today’s team though has risen to the challenge. We are delivering, doing what we said. Let me say congratulations to the O-I team across the globe with the one enterprise mindset that is making the Company resilient and improving its year-on-year performance. In fact, we have met or beat expectations for the last seven quarters. We continued to improve our response on service to customers and our focus on building long-term partnerships. We use structural cost through a Total Systems Cost approach, improve our ability to operate effectively and efficiently, organize O-I to be safer, more agile and capable to adapt and invest in capabilities to drive top and bottom line growth. That’s it. I don’t want to suggest we are impervious to external conditions; they are affecting us, but they’re not weighing us down. In the third quarter, our net sales were higher than prior year, price was up more than 1% and currency was a tailwind as well. Shipments were on par with last year as higher than expected volumes in Latin America offset lower local sales in North America. While prices tracked well with cost inflation, operating profit benefited from our Total Systems Cost initiatives and higher equity earnings. Segment operating profit was up 10% year-on-year, while margins expanded 70 basis points. While the net impact of non-operational items was almost neutral year-on-year, I would like to point out that Jan’s team has done an outstanding job in managing where possible to limit the impact of interest and tax expense. [Ph] A bit later, in the presentation, we will touch on our announcement about CBI as well as the outlook for the rest of this year. Now, let’s turn to our regional review starting with Europe on slide four. We are seeing a solid overall business environment in Europe with volume holding up well and a constructive pricing environment. For O-I specifically, sales in the quarter were up 6%, primarily due to strengthening euro. While shipments were essentially flat year-over-year, we benefitted from some favorable mix in the quarter. The European team’s focus on Total Systems Cost is certainly contributing to their improving cost profile. Be mindful that the inclusion of the energy credit in this quarter and not a fourth quarter as was the case last year, does cause some swing in profit margins within the year but no impact on the full year. Even so, excluding that credit, Europe is performing well year to date, generating higher profits and margin expansion of about 90 basis points. In the fourth quarter, we expect essentially flat operating profit. On the upside, we expect to see modest sales growth, ongoing benefits from product system cost initiatives, and savings from the plant closure in the Netherlands. These gains will more or less be offset by the timing of the energy credit that came at the very end of last year. For the full year, good performance; we are expecting higher profits and a strong margin expansion. Let’s turn to slide five. North American local sales volume were under pressure, worse than we thought going into the quarter, due to challenging mainstream beer dynamics as well as impact from the hurricanes. As we have suggested at the recent sales side conference, bottom line results were lower than in the prior year. While we saw more contraction in beer this quarter compared with the first half of the year, the food, wine and spirits segments performed better than average in the third quarter. September results were impacted by hurricanes as some customers shut down, freight costs increased and truck availability was disrupted. There might be a further impact in the fourth quarter. So, we are conscious about our sales outlook in North America. As I mentioned on our last earnings call, we are combating the ongoing decline megabeer sales by repositioning the enterprise to better capitalize on a strong growth in Mexican beer imports through our joint venture with CBI and some supply contracts. This is a perfect transition to the next slide. I’m very pleased by our evolving relationship with Constellation Brands. In late 2014, we embarked together on a partnership to supply glass containers for their acquired beer business. We created a 10-year joint venture with a vision to build and operated four world-class furnaces adjacent to a brewery in Nava, Mexico. The JV has exceeded expectations at most every turn, adding an incremental furnace this year, ramping up smoothly on time and on budget, reflecting the knowhow that OI brings to this partnership. Productivity has been higher than expected. Capital costs on the partners were considerably less than initially anticipated. And earnings have been growing every year and right in line with our original expectations, the JV is expected to initiate cash dividends in 2018. This all adds up to a sound investment yielding a very solid return on capital that we are now expanding and spending. We will build out a fifth furnace following the long planned fourth furnace, which should come on line in the first half of 2018, and we are extending the life of the joint venture by 10 years out to 2034. Stepping back for a moment, some of our investments like this one take time to develop yet are well worth the wait. Others, like the acquisition that became O-I Mexico are immediately accretive. Whatever the case, we are squarely focused on delivering long-term, sustainable value to our shareholders. Let’s turn attention to the slide seven. Latin America is performing at a very high level. Brazil recorded double-digit gains in sales volume in most every category and led by beer. And Mexico continues to report record shipments with solid growth in beer, spirits and non-alcoholic beverages. Latin America price cost spread in the quarter was the modest tailwind, allowing us to partially recapture the fairly significant headwind we reported in the first half of the year. The Latin America team continues to improve their bottom line performance due to their Total Systems Cost approach. In the third quarter, they achieved improvements in spending on energy and labor. In all, higher profits and 20% margins, a clear standout in the quarter, and we anticipate even more impressive results as the same trends continue into a seasonally high fourth quarter. Turning to slide eight. Market trends in Asia Pacific remained favorable with growth throughout the region. And O-I has seen the growth as evidenced by an 11% increase in sales in the quarter, driven by price, volume and currency. However, we have not seen this translate into the bottom line for several reasons, ongoing downtime from repair activity, changing customer needs and increasing supply chain complexity. In order to grow with our customers today, the response to those challenges has been to ship containers from where the product is readily available. In Australia for instance, we presently have quite long extended internal supply lines to support the needs of our customers. In turn, our supply chain costs are relatively high and definitely impacting our bottom line. To restore expected financial returns, we are accelerating investments that will enable flexibility to support changing market trends with a focus customer service and growth, broaden our asset stability efforts within the region and expand our supply chain capabilities. Going forward, then, we must retool [ph] our assets in this region similar to what we have done in Europe, North America and Latin America. Our investments will begin in earnest in Q4 2017 and be largely completed by mid-year 2018. While we project subdued margins in the interim, we expect a significant rise in margins, exiting 2018. We know we can do this well because we have already done it successfully in other regions. With that update, let me turn the call over to Jan.

