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Executives

Ed White - SVP and CFO

Al Stroucken - Chairman and CEO

John Haudrich - VP of IR

Analysts

Rick Skidmore - Goldman Sachs

Claudia Hueston - JPMorgan

Tim Thein - Citigroup

George Staphos - Bank of America-Merrill Lynch

Peter Ruschmeier - Barclays Capital

Al Kabili - MacQuarie Research

Alton Stump - Longbow Research

Mark Wilde - Deutsche Bank

Chris Manuel - KeyBanc Capital Markets

Joe Stivaletti - Goldman Sachs

Owens-Illinois, Inc. (OI) Q1 2009 Earnings Call April 30, 2009 8:30 AM ET

Operator

At this time I would like to welcome everyone to the O-I first quarter 2009 conference call. (Operator Instructions)

I would now like to turn the call over to our host, Mr. Ed White, Senior Vice President and Chief Financial Officer. Sir, go ahead.

Ed White

Welcome to O-I's first quarter 2009 Earnings Call. I'm joined today by Al Stroucken, our Chairman and CEO, as well as several other members of the senior management team, including John Haudrich, who joined us in March as our Vice President of Investor Relations.

Today we will discuss key business developments in the first quarter, review our quarterly financial results and share our business outlook. Following our prepared remarks, we will host a Q&A session. Presentation materials for this earnings call are also being simulcast 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. The financial results that we present relate to adjusted net earnings, which exclude certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP earnings can be found in the appendix of this presentation.

Now, let me turn the call over to Al.

Al Stroucken

Thank you, Ed. Good morning, everyone. We are encouraged by our first quarter results. Despite an extremely challenging economy, we've performed well, maintained a strong financial flexibility, and our business outlook is now improving.

As you can see on chart number two, our first quarter adjusted net earnings were $0.55 per share compared to our record first quarter earnings last year of $1.08 per share. Despite this drop, our 2009 results represent our second best performance in the first quarter since we relisted on the New York stock exchange in 1991. We accomplished this by raising our selling prices and managing our global footprints to drive productivity improvements, while balancing production against lower demand as shipments declined 15% year over year.

To offset the dramatic decline in demand experienced in recent months, we temporarily curtailed production in all four regions. As such, we avoided unnecessary and costly inventory buildup. Our inventories actually declined slightly on a year-over-year basis. Even more importantly, we protected the pricing gains we have achieved over the last two years.

The option of lowering prices to reduce inventory and to try to push volume into a non-responsive market would have been shortsighted strategy as it would take years to regain price once demands returns. At this point in time we currently have eight furnaces and many machine lines temporarily shut down. When demand picks up, we can quickly bring those furnaces and machines back online.

Despite a difficult market, we achieved our price objectives in the first quarter. While varying from region-to-region, higher selling prices and improved product mix contributed 6.3% to sales. This more than offset cost inflation, which continues, but at more moderate level. We are absolutely committed to ensuring that our prices are competitive, reflect the value we provide to our customers, and are not simply a function of volume and input costs.

Over the past two years the goal of our margin strategy was to recover lost ground. Inflation was skyrocketing so we had to increase prices quite dramatically to keep pace with inflation. We were successful and we improved our margins significantly. Now, cost inflation primarily in energy and transportation and some raw materials is slowing and is no longer the primary driver in determining prices.

Other factors like quality, service, innovation and technologies that help differentiate our customers' brand in the marketplace have increased in relative importance in establishing price points.

We continue to benefit from our strategic footprint alignment initiative first introduced in 2007. In the first quarter of 2009, we took out $33 million of fixed costs associated with this initiative. As we closed high cost plants, we moved production to other facilities with available capacity and in some cases we've invested in the receiving plants to help accommodate the new volume.

Overall, our payback and shutting down inefficient facilities is generally less than two years. I want to emphasize here that our decisions to shut down furnaces and plants on a permanent basis are tied to improving our asset utilization and are not a reaction to current economic conditions.

Maintaining our financial health remains a top priority. Many of the measures we began taking in 2007 helped prepare us for these turbulent times, even though, we could not have anticipated the severity of the global recession. We continue to have a very strong balance sheet. Our debt remained consistent with year-end 2008 and we had good liquidity at the end of the quarter.

Although the first quarter's double-digit drop in volume was more severe than expected, we believe we hit the trough in January. Our business outlook is improving as volume declines appear to be moderating in all regions. We also believe the inventory destocking trend that contributed to lower shipments has begun to abate.

Most of our annual pricing adjustments reset in the first quarter, so we expect to maintain our relative price position. Cost inflation should continue to moderate and we remain committed to improving productivity through our strategic footprint alignment.

Let me now review our performance by region. As you can see on chart number three, all regions contributed to our quarterly segment profit of $192 million, compared to $322 million last year. Since fluctuations in foreign currency exchange rates have a big impact on our results, we've provided a foreign exchange neutral year-over-year comparison of first quarter regional profits. This shows 2009 profits in local currency translated at 2008 exchange rates.

