Q2 2019 Earnings Call

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Hi, good morning, as anyone to go in for ins you're going through June .

Oh in the Illinois earnings call.

And keeping them the spelling and renamed please.

[noise].

Kevin Love from K E V I M.

L.A.F.

Oh, Hey, Andy.

Just to confirm that's L. O. Your last name is L.A.F. Oh, a M M E.

Hey, F.L.A.M. and <unk>.

Okay. Thank you think.

Your company named Kevin.

Era AI.

Okay.

And your email.

Evan at Air at Dotcom.

Thank you I'll tell you now.

Takeout and continuous continued business portfolio optimization.

[noise] [noise] staking base all into consideration we are adjusting the full year financial outlook. We now expect full year 2019 earnings between $2.40 and thoughts on 55 cents and adjusted free cash flow of at least $260 million.

John and I will expand on these an order topics over the course of our prepared comments.

Lets advance to slide four.

We are fully committed to I pod that ROI has been diligently pursuing since 2016.

But we also recognize that there is need for improvement.

The foundation of our strategy includes we're all kind of sponsoring across attractive profitable segments and geographies ongoing product system cost and organizational simplification programs to drive sustainable the structural cost improvement rate through innovation, leveraging magma that will enable new opportunities.

Balanced capital allocation, enabling artist strategy, reducing risk and rewarding shareholders and proceeds from the NOI to win in the Green economy, given glass on parallel sustainable characteristics.

As illustrated on the right Hawaii adjusted earnings is expected to improve about 35% to 40% in constant currency when comparing 2015 to the updated 2019 outlook.

Our strategy has been working you will see the benefits of growth and expansion as well as cost reduction efforts importantly, we have improved selling prices given favorable overall market conditions.

With that said.

That are clear headwinds preventing a much stronger earnings improvement is story.

Organic sales volume have decline in the U.S. due to the Mega trends.

Commissioning new capacity for future growth has added more cost than originally anticipated.

Likewise, changing mix has added complexity to our business.

Why a fresher pathway.

This is a very positive long term development, let me provide color.

We think the U.S., we have partially replace the mega year decline with new business in growing categories.

In Europe .

We are deemphasizing lower margin food and wine categories in favor of more attractive premium beer and spirits business.

While the Onboarding of new mix is positive from a volume and margin perspective, it is creating more operational complexity that requires greater system flexibility.

Europe has made good progress and makes has helped improve margins, but there are still opportunities for improvement.

The U.S. is facing a bigger challenge given the level and pace of mixed change due to the mega year decline.

Through time, we ambition Maximus will dramatically enhance collectability.

Clearly these factors are putting pressure on to ace results and there are real opportunities to accelerate performance, which I will discuss on the next slide.

On slide five we outline the carbon and additional steps we are taking to us internally performance on the left you will see some of the value creation elements currently in flight.

There has been a lot of ground work, a stylist for future organic and inorganic growth.

We have secured roughly 1 million tons of incremental volume that should yield eight of the targeted 10% growth on their painting, our three year growth objective.

In fact, we expect total sales volume across the line network should be up between four and 5% in 2019.

This includes realized organic growth strategic JV growth and acquire new businesses.

The support of the organic components, we are commissioning over 300000 tons of incremental capacity is planning 2019 and 2020.

We are confident about the future growth.

On the cost side, our data products system cost program is progressing as expected.

A number of initiatives are helping to simplify the organization, making it more agile and cost effective.

This includes the voluntary separation exercise undertaken in North America.

Expansion of our global shared service centers as well as organization restructuring across all regions.

We continue to advance our magma initiative and this new production process is progressing well.

As I mentioned, we have began to produce commercial quality glass from our first Mac migration.

Likewise, we are planning the next Magna line in Europe at one of our most technically accomplished and flexible plans.

Reduction Willis starting the second half of two any plenty not long after the year on quarter Spansion project is completed.

We are also pursuing a balanced capital allocation strategy.

Recent actions, including besting improve our key growth initiatives like brownfield expansions in Colombia, and France, as we're lapping markman.

