Verallia Société Anonyme (VRLA) Earnings Call Transcript & Summary

Hello, and welcome to Verallia acquisition of Allied Glass. My name is Sarah, 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, Patrice Lucas, CEO of Verallia to begin today's conference. Thank you.

Good morning, everyone. I hope that you are all fine, and I would like to thank you for being with us right now despite the short notice for this call. So I'm pleased to announce that Verallia is making its first acquisition, and we have decided so to acquire Allied Glass in the U.K. So my objective today is to share with you some piece of information about this acquisition and then we go, as usual, through a Q&A session. So to start with, Allied is a strong industrial leader in the premium glass segment. Allied is all about leading in this growing U.K. premium market with a long-standing U.K. market presence, about 150 years, with a clear focus on premium segment with advanced design, manufacturing and decoration capabilities. And again, a clear focus and primary focus on fast-growing premium spirits, notably gin and whiskey. They are operating with 4 furnaces located in the Yorkshire. Verallia -- Allied is as well a diversified customer base with a high-end service. So diversified customer base covering blue chip, traditional and emerging brands with a good pipe of new product development, with a highly flexible operation setup to meet bespoke needs and with high customer relationship -- long-lasting customer relationship. Allied is a strong team and has a strong track record. So it is around 600 employees with more than 12 years seniority, with a strong management team, and I want to insist on that, with significant industry experience. It's a highly profitable platform with industry-leading margins and a strong growth track record for the past years, with a clear sustainability focus, with a clear action plan and targets in place for the future. It is a stand-alone platform with a factory optimization program well underway. So the rationale of the transaction for Verallia, it is to strengthen our premium positioning while gaining exposure to a growing U.K. spirit market. So it is to capitalize on a unique positioning and expertise in luxury glass containers. It is to complement, obviously, Verallia's geographic footprint while gaining exposure to this fast-growing spirit market. It is to broaden our customer base towards resilient and loyal gin and whiskey customers and pursue some cross-selling opportunities, which is to expand extra-white, color, decoration and over premium capabilities. It is as well an opportunity to leverage some common ESG commitments, priorities and best practices. It is going to enhance Verallia average price and EBITDA margin. And obviously, moving forward, we will have this opportunity to exploit further synergies by developing a sales team, optimizing SG&A procurement and deployment of so-called Verallia PAP methodology, which I'm sure is going to bring some improvement in the operation for additional profitability. As far as the financial terms, so Verallia is acquiring 100% stake for an enterprise value of GBP 315 million. It is fully financed by existing cash. Our leverage will be maintained below 2. And we do plan to keep on adding our same shareholder return policy with a dividend, and we expect to close in the days to come, let's say, mid-November. So in a nutshell, this activity -- this acquisition is really fully aligned with our strategy. It is, as we have shared several times, totally part of our capital allocation, and this acquisition is going to preserve our strong financial profile. So again, with a good contribution to the Verallia margin. And to be clear, we have a stand-alone business here, which is having, before synergy, a higher profitability than the group average. We see some significant synergy potential, again, with our PAP methodology, for sure which will bring a continuous improvement over time. And as it is a stand-alone asset, we are going to enjoy a strong growth potential. Again, we maintained our leverage below 2. And for shareholder return policy, so no change to what we already communicated. So meaning that we're going to have a dividend keep on growing at above 10% per annum, and we keep with accretive share on buybacks options. This is what I wanted to share at glance with you. And now I'm open, with Nathalie, to answer your questions.

[Operator Instructions] On the line to answer your questions, we have Patrice Lucas, CEO of Verallia; and Nathalie Delbreuve, CFO of Verallia. [Operator Instructions] The first question comes from the line of Matthias Pfeifenberger from Deutsche Bank.

Nathalie and Patrice, congrats on the deal. Just checking a couple of points here. Firstly, what has been the growth in the U.K.? You said it's a high growth opportunity. Isn't alcoholic beverage penetration quite high? And then -- so what has been the growth? And what's the competitive landscape? That's the first one. Second one, what are the margins? Can you quantify? And then lastly, including any purchase price allocation, what would you expect the EPS accretion is in '23?

Thanks a lot, Matthias, for your questions. So about growth, you know that in our market, average growth in Europe is about 2%. What we see here with the specific market and segments that Allied is targeting, and it has been demonstrated for the past few years is that we're going to see an average growth, which is going to be significantly above the market average. So again, 2%. What we see is between 5% and 7% from this premium market. As far as competitive landscape, so the #1 is Ardagh Glass in U.K. We have a #2, which is O-I, then we have Encirc, and then we have Allied, #4, but with competitors which are not playing exactly on the same market. So if you take the -- globally, the U.K. market, we could say that Allied is about 10% of the installed capacity. But with a market we are targeting, which is a high premium market, we are about, let's say, 30% of what the U.K. market is addressing for spirits and gins.

