O-I Glass, Inc. (OI) Q3 2019 Earnings Report, Transcript and Summary

Good morning. My name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the O-I's Third Quarter 2019 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. Mr. Chris Manuel, Vice President of Investor Relations, you may begin your conference.

Thank you, Adam, and welcome, everyone, to O-I's third quarter 2019 conference call. Our discussion today will be led by Anders Lopez, our CEO; and John Haudrich, our CFO. Today, we will discuss key business developments and provide a review and the outlook of our financial results. Following prepared remarks, we will 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. Some of the financials we are presenting today relate to non-GAAP measures, such as adjusted earnings, adjusted free cash flow, segment operating profit, and net debt, which excludes certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP can be found in our press release and in the appendix to this presentation. Now I'd like to turn the call over to Anders.

Thanks, Chris. Good morning, and thank you for your interest in O-I. Let me provide an overview of our discussion on Slide 3. 2019 has been a challenging year for O-I, driven by softer than expected demand. However, I believe O-I has a solid path forward to shareholder value creation. We are taking bold steps to set this path with several key initiatives underway. In addition to reviewing our most recent performance, we will outline how we are taking action to drive improvement, introduce key themes for 2020, and how this comes together to provide a compelling investment thesis in O-I. Let us start with recent performance. Last night we had reported adjusted third quarter earnings of $0.54. These results were consistent with our most recent guidance. Segment profit was down from the prior year. Keep in mind that most of the decline was due to FX and discrete items that benefited 2018, but did not repeat this year. From an operational perspective, earnings reflect higher selling prices and the contribution from our recent Nueva Fanal acquisition. However, these benefits were more than offset by lower than expected sales volume and higher operating costs as we are actively curtailing capacity to align our supply with lower demand. Despite lower segment profit, a strong cash flow during the period enabled O-I to reduce net debt by nearly $350 million. To be clear, changing market dynamics is the largest development affecting our business. This includes the accelerated decline in U.S. beer demand that started in 2018 and has continued into 2019. More recently, we have seen a broader market slowdown that is most notable in the U.S., Mexico, and China. With that said, we continue to see good growth in markets where we added new capacity such as in Latin America. Reflecting a dynamic environment, our updated 2019 outlook has been adjusted for continued softer demand, related capacity curtailments, and unfavorable foreign currency translation. We now expect adjusted EPS of between $2.20 and $2.25 per share. Our outlook for adjusted free cash flow now stands at approximately $100 million. We have numerous activities underway to bolster performance. A few examples include, efforts to address complexity following mix changes, new programs like our accelerated cost reduction initiative, and our strategic portfolio review. Importantly, this review now includes an evaluation of strategic alternatives for our Australia and New Zealand business. Finally, we will introduce key themes for 2020 which are highly focused on increased cash generation and debt reduction. Moving to Slide 4, amid a backdrop of softer demand, we are focused on a number of initiatives to address key challenges as well as capitalize on a number of opportunities. Lower than expected demand is our key challenge. As noted, we are actively curtailing capacity which will continue through the fourth quarter. Likewise, we need to fundamentally address structural changes in North America, given the secular decline in beer. While this will include a wide range of solutions, including new product introductions, we will anticipate network optimization efforts in 2020. During our last earnings call, we discussed the challenges we face with increased mix complexity which is impacting operating efficiencies at our [indiscernible] plants across North America and Europe. Here, we are pointing out, we are seeing initial progress across the focused factories which is clearly visible in their key performance metrics. Our resources are fully deployed and we intend to return operating performance to normalized levels in 2020. O-I has capitalizing pockets of new opportunities. We recently completed the acquisition of Nueva Fanal which strengthens our position with faster growing premium beer brands. Likewise, we are seeing a strong growth in both Brazil and Colombia, where we added capacity. Ongoing projects include the fifth furnace at our JV with Constellation and our brownfield expansion in Gironcourt France, where both begin production in the first half of 2020. Our accelerated cost reduction initiatives supported by Accenture was kicked off during the third quarter. Scope includes SG&A and supply chain costs, as well as organization structure. We expect to complete diagnostics in the fourth quarter and begin execution of key initiatives delivering tangible benefits next year. MAGMA is a top priority for O-I and the first shipments from our Streator pilot plant was an important milestone in the third quarter. The next MAGMA line will be located in Holzminden, Germany to support R&D efforts and provide incremental supply to growing segments. The Holzminden line is expected to give us further data about MAGMA capabilities that we expect will enable three additional line applications in Europe in 2021 and 2022. Our portfolio review is critical to properly align our business to support our strategic customers to capitalize the enterprise and expedite their reduction. We are making good progress with potential proceeds in excess of $200 million anticipated around year end. Furthermore, we are reviewing strategic alternatives for our Australia and New Zealand operations, but will make no further comments until the process has run its course. Finally, debt reduction is essential. Supported by cash flows we trim net debt in the third quarter, for quarter cash flows along with potential divestiture proceeds will enable significant debt reduction. As I mentioned, change in market dynamics is the most important development for our business. Slide 5 provides more perspective. Our long-term organic sales volume trends are illustrated on the left. In the top chart you will see our total company volumes. Our legacy business has been flat to modestly lower. We have also shown the volumes of the O-I network which include strategic JVs namely with Constellation Brands and Comegua. The trends for the O-I network better reflect our efforts to align the footprint to support long-term growth. As you can see, O-I network volume is stable to slightly positive over the long-term. The middle chart illustrates our volumes by region. The Americas network represents just over half of our business. Volumes have generally been up modestly over the period. It is a composite of good healthy growth in Latin America, Mexico and non beer demand in North America. However, beer shipments in North America are under increasing pressure as illustrated in the bottom chart. In Europe, our demand has been growing at low single digits. More recently, we have focused on mix management given capacity [indiscernible] to enable future growth and we are installing new machine lines as well as the new furnace in Gironcourt. In Asia-Pacific, shipments have been down modestly. More recently, this has been a reflection of the significant asset repair [ph] activity in the region. Over the past two years we have developed capacity in China to help serve the ANZ market which was most impacted by repairs. Exiting a period of heavy [indiscernible], we expect Asia-Pacific volumes to revamp. With this backdrop, let's discuss the evolution of our organic volume expectations for 2019 as illustrated on the right. Entering the year we expected 1.5% sales volume growth. This reflected nearly 1% growth for new business agreements and about 1% organic growth which was adjusted downward for lower U.S. beer shipments. During our last earnings call, we revised our growth outlook down as we saw full-year volumes will be flat to up slightly. While new contracts awarded should be elevated, a bit higher than expected, base volumes have been negatively impacted by a number of factors. First, the decline in beer demand in the U.S. is more extensive than we originally projected. Likewise, the growth in U.S. NABs has slowed. Furthermore, demand was impacted by temporary events like extreme weather in Europe. More recently we have noted a broader softening in demand as economic growth has slowed most notably in the U.S., Mexico and China. This brings us to our current outlook for legacy volumes which we expect will be around 1% this year. Now, let's discuss regional performance on Slide 6. Starting in the Americas, segment profit was down $19 million excluding the impact of FX and a prior year discrete tax item. Higher selling prices more than offset cost inflation, while sales volumes were down. Total volume was up about 0.5% which includes the benefit of Nueva Fanal. However, organic volumes were down about 5% reflecting the factors that we just discussed. We have seen some initial progress otherwise in mix complexity. Looking at the fourth quarter, we expect organic sales volume will be flat or up slightly. While we anticipate softer underlying demand will continue, we are on boarding some new business this quarter. Finally, we expect capacity curtailments in the U.S. and Mexico will continue through the fourth quarter in response to lower sales. Moving to Europe, segment profit was up modestly, including the impact of FX and prior year CO2 credit sales. Higher selling prices more than offset cost inflation reflecting mix management. Sales volumes were down about 1% given current capacity constraints. Operating costs were in line with prior year but reflected an improvement for the second quarter as we begin to see progress in otherwise a mix complexity. Overall, we expect similar business trends in the fourth quarter. Finally, Asia-Pacific segment profit was relatively flat excluding FX headwinds and a retroactive adjustment for a new sales contract in 2019. Without this adjustment, higher selling prices of sales cost inflation. Segment volume was down 3% with Australia up 4%, which was more than offset by a sharp pull back in China. Operating cost improved from the prior year as efficiency increased following significant furnace rebuild [ph] activity. We expect similar trends will continue into the fourth quarter. However, we do anticipate significant sequential earnings improvement as we enter the seasonal peak. Now, let me turn the call over to John who will detail the quarter and outlook.

