Verallia Société Anonyme (VRLA) Earnings Call Transcript & Summary

Hello, and welcome to the Verallia H1 2022 Results Call. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Patrice Lucas, CEO, to begin today's call. Thank you.

Good morning, everyone. I hope that you are all fine, you and your families. I want to tell you that today, it is my pleasure and privilege to present to you our H1 results. To start with, I would like to share some facts with you about Verallia. So as you know, we are a global leader in glass packaging, #1 in Europe, #2 in Latin America and #3 globally. We are operating in 11 countries with 32 glass plants with 58 furnaces and having the support of 3 decoration plants and 9 recycling centers, producing on a yearly basis more than 16 billion bottles and jars and all of that with our 10,000 employees. We have a well-diversified and balanced end market portfolio. You are here with split. So obviously, [indiscernible] representing 36% and all the others quite well balanced in the different segments of food and beverage. Now I would like to share with you some key highlights about Q2. And to start with, so a snapshot of our capital structure. So you have that on the left-hand side, so with BWSA representing 28%; Bpifrance 7.5%; and what is quite interesting is the evolution of our employees share through the Verallia FCPE or direct shareholders which moved from 3.5% to 4.1% as a result of the success of our 7th employee shareholding offer, which took place in Q2. You remember that this is a clear CSR objective that we have to reach 5% by '25. And this shareholding offer was again a success, so presented in 8 countries, more than 3,200 employees invested in it, meaning 41% of our employees eligible with a strong participation in France with more than 75%. So as we speak, we have more than 45% of our employees that are now a shareholder. About the dynamic of the glass business in Europe, interesting to share with you the final results of '21 that we got lately through the sales report. And here are 2 key takeaways. First of all, in '21, glass packaging sales reached an all-time record in '21, so representing plus 6.7% compared to 2020 and plus 5.4% compared to 2019, pre-COVID, which was a previous record. For 2021, we got more than 23.6 million tons of glass which were sold on the market. And you see the different evolution on the different segments. So you see on wine and spirit, plus 9.7% compared to '20; on nonalcoholic beverage plus 14% versus '20 and even in beer plus 73%. Second key takeaway is that the glass is keep on progressing in the food and beverage market. And analyzing the data, we see that the glass has gained 1 point of market share versus the other packaging material for food and beverage. And we see that we have, again, a positive trend on nonalcoholic beverage and even on beer, and we see a stable performance on wine and spirits and food compared to 2020. So as a result of that, 2021 has been a strong year for glass packaging, confirming the preference of our consumer for glass versus over packaging material, which is the good news that we are confirming and, for sure, the trend we will keep on seeing in the years to come. And as a result of that, it's creating some tension on the glass packaging supply. You know that we have been very clear as well that we are putting ESG at the core of the company, working on many different levels. One of it is the light weighting we are working on with many customers. This is a trend we see as well on the market. And here, you have in front of you 2 examples, 1 with a Chateau tonic with a 9% lighter bottle compared to the previous model, so contributing to a nice reduction of CO2, and we see many customers coming in that direction. And on the right side, you see as well that we are working on our own standard bottle. And this one is seeing a minus 5% weight reduction, which is as well based on the production -- annual production, which is about 230 million bottles contributing significantly to some CO2 emissions sales. Verallia as well keep on promoting creativity and innovation through the design awards. This is something we are very keen on, organizing this design awards in many countries. Here, you see the results of the winning proposals we got in France, in Italy, in Spain and in Germany. Obviously, for us, this is a service that we have provided to our customers. This is a way as well to attract young talent, young designer and allow them to unleash their creativity, their potential and then be able to make some proposal to our customers to magnify their food and beverage products. So we are very proud of that, and this is something we will keep on promoting. Key industrial projects I want to give you a follow up on, maybe what is at the core of our business. So here, we have a follow up on key projects for capacity increase. So we are on track to increase our capacity by 400,000 tons per year by '24 with 3 main projects, 2 in Brazil, so first one, Jacutinga 2. We are on track according to our plan and start of production is planned for the end of this year. We have a second capacity increase in Brazil underway with Campo Bom 2, so the furnace design and the technology is finalized. This is going to be an oxy-combustion furnace, which will allow to reduce by 18% of CO2 emission versus the traditional furnace. Start of production is planned for 2024, and we will have the same technology to be launched in Italy in [indiscernible] for start of production in Q2 '24. So at the same time, we are increasing our capacity with these 3 additional furnaces to come. We are as well taking the benefit of reducing our CO2 emission. And several important projects, this is all about our new furnace technologies. You know that we have announced a clear objective to reduce CO2 by 2030. This will go with some new technology, 2 technologies we are working on. One, it is a 100% electrical furnace. I'm pleased to announce you that we have -- we are working on the design. We have selected a supplier and we are signing a strategic partnership with Fives Group, which is a well-known industrial engineering group to -- we're going to work with them. And we are as well here on track to start production by the end of '23. And on the hybrid furnace, I want to say as well, clearly that our project development is on track. Design supplier and location will be confirmed by the end of Q3 with a clear objective to start production by the end of '24. So all in, we are executing with rigor and professionalism all our projects and key projects for capacity increase, key projects for our CO2 reduction objective. Then results of H1. So as you have seen from our press release, so you can say that we have a very strong first half. So on the revenue we have in H1, which is a plus 23.4%, so up to EUR 1.6 billion. On Q2, plus 23% with EUR 889 million. Adjusted EBITDA is at EUR 425 million in H1. So it's plus 23.4% compared to H1 last year, with a margin at 26%. On net income -- and net income, sorry, is at EUR 179 million, plus 34.9% compared to H1. Earnings per share at EUR 1.49 in H1, so compared to EUR 1.07 in H1 2021. And on the net debt side, so we are keep on deleveraging our net debt ratio with a result at 1.5x adjusted EBITDA for the last 12 months to be compared to 1.7 end of March '22 and to be compared to 1.9 end of June '21. So now, I'm going to hand over to Nathalie Delbreuve, our CFO, who is going to present in details our H1 results.

