Hello, everyone. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the O-I second quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 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 1 to be entered back into the queue. Thank you. It is now my pleasure to turn the call over to Mr. Chris Manuel, VP of Investor Relations. Chris, the floor is yours.
Thank you, Adam. Welcome, everyone, to O-I second quarter 2019 conference call. Our discussion today will be led by Andres Lopez, our CEO, and John Haudrich, our CFO. Today, we will discuss key business developments and provide a review and outlook of our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for the earnings call are available on the company's website at o-i.com. Please review the safe harbor comments and disclosure of our non-GAAP financial measures included in those materials. Some of the materials we are presenting today relate to non-GAAP measures, such as adjusted earnings, adjusted free cash flow, segment operating profit. These exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP can be found in our earnings press release and in the appendix to this presentation.
I'd now like to turn the call over to Andres.
Thank you, Chris. Good morning, and thank you for your interest in O-I. Let me start off with an overview of our discussion on slide three. Last night, we reported second quarter results of $0.69. Earnings were below our guidance range, as well as prior year results of $0.77. Speaking for the entire management team, we are disappointed with these results. We expect to perform better and are fully committed to taking all the necessary steps to improve performance. Importantly, I'm confident in our ability to deliver value to all stakeholders. Looking at the second quarter, results lagged guidance for the following key reasons. Sales volume is low late in the quarter, primarily reflecting the impact of extreme weather conditions in Europe. In fact, most of the gap to guidance is attributable to lower sales volume.
Costs related to the commissioning of a furnace were higher than anticipated at one of the JVs in the Americas, and we incurred unplanned downtime across multiple locations due to flooding and other weather-related issues in the U.S. Despite these challenges, there were a number of positive developments to highlight. Volume growth was strong in the Latin American markets, where we recently commissioned new capacity. We completed the Nueva Fanal acquisition, which expands our position in premium categories. We are now producing commercial quality ware from our first MAGMA line, and we completed a number of refinancing activities to improve the balance sheet. Despite recent challenges, we have made good progress over the past few years, and we are fully committed to our strategy. We must acknowledge the impact of recent pressing headwinds.
This includes lower organic sales volume and greater complexity following changes in sales mix, mostly in the U.S. and in Europe. I will expand on this in a moment. We are taking clear steps to accelerate performance improvement. This includes an expanded effort deploying enterprise resources to improve factory performance, focus on cost takeout, and continued business portfolio optimization. Taking this all into consideration, we are adjusting the full-year financial outlook. We now expect full-year 2019 earnings between $2.40 and $2.55, and adjusted free cash flow of at least $260 million. John and I will expand on this and other topics over the course of our prepared comments. Let's advance to slide four. We are fully committed to the path that O-I has been diligently pursuing since 2016. We also recognize that there is need for improvement.
The foundations of our strategy include growth and expansion across attractive, profitable segments and geographies. Ongoing product system cost and organization simplification programs to drive sustainable structural cost improvements. Breakthrough innovation leveraging MAGMA that will enable new opportunities. Balanced capital allocation enabling our strategy, reducing risk, and rewarding shareholders. Positioning O-I to win in the green economy given glass unparalleled sustainable characteristics. As illustrated on the right, O-I adjusted earnings is expected to improve about 35%-40% in constant currency when comparing 2015 to the updated 2019 outlook. Our strategy has been working. You see the benefits of growth and expansion, as well as cost reduction efforts. Importantly, we have improved selling prices given favorable global market conditions. With that said, there are clear headwinds preventing a much stronger earnings improvement story. Organic sales volume have declined in the U.S. due to the mega beer trend.
Commissioning new capacity for future growth has added more cost than originally anticipated. Likewise, changing mix has added complexity to our business. While a pressure today, this is a very positive long-term development. Let me provide color. Within the U.S., we have partially replaced the mega beer decline with new business in growing categories. In Europe, we are de-emphasizing 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 mix 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 mix change due to the mega beer decline. Through time, we envision MAGMA will dramatically enhance flexibility.
Clearly, these factors are putting pressure on today's results. There are real opportunities to accelerate performance, which I will discuss on the next slide. On slide five, we outline the current and additional steps we are taking to accelerate performance. On the left, you will see some of the value creation elements currently in flight. There has been a lot of groundwork established 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 underpinning our three-year growth objective. In fact, we expect total sales volume across the O-I network should be up between 4% and 5% in 2019. This includes O-I's organic growth, strategic JV growth, and acquired new businesses. To support the organic components, we are commissioning over 300,000 tons of incremental capacity spanning 2019 and 2020.
