Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Owens-Illinois Inc (doing business as O-I)  (NYSE:OI)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Adrian and I will be your conference operator today. At this time I would like to welcome everyone to the Third Quarter 2018 Earnings Conference Call. (Operator Instructions) At this time I would like to welcome and thank Mr. David Johnson Treasurer and Vice President of Investor Relations. Please go ahead sir.

Dave Johnson -- Vice President, Investor Relations

Thank you Adrian. Welcome everyone to O-I's earnings conference call. Our discussion today will be led by Andres Lopez our CEO; and Jan Bertsch our CFO. Today we will discuss key business developments and provide a review and outlook of our financial results. Following our prepared remarks we'll host a Q&A session. Presentation materials for this earnings call are available on the Company's website at o-i.com. Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.

Unless otherwise noted the financials we are presenting today relate to adjusted earnings and adjusted cash flow, which excludes certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP items can be found in our earnings press release and in the appendix to this presentation.

Now I would like to turn the call over to Andres.

Andres Lopez -- Chief Executive Officer

Thank you Dave and good morning everyone. Let me begin on Slide three by saying that we are pleased to meet our earnings guidance despite softer than expected volumes driven by temporary low wine demand in Europe and a slower than expected ramp-up of a couple of new customers in the US. That said, within the third quarter price gains are covering inflation and we continue to make solid progress on reducing our structural costs through Total System Cost with impact across all categories. Footprint optimization like the closure of the Atlanta plant in the third quarter this year and the completion of the incremental asset advancement activities including ramp-ups in Asia Pacific that we plan for 2018.

On the whole, segment operating profit was up a bit after backing out the FX headwind. In fact we saw modest margin expansion for the Company about 30 basis points in the quarter led by Europe's 120 basis points gain. Before moving into a review of trends by region, let me address two key issues that may concern investors. First, currency. While we face currency risk, we continue to work on ways to mitigate its impact. We will lead through active price management when currency impacts our cost. Also nearly half of our debt is non-US dollar denominated, which provides a natural hedge to currency risk. Second, the evolution of volume, which I would like to cover on the next slide. In short, we see the temporary sub-volumes abating and growth in 2019. Remember the big picture, when including volumes of the JV with CBI, demand for O-I glass is expected to be about flat in 2018.

Next year we expect about 1% volume organic growth in legacy O-I volumes plus continued growth in the JV with CBI. Let's separate ongoing trends with more temporary impacts. Glass is growing overall driven by favorable consumer trends as well as increased focus by customers in glass packaging. This renewed interest in glass is driven by value chain and market dynamics that encourage customers to trade up their brands to support higher earnings and margins as well as consumer's emerging preferences related to health and wellness, sustainability, customization, and premiumization. We see broad growth in food, spirits, and non-alcoholic beverages. This is driven by the mid-single-digit growth in premium products that we see across all of our categories. Beer also grows in markets like Europe and since O-I has such a strong presence in beer in Europe, we have been benefiting from a fair share of this growth.

Looking at the ongoing beer dynamics in the US, megabeer continues to decline yet at a slower pace through the third quarter of 2018. Meanwhile craft beer demand has leveled off. These are important trends to continue to monitor going forward. At the same time, the large growth opportunity in the US is driven by the continually increasing demand for premium and super premium beer brands. O-I is uniquely positioned to serve this market. Consequently O-I has built four furnaces at the joint venture with Constellation Brands in just four years and it's currently building a fifth furnace that is expected to come on line in the second half of 2019.

This is why it is so important to look at the total presence of O-I glass in the US market including the volume supplied by the strategic JV with CBI. Historically O-I has been seen as a mainstream beer producer and I understand the reasons why. Nevertheless consider this, after the fifth furnace is operational, the volume produced at the JV with CBI will be the same or even larger than the entire mainstream beer volume O-I currently produces in the US. The JV supports the fastest-growing segment in the market. O-I is increasingly becoming a premium product per user. Importantly as we assess overall O-I demand around the world we are in the process of selectively adding capacity in several plants so that we may benefit from higher demand from the trends I just mentioned and from growth related to several strategic customer partnerships.

Further we anticipate getting back sales that were temporarily dampened this year. A few clear examples come to mind. In Latin America we lost about 20 basis points of growth due to the discrete events in Mexico and Brazil that limited our production and sales this year. In Europe our wine sales are projected to be higher next year due to a strong grape harvest in 2018. And in the US, the ramp-up of some new business is taking a quarter or two longer than we expected. Again, we expect that all of these trends will be sources of growth in 2019 supported by incremental capacity. We will be selectively building capacity to follow growth in the strategic markets and segments supported by long-term customer agreements. Our Investor Day two weeks from now, we will provide more insight into our views of sales growth over the next several years.

Let's turn to the regional review starting with the European market on Slide five. In recent months I have talked in detail about how glass and O-I are actually performing much better than recognized in both the US and in Brazil. Today I like to focus on Europe where overall market trends for glass are very favorable. Consumers are ahead of the curve when it comes to leading trends. Trends where glass is a very good fit, we can appreciate this first hand when we review the emerging trends with global customers in Europe and how the one glass packaging and O-I as specifically to play a leading role to support it.

