Verallia Société Anonyme (VRLA) Earnings Call Transcript & Summary

Hello, and welcome to the Verallia Q3 2024 Financial Results Analyst Call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Patrice Lucas, the CEO, to begin today's conference. Thank you.

Good morning, everyone, and welcome to our Q3 '24 financial results call. As usual, Nathalie and I will go through our presentation, and we will share -- and we'll have the Q&A session at the end. I will share with you some key highlights, Nathalie will present in detail our numbers, and then I will be back on our guidance. Just to start with, just to remind you that Verallia is a global leader in glass packaging. We are #1 in Europe, #2 in Latin America and #3 worldwide. On the chart, you have our ID card, you have on the left the 2023 split of our sales by segment. One of our strong assets is our customer base, more than 10,000 customers and the diversified and balanced market in which we operate. We operate in 12 countries. And as of today, we operate with 35 plants with 64 furnaces including the acquisition of Vidrala Italy, completed early July and the closing of one of our furnace at Essen in Germany. Please, note as well that we are running 19 cullet recycling centers, allowing us to control about 50% of our needs for external cullet. Let's move now to the key highlights of the quarter. The 2 first key highlights are illustrating our move towards decarbonization. First one is about Verallia Air range to implement a breakthrough offer with the lightest product on the market. You know already the Bordelaise Air 300-gram launched at the end of last year. And I'm satisfied to share with you that close to 9 million units have already been sold and that this product is getting a strong customer and industry recognition with many awards in France, in U.K. and other countries. Our objective is to keep on developing this breakthrough offer with new products for other segments. And lastly, we have launched our Air jars offer with 7 jars from 37 centiliter to 265 centiliter. This offer is an opportunity to supply to our customers the best packaging in terms of sustainability and modern design with a weight and CO2 emission reduction between 10% to 27%, depending obviously on the site. The second key highlight is our world premiere with our electrical furnace. It is a strong move towards the implementation of our ambitious decarbonization roadmap. The furnace is running with a pool of 180 tons per day, producing about 300,000 bottles per day. And what is much more important being operational now, running at full speed, we are confirming the minus 60% CO2 emission reduction. Next step will be the launch of our second technology break with the hybrid furnace at Zaragoza in Spain, replacing a traditional end port furnace. This launch is scheduled for H2 next year, and I'm sure it will be again a success as the one we have just launched in Cognac, the electrical one. Next, I want to share some market information. The market environment is still soft, consumption in Europe is soft. The poor summer weather and on-trade performance have impacted the Q3 selling-out performance. We see the destocking coming to an end in the faster-moving segments but still underway in the more premium and export-oriented segments. We also see cautious customer trend and adverse geopolitical environment. On the opposite, we have a good market momentum in Latin America and in Q3, we had a significant double-digit growth. As expected, our Q3 volumes are up compared to last year. Our current trading and outlook for the year end is consistent to the low end of our last July '24 revised assumptions, and we do expect the full year volume to be as commented last in July, slightly negative compared to '23. Good news is that despite a slow market recovery in Q3, we are returning to organic volume growth and delivering a solid profitability. Q3 revenue are minus 6.6% year-over-year with a minus 4.7% organic growth. EBITDA is EUR 210 million with a margin of 24.1%, minus 336 bps versus last year. This is giving a 9-month revenue variation at minus 14.3% year-over-year, with an organic growth at minus 8.7%. For the 9-months EBITDA result is EUR 641 million for a margin of 24.3%, minus 543 bps versus 2024. And finally, about our net debt at the end of September, leverage is at 2.3x compared to 1.9x, end of June; and 1.2x, end of last year. Now I'm leaving the floor to Nathalie for the detailed presentation of our results.

