Edited Transcript of OI earnings conference call or presentation 29-Oct-19 12:00pm GMT

0
7
GLOBAL MARKETS-Global shares slip to 1-month low after U.S. manufacturing shock

PERRYSBURG Oct 29, 2019 (Thomson StreetEvents) — Edited Transcript of Owens-Illinois Inc earnings convention name or presentation Tuesday, October 29, 2019 at 12:00:00pm GMT

Owens-Illinois, Inc. – CEO, President & Director

Owens-Illinois, Inc. – VP of IR

* John A. Haudrich

Owens-Illinois, Inc. – Senior VP & CFO

KeyBanc Capital Markets Inc., Analysis Division – Director and Senior Fairness Analysis Analyst

Robert W. Baird & Co. Included, Analysis Division – Senior Analysis Analyst

* Tyler J. Langton

Good morning. My title is Vanessa, and I might be your convention operator as we speak. Presently, I wish to welcome everybody to the O-I’s Third Quarter 2019 Earnings Convention Name. (Operator Directions) Thanks. Mr. Chris Manuel, Vice President of Investor Relations, chances are you’ll start your convention.

Christopher David Manuel, Owens-Illinois, Inc. – VP of IR [2]

Thanks, Vanessa, and welcome, everybody, to O-I’s Third Quarter 2019 Convention Name. Our dialogue as we speak might be led by Andres Lopez, our CEO; and John Haudrich, our CFO.

As we speak, we’ll focus on key enterprise developments and supply a assessment and the outlook of our monetary outcomes. Following ready remarks, we’ll host a Q&A session. Presentation supplies for this earnings name can be found on the corporate’s web site at o-i.com. Please assessment the secure harbor feedback and disclosure of our use of non-GAAP monetary measures included within the supplies.

Among the financials we’re presenting as we speak relate to non-GAAP measures, akin to adjusted earnings, adjusted free money circulate, phase working revenue and internet debt, which excludes sure gadgets that administration considers not consultant of ongoing operations. A reconciliation of GAAP to non-GAAP will be present in our press launch and within the appendix of this presentation.

Now I might like to show the decision over to Andres.

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [3]

Thanks, Chris. Good morning, and thanks to your curiosity in O-I. Let me present an summary of our dialogue on Slide three. 2019 has been a difficult 12 months for O-I, pushed by softer-than-expected demand. Nevertheless, I imagine O-I has a stable path ahead to shareholder worth creation. We’re taking daring steps to set this path with a number of key initiatives underway. Along with reviewing our most up-to-date efficiency, we’ll define how we’re taking motion to drive enchancment, introduce key themes for 2020 and the way this comes collectively to offer a compelling funding thesis in OI.

Allow us to begin with latest efficiency. Final evening, we reported adjusted third quarter earnings of $zero.54. These outcomes have been in line with our most up-to-date steering. Section revenue was down from the prior 12 months. Remember the fact that a lot of the decline was because of FX and discrete gadgets that benefited 2018 however didn’t repeat this 12 months. From an operational perspective, earnings replicate increased promoting costs and the contribution from our latest Nueva Fanal acquisition. Nevertheless, these advantages have been greater than offset by lower-than-expected gross sales quantity and better working prices as we’re actively curbing capability to align our provide with decrease demand.

Regardless of decrease phase revenue, a robust money circulate through the interval enabled O-I to cut back internet debt by almost $350 million. To be clear, altering market dynamics is the biggest improvement affecting our enterprise. This contains the accelerated decline in U.S. beer demand that has began in 2018 and has continued into 2019.

Extra lately, we’ve seen a broader market slowdown that’s most notable within the U.S., Mexico and China. With that stated, we proceed to see good progress in markets the place we added new capability, akin to in Latin America. Reflecting a dynamic surroundings, our up to date 2019 outlook has been adjusted for continued softer demand, associated capability curtailments and unfavorable overseas foreign money translation. We now anticipate adjusted EPS of between $2.20 and $2.25 per share.

Our outlook for adjusted free money circulate now stands at roughly $100 million. We have now quite a few actions underway to bolster efficiency. A couple of examples embrace efforts to handle complexity following combine adjustments, new applications like our accelerated value discount initiative and our strategic portfolio assessment. Importantly, this assessment now contains an analysis of strategic options for our Australia and New Zealand enterprise. Lastly, we’ll introduce key themes for 2020, that are extremely centered on elevated money era and debt discount.

Transferring to Slide four. Amid a backdrop of softer demand, we’re centered on quite a lot of initiatives to handle key challenges in addition to capitalize on quite a lot of alternatives. Decrease-than-expected demand is our key problem. As famous, we’re actively curbing capability, which is able to proceed by the fourth quarter. Likewise, we have to essentially tackle structural adjustments in North America, given the secular decline in beer. Whereas this may embrace a variety of options, together with new product introductions, we’ll anticipate community optimization efforts in 2020.

Throughout our final earnings name, we mentioned the challenges we face with elevated combine complexity, which is impacting working efficiencies at about 10 crops throughout North America and Europe. Right here, the arrow is pointing up. We’re seeing preliminary progress throughout the centered factories, which is clearly seen of their key efficiency metrics. Our sources are absolutely deployed and we intend to return working efficiency to normalized ranges in 2020.

O-I has capitalized on pockets of latest alternatives. We lately accomplished the acquisition of Nueva Fanal, which strengthens our place with faster-growing premium beer manufacturers. Likewise, we’re seeing a robust progress in each Brazil and Colombia, the place we added capability. Ongoing initiatives embrace the fifth furnace at our JV with Constellation and our brownfield growth in Gironcourt, France, the place each start manufacturing within the first half of 2020.

Our accelerated value discount initiatives, supported by Accenture, was kicked off through the third quarter. Scope contains SG&A and provide chain prices in addition to group construction. We anticipate to finish diagnostic within the fourth quarter and start execution of key initiatives, delivering tangible advantages subsequent 12 months.

