O-I Glass, Inc. (OI) Q2 2013 Earnings Report, Transcript and Summary

Good morning, my name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the O-I Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Dave Johnson, Vice President, Investor Relations. Sir, you may begin your conference.

Thank you, Angela. Good morning, and welcome everyone to O-I's Second Quarter 2013 Earnings Conference Call. I am joined today by Al Stroucken, our Chairman and CEO; Steve Bramlage, our Chief Financial Officer; and several other members of our senior management team. Today, we will discuss key business developments, review our financial results for the second quarter and discuss trends affecting our business in 2013. Following our prepared remarks, we will host a question-and-answer session. Presentation materials for this earnings call are available on the company's website at o-i.com. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP earnings can be found in our earnings press release and in the appendix to this presentation. Now I will turn the call over to Steve, who will review the quarter. Al will follow with a regional overview. Steve?

Thank you, Dave, and good morning. Overall, our results were consistent with our expectation despite increasing headwinds throughout the quarter. We reported adjusted EPS of $0.81, the same as the prior year quarter. Price was up 2% for the quarter and fully offset cost inflation. Globally, shipments were down 1%. While May volumes were strong, demand tapered off toward the end of the quarter, causing volumes to come in modestly softer than anticipated. For the quarter as a whole, sales in beer markets declined in all of our regions due to well-known issues, namely abysmal weather in North America and Europe, along with macroeconomic pressure in South America. In Europe, wine volumes in the second quarter were higher year-on-year despite an overall down market. In fact, overall European profit expanded in the second quarter due to an improved product mix, primarily increased wine sales, progress on reducing costs and early benefits from the asset optimization program. In Asia Pacific, we also continued to benefit from restructuring undertaken in the course of 2011 and 2012. Our capital allocation remains disciplined, debt levels have declined year-on-year. Although we had expected to buy back shares in the back half of the year when cash flow is seasonally stronger, this year we began share repurchases in the second quarter due to our confidence in being able to reach our free cash flow targets. Turning to Slide 3, we will begin our financial review with a second quarter reconciliation for sales, operating profit and EPS. In the first column, second quarter 2013 segment sales were $1.8 billion, up approximately 1% over the prior year. Price and mix in the quarter were up $36 million, which equates to a 2% increase from the prior year. Sales in tonnes were down 1% on average. As I mentioned previously, this was largely driven by global softness in beer. Volume gains in wine were not limited to Europe. All of our other regions recorded modest gains in wine shipments as well. Volume growth in nonalcoholic beverages was largely driven by gains in Southeast Asia, and spirits were nearly flat overall, supported by gains in North and South America. Currency translation negatively impacted the top line by $2 million in the quarter, primarily due to the Brazilian real. Moving over to the second column. Segment operating profit in the second quarter was $267 million, which was consistent with prior year. Remember that our pricing strategy in 2013 is focused on ensuring that we recover inflation, which we did successfully during this quarter. The earnings impact from lower volume is less than we would typically see. The mix of sales is the key factor here. When sales of low-profit business decline, the impact to the bottom line is obviously tempered. For us this was the case when we shut down our plant in northern China late last year. Manufacturing and delivery costs were $4 million, unfavorable to prior year. Lower fixed cost absorption related to lower production in Europe and North America masked savings from improvements in our overall cost structure. Operating and other costs improved by $4 million, mainly driven by progress in our ongoing global cost-reduction programs. Moving to the last column on the chart, as I mentioned previously, we achieved adjusted earnings of $0.81 per share in the quarter, in line with the prior year. Operating profit, driven by the factors just discussed, was up $0.01 from the prior year. Nonoperational items, primarily higher corporate costs, offset the penny gain. For instance, pension expense was approximately $0.14 per share in the quarter. That's about $0.02 per share higher than last year. Please note there was also an accounting reclassification within the quarter that modestly benefited both the tax and interest expense lines, but simultaneously lowered our South American segment profit. There was no impact to total consolidated earnings as a result of this reclassification. Now let's move to Slide 4 to discuss our balance sheet and free cash flow. We continued to enhance our financial flexibility by strengthening our balance sheet. At the end of the second quarter, our net debt was $3.5 billion. That's down nearly $160 million from 1 year ago. While our leverage ratio has been stable due to the timing of our quarterly cash flow generation, we do expect to drive it down to approximately 2.5x by the end of the year. Moving to cash flow, as many of you are already aware, the seasonality in our business results in a use of cash in the first half of the calendar year and a source of cash in the second half. In the second quarter, free cash flow was considerably higher than prior year despite higher planned outlays for capital expenditures. This reflects our actions to phase our furnace rebuilds to reduce production volatility over the course of the year. I now would like to turn the call over to Al in order to review our operating performance.

