Verallia Société Anonyme (VRLA) Earnings Call Transcript & Summary

Hello, and welcome to the Verallia H1 2021 Financial Results Analyst Call. My name is Judy, and I will be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I would now like to hand you over to the Chairman and CEO, Michel Giannuzzi; and Nathalie Delbreuve, CFO, to begin today's conference. Thank you. .

Thank you very much, and good morning, everyone, and thank you very much for attending this call. I hope you and your relatives are in good health and not suffering too much from the COVID. We will go together with Nathalie for the H1 results, and we'll start, first of all, by reminding everyone about the company profile. As you know, Verallia is the leader in European glass packaging industry. And Europe, which is, for us, the great Europe encompassing, EU plus Ukraine and Russia represented last year, 90% of Verallia sales. We are #2 in Latin America, where we are present in 3 countries: Brazil, Chile and Argentina. And in last year, Latin America represented 10% of our sales, and we are the third largest company in the glass packaging industry. As you can see on the left-hand side, we have a very diversified end market reach, where we can address all the segments of the market with a strong presence in the wine segment based on our historical presence in the 3 largest wine-producing countries in the world, namely Italy, France and Spain. And we address it more or less in a balanced way all the other segments of the market. Now Verallia is made of 32 glass producing plants with in total 58 furnaces to produce glass packaging. We also have 3 decoration plants that provide additional services to our customers. We are also treating about half of the cullet, cullet is the name of the used glass that we use internally. And therefore, we have 9 factories that are working really for us in order to treat the cullet that we reintroduced in our furnaces to make glass again. And in total, we employ around 10,000 employees in 11 different countries, and we make every year about 16 billion bottles and jars. So moving to the financial highlights of the semester. First of all, I think it's interesting to note that the capital structure has evolved quite a lot since December. As you have noticed, there has been 2 blocks of shares traded on the market based on the sell-down of Apollo, which today means that Apollo owns 16.3% of the capital of the company. At the same time, we've seen our Brazilian investor, BWSA, increasing their share progressively and slightly up to 26.6% at the end of the semester. And the most important, I think, highlight of the semester was the fact that, as we mentioned before, we have bought back some shares as 2x during the semester. In total, we bought back from EUR 109 million worth of shares. Some of this year's 1.6 million of the shares that we bought back have been canceled in order to avoid any dilutive effect due to the employee ownership program that we've implemented last year and this year. And we have kept 1.7% of the treasury shares in the balance sheet. So today, the Verallia share of capital is divided into 122,289,183 ordinary shares. The other important financial event of the semester was the launch of an inaugural Sustainability-Linked bond. This was the first issuance of a bond by Verallia since we are listed as a listed company. It was clearly oversubscribed. We had 4x more request than what we -- the EUR 500 million that we finally committed to issue. We were the first issuer of the Sustainability-Linked bond in Europe in the glass packaging industry. And we benefited from very attractive financing conditions at -- with a coupon of 1.625% per annum. And this has provided us not only a diversification of our funds of financing, but also it has provided us a greater and extended maturity because it's a 7-year bond that will -- that we've raised in May. So I think we have been very much supported and we received a lot of very -- a lot of interest from the bond investors on the 2 KPIs that are ESG-related that we have taken to measure the sustainability approach of Verallia. One of them is the reduction of the CO2 emissions, which is in line with the presentation we made in January regarding our long-term commitment to reach 27.5% CO2 emissions reduction by 2030, in line with the COP21 agreement. And therefore, for this specific bond, the objective is to reduce by 15% against 2019 our CO2 emissions by 2025. The second KPI that we took was to increase the cullet usage rate, our external cullet usage rate and to increase it by 10 points versus 2019, again, reaching 59% by 2025. Now this has been considered by Vigeo Eiris, which is independent or second-party opinion that looked at this bond as a very relevant and of a higher ambition which allowed Verallia to reach the highest rating provided by Vigeo during this issuance. So we are -- the team here is very proud about what has been achieved and it's, again, a strong commitment not only on the financial benefits of this bond, but also of the commitment of the company in its move and ambition to reduce CO2 emissions. Moving to another completely different topic. One of the very strong capabilities of