Here you can see that third-party data supports what we have been saying. Namely the glass packaging in Western Europe is growing. The growth rate is essentially 1% in line with total packaging. One key driver is the higher-value premium segment which is growing at mid-single digits super premium grows even faster. For a few years now we have been building our capabilities both commercial and end-to-end supply chain to take advantage of these trends, which manifest across all of our categories. The underlying growth of glass packaging in Europe is not only positive, it is improving and we are well positioned to capitalize on these trends.

Let's turn to Slide six where I would like to start by harmonizing our review of the European market with where and how O-I is playing within it. As I mentioned on the prior slide the market for glass containers is growing. Still for O-I Europe within the quarter we had lower sales volumes. This was driven by two specific items. Our sales into wine have been temporarily dampened this year due to a poor grape harvest from last year. We saw a concentration in glass containers sales they'll (ph) beginning in the contraction in glass containers sales they'll beginning in the third quarter after a normal first half of the year. Because the 2018 harvest has been strong, we expect a return to growth in 2019. And our food sales are off a bit effectively due to the closure our plant in Netherlands. Recall that this was part of a larger plan to upgrade our sales mix and sales manufacturing cost. It is a good trend for Europe's bottom line and margins which we see increasing as a result.

The customer-centric mindset we have developed over the last two, three years because our focus on premium products are already helping us expand commitments with several key customers. Let me pass to highlight how we are -- we have been outperforming the European beer market over the past five years and we expect this trend to continue. The beer market itself is much different in Europe than in most of the world including the United States. Within Europe the beer category is highly differentiated and branded in a way that facilitates consumers buying choices. For instance each key brand in Europe has a unique barrel shape and any product comes in a new bottle design. These bottles rapidly become iconic for the brand and help generate a stronger brand equity. We see this as a potential opportunity in the US where the beer market can be quite confusing.

There has been a proliferation of products and most of the market is amber long-neck bottles and cans, oftentimes further covered with secondary cardboard packaging. As a consequence, the (inaudible) looks confusing. Consumers struggle to understand product differences and ultimately to make their purchasing decisions. This has an adverse impact on brands ability to attract more customers, trade them up and even drive consumption. Coming back to Southern Europe for instance, we are actually seeing some shift in alcohol consumption away from wine and into beer. It is important to highlight that our manufacturing teams are currently running our assets at high utilization rates and are only for beer. Consistent with our integrated approach to the business we have been adding some incremental capacity across selected segments in 2018 that will become fully operational in 2019 while continuing to pursue favorable mix management.

Taken together we anticipate while Europe will generate above-market growth beginning next year based on the confluence of key factors, favorable market conditions O-I secured incremental volume through organic growth of the strategic relationships and O-I selectively eying capacity to meet customer demand in key segments. And be assured that whenever we add capacity these opportunities are expected to generate solid returns in invested capital. At the same time we remain squarely progress on reducing the structural cost. These are sustainable efforts with best-in-class processes, practices, and tools now deeply embedded in O-I's DNA. As we look through year-end and into 2019 and beyond, we expect further gains in Europe in volumes, cost reduction, and profitability supporting our objective of continues margin improvement.

Turning to the Americas on Slide seven. Overall trends remain and FX is a considerable headwind. Across the Americas, the commercial and end-to-end supply chain organizations are collaborating well to meet customer's needs and reduce cost. And prices are keeping up with cost inflation including higher freight charges. Shipments were down 2% versus prior year yet are modestly up when incorporating the JV with CBI. Let's first focus on the US where domestic beer continues to decline even though at a slower pace in the last few quarters and the industry has reduced capacity accordingly. It is important to highlight that non-beer categories in the US continue to grow at low single digits over time. This categories food, non-alcoholic beverages as well as wine and spirits have been high priorities of ours for a few years as an element of our strategy as evidenced through significantly improved customer relationships, commercial and design capabilities and the conversion of almost 20% of our beer capacity into flexible capacity to meet non-beer customer demand.

Outside the US, the remainder of America sales volumes were up 2% in line with expectations of low single-digit growth. Similar to a situation in Europe we see rise in demand, market demand in Mexico and Brazil and we have reached high capacity utilization. We will continue to focus on mixed management and we are prudently investing in incremental capacity in the region by bringing our Victoria plant back into operation in Brazil and adding a production line in Mexico to grow with the market and our customers. Overall we expect the Americas will generate higher sales, profit and margin in the coming years.

Let's turn to Asia Pacific on Slide eight. Asia Pacific has played out largely as expected this year. We undertook a massive asset advancement program similar to what we previously did in Europe and the Americas with very positive results. While the program temporarily suppressed our margins through lower production volumes and higher manufacturing and delivery cost, it is what we needed to do to meet customer needs going forward. In the third quarter, we ramped up production and unwound standard supply chain cost. As we exited the quarter all these efforts has been finished.

Going forward, our much improved assets are a better fit to market increasing productivity, reducing cost, and increasing capacity to support growth. And although 2018 has been a transition year for the region, you can see sequentially, throughout the year, they are making progress on their margins.

