Owens-Illinois Inc. (NYSE:OI) Q4 2018 Results Earnings Conference Call February 6, 2019 8:00 AM ET
Dave Johnson - Treasurer and VP, IR
Andres Lopez - CEO
Jan Bertsch - CFO
Conference Call Participants
Mark Wilde - BMO Capital Markets
George Staphos - Bank of America Merrill Lynch
Chip Dillon - Vertical Research
Debbie Jones - Deutsche Bank
Gabe Hajde - Wells Fargo
Tyler Langton - JPMorgan
Edlain Rodriguez - UBS
Scott Gaffner - Barclays Capital
Ghansham Panjabi - Robert Baird
Arun Viswanathan - RBC Capital Markets
Good morning. My name is Mary, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Mr. Dave Johnson, Treasurer and Vice President of Investor Relations. The floor is y ours.
Thank you, Mary. Welcome, everyone, to OI's earnings conference call. Our discussion today will be led by Andres Lopez, our CEO; and Jan Bertsch, 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 excludes 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 Andres.
Thank you, Dave, and good morning, everyone. Let me begin with an overview on the slide 3. The year 2018 offered plenty of challenges for the like, yet it does offer the opportunity to display our improved leadership, accountability, new capabilities, improved culture and ability to execute as a single integrated global enterprise. Altogether, we are more resilient than ever before and this year is a clear demonstration of the ongoing success of our transformation overcoming both external and internal challenges.
For instance, coming in to the year FX was projected to be a significant headwind, by mid-year it has become a headwind for the full year. We faced all our expected issues as well, the transportation strike in Brazil, a bad disruption in Mexico, very high trade in the US and a soft going season in Europe. Further, in 2018, we took a pause in effect to emphasize a large incremental asset maintenance program that retrofitted assets to new market needs and added incremental capacity to support growth in our new markets. As we said in prior earnings calls, the region hit its 50% margin target exiting the year. In all, this focused effort has helped reset the region for a sustainable improvement trend going forward.
Again, O-I is a resilient company. It is a changed company that can absorb these shocks, meet financial commitments, while investing to setup the drivers of future shareholder value creation, and of course Europe continues to grow year-after-year with three consecutive years of three-fold digit margin expansion. Europe is the region’s most advanced in our transformation. They are showing us what is possible as we properly segment our markets, clearly define where to play and how to win and execute effectively to achieve desired results.
The outline if they rated this as planning with a rolling three year time horizon focusing on product system costs and simplifying the organization to become faster and more effective. In 2018, our total system cost efforts contributed over $30 million and we continued to optimize our footprint with a closure of the Atlanta plant in the third quarter.
As Jan will talk more about it later, we continue to make progress of managing our capital structure and especially capital allocation. In fact, we have initiated a quarterly dividend while continuing to buy back shares. At our investor day, we provided an overview of our strategy and key financial targets, all of which remain on track over the next several years, including our 2019 earnings and cash flow guidance.
Before moving in to a review of strength by region, let me provide detailed insight in to sales volume, which might be of concern to investors. As you can see on the slide 4, one of our key takeaways today is that our sales volume growth profile is changing for the better in 2019. Quite simply, the year 2018 is distorted by multiples ins and out that mask the solid foundation for our volume evolution over the next several years.
We have characterized the ins and outs as simple optics, temporary, one-off items that will favorably impact 2019 and beyond and a structural factor we have already at risk where we are close to concluding in early 2019. These factors taken together adversely will impact 2018 sales volume by about 250 basis points.
First, we have been shifting a large amount of volume from Waco and Monterey to our JV with CBI. This instantly reduces our topline. While this generates an unfavorable year-on-year comparison effect that is lapping in the second quarter of 2019, it is the right thing to do for long term sustainable value-creation, which shows in a strong and ongoing [apiternist]. Second, our sales in 2018 were adversely impacted by 50 basis points from several discreet events that won’t repeat in 2019. Examples include the great harvest in Europe and Brazil transportation strike. And third, we couldn’t serve some incremental volume last year due to capacity constraints in Europe and Latin America. We are addressing this latter point by adding incremental capacity. We already installed lines in late 2018 in Europe that are now fully operational and we are adding a few more lines this year.
Also in the first half of 2019, we are reopening a plant in Brazil and adding lines in Colombia. In Mexico, we are successfully increasing the current theory of existing assets and excellent and inexpensive way to affectively increase capacity, serve incremental sales and reduce cost. Be mindful that our commercial organization has already tangible, incremental volume commitments from customers.
I think it’s also important to work through the cadence of volume gains over the course of the year. In the last chart on this slide let’s focus in on the evolution of O-I legacy volumes which will drive our reported revenue. Dynamics in the first quarter are clearly transitory. This is a large quarter, the transfer of high volume in to the JV impacts high revenue. From there, you can really see the year-on-year increase taking hold beginning in the second quarter. Again, this is driven by culmination of various specific events unwinding the temporary factors from last year, the additional capacity I mentioned and topline growth from customary contracts and favorable market trends.
In all, despite a slight volume decline in the first quarter of 2019, we continue to see full year volume growth of 150 basis points, a combination of core organic growth and new business from strategic customers. Turning to slide 5, let’s step back from just 2019 for the moment to recognize the strong start we have made on our three-year plan for volume growth.
