O-I Glass, Inc. (OI) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the O-I First Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is bring recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Chris Manuel, Vice President of Investor Relations. Please go ahead sir.

Thank you, JP and welcome everyone to O-I Glass first quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO; and John Haudrich, our CFO. Today we will provide key business developments and provide a review and outlook of our financial results. Following prepared remarks, we’ll take your questions. Presentation materials for this call are available on the 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. Some of the financials we’re representing today relate to non-GAAP measures such as adjusted earnings, free cash flow, segment operating profit and net debt, which excludes certain items that management considers not representative of ongoing operations. A reconciliation of GAAP to non-GAAP items can be found in our earnings press release and in the appendix to this presentation. Now I’d like to turn the call over to Andres.

Thanks, Chris. Good morning and thank you for your interest in O-I Glass. I would like to start by acknowledging all the hard work and dedication of so many people during these extraordinary times to support millions of people across communities. While the pandemic has created significant pain and hardship for many, every day we see the evidence of people coming together to support each other. The same is true for the O-I team of 27,000 employees who are hard at work every day to help make sure we all have the food and beverage products, essentially during these challenging times. The health and safety of our employees is our top priority. On today's call, John and I will touch on key aspects of the quarter, provide you with some perspective on the Impact COVID-19 is having on our business and highlight the steps we are taking to mitigate that impact. As you've seen, last night we reported adjusted earnings of $0.41 cents per share for the first quarter of 2020, which was in line with our guidance and consistent with the business update we provided back on April 8. Earnings benefited from favorable price and mix and a strong operating performance, reflecting progress on our turnaround initiatives. These benefits compensated for a slightly lower sales volume on favorable FX and higher than expected tax rate. From an operational standpoint, our business has performed well with solid improvements in safety, efficiency, quality and cost. The early success executing our turnaround portfolios is playing a critical role in enabling us to navigate the impact of the pandemic. This includes the improved performance at the eight factories affected by complexity last year. In the countries in which we operate glass containers manufacturing has been largely viewed as essential to the important food and beverage value chain. Yet markets remain highly disrupted, reflecting the actions governments have taken to combat the virus as well as a rapid shift from on-premise to at home consumption patterns. I've been impressed by how customers and suppliers across the value chain have worked together to keep the food and beverage channel to reasonably serve despite a challenging environment. 2020 will be a balancing act as we both navigate COVID-19 and focus on long-term value creation drivers. We are taking a number of preemptive in cost reduction measures to mitigate the financial impact of the pandemic. At the same time, we continue to advance a number of our key programs, including our turnaround initiatives, MAGMA and pursuing a resolution of legacy asbestos liabilities. With the significant uncertainty, we are not providing earnings guidance for the second quarter or full-year. However, we will provide some key guiding principles, including maintaining a strong liquidity, maximizing free cash flow we're using that and proactively implementing effective cost reduction measures. As noted on Slide 4, O-I serves a stable food and beverage market with a balanced portfolio of end market categories, including food, NABs, beer, wine and spirits. Indeed, COVID-19 has disrupted all of our lives. However, people continue to eat and drink. While we expect significant volatility in the short-term, we do anticipate a more modest impact from the pandemic over time. Looking back to a great recession, total glass consumption in Europe and the Americas declined an aggregate of about 3% through a 2-year period spanning 2009 and 2010. That represents the worst of the downturn. On the other hand, consumption increased in Asia Pacific during this period. Of course, every situation is unique. So let me provide more color on how COVID-19 is presently impacting our business on Slide 5. COVID-19 is an impressive and fluid situation. It has deferred from past experiences in two important ways. First, the pandemic has triggered a rapid shift from on-premise to at home consumption patterns. I believe we all witnessed the surge in pantry loading as consumers stocked up at the grocery store when bars and restaurants have closed. As illustrated on the right hand chart, the level of grocery store purchases for key end markets has skyrocketed in mid-March. We estimate about 20% to 25% of our glass is consumed on-premise, meaning in bars and restaurants and the like. However, the majority, about 75% to 80%, is consumed at home. Certainly the on-premise closures are impacting our business. Yet we are also benefiting