Hello, everyone. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the O-I's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Chris Manuel, VP of Investor Relations. Chris, the floor is yours.

Thank you, Adam. Welcome, everyone, to O-I's Second Quarter 2019 Conference Call. Our discussion today will be led by Anders Lopez, CEO; and John Haudrich, our CFO. Today, we will discuss key business developments and provide a review and outlook of our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for the earnings call are available on the company's website at o-i.com. Please review the safe harbor comments and disclosure of our non-GAAP financial measures included in those materials. Some of the materials we are presenting today relate to non-GAAP measures, such as adjusted earnings, adjusted free cash flow, segment operating profit, and these exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP can be found in our earnings press release and in the appendix to this presentation. I'd now like to turn the call over to Anders.

Thank you, Chris. Good morning, and thank you for your interest in O-I. Let me start off with an overview of our discussion on Slide 3. Last night, we reported second quarter results of $0.69. Earnings were below our guidance range as well as prior year results of $0.77. Speaking for the entire management team, we are disappointed with these results. We expect to perform better and are fully committed to taking all the necessary steps to improve performance. Importantly, I'm confident in our ability to deliver value to all stakeholders. Looking at the second quarter, results lag guidance for the following reasons. Sales volume has slowed late in the quarter, primarily reflecting the impact of extreme weather conditions in Europe. In fact, most of the gap to guidance is attributable to lower sales volume. Costs related to the commissioning of a furnace were higher than anticipated at one of the JVs in the Americas, and we incurred unplanned downtime across multiple locations due to flooding and all other weather-related issues in the U.S. Despite these challenges, there were a number of positive developments to highlight. Volume growth was strong in the Latin American markets, where we recently commissioned new capacity. We completed the Nueva Fanal acquisition, which expands our position in premium categories. We are now producing commercial-quality work for -- from our first MAGMA line, and we completed a number of refinancing activities to improve the balance sheet. Despite recent challenges, we have made good progress over the past few years, and we are fully committed to our strategy. However, we must acknowledge the impact of recent present headwinds. This includes lower organic sales volume and greater complexity following changes in sales mix, mostly in the U.S. and in Europe. I will expand on this in a moment.…

Thanks, Anders, and good morning, everyone. I will start with a review of the second quarter performance on Slide 7. As we announced, second quarter adjusted EPS was $0.69, which fell short of the guidance range of $0.75 to $0.80. There were 3 key factors that totaled about $0.09 per share that pressured earnings. Building on Anders' earlier comments, sales volumes were flat year-on-year compared to our expectation of 2.5% growth for the period. This impacted results by $0.06 compared to our guidance. Organic growth was about 0.5% in April and improved to 2.5% in May. This was consistent with our expectations heading into the quarter. However, June was down about 3% from the prior year due to extreme weather in the EU and lower demand of French wine for China. As a result, overall volumes were up about 0.1% or essentially flat. We incurred about $0.02 of additional cost to commission a furnace at one of the JVs in the Americas. Structural issues that needed to be addressed delayed the start-up a few weeks, resulting in higher engineering and logistics costs. We were also impacted $0.01 due to temporary unplanned downtime given flooding and other weather-related disruption in Texas and Oklahoma later in the quarter. Looking at the chart, second quarter adjusted EPS of $0.69 is a decline from $0.77 in the prior year period. To better understand core operating performance, we have illustrated the impact of changes in currency as well as its discrete items, which include the timing of an energy credit that was earned in the second quarter of 2018 but recorded in the first quarter of 2019. Adjusted for these items, prior year earnings were about to $0.70 for comparative purposes. From that base, you can see that price more than offset cost inflation benefiting…

Thanks, John. Let me wrap up with just a few comments. First, we appreciate that the second quarter performance and adjustments to our full year outlook are disappointing. We too are disappointed. Building on the overall favorable trends since 2015, we believe we are pursuing the right strategy to improve earnings and create long-term shareholder value. This includes monetizing the growing sales pipeline, executing cost reduction initiatives and developing breakthrough technologies like MAGMA. However, we need to accelerate performance to deliver shareholder value. In addition to our current strategic plan, we are initiating a program to bolster cost reduction efforts supported by an outside consultant. Likewise, we continue a strategic review of our business portfolio efforts supported by Goldman Sachs, who is our strategic adviser. This concludes our prepared remarks, and we now welcome your questions.