Thanks, Steve. Let's begin with Europe on Slide 5. Sales were up 2% as price and currency gains outweighed declining volume. Sales volume in tonnes declined approximately 1% for the quarter. Our targeted efforts to win back wine customers continued to show traction. In fact, wine volumes were up across all of southern Europe. That said, adverse weather and weak macroeconomic conditions are taking their toll on demand in other markets. Volume contracted in beer, nonalcoholic beverages and food. Despite challenges in sales volume, as well as lower fixed cost absorption from tapering back production, you can see that we have expanded profitability in Europe. Modest cost inflation has been covered by gains in price and product mix. And clearly, savings from our cost-reduction and asset optimization programs are becoming increasingly apparent in Europe's bottom line. In North America, our operating profits were down $3 million from prior year. Shipments were down approximately 1% in the quarter, and this was primarily due to a decline in shipments of the mega beer brands. We are seeing steady growth in the craft beer segment, of which we have a 70% share, and we experienced volume gains in wine, spirits and to nonalcoholic beverages. Mostly -- modestly lower production volume year-on-year, due primarily to furnace rebuild timing, impacted the region's results as well. Moving to Slide 6. While South America has excellent long-term fundamentals, macro pressure here can cause volatility and results in variations in any one quarter. In the second quarter, headwinds became increasingly apparent. The Brazilian real devalued approximately 6% year-on-year and volumes in Latin America were down by nearly 3%. Declines in beer demand across the region were driven by 2 key issues that seem now to be abating: lower consumer confidence and weather. While economic conditions in Argentina remain tenuous, we are encouraged that the government has lifted the price controls that have been in place since early in the first quarter. Our 2 planned furnace rebuilds in the quarter temporarily impacted profitability versus prior year. In all, South America reported a solid performance in the first half of the year. Volumes are up low-single digits, and operating profits have improved over the prior year first half. Now moving to Asia Pacific, volume for the quarter was consistent with prior year, but operating profits and segment margin were up significantly. Volume levels in Australia and New Zealand were flat with very modest gains in beer, offset by contraction in other category. These trends are a clear improvement over the declining volume we experienced in preceding years. We continue to see strong sales growth in Southeast Asia, primarily in the food and nonalcoholic beverage category. The aforementioned plant closure in China offset the volume gains in Southeast Asia. We continue to see the benefits of our restructuring efforts flow to the bottom line. Our operating profit margin increased to 11% in the region. This is 400 basis points over the prior year quarter. We are pleased to see this step increase in profitability in the region. I would now like to turn the call back over to Steve to discuss our outlook.