Let me turn the call over to Jan to provide details on the financials.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Thanks Andres. Turning to Slide nine. Let me start on the left with operating profit in the third quarter compared with prior year. The currency headwind was substantial. Enough that if you back out currency, segment operating profit for the Company was actually up 2% year-over-year. We continue to see a constructive pricing environment. While we understand that many corporates are facing high inflation, you can see that our price and sales mix combination are modestly outpacing cost inflation and this is our experience in every region. At the same time, sales volumes declined as we discussed earlier. Operating costs were favorable year-over-year reflecting many structural improvements.

A few examples include ongoing contributions from our Total System Cost approach and the benefit from the closure of the Atlanta plant. We did have a few temporary items which amounted to a minor headwind on a net basis. For instance, we had planned production downtime from asset activity that Andres mentioned and there's the mismatch in timing of when Europe received the energy credit in 2018 as compared with prior year. We monetized some carbon credits in Europe as we do from time to time and the Americas benefited from a court ruling in Brazil, which allowed us to recover revenue tax credits from previous years. And shifting to the chart on the right. EPS in the quarter was in line with our expectations of $0.75. It was down $0.02 from prior year entirely attributed to the $0.04 headwind from currency which partially drove the decline in segment operating profit as I discussed. Non-operational items like our corporate tax rate and share count offset one another.

On Slide 10 let me discuss our full year guidance. Starting with EPS. Entering 2018 we expected to continue the solid earnings growth profile that we generated over the past couple of years. That said mid-year, we mentioned that our earnings were likely to be on the low end of our initial guidance. In light of many moving pieces that's now the midpoint of our current guidance range. Currency was by far the most significant headwind. It flipped from being a $0.10 tailwind to a $0.05 headwind, a delta of $0.15 which includes a few cents from hyperinflation accounting in Argentina. Plus we faced a temporary soft sales volumes and substantial freight inflation in the US. We found several ways to largely offset the incremental downdraft. For example, through cost containment efforts and share buybacks. So today with our current business outlook and using end of Q3 FX rates, we are confident we can achieve $2.75 plus or minus a few cents. This would be the third consecutive year of annual earnings improvement and generate a double-digit CAGR in adjusted EPS.

As we look into 2019, the top line is expected to grow, improve structural costs from our Total System Cost approach and footprint actions will help as well. This will be partially offset by the carryover FX headwind and the non-recurrence of some measures that contributed to earnings in 2018. In all we remained confident that O-I can achieve $3 per share next year. We will discuss all that and more in greater detail at our Investor Day in two weeks.

Let's turn to cash flow on Slide 11. Coming into the year we expected to generate about $400 million in adjusted free cash flow. With the benefit of three quarters behind us, it looks like our adjusted free cash flow will be lower than original guidance fundamentally due to the same drivers that impacted EPS. FX volatility has been greater than expected and it has a stronger impact on our cash flows and on earnings given the seasonality of our cash flows. Also softer than expected sales volumes will impact inventory, which may be a modest use of cash instead of a $35 million to $40 million source of cash. We continue to look for ways to offset these headwinds throughout the balance of the year. As we look into 2019 we expect adjusted free cash flow will increase year-over-year primarily due to stronger business performance, continued structural cost reductions, prudent CapEx levels and lower inventories.

On Slide 12, let me walk through our capital allocation priorities. We will continue to maintain financial flexibility. Our top priority is to invest in the business through CapEx, through investments and joint ventures and incremental capacity and through bolt-on acquisitions in emerging geographies while delivering a favorable return on invested capital. We continue to assess our capital structure. While we have been in a balanced capital allocation mode, we clearly see a heightened need to review the design of our cash return to shareholders. More to come on this at Investor Day.

And speaking of Investor Day, let's turn to the next slide where Andres will continue.

Andres Lopez -- Chief Executive Officer

Our Investor Day two weeks from now you will have the opportunity to hear from standard team of leaders from O-I. You can expect us to discuss our strategic plan and financial targets over the next two years and capital allocation as an integral part of our strategy. As you heard today, this Company has had a few unexpected headwinds this year, but that has not derailed us from pushing forward on our clear strategic ambitions and reinforcing our execution discipline to meet our commitment. We will provide more insight into market trends and how we have a solid foundation to leverage those trends and grow faster than the market plus explaining how we are structured to consistently and substantially reduce cost through our Total System Cost approach. We are going to talk more about this rapid technology and innovation and in particular, how they perfectly align with and support O-I's transformational strategy going forward. Consumers, customers, and investors alike have become exponentially more focused on sustainability. We are also very focused on this and will present O-I sustainability goals and demonstrate how glass is the clear choice for our planet.

And with that, we will open the lines for your questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Anthony Pettinari with Citi.

Anthony Pettinari -- Citigroup Global Markets Inc. -- Analyst

Good morning.

Andres Lopez -- Chief Executive Officer

Good morning.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Good morning.

Anthony Pettinari -- Citigroup Global Markets Inc. -- Analyst

Jan I was wondering if it's possible the size in Europe, the positive impact of the asset sale as well as the negative impact of the weaker wine harvest. And then just in Brazil, sorry if I missed this, but is it possible to size the impact of the Brazil court ruling either in the quarter or going forward?