from significantly higher home consumption patterns. It is too early to know the net effect of those trends on our business, how long it will last and how sustainable those patterns will remain. The second unique aspect of the pandemic has actually been more impactful than the change in consumer product. At least in the short-term, in many markets we are operating under the economics of a stoppage instead of the economics of supply and demand. Unprecedented and widespread regulatory actions to combat the virus have required many aspects of our economies to simply stop regardless of demand. Fortunately, the manufacturer of glass containers has been largely viewed as essential in the countries in which we operate. However, we are still impacted by the rather supply chain issues and in some cases certain end use categories that we serve are not deemed essential. In some geographies, high absenteeism or ability to secure transportation have been issues. Customers have endured similar challenges that have helped it or adjusted filling line requirements in many areas as well. In some markets like the Andean countries, and Mexico beer has not been deemed essential. And we have had to curtail about half of our capacity in those markets. Overall, our shipments were down about 7% in the second half of March, and we anticipate April will be down mid to high teens, which include the impact of temporary stoppage requirements in Mexico and the Andeans. Looking at April, demand was down sharply in the first half of the month, but the trend improved over the second half of the month, excluding the markets impacted by temporary stoppage requirements like Mexico and Andeans. Lower demand was now less than 10% during the last two weeks of April. We will not believe these rates reflect the true demand patents given the level of market and supply chain disruption as well as inventory corrections. We expect shipments levels will normalize after markets reopen. More regional color is provided on this slide. As we contend with significant market volatility, reason is, strong operating performance provides a solid foundation to navigate these times. I'm now as Slide Six. First, the health and safety of our employees is our top priority. We are taking effective protective measures aligned with the WHO and CDC. The actions we implemented in 2019 to drive improve operating performance have begun to gain traction as all of our operations not impacted by COVID-19. Our operating at higher levels of self-sufficiency. On a year-over-year basis, operating costs at our eight focused factories improved $,40 million, which reflects very good progress for the earliest stages of that initiative. As I will discuss in a moment, augmenting our cost transformation effort focused on SGNA while revenue efforts are focused on mix opportunities even to pandemic. Importantly, we're moving with speed and agility to actively run and supply and demand. Naturally, we are optimizing our network to mitigate the full impact of downtime as we tried to concentrate curtailment in a handful of furnaces instead of widespread machine line downtime. We anticipate second quarter would be -- to be down, reflecting the worst of the production dislocations and the trajectory to improve in the second half of the year. Less advanced to Slide 7. And I would share some of the actions we're taking to manage through this pandemic as well as create long-term value. As a result of these efforts, we believe we will emerge in a stronger position. As we navigate COVID-19 we are highly focused on maintaining our liquidity, maximizing free cash flow and we're using debt. As I mentioned, we are quickly aligning supply with demand to avoid expensive inventory yield as we continue to manage all their working capital layers. We now expect 2020 CapEx will approximate to $100 million -- $300 million, or lower. And we are expanding our SG&A reduction program as part of our cost transformation initiatives. As a proactive element, we are implementing a program to temporarily reduce salaries for certain executive officers, including me as the CEO and Board fees by up to 25%, with future repayments subject to achieving certain goals. The company will also temporality refer up to 15% of certain salaried employees' base pay during 2020. As we focus on cash and debt reduction, we are also suspending our dividend and pausing share repurchases. While the status of these efforts will be reviewed periodically, we expect these measures will continue through 2020. At the same time, we will continue with key initiatives to create long-term value for our shareholders. This includes our turnaround initiatives as well as asset optimization efforts. Likewise, we remain committed to changes in our organizational structure to simplify the business and expedite decision making. We will continue to advance MAGMA. Furthermore, the Para Chapter 11 reorganization remains on track as we seek a final resolution to our legacy asbestos liabilities. Our strategic portfolio review is ongoing. However, the resolution of the ANZ process that we previously hoped to complete by mid-year has been halted until markets stabilize. We will continue to run the operation, which has performed well in recent months despite the pandemic. Similarly, some components of the tactical divestiture program have slowed, although we still believe the program will deliver $400 million to $500 million of proceeds by the end of 2021. With that, I'll turn it over to John to detail financing matters.

