O-I Glass, Inc. (OI) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is Angela, and I will be your conference operator. At this time, I would like to welcome everyone to the O-I First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. John Haudrich, Vice President of Finance. Sir, you may begin your conference.

Thank you, Angela. Good morning, and welcome everyone to O-I's first quarter 2011 earnings conference call. I'm joined today by Al Stroucken, our Chairman and CEO; Ed White, our Chief Financial Officer; and several other members of our senior management team. Today, we will discuss key business developments, review our financial results for the first quarter and discuss future trends affecting our business in 2011. Following our prepared remarks, we'll host a question-and-answer 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. Unless otherwise noted, the financial results we are presenting today 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 our earnings press release and in the appendix to this presentation. I'll now turn the call over to Al, who will start on Chart 2.

Thank you, John, and good morning. Our adjusted earnings were $0.47 per share in the first quarter of 2011, compared to $0.48 last year. Overall, higher shipments and production levels were offset by additional costs, including incremental cost inflation. Our total shipments in tonnes were up 7% over the first quarter of 2010. More than 5% of the increase was attributable to our recent acquisitions in South America and China. The rest came from organic growth, driven primarily by our global sales and marketing initiative, Glass Smart, which is successfully generating profitable business with new and existing customers. Sales volumes were up across all regions and end-use categories. Higher shipments increased production levels, and our machine operating rate improved to approximately 93% on a global basis during the first quarter. Significant flooding in Australia during January impacted sales and production at our Brisbane plant, which reduced our earnings by $0.04 per share in the first quarter. While our selling prices were up slightly, the combined effect of price and product mix was essentially flat with prior year. Overall, additional costs offset the benefit of higher volumes and production levels. We incurred incremental cost inflation due to a higher labor, raw material and energy prices. In particular, energy prices in some markets increased rapidly over the course of the quarter and I'll expand on that later. Operating expenses were up as we roll out our new global Glass Smart sales and marketing program and begin the deployment of our SAP system in North America. Furthermore, additional debt to fund the recent and future acquisitions led to a higher interest expense. We expect to see similar business trends in the second quarter. Shipments will be up in all regions on a year-over-year basis. Our recent acquisitions and continued organic growth will drive stronger volumes as our markets continue to recover. Improved shipments will translate into increased production and higher operating rates. Yet we also anticipate higher costs. Cost inflation has accelerated again due to rapidly increasing energy prices. Operating expense and interest expense will also be up in the second quarter. However, a stronger demand profile, as well as terms in our key customer contracts, should support the pass-through of additional cost inflation over the course of 2011, and this should start supporting earnings in the second half of the year. Now let me review our operating performance, beginning with Chart 3. Here, we show first quarter segment operating profits for the company, as well as for each of our 4 regions. Total operating profit was $199 million in the first quarter, up from $193 million last year, primarily driven by stronger performance in both Europe and South America. Our European operating profit was $71 million, up $15 million from the first quarter of 2010. Shipment levels improved by low-single-digits from the prior year, led by stronger growth in both wine and spirits. Demand was particularly strong in France and Spain. Despite additional cost inflation, higher production levels led to lower manufacturing costs on a per tonne basis. In North America, operating profit was $59 million, down from $63 million in the prior year, due to the increased investments and several initiatives, including Glass Smart and SAP, which I mentioned previously. Shipments in North America were up slightly in the first quarter of 2011, despite poor winter weather and the residual impact from prior year contract renegotiations. Volume trends improved over the quarter, indicating a more favorable run rate heading into the second quarter. In fact, we expect to restart 2 idled furnaces in the second quarter to meet increasing demand. This will improve capacity utilization and benefit segment profits in the second half of the year. Our North American team finalized our multi-planned union negotiations in the first quarter, and we believe both parties are satisfied with the terms of this agreement. Importantly, new hourly employees will be eligible for a cash balance pension plan rather than the traditional defined benefit pension plan. Our South American region generated operating profit of $45 million in the first quarter, a 22% improvement over the prior year. Total shipments were up approximately 50%, 5-0 percent. The acquisitions in Brazil and Argentina accounted for 35 percentage points of the volume boost. Robust organic growth represented the rest of this improvement. To support rapid growth, we have been importing glass into Brazil. Leveraging our extensive footprint is one of our great strength at O-I, but this has led to increased transportation costs, which impacted our South American margins. Most of the markets that we serve in South America continue to experience robust improvement in their GDP, and our growth rates have exceeded general market trend. This performance underscores the clear appreciation of glass in these markets, as well as the efforts of our entire team in the region. Given strong growth, we continue to increase productivity in our current footprint. Also we are planning future capacity expansion in the region, which will help reduce higher transportation costs. Our Asia Pacific operating profit was $24 million, down $13 million compared to the first quarter last year. $9 million of the decline pertained to the flooding in Queensland, Australia, which shut down our plant in Brisbane for several weeks. Our Australian team did a great job bringing the plant back into production safely and serving our customers during this very challenging situation. Total glass container shipments were down more than 10% in Australia and New Zealand. In addition to weather issues, the strong Australian and New Zealand dollars negatively impacted exports, particularly wine. Also higher interest rates have reduced disposable income and domestic consumption levels in those countries. Growth remains strong in China, and we have begun integrating the 3 plants we purchased in the fourth quarter. One of our recent acquisitions is just outside the city of Guangzhou, and we are in the process of expanding capacity at this new site and selling our property in the Guangzhou central business district that will be developed for other retail or commercial uses. We expect the proceeds from this sale will fund our future expansion in the area. And as a result, we will both increase our capacity and improve our overall cost position in one of China's most important glass markets. Globally, we are seeing market conditions improve, and our recent acquisitions are beginning to generate real value for O-I. And I'll now turn the call over to Ed.