Verallia is design and just as for information, since 2009, sorry, we are organizing in the main Verallia countries, some design contest with students. And this year, we had more than 500 students in France, Italy, Spain and Ukraine. And we provide a theme of the year. This year, the theme was glass in solar format. And based on this theme, we received a lot of interesting design ideas and design the products that sometimes end up in commercialization because they are very much liked by some of our customers. And we've had a very interesting successes in the past with this contest being the most interesting products and have been selected by our customers to be commercialized. Every year, we also have on the design side, what we call a stylebook, which is trying to anticipate the trends for the following year. This is our premium product line, which we call Selective Line that is benefiting of this trend book. And this, again, has been updated and put online on our website very recently. And you can see all the beautiful products that we can provide to the customers as well as the new trends for the next year. So this is all for the design. Let's move again to environment, where Verallia has joined the ambition for climate initiative launched by AFEP. AFEP is French association of private enterprises. And the idea is to really put together all the good examples of what companies in France are doing to reduce the global warming at the global level. And we've submitted 3 low-carbon projects on the platform, the ambition for climate platform. One of them is about the improvement on non-melting energy. The other one -- the second one is about the ability to mix white cullet in order to improve the share of white cullet in the flint glass production. And the third project is about the project that is ongoing with the installation of photovoltaic panels on our Portugal seat of Mondego. So these were again some good examples of what Verallia is doing to reduce its CO2 emissions. And last but not least, on the social and community side, we have, as we speak, partnered with Bpifrance on their big tour. This is the second year in a row that we participate to this big tour. The purpose of this is really to get consumers, citizens know more about the glass industry, about Verallia and also promote, of course, the recycling habits at a very large scale. So this big tour is organized in 24 different cities from July 16 to August 20 by Bpifrance. We also promote during this tour, the know-how and the innovation and the French industry and technology. And we have a stand there where we meet hundreds or thousands even of, I would say, visitors, where we educate them about the quality of glass and the importance of recycling. So the goal is really to raise the awareness and to involve local communities in the challenges of the circular economy. And last but not least, we have a few jobs to propose to those people that would be interesting to join us in our industry. Now, these are the most interesting, I think, highlights of the semester. Now let's move to the financial results. As you've seen from the numbers, this is a very robust performance in the first semester with a very, very strong Q2, where you can see that the revenues were up 4.2% for the semester, and it was even a 7.7% organic growth for the semester. But Q2 shows very strong after Q1, as you remember, that was a bit soft. We mentioned a soft start of the year, Q2 was extremely strong with a 14.8% growth in Q2 and a 17.6% organic growth in Q2. So this is, as we said before, the results of the progressive reopening of hotels, cafe and restaurant mainly. And by the way, we are clearly sold out, and our factories are producing as much as they can. Everything they can produce is today being sold given the strong demand that we have on the market. Now on the profitability side, our EBITDA increased also very significantly, 15.4% compared to H1 last year and 20.8% organically to reach EUR 345 million, which means an EBITDA margin of 26% compared to 23.4% last year. Again, very, very nice results that we are very proud to comment to you today. As a consequence, indeed, the net income has jumped significantly from EUR 79 million last year to EUR 133 million, and it's even EUR 155 million if we exclude the PPA impact due to the acquisitions of the company by -- from Saint-Gobain, which is amortization basically of the customer relationships that was, I would say, booked at the time of the acquisition. And despite the strong share buybacks that we made during the semester, the very strong cash flow allowed us to keep reducing the leverage of the company, and we ended up the semester with a leverage of 1.9x adjusted EBITDA for the last 12 months, against 2.1x at the end of March this year. So altogether, these very strong results give us the confidence that we can improve our guidance for the year. And we are going to be revised, if you want, upward the 2021 adjusted EBITDA guidance, and I will comment it in a few minutes. Before we move to the guidance upgrade, which I'm sure you look forward hearing from us. I will hand over to Nathalie, who is going to explain to you the strong results of the semester.

