O-I Glass, Inc.
Q4 2013 Earnings Call Transcript

Published: 29 Jan 2014

[Operator:]

Good morning. My name is Jeremy, and I will be your conference operator today. At this time I would like to welcome everyone to the O-I Fourth Quarter and Full Year 2013 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). Please limit your question to one and one follow-up. Thank you. I would now like to turn the call over to Mr. Dave Johnson, Vice President of Investor Relations. Sir, you may begin your conference.

[David Johnson:]

Thank you, Jeremy. Good morning, and welcome everyone, to O-I's Earnings Conference Call. Our discussion today will be led by Al Stroucken, our Chairman and CEO; and Steve Bramlage, our Chief Financial Officer. Today we will discuss key business developments, review our financial results for the fourth quarter and full year 2013 and discuss business trends in 2013. 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 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'd like to turn the call over to Al.

[Albert P.L. Stroucken:]

Thank you, Dave and good morning. As we committed to you last year at this time we have delivered higher cash flow and earnings for 2013. And that in a rather challenging environment of no volume growth coupled with currency and pension headwind. Our focus on execution is clearly making a difference in structural cost reductions and asset optimization and managing production volatility and in enhancing our financial flexibility. Let me touch on fourth quarter results before moving to the full year picture. We reported adjusted EPS of $0.51 for the quarter, a 28% increase over prior year and in line with our expectation. Shipments of glass containers were up 2%, similar to the year-on-year increase that we saw in the third quarter. Beverage volumes rebounded in South America driven by double-digit gains in Brazil. Shipments in Europe on the other hand remained stubbornly soft, especially at the end of the year. Production volumes were significantly higher in North America and Europe, the result of our deliberate actions to even out production throughout the year. And lastly we continue to improve our cost structure, particularly in North America and Asia Pacific. Turning to the full year the organization's focus on cash flow is paying off. We generated nearly $340 million in free cash flow for the year, up 17%. Higher segment profit and improvement in working capital contributed to the year-on-year increase in cash flow. Adjusted EPS for the full year was $2.72. This is in-line with the guidance we set up at the beginning of the year despite all geographies reporting essentially flat volumes for the full year. Without a doubt solid progress on structural cost saving initiatives led to higher year-over-year earnings. With respect to capital allocation we are strictly implementing our plan. For the year we repaid nearly $300 million in debt and repurchased $33 million in share. On the next slide let me review our business performance by region. Clearly North America turned in an excellent performance. For the full year 2013 volumes were flat. Declines in mega beer were offset by gains in draft beer, wine and non-alcoholic beverages such as iced coffees and teas. Through solid execution on cost reduction initiatives, most notably in automation and freight North America has already reached the 15% profit margin target that we led out at Investor Day. In Europe after a very challenging first quarter our results improved considerably. For the year European segment profit was flat even though external factors like the economy and weather did us no favors. In 2013 volume and tons shipped was down by less than 1% although volumes in the back half of the year were up nearly 4%. On matters more within our control we have made solid progress. We recaptured about half of the wine business that we lost to competitive activity in 2012 and our asset optimization efforts are on track and yielding about $40 million per year in savings on a run rate basis. While South America continues to generate the highest regional margins, a handful of factors dampened our growth and profitability there. The low-single digit growth for the region we projected on this call one year ago simply did not materialize. We started and ended the year with mid-single digit growth rates. But those gains were offset by declines recorded in the second and third quarters. Brazil was a clear positive with volumes up 5% for the year. The rest of South America underperformed as we experienced a number of challenges. A general strike in Columbia, broad economic uncertainty in the region that caused our customers to postpone orders, most acutely felt in [returnables], price controls, high inflation and economic malaise in Argentina and currency headwinds across the region. Volatile conditions are certainly not new to us in South America and we are committed to this very important region. We remain confident that we have the right strategy, experience and challenge in place to drive growth of sales and profitability in the region. Asia Pacific performed exceptionally well in 2013, already reaching the 13% target margin we outlined at Investor Day. Our ongoing restructuring efforts in Australia are clearly adding value. In South Asia we've benefited from substantial growth in the non-alcoholic beverage and food market. And in China we continue to selectively shutdown assets that have unacceptable return on capital profiles. Now I'll turn the call over to Steve who will review our financial performance.

[Stephen P. Bramlage:]