Likewise, we net initiated a dividend and rate refinance our debt to optimize their balance sheet.

Tactical divestiture will free up cash to reduce debt and focus on core operations.

We currently expect progress on divestitures will be announced later in 2019.

We believe this strategy and these actions are exactly the right areas of focus however, it will take some time to fully realize their value. Meanwhile, our current performance is not acceptable.

As you see on the right. We are diligently focused on additional actions to unlock value.

First we are initiating a cost reduction initiative that will be supported by a third party consultant.

While PSC is proceeding well, we intend to almonds is worried by accelerating key productivity opportunities across all functions and radiance.

Supported by Goldman Sachs, we have been actively working on a strategic review of our business portfolio.

Through this effort, we are seeking opportunities to be capitalized deviousness the de risk the balance sheet and focus on the core businesses and best aligned with the interest of our strategic customers and shareholders.

As a result, we anticipate additional targeted divestitures of all of the $400 million to $500 million of proceeds we outlined during the last Investor day.

And we are turning our focus on cash generation.

In addition to tactical divestitures, we are optimizing capital expenditures and prioritizing inventory management as well as debt free auction.

All of these additional activities our key objectives for ice leadership team.

I will now move to slide six to east coast regional performance and outlook.

Let's start with the Americas.

Second quarter profits were down from the prior year as higher operating costs more than offset the benefit of favorable price spread and sales volume.

Volumes improve about 1% from last year with notable strength coming from premium beer foot and the spirits.

Looking geographically the Andean market improved validated and both Brazil, and Mexico were up mid single digits.

These follows new capacity in Colombia, and Brazil in the first half of the year and better manufacturing performance in Mexico that supported higher shipments.

As expected sales volumes were down in the U.S. given continued pressure on mega year.

Higher operating costs reflected incremental costs given challenges commissioning a new foreign is at one of the Jvs.

Likewise that region in fewer unplanned downtime in the U.S. due to flooding and weather related issues.

These plans have now recover from these events.

We now expect full year 2019 results we've lacked the prior year for the Americas earnings should benefit from the addition of Nuevo now constructive pricing and sales volume growth, which will be weighted to the fourth quarter as we onboard new contracted business.

However.

Cost are being impacted by greater greater complexity and commissioning new capacity.

Shifting gears to Europe segment profit was down from the prior year, but essentially flat year over year, excluding the timing of an energy credit.

Higher selling prices unfavorable mix offset cost input inflation lower sales volume and unfavorable FX.

Sales volumes were down about 2% in the quarter.

April shipments were up low single digits may improve mid single digits, but the situation of roughly change in June when cheapness in decline almost 10%, mostly reflecting extreme weather conditions and is lower Chinese demand for French wine.

Consumption patterns, clearly reflected the impact of on seasonal weather.

According to Nielsen consumer data via sales were down 16% in France, and 10% in Italy in May.

During June day decline moderated from 3% and 5% respectively.

In turn those trends appear to have triggered eight an inventory correction in the supply chain, resulting in the chart decline we saw in June .

Regarding the outlook, we expect higher year over year segment income out of Europe .

Favorable price and mix as well as solid cost performance will more than offset the slightly lower sales volumes.

While volumes will lag the prior year, we expect modest growth in the third quarter.

Finally.

Segment profit was flat in Asia Pacific as higher sales volume offset cost inflation.

Selling prices were stable with the prior year as price increases typically go into effect. The studied in July across the region.

Sales volume was up 7%, reflecting the strong growth in China, following new capacity, our issuance last year and earlier this year.

Operating costs were about flat with the prior year reduction levels have increased across the region, following peaking units and activity last year.

However, we did pull additional maintenance activity into the second quarter.

We get our performance has been impacted by higher than normal levels of maintenance like critical for asset of stability. This activity can be costly and disruptive.

Over the past 18 months, 60% of the region's furnaces have undergone significant maintenance.

This is unusually high compared to maintenance activity that normally impacts less than 10% of foreigners is in a given year.

As we look to the full year, we expect Asia Pacific results will be up from the prior year with higher sales and production volume following the conclusion of heavy rebuild activity.