Europe, which is our largest market, continues to be our most challenging region and accounted for most of our year-over-year decline in segment profit. Based on publicly available sources, many of our European customers experienced significant volume declines in the first quarter. For instance, recent reports on beer shipments for a major European producer indicated that volumes across the continent were down 10% to 12%, while exports to the US were off 16% in the quarter.

Spirits were off double-digits and champagne sales were down across Europe, between 20% and 50% in the first two months of the year. In some cases, destocking trends caused our European volume declines to exceed those of our customers and this was the case regardless of whether we were a sole supplier or had a shared position.

The European marketplace is unique as we have numerous smaller competitors and many low volume customers. Many of our customers there are heavily dependent on export markets and who supplies pipelines, of course, take much longer to clear in a recession before orders resume to more stable levels. But the good news is that it appears we have hit the bottom in Europe and demand declines are beginning to moderate there, as well.

In North America, profits improved year-over-year due to benefits from our footprint initiative, but our business was impacted by lower consumer demand and a constricted economy. We have seen a notable decline in beer sales, which is a key market for us. When people consume beverages in restaurants and bars, more glass is used. So the fact that people are going out less has impacted the relative share of glass versus other packaging material.

In addition, consumers have also been trading down from premium brands to normal beer brands, which very often are supplied in can. While all of this impacts our sales in the short-term, we believe that demand will return once market conditions and consumer confidence improves.

South America experienced the most significant percentage fall-off in glass demand behind Europe. This is clearly a reflection of the recession. In most of our markets there, we have a fairly clear visibility into our customers' business, so we know that lower shipments reflect a soft economy and are not due to pricing or lost market share.

Lower food exports to the US and Europe and decreased beer production have been considerable drivers of lower demand. We have also seen that our customers are preserving capital by delaying the purchase of new returnable and refillable bottles. They are reusing bottles longer than normal. This has a temporary, albeit significant impact on glass shipments. As a result, we swiftly curtailed production on a temporary basis in South America. While the intent to complete the construction of the second furnace at the Lurin, Peru plant will delay its startup until demand warrants.

We are also seeing continuing high inflation in our raw materials costs in South America, as well as the devaluation of several South American currencies against the US dollar. Despite these headwinds, South American profits as a percent of sales have held up well as we have successfully implemented our pricing strategy and growth initiatives in the region.

In Asia Pacific, we continued to see two different patterns, one in China and another in Australia and New Zealand. Demand is slowing in Australia, but to a lesser degree than in other regions. While Asia Pacific's wine exports are more attractive due to the weaker Australian and New Zealand currencies, global wine consumption is down due to the recession. We expect this decline will be temporary and that wine demands will return once a global economy begins to improve.

The recession has severely impacted China's export market, and sales growth has slowed there considerably. As in South America, the demand for refillable bottles has dropped abruptly and customers are using bottles longer or even buying used bottles from the secondary market. As a result, we temporarily curtailed some production in China also. But we continue to see great long-term opportunity there. We are adding salespeople to our organization in China to more aggressively pursue volume in the domestic market. Also, the Chinese Government has recently introduced a substantial stimulus package that we believe will bring some general economic recovery later in the year.

Overall, we are satisfied with our relative performance in this very challenging quarter. Our fundamentals are sound. We've demonstrated great flexibility in dealing with lower demand, driven improved productivity and maintained our financial flexibility.

Now, let me turn the call over to Ed, who will review our results in more detail. Ed.

Ed White

Thanks, Al for that overview. I will start with chart number four. This was the most challenging market I've seen in my 35 years with O-I. Nevertheless, we reported one of our best first quarters ever. I believe this is a strong endorsement of our pricing strategy and our focus on productivity and cost, all key elements of our operational excellence strategy.

Despite this accomplishment, our first quarter earnings declined from the record high results of a year ago. As you can see on the earnings reconciliation, our first quarter 2009 adjusted EPS was $0.55 per share, compared to $1.08 in the first quarter of 2008. On the chart we've highlighted the three factors that most impacted earnings. Lower volume and higher manufacturing and delivery costs negatively impacted earnings by $0.41 and $0.59, respectively, while higher price and improved product mix added $0.53. I will expand on these shortly, but let me first address a few other factors.

Earnings declined $0.13 per share due to foreign currency translation related to the stronger US dollar. Since about 70% of our business is outside the US, a stronger dollar negatively impacts our reported earnings. Higher corporate costs reduced earnings $0.06, primarily due to pension expense in 2009, compared to pension income in 2008. And interest expense declined $0.07 due to lower debt levels and lower interest rates, as well as the favorable effect of foreign currency translation on interest associated with non-US denominated debt.

Now let's look at our sales reconciliation on chart number five. As you can see, segment sales declined from $1.9 billion in the first quarter of 2008 to $1.5 billion in 2009. A 15% decline in glass shipments impacted net sales by nearly $300 million, while the stronger US dollar further reduced revenues by approximately $246 million. Despite a soft market, we achieved higher selling prices and improved product mix, which contributed $120 million, or 6.3%, to sales.