Thanks, Al. Turning to slide four. Fourth quarter 2013 segment sales were $1.8 billion. Price and mix in the quarter was up 1%, less than gains in prior quarters due to an adverse sales mix within our segments. Company’s sales volume was up 2% primarily due to mid-single digit gains in both North and South America. Currency translation negatively impacted the top line by $35 million in the quarter. The weakening Brazilian real and Australian dollar were only partially offset by the strengthening euro. Segment operating profit in the quarter was $195 million, approximately 19% more than prior year. Price and mix contributed $16 million while margin on sales volume added $8 million to operating profit. Within operating costs, inflation of $32 million was partially offset by our cost reduction efforts and higher year-on-year production volume which allowed us to absorb more fixed cost. Lastly, the net impact of currency was a headwind of approximately $6 million. As we turn to slide five you will see that higher operating profit contributed most of the increase in earnings. We are making additional inroads in non-operational items as our balance sheet continues to improve and our focus on overhead cost control stays sharp. We continue to scale back corporate costs. However this progress was partially masked by higher year-on-year pension expense. Interest expense continues to benefit from our ongoing de-leveraging activity. Note that tax expense in the quarter was adjusted primarily for the geographic mix of full year earnings. In fact, the effective tax rate for the full year 2013 was 22%, which is on par with the prior year. Let me shift my comment to GAAP earnings per share for the moment, highlighting the items contained in the note one table. Our annual evaluation of our asbestos-related liability resulted in a $145 million charge in the fourth quarter. This is in line with expectation and consistent with the underlying trends we’re experiencing. It is $10 million less than the prior year’s charge. Asbestos remained a gradually declining albeit still significant liability for the company. We also recorded pretax restructuring and asset impairment charges of $109 million in the fourth quarter. These charges principally relate to the second stage of our European asset optimization program, the final stage of our Australian restructuring program, the closure of our non-strategic flat glass operation in South America and China where as I mentioned before, we continue to selectively prune our footprint. I would like to note that similar to last year the accounting rules dictated timing under which we can recognize certain restructuring charges. In 2014 we anticipate recording approximately $10 million to $20 million in additional charges related to the aforementioned items. Please also note that our note one item in South America impacted minority interest by $11 million. Excluding this, minority interest in the quarter flips from a positive $3 million recorded on a GAAP basis to a negative $8 million on an adjusted basis. Let’s move to slide six for a financial review for the full year. We’re very pleased with our progress on several key financial metrics. Higher earnings contributed to the $339 million of free cash flow we generated in 2013. That’s up more than 50% versus 2011. Clearly our focus on free cash flow is making a difference and we’re confident we still have momentum to carry it further towards our 2015 goal of $400 million. With respect to capital allocation we continue to deliver on our commitments. Over the past two years in fact approximately 90% of the $629 million of free cash flow we generated went towards debt repayment and the remainder was used for anti-dilutive share repurchases. During the year we repaid nearly $300 million of debt. The gross debt on our balance sheet declined by a lower amount due to the stronger euro, accretion of our convertibles and the modest up-sizing of our first half Euro bond refinancing. Exiting the fourth quarter our net debt-to-EBITDA leverage ratio was 2.6 times. As we have already said many times we intend to stick with this capital allocation until we reach approximately two times net debt-to-EBITDA which is the low end of our target leverage ratio range. In all we are making continued progress in enhancing our financial flexibility via an improving balance sheet. Our leverage ratio continues to decline. Discretionary pension contributions over the last two years have significantly boosted our funded ratio and a $330 million euro bond transaction we entered in the first quarter of 2013 extended our debt maturity horizon at historically low interest rates for us in Europe. Let's move to slide seven to review our business outlook for 2014. In Europe sales volumes are likely to be flat with prior year. We remain very cautious on the Eurozone macros. While we had initial guided Europe volumes to be modestly up for 2014, the repeat experience of slow sales in December has made us more pessimistic about any meaningful expansion in Europe this year. However we still expect higher profits in Europe principally due to savings from our asset optimization program. In North America we see 2014 unfolding much as 2013 did. Volumes and margins are expected to be essentially flat. We are already operating at record margins which provide us with a good foundation to pursue future commercial opportunities. In South America we anticipate returning to low single-digit volume growth for the region. Note that we do not anticipate a material boost in our sales due to the World Cup. On the whole our customers are more likely to use one way containers only some of which will be glass to supply the increased demand from this one-time sporting event. South America’s profitability does stand to benefit from less downsize in 2014, as the disruption in Colombia as-well-as several other one-off events should not repeat. In Asia Pacific many moving pieces are likely to offset one another. Further plant closures in China will reduce sales volume but will have little impact on overall profit margins. On the other hand the final phase of our restructuring program in Australia should improve our cost structure. In all stable profit on a lower sales basis suggests that we will see margin expansion in Asia Pacific in 2014. In total we expect higher segment operating profit for 2014, driven primarily by improvements in Europe and South America. Corporate expense for 2014 is expected to be approximately $100 million. The largest tailwind will be pension, higher interest rates will drive pension expense at least $30 million lower than in 2013. This benefit will be partially masked by other corporate expenses such as modestly higher investments in product commercialization and research and development. Interest expense is expected to decrease approximately $5 million from 2013. We stand to continue to benefit from lower outstanding debt levels as our deleveraging efforts continue but the rates of the debt being repaid will be lower than the prior year’s repayments. We see our effective annual tax rate in the range of 23% to 25% next year. This would be a modest uptick from 2013's 22% and is largely attributable to the geographic mix of earnings. For the full year 2014 therefore we expect our adjusted earnings to range between $2.80 and $3.20 per share, assuming steady foreign exchange rate and the current macroeconomic environment. Please be mindful that this includes an approximately $0.10 per share headwind versus 2013 at current exchange rates. Generally speaking as many of you already know changes in volume continue to have the biggest impact on our earnings per share. That is an incremental 1% of sales and production volumes for the year is worth approximately $0.15 to $0.20 in earnings. Let's now turn to slide eight to review cash flow. We see a continuing trend of rising cash flow from operation next year. As I just said we expect higher adjusted earnings. Working capital will likely be neutral to cash with further working capital reduction actions offsetting inflation headwinds. Pension contributions are now projected to decline due to the discretionary payments we made in 2013. Unlike pension expense we do not expect rate changes in the United States to directly impact our required pension contributions in 2014. This is because our required contributions remain exclusively outside the U.S. Asbestos spending should be a continuing tailwind given the expected trend of the $5 million to $10 million per annum reduction. Restructuring payments of approximately $70 million in 2014 should be approximately $10 million less than the prior year. The need for the European asset optimization restructuring spending should be marginally lower as the program shifts incrementally towards capital spending in 2014. Still restructuring and CapEx taken together should be on par with our 2013 spending levels of nearly $440 million. Therefore our capital spending is expected to be approximately $370 million. On balance we envision our 2014 free cash flow to be approximately $350 million, continuing the positive year-over-year trend and on track towards our 2015 target of generating more than $400 million of free cash flow. Let me begin our first quarter outlook on slide nine with Europe. Absent a substantive pickup in macroeconomic activity we expect European sales volumes to be flat with the prior year. The carryover benefit from higher sales in the wine business is likely to be offset by lackluster demand across other categories. That being said, European first quarter operating profit is projected to be higher year-on-year, primarily driven by the cost savings from the asset optimization program. In North America we expect volumes to be flat. We should see volume growth inline and non-alcoholic beverages while mega beer is likely to trend modestly downward. We do not currently see a significant change in regional profitability levels in 2014. In South America, uncertainty in sales volume and ongoing headwind are likely to dampen profitability and make for a quite difficult first quarter. The trend of softness in beer in the Andean countries is likely to continue. Early signs suggest that volumes in Brazil should be flat to very modestly higher than last year. Taking together though, we expect regional volumes in the first quarter of 2014 to be down mid-single digits. Beyond volume, the region faces several other headwinds in the quarter; the devaluation of real, which at current rates is down approximately 18% from prior year. The accounting reclassification will continue to carry over though for just the first quarter. And finally we will have more furnace repair expense and downtime compared with the very light regional rebuild activity in 2013. Finally let's turn to Asia Pacific, where we see lower year-on-year operating profit in the first quarter. Volume in the first quarter is expected to be lower. Shuttering plants in China will be a clear drag on the top line. Consistent with our broader view on macroeconomic conditions we project continuing softness in the mature markets but we should see continued growth in Southeast Asia. I would remind you that a portion of our Southeast Asia business is a non-consolidated joint venture and hence does not appear in our top line revenue result. Turning to segment profit for the region we expect lower sales volume to be fully offset by structural cost savings. However the region will still face some headwinds. At current exchange rates the Australian dollar is off approximately 15% compared with the first quarter of 2013, impacting translation of our financial performance. In addition per contractual agreements, significant energy inflation in Australia will not be passed through to our customers until the middle of the year. This will result in margin pressure in the first half of the year. Corporate costs should be approximately $25 million. This is a decrease from prior year and is driven by lower pension expense. Considering all of the puts and takes we expect adjusted EPS for the quarter to be approximately in-line with prior year. Now I'll turn the call back over to Al for some final comments.

