O-I Glass, Inc.
Q2 2009 Earnings Call Transcript

Published: 30 Jul 2009

[Operator:]

My name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Now, I would like to turn the call over to Mr. Ed White, Senior Vice President and Chief Financial Officer.

[Edward C. White:]

Welcome everyone to OI’s second quarter 2009. I am joined today by Al Stroucken our Chairman and CEO; John Haudrich, Vice President of Investor Relations and several other members of our senior management team. Today we will discuss key business developments in the second quarter, review our quarterly financial results and discuss the trends affecting our business. Following our prepared remarks we’ll hold a question and answer session. Presentation for this earnings call are also being simulcast from the company’s website at www.O-I.com. Please review the Safe Harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. The financial results that we 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 this appendix to this presentation. I will now turn the call over to Al.

[Albert P. L. Stroucken:]

We are pleased with our second quarter performance and our earnings improvement over the first quarter. This reflects seasonal trends in our business, improvement in market conditions across all regions or I should say several regions and moderating cost inflation as well as continuing benefits from our strategic footprint alignment initiatives. On a year-over-year basis however, second quarter earnings were still down due to lower demand and production levels which reflect the challenges presented by the ongoing global recession. As you can see on Chart Two, our second quarter adjusted earnings were $0.94 per share, down from record earnings of $1.35 in the second quarter of 2008. However, our earnings have gradually increased since the fourth quarter of last year. Our second quarter shipments were down 12% over last year, a clear sign that the global recession continues but, in comparison to the first quarter, shipments were up by 14%. This increase principally reflects stronger demand in the second quarter due to increased beverage consumption associated with warmer weather in the northern hemisphere. We also benefitted from the gradual abatement of inventory destocking by our customers and monthly sales volumes comparisons versus the prior year improved throughout the quarter. To counterbalance the lower demand we’ve experienced since last fall, we continued our temporary production curtailments in all regions as we further reduced inventories to manage our cash flow. Our temporary production adjustments are a response to the current economic situation. Our strategic footprint alignment initiative on the other hand is focused on driving long term productivity improvements. We are improving our cost structure by relocating production to more cost effective facilities. This realignment delivered $38 million of fixed cost savings on a year-over-year basis. During the second quarter we shutdown one furnace in our Asia Pacific region and announced that two additional plants in Europe will be closed later this year. We continue to pursue our successful strategy or repairing margins to reflect the value that we provide to our customers. Improved price and mix contributed 4% to sales in the second quarter over last year. At the same time, cost inflation has slowed and we are achieving internal cost reductions along with productivity gains. As a result, improved price and mix exceeded cost inflation and the year-over-year net benefit to operating profit was $81 million in the second quarter compared to a $55 million benefit to profit in the first quarter. This illustrates that it is possible to earn a fair value for our products even during challenging times. Looking to the next quarter we expect market conditions will gradually improve, cost inflation will remain mild and our strategic footprint alignment will continue to deliver additional year-over-year benefit. As we’ll expand on our very successful $600 million bond offering which significantly improved our already strong financial flexibility. Now, I’d like to review our performance by region. Chart Three illustrates segment profit for each of our four regions. We have also included second quarter 2009 profit adjusted for changes in foreign currency for easier year-over-year comparison. I’ll begin with Europe, our largest region; after six months of sharply lower demand, market conditions improved in the second quarter. It appears that consumer confidence is returning as Europe’s economic sentiment indicator increased for the third straight month in June. Our year-over-year shipments were still down by low double digits in the second quarter but much better than the first quarter. Also, monthly sales volume comparisons versus the prior year improved sharply throughout the quarter. Temporary production curtailments continued, a reflection of overall sluggish demand especially in the beer and wine segments. Revenue benefited from improved year-over-year price and mix. Most importantly we have successfully balanced our value based pricing strategy with lower inflation and overall demand to ensure that we maintain margins and retain our regional market position. Finally, we are beginning to benefit from our footprint initiative in Europe which has seen the permanent closure of six furnaces. Our North American segment profit was up both over last year and the first quarter reflecting the lower cost inflation and benefits from our footprint initiative. North America has been the most effective region in achieving footprint savings by closing down higher cost operations primarily in Canada and redirecting that business to more efficient facilities. North American shipments were down from last given the state of the economy but improved from trough levels noted earlier this year. Reflecting improved demand, the number of temporary production curtailments in North America declined in the second quarter and inventories remained still very weak. Our north American pricing trends are more dynamic than in the past. Currently, about a quarter of our North American volume is sold under customer contracts that include terms and conditions allowing us to quickly pass through cost changes on highly volatile inputs like energy. Therefore, while higher than the prior year and previous quarter, our average price delta trended down from the first quarter reflecting a more timely pass through of input costs for a portion of our sales. Sales and profit margins in South America were down in the second quarter as our operations are now experiencing the full impact of the global recession. Nevertheless, South America still had the best margins of all our regions. Shipments were down significantly on a year-over-year basis which has led to additional temporary production curtailments in the region. It’s important to remember that there is a sizeable returnable bottle market in South America especially for beer and non-alcoholic beverages. In challenging economic times beverage producers also extend the useful life of these bottles and defer replenishing their stock of returnable bottles which they consider a capital investment. Of course this causes a steep but temporary drop off in demand. Also, shipments of food containers in Peru were down due to lower consumer demand of their products in Europe and in the United States. Given our strong position in South America, lower shipments reflect economic conditions and not a loss of customers to the competition. Like our other regions, price increases have more than offset cost inflation across South America. While inflation was modest on a global basis costs were higher in South America especially Venezuela. Furthermore, the Venezuela government has slowed its currency exchange process. Strong cost inflation and currency pressures could affect the future value of our Venezuelan balance sheet and operation results. Ed will provide some additional comments on this later. Operating profit also declined in Asia Pacific primarily due to lower production levels and a modest decline in shipments. We saw different trends in Australia and New Zealand as compared to China. Weaker wine exports and beer sales in Australia and New Zealand drove the regions lower shipment level. This was somewhat offset by an improvement in shipments in China but our prices there were down modestly due to significant price competition stemming from a highly fragmented market place. To match the regional decline in sales, we temporary curtailed production and aggressively reduced inventory. We also incurred higher freight charges related to planned furnace rebuilds as products was then being shipped from other plants in the region to fulfill customer commitment. Overall, we expect profits will gradually return to historical levels at varying paces. It depends really on how each region cycles through the global economic downturn. We are satisfied with the results of the actions we are taking in each of our regions as we manage our cash flow and adjust production to match the math. We are consistently making decisions with regard to our most important business drivers such as volume, price, temporary production curtailments and inventory management. I will now turn the call back to Ed who will review our results in more detail.

