Verallia,Courbevoie

Hello and welcome to the Veralia H1 2024 Financial Results Analyst Call. Please note this call is being recorded and for the duration of the call, your lines will be on listened only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad. If you require assistance at any time, please press star 0 and you will be connected to an operator. I will now hand you over to your host, Patrice Lucas, to begin today's conference. Please go ahead, sir.

Good morning, everyone, and welcome to our H124 Result Call. As usual, Nathalie and I will go through our presentation and we'll have our Q&A session. I will share with you some key highlights and focus on market information. Nathalie will present in detail our numbers, and then I will come back on our guidance portfolio. To start with, just to remind you that Veralia is a global leader in glass packaging. We are number one in Europe, number two in Latin America, and number three worldwide. On this chart, you have our ID cards. 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, and the diversified and balanced market in which we operate. We do operate in 12 countries, and as of today, we operate with 35 plants, plus one with the acquisition of Hidrala Italy, and with 64 furnaces. which is plus two with Vidrala Italy and minus one with a closing of one furnace we decided at Essen in Germany. One of the key highlights of the semester is the completion of the acquisition of Vidrala in Italy. Closing was achieved on July 4th for an enterprise value of 230 million euros, financed with a three-year term loan. This acquisition is about one production site near Milan with two furnaces for a capacity of 225 kilotons per year with about 200 employees. In 2023, the company generated a revenue of €131 million and an EBITDA of €33 million. This acquisition is allowing us to expand our offer to the food and beverage industry in Italy for the benefit of our customers. And after the acquisition of Ally Glass in UK at the end of 2022, this acquisition confirms our desire to continue to develop and invest in key markets. About our financial performance of H1, as expected, due to market conditions and the high comparison base of H123, our results are down versus H123. We had a positive gradual recovery of volumes during the semester, but slower than expected. In Q2, we were expecting to be close to last year in volumes. However, with this context and our ability to adapt, we are still delivering a solid EBITDA margin performance. And we close H1 with a revenue of €1,765,000,000, minus 17.6% versus last year, with an organic growth of minus 10.4%, an adjusted EBITDA of €431,000,000, minus 34.6% versus last year, giving an EBITDA margin of 24.4%, a leverage of 1.9 compared to 1.2 at the end of 2023, and a net income of €123 million. Nathalie will comment in detail our H1 results in a few minutes, but before, I would like to share some market data as the activity is the main driver of our guidance adjustment for 24 full year, announced on July 9th. To start, let's step back. Here, on this chart, you have the official data of the glass container sales from FEWE, the European Glass Producers Federation, data from the last 10 years. Historical data from 2013 to 2022 are showing steady and regular growth with a CAGR of plus 2.2%. With COVID in 2020, we entered in a different period with different patterns compared to previous years. It has been the starting point of supply chain disruption. Then in 2021, post-COVID, we faced a strong growth due to high end demand. Glass market went up to 6.9%. We were running production at maximum and inventory kept on decreasing to serve our customers. Then beginning of 22, demand was again high and the conflict in Ukraine has further disrupted the supply chain. Many of our customers were afraid about not getting their glass packaging to do their own business, meaning certainly But many customers reacted in a way to secure and inflate some inventory level in the overall value chain to ensure good business continuity. And finally, in 2023, it was a totally different story, impacted by two years of high inflation in Europe, unprecedented for the past 40 years, and with a context of high interest rate. So the glass market went down by minus 12%. minus 9.5% in H1 and minus 14.5% in H2. And Veralia did perform better than this negative variation, confirming the fact that we did not lose market share globally. From