Thank you, Andres and good morning, everyone. I'm now on Slide 8. As Andres mentioned, our first quarter results were $0.41 per share, which was within our guidance range of $0.40 to $0.45. This was achieved despite $0.09 of additional headwinds reflecting incremental FX pressure, a higher-than-expected tax rate and the initial impact of COVID-19. We estimate the pandemic impacted sales volume by 1.7% and earnings by $0.05 in the first quarter, primarily in the last two weeks of March. Let me walk you through our earnings reconciliation on the right. Segment operating profit was $169 million, which compared to $200 million in the prior year. Nearly all of this change was attributable to FX and temporary items. Higher selling prices more than offset cost inflation, which was elevated due to FX induced inflation, especially in Latin America. Volume and mix was a $12 million headwind, which was fully attributed to the pandemic, as I just mentioned. As you can see, favorable operating costs benefited earnings by $6 million, and reflected the contribution of our various turnaround initiatives despite cost to commission new capacity or brownfield site in Gironcourt as well as other maintenance activity. Non-operating items included lower interest expense following recent refinancing activities and a higher tax rate, mostly due to certain regulatory changes, including Mexico. Bottom line, core operating performance was strong, while reported earnings reflected the unfavorable impact of COVID-19, FX and temporary items. Moving to Slide 9, let me share a little color on regional performance during the quarter. In the Americas, profit was $103 million, down about $4 million on a currency neutral basis. Keep in mind that the pandemic impact results about $7 million due to lower sales and production volumes. Overall, the benefit of good operating performance was more than offset by unfavorable net price and lower sales volume. The region made significant progress with the turnaround initiatives, especially in North America, which was the most impacted by increased mix complexity last year. While price and mix improved as expected, Latin America incurred significant FX induced inflation, resulting in lower net price for the geography. This is not unusual for LatAm, which usually recovers inflation through a higher pricing in subsequent periods. Sales volumes were down about 1%. This reflected the benefit of Nueva Fanal, which was more than offset by the impact of COVID-19 and the continued decline in the North American beer category, which was off about 8% from the prior year. Europe's operating profit was $61 million, which was up slightly from the prior year, adjusting for FX and temporary items despite an estimated $4 million impact from COVID-19. Higher earnings reflected strong price realization in conjunction with the region's mixed improvement strategy. Sales volumes were down 2%, primarily related to the pandemic. Like the Americas, Europe made very good progress with its turnaround initiatives. However, operating costs were elevated due to construction of the new Gironcourt brownfield furnace and other maintenance activities. Asia Pacific's operating profit was $5 million, which was essentially flat with the prior year on a FX adjusted basis, while COVID-19 negatively impacted results $1 million. While prices did increase modestly in the region, higher cost inflation more than offset these gains. Shipments were up 7% and improved in all key markets. Likewise, the region benefited from improved operating performance following significant asset maintenance related downtime in the prior year. Let's shift to cash flows and the balance sheet. I'm now on Slide 10. As you know, the first part of the year is a seasonally use of cash for the business, which reverses to be a strong source of cash in the second half of the year. Our first quarter was a $435 million use of cash, which compares favorably to the prior year by more than $280 million. Most of the improvement was due to suspending asbestos related payments and favorable working capital, including higher AR factoring to secure cash given the pandemic. Factoring levels in March of this year were $126 million higher compared to the prior year period. As you can see on the lower chart, net debt also compares favorably with the prior year, despite funding Paddock prior to the Chapter 11 filing. Over the past year, we have shared a consistent set of capital allocation priorities; derisk the balance sheet, fund our strategy and return value to shareholders. Given COVID-19, we are temporarily changing our capital allocation priorities as shown on the chart. First, we will maintain our strong liquidity, which stood at $1.7 billion or 25% of annual sales at the end of the first quarter, including nearly $900 million of cash on hand. Fortunately, we have no maturities due until March of 2021, which is relatively small, and the next maturity after that isn't due until early 2022. From a bank covenant perspective, our BCA leverage ratio was 3.9x at the end of the first quarter, well below our 5x covenant ceiling. So we have good headroom. As Andres discussed, we will prioritize cash generation. This means we seek to balance supply with demand, with significant focus on working capital management. We will reduce capital expenditures, which we now estimate will be $300 million or lower and substantially focus that on maintenance activities. We intend to maintain our financial flexibility through this down cycle, so we will focus on reducing debt as a means to transfer value to shareholders. As a result, we are suspending our dividend and pausing our share repurchase program. We will continue to manage our legacy liabilities and the Paddock Chapter 11 process is proceeding as expected. As you can imagine, it's challenging to advance our strategic portfolio amid the pandemic. As Andres mentioned, the review of strategic alternatives for ANZ business has been halted for the time being, while our tactical divestiture program continues to advance, but at a slower pace. Let's move to Slide 11 and discuss our business outlook and guiding principles. Given the significant uncertainties and volatility due to COVID-19, we are not providing specific earnings and cash flow guidance. We will consider reinstating guidance in the future when there is more market stability. However, we are providing our best estimates on demand trends and guidelines for how we will run our operations over the balance of the year. First, we expect the second quarter to be a very challenging period. And April will be the most impacted period of the quarter as many governments look to slowly open up their economies, starting in May. For the year, we currently believe that shipments could be down around 5% to 10% on a year-over-year basis. Of course, the situation remains fluid, so actual limes could be outside this range. This perspective is subject to change as we get a better understanding of underlying trends. We also want to share the key principles that we are following as we work with agility to respond to the pandemic. First, we will preserve our strong liquidity and we will manage our company to maintain liquidity at or above $1.25 billion each quarter. Furthermore, we intend to run our business to maximize free cash flow this year. This includes balancing supply with demand so that inventories will remain at/or below prior year levels. Cost control measures will also support free cash flow generation. Finally, we expect to keep net debt at/or below $5 billion, which was our position at the end of 2019. Overall, we will be very focused on maintaining strong liquidity, maximizing free cash flow, debt reduction and stringent cost controls. Now back to Andres.

