Verallia Société Anonyme (VRLA) Earnings Call Transcript & Summary

Hello, and welcome to the Verallia H1 2023 Financial Results Analyst Call. My name is Caroline, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Patrice Lucas, to begin today's conference. Thank you.

Good morning, everyone, and welcome to our H1 2023 results. As usual, it is a pleasure for Nathalie and myself to have this privileged moment with you for a nice exchange. We will go, as usual, with some key highlights, and then Nathalie will present in detail our H1 results. Then we'll be back to the guidance, and then we'll move forward with our Q&A session. So moving to the first chapter with the key highlights. As usual, a reminder of who we are. So Verallia is a global leader in glass packaging. We are #1 in Europe, #2 in Latin America and #3 worldwide. We have strong assets with a diversified customer base, with diversified end markets. And here, you have the snapshot of sales split at the end of '22 being present in still wine 35%, sparkling wine, spirits, beer less than 15%, soft drinks and foods. About who we are. So, we do operate in 12 countries with 34 glass plants, 12 cullet recycling centers, 5 decoration plants, all of that with 10,000 employees, and we are producing more than 17 billion bottles and jars. About our capital structure. Here, this is a picture at the end of June, so no major change. BWSA at around 28%. Bpifrance at 7.5%, and the free floating close to 56%. The key highlight of H1 is again the success of our eighth employee shareholding offer. We've put an amount of 0.5% of share capital with a 20% discount, offering that to our employees. This was eligible to 9 countries, including, to be noticed for the first time the U.K. And based on that, more than 3,600 employees invested in Verallia, which is about more than 40% of our eligible headcount. And the good news is that thanks to this eighth employee shareholding offer, now we have more than 48% of employees shareholder of Verallia. And to be noticed that in France, it is 88%, leading to now 4.2% of Verallia share capital are owned by employees. And this is totally in line with the objective, which was announced to be at 5% by 2025. So this is an important topic for us. This is part of our DNA to make sure that we are sharing values with our employees. Next is an net debt on ESG. You know that ESG is at the core of our strategy, and we are keep on moving forward implementing our decarbonization roadmap with some key topics. First one is our new furnace technologies. We have 2 new technologies that we are developing, which will allow us to reduce moving forward our CO2 emissions. First one is the electrical furnace, which will be launched in Cognac beginning of next year. So the pilot is on track. I do remember you that it's going to be a world premiere in the sector. So we are on track to be ready for next. Second technology is hybrid furnace. Here again, this project is on track. It will be located in Zaragoza in Spain and start-up production is scheduled as well for '24. So these are the 2 key new technologies. But this is not just about that. Implementing of decarbonization roadmap is about also being creative, being able to look at all the different solutions. And here, you have 2 solutions, bio heating oil, which is an alternative to natural gas, which will support the reduction of CO2 emission. So since '22, we are running in Zaragoza with bio heating, meaning that we are replacing natural gas, 20% of natural gas with bio heating, which is allowing us to reduce CO2 emission by 10%. And this was the first pilot, and this will be implemented as well all the divisions within Verallia. The second project is what we call batch preheater. Use of fumes -- it is about use of fumes energy to heat raw material before introduction in the furnace, which is making melting easier and less energy intensive. So we had the first application in Bad Wurzach in Germany, beginning of '23. We have 2 others to come, one in Portugal and one in Italy this year. And this is again a nice solution, which makes sense, allowing us to reduce by 12% of our CO2 emissions. And then, as you know, we are working on some additional capacity to seize market growth. So we have right now 2 ongoing brownfield projects, one in Brazil in Campo Bom and the second one in Pescia in Italy. They are progressing according to planning and start-up is expecting to be done first semester in '24. And both projects, obviously, would be an opportunity as well to reduce CO2 emission with the oxy-combustion technology. Reuse is a strong social trend and will certainly be pushed by regulation. And we want to be a frontrunner on this matter. And as a matter of fact, we have taken initiatives in H1. And here, you have 3 initiatives taken in H1. The first one is a partnership with Bout a Bout, which is a French start-up, which is having a 220 point of sales collection. They are collecting 700,000 -- they collected 700,000 bottles in '22, and they are targeting to grow to 60 million bottles as a capacity. So we are part of them moving forward, working with them to understand all their business model. Second initiative is what, a partnership we have signed in France with CITEO. CITEO is reporting to the French Ministry of Ecology. This is the organism with managing, in particular, the -- all the collection. And here again, so we have signed partnership where we are going to develop a reusable standards for a large-scale operation by '25. And last, this is a specific opportunity we see in Germany to develop the reuse in the one market. We have signed a first agreement with Riegel, a German customer. And here, we plan to fully operate the supply chain, the logistics, the washing. And this will be able to be live first semester next year. For us, it is all about test and learn phase, again, understanding the business model for something which is going to come. And again, something which is a strong social plan for which we have to cope with. As usual, you know that we are not just delivering bottles. In our mind, we want to create value, supporting our customers. So here every year, we have what we call the Verallia Design Award. So this one took place in France and in Iberia. You see that we are using the creativity of young, talented people. Just as a example of France, 130 schools did participate in this context, more than 600 students. And we are delighted with a different proposal, and this is, again, a creativity, we are able to offer to our customers and mainly focusing on premiumization. Last but not least, and before leaving the floor to Nathalie, I would like to tell you that I'm very glad and privileged about our excellent half year results. And this is the opportunity for me to warmly thanks our teams for the agility and the adaptation they have demonstrated. So about our revenues, we see a growth of plus 30.7%, leading to more than EUR 2.1 billion, which is an organic growth of 28.6%. Our adjusted EBITDA closed at EUR 659 million, plus 54.9% compared to H1, leading to a margin of 30.8%. About our net debt, so we maintain our leverage at 1.3x. And our net income is showing a nice value of EUR 311 million. So again, very glad with results, very positive for the company and very positive moving forward. And I'll led floor to Nathalie for the details.