Thank you very much, Michel, and good morning to all of you. So indeed, let's go and look at the sales at the top line, where you can see that we enjoy a strong organic growth in the first half with plus 7.7%. Now as Michel commented, you know that we had a slow start in Q1 in the year in terms of volumes. We had a negative of any growth in the first quarter. But the second quarter is showing plus 17.6% so a strong rebound and directly linked to the gradual reopening of the on-trade channel. So the sales have been strong on all product categories. exception for food jars, that is a category that benefited last year from the first lockdowns in the second quarter. So food jar volumes are more back to pre-COVID and 2019 levels in our portfolio. Now the spirits rebounded sharply and, thanks to exports to Asia and U.S. picked up in the second quarter. The sales price increases, as already commented, are pretty moderate, and this is exactly as planned. And one important point in the first half and even stronger in the second quarter is that we enjoyed an excellent product mix at a group level. And now the last pillar is impact on exchange rates that is negative for us mainly from Latin America. If we look now per regions and move to South and West Europe, you can see that the sales recovered well and organic growth is positive at plus 5.5%. So the growth is in all the countries and all the product categories with the comment already made on food jars. In South and West Europe, we can really see the spirits back and strong -- recording quite strong in the first semester. The growth is also there in wine and beer and sparkling wines benefited from Italy increase especially on Prosecco. And in South and West Europe, price contribution is pretty neutral. Moving to North and Eastern Europe. Here, you can see negative organic growth. So some comments here, it's -- we mainly had a fall in volume in Q1. So the impact is mainly in the first quarter. And we've seen an improvement in the second quarter with volume improving across all product categories. And to recall that 1 year ago, North and Eastern Europe had been hit this very differently from the COVID and was the region, the only region in our in our group with still a positive growth in sales. So the comparison with H1 is a bit more difficult for North and Eastern Europe. The sales prices are overall stable, and the foreign exchange impact is negative due to Ukraine and Russia. If we move to Latin America, you can see very strong organic growth. We had some additional capacities, as you know, in 2020 that we fully benefit from in 2021. But the market is really strong in all the countries and in all the categories with, again, the same comment on food jars. So as Michel said, and especially in this country, we are fully sold out and the market is pulling really hard. Now increase in selling prices are still there. We compensate inflation and hyperinflation in Argentina. So we have this effect always in Latin America to maintain a positive spread. And the impact on ForEx is negative. But despite this impact, I mean, even with the impact, the increase in sales is there. So how does this translate into EBITDA, adjusted EBITDA and margin. You can see that we moved from EUR 299 million, up to EUR 345 million. And more than that, we improved significantly the adjusted EBITDA margin percentage moving up from 23.4% to 26%. So the activity pillar is slightly negative. It was, if you remember, pretty negative in the first quarter. So here, we benefit from the positive volume growth I just commented in the second quarter. But we have also still destocking effect in our EBITDA as we had 5 furnace repairs in the first half of this year compared to much less in last year. And we have the strong sales. So again, we are sold out, and we sell everything we produce in the second quarter. The spread contribution is especially strong. Here, we benefit from EUR 45.4 million in our EBITDA. And the mix impact is -- has increased in this second quarter and is strong compared to last year. The PAP is contributing significantly to the good performance of this first half year with a net productivity of EUR 21.3 million, and that is 2.7% of production cash costs. You know that this pillar is especially important as it is purely our import -- our internal work contributing to improving our EBITDA. Exchange rate impact continues to be negative with a minus EUR 16 million. And the other pillar is almost -- I mean, it's very low with plus and minus. So if we look at the regions now, South and West Europe, we've seen an improvement in the EBITDA margin, moving up from 22.2% to 25%. The spread on sales is positive. In this region, especially we benefit from the strong product mix I commented and the industrial performance is also contributing despite the difficulties that we had in France in the first quarter we commented to you and that are now over. And the performance is good overall in industrial. So North and Eastern Europe, we saw that we are penalized by volumes. And we also have in this region, adverse exchange rates that also impacted the EBITDA. Still the spread is positive, it does not certainly compensate fully for the negative impact of the volume drop. And in this region, maintenance costs are pretty high in this first half, and that's a one-off as we had 2 furnace repairs versus none 1 year ago. Latin America is posting an outstanding performance. As you can see, with adjusted EBITDA margin moving from already a nice level of 30.6%, up to 38.5%. So the growth in sales volumes and the dynamic of the market, we already commented, the spread is positive, which is a very good achievement in this region where inflation in cost continues. And the mix was also strong in the region. The industrial performance is also delivering in the region. And 1 point to comment on this first half is that Brazil benefited from an impact, a positive impact, tax credit on the ICMS following a Supreme Court decision to give France this credit. But despite this one-off, I mean, adjusted EBITDA margin is really strong and improving versus last year. If we move to cash and balance sheet, let's look at investments, fully in line with our plans, our strategy. You can see that total book CapEx reached EUR 109 million in the first half. And this semester, we've seen more recurring CapEx. This is directly linked to the maintenance in the furnaces, which we commented to you, and which were less last year, 1 year ago. And the strategic CapEx, we will see the Jacutinga to get back in the second half of the year. So for the first half, it's pretty limited to EUR 11 million. And 1 year ago, we had the CapEx still for our 2 new furnaces 1 in Italy, Villa Poma, and 1 in Spain in Azuqueca. The cash flow generation is very strong in this first half. It starts, of course, with the adjusted EBITDA. So the strong growth in adjusted EBITDA, so EUR 45 million more and the cash conversion is still very strong with a 68.3%. And the change in operating working capital is negative by EUR 23.7 million, including CapEx this year, that is EUR 38.7 million. In the operating working capital, worth mentioning 2 points: Stocks inventories are still extremely low as we are addressing the market, plus we had these furnace repairs. And 1 important point on the overdues absolutely were very well managed, stable, and we've been facing no customer issue at all in the semester. So the operating cash flow ends up at EUR 211.6 million to be compared to EUR 138.2 million 1 year ago. So our net debt is at, sorry, EUR 1,266.2 million and leads to a ratio -- a net debt ratio at 1.9x that is decreasing versus end of March, but also, as you can see, versus end of the year and 1 year ago, we were at 2.5x. So we continue to deleverage the company even after the share buyback of EUR 109 million, which was commented to you. The good thing is that by decreasing our net debt leverage below 2x, we allow Verallia to lower our TLA and RCF margins by 25 bps so we lower our financial interest. Net debt and liquidity profile. Our net debt profile has changed since the last time I presented to you. I'm very pleased to present 1 new line with the Sustainability-Linked bond we issued in May for EUR 500 million. And as you can see on the right of the table, in the final maturity column it allows us to push EUR 500 million of our debt to 2028 when the rest of the maturities are for 2024. And as you can see and commented already, the nominal rate is at a very interesting nice level. So in this operation, we managed to diversify our funding -- financing sourcing and to diversify also maturity. Now available liquidity is reaching EUR 847.9 million, so still at a very nice and comfortable level.

