O-I Glass, Inc. (OI) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Angel, and I will be your conference operator for today's conference. At this time, I would like to welcome everyone to the O-I First Quarter 2018 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 conference over to host Mr. David Johnson, Treasurer and Vice President of Investor Relations. Sir, you may begin your conference.

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 CFO. Today, we will discuss key business developments and provide a review and outlook of our financial results. 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 and adjusted cash flow, which excludes certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP items can be found in our earnings press release and in the appendix to this presentation. Now, I'd like to turn the call over to Andres.

Thank you, Dave, and good morning, everyone. Let me start by saying that we're doing when we say delivering nine consecutive quarters of meeting or beating the key financial targets and performance [indiscernible] through a rising profits and margins in Europe and the Americas, which account for 90% of the business. And Asia Pacific really improved in the back half of this year, as we're already more than half way through the intensive investment program to improve the fit-to-market of their assets. This is the same type of programs that was done before and is now facilitated results in Europe and the Americas. While Jan will dig into a detailed financial review and outlook in a moment, let me provide an overview of the first quarter of 2018, which unfolded as expected across the world, in terms of external conditions, sales and shipments, as well as both operational and non-operational performance. Sales were solid and at high singles reported by a stronger euro and a constructive price cost inflation environment across the world. Shipments were essentially on par with the prior year just as we expected and we continued to see stronger shipments from our joint venture with CBI that supports the fastest growing beer segment in the US. Our cost position was right in line with expectations. Total Systems cost and footprint actions added to a bottom line. Meanwhile, as we previously mentioned in prior calls, investment in assets and key capabilities are temporarily putting pressure on our earnings, more on this in a moment. In the immediate term, as we assess how the business is performing and the solid results we have delivered in the first quarter, I'm confident that we are on track to deliver our financial targets for full year 2018. Now, let's turn to Slide 4, where I want to focus on sustainable value creation. Consumer trends are starting turn towards glass. This is reflected in the high level of new products and productions around the world. As an example, we launched glass for milk in six different countries recently. Today milk is selling in glass in countries like the US and the UK, something unthinkable until just recently. We're further building key capabilities in areas such as sales and marketing, innovation, integrated business planning, end-to-end supply chain and talent and organization. In fact, we have been actively rolling out many of these capabilities around the world and the benefits are starting to be visible in our two largest regions. For instance, Europe has been through four cycles of IBP, integrating the part of demand, supply and finance dimensions in a three year rolling horizon. This is an ideal planning process to support growth in an intensive asset industry like glass with a long capital cycle. This is very timely considering the interest in glass by consumers, customers and channels to market as well as our important stake holders. The Americas is now launching the program and the Asia Pacific region will do so early next year separately and within end-to-end supply chain TSC is deployed and several of our plans are now adopting a new operating system that will allow for much efficient operations by applying the standard work and continuous improvement methodologies. We've been investing in new product innovation and process technology to significantly improve O-I's position within the glass container industry and the packaging industry as a whole. Within the people dimension, we're working in much more collaborative and productive ways. Cross functional teams are bringing together insights from marketing, sales, manufacturing, supply chain, engineering and finance across the world, all driving towards the execution of practical solutions to impact the top and bottom line and leveraging O-I's truly global enterprise. Our end-to-end supply chain teams are singularly focused on improving assets and enhancing their flexibility and reliability. While also making proven strategic investments in our footprint that will dramatically enhance our ability to meet rising and changing customer needs at a more sustainable value generating cost point. And this is a key linkage to how we are strategically investing in our asset. We continually review our footprints seeking ways to redeploy supply from higher cost to serve assets into more productive efficient assets. In 2017, we did this in the Netherlands, while in 2018; Columbia is already in the works. These are projects with a very favorable return on investments. As we noted in previous earnings calls, we're deeply engaged in a variety intensive asset investment program through the first half of 2018 in Asia Pacific. Over the past year or so it has become evident that while there is good growth in this region, our assets have not been fully matched to evolving costumer product needs. So in the fourth quarter of last year, we opted to earnestly begin the process, improving the assets fit to market in order to drive long term value. This is similar to what we've done before in the Americas and Europe with very positive results as areas by rising segment operating, profit and margins over the past two years. This illustrates that efforts to improve our assets are a strong catalyst to lift margins and earnings. Good assets that are more productive and are better fit to market will drive margin expansion when properly leveraged by cross functional teams. This is what we are increasingly doing, so now it is Asia Pacific's turn. We have a finite set of projects that we know well how to manage from start to finish, all in a way to meet current and future customer needs. In fact we are presently ramping up furnaces that were in the initial part of the asset improvement program. Bringing all the regions together, clearly we are firmly on the path to increase shareholder value Now, let me turn the call over to Jan.