After the global recession began in earnest last fall glass demand declined at an accelerated rate until reaching trough levels this January. Since the end of January, year-over-year declines have moderated. This suggests the inventory destocking cycle has subsided in many end-use markets. While the degree of destocking was greater than expected, underlying volume trends were consistent with expectations we shared with you on our earnings call in January.

I want to reinforce the fact that as the industry leader, we've not been afraid to throttle back our capacity in light of changing market demand. We strongly believe that it is not a good use of shareholders' money to purchase raw materials and storage pallets to make and warehouse bottles that we cannot sell in the near term.

Now, let me acknowledge the critical role our plant managers and manufacturing teams have played in accomplishing these goals. Despite the challenges presented in temporarily shutting down production capacity, the team still achieved record productivity levels last quarter. We commend them for this accomplishment, as it shows our response to this downturn was measured and deliberate and reflects their 'can-do' attitude.

Let's move now to our operating profit reconciliation, chart number six. Segment operating profit for the first quarter was $192 million, down from $322 million last year. Our year-over-year shipment declines reduced operating profits by $94 million. As mentioned, earnings benefited $121 million due to higher prices and improved mix. Manufacturing and delivery costs increased $133 million in the quarter. Let me talk about the three largest components included in that line.

First, we incurred more than $100 million of unabsorbed fixed cost as a result of our temporary production curtailment. Inflation was the second component. While moderating in recent months, inflation still impacted earnings by approximately $66 million in the first quarter, primarily due to higher raw material prices. As prices for key input costs have risen, our Lean Six Sigma and other productivity initiatives have eliminated waste and inefficiencies across the company, helping us control overall costs.

Temporary curtailments and cost inflation were partially offset by benefits from our strategic footprint realignment, which removed $33 million of fixed costs from our system. Our reconciliation also reflects a number of other factors. Operating expenses, primarily SG&A and engineering in our operating unit, were up $3 million due in part to an increase in our non-cash pension expense. Foreign currency translation negatively impacted earnings by $29 million in the quarter.

As shown on chart number seven, our cost profile has benefited from moderating inflation and savings from our strategic footprint alignment. 2008 inflation approximated $390 million, clearly driven by unprecedented high energy prices. We now expect 2009 net inflation will be $150 million or lower. Of course, this estimate is subject to revision given the extreme volatility of the energy and commodity market.

On the right side of this chart, we illustrate the quarterly benefits from our strategic footprint initiative. The flexibility and breadth of our global manufacturing base is a key competitive advantage. By closing high-cost operations and shifting volume to more efficient plants, we improved capacity utilization. We make these decisions with great care and consideration.

We know we are affecting the livelihood of many long-term and dedicated employees. Since late 2007, we have permanently shut down four plants and an additional seven furnaces. We have now closed a total of 14 furnaces, including three in Europe during the quarter just ended. Most of this restructuring has occurred in North America, which contributed to that region's year-over-year first quarter operating profit improvement. We also recorded a $50 million restructuring charge in the first quarter, principally for additional permanent capacity reductions.

Chart number eight illustrates our year-over-year free cash flow reconciliation. First quarter 2009 was a $75 million use of free cash compared to a $6 million source of cash in the first quarter last year. The red bars show decreases in components of cash compared to the prior year, while the green bars show increases.

The first red bar shows segment operating profit was $130 million lower than the first quarter last year. D&A was lower by $28 million, reflecting the impact of weaker foreign currencies and a smaller footprint. Capital expenditures were consistent with prior year, and while we invested $7 million more in restructuring and growth capital projects in the first quarter, maintenance capital was down $6 million compared to prior. The last red bar reflects restructuring payments, principally for severance, which were $16 million higher than last year. We view both severance and restructuring capital as necessary investments to optimize our company's long-term profitability.

Looking at the green bars, we benefited from working capital management and from less cash spending for settlement of asbestos-related claims. Although, our working capital balances increased in the first quarter, which is typical due to seasonal trends in our business, the growth was less than the same period last year. This is a benefit of our temporary production curtailment.

In addition, asbestos spending declined approximately 13% in the first quarter. We look for a similar trend to continue throughout the year. Other operating cash flow items defined in the footnote at the bottom of this chart contributed $48 million and were principally driven by lower interest and tax payments.

Looking ahead, we expect that the second quarter will be a use of free cash due to anticipated restructuring payments and higher capital expenditure.

Moving onto chart number nine, O-I entered 2009 with a strong balance sheet and excellent liquidity. Our total debt at the end of the first quarter was $3.3 billion, consistent with year-end 2008 levels. Based on our bank covenant agreements, our debt to EBITDA ratio was 2.2, within our targeted range and well below 4.15, the current limit in our bank covenant.