Thank you, Andres. On slide nine, let’s pull this all together for the enterprise. Currency was a tailwind in the quarter, primarily related to Europe and Latin America. Price was a significant benefit in the quarter, largely driven by pass-throughs and recovery cost inflation. The favorable impacts of sales volume from gains in Latin America and Asia Pacific were essentially offset by lower volume and mix in North America. Operating costs were unfavorable year-on-year, clear upside from our Total Systems Cost initiative, equity earnings and the energy credit were offset by cost inflation, higher supply chain cost in Asia Pacific that Andres just mentioned, as well as the adverse impact of hurricanes and earthquakes. In all, the business is demonstrating resilience in a challenging macro environment by posting higher year-on-year segment operating profit. As you have heard me say many times, we continue to focus on margin improvement. Margins were 70 basis points higher than prior year as operating performance in Europe more than outpaced the decline in Asia Pacific. Turning to slide 10. Adjusted EPS in the prior year was $0.68. As expected, currency was a modest tailwind this year. Segment operating profit was the key driver for the improved results, adding about $0.08 to earnings, and all the remaining items sum to $0.01 headwind. Corporate costs were unfavorable, driven entirely by the unusually low comparable period. From the third quarter of this year, corporate costs were at a more normal level, ending up a touch lighter than the quarterly average in the first half of the year and net interest expense added about $0.02, which I will touch on in a moment. Our tax rate has been better than expected for most of this year, mostly driven by audit settlements and expirations over which we have very limited control. In all, we achieved third quarter adjusted EPS of $0.77, the fifth consecutive quarter of 10%-plus year-on-year earnings growth. Turning to slide 11. I’m very 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. Note that our full year earnings target has been narrowed to a $0.05 range and the midpoint of the annual range has been increased by a few pennies. On the following slide, I want to highlight ongoing efforts to de-risk the Company. We have made great strides in our debt profile and pension liability over the past 12 months. The majority -- excuse me, the maturity horizon of our senior notes is exceptional. Our next sizeable bond is due in 2020. Of course, our term loan A is also outstanding, against which we are deleveraging presently. We anticipate refinancing, what remains of it, when we renegotiate our bank credit agreement, likely in 2019, the year before it expires. And on that note, pun intended, we recently amended our BCA in a favorable way. Our leverage ratio, the key covenant in our BCA, is typically adversely impacted by higher seasonal borrowings to cover working capital needs. We successfully work with our bank to remove this type of borrowing from our calculation of net debt during the first three quarters of each year. As such we have effectively increased the headroom to our leverage ratio covenant With a further eye towards reducing risk, we have been issuing euro debt because it provides a natural hedge to our euro-based earnings, and it helps that rates are lower than in the U.S. We have also been active on the pension front in a very systematic way. Regarding pensions, expense and contributions have been remarkably stable over the last several years, and we project it to continue. This is due in part because we have reduced our pension liability by one third since 2012. We have done this through deliberate actions and converting to defined contribution plans, term vested buyouts and annuity purchases. In fact, taking advantage of strong equity returns year to date, we plan to undertake another annuity purchase in the fourth quarter of this year. We have been focused on derisking the Company and will continue to do so in the future. Now, I’d like to turn our attention to the near-term outlook on slide 13. Andres already talked about the outlook for our region. So, let me highlight just a few elements. We expect Europe to be flat year-on-year, a strong performance by the business to cover the energy credit. And we continue to have high expectations for Latin America. Incrementally, I would say that we have taken down expectations by a notch in the other two regions. In North America, there is some uncertainty about customer demand in the quarter. However, we anticipate that higher equity earnings will favorably impact the region’s bottom line. In Asia Pacific, profits will be lower year-on-year as we intensify the asset improvement program there. Corporate costs are likely to be in line with the year to date quarterly average, approximately $27 million. Interest expense should be on par with prior year. And we expect the tax rate in the fourth quarter will be approximately 24%, leading to a full year rate of about 22%. In all, our adjusted EPS range is projected to be $0.50 to $0.55 with the middle of the range pointing to the eighth consecutive quarter of year-on-year growth. Now, with the financial review and outlook complete, I’d like to turn the call back to Andres.