The pie chart from investor day outlines the resources of our expected 10% increase in volume over the next three years. The 150 basis points of growth in 2019 I spoke about on the prior slide is a combination of core organic growth and strategic customer agreement, again, leading to a break from a 2018 volume pattern. We have also locked in most of the older elements that will increase our volumes over two year. The capacity I mentioned that we are adding in Europe and Colombia, for instance, is especially linked to growth with the strategic customers. Together, this will support an incremental 150 basis points of volume for O-I as they ramp up over the next 6-12 months.
Joint ventures will continue to be a key part of our volume story even if we only formally recognize equity earnings from them. The JV with CBI is adding another furnace at the end of 2019 mainly fueled by higher sales volumes of the [Morello] brands, and we also invested in a nearly 50% interest in Comegua in Central America and the Caribbean. Together, incremental volumes are more than 350 points, and I hope to share modules with you soon about a few all important opportunities that we are making a lot of progress on. In all, we are well on our way to lock-in the 10% increase in volumes over the next several years.
Now, on slide 5, let’s take in the full year 2019. In short, we envisioned higher adjusted earnings and adjusted free cash flow in a year. Fundamentally, we are building upon investments we have made so far and are still investing for future shareholder value. These investments are in additional capacity, cost reduction, a more flexible and reliable assets in talent and capabilities like lower procurement and breakthrough innovation and technology.
On the capacity side, we anticipate adding four new furnaces, seven new machines and several line conversions in 2019 to support volume growth. About half of the capacity has been added in the Americas and the other half in Europe, and we envision investing capital within our product system cost framework in order to continue to reuse our structural cost in warehousing and logistics, energy and labor for instance.
Remember as we mentioned at investor day, the capital prices for both growth and cost reductions are expected to generate returns between 12% and 25%. As volume growth continued benefiting our product system cost approach and a constructive price environment will push up our segment operating profit in absolute terms and boost our margins as well. While Jan will provide more financial details on how we see 2019 unfolding, let me focus on the regional perspective.
Let us start with Europe on slide 7; overall the glass container market in Europe is healthy and continuing to grow at about 1% per year. Glass continues to be a very good fit with customers in this market that value premium products packaged in a sustainable [soft drink]. Our customers’ local, regional and global are very interesting in our support for them to grow the [Chero] glass in their portfolio. Interest from customers and consumers is clearly on the rise. And we have been adopting our operations and footprint to meet emerging trends especially to meet the higher value premium segment which is growing at mid-single digits to premium growth even faster. In fact for a few years now we have been building our capabilities both commercial and influence supply chain to take advantage of these trends which manifests across all of our geographies.
Let me pause on O-I sales volume for a moment; underlying growth is good, it is positive, yet O-I Europe’s shipments were essentially on par with prior year due to three specific issues that temporarily offset the positive translation of the growing segments in 2018. Before great harvest 2017 impacted 2018 glass container shipments which will rebound in 2019 due to a strong harvest confirmed in 2018.
Lower margin fruit sales driven by mix management increases Europe’s margin that will lap in early 2019 and the lack of capacity to serve incremental sales in growing segments due to high capacity utilization. Supported by long term customer contracts we added several lines to existing furnaces in late 2018 that will supply incremental capacity across selected segments. Plus we are adding a few more lines this year.
Separately, we plan to build a brownfield furnace to meet increased demand for long term strategic customers’’ growth. This furnace intended to come in line in early 2020 is expected to generate a return on capital of more than 12%. Taken together, we anticipate why Europe will generate above market growth in 2019 based on the confluence of key factors; favorable market conditions, incremental volume through growth of strategic relationships, analyze selectively adding capacity to meet customer demand in key segments.
As we mentioned at investor day, these opportunities are expected to generate solid returns on invested capital. At the same time, we remain squarely focused on reusing the structural cost. With our sustainable efforts with best-in-class processes, practices and tools now deeply embedded in O-I DNA. In fact, in the chart on the right, you can see how Europe is doing more with less and volumes haven’t moved too much over the past few years. And as we explained, this is about to change. So the profit expansion has really been driven by commercial efforts on price and mix management and continued benefits of total system cost. As we look through year-end and in to 2019 and beyond, we expect further gains in Europe in volumes, cost reduction and profitability supporting our objective of continues margin improvement.
Turning to Americas on slide 8, FX continues to be a considerable headwind, while overall market trend support low single digit volume growth overtime. That said, 2018 was a challenging year for volume in the region most of which I have already touched on, however, let me walk through dynamics in the fourth quarter in particular, which saw an abnormally high year-on-year decline in volume.
Volumes in the fourth quarter in the US were down around 10%. 5 percentage points is due to a cheap introduction to the JV with CBI which will begin to lap in the second quarter of 2019. 5 percentage points is due ongoing mega-beer dynamics to one customer’s (inaudible) impacted by two hurricanes and one customer that temporarily stopped purchases and is resuming normal purchases in 2019.
For 2019, we anticipated return to year-on-year growth in the US in the second quarter. We have been focusing on our commercial and operational efforts on premium products across all categories and on securing customer growth. As a result, we expect broad based growth in non-beer categories will overtake the current mega-beer down track.
In Brazil, we continue to see very strong market dynamics across all categories especially in premium products. In the first nine months of the year, our shipments in Brazil were up double digits. By the third quarter, though, we were already straining our capacities. We had been running very hard and then the Brazil transportation strike preventing us from building up our inventories, which only stranded further. As such, we actually saw a year-on-year decline in shipments in the fourth quarter, not because the market is very healthy, but because of supply chain constraints.