[Edward C. White:]

Let’s turn to Chart Four which illustrates our year-over-year reconciliation for sales, operating profit and EPS. We’ll start with revenue; segment sales declined from approximately $2.2 billion in the second quarter of 2008 to $1.8 billion this year. A 12% decline in glass shipments impacted revenue by approximately $271 million. Foreign currency translation rates which reflect a stronger dollar reduced sales by approximately $208 million. Finally, improved price and mix increased sales by nearly $88 million or 4%. As Al mentioned, our second quarter price increases is down a bit from the first quarter increase of 6% due to several factors. Our selling prices increased by 1% between the first and second quarters in 2008 due to rapidly increasing cost inflation. As a result, our second quarter 2009 comparison was higher than we experienced in the first quarter. Also, this year we have more contracts with quicker cost pass throughs and therefore lower inflation resulted in reduced price increases for these customers. Finally, both product and regional mix factors impacted prices as a result of seasonal trends and softer markets in South America. That said, we remain very pleased with our favorable spread between price and cost achieved in the second quarter. Moving on to our segment operating profit reconciliation, second quarter profit was $292 million, down from $390 million in the second quarter last year. Lower shipments reduce operating profit by $94 million. As I mentioned, improved price and mix increased segment profit by $88 million. Foreign currency translation was a $23 million headwind on a year-over-year basis. For your reference a chart illustrating foreign currency exchange trends is included in the appendix to this presentation. Finally, manufacturing and delivery costs increased $64 million compared to prior year. Let me recap the three largest components of this line

