Verallia Société Anonyme (VRLA) Earnings Call Transcript & Summary

Hello, and welcome to Verallia Financial Results for Q3 2020. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Michel Giannuzzi, CEO, to begin today's conference. Thank you.

Thank you very much. Good evening, everyone, and thank you very much for attending this call meeting about the 9 months result of Verallia Group. I will be very pleased to share my presentation with Didier Fontaine, the current group CFO. And please be aware that also Nathalie Delbreuve, who will be succeeding to Didier as the Chief Financial Officer as of November 2, next week, will also be attending the meeting. So we are very pleased that both of them are able to participate to this meeting. And without any further ado, I will start my presentation with the first slide, Page 4, which is the financial highlights of the quarter and of the 9 months. But please, I would like, first of all, to draw your attention to the Verallia profile on the left part of the slide to explain a little more in detail why this profile has enabled us to be so resilient during the year 2020, which has been a challenging year for every industry, indeed. And the first thing I would like to highlight is the fact that, as you can see on the donut, we have a very diversified and balanced and market exposure, which has been very useful to especially grasp the growth in some segments of the market that have been extremely -- growing extremely fast during the lockdown or during the recession, especially in the second quarter and even after that. And I mean by this, the food glass packaging. And also, if you see below, the fact that we are leaders in Europe has -- of course, has an implication, the fact that we are not only exposed to the premium segment, where, as you know, very well, as you recall from the IPO presentation, we are quite strong in this premium segment. But you can't be a leader in Europe with only premium products, which means that, of course, indeed, we are also competing in all other segments of the market, including the entry-level or mid-mass market segments, which, of course, have been probably more resilient during this year than the premium market that has suffered a bit more. And the last thing I would like to say is that the combination of both diversified end-market segments and the many countries we are present in, the 11 industrial countries where we are present, is giving us the opportunity to balance and follow the market trends that are -- can be different from one market to the other, with kind of much more resilient factor than maybe pure players in one country or one segment of the market. Let me give you a concrete example. According to national statistics in Italy, Italy is the largest wine producer in the world, and wine Tier 1 especially is our largest segment. If you consider the Italian statistics, the winemakers in Italy have been exporting in the first half of this year 3% less in volume in hectoliters and 4% less in value compared to the previous year, whilst at the same time, the French wine producers have still has seen their exports going down by 10% in volume and 21% in value during the first half of the year. In other words, the French wine producers that are exporting have lost market share at export. Again, the Italian, knowing that for the top 11 exporting countries in the world, the drop of volume has been 6% for the first half of the year. So Italy has been gaining share. One of the country where Italy is gaining share at export is, indeed, United States where you know that the Italian wine producers were exempted for -- from the U.S. tax that were imposed a year ago, which was not the case of the French wine producers and the Spanish wine producers, the 2 other largest wine exporters in the world. So this exposure that Verallia has in the 3 biggest wine markets, for example, in the world, the 3 biggest wine exporters market in the world, France, Italy and Spain, and the fact that some markets are gaining share at exports versus others, has enabled Verallia to take advantage of this diversification that I was mentioning before. The second thing that I would like to draw your attention to, when you look at this split of end market and the fact that food is a quite important segment for Verallia is that even though we estimated during the first semester that about 1/3 of our customers sales are made on trade, which means on the hotels, cafe and restaurants, we've seen during the confinements that some shift from on-trade to off-trade -- some volumes were shifted from on-trade to off-trade, and jars is a very good example of that shift that we have seen. And this also is an explanation for, I think, the strong performance of the company in the first 9 months. Last but not least, I mentioned the fact that we were strong in the premium segment. But if you recall what I said during the presentation a year ago, the fact that we are quite strong in this premium segment is not so much the evidence of the capacity we have to make very nice products, very customized product for our customers, but more the fact that we have equipment, facilities, plants that are flexible enough to make short production runs because you know very well that in the premium segment, you don't have such long runs as in the mass market segment. And we have taken advantage of our capacity to change over our production lines fast to adapt to the new customer demand trends to, of course, grasp any opportunity to grow our business during this year. This flexibility has been evidenced, for example, by our capacity to shift very quickly some lines of production that we're producing bottles into lines of production that are now producing jars, for example, to follow the strong demand in jar. And also, this flexibility is being used every day as we speak to follow a very unpredictable customer demand. I mean let's be honest, our customers' forecast right now are very hard and very difficult to follow because they are very volatile. And the fact that we have this flexibility has probably given us some kind of advantage to -- that you can -- we can use to explain the very strong performance of the first 9 months. So this introduction being done, and this is evidenced by the left-hand part of the slide, let's look at the Q numbers now. First of all, we are very pleased to report that over 9 months, the reported sales are only 1% down versus the first 9 months of last year. And more importantly, the organic growth for the first 9 months are up 2.3%. And even if you exclude Argentina that is a boost to our organic growth, as you know, it's still a very nice 0.9% organic growth for the first 9 months year-on-year. And this has been extremely boosted by the first quarter where we reported a 5.3% revenue growth and an 8.9% organic growth during the third quarter. This strong performance on the top line has enabled us to maintain an adjusted EBITDA at almost the same level of last year at EUR 474 million for the first 9 months. Last year, I remind you, we were at EUR 478 million. And with a slight improvement of EBITDA margin by 10 basis points, up to 24.3% of net revenue. You know very well that we are very focused on managing also the balance sheet very tightly and very carefully. And we've continued to deleverage the company, bringing the ratio of net debt to last 12 months adjusted EBITDA from 2.7x a year ago to 2.2x at the end of September this year. And those very strong results of the first 9 months of the year have made us very, I would say, have encouraged us to revise our guidance for the year, including the latest news that have been made in the last 24 hours in France and in other countries regarding the more severe measures taken against COVID. We have the confidence to upgrade our guidance to the numbers that I will provide to you in a few minutes. So this was the first highlight for the quarter. If you move to the next page, you will we read here that we've also worked in the last 9 months, together with 1,500 employees, customers, suppliers, investors and also other local community members, we worked together to define the Verallia Purpose, which we were very pleased to announce a week ago, our purpose is to reimagine glass for a sustainable future. Clearly, this purpose is already fully integrated in our strategy, is leveraging our company values that are more -- almost 200 years old and clearly, with a strong focus and a clear focus on to secular economy that we want to promote. And of course, improving the carbon emissions to avoid the global warming or to maintain the temperature increase below -- well below 2 degrees. So this is something that we have announced a week ago. We'll be in the coming weeks, communicating a lot more about the concrete measures and objectives that we are taking in this respect. But we are very proud to communicate to you that we have made this very important work during the first 9 months of this year, and we are pleased to report that to you today. Moving into more recent news regarding innovation and product launches. You have here 2 interesting examples of eco-design innovation, especially in the perspective of leveraging reuse concept, which you know very well about the recycled content the fact that the glass is infinitely recyclable, but we also work on reuse. And here, you have 2 examples of reused bottles that have been developed by Verallia recently. The first one is the Gobi Indoor water bottle, which Gobi has sourced 100% in France and through a life cycle analysis has been able to demonstrate by using this water bottle during 3 months that will compensate the carbon emissions that PET bottles and plastic caps are generating during the same period. On the right-hand side, it's another innovation, which is the SodaStream that I'm sure you know very well. The SodaStream machine today is either dedicated to glass or PET, and SodaStream has developed a new machine that can be versatile, can be used either with a glass container or PET container, and we are very proud that we've co-developed this nice glass bottle that will be able to resist to carbonated liquid. And of course, in a reasonable way, in other words, you can put it in your dishwashing machine and it will, of course, remain as efficient as in the first day. So these are 2 examples of innovation, product innovations that are interesting because it shows that we are not only focusing on recycling, we've talked a lot about recycling the past, but we're also trying to contribute on some reuse solutions for -- that are, of course, very good for the environment, and we are pleased to report that to you. Now moving to the next page. We are also pleased to give you some evidence -- the interesting work that we've done on the R&D side developing augmented intelligence. I prefer this word rather than official actual intelligence. And that has been recognized with an enterprise trophy given by RH&M Group. And Verallia was prized, if you want, for -- in a very traditional industry like the glass-making industry being able to use such innovative solutions, either, for example, to control our furnaces and to improve the efficiency of our furnaces, either to improve the inspection, the end-of-line inspection in the quality machines that we have or to also improve the process control on the forming machines that we have in our factories. These were 3 examples where we use augmented intelligence at Verallia and again, not only we work on the innovative designs and products, but we also work on strong innovation, especially on the processing. And more to come, I'm sure, in the next quarters. So this being said, I will hand over to Didier, who will go through you -- with you, sorry, through financial results.