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Sure. Let me start and then I'll turn it over to Andres to talk about the wine harvest. First of all we recorded a $13 million benefit in Q3 related to the Brazil revenue based tax. So this was a retroactive benefit due to a favorable settlement of a court case that was originally filed by our Company back in 2015. The settlement was reached in September of this year, of which of course, we really had no certainty of the timing of that. The key issue was the revenue base for calculating the tax and the court ruled that value added tax could be excluded from the revenue as a base for the tax and therefore reducing the overall tax. So as with any multinational company there is many things we don't control the timing of as I'm sure you can imagine. And we had line of sight to our third quarter earnings and then experienced a weaker volume scenario in September than we expected. So this Brazil tax help to offset that gap and obviously to help us meet our quarterly earnings.

Just switching over to the European carbon credit. Europe is subject to trade regulations related to carbon emissions and the Company systematically buys the CO2 allowances to cover the requirements up to several years in advance. So in September, O-I Europe sold some CO2 allowances that were purchased over time for a gain of about EUR9.5 million. It was an opportunity to capture the value of a significant price increase at that time. So we monetized it at a high price and then we actually have layered some back in at a much lower price already. The other thing that might -- that you didn't ask about, but might be helpful just to remind you is that, we had an energy credit for Europe in the second quarter of this year. Last year it was in the third quarters. So from a year-over-year basis we were down in the third quarter because of the timing of that energy credit.

And then, I don't know, if Andres, you want to talk a little bit about --

Andres Lopez -- Chief Executive Officer

Yeah. So the -- during the first half of the year, we experienced normal demand for wine in Europe. Now when we got to the third quarter, demand has slowed down quite drastically. Now this is all driven by the poor harvest in 2017, which was down 15%. It just didn't manifest through the year and it got really strong in the third quarter. Now this is going to rewound in our minds in 2019 because the harvest of 2018 is quite strong. And we're going to have in favor the inventories that we already have to be able to support that incremental demand as the very good harvest translate into higher demand for wine containers in 2019.

Operator

The next question comes from the line of Debbie Jones with Deutsche Bank.

Debbie Jones -- Deutsche Bank -- Analyst

Good morning. Thanks for taking my question.

Andres Lopez -- Chief Executive Officer

Good morning.

Debbie Jones -- Deutsche Bank -- Analyst

I just wanted to ask about Asia Pac and volumes there. They were lighter than I think you were expecting and just how to think about that in terms of some of the projects we've been doing down there because I think that there is an expectation that volumes move higher next year. And then lastly on Asia Pac, could you just help us with how to think about the margin, in Q4 I think you're expecting to exit mid-teens, but I assume the actual margin for the quarter would be a bit lower than that?

Andres Lopez -- Chief Executive Officer

Thanks Debbie. So let me start by talking about the work on assets. So we work to have a significant level of activity this year, which is similar to what we did before in Europe and the Americas with very good result. We already finished all that, we did as planned. And the last quarter where we had an influence of the ramp-up was in third quarter. And in fact, in that quarter we had still one asset to be worked on. So all of that is behind us. So demand -- the demand we're seeing is primarily influenced by capacity catching up as required with the different segments. But when we look at overall demand for the region, it is the same way it's been before. So we see low single digits kind of growth for the overall region. Now as we go into 2019, our capacity is going to be in full, it's going to be aligned with the segments that are growing as we said before. So we're going to have a better fit to market. We're going to have a better cost and as a consequence, we are estimating that we're going to have it rebound in Asia Pacific as well.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

And talking about the margins, Debbie, we will have a fourth quarter margin that we're expecting of about 15% for the quarter. And next year we wouldn't expect to go into the year at that level because the fourth quarter is a seasonably high level for APAC selling. But next year we would expect to have a full year margins for APAC in the low-double digit, which would be significantly higher than this year.

Operator

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

Lars Kjellberg -- Credit Suisse -- Analyst

Thank you and good morning.

Andres Lopez -- Chief Executive Officer

Good morning Lars.

Lars Kjellberg -- Credit Suisse -- Analyst

I just want to come back a bit to Europe and what sort of delta would you expect this to have on your writing space as wine comes back? There seems to be somewhat low visibility on that, but if you can share that with us and also what that means in terms of production volume, which of course feeds to your margins. The other question I had was really on Mexico, of course, CBI is doing very, very well indeed, but is that cannibalizing on your Vitro volumes in the country, your own consolidated volumes? Can you shed any light on that?

Andres Lopez -- Chief Executive Officer

Okay. So, when we look at wine or when we look at overall sales in Europe, the slowdown that we saw, it is primarily driven by two things, the wine as we just explained and also that we've been focused on mix management. As we go into '19, we don't expect that much impact of the mix management anymore. So what we can assume is that half of the slowdown we just saw is wine driven and that's going to come back as the stronger harvest drive larger demand for glass containers. Now I think the question on Mexico is, if our growth in beer over there is having any impact on local demand, we're not having an impact on local demand. Remember that in Mexico we have little presence locally in beer. So our production in beer in Mexico is related all to -- primarily related to CBI at this point.

Operator

The next question comes from the line of Chip Dillon with Vertical Research.

Chip Dillon -- Vertical Research Partners LLC -- Analyst

Hi, we try to keep it real, but good morning everyone.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Good morning.

Andres Lopez -- Chief Executive Officer

Good morning.