Thank you, Patrice. So let me lead you through the quarter results and the 9-month results as a consequence. So in this presentation, you will find 2 changes. So first, we did highlight the Q3. And second, in the bridges, we have separated Argentina as a whole. If you remember, due to the strong devaluation that occurred last year, it was disturbing to keep Argentina in all the pillars of our bridges. So now as you can see on this screen, you have one separate pillar for Argentina. And you can see that on the Q3 sales, for example, the variation is a positive plus EUR 1.6 million. So for our Q3 revenue variance, we move from sales of EUR 932 million in '23 -- in Q3 '23 to EUR 871 million in Q3 '24. Organic growth for the quarter is minus 4.7%, and this is minus 9.7% excluding Argentina. The volumes are up year-on-year organically. So this is the good news of the quarter. We are back to a positive organic growth on volumes. And this growth is combined with the contribution of newly acquired Vidrala Italy operations. We closed the acquisition in July. So we consolidate this activity in the full third quarter. In Europe, we have a positive volume growth led by beer and to a lesser extent, food. And in Latin America, we see a strong year-on-year increase in volumes here as well, led by beer and also nonalcoholic beverages. As Patrice mentioned, Latin America is more dynamic. Price and mix, broad-base price decline with the full impact of H1 price negotiations now running in the third quarter. We have a slight negative price/mix impact, minus EUR 92 million, but with a positive contribution from mix from South and West Europe in the quarter, we see mix step-by-step going to a more neutral effect after a stronger negative one in H1. And the FX impact that you have here is mainly from the Brazilian real, and you can see in the perimeter column, the contribution of mainly Vidrala glass business in Italy and to a lesser extent, some of the cullet treatment centers acquired in Iberia last year. So if we move to the 9 months, you can see that the volumes here are back to a negative number, minus EUR 185 million. This is mostly from H1, as just explained. For the full 9 months, the organic growth is minus 8.7%, and that's minus 15.3% excluding Argentina. So lower volumes, down mid-single digit despite the year-on-year increase in Q3 that I just commented. In Europe, overall, for the 9 months, the volumes are down mostly in spirits, nonalcoholic beverages and impacted, if we remember, by a strong comparative basis in H1. In Q3, we still have quite a strong comparative basis as well for spirits. If you remember, last year, spirits started to slow down in Q4 after the other segments. In Latin America, we have a strong positive year-on-year volume evolution again. The price/mix is strongly negative with the contribution driven by lower selling prices, and this is mainly in Europe. In Latin America, we continue to follow inflation, and the contribution of the mix, as I commented, is negative but with a better trend in Q3. The foreign exchange impact, again, mainly from Brazilian real and the perimeter effect coming from acquisition and cullet treatment centers in Iberia. That's why the amount is very close to the Q3, of course, and you can see that the full impact in Argentina variation is only EUR 1.1 million. So how does this translate into a consolidated adjusted EBITDA? So we moved in the third quarter from an adjusted EBITDA last year of EUR 256 million to EUR 210 million this year. You can see on the top right the margins. So we maintain a margin above 24% in the quarter to 24.1% to be compared to 27.5% last year. So how do we go from EUR 256 million to EUR 210 million? You see in the bridges, we have an activity pillar that is negative with minus EUR 35.4 million. So in the quarter, despite the positive volume impact we have here, this is entirely due to the inventory variation. Last year, in the third quarter, we had a significant increase in our inventory due to the -- I would say, the surprise of the lower volume came after the summer. And we started to slow down our inventory for the year-end. So we have this negative impact as a comparison in the third quarter, this is a very specific one. In the spread, we see a minus EUR 33.7 million, so same drivers and lower selling prices not fully offset by a lower cost, even if we have deflation in our costs. And the mix contribution, mainly in South and West Europe is neutral to positive which is a good news. We can see that the net productivity continues to deliver strongly 2.9% of cash production cost reduction. You know that our target is to deliver a minimum of 2% every year. So we are above that, that brings EUR 14.8 million to the party. And this is, of course, very important. We push our net PAP contribution to offset the adverse trends on sales. In the other, you have EUR 9.2 million. This includes the perimeter impact, if you remember. So a large part is coming from Vidrala Italy acquisition. But we also have a nice reduction in SG&A costs that we also had in H1 to -- in the 9 months and that is as well steadily contributing to our EBITDA. The ForEx is negative by minus EUR 3 million, and this is again, mainly linked to Brazilian real. And the Argentina EBITDA variation is plus EUR 1.9 million in the quarter. So for the 9 months, you have here the summary. So the main negative pillar remains the activity one. So sales volume down year-on-year, especially in H1, and we have here, as I explained from Q3, the negative comp on the inventory variation. We were restocking at the end of September '23, and since then, we keep -- you know that we keep our inventory very much under control by adjusting our capacity to the current volume level. The price-mix/cost spread is negative by minus EUR 136.7 million, driven by the lower selling prices and negative mix despite, again, the deflation in cost. For the 9 months, the net PAP is EUR 44.6 million positive, and that's a 2.7% cash production cost reduction. The ForEx for the 9 months is minus EUR 6.3 million. And the total variation of EBITDA for the 9 months of Argentina is minus EUR 6 million, as you can read here. For the leverage. So as you can see here, our leverage is 2.3x at the end of September. The variation between June and September in the debt is mainly driven by the additional -- by the acquisition of Vidrala's Italian business in July. We financed this by EUR 250 million debt. So this is the main variation of the debt. We did have positive free cash flow in Q3 and then some adverse impact -- FX impact on the debt also in the quarter if we want to bridge the 2 debt levels. And of course, as a reminder, we did pay our dividend for EUR 252 million, and that was in May, so already incorporated into the June data. And our long-term credit rating has been confirmed by Moody's and S&P. Now if we look at our financial structure and liquidity, as usual. So here, the new line is for the acquisition of our Italian -- new Italian activity from Vidrala in Italy. We have a -- so total borrowings of EUR 2,388.7 million and total available liquidity reaches EUR 649.2 million at the end of September. As you have read in our press release, we are contemplating a bond issue that would help us, again, re-diversify funding sources and extend debt maturity.

