Vidrala, S.A. (VID) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and welcome to the conference call organized by Vidrala to present its 2022 first half results. Vidrala will be represented in this meeting by Rául Gómez, CFO; and Iñigo Mendieta, Head of IR. The presentation will be held in English. In the Q&A session, questions will be also answered in Spanish. Nevertheless, it's strongly recommended to post questions in English in order to facilitate understanding of everyone. In the company website, www.vidrala.com, you will find available a presentation that will be used as a supporting material to cover this call as well as a link to access the webcast. Mr. Mendieta, you now have the floor.

Okay. Good morning to everyone, and thank you for the time that you dedicate to attend this call. As announced, Vidrala has published this morning its 2022 first half results. And additionally, we have also published the results presentation that will be used as supporting material to this conference call. Following this document, we will dedicate the first part of our exposition to briefly explain the figures released today to devote afterwards as much time as necessary to discuss on the business performance in the Q&A session. So starting with the main magnitudes. In the first half of 2022, we achieved, as most relevant business figures, revenues of EUR 651 million and EBITDA of EUR 112 million and net income equivalent to an EPS of EUR 1.9. Net debt at the end of the period stood at EUR 215 million, which is equivalent to a leverage ratio of 0.9x the reported EBITDA. Turning to Slide 4. We look at the top line performance, analyzing the annual variation of revenue broken down by concepts to arrive at the reported figure of EUR 650.8 million. As it is shown in the graph, this figure is the result of an organic growth of 21.8% and incorporating the effect of the currency, the reported variation amounts to 22.9%. Following the order of key business figures referred to at the beginning, we analyze with exactly the same breakdown, the variation of operating income. 2022 first half EBITDA amounted to EUR 112 million, reflecting an organic decline in this case of minus 25.4%. In reported terms, EBITDA decreased by minus 25.1% in the period. These operating figures resulted in an operating margin EBITDA over sales of 17.2%, which represents a contraction of approximately 11 percentage points compared to the 28.2% registered in the previous year. Taking a detailed look at the performance quarter-by-quarter, we can see how our pricing adaptation initiatives, and a more stable global energy market has enabled us to recover more -- let's say, normal margins consistent with the guidance that we announced back in the month of April. Going down to the income statement. Net profit obtained in the period amounted to EUR 56.3 million, equivalent to EUR 1.9 per share which reflects a decrease of minus 30.8% over the previous year. Let's analyze now free cash flow generation in detail. We'll do so with the help of the chart on Slide 9, which reconstructs the cash conversion accumulated for the last 12 months in order to fully normalize our annual cash profile. So starting from an EBITDA margin of 19.1%, we have dedicated 10.1% of sales to investments. And initially the aggregate of working capital, financial and taxes, represented a cash outflow of 7.7% of sales. As a result, free cash flow generation stands at 1.3% of sales. Finally, net debt at the end of the reported period closed at EUR 215 million. And as a result of this, the leverage ratio stands at 0.9x EBITDA. And now before turning to the Q&A session, I pass the word to Rául, so that he can extract the main conclusions or highlights and make additional comments that he considers appropriate.

Well, good morning. Thank you. Thank you, Iñigo, for your great introduction, and thank you all for your time today attending this conference. Well, let me conclude with some basic remarks before going directly to the Q&A. You will surely agree with me that we are living quiet [ particular ] times. I will try to summarize how we see the business today, and particularly, how we are managing current priorities based on 3 main factors. First, most important, demand for glass containers in our regions of activity remains quite strong, exceeding our expectations. And this is due to a number of causes, and some of them are structural. That proves that glass as a packaging material has today a really bright future. Despite we are all very aware of the different potential global macroeconomic distortions we could soon face, this solid base of market conditions, combined with stock levels that are quite tight sort across the industry, give us some further probably higher than usual visibility over our sales performance in the coming months. And let me say this, looking beyond in the future, we invite you to keep in mind that glass packaging demand fundamentals have proven to be quite resilience under different economic context in the past. Second factor, not less important and much more focused on the very short term. Cost inflation is exceeding everyone's expectations. And this is now today basically a matter of what is happening around the European natural gas markets that are crazy volatile. Despite we have been able to recover, as Iñigo said before, more normal margins in the second quarter. Despite we are today more protected against energy inflation than at the beginning of this year and despite we are solidly executing price adaptation initiatives, the reality today is that natural gas prices have doubled in only 4 weeks. So should natural gas markets remain so stressed as they are today, it could be difficult for us to avoid some margins deteriorations from the current level temporarily. As energy markets stabilize or alternatively, our prices are progressively fully readapted. Please, at this point, don't forget that this is mostly due to an external factor that affects all of us that should be corrected soon in any sense. And energy markets are changing every day, every hour. I'm sure we will go deeper in the discussion of these points -- of this point during the Q&A. And third and final factor, our cash generation in the short term will be determined by our more unpredictable margins, the abnormal temporary movement in working capital caused by the inflationary context explained before, and a CapEx plan that remains intense as planned. We will have a voluntary plan to invest more than before to reduce cost, to improve our competitiveness, to realign our capacity, to expand the business, to secure service and better serve our customers. All this, as I said, will consume some cash in the short term. But as a good proof of our confidence in the future and our confidence in our strong financial position today, we are, in this context, executing a new share buyback program. In conclusion, we can say today that we are managing the context more protected than before. Fully context -- fully conscious, sorry, of the situation in the short term. And we are doing this under the warranty or the credentials of a business profile that has been able to recover more normal margins very recently. So we do keep a clear view on the future. Please let me finalize remarking that demand for glass is there, and quite strong.