Thanks, Al. On Slide 7, let me begin our third quarter outlook with Europe. Overall, we expect European sales volumes to be positive versus prior year despite softness in beer, a market in which we do not expect any short-term meaningful recovery. We will continue to benefit from our efforts to recapture wine business, and we expect growth in food after a year-on-year decline. Adverse weather, for instance, delayed the harvest processing in southern Europe for several weeks. Be mindful that in the third quarter of 2012, we were already experiencing volume declines from the share shift in wine, as well as concomitantly curtailing production. This means we have a relatively benign comparable period. As such, we expect operating profits to be up over the prior year. While we have modestly adjusted our volume expectations for Europe downward, we anticipate that higher year-on-year production will favorably impact fixed-cost absorption. Furthermore, benefits from the asset optimization program will become more evident. In North America, we expect our operations to continue to perform well. On the sales side, we expect volume to be flat to slightly down. It's difficult here as well to see a short-term increase in mega beer at this point. Yet we see continued progress in wine, spirits and nonalcoholic beverages. Ongoing gains and structural cost reductions should more than offset soft volume, which will lead to modestly higher year-on-year earnings. In South America, we expect to return to low-single-digit growth in the back half of the year. Within beer, we remain confident of growth, yet we do lack visibility as to the exact inflection point. Our customers need to see more stable trends in end-consumer demand. The market is already seeing some encouraging signs of year-on-year gains in beer consumption in recent weeks. We expect strong growth in all other categories through the back half of the year. On balance, we see modest volume growth for the third quarter. From a profitability perspective, the devaluation of the real, presently approximately 8% down year-on-year, will offset expected volume gain in logistic savings from the furnace we started up late last year in Brazil. Finally, in Asia Pacific, volumes are likely to be up low-single digits, with growth more pronounced in the emerging markets. We will lap the 2012 restructuring benefits in the second half of the year. This, coupled with currency headwinds in the Australian dollar of approximately 11% at current exchange rates, is expected to offset the volume gain, resulting in flat year-over-year earnings. Aside from segment earnings, we anticipate that higher levels of pension expense will be only partially offset by lower net interest expense. Although the outlook is fluid, we expect to generate a double-digit increase in EPS for the quarter. Let's look for a moment at a sequential view of the third quarter outlook versus the second quarter of 2013. Sales and production volumes are expected to be fairly flat. We should see incremental benefit from our cost-saving and asset optimization programs, yet we are beginning to lap the benefits of prior year restructuring in Asia Pacific. Sequential currency devaluation will dampen profitability as it's translated back to U.S. dollars versus the second quarter. So on balance, third quarter earnings could approach that of the second quarter of 2013, though at the moment, macroeconomic uncertainty is creating some modest downward pressure. Continuing on Slide 8, our results in the first half of the year are consistent with our expectation, really no surprises in terms of executing on priorities within the company's control. And now that we have better visibility into the second half, we are updating our financial targets for the full year as we promised to do. The company remains fully committed to delivering improved earnings and generating higher free cash flow. Most importantly, our free cash flow target of at least $300 million remains unchanged. Furthermore, we have not changed our capital allocation priorities. Therefore we plan to devote approximately 90% of our free cash flow generation to debt repayment, and the remaining 10% to antidilutive share repurchases. Let me concentrate for a moment on the key drivers that impact our EPS guidance. First, currency devaluation, specifically in Brazil and Australia, compared to January exchange rates will reduce earnings by approximately $0.10 per share in the back half of the year. That is, currency alone would otherwise shift the range to $2.50 to $2.90 per share. Second, as we have discussed, we are seeing incrementally more challenging macroeconomic conditions in Europe and South America. The potential impact of volume would decrease the range. Finally, of course, we're not standing still. Management is squarely focused on executing on our cost reduction and asset optimization programs, and the benefits of these concerted actions shift the range higher. Considering all of the moving parts, we are narrowing our 2013 full year EPS guidance to $2.65 to $2.85% per share. We believe this demonstrates our confidence in executing on our strategic priorities in a volatile environment. Let me now turn the call back over to Al to discuss our key priorities on Slide 9. Al?

Thank you, Steve. As we outlined to you at our Investor's Day in February, we have sharpened our focus on initiatives that will strengthen our core business and enhance our competitive advantage. We have had success to date in delivering on these priorities. On the operational side, we have seen labor productivity gains in North America, and we accelerated furnace rebuilds in 2 regions in the first half of the year. Prices are keeping pace with inflation so far this year. As Steve already mentioned, we are fully committed to driving shareholder value principally through free cash flow generation. On the strategic front, we are on target with our European asset optimization program. To date, we have closed furnaces in France, Germany and Italy. Upgraded machines are now in operation in Germany and the Netherlands, and additional line upgrade projects are underway in France. We have many innovation projects in the pipeline and are working in new ways with customers to enhance their brands through glass. For instance, Amorim, a leading cork manufacturer, and O-I have jointly introduced Helix to serve the European wine market. The new twist-to-open Helix concept combines an ergonomically-designed stopper made from cork and a glass bottle with an internal thread finish in the neck, creating a high-performing and sophisticated wine packaging solution. By focusing our resources on fewer initiatives, we enhance our ability to execute, to drive higher earnings and higher cash flows. Before opening the lines to your questions, let me summarize. We performed well in the second quarter. Our cost-reduction actions have offset rising headwinds. We remain committed to generating $300 million in free cash flow, and we have narrowed the range of expectations for EPS. And lastly, we will remain disciplined in our capital allocation, striking the appropriate balance between deleveraging and share repurchases. Thank you, and now I will ask Angela to open up the lines for your questions.

