Verallia SAS

F:1VRA

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and welcome to Verallia's First Quarter 2020 Results Presentation. My name is Judy, and I'll be your operator for today's event. Please note that this conference is being recorded. [Operator Instructions] And I will now hand you over to your host to begin today's conference. Your first speaker will be Michel Giannuzzi, followed by Didier Fontaine. Thank you.

[Michel Giannuzzi, Chairman & CEO]

So good afternoon, everyone, and thank you very much for joining us for this presentation of Verallia first quarter 2020 results. Before moving on to the financial highlights, I would like to firstly express my sympathy and solidarity with those particularly hit by the COVID-19 crisis and convey my gratitude to those risking their own health to respond to this epidemic. So I propose to start with Page 3, which is the financial highlights of the quarter. As you will see from -- later on the presentation from Didier, the good -- we have a very good start of the year with limited impact from the COVID-19 pandemic. Our reported revenue were at EUR 645 million, up 1.9% versus prior year. And the sustained organic growth of 4% versus Q1 2019 was quite impressive in the current environment. Even if we exclude the positive impact of hyperinflation in Argentina, we still enjoyed a 2% organic growth in the quarter. Our adjusted EBITDA was up 6.5% at EUR 151 million, and this increase was up by 9.6% at constant exchange rate and scope versus the prior year. And our adjusted EBITDA margin was at 23.5% for the quarter, up 103 basis points compared to the Q1 2019. As you know, Verallia is a very strong generative company -- strong cash-generative company, and we continued to delever the company during the quarter. Our ratio of net debt leverage and ratio of debt-to-EBITDA was reduced from 2.6x at the end of December 31 to 2.5x last 12-month adjusted EBITDA at the end of March 2020. We -- given the COVID-19 epidemic, we have limited visibility on what's going on in the next few months, and therefore, we withdrew, as you know, our 2020 guidance. However, we stood firm on our proposal to pay a dividend of EUR 0.85 per share either in cash or our new shares at shareholder's option. That would be subject, of course, to the Shareholders' General Meeting, which will take place on June 10. So let's move maybe to the next page, Page 4, where we will see the main impact or the main event of the quarter, which is the COVID-19 and the short-term priorities we took. As we have no operations in Asia and in China, in particular, the first country that started to be hit by COVID-19 was Italy for Verallia. And I have to say that I'm quite impressed by the way our Italian colleagues first reacted to this pandemic. And then after, we have immediately implemented a crisis management organization not just in Italy but across all areas with 3 clear immediate priorities: The first priority is obvious. We want to preserve our employees' health and safety. The second priority is to ensure the business continuity to continue to serve our customers. And the third priority, short-term priority, is to protect our financial strength. On the top of this immediate priority, I have to say that I'm very proud of the spontaneous reaction of our employees that have shown a lot of solidarity with very local initiatives to support the people in their local communities where we live and -- where they live and work by showing -- by providing some very nice support to those people that were severely hit by the COVID-19, and we'll see that in a few slides. So moving on to the next slide, which is Slide 5. The priority #1 is to preserve our employees' health and safety. So immediately, in all sites, we took measures to guarantee employees' health and safety that are stricter than public authority guidelines at that time. We immediately act all the support functions either in offices or in the plants to, as much as possible, work from their home office. We, of course, implemented social distancing. We implemented very strong hygienic measures everywhere, including the canteen and the locker rooms. We've checked employee temperatures at the entrance of the factory gates. We've avoided, as much as possible, face-to-face meetings, opting for calls. We have reorganized our shift handovers in the production facilities to avoid to have too many people in the locker rooms at the same time. And we restricted access to our suppliers and, of course, our customers too during that period. So these are a few examples of what was done. And I think I'm glad to report that out of the 10,000 employees that Verallia currently employs, we've had to report so far only about 15 people contaminated by COVID-19, and none of them being in a very serious health situation. If I move to the next slide on Page 6, the second priority was to ensure business continuity to better serve our customers. First, I'd like to remind you that our activity has been considered as essential for the food and beverage chain. And all our sites have been able to continue to produce during that period and still are. Therefore, we had no factory shutdown at all. And I'm quite pleased to say that even though we are planned to slow down some production lines in some areas where the demand was lower, all the furnaces are continuing to work as normal. You know that our business model is glocal, very decentralized organization to better serve our customers. And this decentralized organization provided us a lot of agility and reactivity in this crisis situation. And the business continuity plans have been very swiftly and timely implemented in all plants, all countries in a very remarkable way. I personally had daily calls with all the division general managers to review the situation. We had a call with executive committees every other day to review the situation and take appropriate actions. We also have some coordinated efforts at the corporate label, sharing the best practices, especially on health and safety, where our group health and safety coordinator made sure that all the knowledge and the experience of our Italian colleagues was very fastly disseminated across the organization to the other divisions, to the other areas. We even had some examples where the Italian colleagues had some stock of masks that could be transferred to the Spanish colleagues that were masking -- lacking, sorry, masks, as an example of the things that we have done. And group purchasing also made sure that we managed, very efficiently and very rapidly, a good supply of personal protective equipments. And