Thank you, Michel. Thank you very much for all of you to join this call. As usual, I will cover the financial matters in 3 parts. Firstly, we will start by reviewing the revenue numbers at group level. I will then move on to profitability via the review of the adjusted EBITDA, and then we conclude on our cash performance and our updated capital structure. So let's move to Page 9. As Michel stated at the beginning of the call, volumes in the third quarter had been better than expected. Actually, volumes have been growing by 4.2% versus the third quarter last year, leading to a strong 8.9% organic growth. As you remember all, volumes were down 7.9% in Q2, and during our H1 review in July, we're indicating the 2 numbers were much better than the April and May ones, and the trend has continued in Q3. As a consequence of that, the sales posted a very solid 8.9% organic growth in Q3 versus a minus 5% -- 5.4%, sorry, in Q2. Just 2 seconds over that number -- that set of number, I would like to come back to what Michel said in introduction about our portfolio diversification. The minus 5.4%, indeed, is a negative number. But even though it was negative, it was probably the best number among our peers in Europe in Q2. Therefore, showing the benefit of our product portfolio and original span as well. So over the first 9 months, the group achieved a revenue of EUR 1.956 billion to be compared to EUR 1.976 billion in the first 9 months of 2019. This corresponds to a slight 1% decrease in reported figures. However, almost recovering from the tough Q2. On an organic basis, if we exclude the currency impact, revenue grew by 2.3% all-in and 0.9% if you exclude Argentina. If we go by geography, the volumes improvement over Q3 is basically mostly due, on the one hand, to the very swift recovery and the very dynamic environment in Latin America, especially in Brazil, where despite the difficult political and sanitary context, the market is pulling a lot today. We mentioned Italy. Italy has been posting very strong volumes increase, we've made during the good part our customers' exports. While in Iberia, volumes have been pick up -- picking up nicely as well. If we move from geography to product family, we mentioned non-alcoholic beverages, especially food jars. Food jars have been the product category that have done extremely well during the crisis and are still very well oriented, and we believe this is a trend. And still wine where inventory is higher in terms of tonnes sold compared to last year, especially from Italy and from Spain. In addition, in the third quarter, our top line enjoyed a positive mix and continue to benefit from the contribution of the price increases that have been carried out at the start of the year. And lastly, I will say, as usual, most unfortunately, we still have been penalized by the exchange rate variation, which has been high given the current economical turmoils. The impact was strongly negative, reaching the 3.3% of sales over the 9 first month, representing overall rate of EUR 66 million, driven mostly by the currency appreciation in Latin America. And especially in Brazil, if you look at Brazil between the closing rate of September '19 and the closing rate of September '20, the real lost 45%. And given that, Brazilian real, represent more -- almost 50% of that negative hit. Now we have covered revenue. Let's move on to the adjusted EBITDA on Slide 10. Adjusted EBITDA of the first 9 months is back to last year's level, which is, I think, a very good and solid news. Despite the heavy negative impact from the COVID-19 and the ForEx transactional impact, reaching EUR 474 million. Organically, if we remove the ForEx, it increase by 3.9% despite all what we had since the beginning of the year. This performance, I'm going to repeat it again, but I think it's always good to repeat the same good stuff. This performance has been driven by the rolling out of our 3 pillars. And if you allow me, I will highlight some key points of the 3 pillars that happened on the third quarter, so that it will help you better understand the bridge year-to-date. Activity remained negative over the 9 months and has been negative in Q3. However, in Q3, we benefited from a positive operational leverage that partly offset the anticipated negative impact of the destocking, resulting mainly from our planned and extended furnace repairs. We reduced the level of inventories between the end of June and the end of September by almost 10%. Our second pillar, that was, again, very strange in Q3 as supported by the improvement of other product mix, is a positive price/mix cost spread. Very good performance in Q3, contributing and reinforcing a good price/mix spread over the 9 months. Finally, the third pillar, i.e., our capability to reduce our cost base via productivity actions, this third pillar has continued to deliver. Keep in mind, we have a 2% reduction target, net cash cost base, production cash cost base. The Performance Action Plan led to a net reduction in cash production costs for the 9 months representing 2.3% of production cash cost, i.e., EUR 28 million. To complete the picture, the other column includes mainly the COVID-19 direct extra cost of EUR 4 million. By the way, the total cost for the year or year-to-date, COVID, has been EUR 40 million for the company so far. EUR 10 million is recorded in adjusted EBITDA. The EUR 4 million also that are partly PPE and donation are recorded below the line. And out of this EUR 10 million booked in adjusted EBITDA, majority of that is linked to -- under activity and is recorded under the pillar activity, a negative impact for activity, and the rest is booked in the other column. As a conclusion, in spite of those headwinds, Verallia has been posting a very solid EBITDA margin at 24.3% over the first 9 months of the year, which is high -- as Michel was saying, 8 basis points, but higher than the 24.2% over the first 9 months 2019, proving once again the resilience of our business model. Now that we cover revenue and profitability, let's look at reality, which is cash, review of your cash flow performance, the improvement in our leverage and our capital structure. Let's move to Slide 12. Our debt reached EUR 1.359 billion at the end of September versus EUR 1.627 billion 1 year ago. This net debt represents 2.2x adjusted EBITDA for the last 12 months. It was, by the way, EUR 1.591 billion at the end of '19, which represent a reduction of almost 15%, i.e., EUR 230 million reduction in value over the first 9 months of the year. All that put together, those numbers compares very favorably in the past, 2.7x leverage at the end of September 2019, 2.5x leverage at the end of June 2020. This is confirming, again, our capability to reduce leverage from 0.4 throughout the term per year after dividend. And this is confirming as well the capabilities of this company to generate a very robust free cash flow to equity via, not only the results, but the control and the master of the balance sheet, its working cap and via its disciplined and smart investment policy. And just for the sake of clarification in case of some of you has some doubt, the leverage ratio remains well below the maximum leverage ratio set out in our financial loan documentation, which is at 5x adjusted EBITDA. Clearly, you understand that's not something that should keep us awake at night. Now if we move into the Slide 13. And as mentioned at the beginning of this presentation, Verallia has a strong balance sheet that underpins its resilience in these critical times. By the way, between June and September, nothing much in the structure per se has changed, except the fact that on September 30, we have fully repaid from our cash balance of EUR 200 million RCF drawn made mid-H1 since the commercial paper has been reopening up. Surprisingly, in those troubled days, it can cost more for cash in bank than to draw from the same bank. Therefore, we use our cash to repay our loan balance. Interesting to note as well, as I was saying, reopening of the commercial papers market. We remain very cautious. We have seen the crisis that told us that being a BB- market can close very quickly. We have been able to draw and find another EUR 120 million. We have not pushed to pull much bigger. Today, we are much more focusing on pricing and duration with capability to go up to 12 months. In addition, toward a good cash performance, the decrease of the leverage below 2.5x last 12 months adjusted EBITDA as of June 30 allowed us to lower by 20 bps our TLA and RCF1 margin. The change in the margin is effective as of August 3, 2020, and this is going to represent a yearly saving for the company of EUR 4 million cash in financial charges. I think you will join me to say that the liquidity remains very solid. I told you at the end of June, I was frustrated that we were are shy of the EUR 900 million by EUR 3 million. We reached EUR 897 million. This time, we beat the EUR 1 billion liquidity at the end of September, which speak by itself and should continue to build up. Well, on my side, this is it. That was my last financial presentation as the CFO of Verallia, the company I've been very honored to work for over the past few years. My last words is to say that I'm leaving the group with solid fundamental prospects and a solid and very dedicated financial team, starting with Nathalie, to whom I'm handing over with confidence after this call. Thank you all for having listened. And now I give the floor back to Michel.