Okay. This completes our exposition. So we now give way to the Q&A session.

[Foreign Language] [Operator Instructions] The first question comes from Paco Ruiz from Exane BNP Paribas.

I have 3 questions. The first one is on the energy surcharge because Merino Rául has commented that if gas prices continues to be at these levels, your margin will suffer. But will it be the same with the absolute EBITDA or could we think on your words that the clients are more reluctant to offset the energy surcharge prices of EUR 150 per megawatt hour of the gas. The second question is on the working capital. You mentioned that -- I mean this has some increase on prices and cost has -- may imply a huge increase on working capital and obviously showing in the figures. So how temporary it is? And also in the working -- in the cash flow statement this quarter, you have EUR 36 million of -- on provisioning, mainly due to CO2 rights. Could you elaborate a little bit on this and how sustainable are these? And last but not least, just if you could give us the data on volume growth in Q2 isolated?

Okay. And thank you. Thank you, Paco. And your first question regarding the -- our pricing initiatives. Well, let me start saying that, obviously, under the current conditions, our capacity to recover absolute EBITDA in value will be easier than EBITDA margins or -- in relative terms, obviously, obviously. Let's say, and I will try to provide as much clarity as needed in this point. Let's say that today, 1/3 of our sales are concentrated in contractual pass-through mechanisms under multiyear agreements. These are mostly based in the U.K. and Ireland and Italy. An additional 40% of our sales, mostly in Southern Europe, for this, we executed an energy surcharge price increase during the second quarter of the year and decided very recently to fix most of the energies posture associated to these volumes, and to fix the price increase in and around an increase that is today around 25%. And we did this in an effort to avoid market share losses as our competitors were following more relaxed pricing initiatives. And the remainder of our sales are particularly based on direct negotiations. So all in, if we consider that today, 2/3 of our natural gas consumption for the remainder of the year, for the second half of the year, is protected by hedging, it's -- 2/3 for natural gas is 62% for our total energy consumption. And if we do consider that today, our average price increases exceed 25% annual, this should be enough to preserve current margins if the -- for the percentage of our energy position that is under hedging. The problem or the issue is the open position. Having said that, all we need today is for natural gas prices to revert to levels of 3 weeks ago. That means the business is prepared, is more protected and prepared to maintain margins as they were in the first half of the year, even if natural gas prices are slightly above EUR 100 per megawatt, a figure that is extraordinarily high. The problem is that today energy markets or energy or natural gas prices have doubled in only 2, 3, 4 weeks, and we cannot avoid. And there's such a sudden movement, some margin deterioration is certain. This -- we wait for energy markets to stabilize, or if not, we will be forced to readapt our prices. And probably, we are able to do this only in weeks, months if that's the situation. Second point, working capital, Iñigo, please?

Just to give the figures background, and then we'll add some additional comments. For the year-to-date, let's say, free cash flow generation, working capital is cash outflow in the range of EUR 125 million. And for the figures that we have presented in the results presentation, which is last 12 months, working capital is a cash outflow of slightly more than EUR 60 million. Okay.

Yes. Let me add on this point that -- and I assume that this is a point of discussion today, obviously, our increasing debt shown in our numbers is explained by, first, obvious lower operating cash flow generation following the EBITDA variation, and more important, by a significant easy-to-understand increase in working capital because we have started to suffer a normal OpEx increases inflation since the beginning of the year. And this is fully cash out. And we basically started to recover in the second quarter this inflation through higher sales prices that are not fully cashed in following normal payment and receivable periods. And that's the main reason of this extraordinary working capital variation. For the remainder of the year, this effect will remain as long as prices during the end of the year are expected to be higher than a year ago or even higher than today. And some of this will be cashed in 2023, okay. The rest of our debt variation is, basically, in my opinion, explainable. If we consider that we are executing our planned intense investment plan, and -- okay, focusing on your -- or the reconciliation of our debt movement. Finally, to complete this understanding, please keep in mind that we are boosting above last year levels, our share buyback program.

Okay. And on your third question, Paco, volumes prices. And you can assume that prices in the second quarter are slightly above 30% with volumes slightly down in the range of 5%. This is for the second quarter stand-alone. And for the, let's say, year-to-date, the 6 months of the year, prices are slightly above 20% with volumes more or less flat.

The next question comes from Alberto Espelosín from JB Capital.

Yes. Most of my questions were just asked by Paco. I but I still have 1 and 2 follow-ups from Paco's questions, if I might. First is on volumes, and it's actually a clarification on your business outlook. So you commented that sales forecast for the second half of the year remain stable. Could you please share this sales forecast in terms of volumes? My second one is a follow-up on Paco's question on the price formulas for the rest of the year. If I understood correctly, 2/3 of your sales and costs are currently fixed. Could you please specify at what margin? And why are you not being able to do these fixed prices out for the other 1/3 of your sales in the U.K. And the third one is -- I did not really hear the answer. I don't know if you provided the answer on the EUR 36 million of provisions due to emission rights this first half of the year.