Of course, this is why we‘ve presently restarted a plant in the country and leaning on our plants in the Americas leveraging our integrated supply chain capabilities to meet ongoing growth in Brazil. Given that we are still likely to be somewhat capacity constrained, sales volume growth in Brazil is expected to be up low-single digits for the full year 2019. Despite these transitory issues, there were many bright spots; the JV with CBI continues to perform exceptionally well. The fourth furnace came online in the first quarter of 2018 and helped reached equity earnings from the JV higher year-on-year.
The fifth furnace is projected to be online by the end of 2019. Volumes in Mexico were strong in the back half of 2018 driven by solid demand trends and supply through increasing productivity. Volumes grew modestly in the Andean countries under [strained] utilization rates. This justifies the new lines we are adding there in early 2019. Beyond volume dynamics, prices kept pace with cost inflation, including higher freight charges and the apex impact on raw materials and energy supplies.
Across the Americas, the commercial and end-to-end supply chain organization started collaborating well to meet customer needs and reduce cost. Overall, we expect the Americas will generate higher sales, profit and margin in 2019 and beyond.
Let’s finish the regional review with Asia-Pacific on the slide 9. The region improved significantly over the course of 2018 and undertook incremental activity in the asset advancement program starting in the fourth quarter of 2017, similar to what we did in previous in Europe and the Americas with very positive impact overtime. As expected, the region exited 2018 with a 50% margin, an improvement by 800 basis points year-on-year. 2019 will bring a year with much improved assets that are a better fit to market with increased productivity and increased capacity to support growth.
With a focus on reducing the structural cost and capitalizing on growth opportunities, APACs financial profile will continue to improve. We see they’ve all been similar to Europe overtime, where their transformative actions had driven a steady profit increases and margin expansion for the last several years.
That said, in the first quarter, Asia Pacific has engineering activity consistent with the company-wide related program and during the first half of the year the region will be working on relatively high cost importing inventory driven by the prior years’ asset activity. APAC is translating to a full year 2019 with low double-digit margins which we then expect to spend by 100 basis points per year for several years.
And now, I’d like to turn the call over to Jan to discuss our financial review and outlook.
Thanks Andres. Turning to slide 10, I want to first remind you of our key metrics, which we presented at Investor Day last November. We’ve updated the slides for 2018 actuals, in short, we achieve our previous commitments certainly not without new challenges and we are excited to move forward to the next phase. We see 2019 as a pivotal year for the company’s transformation. We have momentum and are on track to achieving growth, margin expansion, cash generation and return cash to shareholders over the three year plan.
Before jumping forward though, let me review the EPS bridges for 2018 on slide 11. Beginning with the full year, on the chart on the left, entering the year we thought FX would be a tailwind of about $0.10. However, as we look back on the full year, the strengthening US dollar led to a $0.02 headwind for earnings, a $0.12 delta to expectations, and that’s just on translation. It’s even higher when considering the FX impact on cost inflation, which would add another nickel or so.
So, on a constant currency basis, adjusted EPS for full year 2018 was up $0.09, with half of this coming from the business and the other half from our investment in share buybacks. As we look at the reconciliation for the fourth quarter on the right, most of the full year commentary holds for the quarter. Currency was a $0.01 headwind, while segment operating profit was higher. Net interest slipped to a headwind as a result of higher variable rate.
While the tax rate for the full year was essentially flat, there was a benefit in the fourth quarter due to the favorable impact of closed audits and statute exploration. Moving on to cash flow on slide 12, we delivered adjusted free cash flow of $362 million, right in the middle of our guidance range. Cash flow from operations was up 10% compared with prior year, driven not only higher segment operating profit I just mentioned, but also by lower cash restructuring payments.
Working capital in total contributed cash of $15 million in 2018, which reflects a lower impact from inventory due to softer sales at the end of the year as I anticipated on the last earnings call. We gave back some of the increasing cash flow from operations through a higher level of CapEx activity in 2018, up above 25 million compared with prior year. You may recall that we had a high level of outstanding CapEx payables at the end of 2017 due to activity late in the year. We paid that down early in 2018; in turn the change in CapEx payables was larger in 2018 as reflected on the statement of cash flows.
Still the average level of CapEx activity for the past two years has been above $5 million in line with our expectation. That said; please see the last page of the appendix for more details on that. On slide 13, let me refresh the 2019 adjusted EPS guidance I presented at investor day last November. The temporary items didn’t change, which taken together, would rebase adjusted earnings to just under $2.60 a share. We spoke in great detail at investor day about our strategic initiatives and the benefits we expect in the coming years, specifically in 2019, we expect a 150 basis points of volume growth both organic and from strategic customers.
Andres mentioned the solid price cost dynamics, structural cost will also benefit from our total system cost initiative and a much improved Asia-Pacific cost base. Regarding strategic initiatives, we will see a small contribution from our nearly 50% interest in the Central America JV already in the first quarter. Variable interest rates are higher year-over-year and we expect a higher effective tax rate. We therefore anticipate a headwind coming from non-operational items in 2019.
And lastly, we have become more active in repurchasing shares which we expect will add $0.10 to $0.15 to EPS in 2019 depending on the case of the buy back. In all, we have a good line of sight to $3 per share in adjusted earnings for 2019, and while there are many moving pieces to achieve it, we see about half coming from business performance and half from share buyback.