As of March 31, 2009, credit availability under our global revolver, which do not mature until 2012, was $642 million, and this is in addition to our cash on hand. I also want to point out that Standard & Poor's recently upgraded O-I's credit outlook from stable to positive. We believe this reflects our strong financial position and the great fundamentals of our business.

We will continue to invest in organic growth, which includes expansion and attractive markets and optimizing our footprint. That we are aware of today's challenging business climate and we'll not put our financial flexibility at risk. We have identified a number of capital projects, totaling between $50 million and $60 million that may be deferred if business conditions should warrant.

The chart illustrates our anticipated capital spending levels and the opportunity to reduce expenditures if needed. Of course, our capital spending amounts will be impacted by foreign exchange rates, given our international footprint. We will keep you posted on our spending plans as the year progresses.

In addition to capital investment, we expect cash restructuring payments of $120 million in 2009, primarily due to severance, as we implement our footprint realignment. Given concerns about the impact of market volatility on pension funding, I want to discuss our expectations for future pension contribution.

We currently expect 2009 contribution will approximate $75 million to $80 million, which is only $15 million to $20 million higher than 2008 contribution. Please note, we are not required to, nor do we anticipate making any contributions to our US pension plans this year. Given recent equity market volatility, we have analyzed potential required 2010 pension contributions. Assuming a discount rate and asset returns consistent with 2008, we expect only a modest increase in contributions to our non-US plans in 2010.

Furthermore, we still do not anticipate any required contributions to the US plan. However, future pension contributions are a function of many unpredictable factors, such as the return on plant assets and discount rates, as such, we may elect to make contributions based on the developing outlook for future years.

Turning now to chart number 10; while our business outlook is improving, we continue to face an uncertain market. Given our significant operating leverage and the lack of clarity on future demand, we recognize that it's difficult for the investment community to make independent projections of our future earnings.

To provide more clarity on our outlook, we've outlined the key business factors that drive earnings and cash. The arrows illustrate the anticipated favorable or unfavorable impact on second quarter 2009 earnings for each factor, both on a year-over-year and a sequential basis.

We expect glass shipments will be down year-over-year in the second quarter, reflecting still challenging market conditions, but the second quarter is typically stronger than the first due to seasonal demand patterns, so with that, and the abatement of inventory destocking, we expect shipments will improve sequentially over the coming months.

We expect production curtailments will decline in the second quarter, but temporary down time should decrease compared to the first quarter due to improved seasonal demand and lower destocking. As most of our price adjustments reset in the first quarter of each year, we expect higher average prices on a year-over-year basis, with prices generally stable between first and second quarter.

While energy prices have declined, other key input costs will remain higher compared to 2008, negatively impacting earnings on a year-over-year basis. As lower energy prices work their way through the supply chain, fuel costs should decline from the first to second quarter.

And lastly, we continue to see incremental economic benefits from our strategic footprint initiative. Overall, we expect second quarter 2009 adjusted net earnings will be down year-over-year, but up from the first quarter just ended.

That wraps up our financial review. I will now turn the call back over to Al for some final comments.

Al Stroucken

Thanks, Ed. Overall, we feel good about our performance in the first quarter of 2009 considering the economic environment. We executed our strategies well, we preserved our financial flexibility and I believe that we have enhanced our leadership position in the global glass industry by the quick and considered measures we have taken to balance our production with demand.

As we derive benefits from our footprint initiative, we continue to invest in our own research and development to enhance our technological capabilities. We are also working to strengthen our marketing and innovation to better serve the needs of our customers, and to tap into markets that we don't current service.

We're now seeing glimmers of consumer confidence returning, and with that, increasing demand. I'm confident that we will emerge from this recession still a very strong and profitable company.

Now, I will ask the operator to open the line for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Rick Skidmore with Goldman Sachs.

Rick Skidmore - Goldman Sachs

Can you just talk about how you see the capacity shuts unfolding and specifically your fixed cost reduction efforts unfolding as you move through the year?

Al Stroucken

I think as far as permanent shutdowns is concerned, I assume that's what you're referring to, we had said at the beginning of this year that we expect the benefit of about $100 million in the course of this year. I'd say the comparison against previous year is most probably going to be more favorable in the first half of the year as we will be lapping some of the closure activities that we had in the second half of last year.

Rick Skidmore - Goldman Sachs

Just following up on that, looking at specifically North America, and as you approach the two big contracts that you have coming up, do you anticipate anything happening in North America or is the focus on capacity closures primarily going to be Europe?

Al Stroucken

I want to make very clear that what we are doing with regard to permanent adjustments is really adjusting our global footprint independent of the present economic conditions and also independent of what we may or may not expect is going to happen with one or other customers. So all the things that we have put in place at this point in time, we are starting from the assumption that we have too much installed assets that we did not need and this is the correction that we are presently going through, so it's quite independent of what is presently occurring in the marketplace.

Operator

And your next question is from the line of Claudia Hueston with JPMorgan.