We are confident about the future growth. On the cost side, our Total 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 undertaking 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. This new production process is progressing well. As I mentioned, we have begun to produce commercial quality glass from our first MAGMA operation. Likewise, we are planning the next MAGMA line in Europe at one of our most technically accomplished and flexible plants. Production will start in the second half of 2020, not long after the German CORE expansion project is completed. We are also pursuing a balanced capital allocation strategy.
Recent actions include investing in key growth initiatives like brownfield expansions in Colombia and France, as well as in MAGMA. Likewise, we initiated a dividend and refinanced our debt to optimize the balance sheet. Tactical divestitures will free up cash to reuse that 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 TSC is proceeding well, we intend to augment this work by accelerating key productivity opportunities across all functions and regions.
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 decapitalize the business, derisk the balance sheet, and focus on the core businesses best aligned with the interests of our strategic customers and shareholders. As a result, we anticipate additional targeted divestitures above the $400 million-$500 million of proceeds we outlined during the last investor day. We are sharpening our focus on cash generation. In addition to tactical divestitures, we are optimizing capital expenditures and prioritizing inventory management as well as debt reduction. All of these additional activities are key objectives for O-I's leadership team. I will now move to slide six to discuss regional performance and outlook. Let us 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 improved about 1% from last year, with notable strength coming from premium beer, food, and spirits. Looking geographically, the Andean market improved double digits, and both Brazil and Mexico were up mid-single digits. This follows new capacity added 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., giving continued pressure on mega beer. Higher operating costs reflected incremental costs, given challenges commissioning a new furnace at one of the JVs. Likewise, the region incurred unplanned downtime in the U.S. due to flooding and weather-related issues. These plants have now recovered from these events.
We now expect full year 2019 results will lag the prior year for the Americas. Earnings should benefit from the addition of Nueva Fanal, constructive pricing and sales volume growth, which will be weighted to the fourth quarter as we onboard new contracted business. Costs are being impacted by 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 and favorable mix offset cost inflation, lower sales volume, and unfavorable FX. Sales volumes were down about 2% in the quarter. April shipments were up low single digits. May improved mid-single digits, but the situation abruptly changed in June when shipments declined almost 10%, mostly reflecting extreme weather conditions and slower Chinese demand for French wine. Consumption patterns clearly reflected the impact of unseasonal weather.
According to Nielsen consumer data, beer sales were down 16% in France and 10% in Italy in May. During June, the decline moderated to 3% and 5% respectively. In turn, those trends appear to have triggered an inventory correction in the supply chain, resulting in the sharp 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 starting in July across the region.
Sales volume was up 7%, reflecting a strong growth in China following new capacity additions last year and earlier this year. Operating costs were about flat with the prior year. Production levels have increased across the region following peak engineering activity last year. We did pull at least activity into the second quarter. Regional performance has been impacted by higher than normal levels of maintenance. While critical for asset 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 furnaces 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 revise expectations.
Thanks, Andres, and good morning, everyone. I will start with a review of second quarter performance on slide seven. As we announced, second quarter adjusted EPS was $0.69, which fell short of the guidance range of $0.75-$0.80. There were three key factors that totaled about $0.09 per share that pressured earnings. Building on Andres' earlier comments, sales volumes were flat year-over-year compared to our expectation of 2.5% growth for the period. This impacted results by $0.06 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. June was down about 3% from the prior year due to extreme weather in the EU and lower demand of French wine for China. Overall volumes were up about 0.1%, or essentially flat.
We incurred about $0.02 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 $0.01 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 $0.69 is a decline from $0.77 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 were about $0.70 for comparative purposes.
From that base, you can see that price more than offset cost inflation, benefiting earnings by $0.07. This was in line with our expectations despite higher energy inflation in Mexico and Brazil. Volumes were about flat, with mix impacting results by about $0.01. Operating costs were up $0.09 from the prior year. This included the extra cost related to commissioning new capacity at one of the JVs and weather-related downtime in the Americas that I discussed. Likewise, higher costs reflect anticipated commissioning costs across the O-I network, as well as the impact of increased complexity. Retained corporate costs were $0.02 favorable, reflecting the organization simplification actions that we completed in May, as well as adjustments to management incentives. Net interest expense was up about $0.02, reflecting higher borrowing levels compared to the same period last year, which was offset by lower share count.
