Good morning and thank you for standing by. Welcome to OI's Second Quarter 2016 Earnings Call. My name is Deborah and I will be your operator. At this time, all participants are on a listen-only mode. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] I will now turn the call over to your host, Mr. David Johnson, Treasurer and Vice President of Investor Relations. You may begin, sir.

Thank you, Deborah. Welcome, everyone, to OI's earnings conference call. Our discussion today will be led by Andres Lopez, our CEO; and Jan Bertsch, our Chief Financial Officer. Today, we will review our financial results for the second quarter of 2016, discuss key business developments and trends, and finish with 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 these materials. Unless otherwise noted, the financial results we are presenting today relate to adjusted earnings, which excludes certain items that management considers not representative of ongoing operations. Reconciliations of GAAP to non-GAAP measures 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 Andres.

Thank you, Dave, and good morning. We'll start on slide 3. I'm pleased to report that our second quarter results came in at the upper end of our guidance range. Earnings were $0.65 per share in the quarter. On a constant currency basis, this is a double-digit percentage improvement year-over-year. I would like to summarize our second quarter results which clearly demonstrate continued solid progress on the strategy we outlined at our Investor Day on March 1 of this year. Our investment in the acquisition of Vitro's food and beverage business is paying off. The acquisition is a key driver for both top and bottom line results in the quarter. In fact, the business is exceeding our expectations despite some weakness in the Mexican peso. Our strategic initiatives are delivering results with Europe's year-on-year gains as a key indicator. North America's legacy business and Asia Pacific both delivered results in line with our guidance. And the Latin America team has really continued to deliver exceptional performance, given macro conditions especially in Brazil, not letting the difficult environment get in the away of healthy year-on-year improvement. For the enterprise, we expanded margins and absolute segment operating profit. And with corporate and interest expense in line with expectations and a lower than expected tax rate, our results were quite good. And despite the economic conditions in the region, we remain confident that our business will deliver on the full year earnings guidance we set forth in the last quarter call. I would now like to spend a few minutes discussing the specifics of our actual performance, outlook and focus areas for each region. Please turn to slide 4. Starting with Europe, the stability and improvement programs we have undertaken in this region continue to make meaningful progress, driven by our strategic initiatives,…

Thank you, Andres. Let's turn to slide 11, where I would like to focus on segment operating profit compared with prior year. The sum of the parts that Andres discussed led to a segment operating profit of $233 million in the quarter. This is an increase of close to 25% compared with the $187 million generated in the prior period. In what I consider a welcome relief, currency was only a modest headwind, mainly from Latin America. The acquired business added $44 million to segment operating profit while generating nearly 20% margins. The price inflation spread was modestly positive. Some of this reflects price adjustment formulas clawing back prior inflation. As Andres mentioned, organic sales volume for the legacy business was essentially flat year-over-year, with gains in Europe and Asia Pacific offsetting the decline in legacy business in Latin America. We are diligently tracking the gains from strategic initiatives, which amounted to about $12 million in the quarter. Unfortunately, this was largely masked by selected external events and O-I-specific challenges, such as the general country strikes in France and Colombia, the Brexit vote, and a few isolated furnace issues that created some noise. Increasing flexibility and investments in reliability pressure our production volumes in the short term, but increase our ability to serve customers and reduce inventories and costs going forward. This was a very positive quarter in both the legacy business and the acquisition. In all, we are meeting our expectations while positioning ourselves well for the future to better meet our customer needs to drive revenue growth and to reduce structural costs. Turning to slide 12. Second quarter adjusted EPS was $0.65. When factoring in the $0.02 headwind from currency, earnings were up by 12%. Notwithstanding the $12 million in headwinds I just mentioned, we overcame this with…

Thanks, Jan. Turning to slide 17, we are doing what we said we would. The company is performing in line with expectations and our priorities have not changed. We have the right leadership team in place with the right mix of competencies, high level of commitment to take O-I to sustainable performance improvement, and with the right leadership and strategic mentality. Uncertainty exists around the world, yet we are squarely focused on that which we can control. We had another quarter of solid results. We are maintaining our full year guidance and we are building what is needed to drive improved customer experience and shareholder value well into the future. I want to thank all of our employees around the world for their high level of commitment and the contributions to the enterprise performance improvement. And now, we will open the lines for your questions. [Operator Instructions]

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

Thanks for the details. Congratulations on the progress thus far. Lots of questions, but again, I'll try to keep it to one. Andres or Jan, can you provide a little bit more color in terms of what you meant us to take away from your comments about there are challenges in the back half of the year, you're working hard to offset these, and yet there'll be some pressure, I think you said more so in the third quarter versus fourth quarter. Any discussion around that would be helpful. And how do you also offset some of the unplanned incidents that are maybe pressuring results? Thank you.