Claudia Hueston - JPMorgan

Can you just provide a little bit more color on the confidence you have that volumes have bottomed, maybe a little bit of clarity on just how demand is trending now. Are there differences by regions? Are there some places that have picked up more than others? And then just if you have any expectation for volume as a whole for 2009 that you'd like to share, that would be helpful.

Al Stroucken

As I said at the last conference call, visibility is very limited, it's quite murky out there and I have to tell you even after the first quarter, it's still pretty murky out there. But let me try to at least contextually give you some indications. If we look at the first quarter and what we typically saw or what we saw last year was between January and March there was a ramp-up of about 4% of volume in March compared to January. This year that's a difference of 20%, so it really shows you how deep the trough was and what the correction has been.

Normally in a second quarter we are seeing, compared to the first quarter, about a 10% to 15% volume pickup. So that is, I think, giving you at least some magnitude of what the next quarter is going to look like with regard to volume evolution.

For the total year, I would say the significant reductions in pipeline inventories is, of course, going to abate, it's not going to be present anymore, but it still is going to have an impact on the overall volumes for the year. I would expect that the remainder of the year is most probably going to show more in line with what we generally see in a recession, even though this one may be a bit deeper, so I would expect perhaps volumes to be lower for the remainder of the year by the mid-single digits to the upper-single digits.

Claudia Hueston - JPMorgan

Okay. That's really helpful. Thank you very much. And then just in terms of geography, are there regions where you think you've seen more of a pickup, I mean as Europe, which fell so much, have you seen more of a pickup there?

Al Stroucken

I would say that clearly North America is ahead of the game as far as volume evolution is concerned. I believe the United States went into this recession first and it's most probably trailing Europe by about six months or so, as far as time is concerned. Latin America generally reacts just more swiftly to changes in demand, so we may have seen a delayed reaction, but we may see a fairly swift positive reaction of the market turns as well.

Operator

And your next question is from the line of Tim Thein with Citigroup.

Tim Thein - Citigroup

Hi. Thanks. Good morning and congrats on good results in a very difficult environment. The question is, going back to the slides, on slide seven, in terms of the full-year cost inflation, just so I'm clear here and to avoid any confusion, I guess on the range for expected cost inflation, is that compared to the manufacturing and delivery line, how you present it in slide six or is that compared to the $66 million in cost inflation that was part of that?

Al Stroucken

That's compared to the $66 million cost inflation that we showed earlier. So it's not to the manufacturing costs.

Tim Thein - Citigroup

Okay. So call it $30 million or so per quarter versus the $66 million, correct?

Ed White

If you say the high end was $150 million we thought it could be lower for the full year. We will have seen more than what we would say, we've seen about 40% probably of our inflation in the first quarter, the last 60% we will see in the next three, and if it's moderating, you could see us maybe pull even in the back half of the back quarter.

Al Stroucken

I think the dotted line gives you an indication of the level of uncertainty that we still have at this point in time, because we feel that perhaps in the course of this year we may see some additional weakness, but we have not any clear indications of that yet.

Tim Thein - Citigroup

Okay. And, Ed, in terms of looking at the operating income impact from volume declines, if you strip out what down time cost you as a percentage of sales, it was in the low 30% versus up about I guess 700, 800 basis points on a year-over-year basis. Is that a good ballpark to be at in terms of 2009 or should that number decline as the year goes on , as you see some of the fixed cost savings kick in? Can you help on that?

Ed White

Tim, what we said is that we had a $100 million penalty in the quarter from temporary shutdowns. We saw a $33 million benefit of removed fixed costs, principally what we did in Canada, North America last year. As that goes through the year, that temporary shutdown penalty should be getting smaller. We've always talked about '09 being a little bit of a mirror of '08, where '08, it got progressively worse and '09 we are seeing progressive improvement.

Al Stroucken

Yes, and I think you also have to look at these temporary shutdowns really as a component of the service we are obligated to provide to our customers, because they themselves too are pretty uncertain right now about what volume is going to do, but certainly all our customers expect to have the packaging goods available when they need it if demand picks up. So we are taking perhaps a greater charge at this point in time by temporarily shutting down, because we really feel that demand is going to recover, and if that demand recovers, we want to be ready for our customers.

Operator

And your next question is from the line of George Staphos with Bank of America-Merrill Lynch.

George Staphos - Bank of America-Merrill Lynch

Thanks, everyone. Good morning. Thanks for all the details. I just wanted to come back to the volume question for a little bit. You were saying earlier that traditionally volume picks up 10% to 15% sequentially from the first quarter to the second quarter, if I heard you correctly. You're also guiding that second quarter volume, if I read this right, should be down versus last year's second quarter.

Now, if we start with minus 15% and add 10% to 15%, we are very simplistically realizing flat to minus 5%, yet last year if I remember correctly, you were down 6%. So if you can help us maybe further refine that estimate and what some of the exit rates were in the regions that would be helpful?