MAGMA is a high precedence for O-I and the primary shipments from our Streator pilot plant have been an vital milestone within the third quarter. The subsequent MAGMA line might be positioned in Holzminden, Germany, to assist R&D efforts and supply incremental provide to rising segments. The Holzminden line is anticipated to provide us additional information about MAGMA capabilities that we anticipate will allow three extra line purposes in Europe in 2021, 2022.

Our portfolio assessment is important to correctly align our enterprise to assist our extra — our strategic prospects to capitalize the enterprise and expedite debt discount. We’re making good progress with potential proceeds in extra of $200 million anticipated round year-end. Moreover, we’re reviewing strategic options for our Australia and New Zealand operations, however we’ll make no additional feedback till the method has run its course.

Lastly, debt discount is crucial. Supported by money flows, we trimmed internet debt within the third quarter. Fourth quarter money flows, together with potential divestiture proceeds, will allow vital debt discount. As I discussed, altering market dynamics is crucial improvement for our enterprise.

Slide 5 supplies extra perspective. Our long-term natural gross sales quantity traits are illustrated on the left. Within the high chart, we see — you see our complete firm volumes. Our legacy enterprise has been flat to modestly decrease. We have now additionally proven the volumes of the O-I community which embrace strategic JVs, specifically with Constellation Manufacturers and Comegua. The traits for the O-I community higher replicate our efforts to align the footprint to assist long-term progress.

As you’ll be able to see, O-I community quantity is steady to barely optimistic over the long run. The center chart illustrates our volumes by area. The Americas community represents simply over half of our enterprise. Volumes have typically been up modestly over the interval. It’s a composite of excellent, wholesome progress in Latin America, Mexico and non-beer demand in North America. Nevertheless, beer shipments in North America are underneath rising stress, as illustrated within the backside chart.

In Europe, our demand has been rising at low single digits. Extra lately, we’ve centered on combine administration, given capability (technical issue)

To allow future progress, we’re putting in new machine traces in addition to the brand new furnace in Gironcourt.

In Asia Pacific, shipments have been down modestly. Extra lately, this has been a mirrored image of the numerous asset restore exercise within the area. Over the previous 2 years, we’ve developed capability in China to assist serve the ANZ market, which was most impacted by repairs. Exiting a interval of heavy rebuilds, we anticipate Asia Pacific volumes to rev up.

With this backdrop, let’s focus on the evolution of our natural quantity expectations for 2019 as illustrated on the proper. Coming into the 12 months, we anticipated 1.5% gross sales quantity progress. This mirrored almost 1% progress for brand new enterprise agreements and about 1% natural progress, which was adjusted downward for decrease U.S. beer shipments.

Throughout our final earnings name, we revised our progress outlook down as we noticed full 12 months volumes might be flat to up barely. Whereas new contracts transformed ought to be a bit increased than anticipated, base volumes have been negatively impacted by quite a lot of elements.

First, the decline of — in beer demand within the U.S. is extra in depth than we initially projected. Likewise, the expansion in U.S. NABs has slowed. Moreover, demand was impacted by short-term occasions like excessive climate in Europe. Extra lately, we’ve famous a broader softening in demand as financial progress has slowed, most notably within the U.S., Mexico and China. This brings us to our present outlook for legacy volumes, which we anticipate might be down 1% this 12 months.

Now let’s focus on regional efficiency on Slide 6. Beginning within the Americas. Section revenue was down $19 million, excluding the influence of FX and a previous 12 months discrete tax merchandise. Increased promoting costs greater than offset value inflation, whereas gross sales volumes have been down. Complete quantity was up about zero.5%, which incorporates the advantage of Nueva Fanal. Nevertheless, natural volumes have been down about 5%, reflecting the elements that we simply mentioned.

We have now seen some preliminary progress addressing combine complexity. Wanting on the fourth quarter, we anticipate natural gross sales quantity might be flat or up barely. Whereas we anticipate softer underlying demand will proceed, we’re onboarding some new enterprise this quarter. Lastly, we anticipate capability curtailments within the U.S. and Mexico will proceed by fourth quarter in response to decrease gross sales.

Transferring to Europe. Section revenue was up modestly, together with the influence of FX and prior 12 months CO2 credit score sale. Increased promoting costs greater than offset value inflation, reflecting combine administration. Gross sales volumes have been down about 1% given present capability constraints. Working prices have been in keeping with prior 12 months, however mirrored an enchancment for the second quarter as we start to see progress in addressing combine complexity. General, we anticipate related enterprise traits within the fourth quarter.

Lastly, Asia Pacific phase revenue was comparatively flat, excluding FX headwinds and a retroactive adjustment for a brand new gross sales contract in 2019. With out this adjustment, increased promoting costs offset value inflation. Section quantity was down three%, with Australia up four%, which was greater than offset by a pointy pullback in China.

Working value improved from the prior 12 months as effectivity elevated following vital furnace rebuild exercise. We anticipate related traits will proceed into the fourth quarter. Nevertheless, we do anticipate vital sequential earnings enchancment as we enter the seasonal peak.

Now let me flip the decision over to John, who will element the quarter and outlook.

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [4]

——————————————————————————–

Thanks, Andres, and good morning, everybody. I’ll begin with a assessment of third quarter efficiency on Slide 7. As we introduced, third quarter adjusted EPS was $zero.54, inside our most up-to-date earnings steering of $zero.52 to $zero.55.

Let’s check out the reconciliation that compares present third quarter efficiency with prior 12 months outcomes for each phase revenue and adjusted EPS. As you’ll be able to see, phase revenue declined from $255 million final 12 months to $205 million this 12 months. $32 million of this decline displays unfavorable FX and a pair of discrete gadgets that benefited 2018 however didn’t repeat this 12 months. Discrete gadgets embrace the decision of an oblique tax matter in Brazil and the sale of CO2 credit that occurred within the third quarter of 2018.

General, our common promoting costs improved about 2.5% and greater than offset value inflation. So favorable value inflation unfold benefited earnings $12 million. Reflecting 1% decrease shipments, gross sales volumes impacted outcomes by about $9 million, which incorporates the advantage of Nueva Fanal.