last but not least, the [ Gerais ] content organization with all the financial community have implemented a very strict daily monitoring of the cash position, the customer payments with the sales force being involved in it and a tight follow-up on the supply chain as well. So these were the immediate measures that we took to ensure business continuity, and I think it has provided us a very strong thank you from our customers that we have been served very well during that period. As you know, during crisis, communication is key. So we reinforced big time our communication schedules. At area or division level, there were internal video conference calls in the regions. At a group level, I personally had weekly video calls and written information, cash information at the group level. And I also wrote a weekly letter to the Board to update them on the situation. So I think on this one, we scored and we had the very strong reactivity and agility of the company. The third priority, moving to Slide #7, is to protect our financial strength. We have, at the end of March 2020, a very solid balance sheet and liquidity. As I said before, we have continued to deleverage the company to 2.5x last 12 months adjusted EBITDA, which is well below the maximum leverage covenant at 5x. At the end of March, we had 528 available liquidity with a very healthy debt maturity profile. Nevertheless, we also increased our financial ability by putting or creating or setting up EUR 250 million additional revolving credit facility as of Friday last week, which is April 24. So this is giving us a lot of strength and -- to our balance sheet and liquidity situation. Now moving on to the next slide on Page 8. I have to say that it's during crisis that you see people bringing the best out of them. And I witnessed personally many, many inspiring acts of solidarity that I would like to share with you and that were very spontaneous from our people. It started with lots of local donations for hospitals, medical staff, firemen, retirement homes, people in need, the homeless people and low-income families. Most of the things were very basic equipment or food or hygienic protective clothes -- or clothing, sorry, that we gave to those people in need. We also provided some local services, for example, to the truck drivers in Germany and Spain, providing some -- building some specific restrooms and showers for them. And in Ukraine, where we have our own bus transportation company or services, if you want, we have organized transportation for the medical teams that are going to the hospital of Zorya where we are living close by. And as a boost to this local initiatives, the Executive Committee and myself have renounced on 15% of the annual compensation for the [ committee ] and 50% of my annual compensation to create a fund of EUR 1.6 million that will be used for -- to support these local initiatives. Moving on to the next slide. Now maybe leaving the COVID-19 for 2 minutes, there are other things that happened quite nicely during the first quarter. The first one was the reconstruction of the furnace in Chile which started at the end of last year and restarted -- the furnace restarted on time on February 20 this year just before the COVID crisis. It's a major investment for the region. We invested about $40 million to not only reconstruct best-in-class with the most modern technology furnace, but we also took advantage of this big job to upgrade the factory and add a new production line in our Rosario site in Chile. This will increase our capacity in this country by around 50,000 tonnes. And this, if you remember, this is a market, which is -- and this is factory that is mainly addressing the wine market. These new investments will give us more flexibility with more production lines producing up to 6 different types of packaging simultaneously, and we've also upgraded inspection machines to enforce our quality and safety in the factory. Even if Chile is really on the other side of the globe, I have to say that I'm quite impressed by the very good start-up of this big job on February 20, which was really on time as scheduled. So that was a very good achievement for the LATAM team. On a more longer term, there was another initiative on Page 10, which I would like to bring to your attention, which is, again, a very interesting -- is one of the very important initiative for the industry where an association of the main European glass packaging producers have set up together project under the federation -- the European Federation's sponsorship to build a large-scale hybrid oxyfuel furnace, which will be running on 80% electricity. Today, most furnaces run more or less 80% on gas and 20% on electricity. And the purpose, which is an R&D project, is to be able to have a large-scale service. Large-scale means a furnace producing 300 tonnes of glass per day, which is a real -- a very good size furnace, being able to produce high-quality products with electricity as the main energy source. This is a technical challenge for our industry, but it's a way to decarbonize our industry. And this is a project that is going to start in the coming months. And with, of course, if the R&D project is successful, potential deployments after the first results, and this is year 2023. Just as a reminder, this industry has already done a lot to reduce the energy consumption and the emissions of CO2. In the last 50 years, we reduced the energy consumption by 70%, reduced the emissions of CO2 by 50%, and the glass packaging is about 30% lighter than what it was 50 years ago. But this is a major milestone, a major breakthrough initiative to go much further into decarbonization of our industry. This is also in line with the other major initiative that we took at European level, which is to increase the glass collection up to 90%. As you probably remember, every time we can increase by 10 points the ratio of cullet, which is the used glass into our furnace, we can reduce the CO2 emissions by 5%. And therefore, today, we collect, today in Europe, 76% of used glass. And we, as an industry with partners -- various partners, the retailers, the brands, the local municipalities, our project to increase this collection ratio from 76% to 90% in order to use more recycled glass in our furnace and therefore reduce our CO2 emission as well. So these are long-term projects, but -- that have been pursuing despite the short-term hiccups linked to the COVID-19. So these were the main highlights of the quarter for Verallia and for the industry. Now I will hand over next page to Didier Fontaine, who will present the financial results.