Thanks Andres, and good morning everyone. I will start with the review of third quarter performance on Slide 7. As we announced, third quarter adjusted EPS was $0.54 within our most recent earnings guidance of $0.52 to $0.55. Let's take a look at the reconciliation that compares current third quarter performance with prior year results for both segment profit and adjusted EPS. As you can see, segment profit declined from $255 million last year to $205 million this year. 32 million of this decline reflects unfavorable FX in two discrete items that benefited 2018 but did not repeat this year. Discrete items include the resolution of indirect tax matter in Brazil and the sale of CO2 credits that occurred in the third quarter of 2018. Overall, our average selling prices improved about 2.5% and more than offset cost inflation. So favorable price, inflation spread benefited earnings $12 million. Reflecting 1% lower shipments, sales volumes impact results by about $9 million which includes the benefit of Nueva Fanal. Operating costs were also a headwind of around $21 million. Costs remained elevated despite initial progress addressing the challenges from increased mix complexity in North America and Europe. Initial efforts to curtail capacity also impacted the third quarter costs. Looking at EPS, O-I generated $0.54 of adjusted earnings this year compared to $0.75 last year. Currency and discrete items impacted results by $0.15. The net effect of changes in segment profit was an $0.08 headwind. Further the company benefited from lower retained corporate costs and interest expense, but these were offset by a higher tax rate. The tax rate reflects the changing regional mix as profits were up in high tax jurisdictions, especially Latin America, although our share count added $0.02 per share. One final note on the third quarter, we did record a charge to reduce the carrying value of goodwill attributable to a North American business unit given the accelerated decline in beer demand. As a result of this adjustment, we reduce the Americas goodwill from around $1.6 billion to $1 billion. This $595 million non-cash charge is not considered representative of ongoing operations and has been excluded from adjusted EPS. Moving to Slide 8, I will review our most current outlook. We now expect 2019 adjusted EPS of between $2.20 and $2.25 and adjusted free cash flow should approximate $100 million. Compared to our full year guidance provided during our second quarter call, our updated earnings outlook reflects changes in three key factors; FX is an incremental headwind based upon current rates. Given sluggish demand trends over the past several months, we now expect full-year sales volume will be down a little over 1%. Likewise, we are curtailing capacity at a number of furnaces. Our current outlook includes fourth quarter adjusted EPS guidance of $0.45-$0.50 and the chart provides additional details. We have also updated our view on 2019 adjusted free cash flow. Compared to our prior outlook of $260 million, we now expect approximately $100 million of adjusted free cash flow this year. Let me provide additional details as this is a more significant decline than a revised earnings outlook would indicate. First, currency translation is an incremental $40 million headwind. Keep in mind that our fourth quarter cash flow is particularly sensitive to FX given the seasonality of our business. Second, our lower earnings outlook impacts cash flows by around $50 million over the second half of the year compared to our prior outlook, and third we estimate working capital will be a $60 million incremental use of cash. Most of this increase pertains to a continued shift in regional and customer sales mix, which is increasing our average accounts receivable payment terms. The impact of this mix change is most pronounced in the fourth quarter given seasonally higher sales in Latin America which has the longest payment terms. During our second quarter call, we expected this shift would increase our days sales outstanding by four days. Based upon our revised outlook, we now expect DSO will be up around 7 days from prior year. Keep in mind that one DSO equates to nearly $20 million of our receivables, so the change in DSO was negatively impacting working capital by around $140 million for the year, which is $60 million higher than we had assumed in our prior guidance. We believe 2019 is an anomaly and not reflective of normal accounts receivable trends, notwithstanding changes in macro conditions. Let me spend a moment discussing capital allocation. I'm now on Slide 9. As we have discussed in the past, capital allocation priorities include derisking the balance sheet, funding our strategy and returning value to shareholders. With that said, debt reduction remains our top priority driven by operating cash flow and proceeds from divestitures. As illustrated on the chart, seasonality plays a big role in the timing of cash flow generation. The first part of the year is a use of cash and the second half is a strong source. As you can see, the company generated $348 million of adjusted free cash flow during the third quarter of this year. Like last year, we expect strong fourth quarter adjusted free cash flow, which supports our full-year outlook. So our third quarter cash flow supported a $345 million reduction in our net debt, a metric we expect to drive down to just above $5 billion by year-end. Any proceeds from our divestiture program during the fourth quarter would support further debt reduction from the levels illustrated on this page. Consistent with our focus on reducing liabilities, the accelerated effort to derisk our asbestos legacy liability remains on track. While we intend to fund our strategy, we expect 2020 strategic CapEx will focus on advancing MAGMA. Likewise, the company has de-prioritized acquisitions. Returning value to our shareholders is also a priority in addition to initiating a dividend this year $500 million remains outstanding on our share repurchase program. However, this will be deemphasized until leverage approaches three times or do potentially soften the impact of earnings dilution in the event divestitures become significant. Now let me turn the call back to Andres.