Chip Dillon -- Vertical Research Partners LLC -- Analyst

I might have missed this, but Jan, if you could again tell us what those two gains were? I think you said EUR9.5 million, but if you could tell us both pre-tax and after-tax that are included in the segments both the one in Europe and also the one in the court situation in Brazil?

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Sure. So the Brazilian tax credit was $13 million benefit and the European carbon credit was on a US dollar basis about little under $11 million.

Chip Dillon -- Vertical Research Partners LLC -- Analyst

Okay. And those are both reported in those segment numbers that are in your press release right not in -- neither one are in the tax line or do I have that wrong?

Jan Bertsch -- Senior Vice President and Chief Financial Officer

No, they're both in the segments, you're correct. And also the Brazilian tax credit is a credit that we will receive over time as we need to use it over the next couple of years.

Chip Dillon -- Vertical Research Partners LLC -- Analyst

And how much more is left?

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Is left of the --

Chip Dillon -- Vertical Research Partners LLC -- Analyst

Of the credit that you'll get over the next two years?

Jan Bertsch -- Senior Vice President and Chief Financial Officer

The whole thing right now. I mean, we just received that credit. So we will use it as needed over the next several years. There is maybe other credits as well in Brazil, but this one would be incremental to that.

Operator

The next question comes from the line of Edlain Rodriguez with UBS.

Edlain Rodriguez -- UBS -- Analyst

Thank you. Good morning guys.

Andres Lopez -- Chief Executive Officer

Good morning.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Good morning.

Edlain Rodriguez -- UBS -- Analyst

Just one quick one on share buyback. I think so far you've done $107 million. I think last quarter you said you would do $25 million to $30 million, but you've only done half of that in 3Q. So are you done for the year or is there any thoughts on being more aggressive given what the stock is right now?

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Yeah, so we have done about $107 million. We did indicate that we would plan to do about $125 million this year. So I don't believe that we're done. But just in general, looking at our capital structure, I mentioned in my script here that we've been in a capital allocation mode, but that we see the heightened need to relook at and review the design of our cash return to our shareholders. So I think that this is a very good topic for Investor Day. We will share more about it in a couple of weeks. And I think it makes sense to do it then because we can talk about it more in the context of the entire Company and the plans for the Company over the next several years.

Operator

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

Scott Gaffner -- Barclays -- Analyst

Thanks. Good morning Jan, good morning Andres.

Andres Lopez -- Chief Executive Officer

Good morning.

Scott Gaffner -- Barclays -- Analyst

So two parts, just first Jan you highlighted that $3 of EPS for 2019 despite some weakness here in 2018. How much of the confidence around 2019 is really fundamental and operational versus the pension probably just turning to significantly less of a headwind? And then second part is just when you look at your footprint and the scale that you have, I mean, what is the -- from a scale advantage and from a strategic advantage what's the need for O-I to be a global glass producer versus a regional glass producers in various regions? Thanks.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Okay. Thanks Scott. Let me first start with your first question on $3 of EPS, but we do feel confident that that's the number that we can achieve next year. Yes, I think the currency market has weakened a little bit for us since we first talked about it, but as we look at our strategic plan here for 2019, we're confident in that number. We will certainly talk much more about the components of that in two weeks from today.

And let me turn it over to Andres to speak a little bit about the footprint.

Andres Lopez -- Chief Executive Officer

Yeah, just in the same question before I go into the footprint. The -- something that we're going to benefit from going into the following year is some additional capacity that we've been selectively putting in places in various regions of the world. So we've been approaching high utilization in markets like Europe, Brazil, Mexico and Colombia and in some segments in The United States. And we've been, as I just mentioned, adding capacity selectively, so that's going to come online for 2019 and all of this is related to agreements, long-term agreements so it has secure volumes. So please factor that in as you think about 2019.

Now, as you know, since we have started our strategy, we -- one of the areas of focus is changing how O-I approach customers, how it goes to markets, and how because of the way it supports the customers can be long-term partnerships. And those long-term partnerships in a -- to a large extent are related to global accounts, so global customers. And with these customers, as we interact with them, we identify solutions that they can move around the world and that has a significant value for them. So our ability to be the only global player in the glass industry is a differentiating factor. And I think as we go into I-Day you're going to be able to appreciate even more what I'm just describing.

How when you establish this relationships. In fact you can become an strategic supplier for this customers because you can deliver solutions around the world pretty much simultaneously and support their growth better than anybody else can do. So it is our perspective that the global position of O-I, the way we're using it working as one single enterprise, which has been a significant change in our culture and way to operate is becoming an strong differentiator of this Company versus every other glass producer in the world.

Operator

The next question comes from the line of Mark Wilde from BMO Capital Markets.

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning Andres, good morning Jan.

Andres Lopez -- Chief Executive Officer

Good morning.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Good morning.

Mark Wilde -- BMO Capital Markets -- Analyst

Andres, I wondered if you could give us any color on where you expect volumes to come out region-by-region in the fourth quarter? And whether you expect any benefit as we go into '19 from perspectively higher duties on Chinese glass imports?

