OI
#Thank you, Angel.
Welcome, everyone, to O-I's Earnings Conference Call.
Our discussion today will be led by <UNK> <UNK>, our CEO; and <UNK> <UNK>, our CFO.
Today, we will discuss key business developments and provide a review and outlook of our financial results.
Following our prepared remarks, we'll host a Q&A session.
Presentation materials for this earnings call are available on the company's website at o-i.com.
Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.
Unless otherwise noted, the financials we are presenting today relate to adjusted earnings and adjusted cash flow, which exclude certain items that management considers not representative of ongoing operations.
A reconciliation of GAAP to non-GAAP items can be found in our earnings press release and in the appendix to this presentation.
Now I'd like to turn the call over to <UNK>.
Thank you, Dave, and good morning, everyone.
Let me start by saying that we are doing what we say, delivering 9 consecutive quarters of meeting or beating the key financial targets and performance in an uptrend as shown through the rising profits and margins in Europe and the Americas, which account for 90% of the business.
And Asia Pacific will improve in the back half of this year, as we are already more than halfway through the intensive investment program to improve the fit-to-market of their assets.
This is the same type of program that was done before and is now facilitating results in Europe and the Americas.
While <UNK> will dig into a detailed financial review and outlook in a moment, let me provide an overview of the first quarter of 2018, which unfolded as expected across the world in terms of external conditions, sales and shipments as well as both operational and nonoperational performance.
Sales were solid and at high single digits reported by a stronger Europe and a constructive price-cost inflation environment across the world.
Shipments were essentially on par with the prior year, just as we expected.
And we continue to see a stronger shipments from our joint venture with CBI that supports the fastest growing beer segment in the U.<UNK> Our cost position was right in line with expectations.
Total system cost and footprint actions added to the bottom line.
Meanwhile, as we previously mentioned in prior calls, investment in assets and key capabilities are temporarily putting pressure on our earnings.
More on this in a moment.
In the immediate term, as we assess how the business is performing and the solid results we have delivered in the first quarter, I am confident that we are on track to deliver our financial targets for full year 2018.
Now let's turn to Slide 4.
But I want to focus on sustainable value creation.
Consumer trends are starting to turn towards glass.
This is reflected in the high level of new product introductions around the world.
As an example, we launched glass for milk in 6 different countries recently.
Today, milk is selling glass in countries like the U.<UNK> and the U.K., something unthinkable until just recently.
We are further building key capabilities in areas such as sales and marketing, innovation, integrated business planning, end-to-end supply chain and talent and organization.
In fact, we have been actively rolling out many of these capabilities around the world, and the benefits are starting to be visible in our 2 largest regions.
For instance, Europe has been through 4 cycles of IBP, integrated ---+ integrating the product demand, supply and finance dimensions in a 3-year rolling horizon.
It is an ideal planning process to support growth in an intensive asset industry like glass with a long capital cycle.
This is very timely considering renewed interest in glass by consumers, customers and channels to market as well as other important stakeholders.
The Americas is now launching the program and the Asia Pacific region will do so early next year.
Separately and within end-to-end supply chain, TSC is deployed and several of our plants are now adopting a new operating system that will allow for much better efficient operations by applying the standard work and continuous improvement methodologies.
We've been investing in new product innovation and process technology to significantly improve O-I's position within the glass container industry and the packaging industry as a whole.
Within the people dimension, we are working in much more collaborative and productive ways.
Cross-functional teams are bringing together insights from marketing, sales, manufacturing, supply chain, engineering and finance across the world, all driving towards the execution of practical solutions to impact the top and bottom line and leveraging O-I's truly global enterprise.
Our end-to-end supply chain teams are singularly focused on improving assets and enhancing their flexibility and reliability, while also making prudent and strategic investments in our footprint that will dramatically enhance our ability to meet rising and changing customer needs at a more sustainable, value-generating cost point.
And this is a key linkage to how we are strategically investing in our assets.
We continually review our footprint, seeking ways to redeploy supply from higher cost-to-serve assets into more productive, efficient assets.
In 2017, we did this in The Netherlands.
While in 2018, Colombia is already in the works.
These are projects with a very favorable return on investment.
As we noted in previous earnings calls, we are deeply engaged in a really intensive asset investment program through the first half of 2018 in Asia Pacific.