Thanks, John. Given that we are now in the fourth quarter, let me share some themes for 2020. Keep in mind that we are currently in our annual budgeting cycle and more specifics will be provided early next year. Our top priorities for 2020 include improved cash generation, prudent CapEx spending, and enabling debt reduction. Understanding that 2019 has been impacted by lower than expected sales volumes, we are taking preemptive measures this year, such as capacity curtailment, so we can enter 2020 stronger and in a better position to generate cash. For 2020, we expect CapEx should be around $350 million to $375 million focused on maintenance, developing MAGMA, and potentially modest investments to support the accelerated cost reduction initiatives. While it is too early to determine the impact of macro trends on the business, we believe it is prudent to focus on price and optimizing mix within our system. Likewise, we will continue to address the operational challenges following recent improvements in mix. Given that beer will remain challenging in North America and to limit the impact of overall mix challenges within this network, we are focused on new product innovation as well as likely footprint adjustments to align capacity. Cost reduction will remain a priority. We anticipate our accelerated cost reduction initiatives in conjunction with our TSC program will reduce structural costs. Finally, we expect significant progress on our portfolio review initiatives. Overall, we believe these efforts will result in improved operating performance, greater cash generation, which along with divestitures will support meaningful debt reduction. And finally on Slide 11, we believe O-I offers a compelling investment proposition. As the leading global glass producer, O-I is in a unique position to serve our Blue Chip customer base around the world. Likewise, glass is a highly attractive package in the green economy given its clear sustainability attributes. We are actively engaged in several initiatives to improve our operating performance that we articulated today. We are optimizing our capital structure. This includes better aligning our business to our customers needs and priorities which we expect will capitalize the business and support further debt reduction. Likewise, MAGMA represents a breakthrough innovation that helps remove the historic constraints facing glass and enable future profitable growth. We are confident all of these steps done in concert will drive long-term value creation. This concludes our prepared remarks and we now welcome your questions.