Thank you, Didier, and stay online for the questions. So it's time maybe to conclude and to wrap up this presentation. First of all, as you understood from this call, we've had a very solid Q3 after a very resilient H1. The volume increase in Q3 have led us to report 8.9% organic growth in Q3 after a 5.4% organic decline in Q2 and a 4% increase in Q1. So quite a very nice recovery in the third quarter. And to be frank with you, quite unexpected as well. So that puts the full year -- first 9 months, sorry, of the year at 2.3% organic growth at the end of September. The adjusted EBITDA margin has been maintained more or less at the same level with a 24.3% margin over the first 9 months. And we've kept deleveraging this company after turn year-on-year. And at the end of September, we are pleased to report a leverage of 2.2x last 12-month adjusted EBITDA after the EUR 30 million of cash out for the dividend payments. So based on these very strong results of the third quarter, and including taking into account the latest developments and announcements related to COVID-19, of course, providing that the pandemic does not significantly deteriorate further by the end of the year, we are pleased to upgrade our guidance for 2020. The volume for the year should be slightly below 2019. I remind you, we said in July, to be around minus 5%. Here, it will be a low single-digit down in the year 2020 compared to 2019. We expect a slightly positive organic growth for full year. We revised upward our adjusted EBITDA guidance, which will be now around EUR 590 million. If you remember, we mentioned EUR 543 million at the end of July. So it's quite a significant, I would say, improvement in the EBITDA guidance. We'll keep generating cash in Q4. And therefore, the cash flow will still be very strong and solid. In order to maintain the leverage between 2.2x and 2.3x last 12 months EBITDA. And of course, indeed, we confirm and repeat the guidance that we -- the mid-term guidance that we mentioned in July on most of the mid-term objectives, excluding -- all objectives, excluding the organic sales growth, which we would be probably waiting for the kind of economic and COVID-19 stabilization to give you a better guidance on the mid-term organic growth. But you understood from these first 9 months that we are a company that is eager to keep growing in a profitable manner, improving both the top line and the bottom line at the same time. So that was it for our presentation tonight. And we are very pleased now to answer your questions.