Now, let me turn the call over to John who will review the numbers and re raise expectations.

Thanks, Andreas and good morning, everyone I will start with a review of our second quarter performance on slide seven.

As we announced second quarter adjusted EPS was 69 cents, which fell short of the guidance range of 75 to 80 cents. There were three key factors that totaled about nine cents per share that pressured earnings.

Building on honors his earlier comments sales volumes were flat year over year compared to our expectation of 2.5% growth for the period.

This impacted results by six cents compared to our guidance.

Organic growth was about 0.5% in April and improved to 2.5% in may.

This was consistent with our expectations heading into the quarter.

However June was down about 3% from the prior year due to extreme weather in the EU and lower demand a French wine for China.

As a result overall volumes were up about 0.1% or essentially flat.

We incurred about two cents of additional cost to commission a furnace at one of the Jvs in the Americas structural issues that needed to be addressed delayed the start up a few weeks, resulting in higher engineering and logistics costs.

We were also impacted one cent due to temporary unplanned downtime given flooding and other weather related disruption in Texas and Oklahoma later in the quarter.

Looking at the chart second quarter adjusted EPS of 69 cents is a decline from 77 cents in the prior year period.

To better understand core operating performance, we have illustrated the impact of changes in currency as well as its discrete items, which include the timing of an energy credit that was earned in the second quarter of 2018, but recorded in the first quarter of 2019.

Adjusted for these items prior year earnings are about 70 cents for comparative purposes.

From that base, you can see that price more than offset cost inflation bidding benefiting earnings by seven cents. This was in line with our expense expectations, Despite higher energy inflation in Mexico and Brazil.

Volumes were about flat with NEC mix impacting results by about one cents.

Operating costs were up nine cents from the prior year. This included the extra costs related to commissioning new capacity one of the Jvs and weather related downtime in the Americas that I discussed.

Likewise higher cost reflect anticipated commissioning costs across our network as well as the impact of increased complexity.

Retained corporate costs were two cents favorable reflecting the organization simplification actions that we completed in may as well as adjustments to management incentives.

Finally, net interest expense was up about two cents, reflecting higher borrowing levels compared to the same period last year, which was offset by lower share count.

Moving to slide eight we're revising our full year 2019 outlook and guidance. We now expect adjusted EPS of between $2 and 40 and $2.55 and adjusted free cash flow will be at least $260 million.

Understanding that this is a sizable adjustment let me spend a few minutes walking through our updated outlook.

I want to discuss our revised earnings outlook from two angles first our outlook compared to our original guidance and second compared to prior year results.

Versus the original outlook of $3 per share current guidance reflects a few factors.

First we have adjusted our outlook by nine cents to reflect July currency rates for the balance of the year.

Also we are revising our full year sales volume growth outlook.

We now expect sales volume will grow this year up to 0.5% compared to our original guidance of 1.5% growth.

As expected new contracted businesses, adding growth over the course of 2019, but there are a few headwinds.

As Andres discussed we have a little overhang from softer beer and wine demand in Europe .

However, most of the adjustment in our outlook pertains to a revised growth outlook for in ABS in the Americas based upon revised customer projections.

Overall, lower volume growth impacts or outlook by around 20 cents.

We have also halted further share repurchases for the balance of the year as proceeds from future divestitures will primarily be used to reduce debt.

Original guidance included five cents of benefit from incremental share repurchases.

Likewise, we are factoring in a higher effective tax rate to reflect changes in regional earnings mix that could impact earnings by around 10 cents over the course of the second half of the year.

Finally results will also reflect additional costs due to increased mix can plus complexity, mostly in the Americas. This could impact results by around 10 cents more or less.

These adjustments result in our revised outlook.

Now I will shift to a comparison ever updated guidance to prior year's results, which is illustrated on the chart on the right.

Our full year outlook is a decline from $2.72 in the prior year.

Currency is a headwind and results during the first half decline from the prior year.

Furthermore earnings during the second half of 2018 benefited from discrete items that will not repeat this year.