Thanks, Andres. Let's turn to Slide 5. Beginning this year, we have consolidated North America and Latin America into one segment named the Americas This allows us to better leverage critical resources and competencies across the larger geography, to replicate best practices and to realize cost synergies. Trends across the Americas are as expected. Sales revenue was up with gains reported and price currency and volume. Overall shipments were up low single digits. Continuing trends that we saw exiting last year, Brazil was the strongest performer in the region where private consumption is recovering and the new product introduction activity enabled us 30% increase in sales volume year-over-year. For instance we are helping a major nonalcoholic beverage company successfully launch soda in glass in Brazil and introducing glass packaging into the fast growing fruit juice and coconut water segment among many other new product introductions across all end uses. And cross functional teams across the region are generating new business in glass, premium olive oil in Colombia, tuna in Ecuador, fruit juices in Mexico and new pasta sauces in the US, to just name a few in this region. Within the US, solid growth in premium and super premium beer, spirits, food and nonalcoholic beverages helped once again to largely offset the overall declining trend driven by mega beer. On our last earnings call we mentioned that the use of O-I containers in the US has been at record levels in recent years, when taking into account volumes from our JV with Constellation Brands. I'm happy to say that the situation is now even better. Use of O-I containers in the US market is higher year-on-year, when including results of the JV, which ramped up its fourth furnace in the quarter and in the first quarter of 2018, we have seen continue traction on total systems cost results. In all, the Americas is performing solidly with price and volume growths plus margin expansion. Turning to Europe, the team is driving exceptional improvement. Sales revenue was up 16%, driven by both price and currency. Shipments were essentially flat, which is quite solid and in line with expectations in light of a strong comparable period in the prior year. Price cost spread was modestly favorable consistent with our view of the constructive dynamics we've discussed. After layering in the benefits from the plant closure in the Netherlands and total systems cost you can see margins improved a healthy 60 basis point. Good results and we expect these positive trends to extend into the rest of the year. Let's turn to Asia Pacific. Andres already mentioned the asset investment program which is the cause of the temporary lower profit end margin in the region. While this is dampening earnings through the first half of 2018it's the right thing to do, to sustainably improve the region's earnings profile going forward. As a result we expect that Asia Pacific will emerge in the second half of this year with the solid and profitable foundation upon which to continue to grow for years to come, leveraging favorable demand in Australia New Zealand as well as healthy growth in emerging markets. Let's turn to Slide 6, overall segment operating profit in the first quarter was right in line with our guidance, currency primarily from the stronger euro with favorable year-over-year. The impact of sales volume and mix also helped segment operating profit due to the volume growth in the Americas. Price was up about 2% with gains in all regions. With respect to operating cost, there are several elements in this rather broad bucket, cost inflation is over half of it, plus higher engineering activity compared with prior year led to more production volume and higher manufacturing spend in the quarter. On the positive side total system cost performance and benefits from the plant closure continued to drive sustainable improvements in our cost base. You know we are passionate about and committed to driving margin expansion, in this quarter top line gains didn't all drop to the bottom line as I just mentioned, so simple math leads to lower year-over-year margins within the quarter. We anticipate less pressure in the second half of 2018 as the cost associated with asset enhancements return to a more normal level and while the favorable price cost spread and TSC continue to support growth in the bottom line. For the full year then, we are confident that we are on track to deliver solid margin expansion of at least 40 basis points. Turning to Slide 7, while our business operations have several moving parts sales, TSC, asset improvements and price cost spread to name a few. The year-over-year impact and EPS is relatively modest in the quarter, segment operating profit in total, added $0.02 to EPS. The effective tax rate in the quarter was in line with our annual guidance. However, since it is about 100 basis points higher than prior year, tax was a $0.01 headwind. While those two items together sufficiently explain the $0.01 increase in adjusted EPS, I'd like to pass on interest expense, share count and currency. Flat interest expense is a great outcome as we faced a stronger euro and rising variable interest rates in the US. We have essentially offset these pressures through deleveraging smart capital structure planning and efficient global cash management. We repurchased two million shares of our stock in the quarter, all in March. This had no appreciable impact on our average shares outstanding in the quarter and therefore no impact on earnings per share yet. Lastly, currency was a $0.02 tailwind overall, which is not quite as favorable as the expected $0.03 to $0.05 I mentioned on our fourth quarter call and although we delivered earnings on the upper end of our guidance range. And looking at Slide 8, our second quarter outlook feels a lot like first quarter results albeit from $0.75 base. There are many moving pieces which largely offset one another, leading to second quarter 2018 adjusted EPS outlook of about $0.75. Here's a breakdown of the key pieces, we expect currency will continue to contribute a few pennies and we anticipate a modestly favorable price cost spread in the second quarter while shipments are likely to be flat overall. Similar to the first quarter, the impact of engineering activity should be partially offset by global total systems cost efforts plus continued footprint benefits in Europe and lastly interest in taxes will be higher than prior year, entirely consistent with the full year outlook. From a regional perspective, the Americas should be about flat in the quarter, while the region is running very well it won't have the benefit of a minor sales of non-strategic assets that we completed in the second quarter of 2017. Segment operating profit for the other regions is expected to be directionally consistent with the year-over-year performance as in the first quarter, but perhaps more muted. Europe should still benefit from favorable FX and price cost spread. Asia Pacific is expected to be lower year-over-year, but not as much as in the first quarter because some of the assets are coming back on line in this quarter. Considering the high level of investments in the first half of the year EPS on par with the prior year would be a solid outcome and a testament to our resiliency. In all, we're setting the stage for substantial earnings improvement in the back half of 2018. Turning to Slide 9, I trust you can see that we are making steady progress through our comprehensive transformation. You know, I've been here for over two years now, in my assessment the O-I team has come a long way improving our financial performance, rebuilding our credibility and establishing a solid foundation for the future. The Americas in Europe are performing better year-over-year, sales, profit and margins. Andres mention that Asia Pacific assets are a key focus. We'll get that behind us mid-year, really working as an organized, simplified, effective and efficient global enterprise. Said differently, we are hitting our earnings and cash flow targets even with APAC's temporarily limited contribution. Clearly the Americas and Europe are delivering strong results. As APAC rebounds and Americas in Europe continue to improve there is quite some runway ahead of us. While we will have more to say about the longer term outlook at our Investor Day later this year, you can expect discussions about how we anticipate that solid volume growth and the continued impact of our strategic actions will lead to higher margins, earnings and cash flow. Let's turn to capital allocation on Slide 10, we will continue to invest in our business as our CapEx activity will reach about 500 million for the full year and we will see an increase in our cash contributions to joint ventures. For example, we continue to invest in our joint venture with CBI. The fifth furnace is expected to come on line in 2019. We will continue to look for built on acquisitions that complement our global footprint and product portfolio. And while we continue to manage our legacy liabilities and that structure, we have just recently begun to slow the pace of deleveraging by repurchasing shares. Over the course of 2018, we plan to execute about $100 million in share repurchases. With the review and outlook complete, let me turn the call back to Andres.