[Operator Instructions] The first question comes from the line of Matthias Pfeifenberger from Deutsche Bank.

Congrats to these very strong results. The first one is clearly on the section wave. Can you share some thinking on that? Actually, did you have a higher fiscal EBITDA target maybe a week ago and just trimmed it a bit because of what's happening in the last week? And also, you said the guidance is under the condition that it's not deteriorating significantly, but that's what's happening in the market. So the question is, how safe are you with regards to this implied minus 15%, 16% on EBITDA?

Thank you, Matthias, for your question. Indeed, we've been monitoring the global situation on a daily basis, almost hour by hour last 24 hours. And this guidance is the latest we -- revision, if you want, that we've made available today. This includes everything we know so far, which basically summarizes or sums up to more drastic measures in the lockdown of hotels, cafe and restaurants in many countries, starting by France, Iberia, Italy, maybe Germany. But as you've seen in Q2, we've seen that even when there was a significant -- actually in Q2, it was almost full closure for 2 months of hotels, cafe and restaurants. There has been some slight offset or slight compensation made in the retail chain. And therefore, the impact, if you remember, for Q2 for Verallia was not the mathematical calculation if you take into account that around 30% of our customers' sales are made in the hotels, cafe and restaurant. In Q2, our volumes dropped single digit, high single-digit growth, but still single-digit in volume. And therefore, we don't expect, of course, to see such a sharp drop in Q4. The second thing is Q4 is a small quarter, I remind you. This is the, I would say, lowest quarter of the year for us. And therefore, again, we factored into our forecast the fact that Q4 will be quite less impacted, if you want, if anything happens, than the other quarters. And the third thing that you need to have into -- that you need to have in mind, sorry, that makes us confident of our guidance is the fact that because we've been surprised by the strong sales in Q3, we've ended up the quarter with very low level of inventory. Actually, to be honest with you, too low level to satisfy our customers' needs. And therefore, if anything, if the sales are softening in Q4 more than what we expect, it will be an opportunity for us to rebalance our inventory and rebuild some inventory to better serve our customers.