Thanks, Al. Let's begin our financial review, with the first quarter reconciliations for sales, operating profit and EPS on Chart 4. First quarter 2011 segment sales increased 10% to almost $1.7 billion. The combined effect of price and mix was essentially flat with last year. While average selling prices increased slightly compared to the prior year, this increase was offset by a shift in product mix as beer business began to improve. Normally, we break out the impact on price of North American monthly or quarterly cost pass-through provisions. However, the impact was immaterial in the first quarter as natural gas prices have not shifted much, and escalating freight costs should be passed through in future periods. 7% higher sales volume increased the top line by $95 million, reflecting both additional organic sales and benefits from last year's acquisitions. Finally, currency translation increased our top line by $59 million in the first quarter. Moving over to segment operating profit. The first quarter was $199 million, up $6 million from the same period last year. Segment operating profit benefited slightly from price and mix. Higher volumes improved operating profit by $18 million, largely driven by strong growth of higher margin business in South America. Manufacturing and delivery costs increased $6 million. The combination of inflation of $49 million this quarter and the $9 million impact of the Brisbane plant flooding, offset the $52 million benefit from last year's footprint activities and from higher capacity utilization this year. As expected, operating expense increased $12 million, reflecting investments made in several initiatives that Al mentioned, including Glass Smart and our North American SAP deployment. And currency translation provided a small benefit this quarter. Overall in the first quarter, we saw about $40 million to $45 million of contribution from positive operating leverage, driven by organic growth. This is reflected in both the volume line and the benefit of the higher capacity utilization, which flows through manufacturing and delivery. Operating leverage was most pronounced in Europe and was the biggest factor that led to Europe's 27% year-over-year increase in segment profits this quarter. However, cost inflation offset operating leverage, and we will review this factor more in a minute. Finishing with the EPS reconciliation, our adjusted net income was $0.47 per share in the quarter compared to $0.48 in the prior year quarter. Operating profit was up $0.03 from the prior year and reflected the benefits of higher sales and production volumes this quarter. Earnings were impacted $0.04 from unfavorable nonoperating items, largely due to higher interest expense on incremental debt to fund future acquisitions as well as those completed during 2010. Corporate and retained costs were down slightly from the prior year, mostly due to the benefit of additional machine and equipment sales during the quarter. Furthermore, certain corporate initiatives, including our glass advertising campaign, as well as other supply chain and IT projects, were light in the first quarter but will ramp up as the year progresses. Finally, our only Note 1 item this quarter was a $6 million after-tax restructuring charge related to the closure of our plant in Guangzhou and the planned sale of its property that Al mentioned earlier. Let's move to Chart 5 for more detail on our balance sheet and free cash flow. On March 31, 2011, cash was $430 million, and total debt was nearly $4.4 billion. So net debt was $3.9 billion, an increase of over $900 million from the first quarter of last year as we put our balance sheet to work to fund several acquisitions in 2010. Our net-debt-to-EBITDA ratio was about 3 at the end of the first quarter, and that's at the upper end of our annual leverage target of between 2x and 3x EBITDA. Shifting to free cash flow. Please keep in mind that seasonality in our business usually results in the use of cash in the first half of the calendar year, followed by a strong source of cash in the back half of the year. The first quarter was a $158 million use of free cash flow compared to $80 million use of cash in the first quarter last year. This greater use of cash was due to a larger increase in working capital compared to the first quarter of 2010. The working capital increase this year reflected higher