[Albert P. L. Stroucken:]

Thanks, Steve. Let's turn to slide 10 where you see that our priorities in 2014 remain unchanged. We are building upon our success and delivering on the strategic priorities we laid out at Investor Day a year ago. On the operational side we'll continue to see price increases yet selectively balance this with our desire to maintain our market share. And we expect to preserve the great strides we achieved in mitigating variability in our production. On the financial front we are committed to generating higher free cash flow in 2014 and to allocating capital in the same disciplined way. On the strategic side we are on target with our European asset optimization program. We expect the next demonstrable step up in benefits to manifest in the back half of the year given the phasing of project spending within the year. Although you’ll hear us talk a lot about reducing cost we are also investing in the future. A visible demonstration of that investment is our new innovation center in Perrysburg which actually served as a pilot plant as well an R&D facility. Some scientists and engineers work on new ways to melt and pour glass while others are testing process changes in an operating environment. Our ability to produce sample containers in the pilot plant allows a much faster design to market process. Before opening the lines to your questions let me summarize my thoughts on our outlook for 2014. In short we don't expect much help from the external environment with the exception of a sizeable pension tailwind. We will continue to relentlessly focus on that which we can control, reducing our cost structure and optimizing our assets across the globe, particularly in Europe. And on the commercial side we will capitalize on opportunities where our customers recognize the value we bring to the table and we will continue to balance price volume management. Taken together we fully expect to continue delivering rising cash flow and higher earnings. Thank you and now I'll ask Jeremy to open up the lines for your questions.