Okay. Thank you. Well, first question regarding volumes. Well, first of all, demand is -- still today is quite strong than our expectations all across our regions of activity, particularly in Southern Europe that is a region probably more benefited by the -- by some short-term drivers that are boosting demand. For example, reopening of activities, boost on consumption levels, tourism and the rest of things. But demand is pretty strong and exceeding our previous expectations all across the business. Having said that, our sales volume performance in the short term from now will be fully determined as planned. This is not a surprise for us. And if it is, it is probably more a positive surprise by our exceptionally low inventory levels. And we assume we understand from our customers from what our competitors are publicly saying that this shortage, that these tight inventory levels, are basically common around the industry. But in our specific case, we're determined. We limit our capacity to growth on volumes in the second half of the year. Probably this is -- you will agree with me that this is positive, looking at the next year. The reasons for -- of why this is happening, these low inventories are happening is basically, it's a solid demand. And that means finalizing our comment that our positive sales forecast for the remainder of the year are basically due -- basically based on pricing -- on the pricing driver -- okay, price increases. Volumes should be flat for the remainder of the year, and that won't follow or reflect real underlying demand conditions, that will be basically determined by our short or tight inventory levels. Second question, probably more important, I will try to be even more clear. I say that approximately 2/3 of our natural gas consumption, more than 60% of our total energy consumption for the second half of this year is now protected. This is a higher percentage than at the beginning of the year. So we deliberately increased hedging during the second quarter of this year, but the remainder 1/3 is open, exposed to an abnormal level of inflation as natural gas prices have, as I said before, doubled in the last 4 weeks and more than 10x, 15x higher than a year ago, following the difficult events that we are seeing, particularly in Central Europe, regarding apparently growing risk of future gas supplies from Russia in these areas. Simultaneously, our prices are today seeing increases of more than 25%. 1/3 of our sales are protected by contractual pass-through mechanisms under multiyear agreements. That will take some time. Not much time, but some time to be fully efficient. And this is enough -- this hedging protection, these price increases, these contractual price adjustment formulas, this is enough to preserve margins as they are today for the portion of our cost -- I mean of our energy costs that are today protected under hedging. But obviously, understanding the sudden increase of natural gas prices concentrated in a couple of days, in a couple of weeks. This is today, things can change quickly, not enough to avoid the deterioration in the portion of our open energy position. And we need -- looking at the short time, we need some time to adapt our prices to this energy environment, okay? This industry is not prepared to such sudden movements as you can imagine. But maybe only weeks or months or maybe energy market stabilize. And before you ask, the magnitude of the deterioration for this open position changes every day. But you can make your own calculations if you estimate that -- okay, the situation is this, 1/3 of our energy costs are exposed and today doubling. Our margins are still positive, but below recent levels. And my final remark, just to give you some visibility and optimistic clarity, I hope. We don't need natural gas prices to revert or go back to previous historical levels, something that is probably not realistic today, unfortunately. We only need natural gas prices for this open position to go back to levels of 3 weeks ago, as I said before, above EUR 100 per megawatt, Okay. And if this -- we will monitor the situation very carefully. If this finally doesn't happen, we will quickly, efficiently apply -- be forced to apply new pricing initiatives to readapt our prices. Is that clear?

Finally, Alberto, on your point on CO2 rights. The deficit that is registered is similar to the deficit that we have in December, so no big changes on that. And the provision only reflects the increase in prices on the -- prices of CO2 rights, both in Europe and the U.K., okay? If you want, in any case, to have further detail, we can have a quick chat after the conference.

The next question comes from Luis de Toledo from ODDO BHF.

Two questions from my side. The first one, referring to -- I mean the guidance, obviously, you removed the comment in the presentation. You made some remarks. Obviously, it's a lot of -- not really affecting the guidance. But would you speak to your previous comments regarding the level of EBITDA margin for the remainder of the year above 20%. The second question refers to the segment reporting. U.K. profitability levels have underperformed a little bit. Do you associate this to the pricing formula or -- because we can also see some inflation, particularly in personnel? I don't know if you can refer to the U.K. situation in margins.

Okay. Thank you. Thank you, Luis, for your question. Well, I will -- again, try to be very clear on this. As long as the situation on natural gas markets are particularly volatile today, and despite, we are much more protected on energy hedging and on prices than before, today, our guidance for the very short term, I repeat, for the very short term, cannot be maintained, okay? That's the -- that's all the clarity we can give you. What do we need for our guidance to be maintained for the remainder of the year, probably for the -- for last quarter of this year, is energy markets to stabilize, I will say, a little. Not to recover or revert to historic levels or our prices to readapt to the new reality for this small portion of our business, sales and costs that are not fully protected, okay? The portion of our business that is not protected is small, but the variation or the inflation that we are seeing in this small portion is so high, that will, unfortunately, in the very short term, temporarily affect our margins.