[Operator Instructions] Your first question comes from the line of George Staphos from Bank of America Merrill Lynch. Please ask your questions.

Good morning everybody. I hope you can hear me. I wanted to ask a question regarding North America and to the extent that you can have a view on 2020 Andres and John, to what extent might the footprint optimization efforts that you seem to need to do affect negatively your operating earnings, realizing ultimately there will be a benefit from this, but might you lose efficiency as you go through this footprint optimization? And then, relatedly, clearly we see the GPI data and beer glasses declining, yet it seems to be declining at a much quicker rate in North America than the market as a whole and other substrates, obviously, beer cans. Why do you think this is occurring, given what you view to be, the advantages of glass versus other substrates from sustainability standpoint and other factors? Thank you, guys.

Okay George, so the -- we're taking proactive action with regards to footprint realignment. We already have started. We expect that we will have four directions in Q4. So as we do that, we're clearing the results for next year from those impacts, which at this point in time are higher. We are obviously taking higher inventories as we prepare for the curtails mentioned. We cannot react fast enough to be able to avoid that. We're taking higher cost at this point, but as we go into next year with that done, we are going to have the opposite, we're going to have lower cost we're going to have the inventories going back down, and all the spending that is related to that will go down with that. So that's what we’re seeing on that front. With regards to the North America market, we are seeing the declining beer as we saw it before. I think it's been accelerated by continuing consumer trends being changing in the market. Something that we've seen lately is the evolution of hard seltzers with – have been growing extremely fast is something that happened over the last few months. And this is a category in which we have a very, very small participation. So at this point in time, that volume is going primarily toward packages. Now when I look at the volumes of the market, we have a different situation. For example, we're seeing growth in the spirits. We're seeing growth in our case for -- in food. NABs are growing even though they're growing at a slower pace and that's why we're changing our projections. And wine is quite flat. So it's really concentrated in the beer category. Now, we're not seeing that kind of dynamics in any other market around the world. So this is the only one in which we have that and in order to deal with that we're taking, as I said, before, proactive action. We're going to adjust the footprint, but we also have very strong talent in marketing in the organization. We have very strong capabilities in new product development. So we're working on developing new product breakthrough innovations for beer as well as for hard seltzer so we can enter the higher sales category in the near future. And we can support the volumes in beer in a better way in the future.

The one thing I would add to that as we look to 2020 and any efforts that we need to do on footprint optimization, we would not foresee the restructuring costs associated with this at this time to be in excess of what we're doing this year collectively as a company because we have taken a number of restructuring actions this year. So something in that $40 million range is what we think this year and we do not expect that it would exceed that at this point.

All right, thank you very much, guys.

Thank you.

Your next question comes from the line of Ghansham Panjabi from Baird. Please ask your question.

Thank you, good morning, everyone.

Good morning.

Good morning. Just following up on George's question on North American beer, just given the weakness there, I mean, kind of thinking about your customers also showcasing the weakness, they have a fair amount of debt on their balance sheets as well. Has that accelerated, destocking along the supply chain that you're starting to feel? In other words, is your 5% decline yes, how should we think about that 5% decline as it relates to the trend line going into next year versus point-of-sale? And then second, in terms of the tariffs that have been instituted on certain categories such as scotch, do foresee any impact on that as it relates to your European business? Thanks so much.