[Albert P. L. Stroucken:]

As I said at the beginning, we are pleased with our recent performance as we work our way through the continuing global recession. Second quarter earnings improved over the first quarter due to seasonality in our business, early signs of improved market demand, lower costs due to moderating inflation and savings from our footprint initiative. Shipments improved from the first quarter and volume in the two largest regions exited the quarter with a mid single digit decline. Furthermore, we expect third quarter shipments will be comparable to second quarter levels. As Ed said, our plant managers and manufacturing leadership have done a terrific job in adjusting operating activity in a very volatile marketplace. We recognize that this has been a particularly difficult time for employees who have been impacted by the temporary curtailments but we strongly believe that these have been critical in maintaining our financial health. We remain optimistic that the curtailments will wane as market conditions improve. We have demonstrated flexibility, perhaps not a characteristic of a large company and we are more confident than ever of our ability to manage in a rapidly changing marketplace. We find ourselves well positioned to drive improved financial performance and achieve our strategic priorities as economic conditions gradually improve. Now, I will ask the operator to open the line for your questions.

[Operator:]

(Operator Instructions) Your first question comes from Timothy Thein – Citigroup.

[Timothy Thein:]

First question is a bit more of a longer term question, in terms of if you look at your kind of operating footprint if you take out the high cost melting capacity in some of your six sigma and other productivity measures I’m trying to see if you can give any color in terms of kind of a cost per ton measure going forward in terms of what you’ve reduced that by? Ultimately what I’m trying to get at in terms of what your incremental margins could look like if and when we do finally get a volume recovery? Second, the question quickly was on the wine segment in Europe of obvious importance given the size both to mix as well as to profitability. Can you give any color there in terms of what you saw in the first half in terms of shipments relative to end demand and what you think you’ll see there in the back half of the year as we get closer to the harvest?

[Albert P. L. Stroucken:]

With regard to your first question, since not all of the productivity improvement as well as the lean six sigma efforts are concentrated on manufacturing costs, not all these benefits will really show up in the cost per unit of manufacturing so it’s very difficult to really tie it back to a manufacturing or dollars per ton. But, it is obvious that what we have been trying to do is move our productivity improvements higher from the trends we’ve seen in the past. I think you’ve heard in the past of a 1% improvement in productivity per year and we’re clearly trying to strive that to a 2% productivity improvement which may not sound like a huge difference but over a period of time that really creates significant competitive advantage. Now, with regard to the win business and Europe it really had behaved differently depending on the wine region and some of that also has to do with the product mix. For instance, Italy and Spain are holding up pretty decently as far as volume is concerned whereas France has seen the biggest drop off but a lot of that is due to France of course does have a fairly significant component of champagne which really has been much more affected than many of the other less costly wines that you would typically get from Spain or Italy or even some of the [inaudible] that you can get in France. I’d say that is really the only difference that we see. Then of course, as we had mentioned in the previous conference call, we really saw a reluctance of people to bottle their wines in the first quarter which has somewhat diminished in the second quarter.

[Operator:]

Your next question comes from Chip Dillon – Credit Suisse.

[Chip Dillon:]

When you look at the asbestos exposure you have, it looks like the number of claims have really come down a fashion and I would imagine you or anyone could imagine, do you feel like in hindsight that maybe the charge you took last year might have if you will over compensated? How should we think about the level of charges and payouts going forward?

[Edward C. White:]

This has been a 20 year liability and we feel that we know that we’re at the very end of the tail. We know that there’s some inflection point out there, we don’t know where it is but we feel comfortable with our liability and our process of reviewing that charge every year end. The decline has really been driven by tort reform and I think by reduction in some of the bogus filings that have come in. So, while we feel really good about the trends, the trends are tracking about on our expectation. So, with only 7,500 pending cases today, this is the lowest inventory of cases we’ve had until you’d probably have to go back in to the mid 90s when you had a perceived slowdown in asbestos that didn’t happen. Filings and pendings are just kind of tracking as planned and we feel good about our liability.