Thanks a lot, Nathalie. About our view for full year '24 results, so we confirm our guidance to deliver an adjusted EBITDA at a level comparable to 2022. All the teams are mobilized on execution for '24 and at the same time on preparation for '25. Meanwhile, we are keeping on strengthening our market intelligence to detect any signal from the market environment, business focus on agility, cost discipline and cash management are paramount in such a context. And as always, we are focused on execution to get the most of what we control to protect the profitability and the cash generation. Our focus is to adapt to this environment, being disciplined on adapting temporary capacity in the most efficient way. We still have about 10% of our capacity not utilized to keep inventory levels under control. PAP is a must and is delivering. PAP, our performance action plan for productivity is a must and is delivering and CapEx contorl is also active. To sum up in few words, we are walking the talk on what was presented to you in July. Thanks a lot for your attention. And let's now move to the Q&A session.

[Operator Instructions] We will now take our first question from Louise Wiseur of UBS.

I've got 3 questions, please. The first one with regards to the destocking. So you mentioned that you still see destocking in Europe in some categories. Do you have any indication of when that destocking might end based on maybe what you hear from your clients and maybe what they hear from their own clients? The second question is, could you give some colors on the trends that you see in the [ latest weeks ] by category? Is there maybe improvement in spirits? I mean you mentioned that spirits started to slow down in Q4 last year. So just wondering. And then the last question is around the price/cost spread for 2025 and just general outlook for 2025, but how do you think about the price/cost spread on EBITDA for next year? And is there the possibility for you to quantify maybe what the potential negative impact could be?

Thanks a lot for all your -- these 3 questions. So first one about destocking. So what we see is that in Europe, we are at the end of destocking for the fast-moving products, let's say, when we are speaking about beer, nonalcoholic beverage, food, to say it other words for the products which are produced, bottled and consumed locally, we do not see any destocking effect anymore. On the opposite for the segments which are export oriented. And here, we can say spirits, still wine and sparkling wine, we do believe that there is still a destocking effect, which is affecting our market. And if I'm looking at the different communication on our customers on that, it seems to be quite clear. When is it going to [ end ] on this part of our segments, we are monitoring that. I mean, each week, we believe it's reducing, obviously, it is moving in the right direction, but we still see maybe some impact in the first half of 2025. But this is why we are strengthening here our market intelligence to get a better understanding between all the selling out of end consumption and the glass market. But you know that everybody is quite cautious especially on top of that with a geopolitical potential topic. So we know China, for instance, with the tariff, certainly to come and to be [indiscernible] on spirits and specifically on Cognac. And we have the U.S. election, which could be as well a game changer. So we see a big part of the customer being very cautious and in kind of wait-and-see situation. For 2025, so first, we are just in the process as usual. This is a period -- intensive period to prepare 2025. So working on all our budget assumptions, cross-checking that with all the -- our teams in the different divisions. Negotiation is ongoing with our customers. So it's too early to be definitive. What we can nevertheless say is that first, as far as volumes are concerned, we do expect to keep on seeing a recovery as we have started to see during the year, and especially in Q3, with volume higher than in Q3 last year. So we do expect volumes to recover and to keep on growing. Two, on pricing, the big part -- the most part of the pricing -- selling price reduction has been done and is behind us, and it was mainly in the first semester. And as we said, we are going to be low teens on selling price reduction this year. So obviously, we will see a carryover effect next year. And as far as 2025 selling price reduction, I would say that we are going to be in a kind of normalization, inflation being controlled. Back to standard level, pricing evolution for '25 will be the pricing reduction or increase we have to do will be as a standard in the past industry -- what we did in the past industry. So this is what we see for '25. But obviously, we'll be able to give much more color when we present our full year results at the end of February.