Thank you, John. Let me wrap this up with a few comments. The first quarter was solid. And I'm very pleased with the progress on the turnaround initiatives, and in particular, our factory performance. In fact, during March we achieved our best monthly productivity and efficiency levels in over a year. While we contend with many challenges during the pandemic, we are taking preemptive measures to reduce costs and improve cash generation. At the same time, we remain focused on several key programs aimed at creating long-term value. I'm confident the steps we're taking today will enable O-I to emerge in a stronger position that will benefit us in 2021 and beyond. Finally, I would like to take a moment to let you know about some of the ways we have been able to contribute to our communities in these troubling times. In both North America and APAC, we have held the spirits of customers transition to make hand sanitizers in our sustainable glass bottles. A couple of examples are shown on this page. Additionally, in Northwest Ohio, we have partnered with RoBEX, a local industrial innovation company, to manufacture PPE. O-I was able to utilize some of their 3D printing capabilities, housing in our Perrysburg-based engineering group to make frames for face shields that had been donated to hospitals for the COVID type. An example was found in Slide 3 earlier in the presentation. We are proud of these accomplishments. Let me pass and thank you for your interest in O-I glass. We will now welcome your questions.

Okay. JP, I think we're ready for some questions.

Yes, sir. [Operator Instructions] Your first question comes from the line of George Staphos of Bank of America. Your line is now open.

Good morning.

Good morning.

Thanks for all the details. Lots going on and thanks for your doing on COVID as well, Andres. So many different questions we could ask, but I guess to start with my one, what kind of trends are you seeing if it kind of peer under the hood of the double-digit or higher decline rate that you're seeing in the quarter and for the year, thinking about food versus beverage, returnable versus non-returnable? I realize there are lots of places you can go with that from a geographic sample to anything that's particularly striking to you. And then, relatedly, any of your cost reduction programs, how volume intensive are they or requiring your volume to get there? Thank you.

Thank you. Thank you, George. So a few comments about current demand. So we're seeing a quite resilient scenario in North America at this point in time as well as ANZ. In fact, ANZ sees about flat with prior year and following the news, you'll see that they've been quite successful in that part of the world, dealing with the illness so far. Now, when you look at our numbers today for the quarter, a couple of things. First, they're highly influenced by the mandatory stoppages that we needed to put in place in Mexico and the Andean countries. And they're quite impactful. In fact, when you look at all of the capacity and demand for O-I across the world, it is really driven primarily -- the downtime is driven primarily by Mexico, Andean countries and France. In the case of France, it's driven by local demand, as you will expect, but also by the decrease in exports, which is related to demand across the world for wine. Now, when we look at the patterns across the world, we see that on-premise demand has dropped. That's pretty much a constant across the world, and off-premise demand is up. When we look at off-premise demand, all the categories we serve are growing in that channel. So I think what we need to understand over time based as we -- more weeks goes by -- go by, is how much the off-premise will be able to offset the on-premise decline. The -- overall, we see consumers trending trading down in Europe and trading up in the United States. So that's something that we need to track to see if that's going to hold or it's just temporary. As you mentioned, food is a category that has been performing quite well. Our position is quite solid in that end use in the United States, about a quarter of our demand is food. So we've been benefited by that. I mentioned all categories are growing in off-premise. When we look at returnable ware, the -- at this point in time, it gets deemphasized by our customers in emerging markets as an example. And the reason for that is they want to reduce their CapEx spending. But then -- when the demand resumes, the returnable containers are going to be instrumental for them. And at that point in time, they're going to be emphasized because this is the most affordable transaction they can put in the market. And you would expect consumers would be impacted by their disposable income. So it will be lower and then returnable will be a very good fit. With regards to the cost reduction efforts, they're not related. All the spending is not related to capacity with the exception of how we deal with the shutdowns, and I will explain that in a minute. But everything we're doing around SG&A is something we are moving forward already. As you know, we were working on cost transformation. So we are -- we've been working on these for probably 6 to 8 months. So we're way down the road already. And what we're doing is we're expanding the program, but we have all the processes in place, organization and all that. So that wouldn't be compromised. When it comes to shut downs, the first reaction we take when demand goes down is to shut down lines. As we do that, we've got to assume 100% of the fixed cost. But then what we do is we start taking action to consolidate those lines, shutdown into full furnaces shut downs. And when we do that, then we only need to assume or we left with only 50% of the fixed cost. And after that, the actual we take is to consolidate all these furnaces shutdowns, hopefully into full plans. And if we do that, then we're left or we need to assume only 10% of the fixed cost. So that's how this is playing out so far.