Hello, Matthias. Nathalie speaking. As for your questions on the margins and the EPS, so the margin of Allied is above -- is currently above our -- the Group's average. And I won't give you more details, but still pledge we will, which is very good news. And on top, as Patrice said, we anticipate synergies by applying -- I mean, first, by Allied joining a larger group, so synergies on purchasing, also benefiting from the sales side also through the portfolio of Verallia and by rolling out our PAP program. So that's why, all in all, this acquisition is accretive for us. As for the EPS impact, it's early to say. It's just -- so it will be aggressive. It will be positive, just with the -- I mean, reminding the size of this acquisition, which is, of course, a bolt-on to the group.

Yes, okay. Just a small add-on, it's more than 95% U.K. revenues, and that's not including any exporters. So there's limit to export business, right?

Yes. Correct. So it is total new territory, I would say.

Absolutely.

Congrats again.

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

Just a couple of follow-ups on Matthias' questions. This is a huge amount of volatility in the margins now. Can you give us a sense of what the premium margin has been over time versus Verallia's margins? And also, when it comes to the synergies, you're essentially adding a new market. Is there any meaningful operational synergies? Or is this more, to your point, adding your PAP methodology and maybe some on procurement, but also if you can get a scale, how we should think about that opportunity when it comes to synergies? And the final point then, you obviously haven't shared the -- what you're paying for this thing in terms of EBITDA multiple. Can you give us an indication how you think about the synergies, post synergy multiple versus whatever you're paying today?

Thanks a lot, Lars. First a lot -- first of all, sorry, about premium margins. So again, we are not going to communicate about that. The beauty of Allied and what they have been demonstrating and doing for the past few years is that they have been able to grow. They have been able to be highly profitable. Again, the margin is going to be above group average, and all of that before synergies. About synergies, what you're mentioning, what I would like to mention is that, and I think, again, this is since day 1, when we started to discuss for this acquisition, we see a strong alignment in terms of value, in terms of doing business, way of doing business, and with the key pillars we're using within Verallia to develop our profitability, let's say. And so we foresee with PAP, especially some industrial upside, a new team who is going to be willing to implement these methodologies. And on other topics, I'm sure that we will be able to take best of both and get some nice contribution as well with some sales development. So you can imagine on top of that, that for Allied joining a bigger group, an international group as Verallia, it is an opportunity as well for synergies in terms of CapEx, in terms of purchasing. And again, this is something we are going to build as a team for the next weeks to come, especially addressing 2023 view of the business, '23 budget. For the multiples, so we are not communicating on that. But let's say, that we are paying what we do consider as an average in this market and much more of what is important for me. I'm not looking at the short-term. We are all looking at the long-term when considering what we have in front of us. We do believe it is a very good and strategic deal for Verallia.

To stitch a very quick follow-up, if I may. First one being, did I understand this correctly that you said you're going to close within weeks? And the second point, again, if you can confirm this comes from cash at hand, so there's no incremental borrowings on your side?

Yes, we are planning to close mid-November, so in a few days from now. And for the cash, Nathalie?

Yes, we are -- indeed, we will pay with cash at hand. You remember, we enjoy high liquidity. At the end of September, we communicated that we had EUR 1.2 billion liquidity. So this allows us to pay with the cash available and not go into additional loans.

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

Sorry to insist on the margin side. When you say that they are both companies or group margin, are we talking about this 26% that you posted in 9 months? I do have also a couple of more questions. Looking at the evolution of sales compared '21 to estimated '22, it looks relatively low, taking into account how much prices have increased this year. I mean if -- do I miss something, because theoretically, the sales has grown only 10% in year versus year, so when prices have been growing more than this. And then last question is, if you could give us an idea of what is the level of capacity utilization in order to grow this 5% per annum and also the age of the furnaces if you need to make a big refurbishing in the short-term?

So on the EBITDA margin, Paco, you are right. Yes, we refer to the 26% of Verallia Group at the end of September. So it's above that.

Okay, for the growth you are referring to, we see rather a growth around 15% year-over-year. We need to take into account as well that in 2022, there was a significant event with a new furnace rebuilt in Leeds. Obviously, which has penalized or impact the production availability to push. So -- but we see growth down the road. And again, with some assets, it is one of your question, which has been -- so we have 4 furnaces, one which has been fully rebuilt in '22 through the summer and production has restarted at the end of August. And the other furnace in Leeds will have to be rebuilt in '23. And then the 2 other furnaces not before 2027, '28. I must say that we are seeing some significant investments in the past years within Allied, which is a good -- we see that as a positive asset.

And in terms of capacity utilization, what's the capacity you have right now?