Andres Lopez -- Chief Executive Officer

Okay. So let me just put volumes in perspective a little bit because what we lived through in Q3 and some of it will continue into Q4 because wine for example, it was a standard too, makes very difficult for you to assess the underlying strength of our demand at this point in time. And here is why. So the wine part I already explained, in our opinion this is going to rewound. So it's going to be a benefit in 2019 well supported by the inventories that today are a pressure for us.

Now the APAC as it work, while it was a substantial pressure in this year and reduced sales in 2018 is going to be exactly the opposite going into the following year. I just talked before about approaching the high utilization of capacity in various markets through adding some selective lines or capacity, which we've been doing proactively. Just in the United States, for example, we already work on realigning or retrofitting almost 20% of the footprint over the last two years. So all of that is going to help us over there.

We know that we've been focused on mix management, which is the right thing to do in Europe. As a consequence of shutting down the plant in the Netherlands around one-third of that capacity or that sales volume was to be addressed through mix management. The remaining portion went to lower cost facilities, which improved margins. Now mix management is improving our margins as you've seen in the region at this point in time. So -- and also (inaudible) at this point in time all the reallocation to CBI, which is going to lap early 2019. So that is a substantial volume that is being reallocated to the right facility, which can produce this significantly more efficiently that is distorting all our numbers. So it makes it very difficult for you. In our opinion, the underlying demand of this business is quite solid and as we go into 2019 we're going to enjoy the rebound of all these things that today are pressures, but are going to be benefits as we go into the following year.

Now when it comes to tariffs related to China, for us, there are a couple of things we got to look at. First is the inputs and this has potential influence in molds or mold equipment because we source from China. And then we're implementing a few mitigation actions to be able to reduce the net impact of this. At this point in time we estimate it's going to be a small and it's going to be very manageable. Now I think your question was more specifically to potential incremental volume coming from the implementation of tariffs with China. So there might be some volume coming through that and we see some customers looking for alternative sourcing at this point in time.

Now I would like to clarify something, the reason why these inputs exist today is primarily because the local producers in the past, all of us, didn't really supply that kind of business because that business is extremely fragmented, it's very small branch (ph) and it's different from a supply chain perspective to serve. Therefore it went to be sourced from China. So while it can be repatriated, it takes footprint changes, significant footprint changes, supply chain changes, it's a different way to do business, which can be done.

Now in our opinion there are many other opportunities in the United States for growth. There are many segments in this country growing and we're going to show you in I-Day some similar charts to the ones we just showed you about Europe that will most likely change your view with regards to the potential of the US market for glass. So, in our opinion, it's better to focus on those opportunities than in that business that is highly complex to adopt. We'll adopt some, but it's not like you can adopt it all pretty easy.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Maybe I'll just step in here because we've talked a lot about temporary volume pressure in the third quarter and I just want to say that there were a few temporary items that we highlighted already on this call and on a net basis they really largely offset one another. For example, the production downtime that we talked about that's coming back next year, timing of the energy credit for Europe that was just the timing item for third quarter versus third quarter last year, the CO2 credit monetization, yet we've already covered much of our needs on that now for next year already as the price has declined in the market. And then the Brazil tax credit and I just want to clarify, we booked a credit from the court ruling, so this is a credit so we will use it to offset cash taxes over a period of time in Brazil. So those things on a net basis largely offset one another.

Operator

The next question comes from the line of George Staphos from Bank of America Merrill Lynch.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thanks. Hi, everyone, good morning.

Andres Lopez -- Chief Executive Officer

Good morning.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thanks for all the detail. I wanted to ask a multi-part question on growth Andres if you can? And mostly focused on Europe, so first of all, as we look at the wine harvest and the affect that we saw on demand this year, and it seem like there was a lag effect relative to the weak harvest last year. Could there also be a lag benefit in terms of when the wine glass volume show up in 2019 or would you expect to see that pick up immediately?

Secondly, when we look at chart -- which chart is it, chart five where you show the percentage year-on-year change in glass versus total packaging, the growth in glass really hasn't begun until '17 and '18. So in prior years it was flat to down. We're seeing a pickup in growth later in the cycle, what do you think is driving that? Could it be just a late cycle move to premium or do you think it's more sustainable? And how do you manage your capital allocation and your projects against the risk that it's maybe just a later-cycle move to volume? Thank you guys and good luck in the quarter.

Andres Lopez -- Chief Executive Officer

Thank you George. So we experienced pressure on wine this year 2018. It is all the impact of 2017. I think what was a little bit misleading for us was that the first half was totally normal, Q3 just a slowed down dramatically. So now we know it is hitting the year. It will hit through the remaining of the year, it's already in our projections. Now this will just rebound as we go into 2019 according to the normal seasonality of the wine business. Now I think the good part of this is, while these inventories today are becoming a significant pressure for us, they will become a significant positive as we go into 2019. So we're very comfortable. We're going to be in a very good position with wine going forward.

Now chart five, as you mentioned, there is kind of a change in pattern starting in 2016. You can even argue that 2015 is a very, very small growth. But what's happening in '16 and '17 -- in '17 and '18 is really driven by growth in several categories, it is spirits, it is food, it is beer. It was wine before, right. This year has the harvest, but it's going to come back too. And all of that, as you mentioned, has one common pattern, which is premium products are becoming extremely relevant. And for those products, glass is a very good fit.