Thank you, Nathalie. So moving to the conclusion, I mean, as you can understand, we are very proud and very happy with the strong performance of the first semester. After a soft start, as we commented in Q1, Q2 has been actuating quite significantly. And we ended the semester with a high organic growth of 7.7%, which is clearly a bit better than expected. We have also improved significantly our EBITDA and EBITDA margin reaching 26%. So as you understand, this is above our target of 25%. And we are, again, very proud of this. The PAP has played an important role for that. Consequently, the net income, of course, has jumped significantly. And on the financial side, the issuance of the new Sustainability-Linked bond and the share buybacks have been also 2 major events using the strong cash flow of the company in a very, I would say, efficient way in the case of the share buybacks that we mentioned. Now based on this strong performance, we are revising our 2021 outlook. Assuming that there is no new widespread COVID lockdown, and we are, of course, always careful about the uncertainty we have in front of us. We are still here and there some partial lockdowns or partial restrictions. But assuming that there is no widespread or massive lockdown like what we had last year in the fall, we believe our sales will reach around EUR 2.6 billion with a volume that will be back to 2019 level. We are upgrading our adjusted EBITDA target for the year, which now should be EUR 675 million versus the EUR 650 million that we commented before. And interestingly, since we are -- we have achieved almost all the objectives of the midterm objectives that we set at the IPO time 2 years ago, we will organize the Capital Market Day on October 7, in order to provide you with new midterm objectives and an update on our strategy and results. So this being said, now I think we can move to the Q&A session, and we'll take a few questions.