Jan talked earlier about our ongoing successful efforts to derisk the Company. We have been just as rigorous and successful with our investment strategy as well. Driven by enterprise-wide collaboration and integrated approach and alignment, our investments built upon one another, creating a virtuous cycle of improvements and advancements that drive sustainable value creation today and in the future. We began with efforts to stabilize the top and bottom line of the Company and followed with efforts to advancing, stepping up our CapEx with the global engineering team, directing the investments into the assets that made it the most and add value long term, then layering in investments into key capabilities like launching key account management to enhance the customer experience, supporting commercial efforts with the state-of-the-art customer relationship management tools, [indiscernible] Total Systems Cost and supported it with organization, processes and reporting systems, creating global supply chain capabilities and developing people and organization best in class processes and practices. All the while we continued to focus on innovation and R&D to also support our strategic ambitions to be the preferred supplier of glass containers, to be the most cost-effective producer and to successfully expand in attractive segments of markets. As a result, we have been leveraging the R&D center we’ve built a few years ago in multiple ways, for instance to quicken the pace of commercializing new products, to improve the existing manufacturing technology and to create new ways to better align our future manufacturing technology with changing market demand which vary as customers grow and change their business and product portfolio. So, we are pleased with the solid progress our innovation and R&D team has meet by meeting several important milestones related to improving new products speed to market as well as critical functionality of existing and future new technologies driving value out of business strategic investments. Turning to a slide 15. Before taking your questions, I wanted to build upon the organizational simplification that I mentioned at the end of our last earnings call. For example, let me share with you how we are beginning to integrate the Americas. We have recently expanded the role of Miguel Alvarez, he is now President of the Americas for O-I. Even before this though, finance, sales, marketing and human resources had already began to organize themselves organically in this way. It just made sense. Going forward, we expect to capitalize on synergies in end to end supply chain, commercial activities as well as in best practices, talent and culture. Clearly, we are making solid progress on becoming a flexible and nimble company able to more effectively and more quickly adapt the changing conditions. Today, we are more resilient than ever before. We know our ambitions. And as we have already discussed, we are making a steady progress across the business across all fronts. Our mindset has changed substantially and continues to evolve. I hope you can feel our excitement about the comprehensive transformation we are undertaking to drive higher value for shareholders, customers and employees. And now, we will open the lines for your questions.