[Didier Fontaine, Chief Financial Officer]

Thank you, Michel. Thank you very much to all of you for joining the call. My presentation will be structured under 3 parts. As usual, number one, we're going to start by reviewing the revenue numbers at group level. I will then move to profitability as Part 2. And I will conclude on the cash performance with a review of our strong financial structure, which is there to address the current crisis. As you know, liquidity is more than ever a point of focus for everyone and for us as well. Before moving to Slide 12, and as Michel mentioned earlier, I would just like to highlight that in Euro terms, despite the first direct impact of the COVID-19 epidemic on our March sales, we are reporting a solid quarterly set of results with increased sales and improved profitability. I'm moving to Slide 12. So overall, we can see that in a good start of the year, with, so far, limited impact from the COVID-19 epidemic. The initial direct impacts have only been felt in March and even second part of March. The group achieved a revenue of EUR 645 million, which compared to EUR 633 million in the first quarter of 2019. This is a reported growth of 1.9%, which represent an organic growth of 4%. And as Michel pointed out, 2% if we exclude Argentina. The first element on which I would like to spend a bit more time is the category "activity" that you see are slightly negative on the bridge tightly achieved despite volume sold, which are showing a small increase. Actually, the decline in French sales where the selling prices and the sale mix are higher than the group average has, therefore, negatively impacted the activity box. In a nutshell, the French drop has triggered a negative country mix. Now if we're looking by segment. In Southern and Western Europe, excluding France, therefore, basically Iberia and Italy, demand levels remain dynamic, particularly food jars, beer and mineral water. Italy and Iberia posted positive growth over the quarter. And shorter term, at the beginning of the quarter, activities in France were affected primarily by the national strikes related to the pension reform, associated to a decline in demand from customer exporting to China. This decline became more pronounced from mid-March onwards due to the reduced workforce available on-site as a direct impact from COVID-19 that came along with associated confinement. On the Northern and Eastern Europe side, all the region has been driven by food jars and mineral water markets. Germany, Ukraine and Russia show, all of them, positive organic growth in Q1. As far as Latin America is concerned, all the countries reported positive growth for the quarter. Nevertheless, the situation took a downturn from mid-March onward, particularly in Brazil, which is going through a challenging political and sanitary context. As a summary, there has been a deceleration in organic growth in March. We've reached overall 4%. But as of February, the 4% was 5.9% and only 0.4% in March. Most of the softening actually was related to the on-trade channel to which we're only exposed for 1/3 of our activity. As you know, this market encompasses hotels, cafes and bars, restaurants, which indeed are suffering heavily from [ imbalance ]. In terms of pricing policy at group level, it's an important point for us, although, and as expected, the sales price increases at the start of the year were more moderate than the previous year. They were in line with our expectations. The weight of Argentina, which, feeling hyperinflation. Is noticeable as a price/mix impact represents EUR 11 million over the quarter. Again, we have been impacted by a negative ForEx rate of 2.1% in the first quarter, which is a negative EUR 30 million, and this is mainly to the depreciation of the LATAM currency. We are used to the Argentinian peso going down, but yet, it was notably in Brazil, and this drop has intensified in March. You know the numbers, but as an illustration, the Brazilian real dropped by 19% in average in March '20 versus March '19. April is currently showing in Brazil a further significant drop of the Brazilian real. Now since we have covered the revenue aspect, we're going to move to the adjusted EBITDA on Slide 13. Adjusted EBITDA grew by 6.5% in the first quarter, reaching EUR 151 million. Organically, it increased by 9.6%. Again, this increase is relying on the 3 pillars. Again, "activity" is negative despite more volume sold over the quarter as it has been penalized by the unfavorable country mix that I mentioned in the previous slide. This is essentially due to the lower sales in France. The pillar number two, the positive price/cost spread. Albeit price increase, as I said earlier, has been moderated compared to prior year is still well positive. Finally, our third pillar, our Performance Action Plan, our capability to reduce our cash cost base via productivity. The PAP led to a net reduction in cash production costs by EUR 8 million in the first quarter of 2020. As you're familiar with it now, I'm going to present it in 3 different buckets. The pure cash savings generated by our hundreds of products in portfolio through the Performance Action Plan, this reached EUR 13 million, well in excess of the 2% of production cash cost reduction target of 2%. Those were, however, partly offset by an amount of EUR 5 million, inclusive of, first, I will say, what we call industrial variances that mainly come with the day-to-day usage for industrial setup and machines and inventory cleanup when it's necessary. But in that case, we need to adopt a limitation in production linked to the March 6 slowdown and associated as well the confinement setup of the workforce, especially in France. Despite those impacts, again, the adjusted EBITDA margin increased by 103 basis points to reach a robust 23.5%. If I go to Page 14, very briefly, I'm going to focus onwards on our cash performance and our deleveraging efforts. As cash is seen, especially in those days. If I'm going to Slide 15, during the first quarter of the year, we have continued to deleverage. Our net debt reached EUR 1.574 billion at the end of March 2020, which is a 2.5x leverage of adjusted EBITDA for the last 12 months. This compares very favorably to the 3.1x of March '19; the 2.6x of December 31, '19, and which is confirming our 0.5 turn per year deleveraging ability. For information purposes, this leverage ratio remains well below the maximum leverage ratio set out in Verallia group financing documentation, which is set at 5x adjusted EBITDA. Now if I'm moving to Slide 16. And as I mentioned at the beginning of this presentation, Verallia has a strong financial structure that underpins its resilience in these critical times. Like Michel -- together with Michel, I am with my team monitoring both at central and very importantly at operational level, daily and accurately the cash position of the group, and we are consistently seeking at optimizing our financial structure to the best. This is why on March [ 20 ] last year, the group drew EUR 200 million from its EUR 700 million revolving credit facility for 6 months, ahead of the upcoming maturities of our commercial papers, which, by the way, explain the high level of cash in the balance sheet at the end of March. As you probably know, the commercial paper market is currently closed for noninvestment-grade companies in France, and EUR 196 million of commercial paper at the end of March is today reduced at lower than EUR 150 million. In term of liquidity, it amounts to EUR 528 million, which, compared to our debt, is at a very comfortable level. A reminder of liquidity, which is simply calculated as the cash plus the [ undrawn ] portion of the RCF, or the revolving credit facility, minus the outstanding commercial paper. Lastly, end of last week, we have been revisiting our capital structure to reinforce our liquidity and have decided to restore the usual level of undrawn credit facilities. I'm pleased to announce that the group has successfully set up on April 24, 2020, an additional EUR 250 million revolving line of credit with 1-year maturity extendable by 6 months at the option of group discretion. The syndicate of banks that I want to thank for their support and activity is made of [ 8 Gov Europe ]. And we have, on purpose, limited the number of banks partnering. Under current unusual circumstances, it has been a good common effort. That concludes my presentation. And I want to thank you for listening, and I give the floor back to Michel.