[Operator:]

(Operator Instructions). And your first question is from Christopher Manuel from Wells Fargo. Your line is open.

[Christopher D. Manuel:]

Good morning gentlemen and congratulations on good finish to the year despite some difficult market conditions.

[Albert P. L. Stroucken:]

Hi, good morning Chris.

[Christopher D. Manuel:]

Al you said this up pretty well when you kind of talked to where you were in Malaysia and some of your objectives for 2015, in particular we look across most of the segments most of them are at pace or even ahead of pace of where you anticipated being with kind of the notable exception being Europe. As you sit today picking up 2014 and sort of a bridge to your objectives in 2015 how do you feel about meeting those or potentially even some of those segments being better than you expect and in particular do you think that with the rest of restructuring you are doing in Europe you can still kind of get towards that 14%, 15% margin target there?

[Albert P. L. Stroucken:]

Yes I think Chris, what you will recall is that we had an underlying assumption of about two percentage points of volume growth in the two or three year period that we talked about and clearly 2013 varied from that assumption. We didn't see a growth we in fact even a slow decline and that was mainly driven by the boo-ha-ha we had in the first half of the year with regard to the financial uncertainty on the European community and that certainly had an impact and that was not very helpful either. So I do not think that is a continuing trend and we already saw the second half of the year our volume was up approximately 12% year-over-year. So I believe that with the volume component coming back we certainly have a decent chance of getting to the objectives that we had set for Europe as well and I don't see it varying too much. On top of that our activities with regard to the restructuring and with regard to the investments that we’re making in Europe are clearly generating the projected numbers that we have talked about and so in the whole I believe that in Europe we are on the pretty decent track. Going forward clearly this year will determine on how much progress we can make and volume again will be a significant factor in this. You heard Steve talk about the impact of volume on a global basis and Europe being about 40% of our overall sales, clearly a significant component of that would benefit Europe if the growth occurs in Europe.

[Albert P. L. Stroucken:]

Okay that’s helpful. And then my follow-up question is you may be seeing if you could, your band for 2014, 280 to 320 is relatively wide. What might be some of the underlying conditions that would get us to the top end, bottom end, whether it’s volume whether its price, cost et cetera that you are expecting in those range?

[Stephen P. Bramlage:]

Hi, Chris, the range is consistent with the size of the range we used in 2013 and we think that worked relatively well for us. I would say the two primary drivers to either the high or the low end of the range frankly are volume as well as currency and a favorable volume scenario relative to our flattish expectations, obviously benefits us because we get both margin drop through and production benefits and currency would certainly help us quite a bit given the 75% to 80% of the company is generating revenue outside of U.S. Flip side at the lower end of that range why would we be down there because the volume has not come through. It’s deteriorated more than we’re currently anticipating which causes us to make production adjustments or a significant weakening beyond current levels in a couple of the main currencies for us would also migrate us to the lower end of that range.

[Christopher D. Manuel:]

Okay, thank you. Good luck guys.

[Albert P. L. Stroucken:]

Thanks.

[Operator:]

Your next question comes from the line of Mark Wilde from Deutsche Bank. Your line is open.

[Mark Wilde:]

Good morning Steve, good morning Al.

[Albert P. L. Stroucken:]

Good morning.

[Mark Wilde:]

I wondered if you can talk just a little bit on how you see kind of raw material cost are playing out for you in 2014 and how that will line up vis-à-vis increased pricing. I think you mentioned that in Australia you see a little bit of a miss match at least through the first half of the year between kind of natural gas prices and your ability to pass those through.

[Albert P. L. Stroucken:]

Yeah I would say that overall inflation is most probably going to be pretty much in line with what we saw in 2013. Now in some countries currency may add to that inflation because the conversion then of imported raw materials may have a more significant impact than perhaps we had assumed but overall what you are seeing in Australia is because the typical approach for us is to try to pass through increases and in particular increases in energy cost as quickly as possible. In Australia typically the contracts are for a longer period of time so we also have a longer transition period there build into the contract and Steve can perhaps give you some more detail.

[Stephen P. Bramlage:]

Yeah. Mark what I would add specifically on Australia our primary contracts are passing through via price adjustment formulas on July 1st to June 30th cycle so we will adjust in the middle of the year and that will -- it’s a backward looking calculation. So we’ll have a lag because of that really over the course of most of the year but mostly skewed in the first half. Total inflation for 2013 was right around $130 million to $135 million or so and I think right now we’re expecting 125 to 150 of inflation for 2014 so something very-very consistent, about 2.5% on a year-over-year basis and the raw material component of that is not radically different from the total average.

[Mark Wilde:]

Just to be clear, you are assuming right now that kind of price offsets that fully?

[Albert P. L. Stroucken:]

We expect our pricing to offset cost and inflation in the coming year.

[Mark Wilde:]

Okay and this is just a short follow-on Steve. I wondered if you could talk about the impact of those furnace rebuilds down in Latin America on a year-over-year basis and also what quarters we are likely to see them. I would assume it’s mainly second-third quarter?