And we will now take our next question from Francisco Ruiz of BNP.

Also 3 questions, if I may. The first one is on the 2024 guidance. In order to reach this around EUR 860 million on EBITDA, you need to grow 15% in this quarter. Also taking into account that Q4 has never been bigger than Q3. Could you give us more clarity on what are the main drivers on this quarter mainly on FX and activity? The second question is on cost. If you look at the quarter, the cost reduction has been significant. According to my calculation something around EUR 60 million. Is this something that could be sustainable also for Q4 and for next year? And what is driving this is just the Essen facility or is something behind? And last but not least, Patrice, you should talk about destocking but how do you know that this is destocking and is not a weak demand that it is here to stay?

Thank you, Francisco. I will start and [indiscernible]. So for the EBITDA guidance, first, let's not forget that we said we will be around 2022, comparable to 2022 adjusted EBITDA. So it doesn't mean that we will speak exactly to the '22 value. Second comment is that Q4 last year was also still very weak. Let's not forget that we were in the full H2 with a much lower volume and a lot of shutdowns, especially in December. And the third point is that we have also the addition of the acquisition of Corsico so the Italian business that will contribute this year in the quarter EBITDA. For the cost reduction and the PAP, but also the reduction in SG&A that we see, yes, it is sustainable. I mean the PAP, we have a high value here, but you know that this program is really continued improvement. It is not a very big program that we would launch, especially because of the situation this year, it's really the continuation of our usual PAP actions. And it now includes fully our new acquisitions, especially in the U.K. where we see a good contribution this year, and it is a good synergy that we have here.

On your second question about cost reduction, and I guess you are mentioning PAP -- sustainable performance of our PAP. So first of all, we see a sustainable performance for Q4, no doubt about that. And as you know, this PAP methodology is something which is very standardizing each of our facility, and we have a strict and rigorous method -- methodology to identify all the inefficiency improvement we can make on each of our lines. We are using the big database with a [ nice ] benchmark, internal benchmark with all our 64 furnaces, which is feeding productivity project portfolio. And you know that our objective is to deliver a 2% cash cost reduction per year. So we do not see why this will not be active again next year. And obviously, this year, it was quite paramount for us to strengthen and to put much more, I would say, positive pressure on delivering additional cost reduction. To make it simple, yes, in Q4, we see something similar to what we have delivered so far after 9 months. And for next year, no reason to not keep on delivering a minimum 2% of cash cost reduction. For your last question about destocking versus weak demand. The first comment I can make on that is facts and data for 2023, '22. First one -- also we have some noise -- background noise, I don't know if it's coming but okay, nevertheless. So the first fact, Francisco is, if you remember what we shared already together, the selling out of end consumption in '23 was down minus 1% roughly. This is representing really the consumer demand. And the glass market was down by minus 12%. So this was clearly the fact that there was a disconnect. What we see as the recovery today as we speak, is not totally back to what I would call a coupling between what is real demand in terms of volume and the glass market. We see that recovering. And on top of that, this is what we get as information from our customers -- some of our customers. And again, it depends on the segment. It depends on how they are exposed to export. I said that everything which is related with local production, local bottling, local consumption, there is no more destocking effect. But on the rest, we believe that we have that. We are very cautious on the demand, as we mentioned, and vigilant to look at that. But we believe that destocking again, is still on the spirit, still wine and sparkling wine.

