Earnings Call Transcript - OI Q1 2020

Chris Manuel, Vice President of Investor Relations

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.

Andres Lopez, CEO

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, especially 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 portfolio 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 reasonably served 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 several preemptive 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 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 the Great Recession, total glass consumption in Europe and the Americas declined an aggregate of about 3% through a two-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 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 manufacture of glass containers has been largely viewed as essential in the countries in which we operate. However, we are still impacted by 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 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 the Andeans. Lower demand was now less than 10% during the last two weeks of April. We do not believe these rates reflect the true demand patterns given the level of market and supply chain disruption as well as inventory corrections. We expect shipment levels will normalize after markets reopen. More regional color is provided on this slide. As we contend with significant market volatility, our strong operating performance provides a solid foundation to navigate these times. I'm now on 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 improved 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 SG&A while revenue efforts are focused on mix opportunities even through the pandemic. Importantly, we're moving with speed and agility to actively manage supply and demand. Naturally, we are optimizing our network to mitigate the full impact of downtime as we try to concentrate curtailment in a handful of furnaces instead of widespread machine line downtime. We anticipate the second quarter will be down, reflecting the worst of the production dislocations and the trajectory to improve in the second half of the year. Let's advance to Slide 7. I would like to 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 managing our debt. As I mentioned, we are quickly aligning supply with demand to avoid expensive inventory yield as we continue to manage all other working capital layers. We now expect 2020 CapEx will approximate to $300 million or lower. Additionally, 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 myself as the CEO and Board fees, by up to 25%, with future repayments subject to achieving certain goals. The company will also temporarily reduce 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 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.

John Haudrich, CFO

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 resulted in 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 the 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 by $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 accounts receivable 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. 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 times 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.

Andres Lopez, CEO

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 helped 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, housed in our Perrysburg-based engineering group to make frames for face shields that had been donated to hospitals for COVID-19. 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.

Chris Manuel, Vice President of Investor Relations

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

Operator, Operator

Your first question comes from the line of George Staphos of Bank of America. Your line is now open.

George Staphos, Analyst

Good morning.

Andres Lopez, CEO

Good morning.

George Staphos, Analyst

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.

Andres Lopez, CEO

Thank you, George. I’d like to share some insights regarding current demand. We are observing a robust market in North America and ANZ. In fact, ANZ is maintaining flat performance compared to the previous year, and they've effectively managed the illness situation in that region. Looking at our quarterly figures, there are a few key points. They are significantly impacted by the mandatory stoppages we've had to implement in Mexico and the Andean countries. These stoppages are quite significant. The majority of the downtime affecting O-I globally is primarily attributed to Mexico, the Andean countries, and France. In France, this downtime is influenced by local demand and the reduced exports driven by global wine demand. Across the globe, we are noting a decline in on-premise demand, which is consistent everywhere, while off-premise demand is rising. Interestingly, all product categories we provide are expanding in the off-premise channel. Moving forward, we need to understand how off-premise demand can compensate for the decline in on-premise sales. Overall, we see a downward trend in consumer behavior in Europe, while in the United States, the trend is upward. It's important for us to monitor whether these trends persist or are merely temporary. Food is one category that has been performing strongly. Our position in that segment in the U.S. is solid, constituting about a quarter of our demand, which has worked to our advantage. All off-premise categories are experiencing growth. When examining returnable ware, we notice that it is currently being deprioritized by our customers in emerging markets, primarily to reduce capital expenditures. However, once demand picks up again, returnable containers will become crucial for them as they represent the most cost-effective option available. Consumers are likely to feel the impact of their disposable income decreasing, making returnables an appealing choice. Regarding our cost reduction initiatives, they are not linked to capacity issues, except for how we manage the shutdowns, which I’ll elaborate on shortly. Our SG&A efforts are already in motion, as we have been focused on cost transformation for the past 6 to 8 months and are making substantial progress. We are expanding this program with all necessary processes and structures in place, so there will be no compromise in that area. When demand decreases, our immediate response is to shut down production lines. During these shut downs, we have to absorb 100% of the fixed costs. Subsequently, we take measures to consolidate these line shut downs into comprehensive furnace shut downs, allowing us to only account for 50% of the fixed costs. Ultimately, we aim to consolidate these furnace shut downs into full plant shut downs, which would reduce our fixed cost burden down to 10%. This is the current situation as it unfolds.

Chris Manuel, Vice President of Investor Relations

The next question.

Operator, Operator

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

Ghansham Panjabi, Analyst

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

Andres Lopez, CEO

Good morning.

John Haudrich, CFO

Good morning.

Ghansham Panjabi, Analyst

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?

Andres Lopez, CEO

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 would 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 than we've seen it in more than a year. So I think that people are so focused, they're so committed to dealing 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've been working on the factory performance for about 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.

Chris Manuel, Vice President of Investor Relations

Next question, please.