Over the past year or so, it has become evident that while there is good growth in this region, our assets have not been fully matched to evolving customer product needs.
So in the fourth quarter of last year, we opted to earnestly begin the process, improving the assets fit-to-market in order to drive long-term value.
This is similar to what we've done before in the Americas and Europe, with very positive results as evidenced by rising segment operating profit and margins over the past 2 years.
This illustrates that efforts to improve our assets are a strong catalyst to lift margins and earnings.
Good assets that are more productive and are better fit to market will drive margin expansion when properly leveraged by cross-functional teams.
This is what we are increasingly doing.
So now it is Asia Pacific's turn.
We have a finite set of projects that we know well how to manage from start to finish, all in a way to meet current and future customer needs.
In fact, we are presently ramping up furnaces that were in the initial part of the asset improvement program.
Bringing all the regions together, clearly we are firmly on the path to increase shareholder value.
Now let me turn the call over to <UNK>.
Thanks, <UNK>.
Let's turn to Slide 5.
Beginning this year, we have consolidated North America and Latin America into one segment, named The Americas.
This allows us to better leverage critical resources and competencies across a larger geography to replicate best practices and to realize cost synergies.
Trends across the Americas are as expected.
Sales revenue was up with gains reported in price, currency and volume.
Overall shipments were up low single digits.
Continuing trends that we saw exiting last year, Brazil was the strongest performer in the region, where private consumption is recovering and our new product introduction activity enabled a 30% increase in sales volume year-over-year.
For instance, we are helping a major nonalcoholic beverage company successfully launch soda in glass in Brazil, and introducing glass packaging into the fast-growing fruit juice and coconut water segment among many other new product introductions across all end users.
And cross-functional teams across the region are generating new business in glass: premium olive oil in Colombia; tuna in Ecuador; fruit juices in Mexico; and new pasta sauces in the U.<UNK>, to just name a few in this region.
Within the U.<UNK>, solid growth in premium and super premium beer, spirits, food and nonalcoholic beverages helped once again to largely offset the overall declining trend driven by mega beer.
On our last earnings call, we mentioned that the use of O-I containers in the U.<UNK> has been at record levels in recent years when taking into account volumes from our JV with Constellation Brands.
I'm happy to say that the situation is now even better.
Use of O-I containers in the U.<UNK> market is higher year-on-year, when including results of the JV, which ramped up its fourth furnace in the quarter.
And in the first quarter of 2018, we have seen continued traction on total systems cost results.
In all, the Americas is performing solidly with price and volume growth plus margin expansion.
Turning to Europe, the team is driving exceptional improvement.
Sales revenue was up 16%, driven by both price and currency.
Shipments were essentially flat, which is quite solid and in line with expectations in light of a strong comparable period in the prior year.
Price-cost spread was modestly favorable, consistent with our view of the constructive dynamics we've discussed.
After layering in the benefits from the plant closure in the Netherlands and total systems cost, you can see margins improved a healthy 60 basis points.
Good results, and we expect these positive trends to extend into the rest of the year.
Let's turn to Asia Pacific.
<UNK> already mentioned the asset investment program, which is the cause of the temporary, lower profit and margin in the region.
While this is dampening earnings through the first half of 2018, it's the right thing to do, to sustainably improve the region's earnings profile going forward.
As a result, we expect that Asia Pacific will emerge in the second half of this year with a solid and profitable foundation upon which to continue to grow for years to come, leveraging favorable demand in Australia, New Zealand as well as healthy growth in emerging markets.
Let's turn to Slide 6.
Overall, segment operating profit in the first quarter was right in line with our guidance.
Currency, primarily from the stronger euro, was favorable year-over-year.
The impact of sales volume and mix also helped segment operating profit due to the volume growth in the Americas.
Price was up about 2% with gains in all regions.
With respect to operating cost, there are several elements in this rather broad bucket.
Cost inflation is over half of it, plus higher engineering activity compared with prior year led to lower production volume and higher manufacturing spend in the quarter.
On the positive side, total system cost performance and benefits from the plant closure continued to drive sustainable improvements in our cost base.
You know we are passionate about and committed to driving margin expansion.
In this quarter, top line gains didn't all drop to the bottom line as I just mentioned.
So simple math leads to lower year-over-year margins within the quarter.
We anticipate less pressure in the second half of 2018, as the costs associated with asset enhancements returned to a more normal level and while the favorable price-cost spread and TSC continue to support growth in the bottom line.