Thank you, Patrice, and good morning to all of you, and this is my pleasure indeed to present to you this first -- this strong first half. So first, as usual, the growth in the sales, so you can see here strong organic growth fueled both by good volumes and price increases. So the -- you see that the price and mix pillar is pretty significant in this first half. So for the volumes, we are up around 10% in the first quarter. And if you remember, we mentioned already at the basis comparison for Q2 was higher in 2021. So in fact, the main contributor to volume increase is still the first quarter, but still a nice growth. In the price and mix, we have around 20% effect in the first half. We have the result of the 2 consecutive sales price increases which we announced -- commented already in Europe, one of around 10% in Q1, and we commented that we would run for around mid-teens in the second quarter, which we have done, and you can see the effect in this graph. And then also the mix contributed positively in this first half and also in the second quarter, which is good news. And in terms of products, the strengths have been really strong in spirits, in jars and in sparkling wines. So now if we move to the geographies and the regions. As you can see in South and West Europe, the strong organic growth as well, plus 20.5%. This is in all product categories, except for beers. In fact, in beers, we see now that we are back to a pre-COVID level, and we are -- have seen more flattish volumes, but the other categories have been really strong, especially in spirits and the jars volume is very well oriented in France. The sparkling wine remains really dynamic. We have champagne volumes continuing to grow very nicely as well as Prosecco. If we move to North and Eastern Europe, you see plus 19.3%. The volume growth is especially in still wine and jars in Germany. So the jars have been really dynamic in Germany, which is good news. Occasion to update you on Ukraine. In fact, we are in the same situation as Q1. We have 1 furnace which we restarted in Q1 as per the request of our customers and the strong support of our employees. And this is still running and mostly for jars for local consumption. And the other furnace is -- has been stopped and cooled down in order to preserve the asset. In Latin America, very strong growth also and significant positive ForEx. The strong volume growth continues, especially in Brazil and in Chile. In Argentina, we had the planned repair of our furnace in the semester, but it restarted very nicely, so will contribute more in the second half. And we have plus 2.3% positive foreign exchange impact to the top line. So now let's look at the adjusted EBITDA. So strong performance in this first half year, moving from EUR 344.7 million up to EUR 425.4 million. That is a reported growth of 23.4%. The activity, operating leverage is the most contributing. It's mainly coming from Q1, so you've already seen it. The positive volume is contributing significantly. And also in the stock variation, we have some valuation impact. And also we destocked, in fact, less than in H1 '21. The spread, positive price/mix cost spread, which is very good news. We succeeded into getting back to green in this pillar that you know is a very important one in our strategy. So we succeeded into covering most of the strong inflation because we have seen, of course, strong inflation in cost in H1. And we have here the effect of the 2 rounds of price increases in Europe, almost offsetting and also the positive mix contribution that is helping to turn this pillar green. In the net productivity, we have a bit of a slow start this year, but still at 1.8% production, cash cost production. This contributed to EUR 14.2 million to our EBITDA, and we keep our objective of delivering a minimum of 2% improvement for the full year. And then the foreign exchange is green, as you can see, so it's a positive impact, both in North and Eastern Europe, but mainly this is coming from Latin America and the BFS. In the other pillar, we have 2 main elements to comment. One year ago, I was commenting to you that we had a very positive one-off in Brazil, linked to a change in the tax regulation that brought a bit more than EUR 6 million from this closing. And this year, if you remember, so it turns as a negative for -- in the comparison. And this year, in Q1, we commented already to you that we had reimbursement of EUR 5 million -- $5 million, sorry, for the fire we had last year in September in our Argentinian furnaces. So all in all, these are the big fishes explaining the minus EUR 1.5 million that you see in the other color. And all of this is leading to an adjusted EBITDA margin at 26%. So if I focus now on the regions. In South and