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

I've got 2 at this stage. Firstly, on pricing. You mentioned moderately positive pricing. We've talked about flat pricing before. When I listen to the Vidrala earnings call, they're talking flat versus minus 0.5 to minus 1 before. So what's the situation? Are you pricing a bit better on the spirits and champagne side? And then also for next year, remind us, I think the majority of your energy costs are hedged as well for next year. When we listen to Vidrala, I mean, I'm not sure if this number is correct, but they are talking about 10% price increases that they want to go for next year. So if that's true, isn't your margin expanding significantly if your energy cost continues to be hedged to a very large degree?

Okay. Thank you, Matthias, for your questions. First of all, regarding pricing. We confirm -- when we say moderate price increases at the group level. But we have 2 very different geographies, Europe and Latin America. And on the one hand, in Europe, we are in line with what we said before, Europe prices are flat basically. It can vary a little bit by country, slightly below 0, I would say, in Iberia and Southwest Europe and slightly positive in Northeast Europe. But altogether in Europe, it's about flat. As we mentioned before, so there's no change compared to the previous comments. So the moderate price increase comes actually from Latin America, where here in this region, we are facing more inflation and also the commercial relationship with our customers allows us to go back to the customers during the year to revisit the prices, which is not the common practice in Europe. In Europe prices are fixed once a year, and we wait for the next round of negotiations usually at the end of the year or beginning of the year the following year to renegotiate prices. So yes, this is exactly what we commented before. There's no change on our side. We are exactly in line with what we commented on the price side. The surprise to some extent, which I would like to highlight again is on the mix side, which you don't have a [ split here ], but it is very strong. And part of it is because, as you mentioned, premium segments like champagne or especially spirits like the cognac are doing extremely well. And of course, that is helping us. So it's a market driven, I would say, mix improvement. But also part of it is, unfortunately, due to the fact that we are sold out. And of course, if we are sold out, we favor the most profitable or the most profitable segments of the market and try to, of course, provide our customers with more added value products rather than commodity products. So part of it also is due to the fact that we are sold out. But this is an important thing on the mix side. Now regarding the hedging policy, clearly, every company has its own policy regarding hedging. Our policy is very clearly described. I remind everyone what it is. It's -- we want to cover 100% of the energy cost of the following year -- sorry, 85% of the energy cost in the following year by October, so that we can really have a good control and good visibility on the cost structure of the following year. And this is what we are doing every year, which means that, as you can understand, the energy prices of this year, we are locked for most of it or more than 85% of them, they were locked back last year. Now unfortunately, the energy cost increase that we see today will have an impact next year. And of course, next year, even if we are hedging on a rolling basis and progressively into the following years, next year, we will have to go for significant price increases in order to reflect the inflection that we have. And when I say significant, it's probably mid-single digit.

Okay. The second one would be on the PAP savings for the question. This EUR 21 million, 2.7%. Are you not raising the PAP savings guidance at this stage? And then also coming back to the guidance. Maybe we can touch on the individual components. So it's the PAP savings, there will be operating leverage. There is mix, but you also talked about restocking being possible in the second half, which is implying better fixed cost absorption. So I guess the EUR 675 million still remains as conservative as the EUR 650 million before with the new dynamics in place?

Okay. Let me try to answer, Matthias. So on the PAP, yes, we are very pleased to see the strong delivery in this semester with 2.7%. Now yes, our guidance is 2%. We are -- it's above 2%, remember. So we are always pleased to see much higher numbers. Now in this year, we -- and this is really good. We benefit from the effect of the transformation plan in France that is and that was planned that is contributing to the PAP numbers. And this one we'll not have that every year. So to answer to you on the guidance, we keep with a guidance of having PAP cost, reducing our production cash cost basis by more than 2%. And you're right, we've been delivering 2.2% and here, 2.7%, so which is good. But again, the transformation plan in France and the France effect will be for this year.