receivables due to sales growth and additional inventories to support seasonally stronger shipment. However, the working capital investment was partially offset by lower capital expenditures, restructuring payments and asbestos payments. Regarding asbestos, let me reiterate our position, given the recent unfavorable jury verdict in McLean County, Illinois. First, our basic fact pattern has not changed, and asbestos remains a limited and declining liability for the company. As far as the recent jury verdict, we continue to deny the conspiracy claim made in this case and will vigorously challenge this verdict if necessary in the appellate courts. O-I, as well as other defendants, have successfully challenged similar conspiracy jury verdicts in the past. Therefore, we have not made any changes to our asbestos-related liability, and we do not anticipate any changes to our 2011 financial outlook as a result of this case. Now moving to the right side of Chart 5, you see our debt maturity schedule as of the end of the first quarter. Our most current bonds are not due until 2014, that leaves only the bank debt due prior to that time. Given current attractive credit markets, we are in discussions with our bank group regarding refinancing options of our bank credit agreement in the second quarter. On Chart 6, we present our business outlook for the second quarter. I will walk through the usual directional guidance on key business drivers that affect earnings and cash flow and will also provide an update on cost inflation. Let's review each of the key business factors, starting with price mix. Given modest cost inflation in 2010, we saw only minimal benefit from annual cost pass-through provisions in the first quarter this year. Consistent with this, prices should be up only slightly in the second quarter, and we expect this benefit will be offset by a change in mix. However, we anticipate a more receptive marketplace for higher pricing over the course of this year, particularly in Europe. Al will expand on this shortly. Sales volume, like the first quarter, we expect second quarter shipment trends will remain in line with our full year outlook for volume, which we anticipate will improve between 5% and 10% from 2010 levels. Cost inflation. On our last earnings call, we provided a 2011 inflation outlook that ranged between $150 million and $180 million. Since that time, we've seen a number of events impact the global energy markets. Well I would like to update you on our energy exposure by region. In South America and Asia Pacific, the clear majority of our energy is purchased under annual fixed agreements. In North America, more than 85% of our customer agreements include monthly or quarterly cost pass-through provisions. So we have limited exposure to further escalating energy prices in those regions during 2011. In Europe, a majority of our energy spend is fixed for 2011, but the remainder is subject to market pricing, especially natural gas. Given recent volatility in European energy prices, which is impacting our variable price position, we are providing more information on the right-hand side of this chart. If average first quarter energy prices in Europe persists for the full year, our global 2011 cost inflation should approximate $200 million. The annualized impact would, of course, be even higher than this projection if we didn't have the majority of energy already covered by fixed price contracts. We estimate that a 5% change in European energy prices, mostly natural gas from the first quarter average, impacts our energy costs in the region by $7 million to $10 million on an annual basis. While it is very difficult at this stage to accurately forecast energy inflation this year, this information should provide additional insights on our cost profile. Now moving to other manufacturing and delivery costs. We expect to see footprint savings and higher operating rates benefit our manufacturing costs in the second quarter. Other costs. Regional operating expense should increase $10 million from the prior year due to the investments in Glass Smart and SAP. Corporate costs will increase about $8 million to $10 million from the prior year, mostly due to higher pension expense and various corporate initiatives. Finally, second quarter net interest expense should remain in line with first quarter levels. Now I will turn it back to Al.