Moving to slide eight, we are revising our full year 2019 outlook and guidance. We now expect adjusted EPS of between $2.40 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 $0.09 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 business is 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 NABs in the Americas based upon revised customer projections. Overall, lower volume growth impacts our outlook by around $0.20. 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 $0.05 of benefit from incremental share repurchases. Likewise, we are factoring in a higher effective tax rate to reflect changes in regional earning mix that could impact earnings by around $0.10 over the course of the second half of the year.
Finally, results will also reflect additional costs due to increased mixed complexity, mostly in the Americas. This could impact results by around $0.10, more or less. These adjustments result in our revised outlook. Now I will shift to a comparison of our 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 CO2 credits and the resolution of a tax matter in Brazil. The subtotal of $2.35 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 Nueva Fanal 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 a revised outlook on earnings as well as a reduction in CapEx to between $450 million 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. As Andres mentioned, we will prioritize cash generation for the balance of the year and beyond.
Shifting to the third quarter outlook on slide 9, we expect earnings of between $0.60 and $0.65. A reconciliation from prior year results in the current outlook is illustrated below. As you can see, O-I reported earnings of $0.75 in the third quarter of 2018. From there, 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 $0.63. From that base, the trends that we noted for the second half of the year apply to the third quarter. Earnings will benefit from favorable price spread and sales volume growth. Nueva Fanal will be accreted 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 $0.60 to $0.65 in the third quarter. Before I turn it back to Andres, 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 the chart, we have employed leverage 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. Inorganic growth is now being de-emphasized post Nueva Fanal. As part of de-risking the balance sheet, we will also reduce legacy liabilities.
We expect to reduce asbestos below $250 million by the end of 2021. Divestiture of operations that are not core to O-I 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 intend to return value to shareholders. In 2019, we initiated a dividend, and 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, our clear bias is towards debt reduction. Likewise, additional repurchases will be minimal until debt levels are closer to the 3 times leverage target. Now back to Andres 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 too are disappointed. Building on the overall favorable trends 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 cost reduction initiatives, and developing breakthrough technologies like MAGMA. However, we need to accelerate performance to deliver shareholder value. In addition to our current strategic plan, we are initiating a program to bolster cost reduction efforts supported by an outside consultant. Likewise, we continue a strategic review of our business portfolio efforts supported by Goldman Sachs, who is our strategic advisor. 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 to compile the Q&A roster. 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're kind of related, but one is, you mentioned that we noticed the working capital or the receivables, I'm sorry, in particular, seemed to go up quite a bit. I don't see how that would be related to a slowdown in orders in June. 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're not selling as much. Then secondly, the buyback, ceasing the buyback regardless of the stock price. Is that something your lenders asked you to do? Or why would you just put a mark on your back and say, "Look, it doesn't matter where the stock goes. We're not going to be involved in the stock, at least for looks like the next couple of years.
Hey, Chip, this is John. 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 schedule 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. You will see on that schedule that working capital was a larger use of cash in the first half than you would see historically. 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.
We had extra liquidity that came in toward the end of the quarter, and it made economical sense not to engage in the level of factoring that we typically do. Even though that's very economical for the business, there was no need to have the extra financing charges. Right in the beginning of July, we refinanced a piece of our largest and our least most expensive debt that we have over in Europe, and that was a subsequent transaction that happened. 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're guiding to. We did indicate that working capital will be impacted in that regard, too. 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 and the desire to run to cash and not build inventory that's not necessary. The other piece is that we're seeing a change in earnings mix, and as more of our growth is in the Latin America countries where you typically have longer terms than you see in other parts of the business. 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, it's very likely some of that will be used in that regard. That's 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 the book of time that we're in right now. 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.
Your next question comes from the line of George Staphos from Bank of America Merrill Lynch.
Hi. Thanks, everyone. Thanks for the details. Good morning.
Good morning.
Good morning, Andres. I wanted to get into a two-part question. I'll 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. 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 enumerated. Is there a way that you could provide a bit more of a bridge or sizing, if I got that correctly, in terms of what's going on there? 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 results.
You've been in the seat for a number of years, one of the things that you were trying to bring to Owens-Illinois was much more operational consistency. Should we expect that O-I can continue along the path that you had established despite this hiccup? What, in particular, do you think went wrong with bringing on the capacity, this quarter? Thank you, guys.