On the next slide, let me pause on how we see EPS unfolding this year, because it’s different than last year due to several specific reasons, which I believe (inaudible) have not fully incorporated. The chart on the left shows how three key factors are expected to flip from a headwind in the first quarter to tailwinds in the second half of the year. FX moved quite a bit in the second quarter of 2018, so it should not be a surprise that its adverse impact is mainly isolated in the first half of this year based on current FX rates of course.
Andres already discussed volumes both production and sales, which are linked. He outlined our capacity ads and how we will resume year-over-year growth in the second quarter. That’s what’s reflected here. Now let’s move to the chart on the right to drill down on just the first quarter. Partially offsetting the down draft from FX and volumes we see some benefits coming from ongoing total system cost savings and APAC gains.
Overall, non-operational items are likely to be about flat. So while we see EPS down a nickel or so in the first quarter on a year-over-year basis, we have tangible reasons for our confidence of higher earnings through the rest of the year. Shifting back to cash generation on slide 15, we are affirming our investor day target for 2019 adjusted free cash flow at $4 million.
Similar to our adjusted earnings, we’ve provided additional assumptions in 2019 in the appendix, so I’ll just touch on a few. The expected increase in earnings should flow naturally in to cash generation. The growth opportunities will allow us to work off the excess inventories from 2018. This coupled with more focus on increasing inventory efficiencies should allow inventory to become a source of cash in 2019.
We are presently forecasting lower cash restructuring payments in 2019, although this is contingent upon footprint optimization and other OpEx reduction efforts. Regarding CapEx, we expect it will again be around $500 million. As discussed in detail during investor day, maintenance capital will be a bit lower and strategic capital for growth and cost reduction will be a bit higher. There’s always some variability in cash generation, FX rates have a big impact and will be sure to properly pace our CapEx expenditures throughout the year.
Turning to slide 16, we have borrowed another investor day slide to highlight how we are managing our debt portfolio. We continue to proactively issues non-US dollar denominated debt to hedge against foreign currency fluctuation. At the end of 2018, only half of our debt was denominated in US dollars, whereas it was three quarters just three years ago. We’re also very deliberate about the overall level of floating rate debt and again in which currencies we hold it.
At the end of 2018, more than half of our floating rate exposure was [two year] LIBOR which has not been on the increase like LIBOR rates. Regarding our overall leverage, we plan to repay debt and reduce our leverage ratio. In 2018, leverage was relatively flat due to investing in our shares and investments and joint ventures. We are confidently working towards a level of three times leverage by year end 2021. Even if our net leverage ratio may fluctuate slightly year-over-year.
On slide 17, you can see the progress we’ve made in reducing our pension benefit obligation. On a year-over-year basis, discount rates were up, which lowered planned liabilities compared with prior year. For planned assets, however, the relatively weak market performance in 2018 more than offset the positive effect of the discount rates, resulting in an overall increase in unfunded pension liabilities. That said, the risk mitigation activities we’ve engaged in over the past several years, have cut in half, the effect that we would have experienced otherwise. The company has focused on annuitizations and taking the liabilities completely off our books in order to reduce our financial risks and we will continue to focus on doing more.
Looking in to 2019, based on the rate of return assumptions, we expect pension expense as well as cash contribution to be relatively flat to 2018. Let’s review the chart on the right, as I’d like to highlight this occasionally to show that using EPS is the gauge of our business performance does not fully reflect the underlying strength of our business fundamentals, because EPS is partially masked by non-cash pension accounting guidelines. This is the reason we continue to remind the investment community about the approximate $0.35 non-cash charge and pension expense related to the amortization of actuarial loss that is weighing on our earnings. Throughout the year and beyond, we will continue to work on reducing our pension liability, so that it’s a smaller source of volatility on company earnings.
Now let’s turn to slide 18 and discuss another way in which we have been managing the company’s risk profile overtime. The fundamental metrics that we monitor related to our legacy asbestos liability continues to progress in the right direction. The key drivers are the company’s 1958 exit from this business and the resulting declining demographic trends. While O-I has been actively defending these demographic trends, this is not the only reason we’ve seen this decline. The company has long practiced risk management in this area. Still the environment is volatile with discreet packets of litigation, perhaps even in adjacent spaces potentially creating substantial risk.
As I mentioned at investor day, we have been actively pursuing some of these proactive risk management strategies to protect the effect of the demographic trends. We believe the combination of several developing factors including changes in the law and procedure, renewed attention to dockets of older, non-(inaudible) cases and deteriorating litigation dynamics and specific jurisdiction have the potential to put upward pressure on plain values in volumes.
Given the situation, the company added a $125 million to the accrual and implemented an accelerated disposition strategy to act as a hedge against these potential pressures. For perspective, the 2018 charge is within 15% of the original lifetime estimate we booked in 2015. The execution of this strategy will likely result in cash payments averaging approximately $150 million in each of the next two years. They are expected to drop to the $60 million to $80 million range in 2021, and then declines consistent with historic, demographically driven trend should continue.
Based on our current assessment of the landscape, we anticipate the accrual in 2021 will not be more than $250 million, De-risking asbestos, protecting the effect of the demographic trend and managing risk in the litigation environment are areas of key focus and we will continue to take actions to protect the company from downside risk. As we hope you can see from the previous few slides, with a backdrop of declining legacy liabilities, we view 2019 as a continuation of our practice of returning cash to shareholders and de-risking the balance sheet.