[Chip Dillon:]

I know you’ve shutdown I think 15 furnaces and two more coming out in the next six months, how many furnaces does that leave you with given your roughly 80 plant footprint?

[Albert P. L. Stroucken:]

I think the last number I saw was somewhere around 168 or 169.

[Edward C. White:]

Chip, we’ve added three in our system, two in Peru and we’ve got one in construction in New Zealand, so kind of that high 160 range is what we’re looking at down from the 170 to 180s, high 170 to 180.

[Chip Dillon:]

Just update on when New Zealand starts up?

[Edward C. White:]

It will be late second quarter next year. We’re in the middle of the construction phase right now.

[Operator:]

Your next question comes from Peter Ruschmeier – Barclays Capital.

[Peter Ruschmeier:]

I wanted to ask if I could Al about progress on contract discussions, big discussions you have for next year for North America and maybe if you wanted to share aside from pricing what’s of importance to you in terms of restriking those contracts?

[Albert P. L. Stroucken:]

As you know we have really vastly virtually all of the contracts that we have on a global scale, some of the ones we had in North America have the longest running period still so they’re the ones that are presently in our area of focus. We have within North America renegotiated quite a number of contracts already this year that were set to expire at the end of 2009 and we believe and are very happy to report that these agreements that we have reset meet the expectations for both our customer and for OI and for our case of course the objective was to get to a margin improvement on the margins that we’ve lost due to the mechanisms of the old contract. That of course does not only address the issues of price, it addresses the issues of key terms and conditions such as more timely pass through of volatile cost inputs like energy so we do not find ourselves back in to this same situation. Now, we haven’t done them all yet so there are still few open but our driver in all of tehse discussions is basically to recover what we have lost due to the mechanisms of the contracts that were in place and to also make the contracts more reactive to the environment to the benefit of our customers because ultimately if we’re out of synch in a year and are underperforming because we cannot pass through the reverse then applies potentially to our customers in the following year because they get higher charges in a market environment that is not reflective of that. I think by trying to cover both our interest and the interests of our customers we’ve been able to get a very good success rate in our negotiations.

[Peter Ruschmeier:]

Just a quick one if I could for Ed, you mentioned working capital was a source of cash in the first half of the year, given the visibility that you have for your business, can you comment on your expectation in terms of source or use in the second half?

[Edward C. White:]

It will be a further source of cash in the second half of the year.

[Operator:]

Your next question comes from Richard Skidmore – Goldman Sachs.

[Richard Skidmore:]

Just a follow up on the inventory question, how do you feel currently about your inventory levels? Do you expect that those will come down more in the third quarter or are you at appropriate levels?

[Albert P. L. Stroucken:]

Well it of course depends a little bit on what we’re going to see in our volume. But, as we are moving towards the end of the year we will want to maintain a fairly good handle on overall inventory levels. Aside from just a cash flow issues, which of course is beneficial to us, the other thing that we’re looking at as well is by improving the flexibility in our operations it really allows us to run with a leaner inventory base and still serve our customers on time and with the products that they need. So, it really is a combination of things that we’re working on. Number one, is the more immediate issue that we were focusing on which was preserving cash flow but, the underlying issue which really permeates through a lot of the things that we’re doing, also the footprint alignment, is really improving flexibility of our facilities which will give us a much greater and more effective tool to drive working capital down further in the future which is really our objective.

[Richard Skidmore:]

Al, as you look at the amount of downtime that you’re taking and the potential pace of recovery and your productivity that you’re seeing through your lean six sigma efforts, is there any thought to accelerate further taking out capacity throughout the system?