Okay, great. I've got a question, maybe you want to comment on the valuation discount to some of your peers. I mean you had the best performance in the second quarter. Now these set of results continue that track record but still you're in a substantial discount. And related to this, can you share some light on your U.K. exposure? Also with respect to some of your peers, you're probably not among the market leaders there.

No. As you know, we have no operations in the U.K. U.K. is not one of the countries where Verallia is present. Having said that, some of our customers are exporting to the U.K. For example, we know very well that some wine customers in Italy are strong exporters to the U.K. We also have some customers that are buying directly from France -- French plants some bottles, but it's a very marginal business for us. So we are not so much, I would say, concerned about what can go on with Brexit.

And the last 2, basically housekeeping. I mean is it fair to say that if we exclude the price increases from Argentina, the price/cost spread is quite narrow. And obviously, that's not needed because we don't have a lot of cost inflation, I guess? And then also, did you see some ramp-up effects from the new furnaces already in the third quarter? Or what do you expect in the fourth quarter?

I'll take that one. Matthias, if we exclude -- so if we exclude Argentina, the price remains reasonable. I mean because don't forget Argentina is not a major country for us. It's a big number but it's a low level. Globally, the price increases have been correct everywhere, all across the board, all across the Verallia company. And relating to the new furnaces, I think in Brazil, notably, Jacutinga, is doing an extremely good job. It's fully loaded. And that's the reason why we think the market was pulling a lot.

The next question comes from the line of Alexander Berglund from Bank of America.

Well, first of all, congratulations, for the good results in these uncertain times. I have a follow-up on Matthias was talking about on kind of visibility, et cetera, here. And I think it has been a question from the investor base as well because there's been surprises for Verallia, I mean positive ones. So it just kind of -- do you -- do you feel that you're your sense of kind of what happens for the business in this environment has increased, that your kind of predictability has increased? And more specifically also kind of in your conversations with your customers, do you have a sense that your customers have a better understanding what end demand, et cetera, will be or could be in different scenarios? So that's my first question. And then secondly, if you could comment anything on supply and supply discipline in the market, generally. We continue to see quite good supply discipline.

Thank you, Alexander, for your questions. Regarding the visibility and the ability of our customers to read the market outlook, frankly speaking, it's extremely volatile. I would have told you maybe 2 months ago that we were on a recovering path regarding visibility and regarding forecastability of our customers. But the last few weeks have shown the opposite actually. It seems that our customers have a very difficult time to figure out what they're going to sell when and where. And that is creating to all the suppliers a huge challenge to be able to meet very volatile demand. And in this environment, that's what I was mentioning before, our flexibility that we have built over years in this company has enabled us to react probably much better than some of our competitors to be able to follow what our customers were asking. But I'm not confident at all that the visibility is improving in the coming weeks. I think we will have to live and to learn to live with a lot of uncertainty going forward, at least probably until beginning of next year. Regarding your second question on the supply discipline, clearly, I think, as we mentioned a year ago during the roadshows of the IPO, I think this is an industry where everybody is, I would say, rational in the way that if the market is down -- I mean, you need to adjust your own capacity to a lower level of demand if you want to maintain your business in a good shape. And this is what we've done. Of course, during the second quarter, it has been quite extreme because the slowdown has been very, I would say, important. But even after the second quarter, we've seen some projects of new furnaces constructions being delayed. We, ourselves, have decided not to rebuild 1 furnace in France because the French market is not as dynamic as the other markets. And therefore, it's even slightly down. And therefore, we decided not to construct 1 furnace in our plant in Cognac in order to, I would say, eliminate some nuisance, unnecessary capacity from the market. And this is what we've seen so far.

The next question comes from the line of Lars Kjellberg from Crédit Suisse.

Just coming back a bit to your discussion going into the second half about, obviously, pushing all of your furnace rebuilds into the -- or furnace repairs into the second half. I think you mentioned 5 or -- 5 was going to go down for rebuilds in H2. So the question is, how many have you now done? The other question, I guess, relates to working capital because your -- to your point, you reduced inventory by 10% from a relatively elevated level after H2 -- sorry, after second quarter. I understand that it depends, of course, how strong demand is and if you will find an opportunity to rebuild or not. But in terms of your production, how do you see that faring -- first and foremost, how did it fare in Q3 year-on-year? And how do you expect that to fare in Q4 on a year-on-year basis based on your plan? And also finally, if you can just confirm what sort of CapEx levels you're looking for in the current year? And how we should think about that in 2021?