Thanks, Ed. I would like to comment on the market dynamics we have seen over the last few years and add some more recent observations, and I will focus on Europe, given our energy exposure there. Since 2007, we have increased our selling prices to successfully repair our margins even during the recession. Yet in 2010, our prices in Europe declined slightly, given the combination of cost deflation and soft market conditions in the region. While we maintained our focus on price, some of our European competitors took a different route, reporting price deterioration of more than 6% while at full capacity utilization. We were still seeing pockets of pricing pressure this last fall when we negotiated our 2011 annual European customer contracts. Since then, several things have changed in Europe. Demand for our glass containers has strengthened, and energy prices have rapidly increased. Our long-term European customer contracts contain pass-through provisions that allow us to recover inflation albeit with some time delay. But most of our business in Europe is covered by annual contracts based on pricing that was set last fall. Nevertheless, because market conditions have changed so significantly, we have notified these customers that we are instituting an energy surcharge to recover rapidly escalating fuel costs. As we look through the balance of 2011, demand should improve further, especially as we enter the summer season in Europe. Supply is tightening, in part due to the permanent capacity closures over the last 2 years. Strong demand, tightening supply and cost inflation are clear signals that the tide is turning, and this sets the stage for a more robust 2012 pricing negotiation, which will commence later this year. Also, our annual cost pass-through provisions on long-term contracts will result in higher 2012 pricing. Globally, we are also seeing stronger demand and tightening supply. In particular as markets improve in Europe and North America, there is less capacity or less excess capacity, I should say, available to supply the fast-growing emerging regions. As a result, we are restarting the 2 furnaces in North America and plan to add capacity in Latin America and China. This should support continued improvement in free cash flow generation. Of course, we will remain flexible and respond to changing market conditions. Over the long term, we do, of course, remain committed to our business strategy. That means we will continue to expand in attractive emerging markets, both through acquisitions and organic growth initiatives. We are investing in innovation and technology, and we are strengthening our ability to offer our customers innovative and brand differentiating glass packaging solutions. Through our execution of these strategies, we expect to create additional shareholder value and to increase free cash flow to approximately $300 million in 2011. Thank you, and now, I will ask Angela to open up the lines for your questions.