Generally speaking, we anticipate that about half of our free cash and half of net divestiture proceeds overtime will be returned to shareholders. First, we will be paying our dividend in fact next week. The quarterly dividend is a clear sign of the Board’s confidence in our three year plan and as of December 31, 2018, we have $550 million remaining in the share repurchase program approved by the Board. We expect about $200 million of that will be purchased during 2019 and the remaining through 2021.
As for our remaining funds, we plan to allocate them amongst de-leveraging, funding strategic investments that have returned in excess of our weighted average cost of capital and repurchasing shares.
And now I’d like to tell the call back over to Andres.
Thanks Jan. I trust and you can see that we will continue to (inaudible) what we have accomplished over the past few years, not just stabilizing the business but elevated it and investing in capabilities to grow in further. As I described on investor day in the next year [running] horizon there are several valued platforms that will unlock shareholder value. The first, is grow and expand, O-I aim is to leverage newly developed capabilities and translate favorable market trends in to grounded, ascribable, topline growth opportunities that will help us grow and expand with our strategic customers.
Next is the structural cost improvement; we believe product system cost is a best-in-class approach to a structural cost reduction and will contribute to our bottom line for years to come. Our third area of focus is sustainability, given that very real global traction of sustainability O-I will exert given more focus on this dimension moving forward. We also made substantial progress on innovation and developing breakthrough technology. The MAGMA pilot is running well in our Streator facility. We are on a schedule successfully and timely hearing important milestones.
The progress is very encouraging, exciting and has generated tangible interest by key stakeholders. We will continue to provide updates in every earnings call even if be like this one. And Jan just mentioned capital location and how the risking O-I’s balance sheet coupled with increasing the return of cash to shareholders will drive value to all holders for days to come.
Now that we have completed our remarks, we are happy to take your questions.
[Operator Instructions] Your first question comes from the line of Mark Wilde from BMO Capital Markets. Your line is now open.
I wondered if you could just give us a little more color on sort of the volume in particular regions around the Americas in the fourth quarter and what you’re expecting in ’19? And then also given the declines you mentioned in the US, whether you have any plans for potential footprint moves over the next year or two?
So the situation in the Americas is as follows; we see solid demand across the region, with exception of mega-beer. So we continue to see the same decline rates we talked about before, we already factored them in at current decline rates. Now beyond that everything else we see is quite solid. Now if we talk about the US, and when we look at all product categories in the market, all of them offering opportunities for growth, and as you know we have been focused on those categories for three years now and we’ve been adapting the footprint in those three years too, and now is the moment to start enjoying even more, the benefits of that work that we did over the last three years.
When you look at particular areas that are growing quite fast for us, products like kombucha, it is growing both double digit and is being sustained, so it’s quite solid. We’re seeing double digit growth in carbonated RTD tea too and we’re seeing situations like one very important food customer that moved the product some time ago PET coming back to glass this year 2019. So that’s quite a successful story there.
So bottom line US mega-beer declines, run rates already reflecting in forecast as we know them today. All the categories growth and we’ve been focused on this three years and that’s why we’re confident, we’re going to see this performance in 2019 as we move forward. When we look at Brazil, very strong demand across all categories, premium beer demand is growing really fast, its 40% of the total business in Brazil at this point. Customers’ want glass to be part of that portfolio for premium beer, so they’ve already been asked to be able to supply enough for them. And as we reflected in the opening remarks, we were able to roll really well from Q1 to Q3 in Brazil at double digit rates.
Now we’ve reached a high utilization of capacity in Brazil. Towards the end of the year, inventories were already low, so what happened is we ended up moving from growth of double digit growth in the first three quarters to decline in the fourth quarter and that’s why you see these four quarters so low for the Americas, because a driver of growth which has very solid demand in the country couldn’t grow in that particular quarter and then US as I explained before and I can’t give more color on that.
Now Brazil is going to receive new capacity as we mentioned which is going to just make this country to rebound back to growth, and that’s all in the plan. Now you see a low Q1 in part because of that, because we are flowing capacity in Brazil and in Colombia and that obviously cost some money, but also had some rampart and that’s impacting the quarter operations.
When we look at Mexico, a very solid demand too, and we’re seeing growth opportunities in premium products specifically beer, premium tequila and [NAVs] and we are emphasizing productivity in that country. We started last year, we’ve been successfully increasing output and we continue to do so, so that’s going to help us to support incremental demand this year, and we will also have the production that we lost last year from (inaudible) issues in 2019. So that’s going to support our growth. Starting in the second quarter, you’re going to see that we’re going to have bottle rates in Mexico. Now when we look at Colombia, it’s having various strong demand in beer premium and we are analyzing this country too. We expect it be operational as we go in to the second quarter and third quarters. So that’s why we are counting that we’re going to have this growth impacting the Americas in 2019. Altogether, we see single digit growth for the Americas in 2019.
Your next question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is now open.
Andres and Jan I want to take a step back and we appreciate all the color on volume and the outlook and your confidence there. If we go back a few years ago, one of the mantras within Owens-Illinois was around stability and bringing stability back to the organization both from an operating standpoint and a volume standpoint. One, can you comment a little bit in terms of how you feel you’ve progressed there, relatedly when we look at the Americas there’s about $48 million negative year-over-year variance in operations. I’m assuming a lot of that was the one-off stuff that you talked about on the quarter call just now, but how much of that was manufactured and maybe was under your control that you could have done a better job on and hopefully we’ll improve on in the future. And then around stability, when we look at cash flows on asbestos, Jan can you give us a little bit more color in terms of why it’s prudent to proactively pull these claims forward as we think about the stability and the cash flow?