Okay, thank you. Well the -- at this point in time what we're considering is that the current trend we're seeing in decline of the NA beer is going to continue into next year, that's what we have. Now we need to see how these all categories that are changing the share within the beer category are going to continue evolving. So we've seen a significant work, growth excuse me, in hard seltzers. We need to see how that evolves in the future. It has slowdown in September already could be seasonal, but we need to just keep a very close watch in that category to see what is best to project for the following year. As far as the tariff is concerned, obviously that should have some impact at some point, but we haven't seen that so far. So we'll see what happens in the next few months, but so far our demand continues to be very strong demand. Demand for spirits in Europe is really strong at this point in time. If we had more capacity in that market for that segment, we will be able to sell more as we speak.

And just some other context is the North American beer business that we have does represent about 6% of the total global volume. So while it's certainly under pressure right now, I just want to make sure you understand the context of the total scope of that business.

Next question please?

Your next question comes from the line of Brian Maguire from Goldman Sachs. Please ask your question.

Good morning, this is Arthur Almeida on for Brian.

Good morning.

I was wondering if you guys could provide a little bit more color on what happened with Mexican volumes being down. Do you view this as an issue with exports to the U.S. more or to the Mexican markets themselves being negative could it be a switch to cans? And finally, do you predict that this could spill over into other Latin American markets? Thank you.

Okay, so the – what we're seeing in the Mexican market is a reduction in NAB volumes and this is related to local demand and is driven by changes in economic conditions in the country. This is something that happens in these markets when economies slowdown. It is related, for example, to return our containers when years like this come our customers tend to reuse the CapEx spending in this type of work. However, what we're saying at this point in time is, our customers preparing to change this pattern as we go into the following year. So there are investments, large investments been planned for 2020 for the NAB category in Mexico. Now we're not seeing any of this in other countries. In fact, we're seeing very strong demand in Brazil and Colombia where we put additional capacity. The beer demand in Brazil is quite strong. It’s driven by premium products growing really fast. They're growing year-to-date at 40% and then it's driven by conversion from return our containers to one way glass, the same is happening in Colombia where we are seeing a double-digit growth overall in this country.

Thanks and one final update. I was wondering if you could provide a little color on the capacity closures in the U.S. that you referenced. How big would that be relative to total U.S. capacity, and to the total U.S. industry and afterwards I'll turn that over? Thanks.

Yes I mean, I think at this point in time, what we're looking at is, we had indicated capacity closures across U.S., Mexico and in China. For competitive purposes, we do not provide any particular details. But the intention is to basically get our inventory levels to be in similar zip code as they were last year. So probably within one or two IDS [ph] prior your levels compared to the higher levels that we saw at the end of the third quarter, and that's about as much information as we can provide at this time.

Yes and the actions we're taken out not only to correct the change in demand that we saw through a year, but being prepared to be adjusted with demand at the similar level of capacity in 2020.

Thank you, our next question, please?

Your next question comes from the line of Mark Rosie [ph] from the BMO Capital Markets. Your line is open.

Good morning, Andres, John.

Good morning.

Andres, I'm just curious if this North American slowing in beer, is that simply, the overall beer market or is there also some further shift going on? I recall it back in the last recession, there was a big move out of glass and into cans because can beer was just at a lower price point and I wonder if that's part of the equation at all?

Mark, as I said before, I think it’s primarily related to the – how the consumer trends are evolving and the category is shifting as a consequence of that. For example, hard seltzers have been growing really fast and they already have a volume that equates to – or equal to 5% of the total beer category. So the consumption patterns are changing, new products are emerging. Those categories are an opportunity for glass too. I think in the earlier stages cans have been doing quite well with that. They had the slim can in the market. They had smaller sizes available to customers and those are a very good feed for this category that focuses on wellness and claims wellness has value. Now as I said before, we are working on new platforms for glass. We intend to make them available to our customers too and at some point in time, given the importance of branding and differentiation in the market, these glass products will have an opportunity too.

Thank you. Your next question comes from the line of Anthony Pettinari from Citigroup. Please ask your question.

Good morning this is actually Randy Toe [ph] sitting in for Anthony.

Good morning.

Good morning with the second pilot plant from MAGMA expected to start next year, can you give us any additional information on the performance of the first machine at the Streator facility? Are there any metrics in particular that you guys are excited about with that production coming up? Thank you.

Okay, so the evolution of MAGMA is quite positive, very nice – we needed to meet - have been quite successful and very encouraging. The line in Streator is producing. We were already to produce commercial ware, the quality of the glass that we're melting is quite high. The quality of the glass that comes out of the machine is quite high too. Now what we are implementing in Europe, in Holzminden is a Gen 1 line, which is expected to be an evolution of the line in Streator. And as we said, during our opening remarks, we expect this line to give us more data for R&D purposes as well as incremental supply volume to be able to supply segments that are growing at this point in time. Now based on the data that we get in that new line, we're going to make decision with regards to the implementation of three additional lines in Europe. So, we continue to be very encouraged by the evolution of MAGMA, and as we said before, MAGMA has the potential to change the business model for glass altogether.