Operator, Operator

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

Mark Wilde, Analyst

Thanks and good morning.

Andres Lopez, CEO

Good morning.

Mark Wilde, Analyst

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?

John Haudrich, CFO

We initiated a strategic review about mid last year and identified the ANZ business as a candidate for review due to changes in our customer base in the region and our capital priorities. The business is very attractive, and we conducted a thorough process over several months with a significant number of interested parties. We narrowed it down to one primary party with whom we were continuing discussions and conducting due diligence. We were very close to finalizing everything, but the challenges posed by the pandemic created obstacles to completing the process under the current circumstances. Therefore, we are pausing that process and will explore alternatives when conditions improve. In the meantime, as mentioned earlier, we will keep operating ANZ, which has been performing quite well.

Chris Manuel, Vice President of Investor Relations

Okay. Next question.

Operator, Operator

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

Brian Maguire, Analyst

Hey, good morning, everyone. Hope everyone well.

Andres Lopez, CEO

Hi. Good morning.

Brian Maguire, Analyst

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.

John Haudrich, CFO

I can address the first part of that. The 5% to 10% figure is intended to represent a full year-on-year perspective of the business, including the benefits from Nueva Fanal. However, we will start comparing against Nueva Fanal from mid-year, so it will not serve as a supporting factor or a challenge after July 1. Additionally, the outlook mentioned for late April of 10% or less excludes markets like Mexico and the Andean region, which were significantly impacted by government restrictions rather than other market factors.

Andres Lopez, CEO

Yes. When examining today's volume performance, it's important to factor in inventory correction. We're witnessing significant sales activity with key customers, indicating they are likely waiting to adjust their inventories before making further purchases. We expect this trend to continue throughout the quarter. Additionally, there are mandatory stoppages in Mexico and the Andean regions that are having a considerable impact. A positive development is that countries like Colombia are beginning to resume operations in several manufacturing sectors. While it's uncertain when all governments will lift restrictions, we anticipate seeing these changes occur within the quarter, which should allow our operations to restart. The stoppages in Mexico and the Andean region are significantly affecting our operations, but this is not a reflection of demand. We noted in our initial remarks that the second half of April is performing better than the first half, so we need to monitor developments in the coming weeks for a clearer indication of what to expect. Off-premise sales are doing well, which is an important factor to consider, as all end users we serve, including the beer segment, are seeing slower declines in off-premise sales compared to previous years.

John Haudrich, CFO

I want to clarify an earlier statement I made. The projected decline of 5% to 10% for the full year does take into account the overall situation in Mexico. When I mentioned excluding Mexico, it was specifically in reference to the trend we observed in the last two weeks of April, where, without Mexico, there was a 10% decline. However, Mexico is included in our full-year outlook.

Chris Manuel, Vice President of Investor Relations

Okay. Next question.

Operator, Operator

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

Debbie Jones, Analyst

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 a $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.

John Haudrich, CFO

Yes, Debbie. To clarify the $1 million, in the first quarter, our overall Asia PAC business experienced a $1 million impact from COVID, which was relatively minor. This was more apparent in Southeast Asia, while we did not see any significant effect in China, even though the virus originated there, as we maintained our operating levels. It's important to note that 75% to 80% of our business in that market is food-related, which performed well. For a normalized level for the Asia PAC region, you should look at the margins from a few years back, specifically the '15 and '16 periods. I would mention that in terms of pricing during contract negotiations, we have entered into longer-term agreements that have secured volume for the foreseeable future, which may lead to some reduction in margins. Therefore, refer back to those previous periods and adjust expectations slightly downward.

Andres Lopez, CEO

In terms of demand in ANZ, as I previously mentioned, it has been quite stable and the situation regarding the illness in that region is improving significantly. We expect this stability to continue for now. China is in a recovery phase, which is an important factor, and manufacturing performance is strong. What we are observing in APAC is the positive impact of our turnaround initiatives, especially our emphasis on factory performance, which is proving to be beneficial as we navigate the challenges posed by COVID-19 across the organization. We feel well-prepared, which contributes to the solid manufacturing performance we are experiencing.

Chris Manuel, Vice President of Investor Relations

The next question.

Operator, Operator

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

Randy Toth, Analyst

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.

Andres Lopez, CEO

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 them 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.

John Haudrich, CFO

I would like to mention that while foreign exchange has posed operational challenges, it does not positively impact capital expenditures. Part of the revised outlook we shared likely reflects an estimated favorable foreign exchange movement of about $10 million to $20 million. Therefore, it's important to consider the overall impact of other project activities in this context.

Andres Lopez, CEO

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.

Chris Manuel, Vice President of Investor Relations

Next question, please.

Operator, Operator

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

Michael Leithead, Analyst

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?