The next question.

Next question comes from the line of Ghansham Panjabi of Baird. Your line is now open.

Hi. Good morning, everybody. Hope everyone's doing well.

Good morning.

Good morning.

Obviously, there's considerable volume variability by region. You cited growth in North America as consumers built up pantry stock. That's across a wide range of categories, including food. Just given the mix complexity issues you had in this region last year, can you just kind of touch on how you're managing with these increases that I assume are asymmetric, depending on category and at even more mixed complexity. How are you handling through that?

Okay. So we are making very good progress in our efforts to deal with complexity. We started these efforts sometime early last year. All of our factories impacted by complexity are performing higher. And I would say quite well, they're quite stable. So that is under control and going up in performance. So we're fine with that. Now, as you will expect, when we need to shut down capacity and consolidate capacity in various forms, the flexibility is challenged, right? So we've been putting special efforts into that to be able to create not only the support by the guidelines for the factories to be able to keep up with that. So far, Ghansham, the total operations -- through the global operations, efficiency is higher at this point in time that we've seen it in more than a year. So I think that people are so focused, they're so committed to deal with this that the performance of these factories is going up instead of going down. So I'm very confident that’s the direction we're taking. We are well-prepared because we'd be working on the factory performance, although for a year now. So that’s all playing out in our favor at this point in time and we've been able to keep up with the complexity driven by all these changes quite well.

Next question, please.

Next question comes from the line of Mark Wilde of Bank of Montreal. Your line is now open.

Thanks and good morning.

Good morning.

Andres, I wondered if you or John could just put a little bit of color on the decision to pull back on the ANZ sale. I mean, it sounded like you were dealing with a single party and I had thought you had a sight line on a closing here in the second quarter?

Yes, yes. Just as a little bit of backdrop. We kicked off that strategic review mid last year or so and through that we identified the ANZ business as a candidate for review, given that the shifts in our customer base in the region as well as our own capital priorities. So, I mean, the business has -- is very attractive. In fact, we ran a robust process on this that lasted several months. We had a significant number of interested parties. We worked it down to, as you identified, one primary party that we continue to work with and good diligence on both sides. And we were very, very close to finalizing all this. But what I would say is that the backdrop of the pandemic just really introduced a number of impediments to completing this process under the set of circumstances. So as a result, we're stepping back, we're halting that process and we'll review alternatives, in a more favorable backdrop. In the meantime, as we mentioned before in the prepared comments, we're going to continue to operate ANZ, which has been performing quite well.

Okay. Next question.

Yes, sir. Next question comes from the line of Brian Maguire of Goldman Sachs. Your line is now open.

Hey, good morning, everyone. Hope everyone well.

Hi. Good morning.

Just following up on some earlier questions on the volume outlook and really, this is more for clarification, and then I wanted to get a little bit of additional color on your outlook for Mexico. But down 5% to 10% volume for the year, does that include the benefit from Nueva Fanal that you would get in the beginning of the year? I think maybe that could be up to 2%, or maybe was expected to be might be a little bit different with Mexico being shut now. And similarly, the color you gave on April trends, are those sort of with and without the shutdown in Mexico. I know the last two weeks you kind of said those were excluding it, but the full month being down, sort of mid teens. So wondering if that’s the true number or if that's making some exclusions for Mexico. And then, just on Mexico in particular, maybe you could just comment on when you expect some of those government restrictions to be lifted and operations to be sort of unimpeded by those government actions? Thank you.

I can take the first part of that. So in the comments of 5% to 10%, yes, that is meant to be a full year-on-year view of the business. So that would include the impact, the benefit of Nueva Fanal. But keep in mind that we will lap Nueva Fanal starting mid-year, which so as a result, that will not be either a tailwind or a headwind, it will be comped starting in -- on July 1. So -- and yes, the -- that the -- the outlook of the or that the color on the later part of April of 10% or there or less was carving out those markets such as Mexico and the Andeans, because they were so affected by government restrictions rather than anything associated with other aspects of market activities.