[Operator Instructions] And your first question is from the line of Chris Manuel with Wells Fargo.

A couple of questions for you. If we could talk a little bit about the volume trajectory ending the quarter and what you're expecting. And specifically, if we could zero in on some of the wine business that you won back. Is that business that you might have for 1 year or 2? Or some of it under longer-term contract that you might keep for a period of time? Or maybe a little bit of the dynamics around some of the business that you've been able to win back?

Well, Chris, as you know, wine predominantly is Europe for us at this point in time. And Europe clearly is where we have seen the greatest variation from year to year in volume shifts, because many of these customers are very small customers and have a variety of options available to them for supply. And what we saw last year was, we saw a significant drop in our volume because we were more aggressive with our recovery of our inflation. What we're seeing this year is really that our competitors are recovering some of the inflation, and some of the same customers we lost last year are coming back this year. It's very difficult to predict on how this is going to play out for next year because as you know, we renegotiate again towards the end of this year so it's an entirely new set of deck of cards. And it's most when we're going to have some variability continuing in the future as well.

Okay, and then any comments on how volumes kind of came out of the quarter? It sounded like they were...

Well, I -- we were really surprised the last week of June dropped off dramatically. Now clearly for many of our customers, June is an important data point. Some of them end the year there and therefore are really watching their cash flow significantly. But also, just to give you a perspective, our customers in Europe are, in our view, running with extremely thin inventories at this point in time. I saw a statistic from the French Brewer Association, which reported that the beer output in the first half of this year was 16.5% below the first half of last year. So as you can see, sales perhaps may have been down 5% or 6% as far as beer sales are concerned. So there's clearly a significant compression of inventory that has taken place, and that may be skewing the numbers a bit.

And your next question is from the line of Alex Ovshey with Goldman Sachs.

For the footprint optimization that you're currently undertaking in Europe, can you remind us again how you think about the benefits to operating earnings in the back half of the year from that?

Yes, Alex, we have guided that we would expect to realize about $25 million over the course of 2013, mainly in the second half of the year from the European footprint optimization. I think the reality is, we picked up a couple million dollars of that $25 million a little bit early, and that helped us in the second quarter in Europe to the tune, again, of a couple million dollars. But I would still anticipate $25 million, the majority of that in the second half and probably weighted a little bit more heavily to the fourth quarter due to the engineering schedule.

Okay, and then on Asia Pacific, I mean, we've seen really nice margin improvement over the last 12 to 18 months. How much more margin improvement do you think you can get out of that region outside of volumes really picking up for you there? Is there much more margin improvement there in terms of just taking costs out?

I'd say yes, there still is clearly some margin improvement possible. And that will be helped somewhat, of course, by the development with regard to the Australian currency. Because what we were seeing in the last year was significant impact from impact that -- from imported finished products, as well as from some imports of bottles from other countries because the Aussie dollar had made the market so attractive. So as the dollar is declining in relation to the U.S. dollar, that may secure our position a little bit better, and most of all, will give us a slight boost in our margins as well.

Your next question is from the line of George Staphos with Bank of America Merrill Lynch.

I wanted to focus first on operations, and I had a question on beer as my follow-up. Al, as you look at how you've phased the rebuild schedule with an eye to both getting done what needs to get done and also preserving cash flow, are there any regions or any furnaces where you're, perhaps, worried about pushing the rebuild schedule a bit too far? And the related point would be next year, should we expect a little bit more rebuild activity or pretty much in concert with what you're seeing in 2013?

I would say in general, our rebuilds are clearly dictated by the state of the furnaces at any point in time because we don't want to endanger operations nor do we want to endanger our people. That's really the predominant guideline. As we are looking at our overall investments in maintenance, as you have realized over the last couple of years, we've really scaled back our investments a bit to make sure that we really get maximum use out of our assets. And we're presently under discussions. We haven't concluded yet whether there is a potential of bumping that number up a little bit for maintenance to make sure that we have some additional margin of safety. But I don't think it's anything significant at this point in time.