Okay. So I will leave 2021 to Michel because I don't think I could comment on that, but I will take the first one. What we have said, we have said that we are planning to do 7 furnace repair in the year 2020, one of which has been -- one of them has been performed in Q1 2020. We have done, I would say, 3.5 because you don't close the 30th of September. So we have done more than half in Q3. And as expected, around time, we have decided, you remember, well, to extend a little bit as well. Now from a working cap management, our working cap, you're right, the inventories have been a big contributor. It was a contributor last year as well. We're talking about variances or variances. Last year, the inventories have been reduced between January and December -- and September, the same here more. Currently, we are 100,000 tonnes below at the end of September, 10% than we were last year. September '19. However, overdues are fully in control. I mean in terms of percentage of sales, lower, despite the fact, and we are improving our working capital without having recourse -- more nonrecourse factoring. There were 4% less than nonrecourse factoring than last year. So I think our balance sheet is pretty well under control. Regarding the production, I think exactly what Michel has been saying, we have a lot -- we have flexibility, where flexibility in the market is not there, to increase a little bit selectively the level of production. And unless global advantage is extremely high, there is no reason why we shouldn't be able to do so. So we have the flexibility or production tool to address that if the sales are not aligned. As regard the CapEx, I will mention cash because we have completed the 2 bond field. In terms of cash, we are going to spend around EUR 250 million -- or EUR 245 million cash, which is EUR 15 million more in cash than last year. So that was expected. If you remember well we said when we started the year, we said, okay, listen, the bulk of the CapEx is due in the middle of the year. So the payment terms make payable during the year. So we were going to have probably actually value the same book CapEx, but with a negative impact on the payables. That's exactly what happened. So we are EUR 15 million more than last year the same period. I leave it to Michel for 2021, but I don't think there is any surprises given our discipline and our rigor on that.

So for 2021, as our goal and target has not changed, it's the mid-term guidance that we gave you and reinforced in July, which is that we are going to spend 8% of our turnover in recurring CapEx. So our turnover being around EUR 2.5 billion, it's around EUR 200 million plus or minus a few millions that we're going to spend every year on recurring CapEx.

And in terms of strategic CapEx for next year, is there anything planned for next year because some projects were pushed, I oppose, maybe into 2021 or...

Well, we didn't announce any other strategic CapEx in the past than the 2 that have been completed this year, which is the brownfield in Villa Poma in Italy and the brownfield in Azuqueca in Spain. Those 2 brownfield strategic CapEx will be started midyear -- before midyear next year, so first half of the year next year. And that's it for the time being. Now should any opportunity, either from an M&A or from another reason be found, if you want, of course, we will communicate in due time about those strategic CapEx. But for the time being, that's what we have.

And the cash on those brownfield has been largely spent year-to-date.

Right. And you -- just to -- in total then, you're looking at a CapEx cash spend at, you said, 2-4-5, EUR 245 million.

This year more or less, for 2020, that's the target we're having for the year. Yes.

Very good. And just finally, so there's no misunderstanding from my side. Your inventories are, of course, tight as you mentioned. But in theory then to reach your EUR 590 million number that you're talking about embedded in that guidance, is that production in line, broadly speaking, with shipments? Or do you have any meaningful deviation between the 2?

No, meaningful. This is no meaningful deviation. This should be in line.

Just to be very precise on this question, we are not planning to significantly increase -- sorry, to increase inventory significantly differently than last year. Q4 is always a quarter, at the end of the year because it's a low quarter in terms of sales, but you know our factories are running 365 days a year and 24 hours a day. So the production output from the factory is very constant throughout the year, but December is a low sales month. Therefore, every year, we increase a little bit inventory in December, but we are not planning to increase it much differently than the previous year.

If I may just butt in with one more question. You -- of course, when you spoke in July, you talked about extended downtime. From then what we expected was relatively subdued demand. I would assume that extended downtime didn't happen this year? I think you can confirm that. And how should we think -- sorry.

No, absolutely. I mean, of course, we were planning some extended downtime especially linked to the furnace repairs, which, of course, we have not done because we were short of inventory.

Great. And furnace rebuild activity next year, is that going to be broader, the same as 6, 7 furnaces going down?

Absolutely. Absolutely. We have a more or less regular flow of furnace rebuild every year, 6, 7 furnace every year.

And well done again in the quarter.

Thank you, Lars.

The next question comes from the line of Francisco Ruiz from Exane.

Congratulation for the figures, and good luck to Didier in his new challenge. I have 4 questions -- 4 questions, if I may, yes. First one is if you could give us some light on the current price negotiations for next year? The second question is, if you could give us what's the current situation of hedging, both in raw materials and energy, and if you could give us what is the delta versus the cost on 2020? The third question is, if you could give an update on the restructuring in France. And the fourth one, it's -- what's the current situation of the new furnaces in Villa Poma and in Azuqueca? Are they opening? Are they running at full capacity? What's the current situation?