Yeah. I'll give you one example. The strike in Colombia. So, it impacted late last quarter, but the most impact is within this quarter. Now some of it is related to shipments as an example, and we expect to recover most of it through the remaining two months. But it might happen that some of it is recovering to the fourth quarter. So, that's what we're talking about it. We believe we can offset those events, it's just that the recovery might be a split between Q3 and Q4. Therefore, we're confident we can continue to meet our previous guidance, and that's why we are maintaining it.

And your next question comes from the line of Deborah Jones with Deutsche Bank.

Hi. Good morning. If you could just go back to the guidance. Can you help us understand, since you did maintain the EPS guidance, what was the impact now from tax, Mexico and Asia Pac, and the strikes? Those four things seemed to have moved around a bit from your previous guidance. Can you kind of discuss the puts and takes there and how that impacted your thoughts going forward?

Sure. Good morning, Deborah, it's Jan. Let me first walk you through the headwinds. Again, we talked about the strike in - the country strikes that we had in France and Colombia. And certainly in the second quarter, the France strike was much more impactful to us. And I would say that was probably worth somewhere - it could be $5 million to $6 million, so several cents in the quarter. The Brexit vote was probably about $0.01 for us. We're thinking in the full year, it's somewhere $5 million and $10 million. The lower tax rate, we settled several European audits during this quarter and they were favorable - net favorable to us. So, that was primarily the big change on the tax rate side of about $0.04. So, I like to think about it as though the tax rate kind of offsets some of those things that we had little control over. And then the acquisition, of course, performed a little bit better than I expected on the upside. So, in the underlying business, quite strong performance, on the initiative side, on the business performance side, and stability in the corporate costs side and interest. Maybe Andres would like to focus a little bit on the flexibility, what we're doing on that side that might add a little more color to it as well.

So, as we said, our improvement efforts are progressing very well. And we're dealing with two levers at the same time at this point. One is improvement in improvement initiatives which are progressing well. So imagine this is - we're going up an up-curve. And at the same time, we're improving the stability of the business and reducing on plan isolated events. At this point in time, as you heard from our comments during the call, we are seeing half the amount of isolated events we saw in the prior year. So, we're making substantial progress. Now, we're meeting and exceeding our guidance in EPS for the quarter. And for all purposes, I think one way to say that is our $0.65 are from operations. Now, I encourage you - all of you to look back and compare the stability and the consistency of our numbers today versus what we used to see a year ago or so. In our opinion, this business is gaining substantial stability and consistency. Now, again, we got to ride those two curves. One is improvement initiatives. The other one is decreasing the isolated events in which we are progressing very well.

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

Good morning. Just a question on free cash flow. Do you have any update in talking with Mexican authorities in terms of receiving the VAT and just the confidence level of getting that in the fourth quarter? And are you still baking in $140 million for that, or is there any change with the peso?

Good morning, Anthony. Actually, we're progressing quite well on that front. We have high confidence that we will be on target in receiving the VAT refund in 2016. We do adjust that number each quarter, of course, relative to the peso. To me, it looks like it's more in the $130 million, $132 million kind of range right now versus the $140 million, but it will continue to move. And we expect settlements in the fourth quarter. We've been having very good dialogue with the authorities and believe that we have submitted all the necessary paperwork.

Your next question comes from the line of Lars Kjellberg from Credit Suisse.

Hey, good morning. Maybe a bit of a premature question, but you are building a very strong momentum as you exit 2016 in your improvement. In your Investor Day, you talked about a 40 basis points year-on-year improvement in margins both in 2017 and 2018. Are you ready to give us any update on that given the momentum you're building? And if I may just add a quick question, what sort of sterling rates do you assume to the dollar in your guidance?