[Operator Instructions]. And your first question comes from the line of Chip Dillon with Vertical Research.

First question, and they're kind of related. But one is, you mentioned -- we noticed that working capital or the receivables, I'm sorry, in particular seemed to go up quite a bit. And I don't see how that would be related to a slowdown in orders in June. But if you could just talk a little bit about what you think working capital -- why it's going to be a big use this year, especially if you're not selling this much? And then secondly, the buyback -- ceasing the buyback regardless of the stock price, is that something you're lenders ask you to do? Or why would you just put a mark on your back and say, "Look, it doesn't matter where the stock goes. We're not going to be involved in the stock, at least for the next -- it looks like the next couple of years?"

Chip, this is John. Let me address a couple of those points, okay? First of all, I think you're referring to the change in the receivables that you see on the free cash flow schedule for the first half of the year. Indeed, if you take a look -- historically, our free cash flow is a use of cash in the first half given the seasonality of our business and typically flips around in the back half of the year. But you will see on that schedule that working capital was a larger use of cash in the first half than you would see historically. And that has -- that's linked to the refinancing that we did right at the end of the third quarter. As we previously communicated, we refinanced our -- a bank credit agreement, and we refinance our bank credit agreement. We had actual liquidity that came in towards the end of the quarter, and it made economical sense not to engage in the level of factoring that we typically do. Even though that's very economical for the business, there is no need to have the extra financing charges. Right in beginning of July, we refinanced our -- a piece of our largest or at least most expensive debt that we had over in Europe, and that was a subsequent transaction that happened. So what you're seeing from that is not going to be something that's going to impact the full year. It was just a transitory item over the course of the quarter. As far as it relates to the full year and the adjustment that we made to our free cash flow guidance, indeed, it is coming down. Most of that decrease is a function of the earnings change that we're guiding to, but we…

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

I wanted to get into a two-part question, I'll turn it over. When we look at what you said or it sounds like Europe will still be up in earnings for this year versus last year despite the volume issues. And similarly, if I heard you correctly, and please correct me if I'm wrong, it sounds like Americas will be down obviously because of all the factors that you enumerated. Is there a way that you could provide a bit more of a bridge or sizing, if I got that correctly, in terms of what's going on there? And then related to the volume growth that you had been expecting, you always had called out the potential for complexity in terms of bringing in this new capacity to impair your results. You've been in the seat for a number of years. And one of the things that you were trying to bring to bear at Owens-Illinois was much more operational consistency. And so should we expect that O-I can continue down -- along the path that you had established despite this hiccup? And what, in particular, do you think went wrong with bringing on the capacity this quarter?

George, this is John. I'll start that to address your first point is to give you some dimensioning of the impact of the adjustments that we have. Indeed, the clear majority, probably 75% or more of the adjustment that we're talking about is occurring in the Americas. We're seeing probably more of the FX hitting the Americas with the Latin America currencies. And probably 75% or 80% of the volume adjustments we're talking about pertain to NAB revisions that we had indicated in our prepared comments. Most of the complexity that we're seeing -- even though complexity is hitting both the Europe and the U.S. and the Americas, more of that complexity is more expensive in the U.S. And so that is weighted over to the Americas marketplace. So that's the major elements that are going on there.