Thank you. Next question please?

Question comes from the line of Chip Dillon from Vertical Research. Please ask your question.

Yes, good morning, Andres.

Good morning.

I appreciate all the details. I just wanted to get an idea as we look into some of the curtailments that you're talking about, I know six months ago, you all were talking about a 10% cumulative volume growth target, that you'd gotten 80% of the volume I guess secured. And I just wanted to know is some of that reversing, or is all of what you're losing other business that is more or less legacy business?

Okay, so when we talked about those targets, we also mentioned that we were pursuing long term agreements and that once we had those agreements secure, we will build capacity to be able to support it. So, all of those are progressing quite well. That's how we are building capacity in Brazil. In Colombia, we're building capacity. In France, we put an additional line, in Europe, so all of those are going well. Nueva Fanal was part of the inorganic portion of that, which is also on boarded at this point in time and it’s going well. Now, we have been facing a couple of things. One is, some temporary events as an example, where in Europe impact in beer demand or we've been facing the reduction in demand for Bordeaux wine exported to China. So those things have been impacting the year. Now, we also have seen some slowdown in demand in some countries and segments within those countries that we just described for Mexico or China, or NAB demand in the United States. So those are primarily driven by macro conditions. So there are a few things combining. Now all the large actions that we needed to put in place to be able to drive incremental volumes associated to long-term agreements are progressing quite well.

Yes, so about 10% we had identified it as ascribable activities as Andres talking for 8% in that that left the remaining 2% really to be organic growth of a fraction of a percent per year. And it’s that base where we're seeing the shift as Andres was talking about.

Your next question comes from the line of Debbie Jones from Deutsche Bank. Please ask your question.

Hi, good morning.

Good morning.

Thank you. My first question is just a clarity question on – and I know you're not talking about the Asia Pacific business in terms of selling it, but it wasn't clear to me if the China assets were included in that. Could you comment on that?

Yes, so as we said in the opening remarks is, we referred to ANZ and we also said at this point in time, we cannot make further comments. But, as we said before, and we confirmed today, we are focused on the strategic review of our portfolio of businesses. We are expecting that as we do that, we're going to get some proceeds and those proceeds will be among other things we use to reuse that.

Okay, thank you, my second question.

Your next question comes from the line of Gabe Hajde from Wells Fargo. Please ask your question.

Good morning, thanks for taking the question. Andres can you address or discuss some of the weakness in China it seemed kind of come out of nowhere? I'm assuming its trade related, but if we do see some sort of trade war, is there a risk that imports start to reaccelerate back in the United States and we have kind of a double edged sword things rebound in China, but get worse here and domestically?

Okay, so yes, the weakness in China is related to economic factors as well as consumption factors. I think this is affecting many industries. We've seen it in the news across multiple industries, many industries are even leaving China and they're going into Southeast Asia for their supply. So there is a significant change going on over there. And this is what is impacting the demand for beer for us. When it comes to importing to United States coming from China what we're seeing is exactly the opposite reaction. So as all of this trade wars have been taking place, the Chinese suppliers have been focusing more and more in the local market. So they're trying to position themselves over there. Lot of the ware that comes into the United States comes from the North of China. I want to highlight that we are present in the South of China, so that's important to have in mind. And over there we tend to serve primarily very large beer multinational companies or global companies.

Your next question comes from the line of Adam Josephson from KeyBanc Capital Markets. Please ask your question.

Thanks, good morning everyone.

Good morning.

Good morning, Andres. John just a couple of cash flow questions, on receivables, please correct me if I got this wrong here, receivables will be $140 million drag this year and I think you said your total working capital drag will be the same $140 million. Please correct me if I'm wrong. And I know you have there's a regional customer mix issue whereby I think some of your Latin American customers take longer to pay, but you also talked about a customer earnings mix affecting receivable collection. So can you just go into more detail John about what exactly is happening with your receivables and given that what gives you confidence that next year will be much better working capital wise? And then just also on cash that CapEx next year of $350 million to $375 million, I think that's close to maintenance levels, I think you've said maintenance is around $300 million. So, how long can you sustain that level of CapEx for before you start to lose some your competitiveness? Thank you.