For the full year then, we are confident that we are on track to deliver solid margin expansion of at least 40 basis points.
Turning to Slide 7.
Well, our business operations have several moving parts: sales, TSC, asset improvements and price-cost spread, to name a few.
The year-over-year impact on EPS is relatively modest in the quarter.
Segment operating profit in total added $0.02 to EP<UNK>
The effective tax rate in the quarter was in line with our annual guidance.
However, since it is about 100 basis points higher than prior year, tax was a $0.01 headwind.
While those 2 items together sufficiently explained the $0.01 increase in adjusted EPS, I'd like to pause on interest expense, share count and currency.
Flat interest expense is a great outcome as we faced a stronger euro and rising variable interest rates in the U.<UNK> We have essentially offset these pressures through deleveraging, smart capital structure planning and efficient global cash management.
We repurchased 2 million shares of our stock in the quarter, all in March.
This had no appreciable impact on our average shares outstanding in the quarter and, therefore, no impact on earnings per share yet.
Lastly, currency was a $0.02 tailwind overall, which is not quite as favorable as the expected $0.03 to $0.05 I mentioned on our fourth quarter call.
In all though, we delivered earnings on the upper end of our guidance range.
And looking at Slide 8, our second quarter outlook feels a lot like first quarter results, albeit from a $0.75 base.
There are many moving pieces, which largely offset one another, leading to second quarter 2018 adjusted EPS outlook of about $0.75.
Here's a breakdown of the key pieces.
We expect currency will continue to contribute a few pennies, and we anticipate a modestly favorable price-cost spread in the second quarter, while shipments are likely to be flat overall.
Similar to the first quarter, the impact of engineering activity should be partially offset by global total systems cost efforts plus continued footprint benefits in Europe.
And lastly, interest in taxes will be higher than prior year, entirely consistent with the full year outlook.
From a regional perspective, the Americas should be about flat in the quarter.
While the region is running very well, it won't have the benefit of a minor sales of nonstrategic assets that we completed in the second quarter of 2017.
Segment operating profit for the other regions is expected to be directionally consistent with the year-over-year performance as in the first quarter, but perhaps more muted.
Europe should still benefit from favorable FX and price-cost spread.
Asia Pacific is expected to be lower year-over-year, but not as much as in the first quarter because some of the assets are coming back online in this quarter.
Considering the high level of investments in the first half of the year, EPS on par with the prior year would be a solid outcome and a testament to our resiliency.
In all, we are setting the stage for substantial earnings improvement in the back half of 2018.
Turning to Slide 9, I trust you can see that we are making steady progress through our comprehensive transformation.
I've been here for over 2 years now.
In my assessment, the O-I team has come a long way: improving our financial performance, rebuilding our credibility and establishing a solid foundation for the future.
The Americas and Europe are performing better year-over-year: sales, profit and margins.
<UNK> mentioned that Asia Pacific assets are a key focus.
We'll get that behind us midyear, really working as an organized, simplified, effective and efficient global enterprise.
Said differently, we are hitting our earnings and cash flow targets, even with APAC's temporarily limited contribution.
Clearly the Americas and Europe are delivering strong results.
As APAC rebounds and Americas and Europe continue to improve, there is quite some runway ahead of us.
While we will have more to say about the longer-term outlook at our Investor Day later this year, you can expect discussions about how we anticipate that solid volume growth and the continued impact of our strategic actions will lead to higher margins, earnings and cash flow.
Let's turn to capital allocation on Slide 10.
We will continue to invest in our business, as our CapEx activity will reach about $500 million for the first year ---+ full year and we will see an increase in our cash contributions to joint ventures.
For example, we continue to invest in our joint venture with CBI.
The fifth furnace is expected to come online in 2019.
We will continue to look for bolt-on acquisitions that complements our global footprint and product portfolio.
And while we continue to manage our legacy liabilities and debt structure, we have just recently begun to slow the pace of deleveraging by repurchasing shares.
Over the course of 2018, we plan to execute about $100 million in share repurchases.
With the review and outlook complete, let me turn the call back to <UNK>.
Thanks, <UNK>, and let's turn to Slide 11.
We are excited about the financial path we are on as well as our strong commitment to sustainability.
At the end of the day, it's about the prosperity we bring to our shareholders, customers and employees as well as our communities, along with the impact on the planning.