[Michel Giannuzzi, Chairman & CEO]

Thank you very much, Didier. So I propose to move to the last slide of the presentation on Page 18. As you've understood from Didier's presentation, we've had a very solid Q1 results -- financial results, which we are very pleased and very proud to report about, especially in the given circumstances. The organic growth was very remarkable at 4%. Even excluding Argentina, it was a strong 2% organic growth. We've continued to improve our adjusted EBITDA margin to 23.5%, with more than 100 basis points improvement versus the prior year. And as you know, we continue to generate cash and deleveraging the company to 2.5x last 12-month adjusted EBITDA. So that was a very good position to face and to start during -- into the second quarter, which would be much tougher, as we all know. Given the fact that we have very limited visibility on the market and our customers' orders, we've decided on March 7 to withdraw the 2020 guidance. And we will, nevertheless, continue to take the very strong adaptation measures that we've taken so far with a lot of discipline and a lot of agility from our teams. The first is to continue to preserve our employees' health and safety. The second thing is we will, of course, variabilize as much our costs. We will continue to have a very accurate daily monitoring of cash and supply chain. We will, of course, continue to adjust our CapEx and investments to what we need to do in the future without compromising the future. So basically, the 2 strategic projects that we've launched will be completed this year, but we will start the new furnaces, the new capacities only when we think we will need them. So we might have a slight delay in the start-up. And last, but not least, we have decided to maintain our 2019 dividend at EUR 0.85 per share in cash or shares, together with the reinforced liquidity, as Didier mentioned, with this new revolving credit line of EUR 250 million that was signed on Friday last week. So we enter in a much tougher second quarter, we believe, but with strong assets and a strong organization in place to face the strong weather or the difficult weather. And we are very confident that beyond the second quarter when lockdowns will be released a bit everywhere, a normal life should resume at some point. So thank you very much for listening to this call. I propose now to move to the question-and-answer sessions.

[Operator]

[Operator Instructions] The first question comes from the line of Matthias Pfeifenberger from Deutsche Bank.

[Matthias Pfeifenberger, Research Analyst]

A couple of questions from my side, if I may. Firstly, trying to see how deep the double-digit decline is going to be in the second quarter. My question is to the Southwest European division. Is the on-trade channel there basically at 0? Or is there some baseload going on? And what is the compensation by the off-trade channel?

[Michel Giannuzzi, Chairman & CEO]

Thank you for the question, Matthias. I mean, as Didier indicated, we estimate, and this is a rough estimate and it changes -- it can change from one country to the other quite significantly. But on average for Verallia Group, the on-trade channel represents about 1/3 of our business versus 2/3 on the retail side off-trade channel. On the on-trade channel, this is the sales of our customers. But our customers are also, I would say, having to manage their own supply chain. And even though, as you know, all the bars and restaurants and cafés are closed in many countries and will still be closed for a couple of weeks, some of them in France, for example, have completely stopped bottling for a few weeks but are now resuming bottling activities in anticipation for the restart and the reopening of those HoReCa channels. And in other countries, also the same. So we've had a big slowdown, which will continue probably in April and May. But I wouldn't say it's 0. Otherwise, it would mean us making the math that we lose 1/3 of our sales, which we said it will be a double-digit drop, but we don't believe at this point in time, that is to be 33% drop in sales.

[Matthias Pfeifenberger, Research Analyst]

Yes. Exactly. And countries like Northern Europe and Sweden is still open and maybe a quick feedback from my side here in Austria because it just came out today. Austria will resume going to restaurants in a party of 4 from the 15th of May onwards, so it's basically, we're one of the earlier countries and it's basically resuming as we speak. My next question would be on the drop-through. Now with this double-digit decline, obviously, maybe being about, whatever, 10%, 15%, how can we think about the drop-through in light of that you said previously? You can also produce to some degree on stock. You can reduce the utilization a bit on the furnace side, and there's also cost measures. How do you think about the drop-through in light of the high fixed-cost shares in these items?

[Michel Giannuzzi, Chairman & CEO]

Okay. I will let Didier maybe handle this answer. So Didier, you want to take this?

[Didier Fontaine, Chief Financial Officer]

Yes. So first, you're right. I think we are repairing furnaces, many furnaces, on a yearly basis. This is the first line of amortization of, I will say, "under activity". Because -- I mean instead of having, 2-year -- 2 months' stoppage, you might have 3 months stoppage, and then you are able to again, say, offset or mitigate the impact. We are not looking at, and we are very careful because it's a double-edged sword, you can still produce and put that in your inventories. But you need to make sure those are good products and that you're able to sell it because is the future problems if those -- if you are just producing for the sake of putting that in the balance sheet. So we are very careful to continue to produce but producing the right product, so that there is no futuring. But the first defense clearly is reducing the number of lines available. When there is downtime, make it a little bit longer, postponing some start-ups where you're not hitting the furnaces, so it's not expensive. So that's basically what we are doing. And there is a mitigating effect on that, yes.

[Matthias Pfeifenberger, Research Analyst]

Yes. Okay. I've got a couple of smaller questions. Actually, let's say the work goes -- has been resumed in Europe in the third quarter. Do you expect a catch-up effect maybe in the fourth quarter? Or is this seasonally too little in terms of importance? And can you confirm that Q2 is seasonally the strongest quarter? And then my last one would be, what about the ability to redirect volumes from France, Italy and Spain, given the limited shipping radius?

[Michel Giannuzzi, Chairman & CEO]

So regarding the catch-up in the third quarter, fourth quarter, I'm not sure in our industry there will be a fit for us. There will be a lot of catch-up to be frank. I mean the wine or the spirit that people have not drunk. And I'm not sure they're going to drink 2x more in the future. So -- and our customers, as I said before, to some extent, have also managed the inventory in order to mitigate the very sharp closing of hotels, restaurants and café. So we are rather cautious on what you call the catch-up or the rebound effect in this industry. We -- that's the first thing, that's why we don't give guidance anymore because we have -- nobody knows and we don't have the crystal ball, but we don't expect a strong rebound in Q3 or Q4 to higher levels than last year. I think it will be a progressive recovery, if you want, of the demand from our customers. The strongest quarter is actually Q3 because that's when people go on holiday and spend more time at bars, restaurants and so on. And therefore -- but we also know that there will be a consequence on the travels and where people will spend their holidays this year, probably less travels and less -- especially in countries like Spain, Italy, where a lot of tourism activity. They will probably be suffering a little more. Now the third question, sorry, can you remind me the third question. I didn't have time to take notes.

[Matthias Pfeifenberger, Research Analyst]

I think I've asked enough anyways. I put myself back in line and let the others ask some questions.

[Operator]

And the next question comes from the line of Francisco Ruiz from Exane.