Yes. So looking at the volume performance today, I think, an important part to take into consideration is inventory correction. We're seeing a pretty selling stuff in the -- in some of the purchases of important customers, which only would tell you that they're just waiting to correct those inventories to come back. So we expect that to play out through the quarter. Now, you -- in addition to that, we have the stoppages that are mandatory stoppages in Mexico and the Andeans, which are highly impactful. I think one important comment with regards to that is we're starting to see countries like Colombia resuming operations in multiple manufacturing industries. So that's just starting to happen. It's difficult to know exactly when every government is going to raise that, but you will see -- or if you look at what's happening in other geographies, in the foreseeable future, within the quarter, we should start seeing some of these things being lifted. And as a consequence of that, our operation will resume. The operation in these two geographies, Mexico and the Andean is highly impacted by those stoppages, so it's not really demand instead. Now we mentioned in our opening remarks that the second half of April has been better than the first half of April. So I think that's something that we got to watch closely, what's going to happen as we go into the following weeks, that's going to give us a better indication of what to expect. Off-premise is performing well. And that's an important consideration to factoring because all end users we serve at RF, even beer, which has been declining for years, it is declining less in off-premise at this point in time than it was before. So that category is also performing better.

I just want to add one point of clarification to some earlier comments that I made. So that the view of 5% to 10% down for the full-year does include the effect that we're seeing from Mexico overall. The comment on -- I had mentioned on excluding Mexico is only in relationship to what the trend that we saw in the last two weeks of April, where it was kind of overall excluding that was down 10%, but Mexico is included in our full-year outlook.

Okay. Next question.

Next question comes from the line of Debbie Jones of Deutsche Bank. Your line is now open.

Hi. Thank you for taking my question. I wanted to ask about Asia PAC and the performance there. And I think you said that just $1 million impact for COVID. So I'm curious now what you would think a normalized number or goal for this business would be on an annualized basis? Just kind of comparing it to what you've done in prior years.

Yes, Debbie, I will clarify the $1 million. So, yes, in fact, in the first quarter, our overall Asia PAC business was impacted $1 million by COVID. It was actually fairly minimal. We found that more in Southeast Asia. We didn't really have any net effect in China, despite the virus originating there as we maintained our operating levels. And in that market, keep in mind, 75%, 80% of our business is food and not in the other categories. So it held up pretty well there. As far as a normalized level for the Asia PAC region, I think you need to go back a few years and take a look at where margins were, back in that '15, '16 period. The one thing I would say is, is that -- some of the pricing elements in contract negotiations, we've entered into some longer term deals that secured volume for quite some time. So I would say that there's a little bit of decrement associated with establishing those margins. So go back to those prior periods and then tap it down a little bit.

Thank you so much.

And with regard to demand in ANZ, as I mentioned during the previous comments, it's being quite stable and the -- we're having a very well -- very good evolution of the illness in that part of the world. So that stability for the time being is expected to remain. China is recovering, so that's important to be factoring and manufacturing performance is quite high. And I think what we're seeing in APAC is the benefit of the turnaround initiatives and specifically the focus on factory performance, which in fact is a tailwind coming into this challenge of COVID-19 for the entire organization. So I think we are very well-prepared there and that's why we're seeing the solid performance we're seeing in manufacturer.

The next question.

Next question comes from the line of Anthony Pettinari of Citi. Your line is now open.

Randy Toth sitting in for Anthony. Can you touch on what type of projects were canceled or delayed to move CapEx $300 million or below and how sustainable that level of spending is moving forward? Thank you.

Yes. So the level of spending we are referring to, which is $300 million or lower, is about the maintenance capital level what it's related to, to keeping the assets in good shape. So that one -- those projects, we keep going. We are focused primarily on technology updates, we're reducing those or improvement projects that are related to the cost improvement that we can put on hold for a minute and doing a little later. So we are doing this, making sure we take care of the critical assets, as we will do in normal circumstances. So that’s been the approach around CapEx.

The one thing I would add in there is, as much as FX has been a challenge operationally, it doesn't benefit CapEx. And so part of that change in outlook that we provided is -- probably represents, say, quick and dirty, $10 million to $20 million of favorable FX movement. So the net effect of other project activity has to be seen in that line.

And one additional factor is because of the market lockdown, it is difficult to mobilize people to work on projects. So you would expect that there is some delay and that will impact the level, the amount of execution we can accomplish within the year too.

Next question, please.

Next question comes from the line of Mike Leithead of Barclays. Your line is now open.

Question for John on the pension. I know it's still early in 2020, but interest rates and asset returns appear to be trending lower. So can you provide any update on how you're thinking about cash funding for the pension? And I know EBITDA is fluid rather than CapEx, are there really any other real changes you're thinking about on that free cash flow walk versus what you provided last quarter?