Can I do a follow-up? So on the Q4 bridge, could you tell us what was the effect of the inflation expected in Argentina, taking into account such a negative impact that you had last year? And also on the Corsico contribution, taking into account that you are valuing stocks at market value. How much could it be the contribution in EBITDA in this quarter?

Okay. So you are right. Last year, we had a strong negative impact in Q4 from Argentina. The -- basically, the EBITDA was divided by 2. So it was several million euro impact in last year Q4. And as for your second question on Corsico -- sorry, on our new entity in Italy, you are right with the valuation of the opening balance sheet that is still in process, our inventories, basically, you don't benefit from the margin of your inventories, but we are not only selling on inventories. So still, we have a positive contribution in the second half -- half, sorry, from this new business where we need to be -- I mean just to [indiscernible] a bit the comment. Anyway, this is a bolt-on acquisition. So it's not a game changer, but it's still an additional contribution just as a few millions in the year are brought from our newer cullet treatment centers in Iberia that we are fully benefiting. So all of that are not a very significant impact, but they are positive in the Q4 when we compare ourselves to last year.

Is that okay, Francisco?

Yes.

And we will now take our next question from Lars Kjellberg of Stifel.

Two questions remaining. Of course, activity has been a major drag this year. Could you give us any color on what you expect in the final quarter in this bucket? It has directionally been improving, of course, through the year-to-date. But what should we expect in Q4? The other component that again was raised, meaningful cost reduction outside the performance action plan in Q3. Is that anything to do with energy hedges becoming in a more supportive versus the sort of negative impact you had in H1? And also, could you share with us how you see energy based on your hedging policy now progressing into 2025 versus 2024?

Okay. So to -- thank you for your question. So to answer to you, in the PAP, we do not have at all any impact of our hedging policy. What we report, what we had in our PAP actions are without any inflation impact because the inflation impact of costs are in the spread pillar. It's really purely a reduction on costs meaning I'm using one forklift less, I have less people in the plant. So productivity actions, okay? And if I have some energy impact, it's because I have a lower consumption of energy. But it is not linked at all to hedging. So that is why we consider that as sustainable because you see these are real actions, continuous improvement in our plants. It's hundreds of actions that are rolled out now every year in the plant. And just as a reminder for everyone, we have a very powerful tool there by benchmarking all our plants on several KPIs of efficiency in the production. And the idea is really to lower everywhere our production cash cost. So this is pure productivity and again, no impact on -- of the hedges here. For the energy in -- so current energy and the impact of our hedges. You know that we do not give the detail of our hedge levels. What we said, and this is still valid for Q3, is that we have a decrease in our energy costs in '24 versus 2023, all included with our hedges as well. And what we see today is the kind of stabilization of energy prices anyway. So we are still in that trend.

In terms of the activity component and again, I guess, more expensive hedges must -- directionally what this means for '25?

Sorry, we didn't hear you. It's a bit cut.

Yes. So again, the activity bucket, how should we think about that in Q4? And then I guess on the hedging front, if I can ask just a follow-up. You -- obviously, you had more expensive hedges in the books in '24 as they roll out. Can you share with us directionally how energy should be faring based on your hedge policy in '25?

So for the activity in Q4, here, we won't have again this negative impact of -- coming from a stock value sense that we commented in Q3. In fact, last year, we did have an increase in inventory in the third quarter. And this year, we maintain basically our inventory level to the right -- to the current level by adjusting our capacity of production. So the inventory variation will be -- we won't have this adverse impact on the inventory. And for volumes in Q4, we should also be better than last year because remember, last year was, as I commented, a very, very low, yes. So we are seeing today kind of high single-digit growth or single-digit growth. So we will have growth again in volumes in Q4, and we won't have this adverse inventory variation.

And you don't want to comment on the hedge change into '25?

2025, so it should be pretty stable or some -- a slight decrease versus this year overall.

And we will now take our next question from Patrick Mann of Bank of America.