Al Stroucken

I think when you say last year we were down, that was against the previous year second quarter, so I think we are mixing up time periods here. So what I'm talking about is sequentially that volume is going to go up 10% to 15% from the first quarter of this year. Last year we also had a double-digit increase, if I recall correctly, in the second quarter from the first quarter.

George Staphos - Bank of America-Merrill Lynch

Okay. Thanks, Al. I appreciate that. If we parse Europe a bit, revenues were down quite a bit, we can make some assumptions on the FX and pricing trend. Were volumes in Europe down mid-20s in the first quarter and how were those volumes trending year-on-year in the second quarter?

Al Stroucken

We are normally not giving the specific details by region. Your number is not correct, by the way, but I think that overall certainly Europe together with Latin America, the regions on a percentage basis we saw the most significant drops, and for two different reasons. In Europe it really had to do with a lot of our business there being based on exports, whether it's in the liquor or beer segment or in the wine or champagne segment, virtually everything is export oriented.

Whereas in Latin America, we had a component of exports, in Peru, for foodstuffs, but certainly the predominant fact in Latin America was that our customers were husbanding their capital and were not replacing their flows as rapidly or as quickly as they normally would and that of course creates significant shifts in volume.

George Staphos - Bank of America-Merrill Lynch

10 years ago when South America went through the downturn as your customers extended their float lasted, I don't know, a couple years, it might have been longer than that, what makes you hopeful that this recovery and pickup in demand will be quicker? Thanks, guys.

Al Stroucken

Well, I wasn't here at the time. What I've seen, though, only showed to indicate it was one year or 1-1/2 years, because it may have straddled two years as far as the effect was concerned. I believe a real difference at this point in time, because at that point in time we also saw a significant drop in profitability which we are not seeing this year. The reason is, I think we are reacting much more swiftly and adroitly to this change in demand and are taking costs out of the operations as it is occurring.

Operator

And your next question is from the line of Peter Ruschmeier with Barclays Capital.

Peter Ruschmeier - Barclays Capital

Thanks and good morning. A couple of questions, I was curious if you could elaborate on your expectations for the number of furnaces that are on the watch list for closure. If you look at the next 12 to 24 months, do you have a range of facilities that you would be contemplating possibly closing permanently?

Al Stroucken

We had said in the second quarter of last year that we were going to look at closing another 10 to 15 furnaces. That number is still valid. I think we closed three in the first quarter of this year, so we are going to continue to go through those steps. But as I said before, this is not a reaction to the demand pattern that we are presently seeing in the market. This is an adjustment of our long-term footprint profile that we feel is needed to serve our markets adequately and profitably. So there is no reason for us at this point in time to change the pace nor the scope of those intended permanent closures.

Peter Ruschmeier - Barclays Capital

Okay. That's helpful. And the $120 million of cash restructuring charges, can you mention how much were the cash charges for 1Q and do you have an approximate time line? Should we straight line that over the course of the year?

Ed White

You can't quite straight line it. What we had was about $20 million of spending in the quarter. We have tried to put that down on our free cash flow statement, which I think is in the back there of the deck. So it was $16 million higher than prior year's spending. In that $120 million, we said there would be about $40 million of spending in '09 based on '08 actions that had not been completed, spending had not been completed yet, which would say there would be $80 million of additional spending. And we have just announced three furnaces in the quarter so that ought to play out over the next three to four months, and then we've said we are also in conversations and consultation across the globe on the next steps.

Peter Ruschmeier - Barclays Capital

Okay. That's helpful. Ed, maybe a couple of quick ones for you if I could, any update on your target for capital spending for the year?

Ed White

Well, I'll just stay with what we said on the script, that we've got that chart that shows the two components, the maintenance and then in the yellow you had the New Zealand and the capital required to move business out of locations where we are shuttering capacity. But we also said that there's probably a $50 million to $60 million flex downward we can do as our global glass team is looking at how you phase rebuilds on furnaces and things like that given where we are in terms of the economic outlook.

Al Stroucken

And the way to look at this Peter is that the flex that we are building in is basically for projects that typically would be considered productivity improvements, higher throughput. And of course, as demand is slow at this point in time, the question is really whether we would get the immediate payback that we had and visits at that point in time. But only time in the course of this year will tell whether this makes sense and is prudent to make those investments in the time line that we had originally anticipated, but certainly gives us flexibility, because if demand is down and business would be down, then of course we would not be spending this kind of money.

Ed White

With the number of furnaces we have, we can stagger the rebuild schedule to a certain degree, which again gives us a capital spending flexibility that we think is very useful for us.

Peter Ruschmeier - Barclays Capital

Okay. Just lastly, if I could, I know visibility on this question may be difficult, but latest guidance for book taxes looking forward and how do you think about cash taxes relative to your book taxes for the year?

Ed White

I just kind of live in the cash world so I'll say our cash taxes we think will be higher than they were last year. Last year I think we were at about the 165 range, but we said this year would be maybe 40 to 50 higher. Given, I think, the profit outlook right now, we will probably be more in the 190, 200 range on cash taxes.