There is an ever-increasing expectation from consumers, customers, government and NGOs for companies to provide responsible packaging.
We are proud to make a product, glass, that has multiple benefits: it's reusable; it's infinitely recyclable; it's pure and doesn't decompose into harmful chemicals in the earth or oceans; and glass is preferred by health-conscious consumers.
You see, consumers get it.
There is no mass of glass floating on the open seas.
We continue to see a resurgence of premium products returning to glass.
There is yogurt, mayonnaise, ketchup, fruit juices, coconut water, milk, among others.
This is really good news for quality premium products and for the environment.
O-I's commitment to sustainability goes beyond the glass products we make and includes how we make them.
We endeavor to use as much recycled glass as possible.
In some plants in Europe, recycled glass amounts to more than 80% of our raw material, that is leveraging new technology in which we are investing.
We envision that our improved glassmaking process will lower energy use, reduce carbon emissions, minimize waste and respond better to changing customer needs.
Let me highlight a project dealing with energy conservation management.
We developed significantly more advanced algorithms in our glass melting and glass conditioning control system that reduce energy consumption and enhance productivity.
The payback on the investment is about 1 year, and we are in the earlier stages of replicating this across the global footprint.
Externally, we have begun to gain recognition for our efforts in health and sustainability.
O-I is the first food and beverage packaging company to achieve a gold rating in material health on the Cradle to Cradle Product Scorecard, one of the premier sustainability certifications for products around the world and across industries.
MSCI recently upgraded our ESG rating to A, elevating O-I into the top 10% for containers and packaging.
And due to efforts in corporate social responsibility, O-I will, this year, receive the Vision for America Award from Keep America Beautiful.
For O-I, sustainability is not only the right thing to do, but also a competitive advantage and growth driver that will fuel our business for years to come.
We plan to share more on our sustainability business and financial strategies at Investor Day on November 14 in New York City.
To finalize, I would like to thank our employees for their high level of engagement, energy and ownership in this transformation.
Their discipline and rigorous execution is taking O-I to rapidly advance and perform.
And now, we will open the lines for your questions.
Given the progress you've made in Asia Pac, do you have any kind of early sense where operating margins could be exiting 2018.
Or where they might be on kind of a more normalized basis.
And then when you think about your footprint in Asia Pac, are there opportunities to potentially add capacity in the region, maybe in Southeast Asia where it seems like demand is growing pretty strongly.
Yes.
Let me start with your second question.
So we see a stable market in Asia Pacific and in some places growing quite steadily.
So the step we're taking at this point in time, which is working on the assets to set them in a way that they can, in fact, fit the market well is the precursor to what you just described.
There are opportunities in the APAC region to add capacity.
And as we complete this phase and we move into the following year, then we can evaluate those opportunities and make the best decision for the company.
When it comes to margins, we expect that as we go into the second half, margins will gradually normalize.
And as we go into the first half of next year, we're going to be running in normal conditions as we did in our best times in this region in the recent past.
Yes.
We'll see consistent improvement in the margins quarter-over-quarter this year.
Exiting this year could be around 15% or 16%.
So for next year, as <UNK> said, we'll see something more normal of what they had been prior to all this activity level.
So let me start by reviewing the volume.
So the reason why the volume is down in this quarter is because we had limited capacity to serve the market.
And also we had some impact in Indonesia coming from lower sales in returnable containers.
Now when we look at the second half and onwards, we see several positive effects that are going to help improve margins in this region and earnings in the region.
One is we're going to improve sales volumes because we're going to have enough capacity to supply the market the way it should be.
We're going to see an improved mix because of the changes we're making in the footprint.
We're going to see improvement of factory costs, warehouse and logistics cost and, therefore, we're going to see improved earnings and margins.
Okay, yes.
So we were about 2% up versus prior year.
When we look at the U.<UNK>, mega beer is in the same trends we've seen before.
However, we're seeing growth in food, spirits, NAB, wine and premium and super premium beer, and we've been introducing new products in this market too.
Now when we look at imported beer, it is the fastest growing segment in the market.
It is driven primarily by the Modelo brands by CBI.
And you know that O-I presence in this segment is very large through the joint venture, or IBC.
Now something that will give you an idea of magnitude is this volume from IBC.
Even though we don't consolidate it in our sales volume, it has a quite large impact.