Sure, sure Adam, thanks. So let me address those questions there. So on the accounts receivable side, yes, we will have something in this $140 million plus or minus impact because of that change in regional change and I'll touch base on that in a moment. The other element is then on the inventory side. Given that we are curtailing right now, we anticipate to make substantial progress on that, but there might still be one or two days of IDS [ph] still outstanding and that might add up to about $30 million. So that that's kind of the zip code of the pressure that you're seeing on the accounts receivable side. So the other question then is, what's going on with receivables? Okay, so as we've mentioned before in the prepared comments, we are seeing growth this year as expected in the Latin American countries, Brazil, Colombia where we're expanding – in those particular markets. They traditionally have longer payment terms as a geography compared to for example, where we're seeing declines in the sales volume, in particular in the U.S., even Mexico and China have slower, lower terms, days outstanding than other parts of the business. So that's really causing the shift and it gets more significant towards the end of the end of the year because that happens to be the peak seasonal period for Latin America given southern hemisphere, and then in the U.S. and Mexico and China being in the Northern Hemisphere, so it's a little bit slower. And when we refer to regional and customer mix, that's the term we use for it. We're not trying to distinguish that there's particular customers being broken out, only in that, that's kind of a nomenclature that we refer to there. So this is substantially just a regional change. And I would also say that on the accounts receivable, our collection processes are actually quite good and this is just a structural change in the terms given those changes. The other question then is CapEx, okay so $350 million to $375 million is the number that we had indicated. Yes, maintenance capital is somewhere in the zip code of $300 million, plus or minus. So this includes that investment, plus primarily MAGMA investments and in some residual carryover effect to some projects that we have underway that we’re really tied to the growth that we had spoken about some of the new on boarding of volumes and things like that. With this kind of activity, we can maintain our competitive advantage, our cost position, because we are maintaining at the appropriate levels. Ultimately down the road, the balancing between that and strategic capital for growth is going to be under review. But especially with on boarding so much of what we just talked about this year, and Gironcourt and a number of other things underway, we're obviously digesting all that activity right now.

Yes, I would like to add that over the last couple of years, we had substantial investment in growth and capabilities. So at this point in time, we want to focus primarily in optimizing what we have. And we mentioned before that MAGMA is evolving quite well, is quite encouraging. We believe this has the potential to change the business model for glass, so we want to advance this faster. And at the same time, as we focus on optimization, we want to optimze the revenue line. We want to accelerate the cost reduction. And we want to focus on all the things we described on Slide 10. And our expectation is that that's going to improve cash flow generation. It’s going to improve our position in debt and at that point, we're going to be able to have a different distribution of our capital allocation.

Next question please?

Yes, your next question comes from the line of Tyler Langton from JPMorgan. Please ask your question.

Good morning, Andres and John.

Good morning.

I just had a question on cost please. You mentioned that you've initiated a cost reduction initiative and that you'll get benefits from the TSC program in 2020, and then also in 2020, I guess, you kind of expect some more progress with the operational complexity and kind of how that should return to more normalized levels. And I guess could you provide a little bit more color on these initiatives and kind of I guess what potential savings you could see in 2020 from them, and just any color would be helpful?

Yes, so we've been actively engaged with Accenture and yes, has been pace, of our opportunities as we go in 2020, we are focused on three different areas, spending, organization and supply chain. We are expecting that by mid to end November, we're going to have the result of that assessment. And then we're going to move into putting together the action plans for our accelerated [indiscernible] in 2020. So we expect that that program is going to improve our cost in a substantial way and with that is going to improve earnings and cash flow for us. Now as you mentioned, we're focused on manufacturing performance improvement to be able to offset the impact of increased complexity. We're making good progress in that and as we said before, we are expecting that this is going to start translating as we exit the year and go into a following year and along that year or two, we should expect to see continuous improvement. So that's the current situation, cost acceleration is one of the critical areas in which we will focus. TSC has been very good for us, but we see that there is an opportunity to compliment those efforts accelerate cost reduction, improve earnings and cash generation with that.

Yes just to provide a little bit of extra color there. We had indicated consistent with our second quarter comments is that complexity is probably impacting our results by $0.10 to $0.12 this year. So while not completely out of the system next year that should be marginally down from that level. We are also incurring costs to commission new capacity this year. That's probably another dime there. While we’ll still be having some costs for Gironcourt for example, it should be at a lower level and then the curtailment costs that we’re absorbing this year are somewhere between $0.05 to $0.10 and really depending on market conditions going forward, we can see some modification of that level going forward.

Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Please ask your question.

Hi this is actually David Paige on for Arun.

Good morning.

Good morning. I just wanted to follow-up on a MAGMA question. So now that you've started to produce commercially, just in terms of rolling it out more broadly in the future, how much of your, I guess ultimate total production do you expect to pass through the MAGMA process? It's like half or 100%, about a quarter, any color you have there?

Well, at this point in time it is too early to provide information in that respect. As we said, as we brought toward the line in Holzminden, Germany which is going to be operated in, I will say one of the top factories we have around the world in terms of flexibility and capabilities, we're going to get a lot more data with regards to acapability of these lines. This is an important data point for us to refine our course with regards to three additional line implementations in Europe. Now overall what I can describe for you is, we are expecting that MAGMA will influence our current asset base and will influence the ability to grow, both in the current asset base we're going to be able to at some point in time replace existing assets by MAGMA assets, that's the overall objective and when it comes to supporting growth, the configuration of this line with lower capital intensity expected with lower manufacturing costs perspective and a lot easier to deploy and faster to deploy. It will be exactly what we need in the glass industry to be able to follow growth in a more effective way. So that's all to come. This is in line with what we said before. We are expecting to have more data in the near future and at that point, we will be able to provide more updates.