With regards to your question on volume growth and then complexity, so I think it's important to differentiate between volume growth related to new capacity for which we don't have issues, and it's only ramping up the capacity and moving forward with that new volume, and that's working well. That's happening in Brazil and Colombia. Now the complexity we have is coming from changing mix, and it has 2 different reasons. We are changing mix in Europe to be able to increase margins, and we're seeing the positive impact in margins in that region. Now that drives complexity up and we're solving for that. We're changing mix in the Americas and, in particular, in the U.S. And that is to be able to offset or partially offset the drop in volume that is coming from the drop in mega-beer. Now it's having a positive impact in the volume side because, for example, in this year, we are offsetting 100% of the mega-beer decline through that new mix we're getting, if we exclude the transfer to the IBC JV. Now we have -- the number of factories that were affected by this changing mix is 10. We have 10 in Europe, 10 in U.S. Now the -- what that complexity does -- excuse me, 10 is 5 in Europe, 5 in the U.S. And what the complexity does is, it takes us to change line configurations or operating parameters in a given factory or customer requirements or product requirements. Now it's taking us longer than we expected to address that. It's difficult to determine how long it will take for any given factory to absorb complexity, and there is no exact science in how we do that. However, we know how to address it. And in fact, we have done it…

And our next question comes from the line of Mark Wilde with BMO Capital Markets.

It's actually Anuja standing in for Mark. My question is I don't mean to harp on this complexity issue, but it occurs to us that the mega-beer declines have been going on for a while, and we've been talking about increasing complexity generally in packaging for a while. Was there anything specific that happened this quarter? Or did you just reaching sort of tipping point? Or just some more details in general on that issue would be appreciated.

Well, thanks for the question. You're right, we've been increasing or changing mix since we started this process in 2016. We've been doing it successfully. We've been adding complexity to factories and then improving the performance of those factories and enjoying the margin benefit or the volume benefit of that. Now at this point in time, this is taking longer for the set of factories we have impacted by complexity today than we originally expected. Now this impact in any given factory depends on the magnitude of the change we make and in some cases -- let me just give you an example. There is a factory in Europe for which we changed the mix in 1 line third quarter for 7 consecutive quarters. We already finished. So now we'll focus on driving the performance up in that facility, and it will come up. But then complexity is also related to the speed of that changing mix, it's related to the talents and skills available in any given factory, it's related to the maturity of the standard processes and practices in the factories and the enterprise resources that we allocate to help every factory in the transition. So it's taking us longer right now. The process we've been going through, as you mentioned, I just mentioned the example before of very successful cases and we have more. So it is just a timing issue. We're going to go through this. We're going to be able to solve it. And we expect that as we go into -- at the end of this year into the following year, we're going to start seeing the positive effects of the complexity reduction and the ability to perform on their beneficial circumstances in every factory.

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

Andres, you call that the impact of lower shipments of French wine to China in your prepared comments. Have the slowdown in China and implementation of tariffs started to impact some of your other liquor categories in the U.S. and Europe also? I'm asking because some of your U.S. customers have starting to -- have started to raise prices after basically holding back a year ago with initial tariffs, and I'm wondering if that is starting to impact volumes as well? And then separately, through the course of the second quarter earnings season a lot of companies along the supply chain have pointed towards the slowdown in Mexico. Just curious as to what are you seeing something there that's given you pause or is that not the case for O-I at this point.

Okay. Thank you. So the situation with the French wine, which is specifically Bordeaux wine, it is coming down in volume in China and as a consequence of consumption slowdown in China as is happening for every industry you hear in the news. Now it is related to the trade issues and tensions indirectly because that's influencing the activity -- economic activity in China. So we're seeing that decline. When it comes to Mexico, we are not seeing a major change in demand. In fact, we had a good quarter. We're expecting that we'll have a, let's say, low to mid-single-digit growth for the year in Mexico. Now we have in NABs which is the most significant change in sales volume we have right now, we have some volume that was revised down in Mexico because we got revised projections from customers. That is related to fast-growing products that are growing at high single digits or low double digits that had higher projections from customers before and as a consequence our projections that we are revising down. But those products are products that are all exported to the U.S. as final products. So not related to the local economy in Mexico.

I would just add two things. I mean if you take a look at the other markets, for example, in the Americas and spirits you referenced, I mean we have seen solid low to mid-single digits growth in those categories, and then we continue from the projections that we're working with our customers that have similar type of outlook. And as -- and just in Mexico, we -- I think it was even in the prepared remarks, we were up mid-single digits in Mexico just in the last month. So while there's other moving parts, it's still a growing marketplace.

Yes. And in Mexico specifically, we've been able to support incremental volumes because of productivity improvement that has given us incremental output.