And the destock -- okay, sorry.

On your second point, yes, I was coming to that. So in the guidance, you're right, we integrate positive impact of not having to destock, and hopefully, to restock in the second half of the year. Now on the adverse side, we have 2 important points which we mentioned already. The first 1 is the inflation. I think we are all -- we will all agree that inflation is coming. And yes, we are hedged on most of our energy. Now we have 15% that is not hedged. So this 1 is even this year having inflation. And one important point where we see inflation coming strong and that was quite limited in the first half is packaging and to a lesser extent, on freight and transportation. So these 2, we don't have hedging policies, and we have -- we see a really -- it's very strong on packaging. So let's see how this goes. But we did integrate a negative effect on inflation costs in the second half. And then another point is the mix. We have quite a specific mix situation that is not usual when we manage and serve all the markets. So here, we also integrate a less positive or even a negative impact on the mix effect. So that's why the plus and the minus would balance, I would say.

And the next question is coming from the line of Francisco Ruiz from Exane.

I have 2 questions. The first one is, I mean, a follow-up on Matthias, which is on operating leverage, because we have seen a very positive turnaround in Q2 despite that the inventories are still declining. So could you see an acceleration of the drop-through in the second half of the year if you are able to start increasing the stock? Or given the strong demand, you think that you won't be able to increase the -- that figures? The second question is on the margin of Latin America. If you could give us the impact of the one-off in Brazil and your view on how sustainable these margins are? And last but not least is on the latest Fit to 55 plan on the European Union. If you could give us an idea if there is any change in your ESG view after the publication of this plan?

Hello, Francisco. So for your first point, on the operating leverage, and the inventory level, we would like, indeed, to rebuild stock in the second half but today, we are sold out. So we anticipate that we won't be able to rebuild inventory as strong as we would like. So the effect there would be more limited than we would have told you at the end of March. Now in the margin in Latin America, so the impact of the ICMS one-off is EUR 7 million to be really clear. So it means that the margin of Latin America, even the adjusted EBITDA margin of Latin America, even if you deduct this one-off, is above 35%. So still a very strong operational performance. And how sustainable is the Latin America margin above 30%? This is a recurring question we have. As per today, we don't see many clouds in the sky. I would say the market is strong. The ability of our teams to maintain a positive spread has been more than demonstrated over the years and is still there, and we can see that every month. And again, the industrial performance in the PAP is delivering very steadily and strongly in this region. So the quality of the of the operations and the team lead us to be confident on Latin America margin percentage.

Now regarding your third question, Francisco, the Fit for 55 plan described by you is yet to be better understood at our level. Clearly, as you know, we are still expecting to receive the final CO2 quota allocations, which are due normally this month. We don't expect any major difference versus our assumptions. So we know that this -- there will be a reduction of CO2 quota compared to Phase 3 in Phase 4, but this is already anticipated. We believe it's going to be around 7% less quota than the Phase 2 quota we used to receive. I remind you, by the way, that we also hedged on our CO2 quota, the shortfall of quota is being hedged. We are fully hedged for next year. We are Asia 75% for 2023 and 50% for 2024. So this is also part of our hedging policy to cover this CO2 quota cost. So of course, we know that this Fit for 55 will put additional pressure on the companies to accelerate their CO2 emissions reductions plan. And we are extremely pleased that we didn't wait and instead we anticipated back in January, if you want, this topic by providing -- by working on our road map to reduce our CO2 emissions and not just the road map and the targets but also concrete action plans. So we believe we are very well positioned compared based on the -- by the way, Vigeo Eiris work that has been done when we issued this SLB. They -- in order for them to provide an opinion on the, I would say, ambition of our targets, the benchmark of course, our competitors and the rest of the industry. And the results of the benchmark was that our results and our ambitions are really very advanced, and this allowed them to give us the highest rating. So in other words, a long story to just say that, yes, it will happen, but we anticipated to some extent that this topic is becoming more and more important for the society, and we are comfortable with our action plans that we've launched that we'll be able to follow these additional targets that will be set.