I think it's important to note that we don't view MAGMA as a niche solution to a small part of our business. We believe it should have broader application and then we're trying to assess how broad that application can be at this stage.

We have another question from the line of Mark Wilde from BMO Capital Markets. Please ask your question.

John, is it possible to get just a brief update on asbestos and any limitation on asset sales or use of proceeds from asset sales due to the asbestos liability?

Yes, just to comment on that. Basically the status of asbestos that we've been giving year-to-date remains the same. And, we're focusing on accelerating the derisking of that, given some inflationary pressures we saw in a couple different jurisdictions in the court systems that is proceeding. As you would look in the financials most of the cash proceeds that we anticipated for 2019 have already been paid and so there's a little bit left for the balance of this year. And no, there is really no restrictions on the use of proceeds due to asbestos component.

Your next question comes from the line of Chip Dillon from Vertical Research. Please ask your question.

Yes hi, just one quick one here. On the new CapEx guide for next year, just looking at the fact that it is actually considerably below what you've done year in and year out when you count CapEx plus the restructuring component, and so could you let us know what's changed especially given that you are doing a lot of growth investments, especially where MAGMA t is concerned?

Yes, what I would say is that, consistently our maintenance level has been in this plus or minus $300 million range. The investments that we've been doing here over the last few years have really been focusing on some of the growth opportunities that we've been looking at. We've also been investing in some of the cost optimization on some of the earlier TSC opportunities that we identified. Back to some of the comments we made before is that, we've been working to on board a fair amount of that growth activity and the things that Andres was articulating earlier. And so, we're now in the digestion and optimization mode of those activities. And so, at this point in time, we believe, one it's appropriate and secondly, prudent to pullback on the capital expenditures to be basically the ongoing maintenance activity, the ongoing elements of MAGMA and some residual costs to on board the capacity for some of the final growth initiatives.

Yes, over the last couple of years we took a number of actions to solve the structural issues in this business. And with that on, it is a good action to take to optimize what we have. We should have plenty of upside in just optimizing and as for you then we continue accelerating the development of MAGMA, improve our balance sheet and with that we should be in a much better position to leverage the potential of that new technology.

Your next question comes from the line of Gabe Hajde from Wells Fargo. Please ask your question.

John, thanks for taking the follow-up. You addressed some of the sort of one-time earnings issues on the income statement side. I was hoping maybe you could address some cash flow items. We've talked about CapEx obviously being down a little bit. Sounds like restructuring will be similar. I think asbestos is supposed to be around $20 million, but any of the other big moving parts that you could help us bridge from what is a negative number this year to something hopefully positive next year?

Yes, sure thanks, Gabe. Let me kind of take that in totality there. So, obviously increasing cash flow is our top priority for next year. We're currently in the middle of the budgeting process, but I can add some color. Let me just clarify some of the P&L elements and go on into the cash flow in that regard. We do expect continued destructive price inflation spread as we've seen this year and in last couple of years. Our sales volume should benefit from Gironcourt and a full year of Nueva Fanal. While glass is expected to grow about 1% as a backdrop, most of this will be probably be offset by the headwinds of the U.S. beer demand trends that we've seen. Of course, general market trends are a bit of a wild card at this stage given macro uncertainties. So as I mentioned before, operating costs should benefit from the complexity, lower complexity, lower commissioning costs, et cetera, plus we'll have the benefit of the accelerated cost reduction with the TSC. But we do face a few headwinds, FX is a headwind and we do have certain programs that benefited 2019 that come into an end things that we've talked about in the past like the EU energy program and the white [ph] certificate program, so those are out there. Now if we look at some of those other cash levers you're talking about, certainly we've got to lower CapEx. We do not anticipate working capital will be the very large use of cash that we saw in 2019. We believe that the AR element is a bit of an anomaly this year. So while pension is probably a modest headwind, maybe $10 million to $15 million, we do expect asbestos to be down as you mentioned. And ideally, dividends with pension, with the JVs, goes higher because we're exiting some of the major capital investment periods. In particular, we bring on some of the new capacity there. And of course, divestitures could affect this whole scenario to some degree and we'll have to update you as we get greater clarity there.

Okay, guys, I think that was our last question. I wanted to thank everyone and that concludes our earnings conference call. Please note that our fourth quarter call is scheduled for February 5th and we'll look forward to talking to you then. Thank you.

So this concludes our conference for today. Thank you all for participating, you may all disconnect.