This includes the sale of Seo two credits and the resolution of a tax matter in Brazil.

The subtotal of $2 of 35 cents reflects the impact of these items.

Overall, our outlook illustrates an improvement from this level.

Looking at the second half of the year, we expect favorable spread and a little over 1% volume growth will benefit earnings along with new wave of financial accretion and total system cost savings.

These tailwinds will be partially offset by the impact of increased complexity as well as a higher effective tax rate.

Regarding cash flow, we now expected adjusted free cash flow of at least $260 million in 2019.

This incorporates our revised outlook on earnings as well as a reduction in capex to between 450 and $475 million compared to our prior estimate of around $500 million.

Working capital will also reflect lower sales volume growth expectations and shifting of this growth more into the second half of the year.

It's Andreas mentioned, we will prioritize cash generation for the balance of the year and beyond.

Shifting to the third quarter outlook on slide nine we expect earnings of between 60 and 65 cents.

A reconciliation from prior year results in the current outlook is illustrated below.

As you can see our reported earnings of 75 cents in the third quarter of 2018 from their FX should be a slight tailwind, but the prior year benefit of the discrete items I just mentioned will not repeat in 2019.

Adjusted for these items comparable prior year earnings were 63 cents.

From that base the trends that we noted for the second half of the year applied to the third quarter earnings will benefit from favorable price spread and sales volume growth and the way the finale will be accretive to earnings and TSC should generate savings. These benefits will be mostly offset by the impact of increased complexity as well as a higher tax rate.

This results in our outlook of 60 to 65 cents in the third quarter.

Before I turn it back to Andreas let me spend a moment discussing capital allocation as you can see on slide 10 capital allocation priorities include funding our strategy de risking the balance sheet and returning value to shareholders.

As illustrated on chart, we have employed leveraged to enable key elements of our strategy, including acquisitions going forward, we will prioritize debt reduction which includes achieving our leverage.

Ratio target of 3.0 or lower by the end of 2021.

Therefore, we will be selective in funding key strategic projects focusing on the highest return initiatives that enable our growth agenda and cost takeout efforts.

And organic growth is now being deemphasized posts and waiver for now.

As part of de risking the balance sheet. We will also reduce legacy liabilities, we expect to reduce as best as below $250 million by the end of 2021.

Divestiture of operations that are not quarter ally and our strategic customers are also important to decapitalize the business and further support debt reduction.

As Andres mentioned, we are undertaking a holistic review of our portfolio, which will likely increase the scope of divestitures.

Finally, we in turn DIR and intend to return value to shareholders. In 2019, we initiated a dividend and two we have repurchased about $200 million of stock over the past year with about $500 million of authorization outstanding.

While some of the proceeds on divestitures will likely be used for additional share repurchases are clear bias is towards debt reduction.

Likewise additional repurchases will be minimal until debt levels are closer to the three times leverage target.

Now back to Andreas to conclude our prepared remarks.

Thanks, John .

Let me wrap up with just a few comments.

First we appreciate that the second quarter performance and adjustments to our full year outlook are disappointing.

We tool are disappointing.

Building on the overall favorable trend since 2015, we believe we are pursuing the right strategy to improve earnings and create long term shareholder value.

This includes monetizing the growing sales pipeline executing costs, we often entities on developing breakthrough technologies like Mike.

However, we need to generate performance to deliver shareholder value.

In addition to our current strategic plan, we are initiating a prominent to launch their cost reduction efforts supported by an outside consultant.

Likewise, we continue a strategic review of our business portfolio efforts supported by government sites, which are strategic advice.

This concludes our prepared remarks, and we now welcome your questions.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

We please ask that you limit yourself to one question.

If you would like to ask additional questions. Please press star one to be entered back into the queue.

We'll pause for just one moment compiled acuity roster.

Okay.

And your first question comes from the line of Chip Dillon.

With vertical research.

Hi, good morning.

Good morning.

Thanks for the details first question.

They are kind of related but one is you mentioned.

We noticed some working capital or the receivables I am sorry in particular seem to go up quite a bit.