Related to the 2017 margin, we believe that what we outlined in Investor Day is still appropriate, 40 basis points year-over-year for the next couple years. This is largely driven of course too by the fact that we should have a full year behind us in some of the initiatives that we're starting this year. So, we'll see a bigger impact from that perspective. And also, I think very importantly, the work that we're doing on the supply chain and improving our asset base will help drive some of that improvement going forward. You also asked about the sterling. I think $1.34 is the rate we're using.

Your next question comes from the line of Scott Gaffner with Barclays Capital.

Thanks. Good morning.

Good morning.

Morning.

Just wanted to dig in to the North American legacy business for a minute. In the press release, you said North America legacy volumes were on par with prior year. And when I look at the slide - actually the very first slide in the Appendix, it shows legacy - or it just shows North American volume, excluding acquisition, is down $13 million which would be a 2% volume decline. Can you just reconcile those numbers and then also talk about maybe some of the underlying businesses within that, food versus beverage, et cetera? Thanks.

So, when we look at our volumes for the first half in North America, they're essentially flat. And as we look into the second half, we are expecting that we're going to be up around low single-digits. And this is driven primarily by the volumes that will come to the region from the contracts we have with CBI to supply the growth that is taking place in the U.S. So, at this point in time, we see, overall, a positive year-end result, volume-wise, for the region.

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

Hi. Good morning. It's actually Matt Krueger sitting in for Ghansham. Thanks for taking our questions. My first question is, have you experienced any unexpected changes in customer order patterns and have you seen any channel inventory shifts on a regional basis? And then, all of that in the context of how the Brexit vote is going to impact the back half of the year for your business, excluding the translational impact that you noted.

So, the overall demand has been quite consistent with our expectations. We see a strong demand in wine in Europe, which is driven by exports primarily, due to the competitive position of the wine in Europe due to the position of the euro at this point. And we're having a good demand in beer, which is consistent with our long-term contracts that we signed the year before. When we look at North America, I just described the situation, so we see a slightly positive overall scenario for the year, and it's been consistent, no major variances there. Latin America has been down and is consistent with what we projected and is driven primarily by Brazil. What was new in, let's say, as we went into the year what is new is the situation in Ecuador. We got quite disrupted by the earthquake down there. So, nevertheless, when we look at the full year for Latin America, we see the demand to be quite consistent. When we look at Brazil, specifically, it is low but is stable. So, we haven't seen any further deterioration in the patterns of demand in Brazil. Something important to highlight with regards to Brazil is we're seeing a very strong demand for premium beer which is primarily packed in glass. So, the growth of premium beer in one-way glass containers is really impressive and is totally out of the ordinary patterns that we saw in the previous years. So, that's a very positive and worth to track. And the returnable containers are performing better lately, they're recovering versus the performance in the first quarter. Andean countries, quite stable and strong in the beer side, all categories remain the same. And when we look at APAC, very strong demand in wine. We were expecting this because of the competitive position that both Australia and New Zealand are gaining because of the exchange rate. And we've seen quite a strong demand in beer. That will be probably something that is slightly out of what we were expecting here in the patterns that we saw in previous years.

And before we go on to the next question, I just wanted to circle back, Scott, with you on your prior question on North America. I mean while shipments were flat basically for the second quarter, they are up 1% for the full year. And then from an accounting basis, the dollar volumes are down primarily because we have more bulk sales versus - and less carton sales.

Your next question come from the line of Mark Wilde with BMO Capital Markets.

Good morning.

Good morning.

Question about Asia Pac, actually kind of two parts. One, Andres, what's the impact this year from that beer contract that I think you picked up late last year? And then, can you help us kind of bridge from 2016 and the profitability in Asia Pac in 2017? Because you talked about the few things going on this year that are depressing results down there.

Yes, so the beer contract, it was a signed a year ago. We're seeing those volumes on closing, that's part of the improvement we're seeing in beer. That is sustainable volume going forward. I don't have specific numbers of impact of that volume in the region. When it comes to the profitability going into 2017, what we're doing in Asia Pacific is dealing with improving the condition of our assets, so we're going to gain stability. That's consistent with what we did before in North America, at some point, and in Europe, later on, with very positive results. So, we think this is the right time given our projections, the business performance, to take care of Asia Pacific where we didn't do before any of that work. So we can guarantee or set the conditions to be able to increase our profitability in 2017 and beyond. So, I think we are very pleased by having the chance to put this emphasis in APAC, and I think it's going to give us a very good return as we move forward.