Thank you, Patrice, and good morning to everyone. So let me present to you the strong results for the first half. So you see here the bridge for the total sales for the revenue. We moved from EUR 1.639 billion, up to EUR 2.143 billion that is an organic growth of 28.6%. You see in the bridge the different elements, as usual, so volumes, price/mix, foreign exchange and perimeter. As for the volumes, we have seen soft volumes in H1, even if we see a better trend in Q2 than in Q1. In Europe, we have seen decrease in beer volumes, mainly and also to a lesser extent in still wine. Latin America, as we commented already at the end of Q1, we have a lower activity in Chile. And here, we start to see some recovery, slight at the end of the quarter. But the full semester was down. And overall, we believe there is destocking down the chain that is impacting those software volumes. As for as sparkling wines, we see continued growth, so positive volume growth, and a good resilience in an alcoholic beverages and food jars. So again, our diversified portfolio allows us to mitigate some stronger decrease like beer. Price and mix, we have the carryover from last year's selling price increases, and we increased, as usual, the prices early 2023. We have now started to do some moderate and selective price reduction in Europe as the inflation of cost is softer than anticipated by us. The contribution from mix is still positive to the top line, and you will see as well to the EBITDA, which is a very positive point. The FX is mainly from Argentinian peso. And in the perimeter effect, you see the Allied Glass contribution, that will be shown as perimeter the full year until up to November 8. So it is contributing to the growth in sales and also EBITDA of the company, EUR 114.3 million for the top line and mainly high premium spirits. So moving to the regions. So the geographic segments. We have reported revenues of growing plus 23.6%. We see here volumes down year-on-year, but the decrease again is slowing down in the second quarter, mainly beer, as I commented already for the group, and we have softer volumes in still wine. But we see really good resilience in Italy and Iberia. We have a strong positive price impact in this top line. And again, here, the mix is significantly positive, remained positive and mainly coming from Italy. If we move to North and Eastern Europe, you have here a combination of -- in the organic growth and of scope. So we have the contribution of Allied Glass that is now Verallia UK. There is a volume decline, mainly in Germany that is impacted by beer. You know that Germany is more exposed to beer. But this is partly offset by Ukraine, where we restarted the second furnace of Zorya earlier than planned, which is a very good news. And if we look at nonalcoholic beverage and food jar contributions, we see indeed a positive contribution. We have a strongly positive price impact and the negative ForEx impact is coming from Ukraine's hryvnia and you have, of course, the Allied impact for the EUR 114 million. Now moving to Latin America. We see here broadly flat sales volumes. We have growth in Brazil, but again, offset by lower volumes, mainly in Chile. We see a continued growth in the Brazilian beer and spirits volumes. And Chile is again impacted down mainly by, of course, wine, where the whole volumes on the market of Chile was down, distributor destocking and lower exports. And again, here, a slight improvement at the end of the half year. We have, and this is usual for LATAM, strong increase in selling prices to cover inflation and local hyperinflation in Argentina. And to remind you that we successfully launched the second furnace of Jacutinga, a new furnace in Brazil that started to produce good glass, if you remember, end of the last year. The ForEx exchange impact here is negative due to Argentinian peso. Moving now to the EBITDA bridge -- to the adjusted EBITDA bridge. So we have significantly improved -- increased our EBITDA, moving from EUR 425 million up to EUR 659 million. And you can see on the top right that it means that our margin moved from 26% up to 30.8%. So looking at the different pillars and the usual pillars that -- our strategy, you can see that the activity pillar operating leverage is slightly negative. This is directly into the comment I made on volume, even its partially offset by inventory we built. So the softer volume in H1 allow us to rebuild inventory that were low. If you remember 1 year ago we were struggling very strongly with the inventory level. The spread price/mix, cost spread is significantly positive, EUR 231.1 million. This is a combination, again, of the carryover of different price increases throughout the year in 2022 and a price increase of '23. And also mix contribute positively to this pillar that is also very important. Good to see that the net productivity is on track, EUR 26.7 million delivered in the half year. So we have here a steady performance of our net PAP program, reducing cash production cost by 2%, exactly in line with our targets. FX is contributing negatively, again, Argentinian peso mainly and also some regional effect. In the other, as usually have several plus and minuses. But in the end, if