George, when we look back we said, achieving the stability in operations and volume was very important for us. And I think we made very good progress, it’s quite solid, so we counting on that as stability to wield our growth that we are seeing in to the future. I think the work that we’ve done with customers is creating stability in the volume side, I’m going to talk about the Americas in a minute for the full quarter, and the operations are more and more stable over time. And obviously that’s a long term effort, however our stability is significantly higher than before.
Now what caused is we have now a chance, and we had that chance over the couple of years to focus on building this new demand and when we were in that day we proposed that we’ll 10% in the following three years and that’s because we have a very (inaudible) opportunities, very specific opportunities in a specific segment already identified that we’ve been working our customers for quite a while that we’re starting to close. So when I look at the position we have when we were (inaudible) based on that stability and the growth momentum, at that point in time we were confident and we were optimistic and I would tell we were even more confident and more optimistic because we made substantial progress on the agreements we needed to put in place to be able to secure the demand for the following three years.
Now, when I look at the fourth quarter, the demand in the fourth quarter wasn’t good, and it was a disappointing quarter, but it has quite a few things in there, so it’s driven by the Americas, within the Americas half of it is with the United States, half of that is the transfer of that volume to the JV which is going to lap now so we don’t have that issue with that comparison anymore, the only happening is mega-beer which we already know it is already factoring (inaudible) as the run rate we know.
Now the other portion is the specific issues with the customer that was supposed to hurricanes that lost the demand altogether and that other customer that stopped buying but is resuming purchases. So these two very specific issues, very unfortunate, but they don’t define the demand pattern for us going forward. And the other situation is Brazil, we were growing very strong for the year and it becomes a decreased year-on-year for the fourth quarter. All the reason for that is capacity. So we need to equal the capacity in Brazil, we already have plans for that, we’re making very good progress, we’re about to start that plan that we mentioned before, and we continue to evaluate our capacity up in Brazil.
And George let me clarify, I think if you’re talking about the operating cost in Americas that you see on, I think it was slide 27 of negative 48 million cost, that is cost inflation, but the trade cost spread is relatively flat, so the driver of decline in volume, which John just mentioned. Let me go to the second part of your question when you were talking about asbestos. But before I do that I just want to mention one other thing, Andres talked about the stability, we also tried to put a lot emphasis over the last several years in the stability of our balance sheet. And whether it was renegotiating our bank credit agreement or changing our debt profile to reduce the exposure, the currencies, spreading out the maturities or annuitizing more pensions that we have it was all a goal of developing a stronger balance sheet and balancing our risk, reducing our risk for the company.
Another piece of that of course is asbestos, and to get me to the last part of your question, it’s probably best if I set some context for the broader topic of asbestos to really answer your question thoroughly. All of the fundamental metric that we monitor related to our legacy asbestos liability continue to progress in the right direction. I mean the key drivers are the company’s 1958 exit from this business and the resulting declining demographic trends. And from 1948 through 1958 this company owned and an installation business that produced and sold materials containing asbestos and in April of 58 the company sold the business unit and therefore the timeframe appropriately reflects the mortality of current and expected claims.
But as 30 years asbestos liability are in litigation, rather has shown us, it’s volatile in many external variables outside the companies or any asbestos defendants control can do and will affect the litigation environment, this is why another key driver of O-I’s progress that its long standing strategy to proactively manage emerging risk so as to protect the favorable demographic trends. And one example of such a strategy will be the use of administrative claims handling agreements.
At our investor day last November I mentioned that a couple of these risks that were materializing such as changes in the law, increases in judicial resources, unfavorable jurisdictional dynamics and even new bankruptcies. As you know bankruptcies by other prominent asbestos payers create additional risks for companies like ours who remain in the litigation. As we have for many years, when we gain more information on these risks we believe it’s prudent to implement strategies to mitigate them.
For some of these matters accelerating the disposition of some claims is a good way to hedge against some future risks and volatility. Like any other type of hedge, the near term cost may be a bit higher than average, but operate to prevent inflationary factors in the future. That’s a situation with our strategy here. We’ll some higher near term cost, the need to adjust our growth that will come from them, but to keep a proper perspective, the accrual increase like I mentioned is about 15% adjustment to the estimated lifetime liability recorded back in 2015.
So let’s also key proper perspective on the lifetime estimate, even though we have booked a projected lifetime asbestos accrual on our balance sheet for the past three years. The litigation environment continues to be active, and as we’ve mentioned evolving factors could develop in a way that would cause us to adjust our asbestos reserve. This is why we have long disclosed that the point estimate of the lifetime accrual could be higher.
Importantly, we think that this charge and the resulting higher payments we’ll make over the next couple of years to dispose off these claims is appropriate to incur now to mitigate a greater risk that may develop in the future. Of course we’ll continue to closely monitor changes in the asbestos environment and may implement additional de-risking strategies in the future to mitigate new risk before they grow.
As I mentioned at our investor day, we still anticipate that our lifetime asbestos accrual will be less than $250 million at the end of the three year period ending in 2021. And our expected annual payments in 2021 will be in the $60 million to $80 million range we anticipate and then likely continue to decline there after consistent with the demographic effect. So I hope that helps with your question.