[Francisco Ruiz, Research Analyst]

I have 3 questions, if I may. The first one is on the efficiency plan. So I remember during the IPO, you commented that the season plan is not heavily linked to production. So how do you expect this PAP to evolve in the following months? The second one is, if you could give us a little bit more detail on the cash flow generation. So maybe what has been the working capital and the CapEx in this quarter? And the last question is, if you could give us some detail if you have any facility already stopped and you could do some selective stoppage of production in the coming months in order to adapt product to demand?

[Michel Giannuzzi, Chairman & CEO]

Okay. And maybe I will take the first question on PAP and let Didier talk about the CapEx evolution. And I will also speak about the selective stoppage. So I'll take number 1 and 3, and Didier will speak probably about the CapEx. So regarding the PAP, as we mentioned, we had a very, very strong Q1 on PAP with EUR 13 million gross PAP, which is well above the 2% target that we have. We are not -- even if it's more difficult, let's be clear, because the people are very busy fixing the short-term accent in label or customer demand changes and so on and so forth. We are more than ever committed to deliver this strong 2% cost reduction on the PAP side. So as far as I'm concerned, I mean this is still a very valued objective. So we are not giving up on this one. And I will take your third question regarding selective stoppage. As Didier mentioned -- and I think that was something we covered during the IPO road shows. We are refurbishing every year 6 furnaces that are completely knocked down and rebuilt. And on the top of this, we have planned to increase the capacity before COVID-19 with 2 new furnaces to be started, one in Azuqueca in Spain and one in Villa Poma in Italy. Obviously, the 2 brownfield projects, the strategic projects, even though they would be completing this year, will be started only when the demand will be back to where it should be, so which means to be probably delayed -- the start-up of those 2 new capacities will be delayed. Regarding the existing capacities, we will adjust our capacity to extend wherever it makes sense, the furnace stoppages to a longer period. Usually, it takes depending on the furnaces between 7 to 10 weeks to rebuild the furnace. We will consider extending in some areas the furnace stoppages to, of course, reduce our capacity in order to have the other lines -- the other production lines run as efficiently and at a nominal level as much as possible. So this will be our strategy, to adjust the capacity to the market demand by not [ stopping ] new capacity, first of all; and secondly, by extending the planned factory rebuild period to more -- a few more weeks for each of them.

[Francisco Ruiz, Research Analyst]

And could you accelerate on refurbishing of plan for next year to this year in order to do the same -- with the same aim?

[Michel Giannuzzi, Chairman & CEO]

Well, accelerating maybe not, maybe stopping a bit earlier, yes. But from a cash point of view, we have no interest to spend money upfront for -- to rebuild furnaces that we won't use immediately afterwards. So we might consider stopping some furnaces that were, for example, supposed to start beginning of 2021, we stop there maybe 1 month earlier. So when I say extended, is extending by playing the restart or extending by anticipating the stoppage by 1 month or so, or 2. So that will be considered as well. Didier, do you want to talk CapEx?

[Didier Fontaine, Chief Financial Officer]

Yes, yes. CapEx and working capital. Francisco, good afternoon. On the working capital, we are going to talk variance by variances. Actually, on working capital, first of all, we used -- we have used less nonrecourse factoring in Q1 '20 than Q1 '19, essentially because France level of sales dropped and France health is a big user of factoring. Despite that, we have been able to improve the variance. So we burn cash in working capital because normally, there' a growth between Q4 and Q1, the Q4 and minus 1 in Q1, between 6% and 7%. That was the case. In 2019, the working capital [ was then ] EUR 8 million more than this year. So we have been able to be better in term of working capital management despite using less factoring, which is mechanical, but we have been better. On the CapEx, a little bit different. We told you that we are going to expect a cash CapEx much higher this year than last year, especially based on the fact that we have the 2 big strategic CapExes. And actually, we spent EUR 20 million more in cash in CapEx this quarter versus Q1 '19, EUR 77 million cash CapEx out versus EUR 55 million the year before same quarter. But that was as expected. Clearly, going forward, the CapEx level is monitored very carefully, the timing, the phasing, as Michel pointed out. So we are looking at that very carefully. But in Q1, that was as per plan, starting to invest and spend a little bit more cash than the year before. But overall, if you look at the free cash flow of Q1, it has been after taxes and EBITDA and taxes and interest charges, it has been positive.

[Michel Giannuzzi, Chairman & CEO]

Maybe I will take -- I will maybe come back to the question from Matthias regarding the quarter -- the Q2 being a strong quarter. Maybe correct what I said. Actually, last year, Q2 was a stronger quarter than Q3, and it was the strongest quarter of the year. We don't expect this year to be the same. So that's why I was mentioning Q3 will probably be higher than Q2 because of the short -- or the big shortfall in Q2 this year. So sorry for the confusion, Matthias, but I just want to correct what I said. Last year, you were right. Last year, Q2 was stronger than Q3. But this year, because of the double-digit drop that we expect to see in Q3 -- in Q2, sorry, we think Q3 will be slightly higher. Sorry, for the misunderstanding -- for the miscommunication.

[Operator]

And the next question comes from the line of Charles Scotti from Kepler.

[Charles-Louis Scotti]

I hope you are safe and healthy. I've got 4 questions, please. The first one, can you share with us the organic sales trend in the second half of March and beginning of April? My second question on the French market. We seem to be more affected than other countries. Is it a production issue? Or is it because of the demand is more impacted? My third question on the -- a follow-up question on the drop-through. Is it fair to assume a 50%, 5-0, drop-through as you guided during the half year? Or can we expect lower drop-through because of the [ coronavirus campaign ]? And the last one, can we expect the wine and sparkling wine demand to be more resilient because regardless of the demand, wine makers will have to bottle it anyway?