You can imagine that we are going to look to use full capacity. As you know, the topic between the demand in Europe versus the installed capacity. So our objective is going to need to work with Allied to make sure that we are using its full capacity, take some opportunities for business development. And again, through the PAP methodology, for sure, working on some line efficiencies. But again, being humble and working with the teams, we believe that we're going to find ways here to fully use this capacity and even to increase it step by step.

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

Congratulations on the deal, Patrice and Nathalie. Just one question from me. I understand that this acquisition allow you to further leverage premiumization trends that are expected to bring benefits over the cycle. I also understand that like short-term, the weaker euro and pound are boosting exports. But looking over it, are you concerned that our recessionary period may reverse this considering final consumers that might down trade or budget their expenses?

Thanks a lot, Michele, for your comment and for your question. Again, the question of short-term versus long-term for us is not a topic because we want to be long-term oriented. So whatever is the current situation, we'll have to face it. Again, we do not see any recession at the door in what we see from our customers. And being much more specific with Allied when we see the segment where they are playing, we see -- we do not see any issue. Premium is certainly the segment which is going to be very resilient. And then most of the customers of Allied is delivering or exporting quite a lot, which is as well with the current forex is an opportunity for our customers. So we do not see that as a real topic and be long-term oriented. Again, this does fit totally. Do you hear us?

Yes. But the sound doesn't come from me. I hear the background noise.

Sorry for that, Michele.

I got the answer fully completely. Thank you.

Apologies, I'm trying to solve the issue. Please proceed, apologies for the system error.

Do we have another question?

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

Yes. So could you just come back on the market share. I don't really understand when do you mention about the market share you have on the U.K. today. And the second question, could you quantify the synergy expected with -- after this acquisition? My third question, when do -- you will integrate and consolidate the acquisition at the beginning of 2023? And the last question, as this is the fourth acquisition you made in U.K., what do you expect for the future? Do you expect another operation to increase your market share? What is your strategy to well penetrate this new market?

Thanks a lot, Jean-Francois. First of all, about market share, what I was mentioning was just an indication because you know that we are not used to speak about market share. So I was just giving an indication of what was Allied about. Allied is about 10% of installed capacity in U.K. But if I'm looking just about the market they are addressing, it is much more, around 30%, because, again, they are targeting a high premium market, and this is what is representing about. About the synergies we are expecting, I mean, again, you know our strategy about PAP, for instance, that we are going to look for 2% PAP at group level. So this is something for which Allied is going to contribute, obviously, and I cannot say more than that at this stage. And this will be built with concrete actions with the Allied teams, line by line. And we have purchasing; we can imagine that we'll have some nice purchasing synergy when it comes to buy soda ash, for instance, or others, and on CapEx as well, with the maintenance to come and the review to come in 2023 for one of the furnaces in Leeds. First acquisition, yes, it is our first acquisition, and this is why I believe it is a strategic move for Verallia. As we have said, we are going to keep on monitoring and screening what opportunities we could have on the market. Here, this one was a new territory for us with a key player on the specific segment, again, contributing to good margins and good contributions to the group. Overall, could be consolidation on some actors in Europe or others. But again, we are fully open. No clear details at this stage. And if opportunities, we will say them. And we have one criteria and you know it, is that it has to make sense for value creation, and it has to make sense for stakeholders. So this is what we will look about. About the consolidation date, Nathalie, so yes, we're going to start to consolidate.

Yes. In fact, the consolidation date will be the closing date. So -- well, you're right is that if we are talking about mid-November, we will see a very limited impact in the P&L of Verallia for the year 2022. So the full year will be 2023, but the consolidation date will be the closing date.

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

Two questions. First one is on inflation pass-through. Should we look for a similar energy hedging policy at Allied in 2023 than for the other European regions? And second one is on the financial situation of Allied. Could you let us know what is the leverage level or balance sheet position of Allied with respect to Verallia?

Thanks, Guillaume. So on your first question about energy hedging, we have -- Allied today is having a policy, which is very similar to what we have at Verallia. So in a nutshell, we can say that they are very well protected for 2023. About the leverage, Nathalie, if you want to?

Yes. As we communicated, anyway, we will integrate Allied in our financing. And after the acquisition, our leverage would remain below 2x. So this integrates everything, the acquisition and the financial position of Allied.

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

Patrice and Nathalie, I have a few questions, so I can maybe just go one by one to make it easier for you. The first was just you mentioned this 30% market share of, let's say, the premium segment in the U.K. I'd be interested kind of on your thoughts on who is filling the rest of that because, obviously, like Encirc and some of the others are kind of quite standard, I think, in their product range. So is it kind of O-I and Ardagh have some premium share as well? Or is it actually like imports from, I don't know, Saverglass -- exports out of France with Saverglass, for example, on the premium glass? Just to kind of have some color there would be useful.

Well, again, we are not used to speak about market share. My indication was much more about the order of magnitude of -- on which market Allied was playing, and I do not want to comment any additional topic on that, mainly about competition. So clearly, we have a key strategic acquisition for us, which, again, playing on a nice, profitable and potential growing market, and this is what we are going to focus on.