Thanks, Jan and let's turn to Slide 11. We are excited about the financial path we are on as well as our strong commitment to sustainability. At the end of the day, it's about the prosperity we bring to our shareholders, customers and employees as well as our communities along with the impact on the planet. There is an ever increasing expectation from consumers, customers, government and NGOs for companies to provide responsible packaging. We are proud to make a product, glass that has multiple benefits, is reusable, it's infinitely recyclable, is pure and doesn't decompose into harmful chemicals in the earth or oceans and glass is preferred by health conscious consumers, you see consumers get it, there is no mass of floating on the open seas. We continue to see a resurgence of premium products returning to glass, there is yogurt, mayonnaise, ketchup, fruit juices, coconut water, milk amongst others, which is really good meals for quality premium products and for the environment. O-I's commitment to sustainability goes beyond the glass products we make and includes how we make them. We are able to use as much recycled glass as possible. In some plants in Europe, recycled glass amounts to more than 80% of our raw material. That is leveraging new technology in which we are investing, we envision that our improved glass making process will lower energy use, reduce carbon emissions, minimize waste and respond better to changing customer needs. Let me highlight a project dealing with energy conservation management. We develop significantly more advanced algorithms in our glass melting and glass conditioning control system that we use energy consumption and enhance productivity. The pay back on the investment is about one year and we are in the earlier stages of replicating these across the global footprint. Externally, we have begun to gain recognition for our efforts in health and sustainability. O-I is the first fruit and berries packaging company to achieve a world rating in Material Health on the Cradle to Cradle product scorecard, one of the premier sustainability certifications for products around the world and across the industry. MSCI recently upgraded our EST rating to A, elevating O-I into the top 10% for containers and packaging. And due to efforts in corporate and social responsibility O-I will this year receive the Vision for America Award from Keep America Beautiful. For O- I sustainability is not only the right thing to do, but also a competitive advantage and growth driver that will fuel our business for years to come. We plan to share more on our sustainability business and financial strategies at Investor Day on November 14, in New York City. To finalize I will like to thank our employees for their high level of engagement, energy and ownership in this transformation. Their discipline and rigorous execution is taking O-I to rapidly advance and perform. And now we will open the lines for your questions.

[Operator Instructions] And at this time your first question comes from the line of Anthony Pettinari from Citigroup. Please go ahead, sir.