[Operator Instructions] And your first question is from the line of Tim Thein with Citigroup.

First, Ed, a question for you is on the volume pull-through that you reported, when you combine the -- going back to the kind of operating income bridge, the $18 million from volume plus the $52 million in terms of higher utilization, that equates to about a 74% pull-through. And I just want to make sure we're -- I'm comparing kind of apples-to-apples here and going back to what you had said prior quarter about, assume 40% to 60% in developed markets and then the acquisition-related growth coming through closer in line with segment margin levels. Can you just kind of parse that out in terms of what you're comparing and what we should expect going forward from those 2 lines?

Tim, our guidance on incremental and decremental margins is -- you've got the right range that we've talked about publicly. What you have in the $52 million benefit that you see in the footnote there on Chart 4, that includes about $15 million of footprint benefit, which is really not an incremental benefit because that's just the cost that we're taking out from the closure of the 2 plants in North America. So you'd have to reduce that $52 million by -- that's less $15 million to $17 million number.

Okay, so call it 55% to 60% kind of range, is that fair to use going forward?

Yes, and again, it always depends a little bit on what regions are seeing it. And so you've got a higher fixed costs especially in Europe so you'll get -- you'll be a little bit on the high end of the incremental range. You'll see less of that in some of the markets where it's more variable.

Okay, great. And then secondly, on the price mix, is it still valid? In the last quarter, I think you had said -- assume that could be up to 1% for this year. Is that based on what you report in the first quarter, what should we be thinking about for the balance of the year?

This is Al. We're still looking at that as our objective and target. The question, of course, is going to be a little bit how mix is going to play into this? Especially as beer is going to recover, the beer volume typically tends to have a lower average price than the rest of our business so that may impact a little bit than the comparison. But from a price perspective, that number is about right.

Okay. And just on that mix point though, you called out, Al, wine and spirits in the quarter and then also the organic strength in South America, which I would think would be favorable to mix. Why was that the headwind that you cited in the first quarter?

You saw in the comments that Australia and New Zealand dropped off considerably in their wine area, and they tend to be fairly high-priced, especially also now with the currency having that impact. Then our acquisitions in China are generally beer volumes so that, and price levels in China tend to be lower. So it's really region as well as industry mix that is playing into this.

And your next question is from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Ed, thanks for the energy transparency in Europe. Can you just tell us how much of your energy spend in Europe is variable due to natural gas volatility? And is there any instrument out there that will allow you to hedge out that exposure going forward?

It's about 40%, and the market there really are -- it's kind of purchase contracts, so there's no real hedging or financial derivatives that you have. So that's what we try to do, and a lot of it is kind of set up at the end of the year, get it going, getting ready to go on to the next year. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Okay. And then, Al, this question is for you. Can you just take us through the thought process behind the furnace startups in North America? I mean, it seems like volumes were basically flat in the first quarter. Have you secured additional business that justifies the additions?

Yes. Of course, we went through these contract negotiations that we've talked about many times over the past couple of quarters so we have been actively pursuing other volumes in other business, and we're gaining some of those customers. But what we're seeing as well is an overall broader growth in demand in general. And you will recall that, I believe it was in the first quarter conference call, I said, "If we see beer picking up like 3% or 4%, we're going to have shortages in the marketplace." And fine, we haven't seen that full percentage yet but we also have a seasonality in the marketplace, which is putting quite a bit of pressure at this point in time. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: But just to clarify, the new volume that you picked up, is that beer volume replacing beer volume or is that a slight shift in mix as well?

It's a shift in mix and where we have picked up beer, it's been in the craft year sector, which of course, is also the faster growing segment of the marketplace. One thing that perhaps rounds out this picture, because it's not just a North American situation where markets are tight, it's really across-the-board, with the exception of Australia and New Zealand, one of our competitors in the Americas has notified their customers in the wine business, I believe it was, that they need 100 days lead time for orders. And in Europe, well we've seen one competitor going out and asking for 6 months lead time on orders. So what we're seeing is that demand has clearly strengthened and especially with this quite a bit of the volume that has been taken out of the capacity over the last couple of years, most probably, the supply-demand balance point is at a lower point than it used to be in the past.

And your next question is from the line of Rick Skidmore from Goldman Sachs.

This is actually Alex Ovshey on behalf of Rick. We have a couple of questions. First is just on the contractual pass-throughs that you have in North America inflation. Can you just provide a little bit more detail around the timing and exactly what components of your inflation get passed through?

Well, the pass-through provisions typical are for the more volatile cost components, and in North America, that's typically natural gas as well as transportation. Natural gas, as you can very well surmise from the published data, has not moved as volatile-ly as we have seen in the oil industry. And so, there really has not been a real inflation in the energy side as far as combustion energy is concerned. Now with regards to transportation, of course, we have seen diesel prices going up significantly, and those pass-through provisions have a 3-month delay. So on a quarterly basis then, the freight rates get adjusted to our customers, and so we'll recover some of that as we go into the next quarter, and that should be fairly evident then when we report out on the second quarter.