And I don't we'll see how that would be related to a slowdown in orders in June but if you could just talk a little bit about what you think working capital.

Why it's going to be a big use this year.

Especially if you are.

Not selling as much and then secondly, the buyback.

Ceasing the buyback regardless of the stock price is that something you are lenders asked you to do or.

Why would you just.

You know put a mark on your back and say look this is kind of where the stock goes we're we're not going to be involved in the stock at least for the next it looks like the next couple of years.

Hey, Jeff. This this is John let me, let me address a couple of those points. Okay. First of all I think you're referring to the change in the.

Receivables that you see on the free cash flow scheduled for the first half of the year.

Indeed, if you take a look historically our free cash flow is a use of cash in the first half given the seasonality of our business and typically flips around in the back half of the year, but you will see on that schedule debt.

Working capital was a more a larger use of cash in the first half than you would see historically and that has that's linked to the refinancing that we did right at the end of the third quarter as we previously communicated we refinanced our bank credit agreement.

And Anda.

We we refinanced our bank credit agreement, we had extra liquidity that came in towards the end of the quarter.

And it made economical sense not to engage in the level of factoring that we typically do even though thats very economical for the business. There was no need to have the extra financing charges.

Right and beginning of July we refinanced our large piece of our largest and or at least most expensive debt that we have over in Europe and that was a subsequent transaction that happened. So what you're seeing from that is not going to be something that's going to impact the full year. It was just a transitory item over the course of the quarter.

As far as it relates to the full year.

And the adjustment that we made to our.

Free cash flow guidance, indeed that is coming down most of that decrease is a function of the earnings change that we are guiding to.

But we did indicate that working capital will will be impacted in that regard to there's two pieces to that one is that the inventory reduction that we were anticipating and targeting for the full year in the original guidance will likely not be to that level given the lower sales volume in the back half in the in the desire to run to cash and not build inventory thats not necessary and the other piece is is that we are seeing a change in earnings mix and as more of our growth is in the Latin America countries, where you typically have longer terms.

And you see in other parts of the business and so that is affecting the receivable balance over the course of the year.

As far as.

The share buyback process, we're halting it for the time being now we had indicated as we look towards divestitures is very likely some of that will be used to do in that regard thats very similar to what we had said earlier in the year.

Just that we had also anticipated that the divestitures will be later in 2019 and not in that book of time that we're in right now so we're not saying that we will not do any at all but they will be more aligned with the divestiture activity and probably be lesser in scope than maybe what was originally intended.

Thanks.

And your next question comes from the line of George Staphos from Bank of America.

Bank of America Merrill Lynch.

Hi, Thanks, everyone.

Thanks for the details good morning.

I want to and good morning under so I wanted to.

Get into a two part question I will turn it over when we look at what you said or.

It sounds like Europe will still be up in earnings for this year versus last year. Despite the volume issues and similarly, if I heard you correctly and please correct me if I'm wrong, it sounds like Americas will be down.

Obviously because of all the factors that you're Numerated is there a way that you can provide a bit more of a bridge or sizing if I, if I got that correctly.

In terms of what's going on there and then.

Related to the volume growth that you'd been expecting you always had called out the potential for complexity.

In terms of bringing in this new capacity to impair your result.

I know you've been in the seat for number of years and one of the things that you were trying to bring to bear at Owens, Illinois was much more operational.

Consistency and so should we expect that a why can continue down along the path that you had established despite this hiccup and what in particular do you think went wrong with bringing on the capacity.

This quarter. Thank you guys.

Hi, Hey, Georgia. This is John I'll start that address your first point is to give you. Some dimensioning of of the impact of the adjustments that we have indeed, the clear majority, probably 75% or more of the adjustment that we're talking about is occurring in the Americas.

We're seeing probably more of the FX hit hitting the Americas with the Latin American currencies.

And probably 75 or 80% of the volume adjustments were talking about pertained to the in a b revisions that we had indicated in our prepared comments.

Most of the complexity that we're seeing even though complexities hitting both Europe and the us in the Americas more of the more of that complexity is more expensive in the U.S.