[Michel Giannuzzi, Chairman & CEO]

What I propose is probably I will take the question number 2 and 4, and I will let Didier give you the trend on the sales trend in the second part of March and April as well as the drop-through. So regarding the French market, what happened in France is a bit different from what happened in the other countries, to be frank. The suddenness that took place in France to put people on lockdown with restricted activities and restricted moves from the people was much bigger than what we saw in the other countries like, for example, Italy and Spain. And so therefore, we had a much bigger drop of demand in France than in the other countries, Italy and Spain to name them, for example, as those countries. And on top of this, I have to say we had a much higher absenteeism from our workforce in France than we have seen in the other countries. So the slowdown or the reduction, if you want, of sales in France is mostly due to the drop of orders from our customers. But to some extent, we also have adjusted our production down due not because just of the drop of orders, but also because of the absenteeism that we had in our factories. Now as I said before, the -- one of the maybe characteristics of the French market, it's probably more premium than other markets. If I just take example of champagne, the champagne producers have shut down their bottling facilities for a couple of weeks. They have restarted in April, but they immediately stopped their bottling activities because champagne was very severely impacted by the closure of hotel, restaurants and cafés, for example, and the fact that when -- it's not the time when people want to drink champagne at home when they are in a lockdown situation. So that -- we saw about the same strong impact on the spirit segment in France. The French spirit market is quite strong, especially at exports. And we believe that our main spirit customers that are especially exporting spirits to Asia or even the U.S. have also suffered quite a lot from a drop of their markets. So therefore, I think it's fair to say that the French market has probably been more impacted than the other markets because of the product mix and also because of the, somehow, the strong lockdown measures that have been requested by the government. Now to answer your fourth question -- your question number four about wine and sparkling wine. It is true that, especially in the sparkling wine, our customers had to empty their barrels and in order to prepare for the next harvest. So that's one of the reasons why we have restarted bottling, for example. And they will, of course, put the sparkling wine and to some extent the wine as well in reserves -- as a reserve for the future years. So we might see some bottling activity starting again. But again, we -- it's very hard right now to forecast what our customers are going to do. It's -- we know we have -- especially in the wine segment, a lot of small customers. This is where we have the biggest number of customers. And they have quite limited visibility on their own sales. And they navigate from one week to the other with sometimes very changing demand and orders. So the good thing about the Verallia is that we are probably very flexible. So we are, I think, quite good at following up their demand and adjusting our production line to the real need. As Didier mentioned before, we don't build stock for the sake of building stock. We build the right stock for them. But we don't have a lot of visibility on what they're going to do to be frank. Now I will let -- now hand over to Didier, who's going to talk about the trend in market?

[Didier Fontaine, Chief Financial Officer]

Yes. So I go -- I will step back, and I come back to what I said during the presentation on the Slide 12. The organic growth, if we exclude Argentina, so that's make everybody -- has been 3.7% in January-February. And as we said, it has been 0.4% in March. And if we include Argentina, the organic growth has been negative in March by 1.1%. So 3.7%, January-February, and 1.1% negative in March. Going forward, the double-digit -- and what has happened is essentially -- this happened essentially in the second half of March in France and in LATAM, especially Brazil. Now April, we're seeing all the countries being impacted at different level depending on their exposure to that product or that product. However, the organic group should be negative as well from a top line perspective by double-digit numbers in April. And that's the reason that the pace we are seeing today. Okay. Now you have a question about the drop-through. Clearly, when we see volume going up, we expect a 50% contribution because we do not expect to put the cost in front of that. On the other hand, when volume are going down, we are putting a lot of measures in place that should enable us to mitigate. So no, we are not expecting a 50% negative flow through on -- from a sales differential into EBITDA differential. It should be much lower than that. It will have an impact, of course, because we are fixed cost business. But we are working on supply costs, we're looking about flexibility of labor, we're looking about stopping furnaces, reducing the fixed cost base of the plants or the lines. So there's a lot of initiatives that we have taken to get flexible -- to be able to flexibilize our fixed cost base. And even our cost base, generally speaking, therefore, it will not be a 50% or 50% go through, lower than that.

[Charles-Louis Scotti]

Okay. Just one follow-up question, please, on raw materials. I know that you have very strict hedging policy. But when shall we expect some positive impact of the decline of raw material prices?

[Didier Fontaine, Chief Financial Officer]

I'll take it, Michel. Raw material is different. You're talking energy raw material because raw material...

[Charles-Louis Scotti]

Sorry, sorry, my mistake, in hedging costs.

[Didier Fontaine, Chief Financial Officer]

Okay. Well, in hedging cost, to be totally transparent with you, we hedge 2020 based in 2019. So clearly today, our hedge cost is higher than the spot. And we have a policy for N plus 1 to be fully hedge, N plus 2 at 70% to 50%, N plus 3 between 50% and 25%. So unfortunately, this year, we are almost locked with pricing that higher than the spot price. But the spot price on gas, for example, is the total is driven as well by the fact that there is variable of activity. So when are we going to benefit, probably very, very limited impact. We have some because we did -- we kept some flexibility a little bit, but very minor. So no, we don't expect a positive impact this year. We are looking at an opportunity, when we think of opportunity, but from a pure at least from pure risk management, I think we are set for to hedge and be speculative. We are running our strategy. The objective is not to be at the best price ever, it's to have a good long-term view on our cost base.

[Michel Giannuzzi, Chairman & CEO]

And you remember, this policy on hedging has enabled us to give the right targets for price increase to our sales force. And this has -- you see from Didier's presentation has enabled us to have a positive spread. So this is really key of our strategy and the 3 pillars of the strategy is growth, positive spread and PAP. And we delivered on the 3 pillars in Q1.

[Operator]

And the next question will be coming from the line of Jean Belanger from Societe Generale.

[Jean-Michel Belanger]

I had a quick one on M&A. I know that, of course, this is not at the top of your agenda. But could you consider that the current situation could lead to some attractive opportunities in some countries in Latin America?