And our next question comes from the line of in Gabe Hajde with Wells Fargo Securities.

I was curious, Andres, perhaps if you could comment at all about July trends, maybe specifically recovering in Europe at all as well as any change in your thought process around the wine harvest for this year that will be for next year? And then maybe if you could address with the $0.20 decline, I think, that you talked about associated with the revised volume outlook, if there's a component within there that's lower production, presumably if you were taking a point off of growth, you're not going to be producing at the same levels and again just break out maybe what that might be.

Okay. Well, thanks for the questions. So I'll take the first part. In July, we're seeing a rebound in beer in Europe. So what we faced in June that impacted quite significantly the second quarter was a sudden drop in beer demand, and that's all related to this weather condition. And what we're seeing in July is a rebound of that. So we're going to watch this closely. Obviously, it impacted our total forecast until we can know exactly the extent of this and for how long it will be. But now we're seeing the rebound, as I mentioned, and we'll watch closely and see if we need to make any adjustment as a result of that. Now the wine harvest. So the wine in 2018 was very good and has influenced the availability of wine this year. Wine locally is going strong. In Italy, it's very strong for example. France local is strong. The issue is with exports to China only, and it's related to the situation in China. The harvest this year should be okay. The -- when we had the issue with the weather that impact the beer, it does exactly the opposite for the wine. So we need to wait for news because that's not reported publicly right now. But at this point, we don't expect any issue there.

And Gabe, let me touch base on the question around the sensitivity of the components around the 26 -- I mean the $0.20 decline on the volume outlook. Indeed, we are anticipating in the back half of the year of adjusting production levels to accommodate the change in the sales volume outlook. As we had indicated in the prepared comments, we want to really focus on cash run for cash. We don't want to build up unnecessary inventories. Just as a general sensitivity is, it's about a 50-50 split in that $0.20 of the impact of reduced sales volume in the contribution from that and then the impact from the production side of the fixed cost coverage. So you can kind of use that as a baseline.

And your next question comes from the line of Kyle White with Deutsche Bank.

Just curious if we can go to the revised volume outlook again. I think you called out most of it in the America is related to the nonalcoholic beverage category. Just a little bit more details on what caused this revised outlook midyear here. And assuming if it is in the U.S. it's just kind of make you take it more a larger view of your footprint. I'm just curious of your thoughts on the supply-demand balance in the U.S. given this new volume outlook.

Okay. So the situation in the U.S. is, we are seeing lower or softer volumes in NAB. We're reflecting that in our projections. That's coming from fast-growing products. It is a similar situation as the Mexico one. Those projections -- original projections that we used from the customers have been revised by them. We're reflecting that. Even after we do that, those products are continuing to grow year-on-year, and they grow either high-single digits or very low double digits. Again, this is new products that we see in the market today, new categories, that are growing really fast. With regards to footprint, we are balanced in demand and capacity in the U.S. in 2019. So we don't expect any changes in that regards.

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

John, just back to the working cap and cash flow for a moment, I think Chip was asking about the components of the cash flow guidance reduction and you said most of it's earnings, a little bit of it is working cap. So within that, how much of a drag roughly or precisely are you expecting working capital to be this year? What I'm really driving at is to what extent do you think your operating cash flow this year is artificially depressed relative to whatever you think normal is based on the receivable situations, both in LatAm and the reduction in your factoring, et cetera?

Yes. So let me unpack that a little bit, okay? So from the $400 million that we started with, we got about a $20 million to $25 million impact right from FX there, okay? And then we also know that we've trimmed back CapEx by, call it, somewhere between $25 million and $50 million. So let's say, those balance things off. If you take a look at the remaining components, about half of that is a change in earnings. So call it $80 million or something like that associated with the revised outlook. And the other balance is associated with working capital roughly split 50-50 between inventory and the receivable components within that. So that should be a temporary item and the fact that we're kind of working through that in the back half of the year from a revised outlook for the business. Going back to some earlier points, we continue to really want to focus on the inventories, and we'll see whether we may can make more progress there, but I want to be mindful of where we are in the calendar of the year. And when you also talk about kind of run rate for the business I just also want to highlight that the asbestos payments that we have this year and including in the next year are unusually high given the derisking activities that we have, and you need to take a hard look at those to understand our core performance. So all in all, the receivables and the inventory hopefully will work its way out. The asbestos works its way out and then you are left with obviously something that is a stronger underlying cash flow generation capability of the business. As we look to even longer term, things like the derisking of the asbestos or the derisking or reducing debt, all things that we really want to focus on that are current calls on cash right now that if we can moderate those over time, allow for longer more sustainable cash flow generation is the top priority for the business.