Yes, sure. So you're right. I mean, where we stand today, is that where asset returns and interest rates would land, that could represent if we had to book the year -- the normal year-end entry today, for example, about a $200 million headwind on the pension liability. Of course, we aren't marking this to market today. There's a lot of distance between now and the end of the year when that transaction -- I mean, that evaluation would occur. So we'll have to see how that continues to play out, ideally things start to normalize a little bit and takes the pressure off there. Keep in mind that nothing regarding that actuarial calculation, for example, would change anything associated with the expense or the cash contributions we would make this year. In fact, there are changes in the CARES Act that should benefit the timing of pension contributions to some degree. And there has been some talk already in Congress about making some form of pension relief, while it may be early days in totality there, what we have seen in back in the Great Recession was that, there was adjustments made that allowed you to smooth this out over a lot longer period of time, understanding that these calculations really can be impacted by those points in time. On the cash flow side, the big things that are moving, obviously, EBITDA will be a function of two major things going on, obviously, the sales and volume -- production volume aspect of the business, but also the -- what I believe is a pretty robust recovery plan, all the things that we've identified, we got about 20 different levers that we're managing that affect, various things of the P&L of free cash flow or other uses of cash. And that represents probably hundreds of millions of dollars worth of levers that we're working. So that we would expect to be some mitigating factor on the overall cash flows of the business. But the remaining levers that you'll see within that cash flow statement under consideration are: one, the working capital, if -- depending on whether we have a V-shaped or U-shaped recovery. And I think most people are looking more of a U-shaped recovery at this point in time, that could actually yield a working capital benefit as we collect receivables on the front end of this process, replace it with lower volumes of the activity and less of investment of receivables. And if we can keep inventory trim, as we intend to do, then that should support improved working capital positions. And we obviously talked about the lower CapEx expenditures as we plan to do, and also be mindful that we have also suspended all of our asbestos related payments, which exceeded $150 million last year. So there's a lot of different levers that are flushing through that, that we think that we can help mitigate the overall impact of the pandemic.

Next question, please.

Next question comes from the line of Lars Kjellberg. Your line is now open.

Thank you. I just want to come back to operating leverage. Just simplistically it looks like you had about 40% negative operating leverage in Q1, as I go through the various fixed costs, closures of furnaces, reducing fixed costs, etcetera, how would you make us think about operating leverage Q2, for example, how can we get into Q3 and also how the variable cost component potentially may be a bit of an offset there in terms of increased, I guess, complexity, transportation cost, etcetera. So if you could give us any color on that, that would be helpful.

Yes. Let me give you a view on the cost position. So, Andres comments were referenced to the fixed costs, but let's take a look at the total cash cost of the business. And then when we do have to have downtime, it ranges again from that spectrum of line stoppages all the way to plants being down. So when a line is down, you get out from underneath 50% of your total cash cost, okay? So, you can cut out a number of things, but you can't cut out everything, obviously. When you go to furnaces down, that's anywhere from, getting out -- or having maybe 20% to 30% of your cash costs still remaining because you can get out of a lot more at that point in time. And as you take a plant fully down, you're really stuck with maybe 5% or so of cash costs overall. And so now that the impact of, as Andres mentioned before is on the very front end of this, you initially respond by taking lines down. And so and that is under that set of scenario, probably the biggest cash impact that you're seeing in the absorption. Now we're going through the process where more and more of our capacity is being managed through furnaces and some through factories down and we're going to continue to optimize that. I can't give you a specific number, and it's inconsistent with our position not providing guidance right now because this is a very fluid situation. It's a very function of also how quickly the economies come back and a lot of governmental decisions that are still underway.

Next question, please.

Next question comes from the line of Gabriel Hajde of Wells Fargo Securities. Your line is now open.

Good morning, gentlemen. I hope everyone and their families are doing well.

Hi, Gabriel.

I was hoping if we look forward a little bit and I appreciate a lock-in transpire between now and the end of the year. But just thinking about some capacity adds that are happening in Europe, price cost has been a pretty big contributor over the last few years to the operations. Any point of view about how the competitive landscape could play out? Again, given that you're adding some capacity, some competitors are as well.

Yes, so when we look at the capacity in Europe and demand, Europe has been quite well balanced over the last two, three years. There is some capacity that has been considered to be built this year. All the information we have is all of those projects are on hold. So they're not in execution anymore and we will expect there are two reasons for that. Obviously, the COVID-19 situation, but also the logistics issues to be able to deal with any of them. So I would expect that capacity will continue to be pretty much of the level we saw it coming into this year. I don't expect more capacity to come on board in Europe at this point.

On the pricing side, as you know, most of our pricing activity goes in very early part of the year and that was substantially put in place. And you can see that overall we had some improvement in our price and that will obviously flush through on a forward basis going forward. And then when you take a look at net price, you referred to is I think we have two counteracting activities going on as we look at inflation. In some -- in one regard, the input costs are going down because of lower energy costs and things like that. On the other side, we do have some FX induced inflation as some things, especially in Latin America, are bought in U.S. dollars. Those are kind of counterbalancing each other right now overall and we'll see how things play out in the future periods. But that pretty much points to a kind of normalized net price spread.