[Michel Giannuzzi, Chairman & CEO]

Well, thank you, Jean, for asking the question. As you know, M&A, although it was not the central theme of our equity story at IPO time, is something that we always say that we will consider if it makes sense for the company, if it makes sense for our customers, for our employees and for our shareholders. Last year, as you can imagine, we were very busy with the IPOs, so that was not the focus of last year. This year, the start of the year has been quite disturbed by COVID-19. But this big shock to the global economy might push some family-owned businesses or smaller businesses to consider partnering with larger and well-managed and very successful company, like Verallia, in the future. So we are going to more than ever actively look for M&A whenever we see opportunities. And despite the short-term turbulences in Latin America, but for those of us that have lived and worked in Latin America for many decades, that's part of the, I would say, volatility of the region that we have to accept. But this is -- as you remember, this is a good area to invest in. And of course, if we see opportunities there, we will look at them very seriously.

[Operator]

And the next question comes from the line of Lars Kjellberg from Crédit Suisse.

[Lars F. Kjellberg, Research Analyst]

Couple of questions from me. I just wanted to better understand the industrial variance we're talking about, the EUR 5 million. What those -- what's in that number? And how we should view that going forward? Also, of course, China is gradually starting to reopen. Are your customers and your business starting to see any light at the end of the tunnel for that -- the spirits business, the export business, specifically to China? And I may have missed this, but did you specifically talk about the first quarter volumes in Europe? And the final point for me would be on the risk as opposed to pricing, given we now have quite a weak environment, energy is a big tailwind. So as you start negotiations for next year's pricing and given your hedging policy, should we view that as a risk generally to pricing? Because some of your competitors may not have the same pricing policies or hedging policies.

[Michel Giannuzzi, Chairman & CEO]

Okay. Thank you very much, Mark. I mean I will take the question about China and pricing, and maybe I will let Didier answer the user variance and first quarter volume to remind you on the first quarter volume. Regarding China, I mean, as you know, we are not directly exposed to China or even Asia. But we are indirectly through our customers that are exporting into this region. Now as you well know, I mean, the biggest impact for them has been the fact that COVID-19 started during the Chinese New Year, which is a very, very important time of the year for our customers sitting in China. And therefore, their business has suffered from that. It seems that they are resuming, according to what we read, they are resuming sales in this country as well as the rest of Asia. But again, I don't think the Chinese will drink the spirit that they have not drunk during the year. So it's a progressive recovery, but it will not catch up the last volume of the first quarter. Now regarding pricing for next year, I mean, it's hard to say. There's still a lot of things that can happen between now and next year. Just let me remind you that, we have in Europe -- Latin America has a different -- completely different system where prices are negotiated on an ad hoc basis, which is -- it could be every day or every month, let's say, in Argentina, for example, or every quarter in Brazil or every month also in Chile. So Latin America is a bit different. But in Europe, prices are negotiated usually once a year. And we have about 20% of our business in Europe, which is based on long-term contracts with price indexation formulas. So for 20% of the business, it's more or less covered by formulas. So whether it's up and down, the formulas will tell us what the new price will be next year. And for 80% of the remaining business, it's annual negotiation, which usually takes place between November and February of the full year. So we will see what energy costs are in November, December. We'll see what the capacities on the market are at that time. We'll see what our customers are doing at that time to do. It's very early to say what will be the pricing dynamics, if you want, on the market. But we will see in due time around the end of the year. It's hard to project again. Didier, do you want to take both the...

[Didier Fontaine, Chief Financial Officer]

Yes, and they're short answers. So the EUR 5 million, when I made my comments, the EUR 5 million was made of 3 buckets. Bucket number one is, generally speaking, the neutral variances which encompasses 2 types of it. Number one is the fact that you are not performing at the expected level of performance, and target price of your product is not reached, and the real cost is higher than the standard cost. So you have neutral variances. On the top of that, we are performing on a very good, some might think [ summer ] business, a review of our inventory hedging, basically depreciating some inventories that are not either good from -- we have too long as a duration or they are not at the right quality. So that's the second bucket with the first one. I will say that the day-to-day of the business. The third bucket is really linked today to what we're seeing given the confinement and the restriction to have the right level of people available online. Meaning what? Meaning that if I produce -- in a given plant, I produce 10% less with the same level of fixed costs, especially on labor costs, indirect labor, I have 2 options. I call that tender activity, given to the COVID and the rest of it, either I put that with my inventory costs, which is put that in balance sheet, which is not financial standard or I secure it as under activity in my P&L. That what has happened in March and what has happened essentially in France because we have a level of charts, something that were high. Therefore, lines running with a lower production instead of charging all the fixed cost to be adequate production is a case -- is a plant-by-plant type of approach. Clearly, the plant is running normally we -- so instead of taking that cost within the cost of production going into the average cost of inventories, we have put that in the P&L. And that's probably something that can be discussed in the future, whether it's a nonrecurring event or it's a recurring event at March. We consider that as non-significant. So we put that here as interactivity industrial variances impacting the PAP. And you had a question on Europe activity. We don't give the breakdown. We don't give the breakdown. What I can tell you is that, as we said, Northern Europe was showing a positive organic growth. Italy and Spain altogether, that was partly offset by France.

[Operator]

And our next question comes from the line of James Rose (sic) [ Rosenthal ] from Barclays.

[James Steven Rosenthal, Research Analyst]

If I talk about some trends in March and April, and -- could you talk about how the demand evolved in the off-trade path? And then maybe give us an idea of how demand has evolved by category? Are there differences between wine, beer, and perhaps there's some offsets from food and water jars as well by the sounds of it? And then lastly, on working capital, because you've got such a fragmented customer base of many smaller producers, have you got any concerns about receivables in the near term? Or is there any help you can provide to those customers?