[Albert P. L. Stroucken:]

As we have said before, we have to separate between temporary adjustments which really are dealing with the underlying demand situation and the more fundamental permanent shutdowns with productivity and flexibility of our operations. Some of those do require logistics and do require supply chain initiatives prior to implementation of a shutdown to make sure that other facilities can absorb that volume so it’s going to be something that has to be longer term in nature in its approach. That’s why I do not want to mix the two. I think the temporary curtailments we can react very quickly and very fast to changing market conditions, the other part is a much more longer term and fundamental improvement for our company because you’ll recall that through the many acquisitions that we’ve made we’ve really absorbed a lot of footprint and not all of that footprint is necessarily required to serve our customers efficiently.

[Operator:]

Your next question comes from Ghansham Panjabi – Robert W. Baird & Co., Inc.

[Ghansham Panjabi:]

Al, could you just give us a sense as to how industry volumes have tracked across your big geographies, North America, Europe, South America and Asia?

[Albert P. L. Stroucken:]

You mean by individual segments?

[Ghansham Panjabi:]

Yes.

[Albert P. L. Stroucken:]

I would say overall beer and wine have really been the two areas that have been affected the most. A lot of that had to do with where the end markets of those products are. So, where we are seeing markets where wine gets exported for consumption because the domestic consumption just is not large enough and you look at for instance Argentina or New Zealand, or France, or Italy, we have seen significant double digit drops in consumption in those industries because of the pipeline effect that is predominate. In the areas where the market is closer to the production facilities and to the production areas we have seen much less of a drop off. North America for instance is a particular case in point, I mean you see from the statistics that get published that volumes have been down somewhere between 3% and 5% or so. I think it’s clearly reflective of that there really is not a lot that gets exported in these products from the United States aboard and so the impact has been much more mild and much more modest. The other thing that is influencing this a little bit is also when the recession really starts to hit and we really saw a sequencing there. It started in North America and then moved to Europe, then moved to Latin America and now it’s in Asia Pacific. I think we also will see those gradually emerging from the downturn that we’re seeing. So, we will over the next couple of months still see graduated and different performances from region-to-region even within the same industries.

[Ghansham Panjabi:]

How then should we reconcile your volume declines relative to your competitors who seem to be declining at a lower rate?

[Albert P. L. Stroucken:]

I think you really look at it number one of course, I depends a little bit on what your geographic distribution is. We have said that certainly Latin America is significantly affected by the down turn so with us having a component in Latin America that perhaps other companies do not have or to a much lesser extent of course, that would have an impact on that percentage. The other point, and we have to be very open about that is that we have said all along that we loss in between 3% and 5% depending on which quarter we were talking about of volume due to our pricing activity. Now, that 5% of course as a full affect on us that others would not have. In fact, others would perhaps, somebody has 20% market share in a particular market could pick up a percentage point or possible two percentage points of the volume we loss. So, you automatically have a 6% to 7% differential between what they report and what we report. So, I think it has to do number one with our strategy and willingness initially that we said we know if we’re the market leader we’re going to do this we’re going to give up some volume. The volume is not going to go away, others are going to pick it up. Then I think the regional component that I just mentioned. If you look at it, and of course, we do this on a fairly detailed basis in comparison with our competition, there is a rather logical explanation. So, other than the fact that we said we’re going to give up volume to achieve what we need to achieve from a margin standpoint there has not been another more significant shift as an underlying factor.

[Ghansham Panjabi:]

Just one final question if I could for Ed, as you sort of restructure these North American contracts and get more reactive on your pass through of raw materials, does it make sense to sort of readdress your hedging policy as well because it doesn’t sound like you need to be as aggressive on the hedging side?

[Edward C. White:]

Exactly, we’re already in the middle of that where we’re saying what is covered by pass throughs, what isn’t. The portion that is not covered by pass throughs we will continue to look at hedging about 50% of that portion of the natural gas buy.