[Stephen P. Bramlage:]

Yeah, so for us, on a full year basis we will rebuild approximately 14 furnaces, I believe in 2014. That will be a couple more than we had rebuild in 2011 but it will be most acute in South America in the first quarter. So we are doing two significant furnace rebuilds in South America in the first quarter and last year we did none. And so that downtime and the fixed cost, the lack of fixed cost absorption will be most significant for us, probably $5 million or so incremental penalty in South America alone from that in the first quarter.

[Operator:]

Our next question comes from the line of Scott Gaffner with Barclays. Your line is open.

[Scott L. Gaffner:]

Alex I want to go back to your comments on Europe, in response to the first question, you sound a little bit more positive on the outlook for Europe. And maybe you have in your guidance there sales volumes flat, do you still think you can get to the 2% volume over the planning period. What exactly was going on late in 4Q, was that more inventory management by your customers or is this something there that gives you better caution about underlying demand as we move into 2014?

[Albert P. L. Stroucken:]

Well, it’s of course very difficult to get real precise information from the customers but what we observed, what we saw was a friendly start in October and then a flattish November and then a very weak December, in particular the last two weeks. And what I saw happening in Europe was that basically everybody took off the last two weeks because the holidays were in the middle of the weekend, so you have bridge days on Mondays and Fridays and everybody took advantage of the opportunity. And that led them to most probably a lot of the facilities just shutting down rather than keep operating on a skeleton crew or paying a lot of overtime. And then of course it may also have been impacted a little bit by inventory controls. But still it creates a sense of uncertainty when you come out of such a strong volume reduction from what you had expected. So people are a little bit more cautious than predicting what's going to happen in the first quarter. I would say that most probably by February or so we will have a much better picture.

[Scott L. Gaffner:]

Okay. And then just following up on that what did demand trends look like in January in Europe? And then as far as the volume regain in the region are you still gaining back client share in 2014, is that in your assumption today.

[Albert P. L. Stroucken:]

January looks slack compared to the previous year. And a lot of the activities and a lot of the recapture of the wine business took place somewhere around the middle of the year, so we will expect that to continue as we go forward.

[Operator:]

Your next question comes from the line of Ghansham Panjabi from Robert W. Baird. Your line is open.

[Ghansham Panjabi:]

Hey guys, good morning.

[Albert P. L. Stroucken:]

Good morning.

[Stephen P. Bramlage:]

Good morning.

[Ghansham Panjabi:]

Hey Steve, maybe a question for you to start off on the free cash flow guidance just starting with the $339 million you delivered in 2013 versus the $350 million guidance. Most of the variances you kind of outlined on slide eight seem positive. There is a pretty wide range for earnings as well. So why the precision on 350 versus a broader range, if you will?

[Stephen P. Bramlage:]

I would just remind you that we are [talking] approximately in front of -- just for the record. However the primary negative that we will face in 2014 year-over-year is that we are not expecting the same working capital improvement. Working capital generated over a $100 million of cash benefit for us in 2013 and our current expectation is that we will keep it flat. So on a year-over-year basis it’s actually a $100 million headwind for us. And so you are right, most of the other items are positive and they in total will offset a little bit better than the working capital drag that we expect.

[Ghansham Panjabi:]

Okay. And then in terms of what you mentioned in North America already being at your 15% threshold target for ‘15, you mentioned new commercial opportunities. Can you just kind of expand on that?

[Albert P. L. Stroucken:]

Yeah. I think that what we've demonstrated and what we've shown over the last couple of years is that the strategy that we've followed in North America has worked out very well for us. And we've have recently had some insights into competitive margins in this field and they fairly are significantly below ours. And so what we are trying to do is balance our income streams and the profitability profile that we have with individual opportunities that we may come across. And I think we have a good base to start from, we are selling very close to what we can make at this point and time. And so we have an opportunity to look at overall distribution of our business and see where there may be opportunities to perhaps shift one piece of the business, that has not generated as much profitability to another one which has higher opportunity.

[Operator:]

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

[George L. Staphos:]

Thanks, hi, everyone. Good morning congratulations on the year.

[Albert P. L. Stroucken:]

Good morning George.

[George L. Staphos:]

I guess the first question I had just back to Europe in your slide pack you mentioned that you expected to continue growing share and I think the last question, either Scott or Ghansham you mentioned that you still expect that you have some activity within one but it wasn’t specifically delineated in this slide pack. So are you seeing should we takeaway that there has been a bit more competitive action in Europe in the last quarter, perhaps as volumes weaken at the end of the year or is that over thinking it and how do you view competitive activity overall in your relative 2013?

[Albert P. L. Stroucken:]

No, I don’t' think we saw a different trend in the last quarter than we saw throughout the year. I think what generally happened throughout the year it was because of the weakened demand in the European market we saw of course more activity with regard to in particular the smaller competitors trying to place volume. So there is not an unusual pattern and an unusual behavior. And that's also why we are little bit more conservative in our projections for the coming year because if that continues and there is some loose capacity rattling around it and they particularly would be the smaller competitors they will try to regain some volume. But overall we believe we're on track, we're not really shifting significant share. What we're trying to do is make sure that what we lost two years is being recovered and I think we're making good progress in that direction.