Operator

And your next question is from the line of Al Kabili with MacQuarie Research.

Al Kabili - MacQuarie Research

On the down time, could you help us a little bit with how you see the second quarter progressing right now? I believe was it $100 million in the first quarter and I know it's less, but can you give us a ballpark of what it's looking like right now?

Al Stroucken

Well, I don't think we want to be that specific, but as we mentioned in our comments, we expect volume to be about 10% to 15% better than in the first quarter of this year, if that were to follow a typical pattern. With that in mind, we will adjust our manufacturing output by that same amount, so that we maintain a fairly stable inventory balance. So I think that gives you at least an indication.

Al Kabili - MacQuarie Research

Okay.

Ed White

Al, one of the challenges we have and we are up to it is, irrespective of whatever forecast we are getting from our customers, when they decide they really want the bottles, they expect us to deliver and we're going to be there for them. So we are watching this closely.

Al Kabili - MacQuarie Research

Okay. Got it. And at the current run rate, does that imply, then, that you would need additional downtime in the third and fourth quarter as well?

Ed White

That's too far out for us to comment in this market.

Al Stroucken

But you will recall, Al, we started to see the decline in shipments last year in the middle of the year and then in the second half and particularly in the fourth quarter we really took the correction. I think we're much more on top of things at this point in time. So I would say, on a comparable basis, we certainly already have set a low base for last year as the base so I don't think it's going to be quite as dramatic.

Al Kabili - MacQuarie Research

Okay. And then on the volumes, revisiting that a bit, the 15% decline in the quarter, are you losing some share in some of the mature markets like Europe? Are you finding you have to walk away from some business to get the strong pricing that you've been able to get?

Al Stroucken

I think a lot of our walkaways were last year and we saw that in the second half and I believe we mentioned that about 50% to 60% or 70% of our volume loss that we saw in the last quarter were most probably due to competitive action, so that gives you about a five percentage point or six percentage point volume loss to the competition. And I don't think that that has exacerbated in the first quarter. I think it has kept that level. So I think it has been fairly stable.

What we have seen and particularly in Europe where, as I indicated in my last conference call, we still had a lot of competitors producing at the usual rate and so building up a lot of inventory. Some of that inventory was being tried to be pushed into the marketplace and of course we saw some pricing action there, but I think we are generally pretty much on top of things and have the ability to react appropriately to make sure that we maintain our shares.

Ed White

Now we are going to have to move onto our next question from someone else. Thanks again.

Operator

And your next question is from the line of Alton Stump with Longbow Research.

Alton Stump - Longbow Research

Good job on the quarter. Two quick questions; first off, on input cost front, I was curious if you can talk just in terms of how over the last couple of months maybe that view has changed, particularly on the soda ash front, whether or not the actual hikes that came at the first of the year were maybe a bit lighter than you would have thought heading into the first of the year?

Ed White

Soda ash certainly ended up in where we were settling in on our contracts for the year in January, significantly lower than what the soda ash industry was advertising back in September, October last year. I think if you look at some of the public data, it came in probably at about one-fourth of what they had hoped for.

Al Stroucken

The CMAI publications, which really specifically report on soda ash, still show an average inflation in Europe of around 12% to 15% and in North America around 15%, in Latin America it's still very high, between 25% and 35%. So it may have tempered somewhat, because Latin America I think initially was looking at a 60% or so inflation, so it has come down somewhat.

Certainly I think also recently a soda ash plant in the Netherlands was closed in Delfzijl or at least was announced to be closed, which has taken some of the pressure off the marketplace so it's still up in the air at this point in time how this is going to play out.

Ed White

And a little more color on South America, because they are buying soda ash in dollars. South America was looking at, on an internal inflation basis, about a 25% price increase in soda ash just because of the weakness of their currency versus the dollar year-over-year, so that's why that number was so high for South America.

Alton Stump - Longbow Research

Thank you, that's helpful. And then just one quick question in Europe, obviously, that's always the region every year where there's the most risk from a competitive behavior standpoint. If you could just talk about what you've seen over the last maybe six to eight weeks whether or not it looks like your competition might be getting more rational or not?

Al Stroucken

Well, we hope everybody in this market is rational. We may not always agree with their strategies, but we certainly have seen much more frantic actions in the first two months of the year than we saw in March, and I would assume that as demand is picking up and normalizing a little bit more and the pipeline effect is gone, that people will take a deep breath and start looking again a little bit at some of the stuff that's been ongoing. But we've certainly seen individual actions where we have scratched our head and said it doesn't make any sense, but, fine, you'll always find that in a market that's going through a lot of turmoil.

Operator

And your next question is from the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank

Good morning and a nice quarter in a difficult market. I wonder, Al, if you can provide us with any kind of thoughts or update on the upcoming North American contracts?