Okay. And on your question, Luis, regarding results by business segment, we can see, as you were seeing in the U.K. and Ireland, higher deterioration of margins in the second quarter stand-alone. Please consider that the levels of margins are similar to the region of Italy, that is also more related, as you were already pointing to price adjustment formulas with -- whose path of execution of the price increases is different to the rest of the business. And this is the main reason. Of course, there are some also differential demand conditions, some differential operational performance. In the case of the U.K. and the second quarter in 2021, there is also a tougher comparison basis. So it's a combination of factors. But the main point as you were already saying is the fact that it's more exposed to price adjustment formulas with different path of execution of the price increases.

Your next question comes from Bruno Bessa from CaixaBank BPI.

I have a few questions. Starting with the price increases you mentioned you would need to offset the current environment in terms of natural gas. And you mentioned already that you are increasing prices above your direct competition. So my question is, what is the room and the volatility that you see for Vidrala to be able to effectively implement more price increases if this backdrop of natural gas costs remains as it is? So this will be my first question. And next 2 questions related also with natural gas. So the first one, there have been news of proposed reduction of natural gas consumption, particularly during August. My question is, how will this impact your activity during the summer period? And the second question related with natural gas. I'm just wondering and looking a little bit beyond summer. If you have any contingency plan in case there is a shortage of natural gas during the coming winter. And -- so this will be the third question on -- I would like, if I may, just a final one on cash flow. I think in the last results conference call, you mentioned that you expected positive cash flow over the next 9 months, so until the end of the year. So we saw this relevant cash consumption during Q2. My question is, is this view has changed after the performance in Q2?

Okay. Thank you. Thank you, Bruno. Well, your first question is a relevant point, I understand, okay? Well, it's obvious that we successfully increased prices and recovered margins during the second quarter of this year. And we did it keeping our prices quite above as long as we can see from the reactions of our customers, quite above our average levels in the industry or quite above our competitors, okay? This is something we needed to do. But this is something we need to take care of, or we need to manage very carefully because we now need to avoid the structural market share losses as you can imagine, okay? So that's the reason to -- for having changed our temporary certain surcharges in fixed prices -- fixed price increases, okay? Simultaneously, we did it increasing our hedging or protecting more our business, okay? The reality today, and we will try to focus the situation or to monitor the situation carefully for the next months, particularly competitive dynamics, is that differential hedging positions during the first half of this year have created differential pricing initiatives to protect variance. And this is abnormal. Hedging, you will agree with me is, could be positive or negative, could be higher or lower in the short term, but is temporary by nature. In the long term, we will all in the industry face similar cost conditions, particularly energy cost conditions. We don't know what these conditions will be. We are almost sure that at current price increases, even Vidrala's higher current price increases, are not yet enough to fully recover cost inflation, if we exclude or remove the temporary effect or protection of energy hedging. I mean if we include real market conditions in our energy cost and not the effect of hedging. And the industry -- or the demand, sorry, is still quite solid, and inventories are low. And our customers are demanding more and more bottles from us and from our competitors. So I should say that this should be a constructive starting point for the needed price increases, we will probably unfortunately need in the coming months, okay? But it's true that the competitive or differential competitive dynamics will be a point to monitor. And it's also true that Vidrala is successfully, but differentially increasing prices more than average in the industry. Okay. Your second and third point, if I understood them well, are basically related to the same. If not, let me know, please. This situation on natural gas markets and risks or growing risks of potential supply shortages caused by the events we are seeing around Russia and Ukraine after the summer. What we can say today is that we are monitoring the situation very carefully. That we are today, unfortunately, more concerned about natural gas prices than about the supply of natural gas. Following comments from experts, governments, politicians, big utilities, it seems evident for us that the gas supply infrastructure is particularly solid, more isolated, and less dependent to Russian gas supply in our regions of activity. This is the case of Spain, Iberia, the U.K., Ireland and even Italy that give us a significant level of comfort about this scenario of gas supply cut after the summer. So I would say that there was a scenario under which we are working is the worst scenario, still, in my opinion, unlikely. It's a potential reduction on natural gas supplies and not a full complete supply cut. I repeat in our regions of activity, maybe or it seems evident that other countries in Europe -- in Central Europe, are apparently under a more risky -- under more risky circumstances. Something that I would say should help dynamize different competitive drivers or dynamics that should be also supportive for the price increases we will probably need over the next coming months, okay? Having said that, we are internally, basically -- in terms of contingency plans, we are internally basically prepared to reduce consumption of natural gas and to substitute natural gas through alternative sources of energy, heavy fuel, gas oil. Actually, we are doing this since the beginning of the year just to reduce cost. So I will say to finalize this that if the worst scenario in terms of potential Russian gas supply cuts after the summer becomes a reality, our problem will be more the price to supply natural gas in our regions than the quantity or the amount of gas that is supplied in our sites. And your final comment, our guidance on cash flow, well, it's true. What we are seeing today is that a -- due to a combination of factors, lower EBITDA during the third quarter, some temporary nonrecurrent use of cash for working capital and our intense investment plan that is fully on track. We now expect a negative cash flow -- free cash flow variation from now till the end of the year despite our margins recover sooner than expected, because energy markets soon stabilize, or we are able to quickly readapt our prices.