Okay, and then this question comes up periodically. Obviously, beer has taken some significant volume lumps this year as a market because of the weather and because of economic uncertainty. Europe is going through, perhaps, what we went through 3 or 4 years ago. But again, do you sense that your customers are also shifting to other pack mix sizes -- pack mix types, excuse me, specifically cans, and that's another reason why your volumes aren't necessarily as good as you would've liked within beer. If you could remind us on what color you've seen, what market did you have that supports that point or refutes that point, that would be great.

Yes, I think there are 2 aspects that we need to address there. Number one is during any economic downturn, what you will see is that the on-trade business will decline first. And so the off-trade business will pick up and typically the share of alternative package in the off trade is greater. So you would automatically, in regions and in countries that are seeing some economic pressure, see a slight shift, just like we saw in the United States 4 or 4.5 years ago. However, on a much broader basis, what's happening is really that the mega brands are the brands that are under pressure and are losing market share. And there clearly is a concerted effort by many of the brewers to become innovative also in their traditional glass packaging and become more proactive in driving their marketing efforts to regain some of the share losses that they are seeing. And that's going to help us. And we clearly see much more activity in the innovation side with the brewers than we have seen in a long, long time. The third aspect that I also want to point out, and it comes back a little bit to potential share shift to other packaging. I mean, you have seen that in particularly competitive environments like we are witnessing at this point in time in Brazil, the largest brewers in the country have clearly decided to go to returnable packaging. And that, of course, only allows them to go to glass because that gives them the greatest level of economics and allows them to reach flashing points in the market that they may need during a potential pressure on the marketplace. So I would say it would be adventurous to say there is a significant share shift happening at this point in time. In fact, we are encouraged by some of the trends that we're seeing and the discussions with our beer customers.

And your next question is from the line of Scott Gaffner with Barclays.

I was hoping you could walk us back through the accounting reclassification on the tax interest in the South American operating profit. I just wanted to make sure we fully understand that impact and also, if you think it's going to recur in the second half.

Sure, the net effect of this in the second quarter was approximately a $5 million reduction in our South American segment operating profit. And then we received a benefit. So that $5 million was split, close to evenly, not quite, with a reduction in interest expense and a reduction in tax expense. And we did that to conform the way we accounted for several items in Latin America with the way we account for similar transactions in the rest of the world. So you ultimately ended up with $5 million less segment profit in South America and $2.5 million to $3 million of better tax expense and better interest expense.

And do you expect this to continue in the second half, and maybe just a little bit more around the logistics? What's causing this shift?

Yes, ultimately the short answer is yes. It won't be quite at that run rate because there was a catch-up component associated with the second quarter adjustments that we made. But yes, we will have, as a result of this change, there will be a reduction in South American profit. It'll probably be about 100 basis points relative to what we had expected and guided at the beginning of the year and then you will get an offsetting benefit in interest and tax going forward as well. So the bottom line number will be unchanged, but we will have this shift and it will be a permanent change going forward.

And your next question is from the line of Mark Wilde with Deutsche Bank.

Yes, actually just to follow on that, I wondered, allowing for those changes, Steve, what type of an EBIT margin would you look for long term down in Latin America?

Mark, we -- if you remember from our Investor Day, we guided to by the time we get to 2015, 20 to -- low 20s, 20% to 22%, 23% segment margins in South America. We don't see this changing that. We still see, even in the current year, a path to very close to 20% margins in South America for this calendar year. So I don't see it fundamentally changing where we think we can end up within the business though. Certainly in the current year, as I said, it'll take about 100 basis points out of where we anticipated we would be at the beginning of the year.

Okay, and, Steve, if I could for follow on, what would it take to get us to the upper end of your earnings target range for the full year this year?

For the $2.80 that we're sitting with now, Mark, we would just -- the first thing we would not want to happen is continued currency devaluation in light of this change. The one thing that has not changed for us is the euro. The euro is essentially flat year-over-year. So continued currency stability at the current levels is a significant item for things beyond our control. But beyond that, slight upticks in volume, vis-a-vis what our base case assumption. As you know, we get quite a bit of leverage benefit from both production and drop through. So a little bit better volume scenario than our base case assumption would get us to the top end of that range.

And your next question is from the line of Anthony Pettinari with Citigroup.

You referenced the Analyst Day in February, and you laid out volume growth targets by region through 2015. And I'm wondering over the last couple of quarters, there seems to be a little bit of a darker macro view especially in Latin America. Are you still comfortable with the kind of 3% volume growth target for LatAm and the remainder of the regions?