Working prices have been additionally a headwind of round $21 million. Prices remained elevated regardless of preliminary progress addressing the challenges from elevated combine complexity in North America and Europe. Preliminary efforts to curtail capability additionally impacted third quarter prices.

Taking a look at EPS, O-I generated $zero.54 of adjusted earnings this 12 months in comparison with $zero.75 final 12 months. Foreign money and discrete gadgets impacted outcomes by $zero.15. The web impact of adjustments in phase revenue was an $zero.08 headwind.

Additional, the corporate benefited from decrease retained company prices and curiosity expense, however these have been offset by the next tax fee. The tax fee displays the altering regional combine as income have been up in excessive tax jurisdictions, particularly Latin America, though our share depend added $zero.02 per share.

One remaining word on the third quarter. We did document a cost to cut back the carrying worth of goodwill attributable to our North America enterprise unit, given the accelerated decline in beer demand. Because of this adjustment, we decreased the Americas goodwill from round $1.6 billion to $1 billion. This $595 million noncash cost just isn’t thought of consultant of ongoing operations and has been excluded from adjusted EPS.

Transferring to Slide eight, I am going to assessment our most present outlook. We now anticipate 2019 adjusted EPS of between $2.20 and $2.25, and adjusted free money circulate ought to approximate $100 million. In comparison with our full 12 months steering offered throughout our second quarter name, our up to date earnings outlook displays adjustments in three key elements: FX is an incremental headwind based mostly upon present charges. Given sluggish demand traits over the previous a number of months, we now anticipate full 12 months gross sales quantity might be down slightly over 1%. Likewise, we’re curbing capability at quite a lot of furnaces.

Our present outlook contains fourth quarter adjusted EPS steering of $zero.45 to $zero.50, and the chart supplies extra particulars. We have now additionally up to date our view on 2019 adjusted free money circulate. In comparison with our prior outlook of $260 million, we now anticipate roughly $100 million of adjusted free money circulate this 12 months.

Let me present extra particulars as this can be a extra vital decline than our revised earnings outlook would point out. First, foreign money translation is an incremental $40 million headwind. Remember the fact that our fourth quarter money circulate is especially delicate to FX, given the seasonality of our enterprise.

Second, our decrease earnings outlook impacts money flows by round $50 million over the second half of the 12 months in comparison with our prior outlook.

And third, we estimate working capital might be a $60 million incremental use of money. Most of this improve pertains to a continued shift in regional and buyer gross sales combine, which is rising our common accounts receivable fee time period. The influence of this combine change is most pronounced within the fourth quarter, given seasonally increased gross sales in Latin America, which has the longest fee phrases.

Throughout our second quarter name, we anticipated this shift would improve our days gross sales excellent by four days. Primarily based upon our revised outlook, we now anticipate DSO might be up round 7 days from prior 12 months. Remember the fact that 1 DSO equates to almost $20 million of upper receivables. So the change in DSO is negatively impacting working capital by round $140 million for the 12 months, which is $60 million increased than we had assumed in our prior steering. We imagine 2019 is an anomaly and never reflective of regular accounts receivable traits, however adjustments in macro situations.

Let me spend a second discussing capital allocation. I am now on Slide 9. As we’ve mentioned up to now, capital allocation priorities embrace derisking the steadiness sheet, funding our technique and returning worth to shareholders. With that stated, debt discount stays our high precedence, pushed by working money circulate and proceeds from divestitures. As illustrated on the chart, seasonality performs a giant function within the timing of money circulate era. The primary a part of the 12 months is a use of money and the second half is a robust supply. As you’ll be able to see, the corporate generated $348 million of adjusted free money circulate through the third quarter of this 12 months. Like final 12 months, we anticipate robust fourth quarter adjusted free money circulate, which helps our full 12 months outlook.

Stable third quarter money circulate supported a $345 million discount in our internet debt, a metric we anticipate to drive down to simply above $5 billion by year-end. Any proceeds from our divestiture program through the fourth quarter would assist additional debt discount from the degrees illustrated on this web page. According to our give attention to decreasing liabilities, the accelerated effort to derisk our asbestos legacy legal responsibility stays on monitor. Whereas we intend to fund our technique, we anticipate 2020 strategic CapEx will give attention to advancing MAGMA. Likewise, the corporate has deprioritized acquisitions.

Returning worth to our shareholders can be a precedence. Along with initiating a dividend this 12 months, $500 million stays excellent on our share repurchase program. Nevertheless, this might be deemphasized till leverage approaches 3x or to doubtlessly soften the influence of earnings dilution within the occasion divestitures develop into vital.

Now let me flip the decision again to Andres.

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [5]

——————————————————————————–

Thanks, John. Provided that we at the moment are within the fourth quarter, let me share some themes for 2020. Remember the fact that we’re at the moment in our annual budgeting cycle and extra specifics might be offered early subsequent 12 months. Our high priorities for 2020 embrace improved money era, prudent CapEx spending and enabling debt discount. Understanding that 2019 has been impacted by lower-than-expected gross sales volumes, we’re taking preemptive measures this 12 months, akin to capability curtailment, so we will enter 2020 stronger and in a greater place to generate money.

For 2020, we anticipate CapEx ought to be round $350 million to $375 million, centered on upkeep, creating MAGMA and doubtlessly modest investments to assist the accelerated value discount initiatives. Whereas it’s too early to find out the influence of macro traits on the enterprise, we imagine it’s prudent to give attention to value and optimizing combine inside our system.

Likewise, we’ll proceed to handle the operational challenges following latest enchancment in combine. Provided that beer will stay difficult in North America and to restrict the influence of total combine challenges inside this community, we’re centered on new product innovation in addition to possible footprint changes to align capability.

Value discount will stay a precedence. We anticipate our accelerated value discount initiative along side our TSC program will scale back structural prices.

Lastly, we anticipate vital progress on our portfolio assessment initiatives. General, we imagine these efforts will lead to improved working efficiency, larger money era, which, together with divestitures, will assist significant debt discount.