Given the of progress you've made in Asia Pac, do you have any kind of early sense where operating margins could be exiting 2018 or where they might be on kind of a more normalized basis? And then when you think about your footprint in Asia Pac, are there opportunities to potentially add capacity in the region maybe in Southeast Asia where it seems like demand is growing pretty strongly?

Yeah, let me start with your second question, so we see a stable market in Asia Pacific and in some places growing quite steadily. So the step were taken at this point in time which is working on the assets to set them in a way that they can in fact fit the market well is - they'll be closer to what you just describe. There are opportunities in the APAC region to add capacity and as we complete this phase and we move into a following year then we can evaluate those opportunities to make the best decision for the company. When it comes to margins, we expect that if we go into the second half margins will gradually normalize and if as we go into the first half of next year we're going to be running in the normal conditions as we did in our best times in this region in the recent past.

Yeah, we'll see consistent improvement in the margins quarter-over-quarter this year, exiting this year could be around 15% or 16%, so for next year as Andres said, we'll see something more normal of what they had been prior to of this activity level.

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

Everyone good morning, thanks for taking my question. I just wanted to come back on Asia Pac for my one question. I remember from the last call that we asked, how should we gauge your progress in your ability to hit your goals and I think one of things Jan you'd mentioned was that we should focus on the revenue development as an indicator of your ability to ultimately hit that margin because you are focusing on the cost side. So when we look at the volume being down a bit and the revenues being flat in the quarter-on-quarter comparison are you pleased with the revenue development relative to the underlying cost effort that you have going on and I also seem to remember that you had mentioned for the year you would - even with the weakness in the first half Asia Pac would be up in profits and margin, correct me if I'm wrong on that, but if that was the case, is that still the goal going forward for '18. Thank you.

So let me start by reviewing the volume, so the reason why the volume is down in this quarter is because we had limited capacity to certain market and also we had some impact in Indonesia coming from lower sales within our containers. Now, when we look at the second half and onwards, we see several positive effects that are going to help improve margins in this region earnings in the region. One is we're going to improve sales volumes because we're going to have enough capacity to supply the market the way it should be, we're going to see an improved mix because of the changes we're making in the footprint. We're going to see improved manufacturing cost, warehouse and logistics cost and therefore we're going to see improved earnings and margins.

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Please go ahead, sir.

Good morning Andres, good morning Jan.

Good morning.

Good morning.

Andres, I wondered if you could just give us a little more color on sort of volume across the Americas in sort of your key markets, places like Brazil, Mexico, US, Canada. I know the aggregate number for the region was about 2% growth.

Okay, yeah. So we were about 2% up versus prior year when we look at the US, mega year in the same trends we've seen before however we're seeing growth in food, spirits, and wine and premium and super premium beer and we've been introducing new products in this market too. Now, when we look at imported beer, it is the fastest growing segment in the market, it is driven primarily by brands by CBI and you know that O-I presence in this segment is very large through the joint venture or IBC. Now, something that we give you an idea of magnitude is this volume from IBC, even though we don't consolidate in our sales volume, it has a quite large impact, so it goes up to 150 basis points growth for the total company. So please take down into consideration when you're looking at the US market because the presence of O-I containers in the US market today is larger than it has ever been in recent years because you combine the local supply from - with this supply that we are having in Mexico for the imported beer. Now, when we look at Brazil, we were up 30% in the market for the quarter and beer was up 35%, three five. Now, when we look at the analysis by Nielsen looking at leaders of beer being sold by packaging type in the country this is what we see, one way [ph] glass is up 11% in the total market. This is the only package that grows in Brazil when you look at that analysis by Nielsen Now, when you look at mainstream one way glass is 4% up and when you look at premium it is 13% up. Then when you look at returnable glass, it is up 31%, three one, in premium. Now, returnable glass drops in mainstream in Brazil that that has very little impact in units for O-I. Now, that returnable glass drops because there's low on premise demand, it's been that way since the economic crisis in Brazil and it doesn't record. Now, the unit impact in our volumes up one way growth in - as I just described before is very large, therefore 35% growth that we see in the quarter. Now, there is a lot of new product introduction activity in Brazil, so as we mentioned before we're working on fruit juices and coconut water, soft drinks and beer as well as other categories. Mexico was fairly flat for the quarter, however, we see a very healthy demand in this country and then when we look at the EMEAN [ph] countries they were a low to mid single digits up year-on-year and this is driven by all categories that we serve in this territory. Again new product development and introduction is very large in this area of the work room. And when we look at APAC, we see a flat market for Australia, New Zealand, important to having consideration that our capacity has been limited, but the market in fact is pretty solid over there and the emerging markets are growing at mid-single digits, which is also something that we can benefit from once we finish this work with the assets. So that's pretty much an overview of demand. If you want a little bit more follow on in Europe, we're seeing very solid demand over there. You'll see Q1 being in line with prior year. Now, we are comparing with a quarter that was very strong in 2017, it was at 4% when compared to 2016. Beer consumption in Europe is at the highest levels in one year, so that's very solid and wine volumes are very good even though there was a poor harvest in the previous year.