Just 2 questions left for me. So just to follow up on the volume. I think you said, obviously, we're seeing positive volume momentum into the end of the year, but you also said that you've still got about 10% of your capacity off-line. I mean, how do you see that evolving? Do you think if the destocking comes to an end that you'll be back to full capacity? Or do you think that potentially you might still have to take some capacity out permanently or wait for somebody else to take capacity out? And then the second question is more broad. So you gave us 3-year forecasts. I think it was October 2021. And we're at the end of that period. Just wondering when you might be in a position to give us sort of your next medium-term goals for the business and how we should be thinking about what your strategy and ambitions are for the business medium term?

Thanks a lot, Patrick, for 2 questions. About our capacity use. So you're right, this is what I said. We are still running -- or not running 10% of our capacity as we speak. This will be the case until the end of the year. And what is very key for us is really to control our inventory level because I don't want the operation to get out of control and to be with, yes, inventory not serving the business. And with obviously a premium cost on whatsoever. So as we speak, we are controlling this, and we are in a good position to close the year. And about when we will be back to full capacity, this is a question related to the volumes we'll see next year. As we speak, we do not have any plan to shut down definitively additional furnaces. We did it in the first part of this year with Essen in Germany because here, as I explained, it was for us a structural change in the German market -- for our German market. It's not the case on the other regions. We see that much more [indiscernible] so this is why we are much more taking temporary measures. What we have decided as well, for instance, in Italy with our new furnace, obviously is to postpone the launch of the additional capacity, which was planned beginning of '25. This, as we speak, we'll see that much more at the end of '25. So this is, I would say, a daily monitoring through our scheduling process according to the demand we see in front of us with our forecast, and we adapt production accordingly. So again, to make it simple, 10% not used today, until the end of the year. For sure -- maybe Q1 will be about in the same proportion. And we do expect with volume recovery in '25 to better use our capacity but again, with high monitoring and to keep our inventory under control and no definitive additional shutdown schedule as we speak. The second question about much more midterm visibility and guidance to the market. So as we said, we'll have to -- we'll come back to you next year for Capital Market Day, giving a midterm guidance. And we do that somewhere in Q2. So we really want to finish '24 to well prepare '25 to -- and obviously, as you can understand, to get a little bit better visibility on this top line and on the growth and what was mentioned about destocking versus a weak demand. So this will be our target to come back in Q2 next year, somewhere in Q2 next year.

And we will now take our next question from James Perry of Citigroup.

I'd just like to ask about mix. So I know you said there's still destocking in wine and spirits, but within wine and within spirits, would you be able to give any more commentary on how the premium and super-premium segments are faring relative to the non-premium? Or to put it another way, how much of the minus 5% price mix in Q3 or the minus low teens in 2024 is driven by mix?

Thanks, James. So you remember that we said in H1 that for quite a while, premiumization was down. We're seeing a down trading, and that the first time, the mix effect was negative in our results. Good news is that we see that in Q3, the mix is neutral. So it means that we start to see, but -- again, we are very cautious, but we start to see no negative impact on the mix. Nevertheless, we are still -- as we speak, we are still very low on the spirits segment and on still wine and sparkling wine. This is where we are lower than what we could expect. So there is much upside to come for us in '25 on this segment and as a result, on the premiumization and mix -- positive mix effect because we all know and we know and we're convinced that premiumization is still a trend -- is still a trend, sorry, and that what we are facing in H1 which will start to revert, was the result of some arbitration from our customer, plus obviously the spirit market impact. So we still see that as an upside for next year and the years to come.

We will now take our next question from Philippe Lorrain of Bernstein.

Yes, thanks as well for giving us a different presentation on the bridges and incorporating Argentina now. I would like to ask a couple of questions, please, on volumes and as well on prices. I understand that your point on the mix effect that is quite neutral in Q3. If I strip out Argentina, I have the impression that then the price part of the price/mix has become worse in Q3 versus H1. Would you agree with that? And what is the reason behind that? And then the second question is more like on the volumes. I calculate that excluding Argentina, the volume is up maybe, yes, slightly more than 0.5% year-on-year in Q3. How does that square back with your comments regarding the different regions saying that Europe was up and to some extent as well, LatAm was up?