Verallia Société Anonyme (VRLA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Verallia 2026 H1 Results Analyst Call. The call will be structured in two parts. First, a presentation by the Verallia Group management team represented by Patrice Lucas, CEO; and Cristina Riesgo, CFO. Afterwards, there will be a Q&A session. [Operator Instructions] I will now hand over to the management team. Please go ahead.

Good morning, everyone, and thank you for joining us. So welcome to our H1 2026 results call. As usual, so we will go through our presentation and we'll have a Q&A session at the end. After a quick introduction, we'll go directly to our numbers with Cristina, and then I will come back on our outlook for 2026. As an introduction, 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 this chart, you have our ID card. You have on the left the 2025 split of our sales by segment. As you know, one of our strong assets is our customer base and the diversified and balanced end markets in which we operate. We operate in 12 countries end of June, we operate 34 glass plants, minus one compared to end of last year with the closure of our Essen plant in Germany. And we operate 63 furnaces compared to 67 at the end of last year with the closure of two furnaces in Germany in Essen, one in France at Cognac and one in the U.K. at Knottingley. We do serve around 11,000 customers and produce around 18 billion bottles and jars per year. Please note also that we are running 19 cullet recycling centers, allowing us to control about 50% of our needs for external cullet. Before moving to our numbers, I would like to share an update on our industrial adaptation footprint, which was announced in mid-February. As a reminder, we decided to adapt and reduce our installed capacity to align with the reality of the current demand and to address overcapacity in the European market. Our three projects are now completed. They were all well managed without any disruption and any operational problems. In Germany, in Essen, the plant was shut down at the end of March. Negotiations regarding the social plan is done and involved around 300 terminations. In France, Cognac furnace was stopped on June 15. The voluntary redundancy plan is negotiated and underway. And in the U.K., we stopped at the end of April, one of our two furnaces at Knottingley facility. We already have some positive impact in Q2, mainly coming from Essen closure. Please note that the total cost of this adaptation is around EUR 60 million, EUR 19 million cash out in H1 and the rest will be split between H2 and next year. The run rate industrial cost saving of these three projects is around EUR 40 million, and we do expect the full impact in H2, meaning in H2, we do expect EUR 20 million cost savings for this year. About our financial numbers, -- we are on track and confirming a higher free cash flow generation. Q2 revenue is down by 0.5% year-over-year to EUR 900 million with an organic growth at minus 0.9% year-over-year with total volume being broadly flat, giving an H1 revenue down by minus 1.4% year-over-year to EUR 1.699 billion with an organic growth of minus 1% year-over-year. Q2 adjusted EBITDA is EUR 192 million, minus 5.6% versus Q2 last year, with a margin at 21.4%, minus 116 bps versus Q2 last year. Giving an H1 adjusted EBITDA at EUR 352 million, plus 0.2% versus H1 '25 with a margin at 20.7%, plus 33 bps versus H1 last year. About free cash flow generation, we closed H1 with EUR 102 million, plus EUR 36 million compared to H1 last year. Excluding restructuring cash out, free cash flow is at EUR 121 million in H1. And our leverage is now at 2.6x at the end of June, slightly down versus 2.7x at the end of December '25. And finally, our net income is EUR 27 million, minus 60.5% compared to last year -- H1 last year. This net income does include a one-off impact of EUR 43 million after tax in relation with our European industrial footprint adaptation, meaning net income without restructuring is at EUR 70 million. That being said, I let the floor to Cristina for more details.