[Albert P. L. Stroucken:]

But overall Ghansham, we are having customers that want to hedge as well so we sill still engage in hedging but it will be at their risk and to their benefit. So, we may still do some hedging but it is not necessarily to cover our profit and our predictability, it really then enures to the benefit or to the deteriment of our customers

[Operator:]

Your next question comes from George Staphos – Bank of America Merrill Lynch.

[George Staphos:]

First question I had going to Venezuela, do you anticipate dealing with the issues there much as you’ve done in the past? And, how might the current economic environment impact your ability to deal with what will be some implicit margin pressure for the time being?

[Albert P. L. Stroucken:]

I would say within the country itself demand is still very strong, the economy is doing very well. In fact, they have been pretty immune to what we have seen in the rest of Latin America on a comparative basis. I think it really is in the interaction with foreign trade and foreign business where I think some of the difficulties come in because it’s just very difficult to transfer the funds or to have any reliable prediction when you can transfer the fund which creates some issues. Now, as you know in the past we’ve worked in quite a variety of high inflation countries. I think eventually things right themselves but there’s certainly going to be a period of instability and uncertainty when the changes take place, when the changes happen. But, I think we have a very good team on the ground in Venezuela and Latin America in general who has a lot of experience of dealing with this environment and I’m sure we will be able to work our way through this. This by the way is not an issue only effecting us, it’s basically affecting every foreign company that’s active in Venezuela at this time.

[George Staphos:]

I understand that but it sounds like as long as demand is fine then you can go back more or less to the old play book and given your position in the market I think you should be able to manage that over time.

[Albert P. L. Stroucken:]

Eventually what happens is there should be a currency adjustment and Venezuela of course becomes a very potent exporter from that region.

[George Staphos:]

Second question, getting back to price mix I was hoping you could perhaps directionally give us a feel to where you had the greatest affect from mix either by region or by product line? We realize that maybe some of the factors were coming from Asia Pacific because of the wine exports there but if you could either regionally or by product delineate where you had the biggest mix affect in the quarter versus the first quarter?

[Albert P. L. Stroucken:]

I would say against the first quarter what certainly had an impact was we saw beer volumes recovering at least throughout the quarter at a quite significant pace. So, beer became a more significant component of the overall mix. Then secondly, South America’s volumes have dropped off the most severe and South America typically has a much higher pricing level than the rest of the world so that has an impact. Then the third aspect that I think is relevant is that in Australia and New Zealand, wine was down in the low double digits and wine tends to also get a higher price there. Those really were I think the biggest effects that you could see from the first quarter to the second quarter. Now, compared to year-over-year as Ed already mentioned, you have the additional component that because of the high inflation that we were still experiencing in the second quarter of last year we were also seeing pricing activity which added a percentage point between the first and second quarter of last year which makes the comparison then first quarter year-over-year, second quarter year-over-year a little bit more difficult. But, what’s important to us of course is that despite the price movement last year, we didn’t get a margin expansion because inflation was just as rapid whereas now in the second quarter we clearly saw a benefit in our margin.

[George Staphos:]

Al maybe the last question quickly, as you consider your existing footprint realignment program, how much do you think is left yet to be achieved on either a percentage terms or dollar terms over the next 12 to 15 months?

[Albert P. L. Stroucken:]

Well, I think the rate we’re running at, at this point in time leads me to believe we might very well see around about $120 to $125 million or so benefit in the course of this year. Then, depending on how rapidly we’re going to act on some of the remaining actions and that is going to be a little bit influenced as a I mentioned earlier by how quickly we can adjust our supply chain and logistics infrastructure so that we would continue to see an ongoing benefit. But, of course in the year-over-year comparison eventually we will have an overlap and that benefit is going to disappear.

[Edward C. White:]

That $150 million cumulative savings of lower fixed costs, that works out to be 200 basis points of margin on a $7.5 billion business. So, kind of answering both your question George and going back to what Tim asked earlier, I think as the economy comes back and these plants are running full you really get a sustainable two margin point improvement.

[Operator:]

Your next question comes from Claudia Shank Hueston – JP Morgan.