Thank you, Francisco. I will take the first question, I will let Didier answer the second one, and I will take the following question #3 and 4. So regarding the price negotiation, of course, we start the price negotiation season, as you know, in Europe. In Latin America, it's every day price negotiation, or almost, in Argentina, for example, but it's much more dynamic. But in Europe, as you know, we usually -- most of our customers negotiate between October and February. A few customers have a different fiscal year. They negotiate midyear, but most of the negotiations are currently happening right now. So without going too much into the details, which, of course, for confidentiality reasons, I will not be able to give you. The price negotiations are led by the -- many reasons -- in many countries by -- led by the inflation of cost factors. This inflation, especially on the energy side, can be different from one country to the other. Therefore, we don't have a general price increase in all countries, which is the same, as you know, very well. So it's very much tailored to each country. Now more than 80% of our negotiations are, I would say, annual negotiations, and we have less than 20% of our negotiations which are linked to long-term agreements, where we have -- where most of the case is a price formula. So when we have a price formula, those price formulas show at -- in some countries, the pricing would be neutral or slightly down, depending on the energy mix, energy cost of the country. And for the other customers that don't have a price formula, it will be arm's length negotiation. I remind you, the purpose for Verallia is to be able -- and the goal for our sales teams is to cover the inflation of cost factors. In other words, to end up with a positive spread. So if there is a deflation in 1 country, therefore, if in 1 country the costs are going down, what we want is our prices to go down less than the cost.

But as of today, you will say that there is -- or is likely not to see a big price decline next New Year?

We don't see a big price decline, overall. I think, I repeat, some countries might have a slight price decline because their energy costs are going down much more than others. But in other countries, there is still opportunity to have price increases. So overall, I don't have the numbers yet. We'll see at the end of the negotiations where we end up with. But I would say, overall, it should be more or less flat. Now regarding hedging, I will let Didier.

Yes. Hedging, you know our strategy on hedging, we don't speculate. We don't assume positions open. Clearly, we -- this has a cost of opportunity and in this year, if you remember this year, the TTF gas price was at EUR 5 in July this year, EUR 5. Now it's back over EUR 15. So the one was taking and speculate and books open benefited from a lot of advantages. That was not our case. We were hedged, that's our strategy when we go in negotiation with the customers. We are hedged. And today, we are at a point where we are -- beginning of -- end of October, beginning of number, we are going to be free hedge in the coming weeks. We see the price of the TTF of the gas increasing significantly. So we miss cost of opportunity. I said that again. I think you prefer a company like us, which is we're missing an opportunity than is taking risk because I've been speculating. So going forward, I have a different view a little bit than what was midyear. Midyear, really, the price were going down. Now the prices are picking up. I think that we're seeing more than EUR 15 in the TTF 1 week ago, so that price continues to increase. As regard raw material, I think we are complete on the soda ash. We have diversified our sources of supply. And we have diversity between short term and medium term. So we don't foresee a price increase next year on the raw material either.

Okay. Regarding restructuring. So as you know, we've started a transformation plan in France to adjust our capacity in our French market to a lower level by not rebuilding 1 of the 3 furnaces of Cognac factory. This is linked to the fact that the French market is not growing a lot. And what I told you at the beginning of this call is even showing that the French winemakers, for example, are even losing market share at export. So this has led us to consider that we didn't need so many furnaces in France and therefore, the furnace in Cognac that was due for reconstruction next year will not be reconstructed. Having said that, we are currently reconstructing one of the other 2 furnaces. So we are still investing in this region and especially in Cognac area for that reason. The purpose of the first transformation plan, just to remind everyone, was, of course, to eliminate this extra capacity from the French market, which has a direct impact on 80 jobs in Cognac factory. And there was also a change in the organization in the other factories, the other 6 factories in order to make them organized the same way as we have in the rest of the group, which is much more empowerment and much more responsibilization for the shop floor people. And this was going to lead to an additional 7 jobs being eliminated in the other 6 factories. Verallia being a very responsible company, every effort has been put to negotiate with our union representative conditions that would favor early retirement or measures to help people to set up their own businesses and in any case, try to avoid as much as possible forcing people to leave the company. In other words, planning measures that will make -- that will favor, if you want, voluntary departures. So we've gone through all the negotiations, all the discussions with our partners, social partners, and those negotiations have ended up at the beginning of October. We have now completed all the files that have been now submitted to the French administration for approval of our plan. And that was done on time, which I think is quite remarkable when you know the way the -- usually those matters are dealt with in France. And we expect an answer from the administration next month. And hopefully, should this answer be as expected, positive, by getting our plan, this plan should be put in place by the end of the year, beginning of next year. So that's where we are. So we are perfectly in line with our timing with our planning. And also in terms of cost, you -- I remind you that we took a EUR 19 million provision in the first semester to cover for this -- all this plan. Including some -- a few asset impairments, so it's not just social costs. So to summarize, we are well on track on this project of transforming the French organization and making it at the right level of capacity and also more efficient in terms of organization. Regarding our last point, the 2 new brownfield furnaces in Italy and Spain. As you know, we've postponed the start-up of those 2 furnaces to next year. I mentioned that we'll start them in the first half of next year when we think we need them. And these, I remind you, that these are totally dedicated for the domestic markets. In other words, they are not conversely to what some journalist could have said, these are not furnaces that have been built to export to France to compensate for the closure and the non-reconstruction of the Cognac furnace, but these are furnaces that are dedicated to the domestic market in Spain and Italy, respectively. So we are all ready to fire them up next year, of course, based on the assumption that next year, economy will be steadily recovering from this year.