And just a quick follow-up, just to see if I understood correctly. So you expect net debt to increase until the end of the year at constant levels. Is that correct?

This is correct. I'm saying that cash flow -- free cash flow generation will be slightly negative from now till the end of the year. And we will keep on -- as a proof of our confidence in the future and our financial position, we will keep on buying back shares or accelerating share buybacks, and that will also determine our condition on our net debt. That will be -- as you say, you are right, it will be at the end of the year higher than today's level.

The next question comes from Iñigo Egusquiza from Kepler.

Most of them have been already answered. So I have just 2 follow-ups and an additional question. The first question is on the demand that you are mentioning that it's quite strong exceeding your expectations. I don't know if you can share with us. According to you, the visibility is higher than in the past. So what can we expect for the summer? And also after the summer, September and October because it seems that we are going to have a pretty strong summer. But as from September, everybody is waiting like the perfect storm. So if you have any indication for glass demand? That's the first question. The second question on the natural gas, just a small question. After all your answers on the topic, what is the exposure of Vidrala to the Russian gas, if any? And third, just to change the topic to a different one, consolidation, I don't know what is -- how is the situation today. In your case, you have recovered the margins, but now margins are, again, suffering and below the level you have achieved in Q2. So I would guess that other small players are suffering as well, margin deterioration, natural gas keep going up very rapidly, as you have mentioned. So I don't know what is exactly the situation in terms of consolidation in the industry?

Okay. Thank you, Iñigo. I will -- if you let me, I will start with your last question? Well, M&A -- what we can say is that despite our financial position remains strong today and despite that we are seeing some interesting dynamics around the industry, not only in Europe, it is time for us now to be prudent and structurally focused on recover more normal margins. So as despite we will remain careful observers, let me say that our -- about what happens around the industry, our relevant corporate transaction for now -- from now for us is unlikely today. Having said that, there are a few other smaller potential transactions we are working in that are part of our plans that are aligned with our investment program that are basically focused on diversifying the business, verticalization, partnering with suppliers and customers to secure sales, to secure supplies, to improve margins or to improve our control over the business. And we are working on this. So I will say in terms of M&A that we won't be quiet and you won't be materially surprised. And whatever happens in the future, please think that this is the result of a long-lasting process of analysis and negotiation, okay? Well, regarding your previous comments, your first question is around demand. I should say that demand is really exceeding expectations. In some regions, that you can imagine in Southern Europe, the organic demand growth that we have seen during the first 6 months of this year are not significantly below double-digit growth. This is a figure abnormally high. Okay. The drivers for this expectational growth are -- we should assume that some of them are nonrecurrent, but some of them are structural. What we can say is that or what we can see is that the inventory levels in the industry are tight. There is a real shortage of supply in the glass container industry, particularly in Continental Europe, particularly in Southern Europe. Our -- actually, our inventory levels are shorter or tighter than usual. We can see that the inventory levels in our customers are tight as well. And we can imagine and we are trying to monitor this more carefully than in the past that inventory levels in the customers of our customers are also tighter or shorter than usual. So that should give us some level of confidence, visibility over the rest of the year. And if you combine this with reality that we are today, losing sales because of our limited availability of product because of our tight inventory levels. That means that our demand -- sorry, sales performance over the next coming months will be much more determined by our production capacity or production levels than external demand conditions, okay? We cannot avoid the message that macroeconomic conditions are probably getting worse, and that could have an impact on demand for glass containers after the summer, particularly if we consider that the comparison basis is -- today, basis is quite strong. But this is not the point for us. This is not our main point of concern. And the industry and our customers are so affected by limited availability of glass bottles that could give us some level of confidence. Our point today is how to recover margins and how to manage the current inflationary context.

And finally, Iñigo, regarding your question on Russian natural gas, our exposure -- the exposure of the group is something in the range of 2% to 3%. So I would say that you can assume that we have a very, very limited or almost no exposure to natural gas coming from Russia.

The next question comes from Beltran Palazuelo from DLTV.

I have 3 little questions. One regarding hedging, what is exactly your hedging position? And how you expect it to play it in a nonefficient market, like natural gas? Then regarding your CapEx -- your strong CapEx program. Could you say how much your capacity is going to increase, let's say, in the next 3 years with a strong CapEx program? And then regarding 2023, and regarding, let's say, a good level of margins, which margins are you going to fight for? Which is, let's say, your level you're going to fight for in the next 2, 3 years in order -- with your clients with price increases in order to see your business perform adequately?