Western Europe you can see on the top right corner, the adjusted EBITDA margin. And you can see that it is improved by 20 bps from 25% up to 25.2%. And here, you have really the comments that I made already overall, so raising sales volumes, positive product mix, and the spread of H1 inflation spread is slightly negative still, but turned positive in Q2. But in South and West Europe net, we are still slightly negative. If we move to North and Eastern Europe, we have an adjusted EBITDA margin of 19.5%, so down versus last year, but increasing in euro from EUR 58 million up to EUR 60 million. So here, we have growth in volume as well. But we have in North and Eastern Europe, the Ukraine facility that is running now with only one furnace. And you know that we decided, of course, to support fully our Ukrainian subsidiary and people. So everyone is still working, maintaining full salary and associated costs for our employees in Ukraine. And so in the comparison, of course, we are missing some euros in EBITDA here for North and Eastern Europe. One specific point commented here is that we have initiated the delisting of Verallia Deutschland. Verallia Deutschland is our German company that is the mother company of also Ukraine and Russia, and that is listed on the stock market. This is really historical, but with a small share of minority shareholders. So we initiated the delisting of this company. Latin America, well, I think that has to speak for themselves. You can see that adjusted EBITDA margin continued to improve from 38.5% last year up to 40.8%, which is really outstanding and in euro, so converting nicely from EUR 55 million up to EUR 79 million, also supported by some FX this semester. So this is really an impressive performance here with the 3 pillars of our performance really delivering fully the sales volume growth, the spread being kept positive in all -- in each and every single country of this region. And the PAP and the industrial performance is absolutely outstanding again in this region. Now if we move to cash. You have here the CapEx. So the CapEx in H1 2022 are lower -- are pretty low at EUR 96 million and that is 5.9% of our sales, and this is lower than last year. You can see here that it is mainly coming from recurring CapEx that are EUR 59 million. It's mainly due to timing effects as most of our furnace repairs this year are in H2, which was not the case last year. So we have 5 furnace repairs coming in the second half of the year. So it means that we will have a catch-up on this in H2. And important to notice, Patrice presented to you that we are on track with our capacity investment and CO2 investment. You can see that the strategic CapEx is with EUR 27 million is higher than last year. And here, it includes EUR 22.5 million for our new furnace in Brazil in Jacutinga, and we also have EUR 3.6 million CO2 emissions reductions CapEx as planned in our ESG road map. So everything I explained leads to a very strong cash flow generation. So in this table, you can see the free cash flow in detail. And you see that it starts with the first line, of course, so the adjusted EBITDA growth; then the lower CapEx lead to a high level of cash conversion in this semester with 77.4%. The operating working capital is very well under control. We have especially high -- sorry, very low overdues in this end of June. So this is really very much under control. And we also have continued to have quite low inventory. So the operating cash flow is very strong. And then in the over line specific to mention, you can see that the interest paid is lower than last year, the interest paid and all the financing costs at minus EUR 16.4 million. We have lower interest rates, and we have some exchange rate effects. On the contrary, the cash tax is higher as a result mainly of our higher results. And also last year, we benefited from some specific positive one-offs in Italy. So all in all, a very high and nice conversion of our adjusted EBITDA flow into free cash flow. So leverage at the end of June is 1.5x, as you can see here. And we are continuing to deleverage the company as we were 1.9x at the end of December. And in fact, this is after the payment of EUR 122 million dividends that were paid in May. And now if you look here, you can see our financial structure. There is nothing new in this table compared to previous quarters. You know that we are now well balanced between debt market and bank financing with our 2 sustainability-linked bonds. And we have, in fact -- we are nicely hedged as well with fixed rates, of course, for our 2 SLBs, but also on the rest of our long-term debt, we are 100% with interest rates as we speak today. The available liquidity is close to EUR 1 billion, very close at EUR 999 million.