Next question, please.

Next question comes from the line of Arun Viswanathan of RBC Capital Markets. Your line is now open.

All right. Thanks. Good morning. Just wanted to get your thoughts on the Americas. There was recent, I guess, development that there would be some countervailing duties placed on imports of glass containers from China. I mean, just give us your thoughts on how that would affect your business. Should we see some positive offsets on margin or cost line over the next couple of periods? Thanks.

Yes, so what we're saying with regards to China is an increase in tariffs and that will cause some volume to come this way. I think also with all the challenges that we're seeing in supply change related to China, customers are going to be more inclined to buy local at this point in time, so they can have the stability in their operation. So with those two considerations, I will expect that we will see more of that volume that has been coming from China being produced in the United States. We are, in fact, producing some of that volume already and supplying that to our customers. So it's already taking place and I expect that to increase over time.

The next question, please.

Next question comes from the line of Adam Josephson of KeyBanc. Your line is now open.

Hope you and your families are well.

Thank you.

John, just back to cash flow for a second, I know you had previously guided to $300 million plus and that was pre-COVID, and given the volume impact etcetera, etcetera, I'm just wondering earnings are obviously much more difficult to manage than is cash flow. And obviously you're managing cash flow by reducing CapEx and tightly managing working capital. Obviously, you suspended the asbestos payments. But just based on your net debt commentary, it doesn't seem like you're expecting to generate much free cash flow this year. And I’m just wondering if I’m -- if I know you have the Paddock payment of about $50 million and the 1Q dividend, but other than that, I'm not aware of too many cash outflows. I'm just wondering the extent to which you think your cash flow could hold up better than your earnings this year. And I just ask because obviously the cash flow is -- it was a negative last year. I don't know what it's going to be this year. And you've got a $1.5 billion of maturities coming up in '22 and '23. So I'm just trying to better understand the bigger picture here.

Yes. So, I mean, first of all, obviously, we're not providing longer term guidance. So I'm -- I can't be in a position …

Sure.

… to provide any dollarization to anything. But you're right. Last year, we were slightly negative on cash flow. Understanding in that period compared to where we are right now is a substantially different position on CapEx investment, substantially different position on asbestos. Those alone are $250 million to $300 million worth of lower cash costs, not to mention the expectation to do better on the working capital side. And obviously the wildcard then ultimately is, is what's the net effect on the EBIT performance of the business. We've got two major variables going on. As I said before, the volume performance of the marketplace, and then obviously the fairly significant cost reduction activities that we have underway. I mean, what I can't say is that we are fully focused on maximizing that cash flow performance. It'll be very contingent, the dollar amount or whatever is how quickly the markets recover and to what degree that shapes, that changes the dynamics a lot there. We have multiple scenarios in which we're operating under. So under different volume outlooks to be able to recalibrate our work and activities to fit whatever pattern ultimately does emerge from the business. Of course, we're taking probably the more conservative view on that right now so that we can be on the right side of the cash generation and balance sheet management view.

Okay. Thank you for your questions. I'm going to turn the floor back over to Andres to make a closing comment.

Thank you, Chris. So a few comments. COVID-19 is a challenging situation for everyone and we are understanding more and more as weeks goes by, the impact that it will have in across the world. Now, I think we're very well prepared to deal with it at this point in time. A few reasons for that is our turnaround initiatives have been structured for many months now and they're in full execution and they're having a positive impact. And I think that gave us the confidence we're working on the right things and we're executing them well. Now, we've been modeling the scenarios, as you will expect, and we have different scenarios depending on the level of severity of the demand drop. When we look at the most likely scenario in our minds, we have leverage that we have identified to be able to deal with that. We also have a severe scenario and we have the levers associated with that. At this point in time, we are executing on the most likely. You'll see that we've been addressing all the levers possible to be addressed. So we're dealing with the SG&A, with CapEx, with working capital as a source of cash, taking manufacturing cost out by consolidating, how we shut down capacity, waste deferrals, dividends, share buybacks and then our liquidity position is quite strong, so that's very important too. And when I look at the organization, I think we are better integrated than ever globally. We can really align very quickly and move into execution. We are a very agile organization today and then we are already in execution. So all those things take me to believe we're well prepared. Again, very challenging situation, but we're taking the right measures to be able to deal with it. I thank you for your interest in O-I and I look forward to the next call.

Thank you, everyone. That concludes our earnings call. Please note that our second quarter call is scheduled for August 5, 2020. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.