That's helpful. And then just shifting...

Fuel is about 20% in North American COGS. And so that other 80% then is more of an annual pass-through if you have a multiyear contract.

Then just shifting to Europe and how you're thinking about price there. Is the focus really to offset inflation? Or are you also looking for opportunity to enhance margins in Europe as you did over the last number of years?

Well, we want to make sure that we have the right sequence. First, we have the greatest need, of course, to recover the inflation, and that is going to be the main focus area. If we, however, see a continuation of the very strong demand that we are expecting at this point in time or continuing into, let's say the August, September timeframe, when contracts start to be renegotiated, that will certainly also have an impact on the potential of doing something with regard to margin enhancement.

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

This is actually Benjamin Wong filling in for George. For my first question, if you use the current run rates on commodities and inputs, is the inflation estimate more or less than the $200 million that you provided? And then, I had a follow-up.

Well, we think that there may be about a $20 million of potential upside to those numbers at this point in time, but of course, it's very difficult to predict. That really depends a lot on the political situation, how that's going to evolve.

Okay, so it could be $20 million higher?

Yes.

And then on free cash flow, given the deficit in the first quarter was more than last year, what gives you confidence that you can still achieve $300 million or more of free cash flow?

Well, the buildup in the inventories is, of course, is based on the projected takeoff that we expect going into the high season. And since we have limitations into our flaks with regard to expanding our capacity during the high demand period, we have to build up the inventory to be able to serve our customers. The difference between last year and this year is particularly pronounced in Europe. Where last year, we were still under an inventory control regimen in the first quarter, and then as a result, even demand was not very high but we still missed some shipments in the second quarter of last year. With the demand profiles and projections that we're seeing at this point in time, we just don't think we can let our customers run that risk to be unsupplied for their demand. So as we sell this inventory then, of course, that is automatically then going to generate the cash, and that's why our confidence level of the $300 million is still in place.

And your next question is from the line of Al Kabili from Macquarie.

I guess, Al, first question for me is, could you help us frame out a little bit more in terms of the opportunity for fuel surcharges in Europe? And then in the back half of the year, what percentage of the European business do you see potential opportunity to recover some of this cost inflation in the back half?

Let me frame this situation a little bit for you, Al. You know from past discussions that about 70% of our volume in Europe is subject to these annual contracts, and I think if you look around at our competitors, they have a very similar approaches and percentages. Now clearly, we have to go out with this surcharge, and it's a modification of an agreement that we made a couple of months ago so it will require some give and take in that process. It will depend very largely, of course, on whether there is supporting move by others that are seeing the same inflation rate. If we have -- I don't think that's the case but if we should have competitors that don't see inflation, then of course, that will make that a little bit more difficult. However, one other aspect that we have to take into consideration is that those competitors that last year filled their capacity with more aggressive pricing, of course, have very little room now to get productivity improvements in the course of this year to absorb some of the brunt. So I would assume that the inflation pressure on quite a few of our competitors is in fact much more substantially greater than in our case, so I'm generally very positive about our ability to get a decent recovery of some of the inflation that we're seeing in the energy sector.

Okay. So we should see that price mix, at least for Europe, moving up in the back half if you're successful there?

Absolutely.

Okay. And I guess the second question, I guess this is for Ed. Ed, if you could help us just bridge the North America decline a little bit for us, given the $15 million of footprint savings, I know there was some cost investments going on there but it still seemed -- the decline still took me a little bit by surprise given the $15 million of footprint and maybe if you could help us bridge that.

Well, the North America did have that benefit. If perhaps and Ed can comment on the cost structure. What we did have, of course, in the first quarter of last year was still the tail end of the supply of the beer contract that we have, which had some upside in volumes and contributions that we did not have this year. So you have to look at it as well not only from a cost structure but also from the market dynamic structure. And then in the first quarter of this year, we've also still had some activities in preparing the facilities for increased utilization because we did some shifting of capacities last year to other facilities and they're still ramping up.