you look at the EUR 21.4 million, it's mainly the contribution of Allied Glass to our EBITDA. After you know some IFRS 3 impact that is a negative impact in the first quarter that we don't have any more and it was EUR 4.6 million. So looking at the adjusted EBITDA by geographics. So in South and West Europe, we have moved from 25.2% margin, up to 31.1% adjusted EBITDA margin and improved the adjusted EBITDA by 52.6%. So here, you have the pillars contributing as you've just seen in the group one. So the positive price cost spread and positive mix from Italy, as I said, and the PAP delivering in line with our cost reduction objectives. Moving to North and Eastern Europe. Here, we have moved our margin from 19.5% to 27.5% and increased the absolute value up from EUR 60 million up to EUR 142 million. So here, we have in north -- in the northern -- Eastern Europe, the contribution of Allied. So we have some perimeter and scope impact here. And we have the spread impact. And also important to note, strong performance -- industrial performance and cost reduction ahead of objective in the perimeter. And here, you have to Ukraine as well EBITDA and thanks to a very strong and impressive commitment and performance of the local team, we restarted our second furnace, and we increased the adjusted EBITDA from Ukraine from 1 year to the other, which is, of course, very good to see. And the negative impact is from Ukraine. Latin America adjusted EBITDA evolution. So here, we have a slight increase in the absolute value of the adjusted EBITDA, EUR 79 million, moving up to EUR 81 million. If you look at excluding FX, you have, of course, a stronger increase as FX is impacting -- the foreign exchange is impacting negatively. When we look at the contribution of the pillars, so we have a strong organic growth on the activity and price/cost spread. And again, we reported that we have a lower activity in Chile. So you see on the top right that the margin is slightly decreasing. So it was 40.8%, still very strong at 36.3%. So the 40% was really strong. And we have the impact of the lower activity in Chile with a fixed cost absorption. And remember, we have also the second furnace of Jacutinga that is ramping up with additional fixed costs. But still, the overall margin is strong and the growth consistent. So let's move to CapEx and free cash flow. So the CapEx evolution that you see here, we are moving from EUR 96 million, up to EUR 150 million, representing 7% of total sales. We have a better balance this year between H1 and H2, but we are on track to be around 10% of sales of CapEx -- total CapEx that you know is our objective for the full year. We can see that strategic CapEx move up from 1.7% up to 2.6%, totally in line with our strategy. We have a capacity increase, as you very well know. So after the second furnace of Jacutinga, we are building another furnace in Brazil in Campo Bom, and we started, as Patrice mentioned, also Pescia project. And in terms of CO2 reduction in CapEx, we have around EUR 90 million CapEx dedicated to CO2 reduction, including the project, for example, the batch preheaters that Patrice mentioned that are included in this figure. So we continue to roll our strategy and deliver our ESG roadmap. So cash flow generation for the group is -- remains strong. We have, of course, the increase in the adjusted EBITDA, and we continue to invest as we've just seen. So with higher CapEx, the cash conversion is very much in line with previous year at 77.2%. We have a significant negative change in operating working capital in this first half. You see that EUR 78 million is due to the CapEx WCR variation. And remember, in Q4, we had last year a strong CapEx build which -- with payments in the first quarter of this year. And we also have an impact in the semester of the inventory rebuilt mainly that is impacting our change in operating working capital. Now this leads to an operating cash flow in line with last year at EUR 300 million and -- EUR 316.3 million. And after other operating impact, interest paid and cash tax, you have a free cash flow -- a strong free cash flow of EUR 248 million. If we move to the net debt evolution and the leverage, so the net debt is pretty stable compared to end of the year, but that's after EUR 164 million dividend payments to our shareholders and 38 million share buyback. We continue to roll out our open program. And we have a leverage that is 1.3x to be compared to 1.6x at the end of the year. And to remind everyone that we have been upgraded by both agencies now to investment-grade levels. And the last upgrade was from Standard & Poor's in May 2023. And so you have the financial structure and liquidity, as usual. So not much change here compared to previous quarter. You know that we have now very well balanced the source of our financing. We have maturities, well, acquisitioned and the nominal rates as well, especially for our bonds. And we renegotiated the term loan, as we already commented for Q1, and so we have now a well-balanced funding source and a nice available liquidity of EUR 837 million at the end of June. And all our financing, yes, to remember that they are all now sustainability linked, even our latest term loan.