[Operator Instructions] Okay. There are no further questions -- sorry, we do have another question coming through from Fraser Donlon from Berenberg.

Just a question on pricing for next year. Like when you look at what's going on in French wine, obviously, there's this kind of weak harvest and maybe this impact will be shared across a couple of years rather than 1 based on the kind of aging life cycle of wines. But do you think that, that disrupts somehow that the balance of the market in places like France and that could play through to the ability to increase prices in that particular market? And then the second question would be, could you maybe just color a little bit the kind of specific volume trends you saw in Q2 in the different regions and/or countries?

So I will take the first question, and Nathalie will comment the second one. Regarding the harvest, as we mentioned, this frost event that took place in the first quarter was, of course, impacting the French wine producers, will impact the French wine producers during this year's harvest. The real impact is yet to be seen because as usual, they always claim big numbers in order to get the attention of the government, but the real impact is still to be measured when harvest comes in the fall. We believe that for Verallia, this could have some impact in France, but yet, still to be defined, to be defined and we'll know probably better and we'll comment it probably better in October during the Capital Market Day. But certainly not this year because this will be next year. And to some extent, limited by the fact that last year was a good year, the harvest was very good. And if you look back in the past, you have from good years to bad years, it's not unusual to have the variations of 20% or 25% in the harvest. And this is why the wine makers are using some inventory, some bulk wine that is put aside during the good years to provide for the bad harvest the following years. So what would be difficult if we have 2 bad years in a row because then you have emptied your reserve, the first year and the second year, you are sort of wine, which is not the case. So cross fingers, unless 2022 is a bad year from a harvest point of view. So far, we trust that there will be enough reserves to compensate for the lower harvest this year than last year. Now regarding the balance and the consequences in the French market in terms of balance between supply and demand? I mean right now, even the French market is really tight in terms of capacity compared to the strong demand that we have. And we don't see any significant impact due to this low harvest, if you want, in France. So knowing that, by the way, the harvest in the other countries like Spain and Italy should be very good this year. So again, as you know, there are quite a lot of exports from Iberia to France or from Italy to France, which probably will be less this year because they will have to care about their domestic market first before exporting to France.

Now on your second question on the sales and volume in the second quarter, and to be -- give more color per region. So first, just 1 step behind in the first quarter, in the regions, Latin America was already strong, and it was mainly Europe really strongly hit versus last year. In the second quarter, we've seen very strong rebound in volumes in South and West Europe and in all the countries in Latin America continue to be really strong. And North America was more flattish compared to previous year as we commented. But again, North and Eastern Europe last year, 1 year ago, the effect of the pandemic was a bit later. And so the comparison is not exactly the same. But as a conclusion, in the second quarter, really strong, especially strong in South and West Europe, in Latin America still and a bit more flattish in North and Eastern Europe.

Very clear. Just 1 final question, if I may, from my side, but just be kind of returning to the point on carbon. Obviously, you have the hedge in place, but do you have now more color on like how the number of kind of free permits and allowances might evolve in this year and later years?

Well, that's what I was mentioning, Fraser. I think we still wait for the final allocations for this year, which are due normally in July. But as I mentioned before, I mean, we believe it will be in line with our forecast, which is basically a reduction of 7% quota compared to Phase 3. But we don't have yet the numbers.

And the next question is coming from the line of Lars Kjellberg from Credit Suisse.

Just had a couple of questions left. Can you remind us about the packaging element as a percent of your cost structure, considering the significant cost inflation you have there? And also, if you can call out the financial impact of your heightened furnace activity in H1? And how we should think about that in H2, considering last year, you had literally everything happening in H2? And also, if you can call out the -- what you expect for the full year in terms of CapEx? You highlighted, of course, Jacutinga will come into the equation, strategic CapEx in the H2, but what can we look for the full year for total CapEx, please?