Yes, Al, getting ready for the shutdown of 2 factories, we were running our North American footprint mill at full capacity to the first quarter last year. So what you're really seeing a little bit of a timing issue that I think could get more normalized as you look out to the rest of the year. And you'll see that really nice upturn, I think, coming back more in the back half.

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

Congratulations on a solid quarter in spite of a lot of issues. Speaking of one of the issues, when you look at Australia and what's happened there, did that start -- when did that start to get better?

Well, I would say one data point doesn't make a trend yet but certainly, what we saw towards the end of the quarter was that beer was recovering somewhat, in Australia in particular. There was a combination, of course, you all have heard about the floods and the wet summer that Australia had, so that may have had an impact. But what we're really seeing is that the policy of the central bank in Australia, which is driven really by the raw material boom that Australia is experiencing, is raising the interest rates, and most of the mortgages in Australia are variable mortgages and pulling a lot of purchasing power out of the population. And that has had quite a bit of impact on beer sales. And if you look at the brewers that have reported from that region, it's quite obvious that they're all suffering quite significantly, and nobody at this point in time is yet making a big prediction of a recovery. That may be due to the fact, of course, that we're running into the winter season now in Australia and New Zealand. So it's very difficult to see any strong demand anyway. So everybody is really waiting for the end of this year, which is moving in through the spring and summer period for them to see whether that's going to recover. Our activities, however, in the last 8 or 9 months have been to fairly heavily go into other sectors of the market as well. We've been trying to get greater position with our light weighted bottles for the wine industry, even though that overall wine export is declining but still, our share of that segment is improving. So it's going to be a while I think before they recover. I would say, and I tell the people in Australia that it's almost like they went into the recession with a 2-year time delay.

Okay, that's helpful. And my follow-up is, it's sounding like from your commentary that in most regions of the world, volume is coming back very nicely, that the supply demand balance, being very, very good. As I see it, the biggest risk is last time we had energy costs directionally where they are today, that's when demand began to get clipped. How do you assess that balance as you look forward? Do you see energy costs, et cetera, how they impact the consumer as something that could kind of stunt some of that momentum or how do you think about that?

I think there are 2 perspectives. One is with regard to the overall purchasing power of the population and of the consumers, so if transportation costs become very high, if many other factors that have an energy component get passed through to the consumer, eventually there's, of course, going to impact their overall purchasing power and that may then potentially also impact consumables. However, the secondary aspect that we look at as well is competitive positioning with regard to what's happening with plastics, what's happening with aluminum. And there we see the same push as well. So I would say, if we will see an impact, it's most probably an impact of what will be reflected on a broad basis in the economy rather than specifically to the markets that we serve.

[Operator Instructions] And your next question is from the line of Alton Stump with Longbow Research.

I think most of my questions have been asked at this point. But just in the first quarter, Al, the all-in corporate and other expense line was quite a bit lower than what I had modeled. And I know you've made a comment, they'll be up $8 million to $10 million in 2Q. Was there anything that was special that made that number lower? Or was that just too high with my assumption for the first quarter?

No. I think overall, we were, I think, pretty clear on what we said we think our OpEx are going to be in the course of this year. We have used some judgment as we've gone into the year, and we saw inflation picking up to say, "Okay, is this the right time?" I think overall, we have looked at some projects and say, "Okay, we can push that out for a couple of months without hurting the intent and the purpose of the strategy that we want to pursue." And that's most probably most of what you see reflected here.

In my prepared comments, when I talked about our machinery business, which shows up in corporate, retained and other, and we had a major project complete and shipped toward the end of March, which almost is a one-off. So we really talk about that number as kind of an annual number. And the quarterly puts and takes are more just showing the ebbs and flows of project and things like that.