And you're not question comes from the line Lars Kjellberg - Credit Suisse. Please go ahead, sir.

Good morning, thanks for taking my questions. Just looking into your sort of full year guidance of 40 basis points, if I look at my own model that would imply in the range of about 130 to 140 bps margin enhancement year-on-year in the second half, what does that tell us heading into 2019 and also if you want to comment on your continued expansion '19 onwards in terms of would that be less disruptive, i.e. less asset improvements and more other things commercializing volumes et cetera to drive further margin expansion beyond '18.

So at this point in time we are expecting for this year 40 basis points of margin expansion. There are a few factors that are influencing margin at this point in time, is constructive pricing across the world. We haven't seen that in quite a few years, mix management, we're doing a lot of work in that dimension through sales and marketing team and that contributes for margins. TSC is fully embedded in the organization and is gaining momentum and we expect the TSC to evolve us into the following years also contributing to a bottom line. And the structural cost reduction and investment we're working on, so we did some last year, we're doing some this year, there are more opportunities going forward, so as the benefits of those investments kick in we expect and in combination with everything we described before, we expect the margins to continue to increase going into '19 and onwards.

Lars, maybe I can elaborate a little bit on the cadence of the margin enhancement for this year. And you saw the performance in the first quarter, in the second quarter we expect margins to be in general flat to slightly down perhaps. In the Americas, we're seeing EBITs relatively flat, but revenue will be up, so we expect to see the Americas performance be relatively flat year-over-year. In Europe, we're seeing continued strength and improvement, so I would say they should be equally as good if not a little bit better than the first quarter performance on a margin improvement basis and in APAC while still negative for the second quarter will be substantially not as negative as the first quarter, so it'll be better quarter-to-quarter and we'll see that improvement for APAC continue a lot in the second half as we get through these asset repairs and the cost - both logistics cost and the asset repair cost are less than the second half of the year, so we'll have good carry over as we go out of this year for 2019 for margins and EBIT and will love or we'll be happy to talk about that in a lot more detail as well during our upcoming Investor Day in November.

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

Hi, good morning. I wanted to ask just for clarification on share repurchases. Jan, I think you said last quarter that it was not in your full year guidance and if I were to roll through what you did so far I'd get about three pennies and just not sure if it's in Q2 or 2018 guidance and then can you talk about the decision to start repurchasing shares in Q1?

Sure, so that's a good question and I can clarify that for you. I think in total, we should expect roughly around $0.03 in 2018 for share repurchases after considering that we typically have about a million shares of dilution for the 401K and executive compensation in any given year and after the fact that we've purchased little less than half of those shares in the latter part of the first quarter and then depending on how the timing of the balance of the shares are repurchased during the rest of the year will determine if it's $0.03 or a little more or a little less. We have not included this in our guidance as of yet, but there's typical - in the mid part of the year we'll update or refine our range on guidance for share repurchase, for FX rates, for the ups and downs as we see them throughout the mid part of the year, so you'll hear more about that probably in our next earnings call as well.

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

Good morning, guys. I wanted to kind of circle around the topic of were you anticipating the volume growth going forward and then how you view acquisitions folding into that? I mean so kind of two parts there to the question. One, when you're thinking about acquisitions will they kind of remain in the glass sector or are you beginning to look outside of glass and how do you think - are there areas that you may acquire to try to improve volume growth or things of that nature.

Okay, so when we look at the volumes are in line with the previous question on volumes, we're seeing in a very solid environment in Europe and we're seeing a renewed interest in glass. That renewed interest in glass also applies for the Americas and applies to Asia Pacific. The new product activity that I mentioned earlier in the call is creating new volume and in fact that's a pretty significant part of the growth that we're seeing year-on-year or the last three years of 100 basis points. Now, when we look at the Americas and as Brazil comes back and the EMEAN countries continue to grow that is a very good source for growth. We're setting up things in Mexico in a way that we can serve incremental demand because we are approaching to match out in capacity over there. So overall we see a positive environment around the world for glass, we see more interest by consumers, by customers, by channels et cetera. When it comes to M&A, we mentioned before that we will continue to look at opportunities. There are opportunities out there, we are evaluating them and when it comes to right time and if we find the right opportunity we're going to materialize that. There is nothing as big as we had before, like [indiscernible], but there are some that can be thoroughly accretive and strategic for the company. That will be primarily in glass, so we are not looking at this point in time other segments. There are plenty of opportunities in glass, we said before we're in 60% of the glass market around the world, we are not in 40% of it, so there are plenty of opportunities for O-I to grow over time.