Okay. Thanks, Nathalie. So about our guidance, based on the result of this first semester, there is some absence what we see for the second semester and with the assumptions that Verallia will not see a significant glass rationing in Europe, we expect on the revenue side a double-digit growth in annual revenue with markets that remain promising. And on the adjusted EBITDA, so we have decided to increase, to upgrade our guidance and the target to be between EUR 750 million and EUR 800 million for the full year to be compared to our previous guidance, which was at a flow of EUR 700 million. So this is what we are seeing for this year. And obviously as well on top of that, again, ESG is at a core of the company, and we are on track versus our road map with many projects to be executed in the second semester. Thanks a lot. This is ending our presentation, and I believe that now we can go with a Q&A session.

[Operator Instructions] And the first question comes from the line of Francisco Ruiz from BNP Paribas Exane.

Congratulations on the foreign seekers. I have 3 questions, if I may. The first one is in CapEx. I meant, the raise, there is some delays on this because of the calendar effect.

Can you speak a bit louder? We cannot hear you very well.

Is it much better?

Yes.

Sorry for that. So my question was on CapEx. So mainly despite lower CapEx in H1, you see that H2 will be with full CapEx for the year. Could you give us an idea if there's going to be some delay than initially expected? And this could impact the capacity increases that you were expecting? The second question, and I know probably is the more difficult one is on 2023. I know that it's quite early to think about it, but with all non-hedged players suffering and also with the energy prices where they are, could it be this year a similar situation than what we saw last year with Verallia having a better situation than the majority of the spears and probably an advantage on pricing and how you see the capacity of the industry to absorb higher price increases in the future? And last question is on new furnaces technologies because now you are dealing with several ones, with the Oxy one with the electric and the hybrid. Could you give us an idea if there is future technology that you are more interested in or you are testing all of this and you will have a mix of this technology in the future?

Okay. Thanks a lot, Paco, for these 3 questions. So Nathalie is going to take the first one, and I will take the 2 last ones.

Yes, exactly. So Paco, thank you for your questions. In terms of CapEx, we have -- this is really due to the timing of our projects. And as Patrice presented our new capacity projects, so far, no impact. You have the date in the presentation, and for Jacutinga 2, we plan to start end of the year. So we do not see -- I mean, we are -- we see some delay, but nothing that would threaten so much this start, and that is why we included the dates in the presentation. So you can count on that. And we do not see so much delay. Of course, our teams are working very closely on that, but that should not impact our capacity.

Okay. For your second question, Paco, so for 2023, obviously, as you have mentioned, it's quite early to be definitive on that. What we see with a lot of uncertainty, obviously, so this is why we have time to put definitive and to make definitive stance on that. Is that for sure, energy price is going to keep on increasing, and this is one of the major factor. You know that we have a clear hedging policy that we are applying. We have a clear strategy as well to be spread positive on a yearly basis. So obviously, when it comes to selling price increase for next year, we will have to do something. And we are quite clear with the customers about that. And this is something we're going to start to work after the summer break, obviously, having a better understanding and better robustness on the assumptions to come for '23. So we will go for a selling price increase. What I can tell why now is this is something which could be around -- in order of magnitude around what we have been doing in '22. All of that, obviously, to be confirmed, all of that to be deal on a case by case, country by country and all of that being dealt with a good balance with our long-term relationships and strategic partnership with our customers. For your third question about new furnaces, what I could say is that the 2 furnaces we are launching in Brazil -- one in Brazil and one in Italy, sorry, Campo Bom 2 and [indiscernible]. Here we are using -- we're going to use some oxygen in a traditional technology, and this will allow us to push the CO2 reduction, around 18% as I have mentioned. And then we have our new technology with [indiscernible] (00:34:06), which will push much more down the CO2 emission to be neutral for the electrical furnaces if we are using, obviously, green energy. So we're going to have the electrical furnaces for flint and extra-flint and then we will use hybrid technology, which will switch from 80% gas, 20% electricity to 80% electricity, 20% gas, and this will allow us to address all the other products colors than the one which will be dedicated to electrical furnaces. And obviously, one launch at the end of '23, the other launch at the end of '24. And the objective of that will be to be -- to have a strong validation and then we'll be able to enter in a deployment plan for the years to come and cope with our decarbonation plan and CO2 reduction objective.

Can I make a follow up. Patrice, when you mentioned similar price increases done in 2022, are you referring to the initial 10% or the 25% that we have right now?

Too early to answer on that. Again, I think this is something we'll be able to have a better view at the end of the year, let's say, in Q4, for sure with a better understanding on all the current situation -- macroeconomic situation and energy prices.

The next question comes from the line of Michele Filippig from Jefferies.

Congratulations on your quality results. I have 3 questions on gas exposure, balance sheet and midterm guidance. So on concerns on cat on natural gas supply and consequence shortage, especially in Germany, my understanding is that you have some flexibility to switch back from natural gas to fuel, if necessary. Can you attach some figure on roughly how much it is doable? And does it require significant CapEx? And do you have other contingency plans or gas storage? And then secondly, one question on your balance sheet. Following continuous deleverage on current macro, your current balance sheet will be ideal for countercyclical M&A. In the past, you said that internal growth as a priority for you over external growth in capital allocation. Do you still take that instance? And then final question on mid-term guidance. Aware that at the moment, uncertainty is the uncertainty, how do you see your margins in 2023 and '24? You gave a guidance of 28% to 30% in 2024, but this was before the inflationary rates really materialized as we see it now?