So it goes up to 150 basis points, a growth for the total company.
So please take that one into consideration when you're looking at the U.<UNK> market because the presence of O-I containers in the U.<UNK> market today is larger than it has ever been in recent years, because you combine the local supply from ---+ with this supply that we are having in Mexico for the imported beer.
Now when we look at Brazil, we were up 30% in the market for the quarter and beer was up 35%, 3-5.
Now when we look at the beer analysis by Nielsen, looking at liters of beer being sold by packaging type in the country, this is what we see: one-way glass is up 11% in the total market.
This is the only package that grows in Brazil when you look at that analysis by Nielsen.
Now when you look at mainstream, one-way glass is 4% up.
And when you look at premium, it is 13% up.
Then when you look at returnable glass, it is up 31%, 3-1, in premium.
Now returnable glass drops in mainstream in Brazil, but that has very little impact in units for O-I.
Now that returnable glass drops because there is low on-premise demand.
It's been that way since the economic crisis in Brazil, I mean, it doesn't recover.
Now the unit impact in our volumes of one-way growth in ---+ as I just described before, is very large, therefore the 35% growth that we see in the quarter.
Now there is a lot of new product introduction activity in Brazil.
So as we mentioned before, we're working on fruit juices and on coconut water, soft drinks and beer as well as other categories.
Mexico was fairly flat for the quarter.
However, we see a very healthy demand in this country.
And then when we look at the Andean countries, they were low to mid-single digits, up year-on-year, and this is driven by all categories that we serve in this territory.
Again, new product development and introduction is very large in this area of the world too.
And when we look at APAC, we see a flat market for Australia, New Zealand.
Important to have in consideration that our capacity has been limited.
But the market, in fact, is pretty solid over there.
And the American markets are growing at mid-single digits, which is also something that we can benefit from once we finish this work with the assets.
So that's pretty much an overview of demand.
If you want a little bit more color in Europe, we're seeing very solid demand over there.
You see Q1 being in line with prior year.
Now we are comparing with a quarter that was very strong in 2017.
U.<UNK> up 4% when compared to 2016.
Beer consumption in Europe is up ---+ is at the highest levels in 9 years, so that's very solid.
And wine volumes are very good, even though there was a poor harvest in the previous year.
So at this point in time, we are expecting, for this year, 40 basis points of margin expansion.
There are a few factors that are influencing our margin at this point in time is constructive pricing across the world.
We haven't seen that in quite a few years.
Mixed management.
We're doing a lot of work in that dimension through the sales and marketing team and that contributes to margins.
TSC is fully embedded in the organization and is gaining momentum, and we expect TSC to go up into the following years also contributing to the bottom line.
And the structural cost with option investments we're working on.
So we did some last year.
We're doing some this year.
There are more opportunities going forward.
So as the benefits of those investments kick in, we expect ---+ and in combination with everything we described before, we expect the margins to continue to increase going into '19 and onwards.
<UNK>, maybe I can elaborate a little bit on the cadence of the margin enhancements for this year.
You saw the performance in the first quarter and the second quarter, we expect margins to be, in general, flat to slightly down perhaps in the Americas.
We would ---+ we're seeing EBITs relatively flat, but revenue will be up.
So we expect to see the Americas performance be relatively flat year-over-year.
In Europe, we're seeing continued strength and improvement.
So I would say they should be equally as good, if not a little bit better than the first quarter performance on a margin improvement basis.
And in APAC, while still negative for the second quarter, will be substantially not as negative as the first quarter.
So it'll be better quarter-to-quarter.
And we'll see that improvement for APAC continue a lot in the second half as we get through these asset repairs and the cost ---+ both logistics cost and the asset repair costs are less in the second half of the year.
So we'll have good carryover as we go out of this year for 2019 for margins and EBI<UNK>
And we'll be happy to talk about that in a lot more detail as well during our upcoming Investor Day in November.
Sure.
So, let ---+ that's a good question and I can clarify that for you.
I think in total, we should expect roughly around $0.03 in 2018 for share repurchases after considering that we typically have about 1 million shares of dilution for the 401(k), in executive compensation in any given year and after the fact that we've purchased a little less than half of those shares in the latter part of the first quarter.
And then depending on how the timing of the balance of the shares are repurchased during the rest of the year, we'll determine if it's $0.03 or a little more or a little less.