And at last, on Slide 11, we imagine O-I provides a compelling funding proposition. Because the main international glass producer, O-I is in a singular place to serve our blue-chip buyer base around the globe. Likewise, glass is a extremely enticing package deal within the inexperienced financial system, given its clear sustainability attributes.

We’re actively engaged on a number of initiatives to enhance our working efficiency that we articulated as we speak. We’re optimizing our capital construction. This contains higher aligning our enterprise to our prospects’ wants and priorities which we anticipate will decapitalize the enterprise and assist additional debt discount.

Likewise, MAGMA represents a breakthrough innovation that helps take away the historic constraints dealing with glass and allow future worthwhile progress. We’re assured all of those steps accomplished in live performance will drive long-term worth creation.

This concludes our ready remarks, and we now welcome your questions.

================================================================================

Questions and Solutions

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Directions) Your first query comes from the road of George Staphos from Financial institution of America Merrill Lynch.

——————————————————————————–

George Leon Staphos, BofA Merrill Lynch, Analysis Division – MD and Co-Sector Head in Fairness Analysis [2]

——————————————————————————–

I needed to ask a query concerning North America and to the extent that you may have a view on 2020, Andres and John. To what extent would possibly the footprint optimization efforts that you simply appear to wish to do have an effect on negatively your working earnings, realizing, in the end, there will be a profit from this, however would possibly you lose effectivity as you undergo this footprint optimization?

After which relatedly, clearly, we see the GPI information and beer glass is declining, but it appears to be declining at a a lot faster fee in North America than the market as an entire and different substrates. Clearly, beer cans. Why do you suppose that is occurring given what you view to be some great benefits of glass versus different substrates from a sustainability standpoint and different elements?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [3]

——————————————————————————–

Okay, George. So the — we’re taking proactive motion almost about footprint realignment. We already began. We anticipate that we are going to have additional actions in This autumn. In order we try this, we’re clearing — the outcomes for the following 12 months from these impacts which at this time limit are increased. We’re, clearly, taking increased inventories as we put together for the curtailments. If we can’t react quick sufficient to have the ability to do it to keep away from that, we’re taking increased value at this level. However as we go into subsequent 12 months with that accomplished, we will have the other. We will have decrease prices. We will have the inventories going again down and all of the spending that’s associated to that can go down with that. So that is what we see in that entrance.

As regards to the North America market, we’re seeing the decline in beer as we noticed it earlier than. I feel it has been accelerated by persevering with client traits been altering available in the market. One thing that we have seen these days is the evolution of laborious seltzers with — have been rising extraordinarily quick. It is one thing that occurred over the previous couple of months. And this can be a class by which we’ve a really, very small participation. So at this time limit, that quantity goes primarily to different packages.

Now once I take a look at the steadiness of the market, we’ve a unique state of affairs. For instance, we’re seeing progress in spirits. We’re seeing progress, in our case, in meals. Our NABs are rising, although they’re rising at a slower tempo, and that is why we’re altering our projections. And wine is kind of flat. So it is actually concentrated within the beer class. Now we’re not seeing that sort of dynamic in another market around the globe. So that is the one one by which we’ve that. And as a way to take care of that, we’re taking, as I stated earlier than, proactive motion. We will modify the footprint, however we even have very robust expertise in advertising and marketing within the group. We have now very robust capabilities in new product improvement. So we’re engaged on creating new product breakthrough improvements for beer in addition to for laborious seltzers so we will enter the laborious seltzers class within the close to future, and we will assist volumes in beer in a greater manner sooner or later.

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [4]

——————————————————————————–

The one factor I might add to that as we glance to 2020 and any efforts that we have to do on footprint optimization, we might not foresee the restructuring prices related to this right now to be in extra of what we’re doing this 12 months collectively as an organization as a result of we’ve taken quite a lot of restructuring actions this 12 months. So one thing in that $40 million vary is what we predict this 12 months, and we don’t anticipate it might exceed that at this level.

——————————————————————————–

Operator [5]

——————————————————————————–

Your subsequent query comes from the road of Ghansham Panjabi from Baird.

——————————————————————————–

Ghansham Panjabi, Robert W. Baird & Co. Included, Analysis Division – Senior Analysis Analyst [6]

——————————————————————————–

I assume, Andres, simply following up on George’s query on North American beer. Simply given the weak spot there, I imply, sort of interested by your prospects additionally showcasing the weak spot. They’ve a good quantity of debt on their steadiness sheets as nicely. Has that accelerated destocking alongside the availability chain that you simply’re beginning to really feel? In different phrases, is your 5% decline — how ought to we take into consideration that 5% decline because it pertains to the development line going into subsequent 12 months versus point-of-sale?

After which second, when it comes to the tariffs which have been instituted on sure classes akin to scotch, do you foresee any influence on that because it pertains to your European enterprise?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [7]

——————————————————————————–

Okay, thanks. Effectively, the — at this time limit, what we’re contemplating is that the present development we’re seeing in decline of the NA beer goes to proceed into subsequent 12 months. That is what we’ve. Now we have to see how these different classes, which can be altering the share inside the beer class, are going to proceed evolving. So we have seen a major work — progress, excuse me, in laborious seltzers. We have to see how that evolves sooner or later. It has slowed down in September already, it might be seasonal, however we have to simply hold a really shut watch in that class to see what’s finest to mission for the next 12 months.

So far as the tariff is worried, clearly, that ought to have some influence sooner or later, however we have not seen that thus far. So we’ll see what occurs within the subsequent few months. However thus far, our demand continues to be very robust. Demand for spirits in Europe is absolutely robust at this time limit. If we had extra capability in that marketplace for that phase, we can promote extra, as we communicate.

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [8]

——————————————————————————–

And simply another context is the North American beer enterprise that we’ve, does symbolize about 6% of the full international quantity. So whereas that is definitely underneath stress proper now, I simply need to ensure you perceive the context of the full scope of that enterprise.

——————————————————————————–

Operator [9]

——————————————————————————–

Your subsequent query comes from the road of Brian Maguire from Goldman Sachs.