Thanks a lot, Michele. So for the gas exposure on the gas situation, obviously, this is a big question, and this is, I can tell you, on the agenda of the Executive Committee not to say daily, but weekly basis, obviously. So what is clear is that we are preparing ourselves for a gas shortage to ensure business continuity. We don't know if it's going to be the case. Maybe we could be in the kind of exemption mode due to our industry being part of the food value chain. But we are preparing ourselves. And since the war, we have checked and prepared our furnaces to an eventual return switch back to fuel in our energy mix. And as a result of that, I can say that we are ready to absorb about a 20% gas shortage without any impact in our production level, meaning that we will use fuel to compensate for that shortage. Obviously, all of that will require fuel availability and supply chain logistics that we are already working on securing some fuel supply for the end of the year and for beginning of '23. So this is our plan. So I would say that, again, with a caveat that fuel will be available if we have to reduce our gas consumption, we have a clear and robust plan. And even in Germany, we have increased our storage capacity by renting some temporary tanks. So I must say that we are doing what we can to face and cope with this tough potential situation. On the balance sheet for your second question. So I mean, again, we are clear with our strategy here. And as it has already been said, first priority for us is organic growth and to make a clear investment on capacity but as well also on all the decarbonation solutions that we need to move towards CO2 neutral. The second is all about M&A. And we said clearly that any opportunity will be taken. Further, it's all about shareholder return through dividends. You'll remember that we have as well as here a clear view, which is to increase our dividend by 10% year after year, which is, by the way, when you see the current share price, it is a good deal if you put the dividend versus the investment you can do. And share buybacks could be as well an option on a way to return to shareholders. So we are keep on having this strategy, and this is what we are playing on in our business. About the midterm -- on your last question about the midterm guidance, obviously, when this guidance was presented at the Capital Market Day last October, the overall context was a little bit different. I do not see -- we do not see any major issue on all the parameters, and we are quite confident that we will meet these objectives. The one which is obviously a challenge is the margin, this 28% and 30%. But again, we believe it is too early to say something about that, mainly what is especially the dilutive effect of the inflation and price increase. But what is sure is that being a margin we're going to see, so we keep it. But what is much more important is that on the absolute value which this objective was representing, we are on and we are getting to be there for sure. So it will come at a point where we see that early today to say that we are on that is still our objective.

The next question comes from the line of Jean-Francois Granjon from ODDO BHF.

Yes. A few questions from me, please. Could you give us -- what do you expect in terms of volume for the H2 after a strong growth for the first quarter, slightly decline for the second quarter? So what do you expect in terms of volume for the second part of this year? My second question concerns the pricing. Could you come back on what you expect for growth expected after the growth increase during the first half? Can you -- do you expect double-digit growth for the pricing? My third question concerns the margin. You mentioned that the dilutive impact on the gross or the price, but I was positively surprised by the high level of margin in the first half stable at 26. So we don't see, in fact, a dilutive impact. So what do you expect? Do you expect a stable or increased margin for the H2? And also, do you expect a positive spread impact in H2 compared to H1?

Jean-Francois, I'll answer your questions. So what do we see as volumes for H2. In fact, as we commented in H1, we had a strong contribution for the first quarter with quite low comparison basis also. In fact, in terms of demand, to be clear, we still see really a strong demand. We are in the position today still where we cannot serve all our customers, and we do not see signs today of any change there. But for H2, we do not see the same growth in volumes as for H1, so mainly for 2 reasons for comparison basis reason, and also for our ability as well to serve this demand, as you know, we have continued to operate with quite low inventories. And we have, in timing, 5 furnace repairs planned for this second half. So that is why we know that the volumes will contribute much less and should be more in the flattish area in the second half. As for pricing in the second half, so we will continue to benefit from the current price increases. We expect further inflation in the second half as a continuation of inflation that we have seen on raw material mainly, like soda ash and cullet. And our target, as always, will be to keep and maintain a positive spread and achieve a positive spread for the year. So that was your third question as well. So yes, we target a positive spread for the year. Also, you asked for margin and dilutive impact. So you are right. In fact, in here, we have a contribution of -- stronger contribution of the activity, including the stock impact in H1. We have also a good contribution of mix that we are always a bit cautious about in our forecast. And this is also our position for H2. We believe that even if volumes we keep strong, we should see maybe a lower mix here. And yes, we have, of course, a very positive and nice mix contribution because when you see the increase in Latin America with 40% EBITDA margin percentage, of course, this is also supporting the overall EBITDA margin of the group. So those are the positive contributors to our EBITDA margin in this first half.