[George L. Staphos:]

Okay. Second question totally unrelated, on asbestos, you mentioned that the pack patterns and trends have been as expected. Could you update us where the serious disease cases are as a percentage of the backlog and how trends are, what kind of trends you are seeing either in terms of inflation and things like measles and lung cancer which is behind the $5 million to $10 million decline you are projecting for the foreseeable future? Thank you guys.

[Albert P. L. Stroucken:]

Yeah sure, George. The overall trend that we see a continuing reduction in filings of claims really is consistent across all potential types of diseases, the clearly measles claims are the primary driver of liability and dollars for us. We continue to see decline in filings of measles claims and lung cancer claims. We will disclose in the 10-K specific numbers around the filing. We also continue to see increases in the average age of people filing claims or seeking relief again the company which makes sense obviously since we exited the business in 1958. So it's a very consistent pattern with our expectations of slow but steady progress and that’s across all of the various categories of claims that we deal with.

[Operator:]

Your next question comes from Alex Ovshey with Goldman Sachs. Your line is open.

[Alex Ovshey:]

Good morning Al and Steve.

[Albert P. L. Stroucken:]

Good morning.

[Stephen P. Bramlage:]

Good morning.

[Alex Ovshey:]

If I am looking at price cost spread for '13 is actually a modestly negative, first half is positive and the back half was negative relative to your expectations in '13 did price cost trend inline or the things kind of weaken for you in the back half of '13?

[Albert P. L. Stroucken:]

No, it's pretty much inline and Steve will be able to give you a few more details but on a broad basis what we did see is a pick-up of beer. And the second half of the year which typically has lower pricing points so there is a mix effect and on top of that some of the wine recapture that we did were more conscious price buyers and that had an impact as well. So I think that really is a considerable mix impact that you see in the price mix differential.

[Stephen P. Bramlage:]

I would add to that, you are correct in that the full year negative on that spread was largely attributable to the fourth quarter, was essentially even in the first, a little bit better than even in the first three quarters of the year. And on the price mix the mix did play a much bigger role than it historically has for us in North America, specifically we shipped much more in bulk packages than in what we would consider in cartons and generally the price associated with cartons because of the extra work is at a higher price point, though you get an offset in cost for sales. So more bulk, less cartons is a negative mix item which shows up as lower price for us and that’s not exactly the case. Then into Al’s point in Europe a lot of the line wine specifically that we’re picking up we had protected, previously the very high end high price point business quite well and as we’ve gone back and gained share at generally higher volume, lower price points types of business that drives the average in total down on price.

[Alex Ovshey:]

Okay that will make sense. And then in China when you guys are done with your restructuring there, can you just talk about what the revenue and EBIT profile will look like in China and when do you guys think you’ll wrapped up with the restructuring there?

[Albert P. L. Stroucken:]

I think what we’re trying to do is make sure that what we’re looking at is a business profile that is more geared to the upper range, or quality range and price range of the marketplace and that certainly is going to help our contribution and our profit profile in China even though the volume maybe off considerably. But I would expect that after we’re done with it the overall volume maybe about half or so of what we used to have in China but certainly the results will have improved considerably. Steve perhaps you want to add?

[Stephen P. Bramlage:]

I would just reemphasize you know our returns mix efforts are not in exit from China. We will remain with facilities in the North, in the West, the South and some of those facilities as Al pointed out will be directed at premium segments. Some of those facilities will be aimed at ourselves in helping us manage our supply chain via exports from China and we will continue to meet customer commitments where they have requirements and desires for us to invest alongside them, to provide them the quality that they are looking for and supply as long as it meets our capital return expectations.

[Operator:]

Your next question comes from the line of Philip Ng from Jefferies & Co. Your line is open.

[Philip Ng:]

Good morning guys. Just on CapEx came in about $20 million higher than what you initially guided and for ’14 you are expecting that to step up a bit as well. Are you spending more because of costs associated with the restructuring effort or you are actually just ramping up the process more quicker than anticipated?

[Albert P. L. Stroucken:]

Well, let me step back for a second and remind you the way we think about it is that the total investment in the business for us is a combination of both capital spending and restructuring and we have said the total investment that we expect to make over the three year cycle for our investor day guidance is essentially equivalent to depreciation and amortization together over the core and that’s this $425 million to $450 million range. As 2013 evolved it became clear to us that we’re going to spend a little bit less on the restructuring side of the ledger than we had thought at the beginning of the year largely due to better social cost outcomes and some of the activities we took in Europe and that allowed us to essentially move some of that investment into the realm of CapEx. And going forward into 2014 it’s really a continuation of that. In general the structuring requirements related to severance redundancy et cetera continue to be modestly less than we had anticipated and so we’ll have the opportunity to reallocate that to more traditional capital spending but again total reinvestment in the business is going to be right at that 100% of DNA level which was the point all along.