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

This is Sahas on for Edlain. I just wanted to talk about the asset divestitures. Have you guys determined the timing or -- to find the assets yet for that? And then also on Brazil volumes, I think in the past, demand has been very strong in that market. Has that continued, especially in the beer segment? Or are you seeing increased competition from other substrates?

Yes. Okay. So let me touch base on the first part there, the timing of divestitures. As we indicated back at our Investor Day in last November, we are targeting tactical divestitures with proceeds in the $400 million to $500 million range over a 3-year period of time. And the idea is that we could probably get $200 million of that in the next year or something like that. I would say we would anticipate that those will likely start towards that tail end of the year as opposed to earlier than that. I only think the original guidance was more like midyear, but that's proven out to be a little bit more on the aggressive side with the corporate development actions that are required. What I would say is it's not one thing. There's multiple pieces to this. And so we don't expect one thing to hit in that regard. It will be multiple elements in that regard. And obviously then when we talk to what we had indicated here is ongoing strategic review of the business. And looking at other opportunities, more information will come out on that in the future, but we're not prepared to discuss that at this point in time.

With regards to the demand in Brazil, it continues to be quite solid for beer. As you know, we put in place or brought back into operation regional capacity early in the year. We're now enjoying the additional volume that, that give us. We're expecting Brazil to grow low single digits for the year. Now we are also expecting that as we approach the end of the year as we exit 2019 will be highly realizing our capacity in that country. So solid demand continues. Beer is growing fast, and there is no change in that position.

And your next question comes from the line of Arun Viswanathan with RBC Capital Markets.

I'm just curious what you're hearing from your customers. It sounds like there's definitely a pretty sizable cut in the second half, and we understand a lot of that is from complexity and continued mass beer declines. But I'm just curious globally speaking, are you seeing continued exit from glass packaging in beverage industry and then growth in food and wine and spirits? But is that any concern for you just given ongoing kind of declines, have you seen that accelerate in beverages and so the sustainability side on cans is growing faster. How would you kind of characterize the packaging mix shift within beverages?

Okay. So the reduction we're seeing, the vast majority of it is coming from NABs. It's concentrated in U.S., Mexico and Andean countries. We explained already U.S. and Mexico. And the Andean countries it's related to the returnable float replacement demand. That is something that as we explained before is related to CapEx availability for our customers, and this fluctuates from year-to-year. So at this point in time we're seeing lower demand for that float replacement. And as you know, that comes back in the following year or moves around. It just varies depending on CapEx availability. We're having solid demand overall in Latin American countries. That's why we're building capacity in Brazil. We're building capacity in Mexico. We are seeing solid demand in Europe. But we live through, while painful, with the European beer demand, it's in our opinion temporary. And everything else remains solid. As you know we're adding capacity in Europe. So we are adding a line. We're building a brownfield, and that's because of that incremental demand. In Asia Pacific, there is growth, and it's driven by emerging countries. Now when it comes to plastics and glass, we have -- we're converting back to glass a important food customer. That's one of the drivers of incremental volume for us in the second half. We're seeing incremental demand in Europe, for example, in sparkling wines, which we believe is related to that too. So overall, we don't see any issue in that regards. I think our adjustments are related to the NAB category that we explained as well as the sudden drop in European beer which we believe is temporary.

And there are no further questions at this time. I'll now hand the call back over to Chris for closing remarks.

Thank you, Adam, and thank you, everyone. I appreciate it's a busy morning for everyone. This does conclude our call. I would like to note that our third quarter call is scheduled for October 29. And it's another exciting day to choose glass. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.