Verallia SAS

F:1VRA

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the Verallia Q1 2022 Financial Results Analyst Call. Please note, this conference is being recorded [Operator Instructions] I will now hand over to your host, Michel Giannuzzi, Chairman and CEO of Verallia, to begin today's conference. Thank you.

[Michel Giannuzzi, executive]

Thank you very much. Good morning, everyone, and thank you very much for attending this call about the Q1 results of Verallia. I will share the presentation with Nathalie Delbreuve, Group CFO, and we'll start, as usual, by a quick reminder about Verallia activities.

As you well know, we are a global leader in the glass packaging industry. We are #1 in Europe. And Europe represented last year 89% of our sales. We are #2 in Latin America that represented last year 11% of our sales, and we are the third largest glass packaging industry -- sorry, glass packaging company in the industry. As you can see on the left-hand side of this chart, we address all end markets, and we have a very balanced exposure to all these end markets with a strong presence, of course, in the still wine and sparkling wine segments, due to historical reasons and our strong presence in the 3 largest wine producing countries in the world, namely, Italy, France and Spain. But we address in a very balanced manner all the other segments, including the Food segment, which we presented last year at 16% of our sales.

We operate in 11 different countries and employ about 10,000 people. We have, today, 32 glass plants with 58 furnaces in total. We also have 3 decoration plants that are providing added value services to our customers by decorating the bottles. And as you know, we also clean and treat our own cullet. Cullet is the used glass that we use in our furnaces in 9 different cullet treatment centers. And altogether, we produce every year around 16 billion bottles and jars. Now let's start with the highlights of the quarter. The first one, you know how important is for us to comply and to move on our ESG road map that we presented last year in January and then updated it in October during the Capital Market Day last year. We are very proud and pleased to report to you that our objective of CO2 reductions of 46% by 2030 compared to 2019 has been completely validated by SBTi. And we are now on track to reduce the global warming to 1.5 degree Celsius as recommended by the Paris Agreement.

Now I remind you here our 3 main objectives regarding the CO2 emission reductions. First of all, we will reduce our CO2 emissions by 46%, as I said before, by 2030 -- sorry compared to 2019. We will also improve our Scope 3 emissions by reducing them by -- to maintain them below 40%. So it's more or less the same amount of reduction that we have -- we are targeting for Scope 1 and Scope 2, which is around 46% reduction. And a long-term vision is that we will become net zero in 2050 or before in terms of Scope 1 and Scope 2 emissions.

Now going back also, as you want more detail, go back to our Capital Markets Day presentation, which is available on our website. But to achieve this, we have presented last year a very comprehensive and detailed road map which basically is based on 3 main pillars. The first pillar is about the raw material that we use, increasing raw materials that do not emit CO2 at all. And here, cullet usage increase is a big factor of improvement in this raw material pillar. The second pillar is to improve the efficiency, the energy efficiency of our plants and especially our furnaces that are the biggest energy consumer in the plant. And for this, we've announced, if you remember, in February that we will develop hybrid furnace and electrical furnaces in order to cut by [ 2 to 1/2 ] the CO2 emissions coming from our plant.

And the third pillar is to increase the share of renewable energy. And here also, we are working actively either to install solar panels in our factories, but this will not be enough. And we're also securing PPAs, purchase power agreements, with main suppliers as we speak. Now an interesting initiative is part of our ESG road map is also something which I think is quite new for our industry, actually, not new, but something that is probably under developed or under looked at by our industry, which is the reuse facility. We know that it's a trend from many consumers in some markets to not only dispose and recycle glass, which is, of course, one of the main advantages of glass, glass being recyclable infinitely, but to also consider reuse as a solution, in some cases, to limit the CO2 emissions.

So we worked last year with many very well-known and famous, I would say, industry experts and universities. Experts and also customers experts in order to define what could reuse look like for our industry. This led to, first of all, a white paper that is also available on our website, which is basically providing some ideas, some guidance in how to make it work in some countries and in some cases. And we organized on the 17th of March Reuse Lab in Paris, where we invited many customers, I repeat, stakeholders in order to work together on what could reuse look like in our industry in order to improve the secularity of glass packaging.