the different analysis we have, we have not seen any material shift in glass to oversubstrate, despite some down trading due to macroeconomic situation. And with the data we have from Euromonitor for 2023, we know that the variation of the end conception of glass in units between 2023 and 2022, the variation of the end conception of glass, was around minus 1% in Europe. If we put in perspective the minus 12% of glass demand reduction and this end conception variation of minus 1%, we confirm that the decline in 2023 glass demand was led by destocking in the overall value chain. And due to this high stock variation in the overall value chain for the past semesters, the glass market has become much less predictable. Obviously, the positive point is that destocking will end at a point and that the demand for glass will align again with the end conception. The difficulty is to predict when destocking will end. And as you know, our initial assumption was end of H1, 24. The destocking endpoint, or the speed of a destocking, to say it differently, must obviously be put in relation with the end of conception demand, with the end conception demand. and EV end consumption is lower than expected, the destocking impact will be delayed. On this chart, we have a Euromonitor end consumption forecast in glass in Europe for 2024. The graph is showing by segment the forecast of 2024 full year as it was projected mid-2023 and as it is projected now mid-2024. And you see that the N conception is revised down on NAB from a growth of plus 4.8% to plus 1.8%. We see no changes for sparkling. Spirits revised from plus 1.6% to plus 0.5%. Beer going down from plus 1.1% to minus 0.4%. and still wine down also. Just food consumption is up from plus 1.2% to 1.5%. Considering our mix of cell, this is giving a Veralia downward end consumption revision of minus 1.3% from plus 1.7% to plus 0.4% now. Therefore, this revised forecast of end consumption will lead to longer than expected destocking period across the chain. Destocking will still impact H2 this year. Our main takeaway on the activities are 2023 decline in glass demand was unprecedented and led by destocking. Post-COVID supply chain disruption has given low short-term visibility in a usually predictable industry. For 24, with the latest information we have, we confirm a gradual recovery from late 23, but a slower pace than expected due to the end consumption forecast revised down, meaning that the stocking will still impact H2. This is why having this new set of data in hand we have decided to revise our forecast for 2024 based on this lower activity. And to be more specific, our initial assumption for 2024 was to have a Q2 close to last year and H2 up low teens, giving a full year up low to mid single digit. Now, based on Q2 being down low to mid single digit, Our new volume assumption for H2 is up high single digit for a full year being flat to slightly down. However, the important point for the semesters to come is that glass demand is expected to return to more stable growth and visibility as it reconnects with the end conception. Facing this lower activity recovery, we have strengthened our action plan with determination. And here you have, as a summary, some of the key actions in place. On pricing, despite the challenging environment, we are maintaining our tight pricing policy. We are continuing to focus on value-based pricing. On capacity adjustment, right now we are running at 10% capacity down for inventory control. And we are doing that in a smart way with a mix of extended cold repair, temporary some line shutdowns, but taking mostly the benefit of our cold stops. Capacity shutdown, we have decided as well to stop one furnace in a sense, because here we see something much more structural. And we have close to 90 residences for a one-off restoring cost of 10 million euros. On productivity, we are delivering a strong PAP result with 2.6% cash production cost reduction in each one. And we are renewing our focus on productivity as a profitable lever, obviously. On HG&A, we are doing the job to flex through some selling measures taken at all the level of organization, and obviously as well, strong focus on cash, adapting our capex. You see that in H1, we are ending at 8.9%, and strict inventory control. You can count on the management team to keep high focus on this execution. Now I would like to hand over to Natalie for the details of our H1 results.