And so that is weighted over two to the Americas marketplace. So thats the major elements that are going on there.

If we exclude that transferred to the IVC JB.

Now.

The we have the.

The number of equity, though I think we have affected by the change in mix is then we have pending Europe pending us.

Now the led that complexity to us.

Asking me. Thank these five in euro five into us and let the complexity that is it takes us to change line configuration soda operating partners in our view, a factory or customer required and requirements or product requirements.

Now, it's taking us longer than we expected to address that is difficult to get there I mean, how long it will take for any given factory Philips or complexity and there is no exact science in how we do that however, we need to we know how to address it any fact, we've done it successfully in the past.

I can recall right at this 0.3 examples in which we were able to improve the precision of factories with high complexity on a year on year comparison between 500 basis points in gross profit to 5200 basis points. So we can really it's now we're organizing ourselves to be able to do it. So we're reassigning resources.

At the leadership level and experts to focus solely so suddenly in this effort. So we can we can improve faster we're mobilizing enterprise resources through our larger to stand that we've done it over the last three years to support those facilities and we're elevating accountability levels.

We are also implementing our yes in July which is a standalone word system. We have 89 factories now some of them are to be selective and factories on the starting there. Some of them are older facilities and we are going to accelerate the implementation of that program.

And with that we expect to see improvement as we exit the year down into their next year and our company and we're going to be able to overcome base. So this is a temporary situation.

Now we will continue down the same path that we were before I think while we are facing these headwinds coming from complexity. We're also seeing the benefits in the margin in Europe and their volume in the us on when we get these complected could we saw both ways, which we will.

We're going to be able to enjoy even higher margins in both places.

And your next question comes from the line of Mark Williams with BMO capital markets.

Okay.

Mark.

And Mark your line is open.

Hi, its actually Enogen standing in for Mark.

My question is I don't mean to harp on this complexity issue, but it occurred to us that the megabeer declines have been going on for a while and we've we've been talking about increasing complexity generally in packaging for a while.

Was there anything specific that happened this quarter or do you just need some sort of tipping point or just some more details in general on that issue would be appreciated.

Well thanks for the question you're right we've been.

Increasing or changing mix since we started this process in 2016, we have been doing it successfully we've been adding complexity to factories and then improving the performance of those factories and enjoying the margin benefit are there volume benefit of that.

Now at this point in time this date, taking longer for this set of factories, we have impacted by complexity to aid them, we already suspected.

Now.

This impact the noting given factory advance on the magnitude of the change we make and in some cases they need to give you. An example, there is a factory in Europe for two weeks, we changed the mix.

In one line third quarter for seven consecutive quarters. We already finished so now we are focused on driving that performance happening that facility and he will come up.

But then complexity. These items are related to a speed of that changing mix.

Is related to Italian 70 scales.

Well in any given factory.

He said forget it related to the materiality of this kind of prices on practices into factories and the enterprise resources that we allocate tool.

Health every fact, putting that transition.

So it's taken us longer right now is the process, we've been going through US you mentioned I just mentioned the examples before it will be very successful cases, and we have more so it is just a timing issue. We're going to go through these we are going to be able to solve it and we expect that as we go into it.

At the end of this year into the following year, we're going to start seeing the positive effects of the complexity reduction and the ability to perform on the under the new circumstances in every factor.

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

Andreas you called out the impact of lower shipments of French wine to China in your prepared comments.

That's giving you pause or or is it.

Is that not the case for a while at this point thanks, so much.

Okay. Thank you so the the situation with the French wine, which is typically worldwide.

It is.

[noise] coming down in volume in China, and that's a consequence self consumption.

Slow down in China, what actually is happening for every industry. You are you hearing the news now it is related to that they trade issues and pensions indirectly because thats influencing the activity economic activity in China.

So we're seeing that decline.

When it comes to Mexico, we are not seeing a major change in demand in fact, we had a good quarter. We're expecting that we'll have a let's say low to mid single digit growth for the year in Mexico now we have.

The most significant change in sales volume, we have right now.