Thank you, Patrice, and good morning, everyone. Let me start with the second quarter revenue bridge. As a reminder, we present these regions, excluding Argentina, given the hyperinflation and the currency distortions there. So you will see the net impact in a separate line. In the second quarter, revenue was roughly stable at EUR 900 million, down just 0.5% reported or minus 0.9% organic. Volumes were down only very marginally in EUR 2 million. And in fact, they were up year-on-year once you exclude Germany. So the underlying demand picture is healthier than the headline. Europe was broadly stable with a strong growth in spirit and food offsetting the softer categories. And Latin America was slightly lower as weaker Chile and Argentina wine offset the pickup in Brazilian beer. The key point on this slide is the price/mix effect, which was negative EUR 7.7 million, but that is a clear improvement versus the first quarter with less than 1% negative in Q2, which tells you that price/mix has essentially stabilized. Currency added EUR 5 million, mostly the Brazilian real, and there was no scope effect and Argentina added EUR 0.5 million. Moving to the half year bridge. It's the same story, but with more of the weight in the first quarter. Revenue for the half was EUR 1,699 million, down 1.4% reported and minus 1% organic. The decline is essentially a pricing story, and it was concentrated in Q1. Prices centralized in the second quarter versus the prior year. On volumes, we were down only marginally, and that is entirely the expected reduction in Germany. And as mentioned for Q1, excluding Germany, volumes were up in the half, driven by spirit and food jars, whose good momentum from Q1 continued. And that was partially offset by lower nonalcoholic beverages that are down because of an extraordinary destocking in Italy last year and still an impact in wine. And product mix was only very slightly negative over the period. The currency effect was a positive EUR 3.2 million against the Brazilian real, and there was no scope. And finally, Argentina added EUR 1.4 million. Now let's move into the regions, starting with Southern and Western Europe, which covers France, Italy, Spain and Portugal. Revenue there was broadly stable, down 0.8%, both reported and at a constant scope and exchange rate at EUR 1,172 million. What I would highlight is that volumes were up in all 4 countries. So we had genuine volume growth across the region, which offset the negative price mix. The growth came from food jars, helped by the new Pescia furnace in Italy and from beer, with spirits accelerating through the second quarter. Sales mix was slightly adverse, but the headline for the region is volume resilience across the board. Northern and Eastern Europe, which is Germany, the U.K., Poland, Ukraine and Russia, where revenue was down 5.4% or 5.1% at constant scope and FX at EUR 338 million. And this is primarily the expected lower volumes in Germany, in line with our new industrial footprint. Lower beer and to a lesser extent, nonalcoholic volumes from our furnace [ reboot ] in Russia were not fully offset by higher spirits. The important one is that price mix was actually positive here, reflecting better capacity utilization. And excluding Germany, volumes across the region were actually stable. We had a strong recovery in Ukraine and the U.K. trend is actually improving in line with stabilization in spirits. And finally, LatAm, where we have Brazil, Argentina, Chile and our U.S. operations. Revenue was up 2.8% reported at EUR 189 million and up 5.5% at constant scope and exchange rate. And even excluding Argentina, organic growth was positive 1.7%. So this is a real growth, not just Argentina inflation. It was fueled by positive price mix, mostly in Brazil and Argentina with a strong momentum in spirit, beer and sparkling wine. Brazil, in particular, picked up strongly in the second quarter, helped by the new Campo Bom furnace, and that was partially offset by lower steel wine volumes in Argentina and Chile. On currency, the effect was negative, where the revaluation of the Brazilian real was more than offset by the devaluation of the Argentine peso. Turning to profitability. Let's look first at the second quarter EBITDA bridge. Adjusted EBITDA in Q2 was EUR 192 million with a margin of 21.4% versus 22.5% a year ago, down 115 basis (sic) [ 116 basis ] points year-on-year. But I would point out that in line with our seasonality, it's up sequentially versus the first quarter. There are two negatives and then our self-help. Activity was negative on a slightly lower space volumes and the inventory revaluation effect. The spread between price and cost was also negative. The strong energy deflation we had in Q1 largely faded in Q2. Energy was still down year-on-year, but by less and the Middle East prices pushed up mainly freight and packaging. Against those two headwinds, our performance action plan delivered a 2.3% reduction in cash production costs. And the other line included around EUR 8 million of savings from the restructuring, mainly Essen. And against that, we had the ramp-up cost of the new furnaces we opened this year Pescia -- we opened between last year [indiscernible]. Pescia, Campo Bom and Zaragoza [indiscernible]. Currency was a positive EUR 2 million. So the message for the quarter is that actually self-help with its productivity through the restructuring savings is doing the heavy lifting in a tougher cost environment. Let's look now at the first half consolidated adjusted EBITDA, which is the key slide