Okay. So for your first question, so freight and packaging represents about 10% of our total cost structure. But again, the increase in the packaging line is really strong, which is leading to some impacts, a strong impact in expected, sorry, in the second half. But all in all, freight and packaging is 10%.

Now regarding the -- regarding the furnace repairs. I mean roughly speaking, you can count around probably a bit less than EUR 1 million of additional maintenance costs and start-up costs when you shut down a furnace for reconstruction. So that's more or less -- less than EUR 1 million is the right number for the cost of such a furnace. So around EUR 700,000 or EUR 800,000 is probably closer to the number. And regarding the full year CapEx will be exactly in line with our -- with our guidance, if you want, of 8% for the recurring CapEx. So it will be exactly 8% for the recurring CapEx. And if we add the strategic CapEx, which, in this case, will be mostly due -- mostly linked sorry, to Jacutinga, to new furnace. We should be slightly below EUR 250 million for the full year. So I would guess between EUR 240 million and EUR 250 million of CapEx for the year.

And just to clarify on the furnace comment that you made. I guess that excludes lost production, et cetera, and then potentially lost revenues then because that number seems...

You're right. No, no, only the start-up cost, the fact that you have to heat the furnace to bring it to 1,500 degrees heat temperature and during that heating period, for example, you use gas and energy, which is not used to be producing any bottles. So these kind of things. But it's not including the loss of revenue, which normally should not happen if we have stock because normally, what we do is we build stock ahead of the furnace stoppage in order to keep selling during the reconstruction. The fact is this year because we ended up last year with very low stock, we have not enough stock to deliver everything we should have done.

So taking that into account, how would you make us think about the total impact from this activity in H1 that you didn't have the stocks to sell?

Well, this is the most difficult question because we -- it's very hard to know exactly how many sales opportunity we missed if you want, because your question is about this. We've sold everything we could and everything we have produced has been sold. Hence, the destocking that's still occurred in H1, despite I repeat, the starting year -- at the start of the year, which was already starting from the very low end on the inventory side. But it's very hard to quantify how many sales we lost because of the lack of capacity.

Got it. Final question for me. You obviously called out a very favorable product mix as spirits recovered, kind of high premium products recovered, et cetera. How should we think about the mix going forward as we continue to reopen, assuming that, that is indeed what's going to happen? Should we have a favorable mix? And how abnormal is the current mix versus what you would see in a normal year?

Okay. I think it's very important and very interesting question you're asking Lars. Because when we comment the mix, we always comment the mix versus the prior year. And you remember last year was exactly the opposite. In the first semester, we had an unfavorable mix because spirit, the most, I would say, premium products like spirit, champagne suffered from the lockdowns, and therefore, our mix was quite negative this year. You've seen the rebound on the very strong sales of our customers in spirits, especially in cognac area, but not just cognac. And of course, year-on-year, the mix is extremely positive. But I would say it's not either, I would say, if we had to compare with a normal year, you wouldn't say it's so positive, I would say. It's positive, but not with the same amount. So what I'm trying to say is that it's one thing to compare year-on-year mix impact, which is what we do when we come on the financial results. It's another thing to look at what could be the, I would say, normal run rate of the product mix we have. And here, we are back to what we said during the IPO is there is a long-term mega trend about premiumization that we see in spirits, but not just in spirits, we see it in wine also. You look at the rose wine, it's very obvious that it's going premium. And this mega trend that we are observing on many, many years, if you want, has been somehow disturbed by last year's pandemic but it's still there. And what we see is a catch-up or recovery compared to last year, but the trend is still the same.

And there are no further questions in the queue. So I'll hand it back over to your host to conclude today's conference.

Okay. Well, thank you very much, everyone, for attending this call. And I know that you have a few busy hours and days in front of you with all the half yearly results of all the companies, but I wish you after this intense working period, a good summer break and stay in good health, and I look forward to talking to you again after the summer break. Have a good day.

Have a good day.

Bye-bye.

Bye-bye.

Thank you, everyone, for joining us on today's call. You may now disconnect your handsets. Hosts, please stay connected.