And, Mark, while we may be short now on the margin improvement relative to our target for the year in APAC, we do expect, based on the end-to-end supply chain improvements that we'll see going forward, that we'll be able to pick up 25 basis points next year and the year after in the margin versus where we had thought - where we had been, I should say.

And your next question comes from Chris Manuel with Wells Fargo.

Good morning and congratulations for a strong quarter here. Wanted to kind of focus on one area in particular, and that was kind of working capital inventories, et cetera. I mean, when I look through some of the financial statements, it looks like working capital's about $90 million behind where you were last year, or there's a little bit more of a build, and it looks inventories are up about $65 million, $70 million in total. Jan, help me with kind of where you are production versus inventories, different things to that year-to-date. Have you been building a little inventory? I remember earlier in the year, you talking about there was some replenishment or some elements in it that were going to happen that might reverse next year. Kind of bring me up to speed to kind of where we are production/inventory so far year-to-date and that activity as well.

Sure. So, there's a couple pieces to working capital. Obviously, one is the trade working capital piece, another is the rest. So, first of all, Vitro - again, the VAT refund for the Vitro acquisition is in our working capital. But also, we made a clear decision at the beginning of this year to try to maintain a flat working capital in relation to our payables and receivables, which had been a deviation from the past. So, that costs us about $90 million on a year-over-year basis in our working capital. But then we had the refund on the VAT side to somewhat offset that. On the inventory side, I think our inventory levels are going to be improving. They're basically flat year-over-year. We talked about in Investor Day that we were positioning ourselves in 2016 to be able to see big improvements in inventory going forward, and we still believe that next year we'll be able to see about a $50 million improvement on the inventory level side.

So, reducing the inventories, in our case, takes two significant improvements that got to precede the reduction. One is the increase in flexibility, which is progressing very well across the world in all regions. And the other aspect to it is developing the supply chain across the world. We put in place the global leadership team for supply chain. We have a global leader for that effort and we already have an agenda for the world. We are replicating best practices across the company. So, those capabilities are being built. We're progressing very well. Inventories at this point are flat, but we are now expecting that we're going to have an improvement at the end of the year which wasn't the case when we started. So, that is a positive change in position. Now, as we go into next year, that reduction of inventories will become stronger as per Jan's comments.

Your next question comes from the line of Tyler Langton with JPMorgan.

Hey. Good morning. Thanks. Jan...

Good morning.

I was just wondering, did Q2 benefit from any reductions in discretionary spending like Q1? And then does your guidance assume some increases in the second half? And then just, I guess, any kind of numbers around that would be great. Thanks.

I've seen no meaningful change in the - I mean, no meaningful extra discretionary spending decisions in the second quarter. And your second half of the question, can you repeat what - Deborah, can we allow him to repeat the second half of the question, please?

He would need to come back into queue and we can do a follow-up.

Okay.

Okay. That's fine. And if that doesn't happen, we'll be sure to get back with your, Tyler. I think it has something to do with the third quarter. And we really expect not a lot of change in the third quarter as well.

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

Thanks. Good morning, everyone.

Good morning.

Jan, just on pension. Can you talk about the potential implications of the 80 basis point or so decline year-to-date in interest rates on your funded status and pension expense, and what your expectations are for contributions this year and next? And just as a follow-up to Chris' question on working capital, are you saying inclusive of the VAT tax refund, that working capital will be a total source of about $50 million this year? And then what about next year? Thanks, Jan.

Okay. Sure. First of all, let's just talk about the working capital. Really, I think it's going to be less than that. We're trying to keep working capital basically flat for the year. And so I don't think $50 million, I think it's going to be a bit less - far less than that. Related to your question on the pensions, right now, our expense on the pension side was about $31 million in 2015 and we're looking at something similar in 2016. On the cash side, it's about $20 million. The change in discount rate, if you're looking at just a general formula, I would say somewhere about a 50 basis point change in the discount rate reduction is going to cost us about $8 million of expense per year. Now, we, at the end of every year, go through an exhaustive study of our discount rates and where we're positioned and payments made to-date and actuarial studies, and so, we don't really have a solid estimate yet for 2017. But I would use the formula of about 50 basis points, that's $8 million of expense.