Okay. Very clear. And I guess, again, without knowing exactly like the selling price and like the economics of these particular glass containers, but like could this kind of become like a European platform for Verallia in premium glass, i.e., you could kind of like reach markets outside of the U.K. and like increase the export sales within Allied or that's not really on the agenda and it's just the South U.K.?

This is something we could think about. There is no definitive stance on that, and we're going to see how we can have some -- again, this is going to be part of some potential synergies and opportunities that we are going to build as a unique family now. But they have already quite a lot on the table with the U.K. market. But again, this is something we're going to work on.

Okay. Understood. And then just thinking about the kind of the P&L of Allied is kind of -- should we think of D&A over sales as similar to kind of Verallia? Or is it a little bit higher? Is it kind of like 10% or something like this?

Sorry, say that again?

Just to understand the kind of capital intensity of Allied Glass, should we think of depreciation and amortization as a percentage of sales kind of around that 10 -- 9%, 10% range, which is kind of usual or is it a little bit higher because they're more kind of flexible in their production and stuff?

Yes. No, it's not higher. It's very similar to ours.

Okay. Perfect, helpful. And then again, without -- like, I guess, talking about the PAP, do you -- is that production tool very different than kind of the usual production tool of Verallia, let's say, i.e., is it more difficult to implement the performance action plan within these kind of more flexible furnaces and flexible production footprint? Or is it actually quite similar to what you have already in terms of the way they operate?

I would say that it is quite similar. Obviously, the industrial means are fully adapted to the market they are addressing. But the PAP methodology is all about making clear identification of one of the loss of efficiency where we do have opportunity for improvement. So the global methodology is about the same. So it means that it is, again, to identify from upstream to downstream on your line, one of the inefficiencies and then to be creative with the teams, implementing some action plans which at the end of the day are leading to additional output. So methodology is about the same. The process is a little bit different again, a little bit much more adapted to smaller batch, but the PAP will be totally adapted to implement synergies.

Okay. And then just in terms of like the -- it will be -- I think this asset has kind of changed owner a few times in the past. And I was just curious like how did it arrive? Did you kind of source it yourselves, the acquisition?

Sorry, say that again?

I was just going to say, so I think Allied was acquired in 2020. So I was just curious as to how the deal came to Verallia, whether it was kind of something you source to yourselves.

In fact, it was same as acquisition in 2019. And I mean, this is all about the screening we are making to try to implement some M&A operations, and it starts as usual with management discussion and to see if there is a fit, if there is a willingness or an alignment to move further to an operation.

Perfect. Okay. That's great. Well, congratulations for the acquisition.

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

Yes. Just quickly, again, slightly off topic, but do you want to comment on current trading? We saw O-I yesterday how the price negotiations going for '23. And then also I came across a post of FEVE, the Glass Association and I start to read about their VERCANE R&D projects. It seems like following the dismissal of the initial group because of limited EU funding, there is another initiative with ENGI and Saverglass and others. So are you -- why you are not joining this group again in terms of hybrid or even electric furnace developments?

Thanks, Matthias. Well, I mean, I do not want to comment again on competition and others on that. So what I know is that we have defined our own technological bricks. And as you know, and as commented a few weeks ago on our hybrid furnace, we are moving forward, and we plan to be ready for production at the end of '24, and we have decided to locate in our Zaragoza factory.

Okay. And on the current trading?

No.

We currently have no further questions on the telephone line. So we'll switch over to written questions to now pass the word back to the host.

Do we have some online questions?

Most of the questions have been already answered. I'm just, sorry, discovering them, about the U.K. potential, the U.K. market. Maybe just -- there was a question regarding -- so please, could I ask about the volume growth in the U.K. market. It appears that total whiskey volumes for the market have not grown much over time. Which verticals have been most important from volume growth over time? Where this come, the growth over the past few years, if it was not from whiskey?

When we see -- we make the detailed analysis on the premium part of it, we see the growth. We see some growth, both in whiskey, in gin and over spirits.

Okay. There was another question regarding maybe the opportunities in U.K. following this deal likely to be more organic or inorganic development in the U.K.

So we are going to be focused with organic growth in U.K. now that we have this new platform. And this is something we are going to build with the teams there, and with the industrial improvement, we can plan for the future here. So this is where we are going to put our focus for U.K. market.

Okay. The rest were already answered regarding the synergies, volume growth and transaction.

Okay. So if we do not have any additional questions, again, thanks a lot for your time. Sorry for the technical issue we had during the call. And again, it is our pleasure to make this announcement, which is fulfilling our strategic plan. And then let's move forward, and I'm sure it's going to be a successful story. The integration is on our side now. Thanks a lot. Take care. Bye-bye.

Bye-Bye.

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