Hey, George, this is John. I'll start that to address your first point, is to give you some dimensioning 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 hitting the Americas with the Latin American currencies. Probably 75% or 80% of the volume adjustments we're talking about pertain to the NAB revisions that we had indicated in our prepared comments. Most of the complexity that we're seeing, even though complexity is hitting both Europe and the U.S. and the Americas, more of that complexity is more expensive in the U.S. That is weighted over to the Americas marketplace. That's the major elements that are going on there.
With regards to your question on volume growth and then complexity. I think it's important to differentiate between volume growth related to new capacity for which we don't have issues. It's only ramping up the capacity and moving forward with that new volume. That's working well. That's happening in Brazil and Colombia. The complexity we have is coming from changing mix, and it has two different reasons. We are changing mix in Europe to be able to increase margins, and we're seeing the positive impact in margins in that region. That drives complexity up, and we're solving for that. We're changing mix in the Americas and in particular in the U.S., and that is to be able to offset or partially offset the drop in volume that is coming from the drop in mega beer.
It's having a positive impact in the volume side because, for example, in this year, we are offsetting 100% of the mega beer decline through that new mix we're getting, if we exclude the transfer to the IVC JV. The number of factories that we have affected by the changing mix is 10. We have 10 in Europe, 10 in the U.S. Excuse me, 10 is five in Europe, five in the U.S. What the complexity does is it takes us to change line configurations or operating parameters in a given factory or customer requirements or product requirements. It's taking us longer than we expected to address that. It's difficult to determine how long it will take for any given factory to absorb complexity, and there is no exact science in how we do that. However, we know how to address it.
In fact, we've done it successfully in the past. I can recall right at this point three examples in which we were able to improve the position of factories with high complexity on a year-on-year comparison between 500 basis points in gross profit to 1,500 basis points. We can do this. We're organizing ourselves to be able to do it. We're reassigning resources, at the leadership level and experts to focus solely in this effort so we can improve faster. We're mobilizing enterprise resources to a larger extent that we've done it over the last three years to support those facilities. We're elevating accountability levels. We are also implementing OIS in O-I, which is a standard work system. We have it in nine factories now. Some of them are these flexible factories, and it's starting there. Some of them are other facilities.
We are going to accelerate the implementation of that program. With that, we expect to see improvement as we exit the year and into the next year. We're confident we're going to be able to overcome this. This is a temporary situation. We will continue down the same path that we were before. I think, while we are facing this headwind coming from complexity, we're also seeing the benefits in the margin in Europe and the volume in the U.S. When we get this complexity resolved, which we will, we're going to be able to enjoy even higher margins in both places.
Your next question comes from the line of Mark Wilde with BMO Capital Markets.
Mark?
Mark, your line is open.
Hi, it's actually Anojja standing in for Mark. My question is, I don't mean to harp on this complexity issue, but it occurs to us that the mega beer declines have been going on for a while, and we've been talking about increasing complexity generally in packaging for a while. Was there anything specific that happened this quarter, or did you just reach 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've been doing it successfully. We've been adding complexity to factories, and then improving the performance of those factories and enjoying the margin benefit or the volume benefit of that. Now, at this point in time, this is taking longer for the set of factories we have impacted by complexity to date than we originally expected. Now, this impact in every given factory depends on the magnitude of the change we make, and in some cases, let me just give you an example. There is a factory in Europe for which we changed the mix in one line per quarter for seven consecutive quarters. We already finished, now we're focused on driving the performance up in that facility, and it will come up.
Complexity is also related to the speed of that changing mix, is related to the talents and the skills available in any given factory, is related to the maturity of the standard processes and practices in the factories, and the enterprise resources that we allocate to help every factory in the transition. It's taking us longer right now. It's the process we've been going through, as you mentioned. I just mentioned the example before of very successful cases, and we have more. It is just a timing issue. We're going to go through this, we're going to be able to solve it, and we expect that as we go into the, 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 under the new circumstances in every factory.
Your next question comes from the line of Ghansham Panjabi with R.W. Baird.
Hey, guys. Good morning.
Good morning.