On this last point, you consider that the margin -- the high margin in LatAm is sustainable with more than 40%. So do you think this is sustainable for the coming quarters or coming years?

Well, this is -- we see a very good challenge for the teams in Latin America. I'm not quite sure that they are going to fight for that. But what we must say, obviously, is that the level that they have reached is quite amazing. And I think the key strategy for Latin America for the quarters to come is to grow, and with the additional capacity, we are going to put there. So I think what is at stake is to grow with this additional capacity and keep on delivering this outstanding manufacturing performance. So I think this is what is a stake to manage the growth and maintain the excellent manufacturing performance which we know is not always a walk in the park. But this is a nice ambition for Latin America, and we count on them to deliver based on that. They have quite maturity about that.

The next question comes from the line of Guillaume Muros from Societe Generale.

Three follow-up questions on the one asked before from me. The first one, so on volumes to support here, the first one is that when we look at some beer brewers first half results, we see that some of them are already to start feeling the pain from inflation in demand. So I don't know if you can give us perhaps a bit more color on any potential sign off of customer demand slow down during the second half per category? And also on volumes. Could you perhaps also elaborate a bit on the inventory or the change of inventories during the first half? Do you expect to rebuild inventories during the second one? That's for the volumes. Then for the gas shortage risk, a follow up as well. How much do the most exposed regions to Russian gas weight into your revenues, namely, for instance, Germany and Poland? And the last question will be on ESG and here again to support for ESG. The first one is a follow up on the electrical furnaces. Do you plan to aggregate renewable production capacity to the plants where these furnaces will be built through PPAs, for instance? And last one on ESG as well. Could we have an update on your workforce and particularly after the strong success from your employee shareholding offer last month?

Guillaume, this is always a good question. So on the first one, about volumes and the demand. What we see today is any signal or even weak signal of a reduction of the demand when we are discussing with our customers and what they're asking to us from the scheduling, we do not see any addition to come globally. Maybe one segment to be over, we could see some variations. But I think we have some as well good tailwind, which is the euro compared to the dollar which is obviously pushing expectations of some of our big customers, especially on champagne, spirits and all these premium beverages. So to be clear, no, at this stage, no reduction. We don't see any reduction in the demand. Obviously, we are cautious about that because we know that the world could change and could one day to be over, so we are very cautious, but no signal of that. On the inventory, Nathalie, if you want to comment on?

Yes, I can comment. Of course, this is a good question. We are running -- in fact, today, we are at exactly the same level of inventory of one year ago in terms of volumes of inventory I mean, and this is low as we comment every quarter. So to answer your question, yes, we intend to rebuild inventories in the second half, and this will be clearly challenging with the furnace repairs we have, but we'll try to rebuild some inventories and also do right inventory. So it's also all about the quality of the inventories.

About the electrical furnace and renewal energy. Obviously, this is what we are and we are starting to work with some providers and to sign some PPA. So we have some to come. And obviously, this is, again, part of our ESG and this is something we'll have to do from North for the rest of the decade in order to secure some green electricity, especially. So we are on that, paying attention to all the projects which are to be launched, which are available and taking part of this contract. On the gas shortage risk, I'm not sure I have understood your question. If I have understood it, it's quite difficult to answer based on the fact that we can do many scenarios. Again, what I can repeat is that we have defined what I do consider as a robust plan to mitigate a potential shortage. We could cope with up to 20% without any impact on our production. So obviously, if it grows further, we would have to reduce production to adapt and to reduce some sections on the IS machine, so to pull a little bit less from the furnaces. But from what we see, we do not see that today as a likely scenario. Be able to reduce already to a minus 20% compared to what we do today and to consider that we have here a robust plant, but let's see. And then on your last question on the workforce, what is again your question on that?

So well, perhaps just a follow up on the shortage risk. So that 20% that you're -- that you can absorb, is it at the group level? Or is it -- I mean, because I get that in some countries, we're already seeing that governments might ask for a bit more than 15%, 20% reductions. I don't know if as to industrial players. That's for the shortage follow up. And then for the workforce, if you could have -- if we can have an update on the workforce in terms of turnover, in terms of salary inflation, in terms of engagement or satisfaction level particularly, as I said, after the successful employee shareholding offer from last month?

Okay. So the 20% I'm referring to is at the Europe level. It is at Europe level. So it may -- we may have some -- it is at Europe level and it is considering that we will be allowed to allocate the restriction from one country -- from one site to the other. So this is our plan. And again, if some factory could test to be stronger than that to allocate at the national level, we will we have to adopt a little bit. For the workforce, what we can say, again, is that this shareholder offer to our employees has been a real success. You have seen the number. It has been oversubscribed, and we have been obliged to shorten a little bit the participation that each of our employees wanted to put in it. So it has been a real success and a demonstration of the confidence of our employees within the company and as well for me as a reward of their commitment and engagement towards our strategy. So good success, and this is something we are going to keep on proposing to our workforce.