[Michel Giannuzzi, Chairman & CEO]

Okay, James, thank you very much for your question. I will answer the first question regarding the trend and a little bit more, I would say, color on the business. And I will let Didier talk about the working cap and what we are doing to protect, of course, our receivables and our cash generation. So regarding the trends in March and April, basically the trend that we started to see at the end of March either strengthened or has worsened generally, hard to say it. In April with the same categories as in March that were doing very well like jars for food; like beer, to some extent, in many countries. And on the opposite, the categories that are doing the worst are clearly the spirits and the sparkling wine that are also linked to mostly [ Orica ] channel. We -- when we talk about the split between on-trade and off-trade, just to -- this is our own assumption, and so it's a kind of estimate from our side because, of course, it's more the business of our customers. But we estimate there is quite a significant difference between one country and the other. The country that we see with the highest share of on-trade business with around 45% on-trade versus 55% off-trade are countries like Iberia or Brazil or Latin America, more generally speaking. Where on the opposite of the spectrum, you see countries in Northeast Europe with a much lower share of on-trade business, which is we estimate about 20% only. And when you talk about France and Italy, they are more in the vicinity of 35% to 40%. So the on-trade, off-trade business changes quite a lot by country. But altogether, when we average it out, it's about 1/3 for the Verallia Group on-trade and 2/3 off-trade. And I repeat, jars, for example, most exclusively off-trade, retail shops, where our spirits are mostly on-trade or a big share of it is on-trade. So that's what I can say on the business side. Maybe, Didier, you want to comment on the customer...

[Didier Fontaine, Chief Financial Officer]

Yes, on the receivable aspect. Clearly, this is -- I'll just say, we are a very diversified customer base. Part of it or a big chunk of it was under the off balance sheet or nonrecourse factoring, meaning this is depending as well a lot on the risk insurance companies. And those one, honestly, they are not playing their role. They are reducing some coverage. Clearly, it's something we're monitoring on a daily basis because for 2 reasons: number one, we are not a bank; number two, base customer, we want to protect as well. But they have to make the effort, especially in a country like France, where they can have access to state-sponsor type of loan. As today, the overdues at the end of Q1 are very similar to the end of Q1 '19. However, I think the worst is in front of us because, I mean, as we said, the drop in sales is coming from. So we need to be very, very careful. We have taken -- we're monitoring that. We have taken very close look through the commercial people who are given tools to support to anticipate going customer by customer. And the only thing is from a pure number -- pure million standpoint, the overdues are the same as last year, same period, which is not satisfactory because really, clearly, we want it to go down in a normal environment. And clearly, it's a point of attention because it can derive. And you know what to call? We call the working capital, the silent killer. You don't see it, you don't feel it. But at the end of the day, you don't get the money.

[Operator]

And the next question comes from the line of Markus Remis from RCB.

[Markus Remis, Financial Analyst]

Two left from my side. Firstly, relating to the mix and especially asking about the off-trade channels. To which extent are you concerned that we will see a deterioration of the mix of people opting for less premium, be it wine or spirits, you name it? And then secondly, if you could clarify whether you have applied for any state aid measures, some sort of subsidies, moratoria to taxes in any of the countries you're operating in?

[Michel Giannuzzi, Chairman & CEO]

Well, regarding the mix, it's really hard to -- the biggest mix impact will be between categories rather than within categories, I believe. The mix within categories can happen, but I'm not sure how big it will be. But the biggest impact would be probably the mix between categories. The fact that spirits are down usually spirit and champagne have, for us, higher margins than -- and for our customers, too, by the way, higher margins than, for example, beer segment. So the mix that we would probably -- that we could probably -- the negative mix that we could probably face, and it's too early to say, would probably come from the segment mix rather than the channel mix, if you want. Regarding the application for the state, maybe Didier you want to mention what we've done. But as much as possible what we've done, especially in France, we've used all the holidays and bank towers that people had, first of all, to adjust for the lower level of activity. Secondly, we have not applied for any state-supported loan or state-sponsor guaranteed loan as probably other companies have done. And usually, everything that we've used is a partial and temporary layoffs when we had to adjust for a lower level of activity in some plants. So that's basically what we've been doing. And in other countries, we've not had to ask for special support from the state either.

[Didier Fontaine, Chief Financial Officer]

And to Michel point, that's the reason why the drop-through will not be 50% as well.

[Markus Remis, Financial Analyst]

Right. Maybe one more on the dividend. So the option to get new shares, that's essentially a scrip dividend. Can you kind of -- or how should we think about the conversion price? Is that fixed in advance? Or when would that be kind of stipulated? How much new shares I get for the EUR 0.85.

[Michel Giannuzzi, Chairman & CEO]

This will be very -- this will be communicated very soon to the market. It's very, very usual practice based on the current practice in this kind of share-based payments for dividend. So we will communicate to the market the details of the way the share dividend will be calculated. Knowing that you have plenty of time and because -- I remind you the general assembly, the shareholder general assembly will take place only on June 10. So we'll communicate probably next week about -- at the same time, we make public our resolutions for the Board -- for the general assembly, sorry. I think we have a written question from Rosanna Burcheri, Artemis. I will read it for you so that you get all the question to -- we have 80% of the contracts are volume-based on annual basis. Could there be a possibility of no volume discount at year-end as volume target will not be reached? The answer is clearly, yes. I mean, we have a rebate system, which, in many cases, is volume-based. And therefore, if volume for some reason is not at the expected level, the rebate might not be paid. Of course, this will be a negotiation at customer by customer, but the answer is yes. There will be a reduction of rebate at the end of the year if the volumes are not met by our customers. Do we have another question? Or are we...

[Operator]

There are no further questions on the phone line, Michael. Michel, sorry.

[Michel Giannuzzi, Chairman & CEO]

Okay. No worries. So thank you all for attending this long discussion and presentation. We much appreciate your time and your interest in Verallia. Again, thank you very much for following our performance. And I wish you all to stay in good health in the coming weeks and months and years to come. So have a good evening, all. Thank you very much.

[Didier Fontaine, Chief Financial Officer]

Thank you very much.

[Operator]

Thank you for joining today's call. You may now disconnect your handsets. Hosts, please stay connected.