Al Stroucken

That's still underway. Of course at this point in time there is a desire on the part of our customers as well to get clarity for next year because we have gotten closer to that point. But we have not yet come to any conclusions in those discussions and in those negotiations. I think there's a variety of factors again that play into this, which is balancing the overall cost inflation that we've seen over the years. Some of those contracts that have not been passed on together with a supply picture that has changed, albeit perhaps only very temporarily changed, and we know from our customer surveys that reliability of supply and availability is extremely important.

So there is a balancing between what really are the opportunities for us to find a point in our pricing negotiations that gives us what we need to recover and what clearly everybody that looks at it objectively would say this is what the need is, and what our customers can feel comfortable with. So we are certainly not at a point where I could make any statements at this point in time what the conclusions of those discussions are going to be.

Mark Wilde - Deutsche Bank

Okay. Then just as a follow on, the one market that you've been pretty consistent about wanting to expand into is China, just wondered if you could provide us with a little update on your thinking there.

Al Stroucken

I think China still is an attractive future market for us. I believe it's quite obvious that with regard to demand profiles, with regard to consumption profiles and so on, as well as with regard to the overall still very unconsolidated supply base, there are plenty of opportunities. Certainly, China is typically a market where a lot of the decisions are made based on price and pricing, and that is certainly much more emphasized in an economic downturn, but we believe there are plenty of opportunities for us for acquisitions to enhance our footprint and base our future growth in the region that is going to develop very nicely.

Now, we all know that generally margins in China tend to be a bit lower than in more developed markets, but that's where the growth is and so we have got to have a position there.

Operator

And your next question is from the line of Chris Manuel with KeyBanc.

Chris Manuel - KeyBanc Capital Markets

A couple questions, as we look through the regions, clearly you're doing much better here in North America. Europe results are, if we look at the margin percentages or things of that nature, still are disappointing to where you have been recently after you've done a lot of work. What does it take to get a little better there? Is it just less curtailment that you've got going forward that will start to get things improving?

I know in the last call you talked about competitors with a lot of inventory. Do you still feel as though you're shouldering a lot of the responsibility there? Maybe if you can talk a little bit about the trajectory and what the competitive landscape changes have been like in Europe?

Al Stroucken

There have been quite a few announcements by our competitors as well in the last couple of months about significant shutdowns and volume curtailments, so I believe even if it may have been delayed eventually the inventory is going to be full and you've got to make the same decisions. So I think that is happening and as these decisions are being made, it's automatically going to take a little bit of the pressure off pushing the inventory in the market because it takes a while to restart those furnaces. So I think that's going to help a little bit in the overall pricing actually.

With regard to margins, I think that with the price increases that we have achieved and with the inflation rates that we are projecting, I think the underlying margins in our business have held up pretty well. What you're seeing in contraction in Europe is primarily influenced of course by currency, and the other part, of course, is because of the temporary shutdowns, because temporary shutdowns in Europe are generally more expensive, relatively more expensive than other parts of the regions, because we have to continue with certain cost structures that in other countries we could at least temporarily eliminate.

Chris Manuel - KeyBanc Capital Markets

Okay. So assuming when you said that most of your curtailments are going to diminish as the year goes on, that should also bode well then for Europe? Is that fair?

Al Stroucken

Yes.

Chris Manuel - KeyBanc Capital Markets

Okay. The second question I had was on the cash, I think you've indicated $120 million out for restructuring this year, but it sounds like you're only about halfway through some of your furnace closures. Should we assume there's going to be a similar size chunk that will continue into 2009 as well?

Al Stroucken

No, I don't think so. Ed mentioned earlier in the call that what we are going to see of the $120 million is about $40 million of carryover from the previous year. So I would assume perhaps we might see a similar carryover, but it depends a little bit on the timing, when these things are going to take place in the rest of this year. So I'd say you'll still see most fully some double-digit impact in cash next year, but it's going to be in the similar range we have seen this year.

Chris Manuel - KeyBanc Capital Markets

Okay. Just one last quick question, Ed, you referenced to pension, can you tell us what you've got left in credit carry forwards?

Ed White

No, not off the top of the head.

Operator

Your final question is from the line of Joe Stivaletti with Goldman Sachs.

Joe Stivaletti - Goldman Sachs

Most of my questions were asked but I just wanted to see if you could update us on pension expense for the year.

Ed White

Yes. We are looking at a delta of about $45 million between last year's pension income and this year's pension expense. Last year the income was $24 million and this year the expense is $20 million.

John Haudrich

That concludes our first quarter earnings conference call. We really appreciate your questions and interest in O-I. Please note that our second quarter conference call is scheduled to be Thursday, July 30, 2009 at 8:30 am Eastern Time. Thank you and have a good day.

Al Stroucken

Thank you, everybody.

Ed White

Thanks.

Operator

And this does conclude today's O-I first quarter 2009 earnings conference call. You may now disconnect.

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Source: Owens-Illinois, Inc. Q1 2009 Earnings Call Transcript
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