Next question comes from the line of Matthias Pfeifenberger from Deutsche Bank.

So firstly, on pricing. You said you're kind of happy with the price increases. I just wanted to point at some other companies that charge up that launch price increases for 3 factors, which is basically the cost inflation, the margin and availability. And that is in sectors where it's not as tight as in yours at the moment. So I'm reading about beer glass bottle shortages in Austria and probably many other markets. On the other token, you are having a lower hedging coverage next year. So you're moving more and more towards spot energy prices. So why don't you raise prices more? I mean, you could be launching 10% every quarter in the next several quarters and especially towards the medium-term target, '27, '28. If you're facing the weaker hedging next year, I mean, how would you get there in '24 without doing additional price increase? That's the first one and I have a couple more.

Thanks, Matthias. I mean, again, we have a clear policy on the strategy, it's spread positive. This is the end of the game. So -- and we are, at the same time, not looking for one shot effect. And this is why the hedging policy we have is really protecting our company, but as well protecting our customers. And we are sharing this hedging policy, giving us some time to make same price increase and as well to the customer to adapt and to make the appropriate decisions. So it's kind of flattening processes. But as far as we are committing on spread being positive, I mean, this is what we're going to do. Selling price increase, leading to positive spread and at the same time, looking for long-lasting relationships with our customers, which we have to legalize or have to face our own inflation. So we are really looking on a long-term decision.

Yes. Okay. But you did them already a big favor by just passing on the hedged cost and next year, you're potentially facing a scenario where demand is going to be weakening and your cost increases will still be there and will be -- so the energy cost will go up because the hedging rates are lower versus right now where you completely sold out, where there's shortages and it's the time to raise prices. But that's maybe just my thinking.

I mean, I don't think so. I think this is again our clear pricing strategy. The customer starts to understand that next year, we're going to have -- and maybe before the end of the year, depending on how it moves. But next year, for sure, they will have to face the selling price increase. And I do not expect our competitors to be in a different situation, to be honest, compared to what I'm able to read through the public information. So this is what we are going to keep on executing. And again, that taking into account the relationships -- the long-term relationship and contact, we want to benefit with our customers.

Okay. The second one would be on the furnace repairs. Now in the tightest period, is it really essentially you do these 5 furnace repairs? Or could you shift some of those into next year when we are facing the recession and potentially weaker demand?

Good question, Matthias. What is important is that we want to maintain our sets. So our priority for us, again, looking for long term and structural and robust results, we don't want to play with maintenance and put in danger all our assets. So this is point number one. Point number two, through our technical expertise and our experts, we are able to evaluate to make audits, technical audits of our furnaces and understand if we can delay or not for few weeks -- for few months the repair, so we have this opportunity. But from what we are planning right now, we are going to execute as it is planned. Again, long-term view, preserving the maintenance for high-quality products and not playing with our assets, this is clear.

Okay. And the last one would be on share buyback. Now it's kind of a site priority for you. On the other token, you're training on a 3-notch discount to your best peer and you've just taken margin leadership from them. So why is this not higher on the priority list? I mean, in the current volatility, how likely you're going to pull off a large M&A deal? And organic is very much covered by the operating cash flow. So why is this not a higher priority? I mean, you're trading on 5x, that's the valuation of a super cyclical, your FMP derivative with very resilient top line and margins.

Nathalie speaking. I'll answer this one. No, we are considering -- we are, of course, looking at the share price and consideration buyback. But as Patrice said, our strategic priorities didn't change. So this is first internal, then if we have opportunity of M&A and share buybacks are on the list. They are just not on top of the list. So we'll be very optimistic on this one, but we are not seeing now for us too. So we'll be opportunistic.

The next question comes from the line of Jean-Francois Granjon from ODDO BHF.

Yes. Last question, please, regarding the -- you mentioned the green energy, the green electricity for your business. Today, there is more and more industry and heavy industry to invest for the medium or long term with the hydrogen energy to produce with hydrogen. Do you have some projects for the coming years to develop some hydrogen production for your industry?

This is something we are looking at, obviously. But so far, we do not have any concrete projects. But as we have mentioned several times, I guess, we are open to look at and analyze all the different options and not to be comprised in one single energy sources or one single technology. So -- but right now, we don't have anything concrete in that.