Andres, you called out the impact of lower shipments of French wine to China in the prepared comments. Have the slowdown in China and implementation of tariffs started to impact some of your other liquor categories in the U.S. and Europe also? I'm asking because some of your U.S. customers have started to raise prices after basically holding back a year ago with the initial tariffs, and I'm wondering if that is starting to impact volumes as well. Separately, through the course of the second quarter earnings season, a lot of companies along the supply chain have pointed towards a slowdown in Mexico. Just curious as to whether you're seeing something there that's giving you pause, or is that not the case for O-I at this point? Thanks so much.
Okay, thank you. The situation with the French wine, which is specifically Bordeaux wine, it is coming down in volume in China, and that's a consequence of consumption, a slowdown in China, as is happening for every industry. You're hearing the news. It is related to the trade issues and tensions indirectly because that's influencing the economic activity in China. 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, a low to mid-single digits growth for the year in Mexico. We have, in NABs, which is 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 from customers.
That is related to fast-growing products that are growing at high single digits or low double digits that had higher projections from customers before. As a consequence, our projections that we are revising down. Those products are products that are all exported to the U.S. as final products, so not related to the local economy in Mexico.
I would just add two things. If you take a look at the other markets, for example, in the Americas, and spirits, you referenced, we have seen solid low to mid-single digits growth in those categories. We continue from the projections that we're working with our customers to have similar type of outlook. Just in Mexico, I think it was in even the prepared remarks, we were up mid-single digits in Mexico just in the last month. While there's other moving parts, it's still a growing marketplace.
Yeah, in Mexico specifically, we've been able to support incremental volumes because of productivity improvement that is giving us incremental output.
Your next question comes from the line of Gabe Hajde with Wells Fargo Securities.
Good morning, gentlemen.
Good morning.
I was curious, Andres, 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. Then maybe if you could address with the $0.20 decline, I think, that you talked about associated with the revised volume outlook, if there's a component within there that's lower production, presumably if you're taking a point off of growth, you're not going to be producing at the same levels, and again, just break out maybe what that might be.
Okay. Well, thanks for the question. I'll take the first part. In July, we're seeing a rebound in beer in Europe. What we faced in June that impacted quite significantly the second quarter was a sudden drop in beer demand, and that's all related to this weather condition. What we're seeing in July is a rebound of that. We're going to watch this closely. Obviously, it impacted our total forecast, until we can know exactly the extent of this and for how long it will be. Now we're seeing the rebound, as I mentioned, and we'll watch it closely and see if we need to make any adjustment as a result of that. Now, the wine harvest. The one in 2022 '18 was very good, and it influenced the availability of wine this year. Wine locally is going strong.
In Italy, it's very strong, for example. France locally is strong. The issue is with the exports to China only, and it's related to the situation in China. The harvest this year should be okay. When we had the issue with the weather that impact the beer, it does exactly the opposite for the wine. We need to wait for news because that's not reported publicly right now. At this point, we don't expect any issue there.
Gabe, let me touch base on the question around the sensitivity of the components around the $0.20 decline on 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. Just as a general sensitivity is, it's about a 50/50 split in that $0.20 of the impact of reduced sales volume and the contribution from that, and then the impact from the production side of the fixed cost coverage. You can use that as a baseline.
Your next question comes from the line of Kyle White with Deutsche Bank.
Hey, good morning. Thanks for all the details.
Morning.
Just curious if we could go to the revised volume outlook again. I think you called out most of it in Americas related to the non-alcoholic beverage category. Just a little bit more details on what caused this revised outlook mid-year here. Assuming if it is in the U.S., does this make you take a larger review of your footprint? Just curious of your thoughts on the supply-demand balance in the U.S., given this new volume outlook.
Okay. The situation in the U.S. is, we are seeing lower or softer volumes in NAB. We're reflecting that in our projections. That's coming from fast-growing products. It's a similar situation as the Mexico one. Those original projections that we used from the customers have been revised by them. We're reflecting that. Even after we do that, those products are continued to grow year-on-year, and they grow either high single digits or very low double digits. Again, this is new products that we see in the market today, new categories that are growing really fast. With regards to our footprint, we are balanced in demand and capacity in the U.S. in 2019, so we don't expect any changes in that regards.
Your next question comes from the line of Adam Josephson with KeyBanc.
Andres, John, Chris, good morning. Thanks for taking my question.
Morning.
John, just back to the working cap and cash flow for a moment. I think Chip was asking about the components of the cash flow guidance reduction, and you said most of it's earnings, a little bit of it is working cap. Within that, how much of a drag, roughly or precisely, are you expecting working capital to be this year? What I'm really driving at is, to what extent do you think your operating cash flow this year is artificially depressed relative to whatever you think normal is, based on the receivable situations, both in LATAM and the reduction in your factoring, et cetera?