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

Good morning. Regarding the asset improvement initiative in Asia Pac, can you give more details in terms of cost? Is that incremental CapEx? How many plants you are making improvements to or are you adding any capacity? And then, just over the past decade, Asia Pac margins have been pretty consistently lower than company average. What kind of margins do you think that we can achieve in Asia Pac, once the program is completed?

So, let me just start by positioning the action that we are taking in Asia Pacific. So, over the last few years, we have focused our asset investment program in the all three regions, and APAC is the last region that is entering this program. So, at this point in time, we want to increase emphasis through the end of the year and through the first half of 2018. Now, at the same time, we’re seeing the mix in region is changing, and this is very favorable because it’s generating growth. However, it is putting some pressure in our footprint. So, we need to retool the footprint, at the same time, we need to put more time into repairing our assets. So, we thought it was convenient to bring those two activities forward and combine them, so we can obviously save time and cost, and reposition that footprint for higher performance. So, our expectation is that given the demand in that region is quite a strong, as we go into the second half of next year, we’re going to have -- we’re going to see an upswing in earnings on margins in that region. Jan?

Anthony, let me just elaborate a little on the margin. Today, let’s say at the end of this year, Asia Pacific should be running about 10% margin for the year. But next year, I don’t think there’s any reason that they can’t reach 12% to 13% as they’re exiting 2018, and that will be after the first half of the year when we are involved more in asset repair for them. So, good margins on a growing base of revenue as we exit the year.

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

Can you, Andres, give us a little bit of color on these volume trends within Brazil? It seems like you had a really nice bounce there. I frankly can’t recall whether we’re working off of real easy comps from last year, it’s also a little surprising, a lot of the economic reports out of Brazil are still pretty somber.

Yes. So, overall, Latin America is quite a strong in demand and it is driven by beer. We’re seeing in the region, mid double digital growth in the quarter. Now, most end users are growing. And when we look at Brazil, Brazil is growing mid double digits for us in the quarter, in Q3. Now that’s even by beer, by spirits, and by food. Now beer is growing at high double-digit rate. And what we’re seeing is that off premise [ph] demand continues to roll, and this is favoring the consumption of one-way glass and the consumption of returnable containers in 300 ml and one liter sizes. And we also see, Mark, one-way glass for beer continues to grow and is in fact the fastest growing package in Brazil now for three or four years. So, this is all due to premium beer, which is growing in Brazil quite fast, as I mentioned in our previous call. Now, as you mentioned, news from Brazil are quite mixed. What we see is that the overall economic activity continued to -- continues to improve. And even though very modestly, it is beating some expectations. We are seeing, for example, the private consumption is starting to improve. We are seeing also this -- early trends reflected in retail sales, which are improving, industrial production, labor market and this is slightly on inflation that is improving too. So, as a result, the confidence index in this country is starting to turn. So, despite of the very unstable political environment, which we all see news about, we are seeing a very good performance for glass. Now, there is something that is common to all, the end users or categories we serve, which is a very high level of new product development activity in this country, so that is supporting our demand as well.

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

Thanks; everyone, good morning. Thanks for the details. Andres, I wondered if you could give us a bit more color in terms of the outlook for Europe to the extent you feel comfortable. Later this year, obviously you gave us some detail in terms of comparisons but really more into 2018, specifically around pricing, which you said the environment remained constructive. Can you sort of square that with what was relatively flat volume in the quarter? How much affect are you getting from the closure of the facility in Holland and how does that all play together as we look out to 2018 in terms of volumes and tightening of capacity? Thank you.