We have not included this in our guidance as of yet.
But as typical in the mid-part of the year, we'll update or refine our range on guidance for share repurchase, for FX rates, for the ups and downs as we see them throughout the mid-part of the year.
So you'll hear more about that probably in our next earnings call as well.
Okay.
So when we look at the volumes and in line with the previous question on volumes, we're seeing a very solid environment in Europe.
And we're seeing a renewed interest in glass.
That renewed interest in glass also applies to the Americas and applies to Asia Pacific.
The new product activity that I mentioned earlier in the call is creating new volume.
And in fact, that's a pretty significant part of the growth that we're seeing year-on-year ---+ over the last 3 years of 100 basis points.
Now when we look at the Americas, and as Brazil comes back and the Andean countries continues to grow, that is a very good source for growth.
We're setting up things in Mexico in a way that we can serve incremental demand because we are approaching to be maxed out in capacity over there.
So overall, we see a positive environment about ---+ around the world for glass.
We see more interest by consumers, by customers, by channels, et cetera.
When it comes to M&A, we mentioned before that we are ---+ we continue to look at opportunities.
There are opportunities out there.
We are evaluating them and when it comes the right time and if we find the right opportunity, we're going to materialize that.
There is nothing as big as we had before like Vitro acquisition, but there are some that can be fairly accretive and strategic for the company.
They will be primarily in glass, so we are not looking at this point in time other segments.
There are plenty of opportunities in glass.
We said before, we're in 60% of the glass market around the world.
We are not in 40% of it.
So there are plenty of opportunities for O-I to grow over time.
So when we look at inflation, that is in line with what we expected coming into the year with exception of the fuel and freight inflation in the U.<UNK> Now we described before that we've been able to recover inflation in the first quarter.
We see a constructive price environment around the world.
So we are confident we're going to be able to recover inflation across the world in 2018.
When it comes to the fuel and freight in the U.<UNK>, which has been a very punctual situation, very specific to this country, we had increased inflation in the first quarter.
It's primarily driven by the freights.
Now when it comes to the fuel, we passed through that fuel in a monthly and quarterly basis, so that one we can recover fairly quickly.
The freight, we pass it through in a yearly basis, annual basis.
Now we're seeing a moderation of that inflation in the second quarter and we expect that, that will pretty much fade away as we go into the second half.
So we don't have a major concern with that at this point in time and we're expecting that we're going to be able to recover inflation across the world in 2018.
So when we look at the CBI volume, it equates to around 150 basis points of growth for the total O-I, so it's a very sizable volume.
As you know that we don't consolidate it.
However, we have equity earnings that come from that business to us.
So it's a very healthy volume with very healthy growth.
It has a lot of runway because we just started furnace 4, which is going to generate growth this year and the following year.
And we're building furnace 5.
And the combination of the two is going to ---+ are going to drive ---+ is going to drive growth going into 2020 and 2021.
Okay.
And then just to clarify your question on free cash flow, we have $400 million of adjusted free cash flow.
And then from that, we make investments in our JV, such as Constellation Brand.
Our JV with them should be about $25 million to $30 million this year and then a bit in RMBC.
Okay.
So a few things.
The first one is, we see the entire market moving towards high value segments and it is for all categories.
And in that space, glass does really well, helping to yield brands.
As we invest in innovation ---+ in product innovation, which we are doing, we're going to support the presence of glass in that ---+ in the high-value segments.
Margins are higher in those segments.
So as we grow, we will tend to improve our mix because of the larger presence in high-value segments.
Now there will be capital required at that point in time to be able to support those businesses.
Nevertheless, that capital will have very high return.
So it is a very positive investment, highly accretive as we move forward.
And, <UNK>, all of that is included in the $500 million that we're anticipating for CapEx for this year.
And just to elaborate a little bit on <UNK>' prior discussion about returns, we look at all of these investments that we do in a variety of ways.
First, of course, we have our strategic kind of investments that might include things like the closure of our Netherland plants ---+ the plant in Netherlands.
And this year, the closure of one of our plants in Colombia, those footprint-type actions.
And those are highly, very positive type returns for the company, 20% or greater type returns.
We also reached investing in ourselves in some of our areas, such as procurement and supply chain that you've heard us talk about a lot, which also bring high returns and sustainable long-term value to the company.
That would be one kind of area, strategic area.