Your next question comes from the line of Chip Dillon from Vertical Research. Your line is now open.
Just a quick question about the asbestos situation, I do know that you had a slide from investor day that talked about the potential to do the de-risking accelerated payments. I don’t recall though, and maybe I just missed this, that there was likely to be an increase to the cumulative reserve which was 125 million. And so my question is, was that increase something that you either missed or maybe you just didn’t - that you knew was going to happen or is it something that is a result of the recent development since November? And then as you go out, how high is your confidence level that we won’t have to see another increase in the reserves?
Chip at investor day we were in the midst of executing our strategy to mitigate future risks, but we hadn’t finished negotiations. And with much of that behind us, we have more clarity about the asbestos related payments over the next few years. So that’s why we think about 150 million on average for the next two years before falling back to a lower level of 60 million to 80 million for the last year of our three year range and then declining thereafter makes sense. And that’s consistent with the demographic trends as we see them today.
Of course, we’ll continue to review our asbestos accrual and liabilities on an annual basis or more frequent if we need to adjust like we mentioned back in 2015 and have done ever since. But I hope you see this as a more aggressive way to continue to tackle this very difficult situation and to help hedge against future increases and to be able to overall reduce the risk of this company, which has been a strong focus especially in the last several years.
Your next question comes from the line of Debbie Jones from Deutsche Bank. Your line is now open.
I have a question on your guidance for Europe, your point to modest growth in Europe’s different region. I was just wondering if you could talk about some of the factors there, I am sure you’ve got FX as a negative and volume growth has been as positive, and how should we model in the cost side of things. And then specifically in Q1 can you elaborate on the comments that you made around some of the temporary items?
So let me just make a comment on Q1 and one of the major reasons why we’re seeing a number that is below prior year. And that is we are installing capacity and as you would expect that comes along with the standing, and we got to hire people, we got to train people, we got to half spend to put a capacity in place and then we got to run that. So that’s part of why we’re seeing at least from an operational perspective impacting in Q1, which in fact is very positive as you look at the following quarters, but we got to go through that quarter to be able to get to the higher performance quarters. So, from an operational perspective that’s what’s taking place.
And Debbie maybe I can share a few numbers with you. When we look at Europe for the first quarter, we see a pretty balanced price cost spread, maybe slightly positive. We see from a volume standpoint things pretty on track versus prior year. FX looks like in the first quarter is going to be a headwind in Europe. I would say $5 million, $6 million or so is what we’re looking at based on the January 31 rates when we compare it to last year. You can see the big movement between the Euro and that’s a comparison area. But that’s where I see the biggest changes overall really are really flat for Europe in the first quarter.
Your next question comes from the line of Gabe Hajde from Wells Fargo. Your line is now open.
I was wondering if you could comment at all Andres bigger picture, on your expectations for volumes given where we are sort of in the economic cycle or climate, any slowdown potential from consumers or travel related spend for some of the higher end liquors and stuff like that? You had a sense for maybe where customer inventories are and how that could impact sales and if in fact something materializes on the slowdown side?
Well at this point in time, what we’re seeing is across the world when we look at all end users, the only segment really that shows weakness and decline is mega-beer in the United States, which we have fully factored. When we talk with customers, they continue to see a growth outlook for the businesses. We haven’t seen any change in that regards and we continually test that. We’ve seen a premium product category to be the driver of our growth going forward. This is a category of products that has proved to be quite resilient even when you have some downturns. And we tested that in Brazil, we’ve been able to grow in that premium beer over the last three years or four years even though the economy was in a very bad situation.
I highlighted the mega-beer before, it’s important to have in mind that even though that sub-segment declines, it is only 5% of the total volume. Now at the same time, premium beer grows very fast in the United States and we are very well positioned to serve that segment as you know because of the JV that we have a Constellation branch. So in all I think demand is quite healthy around the world, we haven’t seen any change on that. The primary focus for us right now is to be able to finalize some of the initiatives and agreements that we got to have in place. Some of them are already finalized, we continue to be focused on the orders and we are focused on the execution around its starting capacity which we had started last year in Europe with the regional lines and we continue this year with regional lines in Brazil, in Europe, with the addition of capacity in Colombia, with increasing productivity in Mexico. So that’s where we got to go right now.
Your next question comes from the line of Tyler Langton from JPMorgan. Your line is now open.
Just had a question on the divestitures, I think you mentioned on investor day that you expected net proceeds I think 400 million to 500 million through 2021. So if you could just talk about how that process is going and what you’re seeing in general?
So we continue with the same expectation, we identify the potential businesses that we can deal with or part of businesses that we can deal with to do that and we are just moving forward with all the stage that you would expect we got to go through. So we’re actively executing on that.
So let me just add Tyler since you asked about that. I think that’s an important part of the conversation related to the cash for the company, because we anticipate based on where we are today and in our plan to reach an adjusted free cash flow of $400 million for the company this year, we’ve talked about asbestos being a $150 million, $160 million payment this year. So that reduces the free cash flow to about 240. If we just add the cash component of these divestitures on just for the sake of conversation, we have about $440 million available to invest in the company, deleverage or return value to our shareholders. And based on our plan we will take about half of that over $200 million to return value to the shareholders through a combination of a dividend which will cost us about 30 million this year and then a couple of 100 million of share buyback that we talked about. So you can clearly see the merits of kind of tying our proceeds from the divestiture with our share buyback plan, it’s an important component of it and we’re taking it very seriously.