John Haudrich, CFO

Yes, you're correct. Currently, if we were to assess the conditions regarding asset returns and interest rates, it could lead to an estimated $200 million impact on our pension liability, assuming we were to recognize the year-end entry today. However, we are not making real-time adjustments, and there's significant time left until the year's end when this evaluation will take place. It's important to see how developments unfold from here; ideally, we hope for some normalization which could alleviate some pressure. It's also worth noting that the actuarial calculations won't alter our expenses or cash contributions this year. Changes in the CARES Act may improve the timing of our pension contributions to some extent. There's been preliminary discussion in Congress about providing pension relief, and historical context reminds us that during the Great Recession, there were measures implemented that allowed for extended smoothing of these calculations, which can be influenced by specific timing factors. Regarding cash flow, our EBITDA will be influenced significantly by sales and production volume dynamics as well as a comprehensive recovery plan we have in place. We've identified around 20 different strategies that impact various aspects of our profit and loss statements and cash flows, representing potentially hundreds of millions of dollars that we are actively managing. Therefore, we expect to see some offsetting factors regarding the overall cash flow of our business. Additionally, we have factors to consider in our cash flow statement, particularly working capital, which will depend on the shape of the recovery. Currently, many anticipate a U-shaped recovery, which could provide working capital benefits as we collect receivables early in the recovery phase while experiencing less volume and investment in receivables. Maintaining a lean inventory will support our working capital, and we have also lowered our capital expenditures. Furthermore, we have suspended all asbestos-related payments, which amounted to over $150 million last year. Overall, we believe there are several levers that can help mitigate the pandemic's overall impact.

Chris Manuel, Vice President of Investor Relations

Next question, please.

Operator, Operator

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

Lars Kjellberg, Analyst

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.

John Haudrich, CFO

Sure, I can provide insights into our cost structure. While Andres focused on fixed costs, it's important to examine the overall cash costs of the business. During downtimes, which can vary from minor line stoppages to entire plants being inactive, the financial implications differ. For instance, if a production line is halted, we reduce more than 50% of our total cash costs. However, we cannot eliminate all costs entirely. When it comes to furnace shutdowns, we can typically reduce around 20% to 30% of cash costs since we have more flexibility. In a complete plant shutdown, we are left with approximately 5% of cash costs. The immediate response to these situations usually involves taking lines offline, leading to the most significant cash impact, particularly in terms of absorption. As we move forward, a larger portion of our capacity is managed through furnace operations and some factory shutdowns, and we will continue to optimize these processes. Unfortunately, I cannot provide a specific figure at this time as our situation remains fluid and heavily influenced by the pace of economic recovery and ongoing governmental decisions.

Chris Manuel, Vice President of Investor Relations

Next question, please.

Operator, Operator

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

Gabriel Hajde, Analyst

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

Andres Lopez, CEO

Hi, Gabriel.

Gabriel Hajde, Analyst

I was hoping if we look forward a little bit and I appreciate a lock-in transpired 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.

Andres Lopez, CEO

Yes, so when we look at the capacity in Europe and demand, Europe has been quite well balanced over the last two to 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 coming into this year. I don't expect more capacity to come on board in Europe at this point.

John Haudrich, CFO

On the pricing side, as you know, most of our pricing activity goes in the 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, I think we have two counteracting activities going on as we look at inflation. 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.

Chris Manuel, Vice President of Investor Relations

Next question, please.

Operator, Operator

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

Arun Viswanathan, Analyst

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.

Andres Lopez, CEO

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 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.

Chris Manuel, Vice President of Investor Relations

The next question, please.

Operator, Operator

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

Adam Josephson, Analyst

Hope you and your families are well.

Andres Lopez, CEO

Thank you.

Adam Josephson, Analyst

John, I wanted to revisit cash flow briefly. I understand you had projected over $300 million before COVID, but considering the impact on volume, it seems that managing earnings is much more challenging than managing cash flow. I see you're addressing cash flow by cutting capital expenditures and closely monitoring working capital. I also noticed that you've halted asbestos payments. However, based on your comments about net debt, it appears you're not anticipating much free cash flow this year. I realize you have the Paddock payment of around $50 million and the first-quarter dividend, but aside from those, I'm not aware of many cash outflows. I'm curious about how much you believe your cash flow could perform better than your earnings this year, especially since cash flow was negative last year. I'm uncertain what it will look like this year, particularly with $1.5 billion in maturities due in 2022 and 2023. I'm looking to gain a clearer understanding of the overall situation.

John Haudrich, CFO

Yes. So, first of all, obviously, we're not providing longer term guidance, so I can't be in a position 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, and 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.

Chris Manuel, Vice President of Investor Relations

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

Andres Lopez, CEO

Thank you, Chris. So a few comments. COVID-19 is a challenging situation for everyone and we are understanding more and more as weeks go by, the impact that it will have 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. 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 lead 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.

Chris Manuel, Vice President of Investor Relations

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

John Haudrich, CFO

Thank you.

Operator, Operator

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