[Claudia Shank Hueston:]

Your liquidity position has obviously improved, cash flow has been trending a little bit better than I had expected so I was just wondering if you could comment about how you are thinking about your priorities for cash going forward?

[Edward C. White:]

It’s nice to have this kind of question Claudia, thanks. As we said at our bond offering we have our four strategic priorities out there and we’ve been pretty consistent saying that some of the things we’re wanting to spend on I’d call at an operational excellence which is streamlining our factories so you have the cash demands on the severance, the site cleanup costs as we shutdown factories so we’re going to have more of that in the back half as some of these pending discussions haven’t been concluded yet. Then, we always have strategic and profitable growth so we want to have dry powder for that and we’re looking at some strategic marketing initiatives and the R&D innovation pipeline. So, all four of those priorities we wanted to be able to execute against those as they develop and we’ll talk about them more in the future.

[Claudia Shank Hueston:]

As you think about sort of future growth how do you prioritize regions that might be more interesting for growth going forward?

[Albert P. L. Stroucken:]

I don’t think I’ve made a secret about this, China is clearly our focus area and we just announced a new managing director for China to really be able to focus on this area with regard to organic growth as well as acquisitions because I believe that there is great opportunity. If we are, I would say within the next seven to eight years not the market leader in China, it will be very difficult to retain our global market leader position. So, that’s clearly a very important focus area for us. But also, other regions where we have a strong position and where there is a stronger consumption growth than we see in the more develop regions like Europe and North America. There the emphasis would be on individual countries like Mexico, Argentina, Brazil and Chile and then of course the third region would be of course the Southeastern flank of Europe. Eastern Europe of course is right now going through a very significant and severe contraction of overall demand, of overall available spending. So, we may want to watch that a little bit longer before we engage there.

[Operator:]

Your next question comes from Alton Stump – Longbow Research.

[Alton Stump:]

I thought I heard you mention that your total volumes were down low double digits in Europe, is that correct?

[Albert P. L. Stroucken:]

No, that was right for the second quarter but there was a gradual improvement throughout the quarter. I think if you look at the overall number, the average for the company was 12% so there were a few regions that were a little bit below that number and others that were above that number. We do not generally specifically give that data for each individual region because of competitive concerns.

[Alton Stump:]

Then just one more thing on the cost front obviously you brought your guidance down quite a bit for the full year expectation. Could you give us an idea of what the major buckets are that are driving that, specifically soda ash whether those costs are moderating or not?

[Albert P. L. Stroucken:]

Soda ash of course is a very significant raw material for us and soda ash has been in tight supply for quite a while but what is happening is in the automotive industry, in the flat glass industry and the insulating glass industry which are really driven by construction and capital expenditure concerns or durable goods spending. We have seen a dramatic drop off in demand which is of course impacting the overall demand for soda ash and then of course we have seen also quite a considerable drop off in the packaging sector. That is clearly impacting the price behavior of our suppliers. Now, if you look at the published information that we have available from the association that tracks it, we still see increases, double digit increases basically in North America, Europe and even some very high double digit increases in Latin America but it has come down significantly from what the expectations were at the beginning of the year. We have of course contracted with our suppliers but we still have ongoing discussion about what the appropriate price level in this economic environment should be.

[Operator:]

Your next question comes from Christopher Manuel – Keybanc Capital Markets.

[Christopher Manuel:]

If we could switch gears a little bit and talk a little bit about 2010, as you look ahead to 2010 given that the volume environment seems to have stabilized and maybe gotten a little bit better from first quarter to second quarter would you envision looking out to 2010 in a world where volumes could end up being closer to a flat sort of trajectory?