And your next question comes from line of Ghansham Panjabi from RW Baird. Please go ahead.

Hi, good morning. This is actually Matt Krueger filling in Ghansham. In the context of higher oil and freight cost to kick off 2018, what level of inflation did you see across your business during the first quarter and what's your outlook for inflation for the rest of 2018? And then how does the year-to-date level of inflation compare to your initial expectations for the year?

So when we look at inflation that is in line with what we expect coming into a year with the exception of the fuel and freight inflation in the US. Now, we described before that we've been able to record inflation in the first quarter. We see a constructive price environment around the world, so we are confident we're going to be able to record inflation cross the world in 2018. When it comes to the fuel and freight in the US which has been a very punctual situation, very specific to this country we had increased inflation in the first quarter, primarily driven by the freight. Now, when it comes to the fuel we pass through that fuel in a monthly and quarterly basis, so that when we can record fairly quickly. The freight we pass it through in a yearly basis, annual basis. Now, we're seeing a moderation of that inflation in the second quarter and we expect that that will pretty much fade away as we go into the second half. So we don't have a major concern with that at this point in time and we're expecting that we're going to be able to record inflation across the world in 2018.

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

Yes and good morning. Could you talk a little bit about your volume? If you were to include your share of the CBI joint venture into the total either the company or the Americas segment and then lastly Jan, if you could just confirm whether or not the investment in joint ventures is taken out of the 400 million free cash or is it above that line?

So when we look at the CBI volume, it equates to around 150 basis points of growth for the total O-I, so it's a very sizable volume and you note that we don't consolidate it. However, we have equity earnings that come from that business to us, so it's a very healthy volume with very healthy growth, it has a lot of a lot of runway because we just started furnace four which is going to generate growth this year and the following year and we're building furnace five and a combination of the two is going to - are going to drive - is going to drive growth going into 2020 and 2021.

Okay and then just to clarify your question on free cash flow we have $400 million of adjusted free cash flow and then from that we make investment in our JV such as Constellation Brand, our JV with them should be about $25 to $30 million this year and then a bit in RMBC.

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

Thanks, good morning Andres and good morning Jan.

Good morning.

Good morning.

Andres, when I look at the slide and you talk about 2018 plus and you talk about there's 1% plus volume growth and innovation and some of these new categories like yogurts, milk and even some expansion in Asia Pacific. Can you talk a little bit about first, the margin profile on this business, is it - should we expect the mix to improve as you win more of this business on a go forward basis and then on the capital side, should any of this new business require additional capital above and beyond what we would normally expect? Thanks.

Okay, so a few things. The first one is, we see an entire market moving towards high value segments and it is for all categories and in that space, glass does really well helping to yield brands. As we invest in innovation and product innovation, which we are doing, we're going to support the presence of glass in that - in the high value segments. Margins are higher in those segments, so as we grow we will tend to improve our mix because of the larger presence in high value segments. Now, there will be capital required at that point in time to be able to support those businesses, nevertheless that capital will have very high return, so it is a very positive investment highly accretive as we move forward.

And Scott, all of that is included in the 500 million that we're anticipating for CapEx for this year and just to elaborate a little bit on Andres's prior discussion about returns, we look at all of these investments that we do in a variety of ways. First, of course we have our strategic kind of investments that might include things like the closure of our Netherland plants, the plant in Netherlands and this year the closure of one of our plants in Colombia, those footprint type actions and those are highly - very positive type returns for the company, 20% or greater type returns. We're also investing in ourselves in some of our areas such as procurement and supply chain that you've heard us talk about a lot which also bring high returns and sustainable long term value to the company. That would be one kind of area, strategic area and then another type I might, I don't know classify maybe as work plus growth. So things that are better than our average cost of capital, but allows for growth for the company ongoing like our joint venture with Constellation, like the Vitro acquisition a few years ago and some of these fit to market type investments that Andres has been talking about to especially in APAC this year, so we can be more responsive to the needs of our customers and all of these allow for future growth. And then maybe the last category would be things better than weighted average across the capital such as in the maintenance area where we're investing in our assets to continually drive greater efficiency and improvement in our manufacturing plant. So those I think are important to understand on how we really look at investments and returns for this company.

Let me add a couple of comments though, when it comes to margin improvement, you're very familiar with it TSC efforts. Our efforts in global supply chain which are fully embedded now in the total organization, process technology that we are investing on, those things will contribute to margin. They are gaining momentum and as we go into the following years they will continue to contribute. The odd thing that we highlighted in the call if IBP, integrated business planning, this is very important. We covered a couple of questions today about growth. In order to support growth in this industry this three year horizon rolling, planning is a very important process for the glass industry. This is already fully implemented in Europe, is going to be implementing in the second half in the Americas and will be implemented in APAC early next year. So we are designing a systematic solution and systemic solution for O-I, that's what we'll be signing, so we can in fact support growth, earnings and higher margins over time.