Yes, we are and as I said in my comments, Latin America will tend to have some greater volatility depending on what's happening in the individual markets there. But clearly, overall underlying growth of the middle class and of consumption in Latin America is projected to be fairly strong. I would say certainly for the next couple of years, in 2016, 2017, after the main events of the Olympics and the main event of the world soccer championship, we might, perhaps, see a slight difference then. But within the time period that we had projected at our Investor Day, I think we're still on target.

Yes, and I think for, Anthony, for the other regions, if you recall, we are quite modest in our expectations. I mean, if I recall correctly, we didn't have anything better than 1% for any of the other regions over that period of time. And I don't think there's anything that's happened in the last couple of months that changes our view of that longer-term potential.

And your next question is from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: On the wine market share gains in Europe, clearly that came from someone else. Are you starting to see a more competitive environment in Europe for the other categories as that extra capacity starts to get filled in? And the reason I ask is your French competitor reported high-single-digit volume declines in Europe, in the southern part of Europe where it looks like you picked up some market share in wine.

Well, I would say first of all, we're not picking up market share. We're regaining what we gave up last year, number one. Number two, if you look at what's been happening in the region, the competitor you're alluding to has its base in France, and France clearly shows a much weaker development in the entire European region than other countries. In particular, I mean, I mentioned to you already that the brewers have curtailed their production by about 16.5%. And what we also saw is that, particularly the weather in France was abysmal with regard to filling. Particularly champagne was affected by that. So I think there are differences also in where the emphasis of our business is. I would expect that overall, Europe may be at its low point at this point in time as far as consumption is concerned. I have compared from a timeline Europe to be somewhere around where the U.S. was in 2009. And I would expect some gradual and continuing improvement, which would most probably offset any competitive pressure from capacity that may be rattling around in the marketplace. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, and then switching to South America, I think last quarter when you were sort of looking at 2Q, you expected low-single-digit volume increases for South America. Obviously, it came down 3%. How did that play out during the quarter on a monthly basis? Because it would seem like you'd had the visibility into April when you gave that guidance.

Well, it really was from a regional perspective, the weakness was particularly in beer in the Andean regions, as in Brazil. In Brazil for instance, all other categories were plus so that Brazil came about out almost flat compared to last year. But clearly what's happening is, and that's why the impact was late in the quarter, some of the replenishment of the float for returnable bottles did not occur as we had expected because people were husbanding their capital and pushed up some of the reordering of the float into later quarters for the year. That really was the impact that I believe we had not counted on.

And your next question is from the line of Alton Stump with Longbow Research.

Just a quick question on Europe, first off. I think you mentioned in your opening comments, Steve, that you were starting to see volumes come back a little bit so far in 3Q. Could you touch on that in a bit more color?

Yes, Alton. We -- I think what Al had referenced in Europe specifically was a noted or a marked reduction or slowdown in volumes in the second half of June. And again whether that's inventory control or a combination of different perspectives on the market in Europe, it clearly slowed down for us. In general, we have seen a little bit better activity, not just in Europe, but frankly in Latin America as well in the beginning of this quarter. It's probably too early to call a trend, but we're certainly not on the same line that we were at the end of the second quarter.

That's helpful. And then one quick follow-up, as you look at Brazil, obviously, it's in their nonpeak winter season down there. You've had a couple of good quarters in a row during the peak season over the last 2 quarters heading into 2Q. So is it fair to say that there is -- have a slim chance that this is not indeed a trend but just a short-term blip during what's obviously a seasonally weaker quarter?

Yes, we are still expecting a solid second half. Most probably, it's going to start to strengthen in September of this year, which is the beginning of the season. Just like it did last year and what our customers are telling us and particularly our beer customers are telling us, is that they have quite a variety of programs on tap to, pardon the pun, to push into the marketplace in the second half of the year to strengthen some of the volume.

And your next question is from the line of -- from Philip Ng with Jefferies.

Looks like your restructuring effort in Europe's progressing very well and you're seeing some of the savings a little quicker. Is there any upside to that $35 million you guided for the entire project? And considering demand is generally softer in the region, could we see a little more right sizing on the capacity down the road?