Okay. Thank you, George. So, demand in Europe is expected to be very solid in Q4, it’s been solid in Q3. Something that is important to know is, the depending on the volumes that were purchased through the summer, the inventory adjustment, if you will, moves between third quarter and fourth quarter. So, we can say that little earlier or a little later, but demand continues to be very, very solid. And as we go into Q4, what we are expecting is to be flat with prior year, but prior year was a very strong demand quarter and that quarter had one more day of shipment. So, in reality, our demand for Q4, as projected, is strong for the region. Now, we’re seeing the capacity and demand balance in the region too going into 2018, and we’re seeing the pricing environment to continue constructive. We haven’t seen any issue related to the shutdown of the facility in the Netherlands. That was very small; the transfer of the customers was very successful. So, we are very pleased with that evolution. Overall, George, I think as we go into 2018, Europe looks solid, both because of demand and because of all the productivity problems, both BSC and organization simplification that we have in place in the region.

And one other thing, George, you know that we are anticipating saving about $4 million to $5 million in the fourth quarter due to the closure of the Netherlands plant. And in 2018 of course, we’ll have a full year impact of that.

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

Hi. Good morning. I was hoping you could a bit about the hurricane impact in Q3 in North America. Do you have any sense for the EBIT impact, volume impact? And then, if you could just comment on what type of conservatism you may have built into Q4 guidance around that, what are your concerns, if the California fires were also impacting you in the quarter as well?

Thanks, Debbie. It’s difficult to estimate exactly the direct impact of every one of those events. And as you mentioned, it’s two hurricanes in the U.S., but it is two earthquakes in Mexico and it is this monumental fire in the West Coast. What we’re hearing about the last or the latter is that the long-term effects are not expected to be large, in fact quite modest; the short-term effect might be primarily related to disruption, lack of labor and some infrastructure that has been -- that has suffered. We’ve seen some impact in our demand so far, nothing really large. And now, it is too early to know what’s going to happen into a quarter and next year. And that’s why we are a little bit cautious, but we are not expecting a significant change in our demand patterns for the region because of that. Now, the hurricanes, we have one in Texas, one in Florida; we didn’t have any issue directly in Texas, even though we have a factory. But our customers experienced significant issues with also transportation and transportation cost and we also experienced transportation cost increase. When we look at Florida, our customers shut down; they needed to shut down their facilities that happened through Q3. They needed to -- they saw the freight increase in the quarter two. So, we are absorbing all of that. The earthquake in Mexico, even though this country is having very strong demand, if they cost to us -- demand has slowed down towards the end of the quarter. So, we suffered because of that. And I think it is important to highlight at this point the reliance of this business today, different than in the past because this kind of event a few years ago will really cost this company to underperform massively and it did. So, we are very pleased with the increased resilience in the organization due to focus and rigorous execution and accountability.

Our next question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead.

I just wanted to -- one clarification if I may, first. I didn’t quite catch the cost savings in Europe and then my question -- from the closure that is. And my question relates to the underlying margin expansion in Q3, if you kind of take away the energy credit year-over-year, it wasn’t meaningful the margin expansion and yet you continued to talk about 80 bps with some incremental challenges for the full-year in terms of margin expansion. It seems as if it’s decelerating a bit, the margin expansion trajectory, if you want to comment on that a bit please?

Sure. First of all, in regards to the cost savings in Europe, the closure of our Netherlands plant, we anticipated that happening in the latter part of this year. It actually closed a little bit sooner than originally anticipated. And so, we are getting a full quarter worth of savings in the fourth quarter of 2017, and we anticipate that to be about $4 million to $5 million, as we discussed in our last call. For next year, of course, we will have four full quarters of savings, so that will exceed $15 million for the full year. In regards to the margins, you are correct, Lars, in saying that a good portion of the third quarter margin expansion is due to the energy credit. But, I think if we focused on the full year for the Company because we did have an energy credit in 2016, we have a very similar one in 2017, our margins are anticipated to expand this year 80 basis points over last year with a very similar energy credit composition. So, a little bit of noise quarter-to -quarter, of which clearly some of the weather and things that Andres talked about a moment ago, played into that. For the full year, I think we’re still on track to reach that 80 basis-point margin improvement for the Company, which of course is up from 40 basis points in our original guidance.