Thank you Patrice. So let me lead you through our H1 2024 results in the light of this introduction. So first slide is about the consolidated revenue variance. So we moved from turnover of €2,143,000,000 last year down to €1,765,000,000. And you can see, as usual, the pillars. The first pillar is down by €168.5 million. These are the volumes, as we shared in introduction. Remember that H1 last year was a high comparison, and organic growth is minus 10.4% in the semester and minus 17.8% if we exclude Argentina. We have lower volumes, so we are down a high single digit in H1, and I will give you more color by regions later on. The price-mix pillar in the bridge, is minus 53.5 million euros, and it's more minus 100 million euros if we exclude Argentina. Just for everyone to remember that Argentina is still distorting significantly, especially in H1, because there was a significant devaluation in the currency last year, so this will smooth in H2 and at the end of the year. So the price mix is negative, and in the price mix pillar, the mix element, I will come back to that in the ABDA, is negative in the semester. Here again, very strong H1 last year, and we can see that there is some consumption trading down, so quality of the consumption is currently down versus prior year. We have exchange rate impact and a small perimeter impact coming from our acquisition of collet treatment centers last year in Iberia as a continuation of our policy to decarbonate and have a good control of our collet supply base. So now if we give a bit more color by regions and also I'll comment So in the South and Western Europe region, the reported revenue is down by minus 15.7%. And it's here as well driven by lower volumes and some price. There is a decline in the non-alcoholic beverages as we speak in the region. And there was clearly an effect of the poor weather condition in the H1 2024 compared to last year. And the mixed impact in this region is where we have the main variation versus private here. Last year we had a very positive mixed impact and mainly driven by Italy and here we have a trading down impact. But overall, here you see the H1, and this is true for all regions. We see a sequential improvement in volumes, Q2 versus Q1, which is what we expected. If we move to North and Eastern Europe, you see here a stronger percentage in decline, minus 25.8%. In the region, you have two countries that are more suffering than the rest, Germany and UK. So Germany, we already shared in the first quarter and since last year, is suffering from VIR volumes being down, and this is the country where we decided to shut one furnace in Essen, as Patrice reminded, in Q1, and we are in the process of this adjustment of capacity. UK is much more conjuntural as the spirit segment is currently suffering more than others. Let's remember together that last year segments did not react at the same pace. Spirit segment was holding very well during the year 2023 and started to decline in November and December, so Q4. So there is a lag basically in the adjustment of spirit volumes, and there is clearly, the distilking in this segment is clearly not over and taking longer than anticipated. Then we have some negative price impact mainly coming from Germany, not in the UK. And here, mix is more flattish. As I was saying before, it's more in South and West Europe that we have the mixed impact. But here again, a sequential improvement from one quarter to the other. In Latin America, we have a decrease in reported revenue, but an increase when we correct the Forex impact. We have some slightly negative volume year on year, but all in all, pretty good activity and a strong rebound in volume in Chile after a low H1. And we still follow, of course, in Argentina the hyperinflation by increasing prices, which is why we give you now all the figures in Argentina. So how does that translate into consolidated adjusted EBDA? So as usual, you see the bridge here. We move from a very, very strong semester last year with an EBDA of 659 million euros. And if you look on the top right, the margin that was at the highest at 30.8 percent and we end in H1 at 431 million euros and with a margin that is still really strong at 24.4 percent and very much in line actually with the first quarter's one. So the usual pillars to bridge from one year to the other So the first PILARD activity is down by €162.9 million, and it's basically half the conversion of the lower volumes that we just commented, and the second 50% is linked to inventory valuation, if you remember. Last year in H1 we were in the process of rebuilding inventories and reaching at the end of the semester a better level to supply to have the right service to our customers starting from a very low point beginning of 2023. And since then we are monitoring and holding the inventories as at the same at this level which is the right one. So we benefited last year from the inventory and we don't have it anymore in H1, and this comp will of course disappear in H2. The spread pillar is negative by 53.4 million euros, and here again excluding Argentina, it's more 100 million euros. And this is the result of the price mix elements that I already commented. And with a significant impact of mix that is all in all close to 30 million euros. So it's quite significant when we compare again a semester when we see down trading with H1 last year that was very, very positive and strong. The net productivity is delivering very much in line and even above our targets at 2.6%. So it means we reduced our cash production cost by 2.6% in the