Thank you, Beltran. Well, hedging -- today, our hedging position is 2/3 of our natural gas consumption for the remainder of the year is protected by hedging. And this is for natural gas. For our total energy consumption, considering that the remainder of our energy consumption is basically electricity or power, with market dynamics that are quite different than the crazy dynamics that we are seeing on the gas markets for the total energy is 62%. 2/3 natural gas, 62% of total energy for the remainder of the year, for the second half of this year. You asked, how we are planning to manage the current circumstances in terms of our hedging. We are much more protected, significantly more protective than at the beginning of the year. Our prices are growing solidly higher than at the beginning of the year. The problem is the inflation that we're seeing in the remainder open energy cost position. And it's time for us to wait a little to see if energy remarket stabilize or to accelerate new pricing readaptation initiatives to offset this situation, okay? CapEx. We see that CapEx this year will be around EUR 140 million, EUR 150 million, nothing surprising, I hope. This figure is almost double the figure requested for our business profile today for minimal maintenance or pure replacement. So we are doing more than this, more than pure replacement, very deliberately, investing. And we said -- we anticipated this to you before, investing in modestly expanding selectively our capacities in the U.K., in Italy and in Portugal. We are investing in new technologies for cost reductions, particularly, and we are investing in sustainability, making our operations more sustainable, for example, self-supply power generation facilities that not only put us in a better, more sustainable place, but do have real attractive returns. We want our operations to be more sustainable and more profitable. I repeat, a significant portion of our investment plan and the execution today is deliberately abnormal, above replacement levels. And as a proof of our confidence in the future, we are executing this plan without any change till today, even after some things around the industry, the business context, particularly energy inflation, are surprising all of us in the industry. So that gives me room to speak a little about 2023. Well, 2023 is particularly unpredictable now. And the level of unpredictability is mostly -- I mean margins for 2023, okay? This level of unpredictability is mostly due or based in only one factor, the natural gas factor, okay? What we can see is that, first, our sales volumes in 2023 will remain, let's say, at a minimum, stable. And this is -- I'm saying this fully aware of potential or the impact of potential macroeconomic conditions. I mean fully aware of the fact that on a macroeconomic point of view, 2023 is probably a tougher, more difficult year than 2022. But please keep in mind, our explanations around the inventory levels across the industry, inventory levels across our customers, particular inventory levels inside our business, inside Vidrala. Second, we expect prices to be progressively adapted to whatever is the circumstances around cost inflation -- manufacturing cost inflation, including natural gas. We do have next 40%, 4-0 percent, of our total energy consumption under hedging for 2023 at particularly lower than current market levels. And that should give us some minimal level of confidence for 2023 to crystallize or to materialize some positive gap between prices and cost. Also if we consider that internally in 2023, we should have additional effects of our -- in terms of cost reductions following our intense investment plan on track, our internal cost, our internal industrial footprint will be more competitive, cost competitive in 2023 than in 2022. So having said that, it's easy for us to give you a number. It's easy for us to say today that margins will be higher in 2023 than in 2022. And this is mostly due to the fact, as we have been trying to explain during all these conference calls that the circumstances that are affecting our margins today are basically abnormal, extraordinary, volatile, inflationary certain or temporary circumstances. That will be corrected.

Okay. And maybe if I may follow-up regarding M&A. Let's say, an excellent company -- industrial company, how Vidrala is, and excellently executed M&A in the past. As I understand, let's say, M&A and consolidation, it should be done countercyclically in order to get the, let's say, the best price possible. So why with a good balance sheet and with good assets, why are you being, let's say, so conservative when exactly companies should do the other way around? You should attack when everybody is being conservative and being conservative when everybody is attacking. So why that much caution in the M&A execution and consolidation of the industry?

Well, Beltran, thank you very much for defining us as an extensively conservative. Okay. So I think that this is very real. And I think that this is a good point under the current circumstances that personally help me focus on the long term, okay? Let's say, that maybe if the industry is leading a process of transformation, is particularly in the part of the industry dominated by a smaller, less sophisticated players that in the past have been particularly profitable. Let's say that the current inflationary -- extraordinarily inflationary context that we are living will nothing but dynamize a more constructive process of consolidation. So it's time for us to not be in a hurry, to keep our eyes open, and to be financially prepared, and we will do this, okay? But my obligation today is to let you know that our first priority is to gain some level of visibility about our capacity to recover margins. We have created, let me say that, some credentials because we have been able to recover margins basically through price increases initiatives during the second quarter of the year. A second quarter of the year that has been still particularly inflationary and particularly in [indiscernible]. So we need this. This is our first priority, but I promise our eyes remain open, and we won't lose particularly attractive opportunities if these arise. This is not the case today. Anyway, as I said before, we are working in some particularly strategic potential M&A actions that will be probably not particularly relevant for you, not particularly material in terms of the changes of the business. But behind this, there is a number of -- there is a lot of strategic rationale. So you will see us active and probably time is starting in our favor.

Your next question comes from Ignacio Romero from Banco de Sabadell.

I have a question to clarify the market share situation. If I understood correctly, you had a volume decline in the second quarter of 5% in a growing market. Therefore, you lost some market share in the second quarter. So my question would be, is that so? And how much do you estimate that the market grew in terms of volumes in the second quarter? And a second question related to this is, do you -- if I understood you correctly, do you plan to gain back that lost market share in the next quarters when your competitors are forced to increase prices because the hedging strategies or their hedging instruments, as time goes by, start to -- well, to reflect a higher energy cost, and therefore, they are forced to increase prices. So is that the situation? Or there is something you could please tell us about this, please?