We've got already reuse loops especially in Germany, where the market has never, I would say, abandoned the reuse system differently from other countries in Europe. So we are going to leverage what works in Germany and in other countries in order to try to make some pilots in France, for example, on reuse. So that was a major initiative that got a lot of interest for both the attendees on site and the people that attended remotely. So to come back to more than 200 people that participated to the seminar. And we intend to, I repeat, launch initiatives to try to test some reuse models. And this, of course, will be communicated in the future as we make progress on this topic.

Now a complete example of also of the interest and growing interest on some customers in reuse. Again, I repeat, it's not new. You see on the -- on the top left of the chart that in Germany, in dairy products, -- they have been for decades, some reuse pools of jars that have been used by the German consumers. This pool has been enriched with a new jar of 150 grams capability, if you want, that we have developed. We also have developed with the Mehrwelt pool, which is part of the Oetker Group, new jar that has been specially designed for this pool, which is, very aesthetically speaking, attractive for our consumers -- for our customers' consumers, sorry. We see also a patented closure -- specific closure, that has been designed by Verallia and that is patented in order to make it, again, a more aesthetically appealable or filling sorry, to the consumers. And we are exclusive supplier now of this Mehrwelt pool that has been started in Germany in already 50 different outlets and with the major objective to generalize this pool in many more outlets in Germany.

The third initiative we have also in Germany is with a start-up company that has developed also reusable jars. And here, again, you see free jars that are -- have been designed and are produced and have been produced by Verallia Germany for this pool that Circujar is implementing. And this is a new concept that this company is trying to set up, which is a pay per use concept where this company will rank basically the jars to the brands in order to -- and we'll manage the loop, if you want, by cleaning the jars after use. So my point is these are interesting initiatives. The interest of all these initiatives, I believe, is that they are gaining share against the worst packaging material, which is plastics, from an environmental point of view. And of course, this is an opportunity to grow the market share of glass packaging versus other materials like plastics.

Another interesting initiative that we just communicated a few days ago is related to the champagne bottles that are, as you know, traditionally very heavy bottles First of all, for technical reasons because the pressure that you have in the champagne bottle is quite high. So therefore, you need a bigger bottle and a more -- and a heavier bottle in order to resist to the internal pressure. But we worked with Champagne Telmont to try to make the lightest champagne bottle with 800 grams bottle. And this has been an eco design done by our factory in Oiry, in the Champagne area. And this has been launched in real life, I would say, very recently this month, I think.

And this contributes to our overall objective, long-term objective our 2025 objective of reducing the weight of the standard and nonreturnable bottles by 3%, which is a complete change in the trend. When you know that in the last few years, the trend has been to increase the weight of the bottles and jars rather than decreasing this weight. So again, a very interesting initiative that is related to our ESG and environmental objectives.

Now let's speak [ two ] words about the -- unfortunately, the conflict in Ukraine and the war in Ukraine, where, as you know, we have a factory there when this all started, by the way, 1 week after our last call of February, we immediately put safety of our people as a first priority by stopping all activities in the factory, asking people to stay at home to protect themselves We only left on site a very few number of -- a very small number of people to maintain the 2 furnaces we have in this factory in hot temperature in a hot condition. This was the situation in the first few weeks of the war at the end of February and March.

After a couple of weeks, we were asked by local customers in food industry to provide them with the glass jars because they needed it to serve the food to the consumers and to the population in Ukraine. Our teams were extremely eager to restart the furnace one of the two furnaces in order to provide those jars to local Ukrainian customers. And this is what we did in the -- during the month of March, restarting one of the two furnaces. At the same time, we completely stopped the second furnace to protect this furnace just in case of any, I would say, either a shortage of gas or any, I would say, war activities around the plant.

So one of the two furnaces has been cooled down. And in order to do it in the way that we can restart it easily, it takes a few days. It takes about 10 days to cool down the furnace in an orderly manner, which is what we did in order to protect our assets. So we cooled down this furnace, and now it's well managed and it's well protected. And on the other side, we restarted the second furnace. We started the production of the second furnace to serve the local Ukrainian customers mostly for the food industry.