semester, which is contributing to 32.6 million euros to our APDA and mitigating part of this adverse trends versus prior year. So very satisfactory results. result that we can see in all regions. The FX is mainly linked to Argentina, and you have some positive other points by 3.2 million euros. This includes the LGNA improvement that Patrice was mentioning in his presentation. So when we move in the regions, We have in South and Western Europe an EBDA of €288 million, so down versus last year, and adjusted EBDA margin very much in line with the group average at 24.3% of the total sales. And here, okay, the payloads actually, variation are exactly the one I presented for the group. with a good industrial performance. When I move to North and Eastern Europe, I have a margin, and I just did the ABDA, sorry, of 76 million euros to be compared to 142 last year, and a margin of 20%. So here, a lesser contribution of UK as the Spirit and UK are down and especially compared to last year and the lower activity in Germany. But what we can say here in this region is a very strong industrial performance with a very strong PAP contribution and including UK being now very well trained and integrated into our programs and contributing significantly. And here again, decline versus last year, but sequential improvement in activity from Q1 to Q2. If we move now to Latin America, we have an adjusted EBDA of 67 million euros to be compared to 81 million last year, and still a very strong adjusted EBDA margin at 33.6%. We see, in fact, the ABDA decrease is mainly driven by Argentina and Forex. And we have here as well a stronger PAP performance. And the spread here, excluding Argentina, is pretty neutral. So we continue to be able to follow the inflation in all the countries with our price evolutions. If we move now to the cash elements, so CAPEX, as Patrice shared with you, are very much kept under control in this environment. So we have CAPEX at 8.9% of the total sales. And we can see that we do not give up, of course, on our strategy CAPEX. So it's a tight monitoring, but of course we keep with our long-term strategy. We have two new furnaces, one in Campobon and one in Italy, so we have some capex. But remember, we delayed the start of these furnaces to adjust to the demand, as we always do. And we have, very important in 2024, two significant investments for our decarbonation roadmap with the first 100% electrical furnace in Cognac that we started in April. And we are preparing our first hybrid furnace, so 80% electricity in Saragossa for end of the year. If we look here at the group cash flow generation, so the free cash flow is negative at minus 49.2 million euros. But if we split Q1 and Q2, remember we had more than 100 million in Q1, so we did generate positive free cash flow in Q2. It's important in the sequence. And we started, especially in Q1, but in the semester with a lower adjusted EBITDA than last year. We see that CapEx are kept under control and the cash conversion is good at 63.6%. The change in operating working capital is negative. There is seasonality here if we look at semesters. in the operating working cap excluding CAPEX VCR and on top you have the CAPEX VCR that as you see here is a minus 81.7 million euro that leads to an operating cash flow of 90.5 million euro and below that we have the usual other operating impact including IFRS and some elements in ABDA with a cash effect. In the semester, for example, it includes the purchase in CO2 quotas. Interest paid and other financing costs at minus 47.5 million euros. So the increase versus last year is not surprising to the increase in interest rates mainly, and there is also some ethics losses for 8 million euros embedded in this amount. And the cash tax, this is lower than last year. The net debt evolution and the leverage, so the net debt is at 1,645,000,007. And this is after the dividend payment that occurred in the second quarter for 252 million this year and the leverage is at 1.9 times after this dividend payment and just reminding our ratings from SAP, S&P and Moody's that have been confirmed so investment grade rating and stable outlook. Here, as usual, you can see our financial structure and liquidity. So, nothing new here using our program on the new CP up to €408 million in the semester, reminding you that most of our long-term debt is hedged or fixed. and we have a nice available liquidity of 591 million euro. So that's it for the H1 and before turning to Patrick, just to remind you what we see for H2 and our assumptions embedded into leading to our guidance. Inactivity, as Patrice already said, we see a full year sales mainly flat to slightly negative when we were before that more optimistic. That's the main driver, clearly, of our new guidance and the softer consumption that Patrice explained. And this is leading, of course, to some lower fixed cost absorption that are also an upside for the coming semesters when volumes are improving. In the price mix cost, so in the spread, as I shared, we see that the mix is impacting negatively. This is, again, a kind of cycle of down trading, which we have seen before, and this is again an upside when consumption will come back to more premium levels. We see selling prices reduction up to low things, and we have, because of our energy We are not benefiting fully from the lower current spot rates in our spread for the full year. In the productivity pillar, consistent PAP delivery through the year is embedded, of course, for the full year. And as you can see, H1 has been very strong in that respect.