for the half as a whole. Despite revenue being down, we held adjusted EBITDA flat at EUR 352 million, and the margin actually improved by 33 basis points to 20.7%. So how did we protect profitability with lower revenue? Activity was only slightly negative, which is coming from the strong growth in Southern and Western Europe, largely offset by the deliberately lower German volumes. The spread was negative on the lower selling prices, mostly in Q1 and a slightly adverse mix, though we did benefit from energy deflation since, as you know, the expensive 2022 hedges rolled off. And then the offset again, our performance action plan delivered 2.2% net reduction in cash production costs and the other line again carries the EUR 8 million of restructuring savings against the new furnace ramp-up costs. Currency was favorable at EUR 1.8 million and finally, Argentina contributing EUR 1.6 million. Taking the EBITDA by region now. In Southern and Western Europe, we held adjusted EBITDA essentially flat, down just 0.6% at EUR 242 million, with the margin stable year-on-year at 20.6%. The positive activity from the volume growth I mentioned, combined with the PAP savings was enough to offset the negative inflation spread that came from the lower selling prices and the adverse mix. So a very resilient performance in our largest region. Northern and Eastern Europe is frankly the clearest illustration of our strategy paying off. We grew EBITDA by 9.9% to EUR 53 million, and the margin improved by 219 basis points to 15.8%. And we did that despite a significant deliberate reduction in German volumes. The negative activity contribution from those lower volumes was more than offset by a positive inflation spread and above all, industrial -- a very strong industrial performance, a 3.2% net reduction in cash costs, driven primarily by the footprint optimization from the asset closure. So this region proves the point, which shows profitability of our volume in Germany and it worked out. And finally, LatAm, which remains our most profitable region with 30% EBITDA margin, even though that's down from 32.2%. EBITDA was EUR 59 million, and the decline came from a slightly negative activity contribution on the lower volumes in Chile and Argentina, plus the ramp-up cost of the new Campo Bom furnace in Brazil. Offsetting part of that, the PAP contributed to deliver 2.3% net reduction in cash costs. It still a highly profitable region with the dip driven by a mix of activity and the transitional furnace cost rather than anything structural. On CapEx, we came down to EUR 91 million in the half, which is 5.3% of sales from EUR 104 million a year ago. So let me split that. Recurring CapEx was actually up year-on-year because 2025 had a light furnace repair schedule. The big move is strategic CapEx, which fell sharply from 2.6% of sales to just 0.6%. That's because the first half of last year included the final stages of our big growth projects, Campo Bom, Pescia and the Zaragoza Hybrid. Those are now complete, and we have no new capacity planned in the near future. And finally, we are continuing our decarbonization plan with our second hybrid furnace, Saint Romain-le-Puy in France opening in the second half. And for the full year, we still expect CapEx around 8% of sales. Moving into cash flow, which is one of the real highlights of the half. Free cash flow rose to EUR 102 million, which is up EUR 36 million or 54% year-on-year, and cash conversion improved to 74.2%. I would stress that this was achieved on essentially flat EBITDA, so it reflects genuine cash discipline and not earnings growth. The improvement came from lower CapEx, disciplined working capital and lower cash tax. Below that, other operating and financing items broadly offset each other with lower cash interest helping, although this is just timing from the refinancing of our sustainability-linked bonds where we pay our coupon now in November instead of May last year. And then remember, this EUR 102 million is after around EUR 19 million of cash outs related to the footprint optimization. So excluding those, free cash flow was EUR 121 million, which is the right basis to compare against our full year guidance. That cash generation flows through the balance sheet and net debt came down to EUR 1,779 million. That includes EUR 61 million of lease liabilities from 1,861 million at year-end and EUR 1,948 million a year ago. So leverage improved 2.6x our last 12 months adjusted EBITDA, which is down from 2.7x at December. And I would note this is after the dividend paid in June. Because our shareholders overwhelmingly chose to take the dividends in shares rather than cash, the actual cash outflow was very limited to just EUR 11 million. So we returned value to shareholders while continuing to deleverage. And finally, the financing structure and liquidity. Total borrowings were 2,193 million against EUR 440 million (sic) [ EUR 414 million ] of cash, giving 1,779 million of net debt. Our debt is well spread across our sustainability-linked bonds and our conventional bonds with maturities out to 2033, plus the Term Loan B and two undrawn revolving credit facilities. A significant part of our floating rate exposure is hedged through interest rate caps, so we are well protected on rates. Total available liquidity was EUR 976 million at the end of June, which is up on the period, and we have no significant debt maturities before 2028. So we are in a very comfortable position on liquidity and the maturity profile. And with that, I hand back to Patrice for the outlook.