And coming back to this machinery comment, which fails out to give some perspective about what's happening in the glass industry. When I looked at published reports from some of our competitors in the machinery sector, it's clear that their order books have held up quite a bit, which again, I think, is a good trend indicator that demand for glass is strengthening and people are making investments again or upgrading their facilities or streamlining their operations, which also, again, is a very positive perspective.

Your next question is from the line of Tom Mullarkey with Morningstar.

I have a question about the South American business. How much longer are you going to expect to see the margins depress due to extra shipping charges going in there? And if you exclude the imports, what did the operating margin of the product produced in the country actually do versus last year?

Well, I would say overall, clearly, the demand that we're serving at this point in time, does only make sense to serve it from the present locations for a transition period. So we're presently working on some projects that will allow us to help local capacity to cover that demand and then the entire freight, as well as duty aspect would disappear. I would say, I don't have specific numbers about how much of that freight component is, but we have not seen a margin compression in Asia Pacific due to the market -- sorry, in South America due to the marketplace. So what we are seeing -- the full effect that you're seeing is really this issue of supply and demand from other locations.

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

[Audio Gap] for Mark Wilde. Most of my questions have been answered but I'm just wondering if you could just elaborate on that machine equipment sales benefits, if you can actually quantify that?

Well, it was almost $8 million, $10 million, and it was a major project. We manufacture -- we design and manufacture machinery for ourselves and we sell them to our licensees. So you'll see that in our royalty line and then it comes through in the sales and profits on that equipment.

And it's generally included in the overall outlook for the year, but the timing, of course, can be very tricky at times and so, we do not know exactly in which quarter it will happen.

There's also a parts business that goes with that. So when you have 500, 600 machines around the world that are running O-I equipment, the parts is sort of a steady business and then you have the major projects that go on top of that.

Okay. And if you could just go back to Brazil, can you talk about the demand trends in the quarter, was that pretty much in line with what you were expecting heading into the quarter?

Yes. What we have seen is beer was a little bit weaker because it's been very rainy in Brazil as well as in most of the world, I would say. So that had an impact, and you see that also reflected in some of the reports by the brewers that saw a little bit lower demand. But what we're also seeing in Brazil is a very strong growth in areas that typically in North America, you would not find in package and glass, which are nonalcoholic beverages and so on. So that is still going very strong.

And your next question is from the line of Philip Ng with Jefferies. Philip Ng - Jefferies & Company, Inc.: Just had a quick question on North America. You're obviously starting up some plants, I guess demand's picking up. Is that startup cost going to weigh on margins for 2Q? How should I be thinking about that?

I think it depends a little bit on the timing when it occurs but at this point in time, we're scheduling this for about mid of the quarter, and so I don't think it's going to have a negative effect. I think whatever there is going to be as far as maintenance and engineering expense to get it back up will most probably be absorbed by the sales and the returns that we got on the sales in there. Philip Ng - Jefferies & Company, Inc.: Okay. So we should see the normal seasonal pick up in the cost...

I would say in then, then in the second, there you would see the benefit from it. Philip Ng - Jefferies & Company, Inc.: Okay. And then just a little more color on the energy surcharges for Europe. If you guys are successful implementing everything you guys talked about, would you be able to fully offset the incremental inflation on energy?

Well, I would say that given the timing of this and when the inflation started and when we, in fact, will see those surcharges then put in place, you mostly are going talk about 5 to 6 months from the beginning of the year until this starts to take place. So then recovering what you have lost in those first 6 months is most probably not going to be feasible. What you are going to get it is you prevent it from continuing to impacting you in the future.

And we have no further questions at this time. I would like to turn the call back to Mr. John Haudrich for closing remarks.

Thank you, everyone. That concludes our first quarter earnings conference call. Please note that our second quarter 2011 conference call is currently scheduled for Thursday, July 28 at 8:30 a.m. Eastern time. We appreciate your interest in O-I. Again, thank you, and don't forget to choose glass.

This does conclude today's conference. You may now disconnect.