And I would like to add that for the total Company, for every one of the businesses and regions, there is a high focus on margin improvement. We’ve seen it last year; we’ve seen it this year; we are projecting to continue that trend into next year. And even though we see a temporary -- a slowdown in Asia Pacific on the underlying work to continue improving margins in Asia Pacific, we’ll continue and will be supported by the footprint enhancement and adjustments that we’re going to make. So, we expect that region to rebound quite well going into the second half.

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

My question is a bit of a follow-up from the question George was asking on price. Because if I look at slide 9 and I look at the segment operating profit bridge year-over-year, not just for the third quarter, but I look for the full year, it looks like segment operating profit is up about $54 million and pricing year-to-date has been up $51 million. And at least in that 3Q slide deck here, you say, it’s mainly reflecting price adjustment formula. So, my question is really, when we look at the pricing for 2017, how much of that is just a pass-through of inflation that you felt in 2017 and how much should we sort of expect pricing to benefit margins as we move into 2018? Thanks.

Well, we normally -- for some of the items, we see immediate pass-through within the quarter, for some of them it has some delay. So, as we know, North America is 90 -- more than 95% on the contract. So, that -- some of it -- of the pass-through has some delay going into a following year. When we look at all regions, we talk essentially about the improvement in the environment in Europe. Now that’s going into 2018. So, we’re going to start the negotiation season in the first quarter of next year. That’s going to be completed towards the end of the quarter. So, we won’t see the impact of that impact of that improved environment in 2017; we’ll see it in 2017. In 2017 in fact, we’re coming with tale of the deflationary that we experienced for a few years.

Yes. Mostly price covers inflation, and I would anticipate to see in the fourth quarter something, maybe a little bit similar to the third quarter. Price was behind inflation in the first half of this year; and in the second half, it’s more flattish.

And your next question comes from the line of Tyler Langton from J.P. Morgan. Please go ahead.

Yes. Good morning. Thank you. Just with the Total Systems Cost initiative, can you talk a little bit more about the areas that you’re targeting going forward? And then, I know it’s early, but do you have any sort of initial thought on sort of what savings could look like in 2018, just compared to 2017 levels, kind of how much is left with the program?

Well, we see quite a runway ahead of us in TSC as well as organizational redesign or some -- and simplification. Our TSC approach is quite comprehensive, it’s very broad, [ph] it covers all the elements of the cost on their cost of goods sold. So, there is no element left uncovered in that program. And we already implemented the organization, the processes and the tool along this year. So, as we go into next year, this program is going to be in full execution because the whole infrastructure is built. And when it comes to organization simplification, that’s something that we empathize towards the second half of the year is building. I just mentioned the integration of the Americas that’s going to have synergies and supply chain, commercial synergies but it’s also organizational synergies. We expect to see some of that too in Europe and across the company including corporate. So, we see quite a good runway going into 2018 and outer years in our productivity efforts that encompass all aspects of it.

I think the team here, Tyler, really thinks about this as a journey. I mean, when we started down this path, there were some short-term things we could go after, certainly some longer term things. And for 2018, I think a big portion of the focus is going to be coming from the logistics and procurement areas of the Company, things that took us a little bit longer to get the infrastructure in place to make an impact but that we’ll see those kind of savings coming forth going forward.

Yes. And we are emphasizing going to a global shared service center that’s already in motion, and something that is highlighted in articles and in the news quite a bit recently, which is they use a robot; it’s something we are doing in O-I already, and we have quite a few robots already implemented around the world, and we expect to have more.

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

Good morning and congratulations on the progress thus far, solid quarter.