Let me try that first, Phil. So the, just to clarify, the $35 million is a combination for the calendar year 2013 of what we expect to get out of both Europe and Asia Pacific. So $25 million of the $35 million was Europe. We do expect to achieve that. $10 million is in Asia Pacific. We have achieved a majority of that in the first half of the year because of the lapping. I candidly don't think it will ramp up significantly higher than that, mainly because in Europe, it's driven by project completion and most of that completion is not going to happen till the second half of the year. We just don't have that much time to realize incremental benefits in this calendar year beyond that.

In the earning capacity front, I mean, demand is generally soft in the region. Could you look to take out some capacity?

Well, remember for us, we are actually, because of our asset optimization program in Europe, we're actually going to be short relative to current market demand because of the timing of our restructuring program. So we will have a lot of capacity coming off line as we reinvest in it and optimize it. So certainly in the short term for us, we will remain fully -- largely fully balanced purely because of the engineering work that's required.

Your next question is from the line of Chip Dillon with Vertical Research.

Just 2 questions, one is how does, at least directionally, does CapEx look to be next year as we get close to '13 and you start budgeting? And then, I guess the second thing is, as we do look at Europe, you did mention that most of that $25 million -- that behind that there might not be a lot, but how do you think about volume next year and do you have strategies to kind of try to deal with volume declines even if the market stays sluggish there?

Chip, this is Steve. I'll answer the CapEx question first and let Al look at the or address the volume. I'll remind everyone that we had -- it's premature for us to be specific as to what we're thinking about for 2014 certainly at this point in time. But we did at Investor Day give some general guidance that over each of the next couple of years, we would expect the total investment of the business, which is CapEx plus restructuring, to be in the $425 million to $450 million range, though the distribution of between those 2 might change in any given year. I have no reason to believe we would spend something radically different in 2014 than that range, though I can't tell you exactly how much might be restructuring versus capital at this particular point in time. Al, do you want to address the volume?

Yes, I would say, Chip, with regard to volume expectation, it's very difficult to find an optimistic person in Europe at this point in time. But if you really look at the evolution and at the numbers, it seems to be quite obvious that we are at a low point. So I would expect some increased economic activity, some increased consumption to help and support our business. And as you have heard in the past, just slight variations in volume, whether it's 1% or 2%, have a significant impact on our profitability. So my level of confidence, despite the fact that we've gone through very dark times in Europe over the last 1.5 years, is still fairly high and optimistic with regard to what we're going to see next year. And I would expect to see a trend change.

And your next question is from the line of Al Kabili with Macquarie.

Just wanted to talk about Australia, and it's good to see some of the volumes doing a little better after some weakness the last few years. And I wanted -- I know your volume outlook's modestly positive in the back half. I just wanted to, a, get some additional color on what you're seeing there and also just an update on some of the contract renegotiations there.

Well, I'll try to answer then I'll let Steve expand on it a bit because he, of course, used to run the region and has more perspective and better perspectives than I have. What I saw as a significant change is that, really, the change from bottled wine to bulk wine has largely run its course. It's been done. So that has stabilized the market. On top of that, the currency evolution that we have seen over the last couple of months is also helping local manufacturers in Australia and New Zealand versus imported products. So that's going to strengthen demand a bit. And then of course, we have, through the actions that we've taken in Australia with rightsizing our operations, increased our competitiveness, which is going to help us specifically. Now on top of that, Southeast Asia clearly is a very strong growth region and market. And with the acquisitions that we made 3 years ago, we have a fairly strong position in the region that we're taking advantage of. Steve, any additional?

I would just I'd remind you that our guidance for the volume side of Asia Pacific, with volumes being up low-single digits, that's weighted. The growth component of that is weighted to Asia as opposed to Australia and New Zealand, first of all. And the trend we've seen in Australia and New Zealand has been a flattening one, a flattening of a decline. I think that's a little bit different than an increase in demand. I mean, there's still not a lot of signs of a true uptick in domestic consumption in those markets. SABMiller has done a good job with reinvigorating some of their brands, specifically Victoria Bitter, which is clearly helping us in the overall market. But probably a little too early to truly call the inflection point on the domestic demand in Australia.

Okay, got it. Steve, that helps on -- makes sense on the Asia Pac or the Asia side driving it, okay. And then just a quick follow-up, European -- you mentioned there's a production benefit in Europe and just wanted to see if you could size what that variance -- what that benefit would be in the second half of the year for Europe.