Okay. Thank you very much. Well, first, regarding market conditions, organic demand growth. It's difficult to say specifically, but we do estimate that the organic demand for glass containers around Western Europe and the U.K. during the first half of this year is growing by slightly more than 5%. More in Southern Europe because of abnormal effects as the reopening of social activities, consumption, tourism and the rest of things that you can imagine. Probably there is also a certain effect of restocking from our customers and from the customers of our customers. But the reality, having said that, is that the organic demand performance is exceeding all or everyone's expectations, and this is a very good starting point. This is a very solid starting point because we need to readapt our prices. We are not taking -- we are not capturing this organic sales -- organic demand growth in our sales volume performance because our inventories are tight, because we do have a limited capacity to supply our customers' request. And that means that some of our -- the rest of the industry, some of our competitors are taking some market share in the short term, temporarily, okay? We have even intensified this process that is not critical, not yet critical and is mostly deliberate or under our control. I was saying we have even intensified these market share movements because we obviously increased prices during the second quarter of this year above the industry average or above our competitors, and that -- okay, even intensified this movement. For now in the future, our availability, our capacity will be probably more aligned. Our stock levels will be progressively more aligned with -- to supply more efficiently, the market. We can see that the rest of the industry is now particularly short on inventories. I hope you are able to confirm this with comments from some of our competitors, but this is the reality we can observe from our point. And that will help us to progressively recover or normalize our market share. And any movement, as I said before is not critical and is basically under control. What is critical is the different pricing dynamics we are seeing, or we are to see from now around the industry across different competitors. And what we need is for our competitors to be, I will say, more disciplined in the price increases that the industry needs today to fully capture the cost inflation we are suffering, if we exclude energy hedging that is temporary by nature, okay? That will be the focus to monitor in the next coming months and not the market share or even not the demand -- organic demand performance.

The next question comes from Manuel Lorente, Mirabaud.

Most of them has already been answered, but -- maybe one quick one regarding next year. I missed the number you gave in terms of natural hedge position for 2023.

Sorry, Manuel. You mean for 2023?

Yes.

Okay. For 2023, I say that its 40%.

40%. Right. Okay. And just my final question. I tend to see you guys very concerned regarding natural gas position, which makes perfectly sense. But I see you very less concern regarding underlying demand trend. And I don't know I confer with that stand. You mentioned on a number of times that demand is pretty strong, but it looks like the vast majority of that 5% demand growth has been restocking driven. So -- I don't know. Do you have any other metrics regarding your positive stance on underlying demand for the remaining of the year in the context of the massive price increases that you have already implemented in these first time in the year?

Well, we are very, very aware of the circumstances that are happening across the macroeconomic distortions that we could face after the summer. We are doing our own internal calculations under different cases, even negative cases around or regarding what this could -- how this could affect our organic demand. But we are doing this with the confidence of what with our reality, that is the comparison basis this is high as some of the certain nonrecurring effects that are today contributing to this solid demand performance and this performance should soon disappear after the summer. But under this process of full realizing, please believe us that we are making our numbers for our estimations under a realistic view. Behind this, the reality is that our inventory levels are very tight. Inventory levels around the industry are tighter or shorter than ever, and that will give us some level of visibility for the next coming months, okay -- next coming months. Having said that, also, please keep in mind that we do have a particular plan, a strategy under which we are investing more than ever in the past to reduce cost, to improve competitiveness, to make our operations more sustainable and more profitable. But we are not expanding significantly our capacities. So our capacity of production in 2023 won't be significantly different than in 2022. So we don't need and we don't depend on demand -- on our growing demand in 2023. Actually, we have been preparing since some years ago since we decided to exit from value, you remember probably this. We have been preparing our industrial footprint to be much more focused on cost competitiveness than on market share -- than the market share gains. This is obviously probably good news for the industry, good news for our competitors, but our driver for future profitability will be cost competitiveness, our realigned industrial footprint and not market share gains based on realistic and on unrealistic organic demand growth. So that gives us a reasonable hopefully well supported level of confidence about the top line performance in the next coming months, okay? The priority now is cost and how to recover this cost on margins.

Okay. So it is fair to say that for next year, you are not expecting or your best case scenario is the fact that massive price increase will end up leading to demand structure?

Yes, exactly. Actually, what I'm saying is that in terms of our production capacity expected for the next coming months, we have no room to further improve our sales volumes, okay, in any circumstances in terms of organic demand. If we have some room that will be the result of some small potential internal corporate transactions, small M&As, as I said before, for example, a customer or a supplier taking some market share, but the reality is that organically, structurally our capacity plan in 2023 is basically very similar to 2022, and our inventory levels today should be slightly increased in 2023 to maintain a more, let's say, manageable internal business profile.

The next question comes from Fraser Donlon from Berenberg.

Fraser from Berenberg. Just a few questions from my side. So first one, just you mentioned this contingency plan, which you've made. Could you perhaps clarify -- and I know you're not completely exposed to Russia, but I'd just be interested to know how much of your production at the group level you believe you could switch to fuel oil or gas oil, which you mentioned? The second question was just on, I guess, the glass value proposition. Like, I saw, I think [indiscernible] because of the availability of glass and the cost of glass. And I just wondered if you have any sense that some customers are being forced towards other substrates like aluminum or whether indeed the price of aluminum is trending in a similar way as glass. And then the third and final question was just thinking about Germany. I know you said you're not looking to add capacity, but is there a scenario which you would consider kind of adding capacity in the event where maybe German glass production has to substantially decrease for a more sustained period of time?