Thanks, Nathalie. So about our guidance, based on the excellent results of H1 plus the visibility we have for the second semester and the strong fundamentals of Verallia, I'm very happy to announce that we have decided to upgrade our guidance. So on the revenue side, we confirm our growth of more than 20%. And for the adjusted EBITDA, we are now targeting to close the year between EUR 1.1 billion and EUR 1.25 billion. Before moving to the Q&A session, I would like to take the opportunity to share a few facts with you. Strong message is that Verallia is committed to improve its profitability over time, period after period. And here, you see 2 graphs [ will ] our track record of last 12 months EBITDA in value and margin from 2017 year to H1 '23. And I would like to remind a few takeaways. The first one is whatever the situation, thanks to the agility and adaptation of a team, Verallia has delivered consistent results, whatever the context, facing a deflation period or inflation period. We are walking the talk, delivering year-after-year a continuous profitable growth. And this is the result of our business model. This is the result of the way we operate. And our business model is based on a diversified customer base with more than 10,000 customers and the top 10 representing about 17% of our sales, with a product offer in all the key segments with a clear focus on premiumization and a presence in key profitable geographies. Therefore, our customer base, our product offer, our focus on premiumization and our geographies are stronger assets for resilience and growth. Our business model is also based on the way we operate. And we have 3 levers we operate on a daily basis for continuous profitable growth. The first one is activity growth, which means additional capacity with new furnaces or debottlenecking actions to seize the market growth we see in our business. Two, this is a positive trend, which is a result of a dynamic pricing policy to cover cost inflation and to reflect the value we create for customers with our products and services. And last lever is our performance action plan, so-called PAP, to generate continuous cash cost reduction of 2% every year, which in an order of magnitude represents about 1.2 points of EBITDA margin. Second takeaway is that our hedging policy is a competitive advantage for the benefit of Verallia and its customer, and it is absolutely non-speculative. This competitive advantage is fact based whatever the context. The visibility and the volatility absorption, thanks to this policy or paramount to deliver consistent and growing results over time. And this will be the case for the semesters and years to come. First takeaway is that 2023 is as well supported by our newly Verallia UK acquisition, delivering what we were expected. And as we have always said, M&A opportunity will be seized whenever it will make sense for value creation. And if aligned, obviously, with our purpose and values. And finally, I would like to remind you that at the same time, we are delivering robust profitability. We want to be the frontrunner on the industry on ESG, especially with -- for implementation of our decarbonation roadmap. All of that is key, to understand clearly who we are, how we do business and why we are delivering profitable growth period after period. Thanks a lot for your attention, and I think it's time to move to Q&A.