Now the old pattern that is related to that, that is emerging lately is the sustainability relevance, which is taking customers to make different decisions. And it's taking consumer to make different choices. It is very interesting to see that, with all the movement that has started very early in the year, we're seeing, if you look at the statistics in several countries in Europe, you're going to find a very important growth for glass ahead of every other packaging. If you look at the statistics in UK or the Netherlands or the Spain or Portugal and this is standing (ph) they're showing that glass is in fact taking a leading role.

And this is not different in other countries. Let me just make a comment with regards to the United States because we normally when we look at capacity and sales historically, we consider The United States to be, for O-I, to be highly oriented to mainstream beer. Now when I look at capacity and sales in reality O-I is becoming over (ph) indexed to premium. And at this point in time we are like 1.2x in premium for beer in The United States, which differ significantly from the past. And this is going to move to 1.5x and then 1.7x. So I think your question is right on. If we want to look at glass, we need to look at premium, which is a significant change in trend in the world. Now, one more point for Europe and everyone of the regions in which we operate, the value chain has changed dramatically over the last couple of years.

And as a result, our customers need to trade up their brands. And they need to do it to be able to bear with their financials as they normally do. So, that brings branding to the center of the action going forward. And when you think about branding glass is a perfect choice. I mean, you can see it in every market. We just make the comments about beer in Europe and how it differs from the rest of the world. It is all about branding. And that's what's happening. It's a very good emerging trend. Now we will present a very good set of statistics and all the conceptual framework about all these in I-Day. I think as you can attend that I-Day you're going to get a very good broad picture of what's happening in glass, which in our opinion requires a very different look versus what has been the traditional look and understanding of this industry.

Operator

The next question comes from the line of Ghansham Panjabi from R W. Baird.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Hi, good morning.

Andres Lopez -- Chief Executive Officer

Good morning.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Andres, just given the weaker second half '18 volumes and your related efforts to adjust inventories, will that inventory adjustment be fully done by 4Q '18 or will that spill over into the first quarter as well? And then just separately, just a technical question, why is the Brazil tax benefit ruling sort of flown through on the operating profit line versus the adjustment on the tax line item? Thanks.

Andres Lopez -- Chief Executive Officer

Yeah, so let me just touch on the inventory first. So it will reduce over time through '19 as we hit the various seasonal peak demands in the various markets in which we operate. So this is primarily concentrated in Europe and the US, then it will just be reduced according to that seasonality. But it will be reduced, we're very comfortable with that for the full year 2019.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Okay. And just your question related to the Brazil tax. This was an indirect tax, it was actually a cost in the P&L for several years.

Operator

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

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning everyone. Jan just a two-part question. On your guidance for this year, midpoint is now $2.75. I assume that is inclusive of the $0.11 of benefits from the Brazil tax credit and the European asset sale, correct me if I'm wrong there. So really the starting point as I look at that is $2.64, and you're talking about getting to $3 next year. That seems to be quite a bit of growth '18 to '19 given the volume difficulties that you're having. So just help me understand why are you so confident in hitting that $3 number if in fact $2.64 is really the right base? And then, a question, Ghansham asked about the Brazil tax credit and the adjusted earnings, the European asset sale, why is that flowing through adjusted EPS if that's just a one-time asset sale gain? Wouldn't that be excluded from adjusted EPS typically? Thank you.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Okay. So let me first address the $3 versus this year's guidance. Yes, those items were inclusive in the $2.75 midpoint range. I just want to bring you back to what happened in 2018, we had a year with significant foreign currency movement of $0.15 on our original guidance for this year. US freight inflation I think was about $0.07 for the year. There was a Brazilian transportation strike that was several cents, volume was down a bit and we had a batch upset in Mexico that we don't intend to repeat. We absorbed a lot of APAC investment this year that manifested itself in lower earnings. And I think we mentioned several times that we also absorbed greater spending in R&D this year as well.

So there were a lot of headwinds this year. Yeah, there were a couple of tailwinds. We talked about two of them today, the carbon credit and the Brazilian tax credit. We also had a lot of management actions in both better performance in OpEx. We're running a little bit higher in TSC for the year. And so, when we look at the mix of all this, we really had a lot of positive movement in the Company operational and not. So we feel very confident that we'll hit those -- that $3.

Andres Lopez -- Chief Executive Officer

Let me add a comment in with regards to a point that we didn't touch so far that will impact next year positively. So, this is Brazilian market demand, so when we look at the overall demand for O-I so far in the year, so, year-to-date is up 17% 1-7. Now when we look at beer sales volumes they are up 27% for the quarter. And it's all driven by premium beer and this goes back to the previous question, this premium beer in fact making a significant difference. Now we know we're limiting capacity in Brazil right now and this is going to influence our performance for the balance of the year, it's been already.

Now we know too that and we comment on this in the previous call that we're bringing back the plant called Victoria. And this is going to be in operation at the end of Q1 2019. So this is going to be helpful for us to have higher earnings next year. And just to complement my comments on premium before, you know, from the statistics that are public about the Brazilian market that the beer consumption in the market because of many various dynamics, our total beer consumption in the industry for the quarter was down 2%. But look at the importance of premium, even for a market that has a very challenging economy premium beer is growing and total glass for premium beer in the country is growing 25%. Returnable glass for premium is growing 33% and one-way glass is growing 19%. And all of this is Nielsen data which is public. So, premium products are important catalyzers for the glass industry.