And then another type, I don't know, classify it maybe as WAC plus growth.
So things that are better than our average cost of capital, but allows for growth for the company ongoing, like our joint venture with Constellation, like the Vitro acquisition a few years ago and some of these fit-to-market type investments that <UNK> has been talking about too, especially in APAC this year.
So we can be more responsive to the needs of our customers.
And all of these allow for future growth.
And then maybe the last category would be things better than weighted average cost of capital, such as in the maintenance area where we're investing in our assets to continually drive greater efficiency and improvement in our manufacturing plants.
So those, I think, are important to understand in how we really look at investments and returns for this company.
Let me add a couple of comments too, when it comes to margin improvement.
You're very familiar with the TSC efforts.
Our efforts in global supply chain, which are fully embedded now in the total organization, process technology that we are investing on, those things will contribute to margin.
They are gaining momentum.
And as we go into the following years, they will continue to contribute.
We are saying that we highlight in the call is IBP, Integrated Business Planning.
This is very important.
We covered a couple of questions today about growth.
In order to support growth in this industry, this 3-year horizon, rolling, planning, is a very important process for the glass industry.
This is already fully implemented in Europe.
It's going to be implemented in the second half in the Americas and will be implemented in APAC early next year.
So we are designing a systematic solution, a systemic solution for O-I, that's what we're designing.
So we can, in fact, support growth, earnings and higher margins over time.
Yes.
Our leverage ratio went up from about 3.5x to 3.6x quarter-over-quarter, which is not only well within our covenants and guidelines, but is very typical of the seasonality that we show as well.
Our debt levels under the ---+ under our bank credit agreement excludes certain seasonal working capital borrowings, as I think I explained on the prior earnings call.
And we expect to be at year-end roughly about 3.2, 3.3.
So we are continuing to deleverage throughout the year, albeit at a little bit smaller pace than we had in the past.
And this is because we have instituted the share repurchase program, but also I think more importantly, because we're looking at capital allocation in a little bit different way now, a little bit more balanced approach.
We are approaching that 3x leverage that we put out there a few years ago.
We think that the prudent thing to do is to balance this a little bit more with share repurchase, with looking at perhaps some M&A opportunities, as <UNK> mentioned, but continue to deleverage through the process.
Good.
So we're seeing a very solid demand in Europe and that goes across categories.
Beer consumption is highest ---+ at its highest point in 9 years.
We're seeing that reflected in our demand.
Wine is remaining strong.
Even though coming into the year, we were expecting a little bit of a slowdown because of the poor harvest season, but it didn't really materialize.
The new product development activity across the region, across the end users is also important.
It's very solid.
So we expect a year that will be flat to slightly up, but we are comparing with a very strong year, last year.
So that's the situation for Europe.
When it comes to Americas, mega beer trends are the same as they've been.
However, we're seeing very good growth in food, in spirits, in NABs, in wine, in premium, super premium, everything else grows quite well.
And we ---+ our presence in those segments is very good, is very solid.
So ---+ and at the same time, we are highly focused on new product development in all those segments.
So the ---+ we're seeing this year a slower overall decline in the U.<UNK>, for example, because the growth in all these categories is, in fact, partially offsetting that decline.
So we are in a better position than we've been in previous year as a consequence of that growth.
Yes.
On the share buyback, the $0.03 was the full year impact of the $100 million repurchase, just to clarify that.
But of course, it's dependent on when we execute the balance of those shares.
It'll be slightly higher than that if we execute more in the second quarter and slightly less if we do it toward year-end.
And at FX, yes, the currency for the second quarter guidance is based on the March-end rates, which is typical of what we would do.
And then, of course, you've seen strengthening of the dollar since there.
The Brazilian real, the euro, the Mexican peso have all moved.
And so maybe that takes back $0.01 or $0.02, I'm not sure, but this moves daily.
So we don't adjust our guidance daily.
You know us, we try to offset minor changes when we can.
And as I mentioned in Debbie's question, we will update and further refine our guidance as we go throughout the year and we'll add in for the share repurchase and we'll adjust if we need to for other items.
And we'll do that as more like maybe the second quarter rolls out.
Yes.
So the situation we're seeing in the U.<UNK> this year is better than what we've seen in the previous years, even though mega beer decline continues.
And our efforts, as we said before, have been focused on improving the performance of every one of the categories, like food, spirits, NAB, wine and the premium and super premium beer.