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

I just want to come back to your guidance. Of course, you had an exceptionally strong first half activity. I appreciate that contributed quite a bit. But if you were to look into our guidance, that implies unseasonal soft H2 in the range of, I guess, 325 to 375, i.e., a big drop. Could you walk us through how you think about the bridge from H1 to H2? Is the activity in the furnace rebuild a big factor? Or how should we think about that? Also, I guess your guidance historically has been on the CapEx to revenues. Of course, with revenues extremely elevated given the cost, how should we think about absolute CapEx, which is getting the more potential relevant number now as we -- as again, the elevated revenue base. And I guess the final point, coming back to the tightness of the market, you are expanding your capacity by about 400,000 tons. Could you remind me what's your basis, how much would that give you an incremental capacity?

Lars, thank you for your question. So to answer your first 2 questions on the guidance, in fact, as you well understood, yes, there is a shift in the activity contribution that was really strong in the first half. Then if we move to the other pillars, we are aiming for a positive spread, but we know also and we fixture in our outlook that mix would be less contributing as with the inflation, maybe people will turn to lower-end products so that is embedded into our forecast. And as I said already, we know that there will be additional inflation as well at least on raw material that we see already and also a bit on the other factors which is -- which will be spread even if again, and we target a positive strength. And then also furnace repairs, not so much. In fact, we have the ramp up as well and started cost of Jacutinga 2 facility, that will start in the fourth quarter 2022 in the second half of the year. So that's a combination of -- these are the mitigating factors, I would say, compared to our H1 performance. Then in terms of CapEx, so yes, we have inflation on the top line. We also have inflation in -- some inflation in the CapEx. There is some -- a bit more delay, but we have also inflation in the CapEx. And I mean, we are -- we want to continue, as Patrice said, with our plan of furnace repair investments. We have the cash, so we expect to close again to the 10% of our sales in the -- for the full year. So that would be CapEx in the range of EUR 340 million, if you want.

Okay. And for your last question, for your last question, so about the 400,000 additional capacity, it will represent a 6% to 7% additional capacity compared to today.

Your next question comes from the line of Fraser Donlon from Berenberg.

Patrice, Nathalie, just 2 questions from my side. It sounds like you're obviously preparing for the difficult scenario vis-à-vis gas availability, but I'd just be interested to know like what the municipalities in Germany, Italy are actually saying to you outside of what your worst case scenario is? And then secondly, I just wanted to understand if there would be any impact on your hedging if you were to use more fuel oil. So if you went from using 80% gas in your energy mix to 65% or 70%, for example, at the group level, how that would impact your energy costs and the robustness of your hedge?

Thanks a lot. Quite difficult to answer your first question again because from one country to another country, many different situations. Obviously, we are following closely on a daily basis, the evolution of the situation. And you may have seen that now we are speaking about the solidarity principle between European countries. So this is where we are with some flexibility. And again, the opportunity to be classified as essential and has been exempted from this -- from the gas shortage. So we follow up what is -- what will be to entered into force in each of the country. And with our plan, again, I think we have a strong resilience capacity to absorb what we have to face. On the hedging, so you know our policy. Again, it is quite clear. We are looking to be hedged at 85% by October for our needs of 2023. So we are moving toward this number. And in order to be prepared as well and to have a clear and robust plan, we are starting to take some position of buying some fuel to complete, at least for the first part of '23, and we'll see how the situation is evolving.

Okay. Perfect. So in the event you have to use more fuel oil, there would be no issues with like hedges breaking effectively or that kind of risk in Germany, which we heard about maybe a month or 6 weeks ago? Just to clarify.

I think you are referring last maybe to the level and to the fact that hedging prices could be made. But to tell you, in terms of hedging, so first thing today, even if we had to not use hedging partly, it would be very positive and we have a very positive financial impact. And on some of our hedges, this -- I mean, this is the price that is hedged and not fully the volumes with the suppliers. So today, we do not expect any significant impact. But of course, as we all know and see, governments continue to discuss on local decisions. So we'll be very -- monitoring that very closely.

There are no further questions in the queue. So I will hand the call back to your host for some closing remarks.

Thank you very much. I think we have some questions on Internet, but most of them have been covered through the Q&A session, the live one. I think probably the only one that has not been covered is one from Emmanuel. So what are the total announced capacity expansion by the industry in Europe for '22, '23 and '24 for the industry?

I think for that, we can refer to the Capital Market Day presentation, where we have a specific slide that is exactly answering this question and listing all the additional announced capacity increase. There was not much change since that, and this slide was showing that it was, I mean, in line or even a bit lower than the demand evolution.

Okay. So I believe that we are ending this Q&A session. So first of all, I would like to thank you for your time. I know how valuable it is. So thanks a lot for that and as well for the quality of your questions. And I hope that you will have a good summer break. So please take care, and we'll meet you back from this summer break for sure. Thanks a lot.

Thank you very much. Bye-bye.

Thank you for joining today's call. You may now disconnect your lines.