Good morning. Thank you.

I wanted to kind of follow up a little bit when we think about utilization levels and particularly in light of what you are talking about integrating all the Americas here. So, when we look at the last year or so, North America has been pretty soft, down a bit. And you’ve been adding capacity in Central America and you are growing pretty nicely in Latin America. Where do you think you are with utilization? And perhaps, is there a need to rebalance and take capacity out in the U.S. versus Central or Latin America?

Great question, Chris. Thank you for that. So, I think one of the great values of the Americas is the network we can build. And we are already working on that. We’re seeing opportunities to move products pretty much across the continent and supporting growing markets with capacity, like the ones you mentioned being less available in North America, for example. We are planning all that and it’s moving across several countries. In fact, we are supporting right now the Asia Pacific from the Andean countries. So, this dimension is growing in the Company. In some cases we can do that with a modest profit; in some cases, it’s kind of breakeven, but it helps to really balance these networks. So, all that is under consideration; we’re seeing good opportunities. As soon as we started the new organization with the Americas, one of the things that Miguel did with his team was to lay out the plan and we continue to refine it at this point in time.

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

Hi. Good morning. This is actually Matt Krueger sitting on for Ghansham. How are you doing today?

Good morning.

So, I just wanted to touch on the volume outlook for 2018. Can you provide an outlook for regional volume expectations? And then along with that, could you provide some of the puts and takes as far as the drivers go for each region? I know, we touched on a couple already but just the overview of them altogether would be helpful?

Well, we don’t provide guidance for 2018 at this point in time. However, let me highlight a few things. I think, we are gaining very good momentum in our productivity initiatives across the regions. And as I explained a few minutes ago, this encompasses the entire business, not only the manufacturing productivities, everything in the Company that drives cost. When we look at the demand in Europe, it is expected to be quite solid going into 2018 with the capacity and demand being balanced and with the pricing environment being constructive. When we look at the demand in Latin America, it is expected to continue to improve, driven by a Brazil recovery, which we are seeing, and I just described earlier in the call and a strong Mexico but we are also seeing very good opportunities emerging in the Andean countries. For example, there is a new brewery emerging in Colombia. It is going to be starting operation in Q2 2018. And there is a growing emphasis in the region across all countries in premium beer. And I described before what’s happening in Brazil with one-way glass for beer which is driven by premium. I explained before that that product category has been growing in the country from a 2.5 share to almost 11% share. This is the fastest growing package in Brazil over any packaging substrate. So, this is a category emerging in the Andean countries and across all countries in Latin America. And we, O-I, have a very high level of new business development activity in this region, which is supporting our growth and thus far what we are seeing in Brazil. North America is expected to continue with the same dynamics. Now, mainstream will decline; it’s been declining, it’s been several years. We don’t see a change there. However, I think what’s important to highlight is our focus because we’ve been positioning O-I to be able to enjoy the growth of the growing segments. So, when it comes to imported beer, we are reinforcing our emphasis in the JV with Constellation as we described before and a fifth furnace will go in place right after we finish the fourth furnace. And just for your information, this is going to be the largest and most modern brewer -- excuse me, glass container facility in the world. Now, we also see in North America very good growth in the spirits, wines, energy and food. And we are retooling and realigning the Company to be able to derive those. Something that we’re seeing in this fourth quarter, let me just mentioned that for a minute. The fourth quarter for North America is showing a positive performance in demand in 2017 year-over-year. And the reason for that is exactly the new business development and the repositioning of the region for the new segments. So, we’re seeing improved performance in some of the segments I just highlighted. APAC is expected to emerge strong after we complete the retooling and their repair time, and demand is quite a strong in the region. So, we are expecting an improvement in earnings and margins as we go into the second half. And overall, our renewed execution rigor and discipline will only increase and improve as we go into 2018. And I just mentioned the reorganization of the Americas as an example, which is also something that will contribute to 2018. So, while I cannot give you guidance at this point in time, I think those things will put some perspective or give you some perspective with regards to what we’re doing.