——————————————————————————–

Arthur Z De Almeida, Goldman Sachs Group Inc., Analysis Division – Analysis Analyst [10]

——————————————————————————–

That is Arthur Almeida on for Brian. I used to be questioning should you guys may present slightly bit extra colour on what occurred with Mexican volumes being down? Do you view this as a problem with exports to the U.S. extra or the Mexican markets themselves being adverse? May or not it’s a change to cans? And at last, do you expect that this might spill over into different Latin American markets?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [11]

——————————————————————————–

Okay. So the — what we’re seeing within the Mexican market is a discount in NAB volumes, and that is associated to native demand and is pushed by adjustments in financial situations within the nation. That is one thing that occurs in these markets when economies decelerate. It’s associated, for instance, to returnable containers. When years like this come, our prospects have a tendency to cut back the CapEx spending in any such ware. Nevertheless, what we’re seeing at this time limit is our prospects making ready to alter this sample as we go into the next 12 months. So there are investments, giant investments being deliberate for 2020 for the NAB class in Mexico.

Now we’re not seeing any of this in different nations. Actually, we’re seeing very robust demand in Brazil and Colombia, the place we put extra capability. The beer demand in Brazil is kind of robust. It is pushed by premium merchandise, rising actually quick. They’re rising year-to-date at 40% after which is pushed by conversion from returnable containers to one-way glass. The identical is going on in Colombia, the place we’re seeing double-digit progress total on this nation.

——————————————————————————–

Arthur Z De Almeida, Goldman Sachs Group Inc., Analysis Division – Analysis Analyst [12]

——————————————————————————–

And one remaining replace. I used to be questioning should you may present slightly colour on the capability closures within the U.S. that you simply referenced, how huge would that be relative to complete U.S. capability and to the full U.S. business? And afterwards, I am going to flip that over.

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [13]

——————————————————————————–

Sure. I imply I feel at this time limit, what we’re taking a look at is we had indicated capability closures throughout U.S., Mexico and in China. For aggressive functions, we don’t present any explicit particulars, however the intention is to principally get our stock ranges to be in an analogous zip code as they have been final 12 months. So most likely inside 1 or 2 IDS of prior 12 months ranges in comparison with the upper ranges that we noticed on the finish of the third quarter, and that is about as a lot data as we will present right now.

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [14]

——————————————————————————–

Sure. And the actions we’re taking will not be solely to appropriate the change in demand that we noticed by the 12 months, however being ready to be adjusted with demand at an analogous stage of capability in 2020.

——————————————————————————–

Operator [15]

——————————————————————————–

Your subsequent query comes from the road of Mark Wilde from BMO Capital Markets.

——————————————————————————–

Mark William Wilde, BMO Capital Markets Fairness Analysis – Senior Analyst [16]

——————————————————————————–

Andres, I am simply curious with this North American slowing in beer, is that merely the general beer market? Or is there additionally some additional shift happening? I recall again within the final recession, there was a giant transfer out of glass and into cans as a result of canned beer was simply at a lower cost level. And I’m wondering if that is a part of the equation in any respect?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [17]

——————————————————————————–

Mark, as I stated earlier than, I feel it is primarily associated to the — how the buyer traits are evolving and the class is shifting as a consequence of that. For instance, laborious seltzers have been rising actually quick they usually have already got a quantity that equates to — or equal to five% of the full beer class. So the consumption patterns are altering. New merchandise are rising. These classes are a possibility for glass, too. I feel within the earlier phases, cans have been doing fairly nicely with that. That they had the slim can available in the market. That they had smaller sizes out there to prospects, and people are an excellent match for this class that focuses on wellness and claims wellness as worth. Now as we — as I stated earlier than, we’re engaged on new platforms for glass. We intend to make them out there to our prospects, too. And sooner or later in time, given the significance of branding and differentiation available in the market, these glass merchandise can have a possibility, too.

——————————————————————————–

Operator [18]

——————————————————————————–

Your subsequent query comes from the road of Anthony Pettinari from Citigroup.

——————————————————————————–

Randy Devin Toth, Citigroup Inc, Analysis Division – Affiliate [19]

——————————————————————————–

That is really Randy Toth sitting in for Anthony. With the second pilot plant for MAGMA anticipated to start out subsequent 12 months, are you able to give us any extra data on the efficiency of the primary machine on the Streator facility? Are there any metrics, specifically, that you simply guys are enthusiastic about with that manufacturing developing?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [20]

——————————————————————————–

Okay. So the evolution of MAGMA is kind of optimistic. Each milestone that we wanted to fulfill have been fairly profitable and really encouraging. The road in Streator is producing. We have been all prepared to supply business ware. The standard of the glass that we’re melting is kind of excessive. The standard of the glass that comes out of the machine is kind of excessive, too. Now what we’re implementing in Europe in Holzminden is a gen-1 line, which is anticipated to be an evolution of the road in Streator. And as we stated throughout our opening remarks, we anticipate this line to provide us extra information for the R&D functions in addition to incremental provide quantity to have the ability to provide segments which can be rising at this time limit.

Now based mostly on the info that we’re getting that new line, we will make choices almost about the implementation of three extra traces in Europe. So we proceed to be very inspired by the evolution of MAGMA. And as we stated earlier than, MAGMA has the potential to alter the enterprise mannequin for glass altogether.

——————————————————————————–

Operator [21]

——————————————————————————–

Subsequent query comes from the road of Chip Dillon from Vertical Analysis.

——————————————————————————–

Clyde Alvin Dillon, Vertical Analysis Companions, LLC – Associate [22]

——————————————————————————–

Andres, I admire all the small print. I simply needed to get an thought as we glance into a few of the curtailments that you simply’re speaking about, I do know 6 months in the past, you all have been speaking a couple of 10% cumulative quantity progress goal that you simply had gotten 80% of the amount, I assume, secured and I simply needed to know, is a few of that reversing? Or is all of what you are dropping different enterprise that is kind of legacy enterprise?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [23]

——————————————————————————–

Okay. So once we discuss these targets, we additionally talked about that we have been pursuing long-term agreements. And that when we have been — we had these agreements safe, we’ll construct capability to have the ability to assist it. So all of these are progressing fairly nicely. That is how we’re constructing capability in Brazil, in Colombia. We’re constructing capability in France. We put a further line in Europe. So all of these are going nicely. Nueva Fanal was a part of the inorganic portion of that, which can be on-boarded at this time limit and it is going nicely.