[Operator Instructions] We will take the first question from the line Lars Kjellberg from Credit Suisse.

I just wanted to get straight back to guidance. Of course, you have a track record of being on the cautious side. I just wanted to hear you out a bit on how you think about the lower end of the guidance range. In essence it would be completely flat year-on-year profitability in H2, given what you said about good visibility and the good base on the cost base, solid fundamentals near term and longer term in your business. So just want to clear out a bit what that lower end of the guidance is or could potentially drive that? When you're talking about moderate price declines, I appreciate that you need to share cost benefits with your customer base. But can you share with us how you -- how those prices are reflected in the cost base? Are you still on a positive spread? Or are you reducing prices more with the backdrop of soft demand? And the final question then, I guess, is where you talked about improving trends, Q1 was weak in volume terms, Q2 somewhat better. Can you please quantify that? And if you also want to talk a bit what you're seeing heading into Q3.

Okay. Thanks a lot for this question. So first of all about our guidance. We'd like just to say that we are very confident that we will meet this guidance. If I'm quite bold, I would say that the low part of the guidance, the EUR 1.1 billion, I would say it's a given, for sure. And what I can tell you is that, based on the visibility we have, H2 EBITDA results will be greater than last year. So I guess with these comments, I think, you can guess where we want to be. But this is the ambition we have. I'm very confident that we are going to deliver it.

Regarding your question, Lars, thank you for the -- about prices reduction. Again, so we have been running moderate and specific prices reduction to our customers. It's exactly what you said. In fact, the inflation of our cost base is lower than we anticipated when we planned the price campaign -- a price evolution campaign for 2023. So in fact, we moderate our prices as inflation is lower. So it means it's a sequential decrease in prices. And it still -- the spread remains positive. And as you can see in those figures, it remains strongly positive. So it's really adjusting because we have lower costs. So again, no impact on the spread there.

And in terms of the volume trajectory Q1 to Q2 and what you're seeing into Q3, please?

So about the volumes. So, as it has been commented by Nathalie. So we have seen a strong decrease in the year, and to some extent still wine, possibly caused by destocking down the chain. This is what we strongly believe now. We had a start this year below our expectation, especially a slow start, which is visible in Germany and France and a specific one in Chile in Latin America. The good news is that we had a better trend in Q2 compared to Q1, certainly because we are less impacted in beer in our total of sales compared to others. And moving forward, in H2, we see some recovery, let's say, that we see a slight increase compared to last year, which at the end of the day, will lead us to a flattish volume for the year. When I'm saying that, it's excluding U.K. It's a pure comparison with last year perimeter. But what is key here to be clear, is that regardless of specific trends we see for H2, we continue to see very strong fundamentals for the industry going forward. But for us, it's not just a question of how it's going to go in the next months. Obviously, this is important, and we are taking that into account to be agile, to adapt and to be flexible. But what is much more important for you guys and for us, is what is the trend of our business. And we see strong fundamentals moving forward as it has been demonstrated for the past 10 years.

Got you. And just to calibrate, could you share with us what your volumes were in H1 in terms of percent change?

No, we don't communicate the actual split of volume. We give you the bridge already, it's very detailed.

It's very detailed.

But again, you can take the comments from Patrice for the full year volumes being flattish.

We will take the next question from line Francisco Ruiz from BNP Exane.

I have 3 questions. The first one is, so mainly now that we have talked about pricing, it's about cost, because cost has been significantly reduced from Q1 to Q2 from 23% increase in Q1 to 11% in Q2. So could you give us or could you guide us on what should be the functions that we should take for the following H2 and next year given the hedging you have? The second question is on Russia, so company like [ Renault ] has made a big write-down of its Russian business. So could you give us an indication of what's the current book value that you have in Russia and if you are thinking on similar move on this one? I know that the situation is totally different. And the third question is a recurring one, which is on the use of cash. With the current level of leverage for 1.3x, you are far away from your midterm guidance of 2x to 3x EBITDA. So what are the alternatives? And could we see something in the short-term, because you haven't announced anything yet.

Hello. So it's difficult for me. So the cost, indeed -- so we have seen a softening in inflation in the second quarter. And let me remember last year's pattern as well with inflation moving up steadily over the year, so the comparison base is important there, of course. So we see softer inflation, but we still see inflation in the second quarter. And for the full year, we still see inflation even if again softening. So we estimate that it will go below 20%. But again, with a very -- there is no deflation here that we see on any component of our costs. And we have, remember, an increase in the cullet that is in our raw material. Here, we are above our assumptions of last year. So again, overall softer inflation, but inflation. For 2024, and we we're mentioning hedging, let's be very clear here. And as Patrice said, our hedging policy is non-speculative. Remember, it's over a 3-year period. So as we speak today, for 2024, we don't see any negative impact versus current market level of energy prices even the opposite. So we are well positioned here so far, and we'll continue to roll out our hedging policy as usual and so benefiting now from the softer energy cost, of course. Regarding Russia, so we are exactly in the same situation as before. So Russia is around 3% of our total sales. We continue to operate and the profitability is absolutely in line. And Russia has the cash through operating business in a normal basis. So there is nothing specific to say here.

And Nathalie, could you give us an indication on how much could be the book value of your Russian assets, just in case.

In fact, I said it's around 3%. So it's even less in our net book value backlog. So it's really a limited impact. Again, today, there is no sign of anything for us, and it's a profitable business. It's very local.

You never know probably. It don't depends on you, no?

You never know what tomorrow is for everything, but okay. What can I answer?