And then on the other side, we have another couple of 100 million plus to pay for minority dividends about $20 million for the year and then our investments and joint ventures specifically like our joint ventures with Constellation brands as well as RMBC and the remaining component of that $150 million, $170 million we will primarily use for deleveraging or strategic capital for the company that yields very solid returns on capital. So there’s a balanced approach of investing in the business, pay down debt, reducing our leverage and returning value to the shareholders.
Your next question comes from the line of Edlain Rodriguez from UBS. Your line is now open.
Just one quick one on the EPS guidance, should we make anything about a slight change in tone from $3 plus to approximately $3, and has anything changed at all since the investor day plus or minus?
I’m glad you asked that question, I saw it came up several times in the commentary last evening. The answer is no, please don’t over analyze that. When I read it several times I was actually surprised. Our goal is to hit that three handle, obviously we’d like to be a bit higher than $3. We are working on everything we can to be that way, but we’re sticking right now with our $3 a share. So please don’t look any deeper in to the minor wording change that was made between last November and last evening in the release.
Your next question comes from the line of Scott Gaffner from Barclays Capital. Your line is now open.
Just a quick question Jan going back to the thoughts on share buyback, a couple of things there, can you talk about in context of de-risking the balance sheet. As you mentioned its $240 million of free cash flow after you subtract out the asbestos payment. So, first would be, should we think about the share buyback being more weighted towards the second half once you’ve finally finished some of these divestitures.
The second part being, should we think about in divestitures and share buyback being more neutral to earnings on a go-forward basis. And then just lastly, on the capital spend, you said 12% return on capital for Brownfield, are you getting later in this cycle and seeing lower return on capital from new investments on a go-forward basis?
Let me first talk about the share buybacks, we already did in January about $40 million of share buyback. So we started the share, we also had about an equivalent amount last December. So if you think about it that way we probably have close to 160 million more to do the balance of this year. We always said that we would time it and make sure that it made sense with other demands on cash in the company including CapEx and everything else and the proceeds from large divestitures.
So we’ll continue to try to match that up. Saying that Andres mentioned that we’re on target on very clearly looking at our open land that we have available for sales as well as some other divestitures that we’re looking at. And so I think we’re on target this year to execute that entire 200 million, and I think it’s a little bit premature to give you by quarter how much that is, but we’ll share that as we go forward.
And you also asked about, is it more neutral to earnings going forward, and we do have a program as of the end of last year of 550 million on share repurchases. So if we execute 200 of those this year, you can think that we’ll have a remaining balance to do through the next couple of years of our plan as well. I think we have good return in excess of 12% for our Brownfield in Europe and it clearly adds value overtime. We look at each one of these opportunities that we have standing on its own as well as in conjunction with what else we’re doing in the region or for the company and so we’ll continue to be very prudent and very disciplined on making decisions that makes sense for the company.
Your next question comes from the line of Ghansham Panjabi from Baird. Your line is now open.
Going back to Europe 3Q 2018 volumes were a bit sluggish, I believe relative to initial expectations. I guess did 4Q ’18 sort of benefit from any sort of catchup, I’m just trying to understand the volume increase and then related to that, just looking at Europe on a full year basis volumes were basically flat, however we’re at this point where we’re capacity constrained in Europe from your vantage point. And then just separately Jan, how is that going to be accounted for in the P&L?
We spent some regional lines in Europe late last year. So they held at the very end and have been across the full (inaudible). We got a little bit of the improvement in wine demand at the very end, but when the 2018 harvest was confirmed to be very strong, we all expect that the dynamics in the market change from that point. So we saw some improvement due to that. And we continued to focus on the premium segments, they have opportunity for growth and so as we make capacity available, we’re confident that we’re going to see improvement in demand in Europe and that’s why we’re putting in place or planning to put in place these Brownfield that will start operation in Q1 2020.
And you also asked about Comegua, that’s a non-consolidated joint venture. So we’ll see the equity earnings of that will be reflected in the Americas segment operating profit.
Your last question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.
Just wanted to go back to the Americas’, obviously we’ve been experiencing these declines on US mass beer for a while. Just wondering, I think you’ve obviously reduced that exposure. Do you think you kind of found a steady state on other categories or will mass beer continue to decline, and if so what kind of percent of the portfolio would that become and what would the other categories become?
The mega-beer in our assumption continues to decline and continues to decline at the career run rates. We’re not assuming that that’s going to stop any time soon. It could but it’s difficult to predict. So our assumption is it continues to go down. And as you know we’ been working on the other categories of products for three years now, both commercially and from a capacity standpoint. So I think we’re going to see more and more opportunities materializing as we go through 2019. Now, we got to take in to consideration the volume that we are gaining through a JV, because we are in fact with larger presence of O-I containers in the US market. When you put together what we sell within the US made with US capacity plus the JV. So we think the growth of the older categories and when you consider the joint venture too, it’s going to have the total US market for us growing to 2019.
Thank you everyone. That concludes our earnings conference call. Please not that our first quarter conference call is currently scheduled for May 2, 2019. We appreciate your ongoing interest in O-I, and a gentle reminder to choose glass packaging made from natural ingredients, it’s safe, it’s pure and a 100% recyclable. Thanks and have a great day.
This concludes today’s conference call. Thank you all for joining. You may now disconnect.