Now we’ve been dealing with a few issues. One is a few short-term occasions, for example, ware in Europe impacting beer demand or we have been dealing with the discount in demand for Bordeaux wine exported to China. So these issues have been impacting the 12 months. Now we even have seen some slowdown in demand in some nations and segments inside these nations that we simply described for Mexico or China or NAB demand in america. So these are primarily pushed by macro situations. So there are some things combining. Now all the massive actions that we wanted to place in place to have the ability to drive incremental volumes related to long-term agreements are progressing fairly nicely.

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [24]

——————————————————————————–

Sure. So of that 10%, we had recognized it as ascribable actions, as Andres is speaking, for eight% and that left the remaining 2% actually to be natural progress of a fraction of 1% per 12 months. And it is that base the place we’re seeing the shift, as Andres was speaking about.

——————————————————————————–

Operator [25]

——————————————————————————–

Your subsequent query comes from the road of Debbie Jones from Deutsche Financial institution.

——————————————————————————–

Deborah Anne Jones, Deutsche Financial institution AG, Analysis Division – Director [26]

——————————————————————————–

My first query is only a readability query on the — I do know you are not speaking in regards to the Asia Pacific enterprise when it comes to promoting it, nevertheless it wasn’t clear to me if the China property have been included in that. May you touch upon that?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [27]

——————————————————————————–

Sure. In order we stated within the opening remarks is, we consult with ANZ. And we additionally stated, at this time limit, we can’t make additional feedback. However as we stated earlier than and we verify as we speak, we’re centered on a strategic assessment of our portfolio of companies. We expect that as we try this, we will get some proceeds, and people proceeds might be, amongst different issues, used to cut back debt.

——————————————————————————–

Deborah Anne Jones, Deutsche Financial institution AG, Analysis Division – Director [28]

——————————————————————————–

Okay. My second query…

——————————————————————————–

Operator [29]

——————————————————————————–

Your subsequent query comes from the road of Gabe Hajde from Wells Fargo.

——————————————————————————–

Gabrial Shane Hajde, Wells Fargo Securities, LLC, Analysis Division – Affiliate Analyst [30]

——————————————————————————–

Andres, are you able to tackle or focus on a few of the weak spot in China, it appear to sort of come out of nowhere? I am assuming it is commerce associated. But when we do see some type of thaw within the commerce struggle, is there a danger that imports begin to reaccelerate again in america, and we’ve sort of a double-edged sword, issues rebound in China however worsen right here in — domestically?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [31]

——————————————————————————–

Okay. So the weak spot in China is expounded to financial elements in addition to consumption elements. I feel that is affecting many industries. We have seen within the information throughout a number of industries. Many industries are even leaving China they usually’re going into Southeast Asia for his or her provide. So there’s a vital change happening over there. And that is what’s impacting the demand for beer for us.

With regards to imports into United States coming from China, what we’re seeing is precisely the other response. In order all of those commerce wars have been happening, the Chinese language suppliers have been focusing an increasing number of within the native markets. So that they’re attempting to place themselves over there. Numerous the ware that comes into United States come from the north of China. I need to spotlight that we’re current within the south of China. In order that’s vital to take into consideration. And over there, we are inclined to serve primarily very giant right here multinational firms or international firms.

——————————————————————————–

Operator [32]

——————————————————————————–

Your subsequent query comes from the road of Adam Josephson from KeyBanc Capital Markets.

——————————————————————————–

Adam Jesse Josephson, KeyBanc Capital Markets Inc., Analysis Division – Director and Senior Fairness Analysis Analyst [33]

——————————————————————————–

John, simply a few money circulate questions. On receivables, please appropriate me if I bought this incorrect right here, receivables might be $140 million drag this 12 months, and I feel you stated your complete working capital drag would be the similar $140 million. Please appropriate me if I am incorrect. And I do know you’ve gotten — there is a regional buyer combine difficulty, whereby I feel a few of your Latin American prospects take longer to pay, however you additionally talked a couple of buyer earnings combine affecting receivable assortment. So are you able to simply go into extra element, John, about what precisely is going on together with your receivables? And on condition that, what provides you confidence that subsequent 12 months might be significantly better working capital-wise? After which simply additionally on money, the CapEx subsequent 12 months of $350 million to $375 million, I feel that is near upkeep ranges. I feel you’ve got stated upkeep is round $300 million. So how lengthy are you able to maintain that stage of CapEx for earlier than you begin to lose a few of your competitiveness?

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [34]

——————————————————————————–

Positive. Positive, Adam. Thanks. So let me tackle these questions there. So on the accounts receivable facet, sure, we can have one thing on this $140 million plus or minus influence due to that change in — regional change, and I am going to contact base on that in a second. The opposite ingredient is then on the stock facet, on condition that we’re curbing proper now, we anticipate to make substantial progress on that, however there would possibly nonetheless be 1 or 2 days of IDS nonetheless excellent, and that may add as much as about $30 million. In order that’s sort of the zip code of the stress that you simply’re seeing on the accounts receivable facet.

So the opposite query then is what is going on on with receivables, okay? In order we talked about earlier than within the ready feedback, we’re seeing progress this 12 months as anticipated within the Latin America nations, Brazil, Colombia, the place we’re increasing in these explicit markets. They historically have longer fee phrases as a geography in comparison with, for instance, the place we’re seeing declines within the gross sales quantity, specifically, within the U.S., even Mexico and China have slower — decrease phrases days excellent than different components of the enterprise. In order that’s actually inflicting the shift. And it will get extra vital in direction of the top of the 12 months as a result of that occurs to be the height seasonal interval for Latin America given Southern Hemisphere, after which within the U.S. and Mexico and China being within the northern hemisphere, it is slightly bit slower. And once we consult with regional and buyer combine, that is the time period we use for it. We’re not attempting to differentiate that there is explicit prospects being damaged out, solely in that, that is sort of the nomenclature that we consult with there. So that is considerably only a regional change. And I might additionally say that on the accounts receivable, our assortment course of are literally fairly good. And that is only a structural change within the phrases given these adjustments.