[Albert P. L. Stroucken:]

Of course, it’s very difficult to make any predictions at this point in time as we’re still in the middle of a storm. But, I’d say when I look at, and let’s take North America for instance as an example, we have seen a drop off in underlying demand because in North America we don’t have this pipeline affect that I just was talking about earlier, we’ve seen a drop of 3% to 5%. Now, that’s more dramatic than we have typically seen in a recession where we would see a drop of perhaps 2% or 3%. But, you know it only takes a little bit of recovery to take that volume back in to the market and then we’re back to where we were a year or year and a half ago with regard to overall demand and supply. So, I really think that what impacted a lot of the visibility and the predictions for many industries, not just for us, was this uniform across the board consumer strike of buying anything. That really got a lot of people wondering what is going to happen in the future. I have more confidence now that the pattern going forward is going to be more reflective of a normal economic downturn and recovery and typically what we have seen is that one year after the down turn basically demands coming back to more normalized levels.

[Christopher Manuel:]

The second component I’d like to ask about is if you’re able to get to that $120 to $125 of cost reductions this year, with your continuing productivity efforts that it sounds as though you’re sort of turbo charging or stepping up, as well as more factories and such that you’re taking out, would there be any reason to believe that looking at 2010 you couldn’t have an incremental $100 millionish or so, something similar of cost reductions?

[Edward C. White:]

I’ll flip that around a little bit, if you say that we’ve taken out $150 million in fixed costs and this year we probably have had an incremental $250 to $300 million of unabsorbed fixed costs due to the lower volume. You always have a difference between practical capacity and what you’re running because of seasonality. You can put $150 for the fixed cost savings and the $300 of shutdown penalties and scenario or model something that says if you get those volumes back that ought to be going right to the bottom line.

[Albert P. L. Stroucken:]

I think it’s going to be more driven by the recovery of volume than really by savings from footprint alignment.

[Christopher Manuel:]

Last question I had was as you think about those curtailments that you have taken, from your prepared remarks and from the dialog thus far, it sounds like the incremental curtailments or shutdowns took place more in the Asia Pacific and South America. Is there a way that you could help us maybe bucket that $95 million or so curtailment costs that you had in the quarter as to which regions were the biggest or swinging around?

[Albert P. L. Stroucken:]

I would say given the size of Europe or North America those two would clearly be at the top of the list even thought Latin America perhaps in a percentage fact may have been more severe but in an overall effect it still comes in third place.

[Operator:]

Your final question comes from [Joseph Nio] – UBS.

[[Joseph Nio]:]

I just wanted to go back to your previous comment about share loss. Were you more talking about kind of the lapping of losses last year or are you continuing to see share loss?

[Albert P. L. Stroucken:]

No, in fact Joe what we have seen and it varies a bit from region-to-region because some of the visibility also depends on how many customers you have an in Europe we of course have many more customers than here in the United States because the customer base is much more dispersed. If I really look at the United States, the volume loss that we had I can pin down to a number of very specific customers. That is volume loss that we knew we might incur as we embarked on this strategy. It happened very, very early in this process. There really has not been any shift or loss of volumes since that time. In Europe, I think the issue is a little bit more difficult to analyze but also there I would say the biggest impact that we saw was in the first half but second quarter of last year when suddenly volumes became more readily available and we saw people on the fringes jumping off and moving to alternate suppliers which is sometimes in Europe easier to do because you have so many smaller customers that have more options available to them to switch from supplier to supplier. But, we certainly have seen over the last three quarters a much more stable environment in regard to that and even somewhat more of an diminishing number.

[[Joseph Nio]:]

Also, just wondering if you might be able to help us out in terms of where the benefits from the footprint alignment might be hitting going forward? It seems as most of them have been in North America so far because that was early in the process. Would you expect to see more of that hitting in year-over-year increases and hitting in the other regions going forward?

[Albert P. L. Stroucken:]

I think we said that we expect mostly about $120 to $125 million benefit for the year. It’s still going to be significantly influenced by North America because that’s where we get the full benefit throughout the year whereas in Europe it’s only gradually moving in, in the course of this year. So, conversely Europe most probably is going to show better comparisons year-over-year than North America would next year.

[John Haudrich:]

That concludes our second quarter earnings conference call. We appreciate your interest in OI. Please note that our third quarter conference call is scheduled for Thursday, October 29th at 8

[Operator:]

This concludes today’s conference call. You may now disconnect.