We, I believe in the first quarter, we had said that we took about a $20 million negative impact from the production differential between higher production last year and lower production this year. It was modestly negative, a couple of million dollars in the second quarter. And we expect that to turn around over the course of the second half of the year. So you'll get that $20 million back between third and fourth quarter, probably a little bit more in the third than in the fourth just based on the year-over-year comps. But I would expect us to essentially end up the year pretty close to flat from a production penalty standpoint in Europe.

And your next question is from Philip Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Just on the guidance for the year, if I take the midpoint, the $2.75 number, in your third quarter guidance of a 10% improvement, it would imply the fourth quarter would be up around 40%. So I was hoping maybe you could help bridge that for me a little bit in terms of maybe some of the discrete pieces that might benefit the fourth quarter relative to the third. I know there's a European phase but are there some other items there that we need to think about for the fourth quarter that helped drive that improvement? Because from what you said, it sounds like the production benefit is kind of more similar 3Q, 4Q in Europe.

Sure, I'll try to do that. So we're not being prescriptive on the fourth quarter, but I'll talk about just the trends that we expect. So clearly the production, obviously as you've referenced, in Europe is one of them. We also will have the continued asset optimization benefits from Europe which are separate from production benefits. And those will ramp up at a faster run rate as the year goes on due to the completion of the various engineering projects. And if you think of the other regions of the world, we had a furnace, significant furnace rebuild in South America last year that we had accelerated into the fourth quarter. We do not have that repeating this year. That's a couple million dollars of fixed cost absorption that will be to our benefit. And North America as a region will produce at a higher level than they did in the previous year, again, because we're trying to phase the overall production a little more evenly. So there's a lot of production-related benefit in regions outside of Europe, which are driving much more of that fourth quarter improvement we're expecting. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Got it, okay, that's helpful. Just one other question in Europe, one of your competitors had talked about winning some business in the U.K. recently. And I was just wondering kind of what kind of competitive activity you've seen in the U.K. given your exposure there?

Well overall, the U.K. is doing very well this year. It's up single digits. Low-single digits compared to the rest of Europe. So it really stands out. As a positive, as I mentioned earlier, there is typical churn about one customer or the other customer every year in Europe. We have been able to recover whatever that volume was and that volume is prospectively, it really was not anything yet effecting this year. It's for next year. And we have been able to shift that volume to other customers and have in the course improved the mix and the profitability of the profile.

And our final question is from Adam Josephson with KeyBanc.

Al, can you elaborate on the delay of the replenishment of the float in South America that you talked about? Was that a customer delaying its CapEx program or something else?

Yes, basically when they replace their float, it's a CapEx decision for them. And they clearly have the ability to shift those from quarter-to-quarter or sometimes even shift it by a longer time period, depending on how willing they are to see some scuffed bottles on the shelves and in the float. And so it really is an easy decision for them to make, and typically they make it in the last month of the quarter, whether they do it this quarter or the next quarter. And that has a considerable impact, of course, sometimes on the outflow of our product, out of our plans and on the profitability.

A related question, based on the data I've seen, cans have gained a few percentage points of share in the beer market in Brazil over the past few years. Why wouldn't you expect that trend to continue assuming you don't think it will?

Well, I think we have talked about the can versus glass market in Brazil several times in the past. What we have seen is that clearly cans were growing at a much faster rate in the beginning of the last decade, then there was an oversupply for a period of time and it has quieted down somewhat. I would say at this point in time, as far as overall volume is concerned, the growth rates for cans and for glass are really not that different. Now as a proportion of the total market, and as a proportion of the share that they have in the market, sometimes these percentages can be significantly different. But I believe in the last call we already expounded significantly on the fact that the large brewers are really pushing returnable containers into the market, also now through the off channels and through the supermarkets and so on, to really get to lower-cost points and more competitive pricing in that market segment, which bodes well for us. So I really don't see a significant shift occurring. I see a coexistence of 2 packaging modalities in a market that has strong underlying growth.

Thank you, everyone. That concludes our second quarter earnings conference call. Please note that our third quarter 2013 conference call is currently scheduled for Thursday, October 31, 2013, at 8:00 a.m. Eastern time. We appreciate your interest in O-I and remember that glass is the most sustainable packaging choice. Thank you.

This does conclude today's conference. You may now disconnect.