The opposite query then is CapEx, okay? So $350 million to $375 million is the quantity that we had indicated. Sure, upkeep capital is someplace within the zip code of $300 million, plus or minus. So this contains that funding plus primarily MAGMA investments and a few residual carryover impact of some initiatives that we’ve underway that have been actually tied to the expansion that we had spoken about a few of the new onboarding of volumes and issues like that.

With this sort of exercise, we will keep our aggressive benefit — our value place as a result of we’re sustaining on the acceptable ranges. Finally, down the highway, the balancing between that and strategic capital for progress goes to be underneath assessment. However particularly with onboarding a lot of what we simply talked about this 12 months and Gironcourt and quite a lot of different issues underway, we’re clearly digesting all that exercise proper now.

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [35]

——————————————————————————–

Sure. I wish to add that during the last couple of years, we had substantial funding in progress and capabilities. So at this time limit, we need to focus totally on optimizing what we’ve. And we talked about earlier than that MAGMA is evolving fairly nicely. It is fairly encouraging. We imagine this has the potential to alter the enterprise mannequin for glass. So we need to advance this quicker. And on the similar time, as we give attention to optimization, we need to optimize the income line. We need to speed up the price discount, and we need to give attention to all of the issues we described on Slide 10. And our expectation is that that is going to enhance money circulate era. It will enhance our place in debt. And at that time, we’re going to have the ability to have a unique distribution of our capital allocation.

——————————————————————————–

Operator [36]

——————————————————————————–

Your subsequent query comes from the road of Tyler Langton from JPMorgan.

——————————————————————————–

Tyler J. Langton, JP Morgan Chase & Co, Analysis Division – Analysis Analyst [37]

——————————————————————————–

I simply had a query on value. I assume you talked about that you simply initiated a price discount initiative and that you simply must also get advantages from the TSC program in 2020, after which additionally in 2020, I assume, you sort of anticipate type of extra progress with the operational complexity and sort of how that type of return to extra normalized ranges? And I assume, are you able to present slightly bit extra colour on these initiatives and sort of, I assume, what potential financial savings you would see in 2020 from them? Simply any colour can be useful.

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [38]

——————————————————————————–

Sure. So we have been really engaged with Accenture within the evaluation section of our alternatives as we go into 2020. We’re centered on three totally different areas: spending, group and provide chain. We expect that by mid to finish November, we will have the results of that evaluation. After which we will transfer into placing collectively the motion plans for our accelerated value discount in 2020. So we anticipate that, that program goes to enhance our value in a considerable manner. And with that, it should enhance earnings and money circulate for us.

Now as you talked about, we’re centered on manufacturing efficiency enchancment to have the ability to offset the influence of elevated complexity. We’re making good progress in that. And as we stated earlier than, we expect that that is going to start out translating as we exit the 12 months and going to the next 12 months and alongside that 12 months, we must always anticipate to see steady enchancment. In order that’s the present state of affairs. Value acceleration is likely one of the important areas by which we’ll focus. TSC has been excellent for us, however we see that there’s a possibility to enrich these efforts, speed up value discount, enhance earnings and money era with that.

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [39]

——————————————————————————–

Sure. Simply to offer slightly bit of additional colour there, we had indicated in line with our second quarter feedback is that complexity might be impacting our outcomes by $zero.10 to $zero.12 this 12 months. So whereas not utterly out of the system subsequent 12 months, that ought to be down from that stage. We’re additionally incurring prices to fee new capability this 12 months. There’s most likely one other dime there. Whereas we’ll nonetheless be having some prices for Gironcourt, for instance, it ought to be at a decrease stage. After which the curtailment prices that we’re absorbing this 12 months are someplace between $zero.05 to $zero.10. And actually, relying on market situations going ahead, we will see some modification of that stage going ahead.

——————————————————————————–

Operator [40]

——————————————————————————–

Your subsequent query comes from the road of Arun Viswanathan from RBC Capital Markets.

——————————————————————————–

David Paige Papadogonas, RBC Capital Markets, LLC, Analysis Division – Senior Affiliate [41]

——————————————————————————–

That is really David Paige on for Arun. I simply needed to comply with up on a MAGMA query. So now that you’ve got began to supply commercially, simply when it comes to rolling it out extra broadly sooner or later, how a lot of your, I assume, final complete manufacturing do you anticipate to go by the MAGMA course of? Is it like half, 100%, a couple of quarter, any colour you’ve gotten there?

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [42]

——————————————————————————–

Effectively, at this time limit, it is too early to offer data in that respect. As we stated — as we put towards the road in Holzminden in Germany, which goes to be working in, I might say, one of many high factories we’ve around the globe when it comes to flexibility and capabilities, we will get much more information almost about the aptitude of those traces. This is a crucial information level for us to outline our course almost about three extra line implementations in Europe.

Now total, what I can describe for you is, we expect that MAGMA will affect our present asset base and can affect the flexibility to develop, each. Within the present asset base, we’re going to have the ability to, sooner or later in time, substitute current property by MAGMA property. That is the general goal. And in the case of supporting progress, this configuration of this line with decrease capital depth anticipated with decrease manufacturing value anticipated and lots simpler to deploy it and quicker to deploy it, will probably be precisely what we want within the glass business to have the ability to comply with progress in a simpler manner. In order that’s all to return. That is in keeping with what we stated earlier than. We expect to have extra information within the close to future, and at that time, we can present extra updates.

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [43]

——————————————————————————–

I feel it is vital to notice that we do not view MAGMA as a distinct segment resolution to a small a part of our enterprise. We imagine it ought to have broader software, after which we’re attempting to evaluate how broad that software will be at this stage.