[Philip Ng:]

Got you. And switching gears to North America I mean demand was pretty strong in Q4. I know there were some easy comparisons but from the optimism you guys were discussing earlier in the call, I am surprised that you are expecting volumes to be flattish. Just want to get color on that front and how are you thinking about the overall marketplaces you know the transaction marketplace getting pushed out a bit is that an opportunity for you to pick up some market share down the road?

[Albert P. L. Stroucken:]

Well in believe as far as the fourth quarter is concerned I am always reluctant to take one quarter and project it for the entire year because we have seen quite a bit of variation in the past from quarter-to-quarter and from month-to-month. So I think we need a few more quarters under our belt before we can really make a comment about level we are seeing a trend that is going to be strong and is going to be consistent as we go forward. And Steve perhaps you have a comment on the overall market conditions as far as I am concerned are pretty stable, pretty solid. Now there is uncertainty of course on who is going to own what at the end of this acquisition process, that's taking place in the marketplace but I don't think it's impacting the market, at least I haven't seen any impact on the market at this point in time, because overall I believe supply demand is pretty well balanced in the North American theatre.

[Stephen P. Bramlage:]

Yeah we continue certainly from our own perspective as Al mentioned earlier we’re largely full with the production base that we have now. So there is limited ability to have large swings up with our current footprint. We think that's generally the state of most of the market and as for the transaction is on the table and subject to approval we'll give you the same answer we have given for the last five quarters we have been asked which is we know what you know in terms of what we read and what those various parties publish, et cetera. And so they seem to be quite focused on trying to get that over the finished line and as a result commercially there really hasn't been much of the impact one way or the other that we would see.

[Albert P. L. Stroucken:]

I think one other comment that I would like to make with regard to volume and volume opportunity in North America is similar to what we have been talking to you about in Brazil in the past, North America, as Steve reaffirmed is pretty full at this point in time. So whatever we pick up in growth, we will have to source from other facilities outside of the region and that is not necessarily going to add a lot of contribution for North America as the selling region but it clearly allows us to support our customers in their growth and then when the volume is substantive enough than we can make an investment decision as we go forward.

[Operator:]

Your next question comes from Al Kabili from Macquarie Research. Your line is open.

[Albert T. Kabili:]

Hi. Thanks. Good morning. Just I wanted to clarify the outlook in South America on volumes in the first quarter you are looking for mid-single-digit volume decline, and for the year you are looking for volumes to be up and I am just wondering if you could clarify what you are seeing and the visibility and the cadence of the volume progression there?

[Albert P. L. Stroucken:]

Yes I believe if you recall we already mentioned last year in the first quarter we had strong growth and we also had strong growth in the fourth quarter but then we had a dramatic drop off in the second and the third quarter. At this point in time, the main driver of the downside is really the Andean region and there we are dependent very heavily on when they would make the decision to order their returnable containers. And we have no clarity as this point in time yet as to what the pattern is going to be, whether they were going to be as reluctant as they were last year in placing orders or whether they are going to now regional float. Because if I look at the overall demand of beer in the Andean region from the customers of ours that publicly report the data is fairly flattish as far as beer volume is concerned. So certainly not indicative of the volume trends that we saw supplying the beer industry. So I would expect that there may be an opportunity that as soon as these customers start to decide to renew the float then we may have to relook at the numbers. But at this point in time it surely doesn't look like the North Andean or the Andean region is going to outperform last year. Brazil on the other hand we expect to be rather flattish perhaps slightly up as far as volume is concerned.

[Albert T. Kabili:]

Okay. That's very helpful. Thanks Al and then just the follow up is the additional restructuring and cost savings items that you highlighted with the China and Europe phase two, et cetera. Can you just help us think about what aggregate cost savings is from that and how that ramps up in '14 or is much of that benefit really going to kick in ' 15 more?

[Stephen P. Bramlage:]

Certainly on the European side Al it is fully, these actions are fully incorporated in our asset optimization program within Europe. So the guidance that we've given around exiting 2015 at an $80 million cost run rate improvement and I think we exited 2013 at $40 million and will record $25 million in year-over-year incremental this year. That is fully reflective of the actions that we announced so they will have no change from the guidance on those sort of things. The Australian component it's a single furnace that was always part of the $50 million cash spend that we had announced as part of that program and that restructuring activity is clearly driven bottom line benefit in that region and so we will continue as we said we will continue margin expansion in 2014 because of that activity. The South American activity, which was a flat blast furnace which is a very small business for us that we chose to exit, the impact there is not material to the overall result and it's incorporated in the guidance that we've given. And then finally on the Chinese stuff as Al mentioned earlier the actions we are taking in China are very consistent with what we've talked about around driving better returns on the invested capital and a good portion of the last couple of years of improvement in Asia Pacific is also due to simply exiting unprofitable or poorly returning business in China.

[Operator:]

And our next question comes from Adam Josephson from KeyBanc Capital Markets. Your line is open.

[Adam J. Josephson:]

Thanks good morning everyone.

[Albert P. L. Stroucken:]

Good morning.