Well, thank you very much. Three very interesting questions. Okay. First in terms of contingency plans against the potential gas supply cuts, okay? What we are seeing today is that apparently, gas supply, it should be more or less secured following the particularly strong infrastructures, we see in our regions of activity. This is the case of Spain, Portugal, U.K., Ireland and Italy. Also, we are seeing, and we are very aware of this. We are seeing today some politicians asking for consumption to be reduced after the summer at the levels of 15%. Simultaneously, we understand that theoretically, the glass manufacturing industry should be out of this request if this becomes a reality in the future because we should be identified as an essential industry as we were during the pandemic for different circumstances. So that gives us some level of comfort, okay? If in this worst case scenario, we are, for any government obligation, forced to reduce our gas consumption to these levels, 10%, 15%, 20%, we are basically prepared to do this almost in all facilities. We should be prepared when it happens -- if that happens after the summer, okay -- if that happens, in my opinion -- and this is a personal opinion. If that happens, the problem won't be supply of natural gas, will be the price to supply this natural gas, okay? That's my personal opinion, okay? Second, regarding alternative materials and the different pricing dynamics or competitive dynamics around different materials. Well, it's true basically the glass packaging industry is today competing against the aluminum beverage can industry as long as we are all both taking progressively market share from plastic due to dynamics -- very positive dynamics in terms of sustainability. Historically, the price of a -- for a customer of us for -- to supply a beverage aluminum can has been cheaper, [ 20, 25 ] cheaper than an alternative similar-in-volume glass bottle. That changed at the beginning of this year as long as aluminum -- as the cost of aluminum were -- was more than tripled. And as long as the industry or customer agreements infrastructure in this industry is more sophisticated than ours and is more dominated by automatic efficient price adjustment formulas or pass-through mechanisms. That means that the average price for -- to supply a beverage aluminum can is today growing, increasing much more than the price for a glass bottle. That's good because apparently, for the first time in years, maybe, for the first time ever, the price today to supply an aluminum beverage can is higher, more expensive than a glass bottle. That's very good, looking at the future. But the reality, to be fully realistic is that we have started to see a significant drop relaxation in the aluminum commodity markets, something that will be soon passed through prices of cans. And this has not yet been the case of cost in the glass -- for manufacturing glass containers. Why? Because of the abnormality that we are seeing around European natural gas prices, okay? That's the total reality of this. And your final comment. Yes, we are seeing certain European economies, particularly Germany, Poland, the Netherlands, even France, suffering relatively much more. I mean the glass industry, the glass packaging industry in those countries, suffering relatively much more. The abnormal inflationary pressures that we are seeing -- that we are suffering in our business. This is the consequence of the geographical positioning and the dependence on Russian gas supplies that will further -- this difference will further probably intensify in the short term, and this is creating new abnormal competitive dynamics -- I mean competitive differences. That should be -- maybe should be positive for us to create a more constructive pricing environment for the needed price adaptation initiatives we need to execute or to materialize in the next coming months. That will also probably create some capacity temporary or a structural capacity rationalization or capacity for payments. This is happening in Ukraine. And Ukraine was a natural exporting market for glass containers in Western Europe. This is not the case today. This is actually happening in some sites in Germany, in Poland, and that -- okay? Finally, understanding that this is the consequence of a very sad event that we would like you to never see. But this will probably create some level of confidence of our capacity or the capacity around the industry to readapt prices soon as we need.

There are no further questions by phone. I return the floor to Mr. Gómez and Mr. Mendieta.

Okay. There are still 5 questions that we have received via webcast. I would say that 3 of them on prices, on free cash flow and on hedging for 2023 have already been answered. Please, if you want to make a follow-up, just contact me after the call. There are still 2 questions without an answer. Okay. The first one is on the new share buyback program. the size and the timing. We have announced a new share buyback in the month of May for a maximum amount of -- 300,000 shares to be acquired for a maximum amount in terms of cash outflow of EUR 30 million and with the timing of -- and maximum timing of 12 months, okay. But in any case, we are currently acquiring shares. We have been for a month in a blackout because of this earnings release, but we are acquiring shares and probably we will finalize this share buyback program before the end of the year. And finally, there is also an additional question on stock levels. If the increase is due to higher valuation or to increase our stocks in unit items. Well, as Rául has mentioned during the call, we are still very tight in terms of inventories in the range of 65 to 70 inventory days. But we have seen stock levels slightly above June 2021, so slightly above 1 year ago. We are still below, in unitary terms, December 2021, okay? So part of this movement is also explained by the increase in valuation due to the current pricing and cost context, okay? So we have now answered also all the questions we received via webcast. So once again, thank you for time that you have dedicated to us this morning. And just remind you that we remain at your complete disposal for any further questions that may arise. Thank you very much, and enjoy your summer season.

Thank you very much. We can here see in some of your comments. That's great. Please enjoy your summer. Hope you enjoy your very well-deserved holidays. And please keep on consuming, drinking anything from glass. Thank you.

[Foreign Language] Ladies and gentlemen, thank you for your participation. You may now disconnect.