Your next question comes from the line of Edlain Rodriguez from UBS. Please go ahead.

Just one quick question on Mexican imports and exports, I mean, clearly that has been very strong. But any concerns at all about oversupply conditions developing there because everyone seems to be chasing the same hot market, I mean like any concerns there at all, given that you’re expanding there?

Okay. We’ve got to separate local market and this market of beer that we just mentioned before. So, the local market is growing, it’s been performing quite well, it’s across all categories. Remember, we are primarily in the -- we are in the open market. We -- our share in the local market of beer is not that high. So, that’s not where we are in the -- with O-I Mexico. Now, the exported beer that comes to the United States is driven by being the fastest growing category in beer in the country. We just saw the results that were made public for August. And I think the growth for this category was 30%. So, it’s a very fast space. Now, the capacity has been built in the past for cans or is under construction. We’re building the capacity for glass. I think every one of the substrate is getting their fair share of what is normally seen in a given market. So, I don’t see any competition between substrates taking place, we’re not getting ahead of demand. In fact, the construction that is coming in the future in the JV is all the time in alignment with the customer, which is our partner and is in line with our projection for glass consumption. So, we’re very comfortable that everything we’re doing has a market, it’s aligned with the actual or what – with their projected demand for glass and it’s not overlapping with the projections of all substrates.

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

Did you guys provide any further detail on some of the flexible manufacturing process -- progress you’re making in Europe as well as in North America? Thanks.

Well, we are emphasizing flexibility across the Company. And that’s very important because our customer, they’re growing in the -- in their base business but they’re also growing in their high value segments. And their high value segments are always fragmented, that’s the characteristic of those markets, but they’re higher margin food. So, we are adapting the Company gradually to able to be more and more capable to serve those markets, to able to really enjoy the growth of both ends, the base and the high value segment. We also mentioned the work we’re doing in the R&D center where we are churning the time to market by using the center for new product development activities and we’re also working on technology as we highlighted to improve flexibility in the overall business.

Your next question comes from the line of Brian Maguire with Goldman Sachs. Please go ahead.

Hey. Good morning to you too. This is actually Connor Robbins [ph] sitting in for Brian McGuire. I just had one question regarding the joint venture with Constellation Brands. If you could give a little more detail as to what went into the decision of extending the JV till 2034? And then, as well as just some details on the expansion of a new furnace; I think you mentioned in the press release it costing about a $140 million in capital. And I was wondering if that is something that you’d have to contribute cash to or if it’s self funded.

We do expect the cost of the fifth furnace to be $140 million that’ll be equally shared between us and our partners. We anticipate that the $70 million, our share will be paid approximately equally between 2018 and 2019. And then as part of that agreement, Constellation extended their contract to us by 10 years to 2034. So, we’re very excited about the new expanded relationship and our interest to get going on the fifth furnace after the fourth one goes in place early next year.

And this is a facility worth to visit. It’s the rest facility you can find for this kind of product line any place around the world.

And we have a follow-up question from the line of Lars Kjellberg from Credit Suisse. Please go ahead.

Yes. Thank you. I just wanted to clarify the incremental savings you’re getting out from Holland being shutting down quicker than you already have expected. Is that part of the 35 to $45 million that you called out since the first quarter in terms of initiative savings, or is that incremental on top of that?

First of all, it’s not incremental. We discussed this in the last earnings call and anticipated a 4 to $5 million savings. It is not however incorporated into the Total Systems Cost save category. That category is $35 million to $45 million, is separate from the closure of the Netherlands plant.

Thank you, everyone. That concludes our earnings conference call. Please note that our fourth quarter conference call is currently scheduled for February 7th. We appreciate your interest in O-I. And remember that glass is transparent and yet multicolored, it’s rigid yet flexible enough to come in a variety of shapes and sizes. Make the smart choice, choose glass. Thanks. Have a great day.

Ladies and gentlemen, thank you for your participation. You may now disconnect.