[Adam J. Josephson:]

Steve quick question on the structural cost reduction program. Can you quantify the savings you expect to generate from that program this year and next year? I know you talked about being a $75 million program over the course of the program?

[Stephen P. Bramlage:]

Yeah so this is separate from the European asset optimization program. We would expect to have a full $75 million run rate over the three year period of the strategic plan, the three year I day guidance that we've given. So it's going to be roughly ratable. So I would expect somewhere in the $20 million to $25 million incremental range on a global basis because of the global program in 2014.

[Adam J. Josephson:]

All right, perfect. And then just on Brazil Al can you talk about the trends you are seeing. I know you said you expected to be pretty flat in the first quarter but just talk about the market as whole and the shift between returnables and cans?

[Albert P. L. Stroucken:]

Yeah I would say Brazil clearly has gone through some struggles overall and demand profile for consumer products in the last year or so and you've seen slight a bit of variation of course in our sales as well. If I look at beer in Brazil I think total production volumes in Brazil were off about 2%, for beer production. And glass has been reported by companies that track this information by approximately 6% or so. Yet our sales in the beer category were up 1% in Brazil. And that difference was even more pronounced in the fourth quarter. So I believe what we are seeing is that the Brazilian brewers are still trying to find the sweet spot with regard to their pricing and just recently you've seen quite a bit of initiative on the part of the largest brewers in Brazil to run campaigns with a significantly reduced price to generate additional demand to generate additional volume to perhaps counteract some of the trends that they saw last year. So I would expect that overall and particularly of course most probably a little bit driven also by preparations for the World Cup, overall beer production is going to be up in the first half of the year. Whether that then continues in the second half is really the uncertainty that we do not have a clear picture on at this point and time.

[Operator:]

Your next question comes from Chip Dillon with Vertical Research. Your line is open.

[Chip A. Dillon:]

Yes and good morning gentlemen. First question has to do with just thinking about the next couple of years in your free cash flow I know it was mentioned that your net-debt to EBITDA ratio is now within the range or in fact well in the range what your target should we still see a sort of this 90 to 10 split or do you think it might start to go more towards 50-50 and may be as an add on to that is your sort of a magic level that you think the annualized asbestos charge needs to get to before you start to entertain a dividend?

[Albert P. L. Stroucken:]

Let me take a shot at that, Chip. The leverage ratio currently is in the middle of the range that we target about 2.6, we are targeting two to three. So certainly for 2014 I would expect no change whatsoever in our capital allocation. So 90%, the vast majority of the cash we generate will go to debt reduction. We will spend enough on share repurchases to mop up the dilution, so that the share count doesn’t creep on us. We continue to believe at the current leverage level not only does the incremental financial flexibility help the organization but we actually believe from a value accretion standpoint the equity holders de-leveraging at this point is still the best thing we can do in terms of attributing value to them. So certainly for 2014 it’s a 90-10 as obviously we will be closer to the low end of that range at the end of the year and moving into 2015, I would expect once we hit that number that, that ratio will change more to the benefit of share repurchase than last de-leveraging because we simply won’t need as much but it’s too early for us to try to being prescriptive in exactly how we are going to end up changing that range. And then as it relates to dividends, there is no doubt at the current level of asbestos spending in the tail that we believe we continue to face with some substance is the single biggest driver of the decision not to have a dividend from the organization’s standpoint. And it would have to be significantly lower than it is today, I think for us to have a higher level of comfort with that. In the short term cash used in share repurchase is a much more effective tool for us to manage the overall capital structure and the asbestos litigation.

[Operator:]

And your final question comes from the line of Alton Stump with Northcoast Research. Your line is open.

[Alton Stump:]

Good morning.

[Albert P. L. Stroucken:]

Morning.

[Alton Stump:]

Just a quick question on the European pricing front. Any comments so far on how the competitive environment is reacting whether or not you are still seeing fully rational behavior year-to-date?

[Albert P. L. Stroucken:]

Well I believe our observations are also a little bit confirmed by what publicly is reported by the companies that give backdrop and background on their own development of what we are seeing is a basically in most cases the large competitors are just around staying in line, staying in line with the overall inflation trend. And we see that behavior also reflected in the marketplace. So while Europe is a bit different from the rest of the regions there is -- there the large ones are not the ones in the marketplace, there are many small ones and their behavior tends to be a little bit more ad hoc and erratic at times. And we have to react to those situations as well. So I believe overall I have not seen a tremendous trend change in Europe in the last two or three years. As demand has weakened due to the general economic demand profiles and situation clearly pricing activity has increased a bit but in most cases people have been able to cover their cost inflation quite well.

[David Johnson:]

Thank you everyone. That concludes our fourth quarter earnings conference call. Please note that our first quarter 2014 conference call is currently scheduled for Wednesday, April 30, 2014 at 8 AM Eastern time. We appreciate your interest in O-I and remember that glass in infinitely recyclable and always the most sustainable packaging choice. We encourage you to choose glass for all your food and beverage needs. Thank you.

[Operator:]

And this concludes today's conference call. You may now disconnect.