We have some volume that was revised down in Mexico, because we got revised projections for cod from customers that is related to fast growing products that are growing at high single digits or low double digits that had to hire predictions from customers before and as a consequence, our consequence out projections that we are revising down but those products are products that are all exported to the U.S. has final products. So I'm not related to the local economy in Mexico.

I would just add two things I mean, if you take a look at the other markets for example in the Americas and spirits you referenced I mean, we have seen.

Solid low to mid single digits growth in those categories and then we continue from the projections that were working with our customers to have similar type of outlook and as and just in Mexico. We I think it was in even in the prepared remarks, we were up mid single digits on Mexico doesn't last month, so while there's other moving parts its still a growing marketplace and in any Mexico, specifically, we've been able to support incremental volumes, because what productivity improvement that is giving us incremental out.

Yeah.

And your next question comes from the line of Gabe Haiti with Wells Fargo Securities.

Good morning, gentlemen, I'm, sorry, I was.

Curious Andreas perhaps if you could comment at all about July trends.

Maybe specifically recovering in Europe at all as well as any change in your thought process around the wine harvest for this year that will be for next year.

And then maybe if you could address what the 20 cents decline I think that you talked about associated with the revised volume outlook. If there is a component within there that's lower production.

Taking a point off of growth you're not going be producing at the same levels and again just break out maybe what that might be.

Okay, well thanks for the question so I'll take the first part.

In July we are seeing a rebound in beer in Europe , So while we face data in June .

In beer demand and Thats all related to use weather condition and while we are seeing in July is that we won't know that so we're going to watch this closely obviously.

It impacted our total forecast.

Until we can know exactly David vs dental days and for how long it will be but now we're seeing the real honest I mention and we'll watch closely and see if we need to make any adjustment as a result of that.

Now they have wine harvest up so they won in 2000.

18 at was very good I. His influence we are living with your wind. This year why locally is going to strong in Italy is very strong for example.

The the harvest this year.

Should be okay. The.

That impact the year, a das exactly the opposite for the wind so we need to wait for news because that's not reported publicly right now but.

At this point, we've done the spec that issue here.

Decline on the the volume outlook.

Indeed, we are anticipating in the back half of the year of adjusting production levels to accommodate the change in the sales volume outlook as we had indicated in the prepared comments, we want to really focus on cash run for cash we don't want to build up unnecessary inventories are just as a general sensitivity is it's about a 50 50 split in that 20 cents.

The impact of reduced sales volume in the contribution from that and then the impact from.

The production side of the fixed cost coverage. So you can kind of use that as a baseline.

Okay.

And your next question comes from the line of Kyle White with Deutsche Bank.

Hi, good morning, Thanks for all that.

Just.

I'm just little bit more details on what kind of what caused this revised outlook mid year here.

And assuming if it is in the U.S. this kind of make you take it more.

Larger view of your footprint and just curious of your thoughts on the supply demand balance.

In the U.S. given this new volume outlook.

Okay. So the the situation in the U.S. is.

We are seeing lower or softer volumes in aby, we're reflecting that in our projections that's coming from fast growing products is a similar situation asked in Mexico one.

We're reflecting that app, even after we do that those products are to continue to grow year on year and they grow either high single digits or very low double digits.

But again this is new products that we see in the market.

With regards to our footprint.

We are balanced in the amount of capacity in the U.S. in 2019. So we don't expect any any changes in that regard.

And your next question comes from the line of Adam Josephson with Keybanc.

Andreas John Chris Good morning, and thanks for taking my question.

John just back to the working cap and cash flow for a moment I think I think chip was asking about the components of the cash flow guidance.

Reduction that you said most of its earnings a little bit.

That is working cap so within that how much of a drag roughly or precise here are you expecting working capital to be this year.

Yes, So let me, let me unpack that a little bit okay. So so from the $400 million that we started with we got about 20 to 25 million dollar impact right from FX there okay.

And then we also know that we've trimmed back to Capex by call it somewhere between 25 and $50 million. So let's say those those.

Bounce things off.

If you take a look at the remaining components about half of that is a change in earnings so call. It.