And our next question comes from the line of Edlain Rodriguez from UBS.

Thank you, good morning guys.

Good morning.

Good morning.

Just one quick point on capital allocation, I mean, your leverage went up this quarter, I mean about four times. Are you comfortable with that number or do you still have a target of getting two to three times by the end of the year.

Yeah our leverage ratio went up from about 3.5 times to 3.6 times quarter-over-quarter, which is not only well within our covenants and guidelines, but is very typical of the seasonality that we show as well. Our debt levels under our bank credit agreement exclude certain seasonal working capital borrowings as I think I explained on the prior earnings call and we expect to be at year end roughly about 3.2, 3.3. So we are continuing to deleverage throughout the year albeit it is little bit smaller pace than we had in the past and this is because we have instituted the share repurchase program, but also I think more importantly because we're looking at capital allocation in a little bit different way now. A little bit more balanced approach, we're approaching that three times leverage that we put out there are a few years ago, we think that the prudent thing to do is to balance this a little bit more with share repurchase, with looking at putting perhaps some M&A opportunities as Andres mentioned, but continue to deleverage through the process.

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

Hey, good morning, thanks.

Good morning.

Good morning.

Just a couple questions, so I guess in Europe, just curious about your outlook for the rest of the year. Do you expect shipments to remain flat and if so maybe you can just help us understand some of the different dynamics in the categories whether it be wine or something else or non-beer or beer and other stuff and then similarly in the US, also maybe if you could parse your expectations by categories, that would be great? Thanks, for the Americas.

Good, so we're seeing a very solid demand in Europe and that goes across categories. Beer consumption at its highest point in nine years, we're seeing that reflected in our demand. Wine is remaining strong even though coming into the year we were expecting a little bit of a slowdown because of the poor hard decision, but it didn't really materialize. The new product development activity across that region, across the end users is also important, is very solid. So we expect a year that will be flat to slightly up, but we are comparing with a very strong year last year, so that's the situation for Europe, when it comes to Americas mega year trends are the same as they've been. However, we're seeing a very good growth in food and the spirits, in NABs, in wine, in premium, super premium everything else grows quite well. And our presence in those segments is very good is very, is very solid, so - and at the same time we are highly focused on new product development in all those segments, so we're seeing this year a slower overall decline in the US for example because the growth in all these categories is in fact partially offsetting that decline, so we are in a better position that we've been in previous year as a consequence of that growth.

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

Good morning everyone. Jan one quick follow up on Debbie's question, you've done buybacks of given your $0.03 and you're anticipating I think another 60 or so that give you a net goal or perhaps a little more, why not just include that in your guidance and as far as FX should we assume you're just using quarter end FX rate as you have historically?

Yeah, on the share buyback the $0.03 was the full year impact of the $100 million repurchase, just to clarify that. But of course it's dependent on when we execute the balance of those shares. It will be slightly higher than that if we execute more in the second quarter and slightly last if we do it toward year end. And FX - yeah, the currency for the second quarter guidance is based on the March end rates, which is typical of what we would do and then of course you've seen strengthening of the dollar sense there. The Brazilian real, the euro, the Mexican peso, have all moved and so maybe that takes back a penny or two, I'm not sure, but this moves daily, so we don't adjust our guidance daily you know as we try to offset minor changes when we can and as I mentioned in Debbie's question we will update and further refine our guidance as we go throughout the year and will add in for the share repurchase and we'll adjust if we need to for other items. And we'll do that more likely as the second quarter rolls out.

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

Hey, good morning.

Good morning.

Just a question on your US footprint, I guess it's been brought up a couple times, just the weakness in US mega beer and given the strong growth in Brazil, it sounds like it must have been down a decent amount in the Americas again, in the US again, just wondering if you have been evaluating any reductions in US capacity to kind of adjust to the environment. I know one of your competitors took out a plant or planning to taking out a plant this year, do you think that's going to be enough or there are opportunities for you to maybe optimize where you're making things for the new sort of level of growth we're seeing?

Yeah, so the situation we're seeing in the US this year is better than what we've seen in the previous years, even though mega beer decline continues. And our efforts, as we said before have been focused on improving the performance of every one of the categories. Like for this period, so maybe wine and the premium and super premium beer and we're also supporting our customers in the mega bear, so they can perform the best within the circumstances. Now, we've been adapting our footprint to that. There is more remaining supply in between some of the local products and on what now IBC is producing, so there are quite a few moving parts when it comes to demand and capacity and the balance and the influence in that footprint. So we are constantly analyzing that, we don't have any major plans at this point in time, our focus is in developing the market that is out there for glass which is very relevant and making sure we respond properly to increase interesting glass that we're seeing around the world and obviously it is also present in the US.