Your next question comes from Chip Dillon with Vertical Research.

Hey, good morning.

Good morning.

My question is just as I try to make a guess at next year's numbers, which obviously the market and many of us on the phone are focusing on, if I think about the free cash flow, it seems like $300 million's the guidance, $20 million of it is going to go to the minority or non-controlling interests roughly. And then, I think you mentioned about $130 million would be for the - would comprise the VAT refund. So, that means we kind of start next year truly what's available to the O-I shareholder of about $150 million, if my math is right. And I know you've talked a little bit about working capital this year. But how should we see that number move next year in additional to or above and beyond whatever we all think, on this phone, your earnings will be?

Yeah. Well, we indicated on our Investor Day that our 2017 forecast was about $250 million to $270 million for next year. Now, we're running ahead of that already this year by $20 million. We do expect - and that will be driven by - even though the VAT refund will not repeat itself, inventories will improve, the business will improve and that's what's driving it. So, I would say that we're positioned quite well now based on everything that's happening this year and our expectation for next year to be running pretty close to what we said at Investor Day or maybe a little bit ahead based on our running ahead this year.

Your next question comes from the line of Phil Ng with Jefferies & Company.

Hey, guys. Demand was pretty solid in Europe, but you did see some modest slippage in pricing. I guess longer term, would you consider taking more of a cost-plus model in Europe like the U.S. as you view - or would you view the longer term opportunity for just better, favorable pricing backdrop? Thanks.

Okay. We've been living in Europe in a deflationary environment. So, in those conditions, it's obviously more common to see a trend towards a lower price. Now, we said before that there is an imbalance in capacity and demand in Europe that remains. We saw a significant activity in the region price-wise from some players trying to gain volume in 2015. We're seeing that decreasing as we move into 2016. So, at this point in time, we see more stability. So, that's what's driving that price. In our case, we said before, we want to take a very balanced approach to price and volume. That's what we're doing. We sustain the same position that we described to all of you before.

And your next question comes from Brian Maguire with Goldman Sachs.

Thank you for taking my question.

Good morning.

Most of my questions have already been answered, but I just had a follow-up on Adam's question about the pension. Just wondering if the move in the discount rate would change your thoughts around how much cash you might contribute to that either this year or next year. Does it make it more attractive to use some of your discretionary cash flow for pension? And then just a question on the Olympics. Any expected benefit down in Brazil from the Olympics coming up? Thanks.

Okay. Let me handle the pension one first, Brian. We haven't made a decision to change what our expectation is on the cash side this year for the pension, so I think it's hovering around $20 million. And I think once we see the position for next year based on the change in discount rates and our actuarial studies, we'll make a determination on the 2017 cash level for the pensions. But right at this point, I think it's a bit too early to really speculate on that. We are, though - I should say, we have in the past, and we continue to spend a lot of time on derisking our pension plan. We've had - we've worked with the Dutch plan recently, the Australia plan, of course, the U.S. plans, and we're going to continue to look at ways to derisk the liabilities on these plans.

Yeah, when we look at the Olympics, we don't expect a major change in position of demand in the country. Normally in Brazil, normally, what happens is because of the short-term nature of this, the overflowing demand goes to camps, and that's what happened with the World Cup, too. So, it's consistent with what we've seen in the past. When we look at glass overall in Brazil, and I think this is an important data point for you, we're seeing a very strong performance. The demand is down overall in the country for all categories. However, within that context and just looking at the statistics you normally look at and we commented on before, you will see a very strong performance in glass in the country, which is worth to track. Its premium but it's also a position - the sustained position of the returnable. And we see the key players in beer making a significant emphasis on that package at this point in time.

Thank you, everyone. That concludes our earnings conference call. Please note that our third quarter conference call is currently scheduled for October 26. We appreciate your interest in O-I, and remember to be one of the cool kids on the block. Be trendy. Buy glass. Thank you. Have a great day.

This does concludes today's conference call. You may now disconnect your lines.