And we're also supporting our customers in the mega beer so they can perform their best within the circumstances.
Now we've been adapting our footprint to that.
There is more remaining supply in between some of the local production and what now IBC is producing.
So there are quite a few moving parts when it comes to demand and capacity and the balance and the influence in the footprint.
So we are constantly analyzing that.
We don't have any major plans at this point in time.
Our focus is in developing the market that is out there for glass, which is very relevant, and making sure we respond properly to increased interest in glass that we're seeing around the world and, obviously, it all ---+ it is also present in the U.<UNK>
Thanks, <UNK>.
So let me start with pricing in Europe.
What we are seeing is what you can expect for the balance of the year.
That environment continues to be very constructive.
We already went through all the negotiation season, so it is all said and done.
So we're confident we are in a good place when it comes to recurring inflation in Europe.
And we are in the best place we've been when we compare to the previous year.
When we look at APAC, the volume that we have seen in the fourth quarter and the first quarter has been influenced by the activity that we have in the assets.
Should we have all the assets in the condition we'll have them in the second half, our demand in the fourth quarter and in this quarter and the second quarter will be higher.
So there is a little bit of an impact in volume there.
But overall, volumes are solid in that region as well as mix, because as we change the footprint, mix is going to improve too because we're going to be a better fit to market.
Now when it comes to the program that we have, first, this is the same thing we've done with Americas and Europe over the last few years with very positive impact.
It's been helping earnings, it's been helping margins and it's been helping growth too, because we can get to markets or serve markets in a better way.
We are making very good progress in that.
This is a very finite activity.
It's something that we know very well that is in our control and that is going to be behind once we get into the second half of the year.
So we're very confident performance in this region is going to come up.
I mentioned before that there are many things that will be impacted.
Sales volume will be better because of that.
Manufacturing cost will be better too.
Warehouse and logistics cost is going to be better.
So we're going to see several variables moving in the right direction as we go into the second half and 2019.
Thanks, <UNK>.
Yes, very good question.
It is very different.
Let me just go back in time for a minute.
So when you look at a period, perhaps 2009 all the way to 2018, I will say that there are 2 major things that created a number of side effects that are related to what you're describing.
The first thing was the price over volume approach of the company, which had a significant impact on losing sales volume along the years.
And as you know, when we started the newest strategy of this company back in early '16, we said very clearly, stability is paramount in this business.
And we've been protecting that and we will.
However, as you look at ---+ you look back, many actions were taken as a consequence of losing volume because of that.
Now the other big thing is the Australian dollar strengthening at that point in time.
It became a very strong currency and that had many impacts.
One is imports of empty glass started to go up.
The second thing is, it accelerated conversion to bulk wine at that point in time.
The third thing is, it dropped the Australian wine exports.
And the fourth thing related to the Australian dollar is, local beer slowed down because the imported beer started to grow.
When you combine all those 4, plus the price over volume, there was a significant excess capacity in that region that forced very drastic capacity reductions over time.
So when you look back, you hear ---+ you see all those various events happening at that point in time.
The other thing that was very significant is the China growth strategy.
We've created a number of issues, and those were described in the past, all of that is behind us.
Now what we're doing today is very different.
We are improving the fit-to-market of those assets.
We are improving the condition of those assets to be able to perform.
This is the same we've done with Europe and the Americas with excellent results.
So we are very happy that we are able to do this.
Americas and Europe are in a very strong run at this point in time.
Earnings are going up.
Margins are going up.
So it is the right time to do APAC, and it was the last that we needed to go through.
It is also important to do it at this point in time because of seasonality.
So this is very different.
I'm glad you asked the question because understanding the evolution of those years is not easy if you don't live through them.
But we're dealing with a very different situation right now.
It's a good market.
It is growing.
APAC is changing with the balance of the company.
This company is changing quite dramatically.
Culturally, how our mentality, how we approach the business is changing.
Our people are engaged.
The ownership is very high.
We're very focused on execution and results.
So it's a very different moment.
And this region is not the exception.
So I think we are on the right path here.
Thank you, everyone.
This concludes our earnings conference call.
Please note that our second quarter conference call is currently scheduled for July 24.
We appreciate your interest in O-I, where we are growing bold, distinctive and infinitely recyclable glass packaging that is good for brands, consumers and the planet.
Thank you.