——————————————————————————–

Operator [44]

——————————————————————————–

We have now one other query from the road of Mark Wilde from BMO Capital Markets.

——————————————————————————–

Mark William Wilde, BMO Capital Markets Fairness Analysis – Senior Analyst [45]

——————————————————————————–

John, is it doable to get only a temporary replace on asbestos? And any limitation on asset gross sales or use of proceeds from asset gross sales as a result of asbestos legal responsibility?

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [46]

——————————————————————————–

Sure. Simply to touch upon that. Principally, the standing of asbestos that we have been giving year-to-date stays the identical, and we’re specializing in accelerating the derisking of that given some inflationary pressures we noticed in a few totally different jurisdictions within the courtroom techniques. That’s continuing. As you look within the financials, a lot of the money proceeds that we anticipated for 2019 have already been paid. And so there’s slightly bit left for the steadiness of this 12 months. And no, there’s actually no restrictions on the usage of proceeds as a result of asbestos part.

——————————————————————————–

Operator [47]

——————————————————————————–

Your subsequent query comes from the road of Chip Dillon from Vertical Analysis.

——————————————————————————–

Clyde Alvin Dillon, Vertical Analysis Companions, LLC – Associate [48]

——————————————————————————–

Sure. Only one fast one right here. You — on the brand new CapEx information for subsequent 12 months, simply taking a look at the truth that it’s really significantly under what you’ve got accomplished year-in and year-out if you depend CapEx plus the restructuring part, and so may you tell us what’s modified, particularly given that you’re doing a number of progress investments, particularly the place MAGMA is worried?

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [49]

——————————————————————————–

Sure. What I might say is that, persistently, our upkeep stage has been on this plus or minus $300 million vary. The investments that we have been doing right here over the previous couple of years have actually been specializing in a few of the progress alternatives that we have been taking a look at. We have additionally been investing in a few of the value optimization on a few of the earlier TSC alternatives that we recognized. And again to a few of the feedback we made earlier than is that we have been working to onboard a good quantity of that progress exercise within the issues that Anders was articulating earlier. And so we’re now within the digestion and optimization mode of these actions. And so at this time limit, we imagine, one, it is acceptable and secondly, prudent to drag again on the capital expenditures to be principally the continuing upkeep exercise, the continuing components of MAGMA and a few residual prices to onboard the capability for a few of the remaining progress initiatives.

——————————————————————————–

Andres Alberto Lopez, Owens-Illinois, Inc. – CEO, President & Director [50]

——————————————————————————–

Sure. Over the past couple of years, we took quite a lot of actions to unravel the structural points on this enterprise. And with that on, it’s a good motion to take to optimize what we’ve. We should always have loads of upside simply optimizing. And as we try this, then we proceed accelerating the event of MAGMA, enhance our steadiness sheet, and with that, we ought to be in a significantly better place to leverage the potential of that new expertise.

——————————————————————————–

Operator [51]

——————————————————————————–

Your subsequent query comes from the road of Gabe Hajde from Wells Fargo.

——————————————————————————–

Gabrial Shane Hajde, Wells Fargo Securities, LLC, Analysis Division – Affiliate Analyst [52]

——————————————————————————–

John, you addressed a few of the type of onetime earnings points on the earnings assertion facet. I hoped possibly you would tackle some money circulate gadgets? We have talked about CapEx, clearly, being down slightly bit. It feels like restructuring might be related. I feel asbestos is meant to go down $20 million, however any of the opposite huge transferring components that you would assist us bridge from what’s a adverse quantity this 12 months to one thing hopefully optimistic subsequent 12 months?

——————————————————————————–

John A. Haudrich, Owens-Illinois, Inc. – Senior VP & CFO [53]

——————————————————————————–

Sure, positive. Thanks, Gabe. Let me sort of take that in totality there. So clearly, rising money circulate is our high precedence for subsequent 12 months. We’re at the moment in the midst of the budgeting course of, however I can add some colour. Let me simply make clear a few of the P&L components and go on into the money circulate in that regard. We do anticipate continued constructive value inflation unfold, as we have seen this 12 months and the final couple of years. Our gross sales quantity ought to profit from Gironcourt and the total 12 months of Nueva Fanal. Whereas glass is anticipated to develop about 1% as a backdrop, this may — most of this may most likely be offset by the headwinds of the U.S. beer demand traits that we have seen. In fact, normal market traits are a little bit of a wildcard at this stage given macro uncertainties.

In order I discussed earlier than, working prices ought to profit from the complexity — decrease complexity, decrease commissioning prices, et cetera, plus we’ll benefit from the accelerated value discount with the TSC. Though we do face a number of headwinds, FX is a headwind and we do have sure applications that benefited 2019 which can be coming to an finish, issues like — we have talked about up to now just like the EU vitality program and the West certificates program. So these are on the market.

Now if we take a look at a few of these different money levers you are speaking about, definitely, we bought the decrease CapEx. We don’t anticipate working capital would be the very giant use of money that we noticed in 2019, we imagine that the AR ingredient is a little bit of an anomaly this 12 months. So whereas pension might be a modest headwind, possibly $10 million to $15 million, we do anticipate asbestos to be down, as you talked about. And ideally, dividends with pension with the JVs goes increased as a result of we’re exiting a few of the main capital funding durations as, specifically, we convey on a few of the new capability there. And naturally, divestitures may have an effect on this complete situation to a point, and we’ll need to replace you as we get larger readability there.

——————————————————————————–

Christopher David Manuel, Owens-Illinois, Inc. – VP of IR [54]

——————————————————————————–

Okay, guys, I feel that was our final query. I needed to thank everybody, and that concludes our earnings convention name. Please word that our fourth quarter name is scheduled for February 5, and we’ll sit up for speaking to you then. Thanks.

——————————————————————————–

Operator [55]

——————————————————————————–

That does concludes our convention for as we speak. Thanks all for taking part. You could all disconnect.

LEAVE A REPLY

Please enter your comment!
Please enter your name here