Thanks, Cristina. So about the outlook. At the end of H1, we are on track. First half is in line with our expectations despite a much more difficult Q2 impacted by inflationary situation with the Middle East situation. Within this context, the company is demonstrating its resilience. The discipline and good execution of our footprint adaptation in just few months is going to support our performance. Therefore, we do remain confident in our ability to meet 2026 guidance. Then obviously, assuming no significant deterioration of the situation in the Middle East crisis situation, we confirm our guidance for full year '26. And as a reminder, we aim to generate an adjusted EBITDA of around EUR 700 million and a free cash flow of around EUR 220 million, excluding the [ restructuring ] cash out plan in relation to our footprint optimization. With our industrial adaptation plan being completed, we remain focused on strengthening our competitiveness, cash generation and deleveraging by delivering PAP savings and keeping CapEx and strict control of our cost and CapEx around 8% of sales. So thanks a lot for your attention, and I give you back the floor for the questions. Thanks a lot.

[Operator Instructions] The next question comes from Paco Ruiz from BNP Paribas.

I have 3, if I may. The first one is on cash flow. And you reached EUR 120 million cash flow this quarter with a very, very low CapEx to sales. So increasing CapEx in the second half that will mean a delta of around EUR 70 million extra. So what is going to offset this situation in order to reach to your free cash flow target? The second question is if you could give us some visibility on the volume situation in Europe for the second half of the year. I mean we have seen that Central European continues to be weak. Now Argentina and Chile looks weaker than initially expected. So what is your thought on this? And the third one is if you could give more detail on the cash component of the restructuring in the cash flow. I mean you say EUR 19 million this semester. What is missing for second half and for 2027?

Thanks a lot, Paco. So I'm going to take the question about the volumes, and I will let Cristina with the two cash questions. So about volume, and maybe to start with, just to give you some color about H1. So you have understood that our group volume are broadly flat in H1, mainly impacted by control volume decline in Germany. And excluding Germany, our volumes at the group level are low single digit up. We see Southwest Europe up low single digit in H1 and Q2 and all countries being positive. LatAm, we have in H1 volumes slightly down but with Brazil being quite positive, mid-single digit in H1, and we can say even high single digit in Q2. So this is the context in which we are. We -- for the rest of the year, we do see something which is going to be relatively similar. So it means at the group level, we're going to be broadly flat. And we don't want to bet on any volume increase, but we want -- as we explained already in Q1 and especially at the beginning of the year, we want to focus on our self-help measures to deliver our growth. So this is how we see, as we speak, the volume situation for Verallia in the context of a weak demand globally in Europe. Cristina, for cash?

Yes. So for cash, as you mentioned, yes, we do expect a much higher cash outflow on CapEx. And this is why we are actually not raising our guidance. So as you know, for the first half, the tailwind comes from some structural actions like cash tax and discipline. And this is what we keep for the second half. So essentially, what we are going to offset against CapEx is working capital and as I mentioned, cash tax and discipline. So you will see a slightly lower free cash flow for the second half.

And on the restructuring cash outflow for the coming semesters?

So the reason why we're going to have a higher outflow in the coming semester, it's because we are also going to pay out the U.K. and the France restructuring plan.

But you have understood Paco, that cash out was EUR 19 million in H1. And the rest, as I mentioned, is going to be split between a part in H2 and we still have some remaining in H1 next year.

The next question comes from Saul Casadio from M&G PLC.

Apologies for the voice a bit under the weather. First question is on your spread, which turned negative in Q2. Wondering whether you can provide an outlook for this component for the rest of the year and whether you think that your self-help measures will be able to offset that?

Thanks a lot for this question. So about the spread, as you mentioned, obviously, we are positive in Q1. We are negative in Q2, mainly coming from the inflationary effect from the Middle East situation. On energy, you do remember that we are hedged at 80% in Europe. So obviously, we are impacted by the 20% nonhedge part, which is despite the fact that we are in deflationary situation compared to last year, obviously, we have an adverse effect in energy in Q2 versus Q1. And then we have inflation as well on all the [ plant ] related costs, speaking about logistics, speaking about packaging, et cetera. What obviously difficult to say what is going to be next. But in this current environment, we do maintain our guidance. And obviously, what is going to be supporting our performance is the restructuring plan we did in Europe in quite a few months again. I think it was a strong performance of the team and getting the full impact in H2. So in other words, the H2 performance is going to be supported by this EUR 20 million savings coming from our footprint adaptation, which is going to offset the inflationary situation we are seeing as we speak, which was -- which impacted Q2.

Okay. Okay. And on the capacity side, do you think you need to do more? And can you provide some measures of capacity utilization if you have some idling just to give a sense of what is the state of the art of the existing capacity in terms of utilization and whether there's potentially more to come there?

Yes. We do not plan -- so you understood that we have done quite a significant part of the job of adaptation in Europe, especially in H1 this year. As a reminder, in Germany, we used to have 10 furnaces running. Now we are running 6 furnaces, which do allow us to make an optimization of our business and profitability of our business as it has been shown by Cristina. So this is quite significant in Germany. We've done the additional one in Cognac one in U.K. And as we speak, we do not plan to do any additional capacity reduction because the forecast we see even within a small growth environment, we do not need to do it. We have -- as we speak, we have a few points of underutilization, mainly driven by the inventory control we want to keep. But I would say it's not material to justify any additional capacity adaptation as we speak. So no more adaptation to come on our side.