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Okay. And Adam I think I owe you a question and also on the carbon credit. So we buy these and sell these in normal course over time and the accounting treatment is what we have done in the past. In this quarter we took advantage of a high market price to monetize them. And like I said, we've already replenished some of them already, albeit at lower prices. And this also will be reflected in the segment operating profit over time. So it's very consistent treatment.

Operator

The next question comes from the line of Gabe Hajde with Wells Fargo Securities.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Yeah, thanks for taking the question guys. Good morning. One on, I guess looking at the SG&A line, it came down sort of on a sequential basis. And I was curious if there was any sort of backing out of incentives that is occurring maybe this quarter and into the fourth quarter?

Andres Lopez -- Chief Executive Officer

Sorry, Gabe can you --

Jan Bertsch -- Senior Vice President and Chief Financial Officer

The SG&A line is coming down because our OpEx spending is coming down a bit. We adjust our compensation accruals on a regular basis to align with where we are in our forecast for spending. So that I think most of it is just, is tighter spending in the OpEx line.

Andres Lopez -- Chief Executive Officer

I would like to make one more comment related to previous questions too. Inflation has been a concern across industries over the last few months. It's been a concern within glass. Now when we look our situation in the various reasons, we are confident that we're going to be able to recover inflation in all the markets in which we operate in 2019. So I think that's an important consideration when you look at the outlook of the Company going into the following year.

Operator

Your final question comes from the line of Tyler Langton from JPMorgan.

Tyler Langton -- J.P. Morgan -- Analyst

Good morning Andres and Jan.

Andres Lopez -- Chief Executive Officer

Good morning.

Tyler Langton -- J.P. Morgan -- Analyst

Just had a question on the -- good morning -- on Americas, I know volume growth was down 2% and it sounds like most of that was in the US with growth in most of the regions. Could you just provide some details on sort of volume growth in the US, Mexico, Brazil, and other areas and then just some details I guess, I think you mentioned US growth was hurt by sort of a delay in the ramp-up of new customers and then just the reallocation of business to the JV. So any kind of details on the impact of that on the US growth?

Andres Lopez -- Chief Executive Officer

Okay. So the -- when we look at the Americas volumes and because of relevance of premium that I -- have been explained through the call it is very important to include the JV, which is a significant investment. We've been building one furnace per year. Now when you look at Americas, we thought the JV, it is down at this point in time year-on-year 150 basis points. That's expected to be for the full year. Now if you include the JV it is up 150 basis points year-on-year. When we look at the US market specifically, including the JV O-I is slightly up year-on-year for the US market, which outpaces the market significantly. Now we've been talking about the conversion of capacity that we've been working on which is important, 20% of the footprint has been addressed.

This is going to give us the ability to continue serving the market that is growing quite well, which is the other categories that are non-mainstream beer because the premium beer is being served out of the JV and is growing really well. So that's the situation within the US market. Very important to highlight we are over indexed to premium already. We have a lot more capacity on sales today in premium beer than we do in mainstream beer.

Now Brazil, I just comment on that, I think is a very healthy market. We're adding capacity to Brazil. If you could add capacity faster it will be beneficial, but we're doing the best we can with that pace. Mexico is about flat year-on-year. And it's been limited by capacity utilization. So this is a market where we are adding a line and we're going to recover the capacity that we lost this year because of the (inaudible) issue and there will be more to come for this market.

And when we look at the Andean countries, Colombia is growing approximately, for the year 300 basis points. So we are in fact adding capacity in Colombia that we expect to come in line in the first half of 2019. Peru is growing 100 basis points year-on-year, Ecuador is growing 760 basis points. So very healthy demand across the Americas. Again very important to look at the JV together as part of our total volumes because of the relevance of premium in the development of the glass business.

Thank you everyone. That concludes our earnings conference call. Please note that our Investor Day is going to be held in New York City on November 14th and fourth quarter conference call is currently scheduled for February 6th, 2019. Folks this is Halloween, don't be afraid of your packaging choice, fearful of what might be lurking inside a package. Choose transparent glass, the clear the safe choice. Thanks, have a great day.

Operator

This concludes today's Third Quarter 2018 Earnings Conference Call. You may now disconnect.

Duration: 64 minutes

Call participants:

Dave Johnson -- Vice President, Investor Relations

Andres Lopez -- Chief Executive Officer

Jan Bertsch -- Senior Vice President and Chief Financial Officer

Anthony Pettinari -- Citigroup Global Markets Inc. -- Analyst

Debbie Jones -- Deutsche Bank -- Analyst

Lars Kjellberg -- Credit Suisse -- Analyst

Chip Dillon -- Vertical Research Partners LLC -- Analyst

Edlain Rodriguez -- UBS -- Analyst

Scott Gaffner -- Barclays -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

George Staphos -- Bank of America Merrill Lynch -- Analyst

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

Tyler Langton -- J.P. Morgan -- Analyst

More OI analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.