Yeah. Let me unpack that a little bit, okay? From the $400 million that we started with, we got about a $20 million-$25 million impact right from FX there, okay? Then we also know that we've trimmed back CapEx by, call it, somewhere between $25 million-$50 million. Let's say those balance things off. If you take a look at the remaining components, about half of that is a change in earnings. Call it $80 million or something like that associated with the revised outlook. The other balance is associated with working capital, roughly split 50/50 between inventory and the receivable components within that. That should be a temporary item, and 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'll see whether we can make more progress there. I want to be mindful of where we are in the calendar of the year. When you also talk about run rate for the business, I just also want to highlight that the asbestos payments that we have this year, 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. All in all, the receivables and the inventory hopefully work its way out, the asbestos works its way out, 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, things like the de-risking of the asbestos or the de-risking or reducing debt are all things that we really want to focus on that are 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.
Your next question comes from the line of Edlain Rodriguez with UBS.
Hi, this is Sahas on for Edlain. How are you?
Hi.
Hi, good morning.
I just want to talk about the asset divestitures. Have you guys determined the timing or defined the assets yet for that? On Brazil volumes, I think in the past, demand has been very strong in that market. Has that continued, especially in the beer segment, or are you seeing increased competition from other substrates?
Let me touch base on the first part there, the timing of divestitures. As we had indicated back at our investor day in last November, we are targeting tactical divestitures with proceeds in the $400 million-$500 million range over a three-year period of time. The idea is that we could probably get $200 million of that in the next year or something like that. I would say, we would anticipate that those will likely start towards the tail end of the year, as opposed to earlier than that. I think original guidance was more like mid-year, but that's proven out to be a little bit more on the aggressive side with the corporate development actions that are required. What I would say is it's not one thing, there's multiple pieces to this. Don't expect one thing to hit in that regard.
It'll be multiple elements in that regard. When we talk to what we had indicated here is ongoing strategic review of the business and looking at other opportunities. 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 demand in Brazil, it continues to be quite solid for beer. As you know, we put in place or brought back into operation additional capacity early in the year. We're now enjoying the additional volume that give us. We're expecting Brazil to grow low single digits for the year. We are also expecting that as we approach the end of the year, as we exit 2019, we'll be highly utilizing our capacity in that country. Solid demand continues. Beer is growing fast, and there is no change in that position.
Your next question comes from the line of Arun Viswanathan 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's definitely a pretty sizable cut in the second half, and we understand a lot of that is from complexity and continued mass beer declines. I'm just curious, globally speaking, are you seeing continued exit from glass packaging in beverage industry and then growth in food and wine and spirits? Is that any concern for you, just given ongoing kind of declines? Have you seen that accelerate in beverages? The sustainability side on cans is growing faster. How would you characterize the packaging mix shift within beverages? Thanks.
Okay. The reaction we're seeing, the vast majority of it is coming from NABs, is concentrated in U.S., Mexico, and Andean countries. We explained already U.S. and Mexico. In the Andean countries, it's related to returnable float replacement demand. That is something that, as we explained before, is related to CapEx availability for our customers, and this fluctuates from year to year. At this point in time, we're seeing lower demand for that float replacement. As you know, that comes back in the following year or it moves around. It just varies depending on CapEx availability. We're having solid demand overall in Latin American countries. That's why we're building capacity in Brazil. We're building capacity in Mexico. We are seeing solid demand in Europe. What we lived through, while painful with the European beer demand, is, in our opinion, temporary, and everything else remains solid.
As you know, we're adding capacity in Europe, we are adding a line. We're building a brownfield, that's because of that incremental demand. In Asia Pacific, there is growth, it's driven by emerging countries. When it comes to plastics and glass, we're converting back to glass an important food customer. That's one of the drivers of incremental volume for us in the second half. We're seeing incremental demand in Europe, for example, in sparkling wines, which we believe is related to that, too. Overall, we don't see any issue in that regards. I think our adjustments are related to the NAB category that we explained, as well as the sudden drop in European beer, which we believe is temporary.
There are no further questions at this time. I'll now hand the call back over to Chris for closing remarks.
Thank you, Adam, and thank you, everyone. I appreciate it's 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.
This concludes today's conference call. Thank you for your participation. You may now disconnect.