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

Hi, everyone. Thanks taking my follow up. Andres and Jan, I just wanted to come back on Asia Pac recognizing it's not your biggest segment and I had a quick follow on. Asia-Pac I think on the last quarter looking at Slide 6, you were saying you expected solid sales volume growth, the arrow was pointing up in terms of EBIT or operating profit on a constant currency basis, is that what you're still expecting this year, higher profit dollars and higher revenues in Asia Pac, is the program progressing as you would expect it and then just a quick follow on. Pricing in Europe, that price increase modest that was - is that what we should expect for the rest of the year kind of that level, I think it was like half a point. Thank you and good luck in the quarter.

Thanks, George. So let me start with price in Europe, what we're seeing is what you can expect for the balance of the year, that environment continues to be very constructive. We already went through all the negotiation season, so it is all set and done. So we are confident that we're in a good place when it comes to recording inflation in Europe. Now, we're in the best place we've been when we compare to the previous year. When we look at APAC, the volume that we've seen in the fourth quarter and the first quarter has been influenced by the activity that we have in the assets. We have all the in the condition we will have them in the second half. Our demand in the fourth quarter and this quarter and the second quarter will be higher, so there is a little bit of an impact in volume there, but all volumes are solid in that region, as well as mix because as we change the footprint, mix is going to improve though because we're going to have a better fit to market. Now, when it comes to the program that we have first, this is the same thing we've done with Americas and Europe or the last few years with a very positive impact, it's been healthy earnings, it's been healthy margins and it's been healthy growth though because we can get to markets or set markets in a better way. We are making very good progress in that, this is a very finite activity, is something that we know very well that is in our control and that is going to be behind wine once we get into the second half of the year. So we're very confident performance in this region is going to come up, I mentioned before that there are many things that will be impacted sales volume will be better because of that manufacturing cost will be better too, warehouse and logistics cost is going to be better so we're going to see variables moving in the right direction as we going to the second half and 2019.

And our final question is a follow up from Mark Wilde from BMO Capital Markets. Please go ahead.

Yeah, Andres just one more on Asia Pacific, it seems like we've had a couple of other rounds of restructuring programs in Asia Pacific over the last, I don't know seven to eight years and I just wonder, what is different about this program from earlier programs? What didn't you do earlier that you're doing now?

Thanks Mark. Yeah, very good question and it is very different. Let me just go back in time for a minute, so when you look at a period perhaps 2009 all the way to 2018 I will say that there are two major things that created a number of side effects that are related to what you're describing. The first thing was the price over volume approach of the company which had a significant impact on losing sales volume along the years and as you know when we started the newest strategy of this company back in early '16, we said very clearly as [indiscernible] in this business and we've been protecting that and we will. However, as you look back many actions were taken as a consequence of losing volume because of that. Now, the other big thing is the Australian dollar is strengthening at that point in time. It became a very strong currency and that had many impacts, one is imports of empty glass has started to go up, the second thing is it accelerated conversion to both line at that point in time, the third thing is it dropped the Australian wine exports and the fourth thing related to the Australian dollar is local beer has slowed down because the imported beer has started to grow. When you combine all those four plus the price over volume there was a significant excess capacity in that region that forced very drastic capacity reductions over time. So when you look back you hear - you see all those various events happening at that point in time. The only thing that was very significant is the China growth strategy, we've created a number of issues and those were described in to past, all of that is behind us. Now, what we're doing today is very different. We are improving the fit to market of those assets. We are improving the condition of those assets to be able to perform. This is the same we've done with Europe and the Americas with excellent results, so we are very happy that we are able to do this. Americas and Europe are in a very strong run at this point in time, earnings are going up, margins are going up, so it is the right time to the APAC and it was the last that we needed to go through. It is also important though at this point in time because of seasonality, so this is very different, I'm glad you asked the question because understanding the evolution of those years is not easy if you done late through them, but we're dealing with a very different situation right now. It is a good market, it is growing, APAC is changing with the balance of the company, this company is changing quite dramatically. Culturally our mentality, how we approach the business is this is changing. Our people are engaged, the ownership is very high, we're very focused on execution and results, so it's a very different moment and this region is not the exception, so I think we are in there on the right path here.

Thank you everyone. This concludes our earnings conference call. Please note that our second quarter conference call is currently scheduled for July 24. We appreciate your interest in O-I, where we are growing both distinctive and infinitely recyclable glass packaging that is good for brands, consumers and the planet. Thank you.

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