Our last question for today comes from the line of Paul Bradley from Citi.

Firstly, add my congratulations on this great set of results. Well done. I've got a couple of questions, but first, I just want to make sure I understand the pricing and cost commentary you just given. Overall, you expect to see prices at the moment to be more or less flat into next year. And from a raw materials point of view, also more or less flat into next year. So just confirm I understood that correctly.

All-in, that's the right assumption. Right now, all-in, I mean if you mix the 11 countries in which we are, if you look at all the cost factors, some cost factors are, in some countries, down, but others are up. For example, Didier mentioned that soda ash was probably stable or down in some countries, but labor cost is sometimes up in other countries. So all-in and including all the countries we are in, it's going to be around 0 inflation and around 0 price increase. What we want is to be slightly -- end up with a slightly positive spread.

Perfect. And on your Performance Action program, again, saw very good performance in the 9 months at 2.3%. It was 2.6% at the half year, I think. What should we expect for the full year? Will you still be running at about 2.3% or so? Or will the fourth quarter sort of tail off as the third quarter has? And what should we be thinking about that in terms of next year's performance on the Performance Action Plan? Would you still be looking at sort of 2%? Or is it looking again to overdeliver?

So on this one, clearly, for the full year, as of also for next -- as also for next year, the goal is more than 2%. Now, of course, if there is a slowdown during the year, you have to incur more industrial balances because the 2% is net of industrial balances. So if you look at the bridge that Didier has presented, actually, the gross PAP is higher -- is EUR 36 million, and the net is EUR 28 million. So we've got EUR 8 million of industrial balances. A big part of it is linked to COVID where we have inefficiencies due to COVID, especially in the second quarter. But altogether, we are aiming at more than 2% net-net productivity for the full year this year and same thing next year.

Okay, great. And just finally, on the business itself. You've highlighted a couple of innovations you've made. What are you seeing in terms of customer appetite this year for new product, new innovation, particularly driven by sustainability considerations? I know it's been a funny year and lot of things probably went on hold in the second quarter. I just wonder if the appetite for new sustainable products or new sustainable angle has come back at all in the third quarter.

Well, I think it's a very interesting question. Thank you very much for asking it. We have 10,000 customers. And let's be honest, we have some very small customers that are struggling. And frankly, speaking, they are not thinking about innovation. They are struggling for life. So the small vineyards that are -- that we're exporting, for example, to the U.S., in France and that are no longer exporting so much or some of them are in difficulty, and frankly, speaking, innovation is not on the top of the agenda. On the opposite, we have some especially large customers that are still very committed to improving their environmental footprint, improving their CSR performance and that are strongly interested in any kind of innovation, especially when it's eco-design or eco-innovation that helps them meet their own CSR objectives. And I've given you some examples here, but we've got plenty of examples with other very large companies that -- big names, big brands that have not paused this year despite COVID on innovation-related to carbon footprint and CO2 emissions. So it's a mixed bag. I mean but with 10,000 customers, you can imagine, we have all kind of situations. But clearly, the trend that we mentioned several times in favor of glass is reinforced day after day. I mean I gave you today, 2 examples, where PET has been substituted by glass. We just have received some interesting statistics from Germany, for example, where the share of reusable glass for mineral water in Germany has increased in 2020 versus 2019 by 5 points, from 30% to 35%, of the containers being used for mineral water. So this is in 1 year, I think, with significant shift. Now clearly, the German consumers are probably more eco-conscious than other countries in the world, but this is something we can see in many other countries as well, probably not to the same extent, but certainly, the trend is there.

Thank you. There are no further questions in the queue. So I'll hand the call back to our speakers to conclude today's conference. Thank you.

Well, thank you very much, all of you, for attending this call and for following up Verallia. On behalf of the company, I'm in front of you because you've been working and interacting a lot with Didier during those years, I would like to thank Didier for his great contribution to these outstanding results and also welcome Nathalie that has been very well groomed by Didier, as I mentioned before. And I'm sure you'll be very pleased to meet Nathalie in person as soon as we would be able to physically meet. But I'm sure in the short term, you will see her easier through video conferences or in calls. So thank you very much, and I wish you all to stay safe, healthy, and look forward to talking to you again in a few weeks. Thank you.

Thank you for joining today's call. You may now disconnect. [Operator Instructions]