$80 million or something like that associated with the revised outlook and the other balance is associated with working capital.

Roughly split 50 50 between inventory and the receivable components within that so so that that should be a temporary item in the fact that we're kind of working through that in the back half of the year from a revised outlook for the business.

Going back to some earlier points, we continue to really want to focus on the inventories and we will see whether we can make more progress there, but I want to be mindful of where we are in the calendar of the year.

And then when you also talk about kind of run rate for the business I. Just also want to highlight that the asbestos payments that we have this year and including in the next year are.

Unusually high given the de risking activities that we have and you need to take a good hard look at those to understand core performance. So so all in all you know the receivables and the inventory hopefully work its way out the assesses works its way out and then you're left with obviously something that is a stronger underlying cash flow generation capability of the business as we look to even longer term you know things like the de risking of the US best as are the de risking or reducing debt are all things that we really want to focus on that our current calls on cash right now that if we can moderate those over time allow for longer more sustainable cash flow generation as a top priority for the business. Thanks John .

Hi, This is on for Alan how are you.

Hi, Hi, good morning.

I just want to talk about is the asset divestitures.

You guys determined the timing or.

To find the assets yet for that and then also on Brazil volumes I think in the past.

Demand is very strong and that market has that continued especially in the beer segment or are you seeing increased competition from other substrates.

Yes, Okay. So silent let me touch base on the first part there that the timing of divestitures as we indicated back at our Investor Day last November we are targeting tactical divestures with proceeds in the $4 million to $500 million range over a three year period of time and the idea is that we could probably get to $100 million of that and in the next year or something like that.

More information will come out on that in the future, but we're not prepared to discuss that at this point in time.

With regards to the.

Demanding pros Haley continues to be quite solid for beer as you know we.

Putting plays are brought back into operation.

Leasing on capacity early in the year, we're now enjoying the additional volume that that gave us we're expecting Brazil to grow low single digits for the year.

Now we are also expecting that as we approach the end of the year as we exit 2019 will be highly utilizing our capacity in that country. So.

So I think the AMAP continues to.

He is growing fast and.

There is no change in that position.

And your next question comes from the line of Arren. This one often with RBC capital markets.

Great. Thanks for taking my question.

I'm just curious what you're hearing from your customers.

It sounds like there is definitely a pretty sizable cut in the second half and we understand a lot of that is from complexity and.

Continued mass period declines.

But I'm just curious you know globally speaking.

Are you seeing you know continued exit from glass packaging in beverage industry, and then you know growth in food and wine and spirits, but is that any any concern for you just given.

And so the sustainability side on Kansas, drawing faster, how would you kind of characterize.

[noise] beverages. Thanks.

Okay. So then we also were saying that <unk>. The vast majority of it is coming from any abuse is concentrated in U.S., Mexico and Andean countries, we explain already U.S. on Mexico, and the Andean countries is related to restore normal float.

Replacement demand.

That is something that as Weve explained before is related to capex.

Availability index being there for our customers.

And this fluctuates from year to year. So at this point in time, we're seeing lower demand for that flow replacement and as you know that comes back into following year or to be more shahroudi too easy just various depending on cap capex availability.

In our opinion temporary.

And everything else remains solid.

As you know, we're adding capacity in Europe . So we are adding a line were built we're building a brownfield and thats because of that incremental demand in Asia Pacific varies growth on Israel by emerging emerging countries now when it comes to plastics on glass.

We have we're converting back to class a important food customer that's one of the drivers of incremental volume for us in the second half.

Is related to that too.

So all in all we don't see any issue in that regards I think our adjustments are related to you and I'd be kind of already that we explained.

Lastly, Ah, that's all and drop in European beer, which we believe is temporary.

And there are no further questions at this time.

Now I'll hand, the call back over to Chris for closing remarks.

Thank you Adam and thank you everyone. Appreciate its a busy morning for everyone.

This does conclude our call I would like to note that our third quarter call is scheduled for October 29th.

And it's another exciting day to choose glass. Thank you.

And this concludes today's conference call. Thank you for your participation you may now disconnect.

Yeah.

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