So this was, first of all, a testimony of the strong engagement of our teams there. I have to say that we are extremely proud of what they are doing in these extremely difficult circumstances. We support them as much as we can through technical support and also through psychological support for those of them who need some psychological support. We also donated many equipments for especially the fire brigades. We also provided some protective clothing. We have provided some emergency medical aid and many other support to the teams. This has been extremely well perceived by all our teams around the world, all the Verallia teams around the world, and that has led all the countries of Verallia to donate also money to support our Ukrainian colleagues. Altogether, we made already for about EUR 590,000 of donations to the Ukrainian area -- to the Ukrainian region. And we also have hosted the families that wanted to leave the country.

We have today 15 families that -- 15 people, sorry, 4 families that have decided to leave the country. Quite impressively many -- all the others have preferred to stay in their own country, knowing that our plant is located on the west part of Ukraine, quite far away from Kyiv. It's closer to the Polish border. Therefore, not where the war has been the most, I would say, unfortunately, impactful. We're lucky so far that the war never reached our city, city where we are located. And so those families -- those 4 families that have wanted to leave the country have been hosted in Poland by Verallia teams. So we are doing everything we can to support our local teams. We are extremely proud about their engagement, their commitment, and it's quite remarkable to see also the, I would say, support that all the other regions have provided in solidarity to our Ukrainian colleagues.

So these were the highlights of the quarter. Quite a lot, as you can understand, since we last discussed on the 17th of February. Now let's look at the financial highlights also. As you can see here, we have enjoyed extremely strong revenues during the quarter, 24% revenue growth with almost no ForEx impact. So that was quite a remarkable and expected actually, revenue growth. EBITDA increased also 20% compared to Q1 2021 at EUR 183 million, and Nathalie, in a few minutes, will explain to you in the bridge how we managed to increase our EBITDA in those extremely challenging, I would say, conditions.

The margin has slightly been reduced because of the dilutive impact of the strong price increases that we made in Q1, which are double digit, as I mentioned before, price increases. And we kept generating a lot of cash, deleveraging the company. And now the net debt on EBITDA ratio has reached 1.7x at the end of the quarter. So all together, a very strong and very dynamic Q1 with a very supportive market, underlying market, extremely dynamic actually. And we've been able, as I said before, to implement our pricing strategy in order to offset part of the inflation of cost that are unprecedented during the first quarter.

This being said, now I will hand over to Nathalie, who is going to present to you the more detailed analysis of the financial results of the first quarter.

[Nathalie Delbreuve, executive]

Thank you, Michel, and good morning, everyone, and thank you for following our call. So let me lead you through the Q1 2022 results. So starting with the top line. We have seen a very strong organic growth during this quarter, plus 24% and -- reported growth and plus 23.9% organic growth because, as Michel mentioned, in this quarter, you will see very limited and even positive exchange rate impact, both on sales and EBITDA, which is quite new for Verallia since some quarters.

So our total sales are EUR 750 million. We've seen very strong volumes in the quarter, growing volumes around 10%, a very dynamic market in all the geographies. The price and mix pillar you see is contributing to EUR 87.4 million. We have seen sales prices up more than 10% over this quarter as we announced as anticipated in order to try to compensate for part of the strong inflation we see. And the mix contribution continues to be positive, both on the sales and on the EBITDA.

If 2 comments by region in South and Western Europe, volumes are up more than 10%, and we've seen the strong selling price increases in this region as well. North and Eastern Europe, volumes are around plus 10%, which is very good for this geography and also selling price increases. And as Michel mentioned, some update on Ukraine, we have restarted one of the furnace mostly for jars as per request of our customers and also our employees. You know that we are part of the food chain. And so, in fact, we are supporting the food chain in the country as well. And the other furnace has been fully emptied now. First, we had stopped it hot, but now it's a cold furnace to preserve the assets and available to restart [indiscernible] situation a little bit later in the year.

In Latin America, we have strong growth again and again, in Brazil and Chile. A specific situation in Argentina, where we have a furnace repair but the dynamic of the market is unchanged, and the pricing is still very dynamic as well.

Now moving to the adjusted EBITDA bridge. You've seen we increased the EBITDA from EUR 152 million, up to EUR 183 million and margin has slightly decreased from 25.1%, down to 24.4%. We commented earlier to you that new price increases would have a dilutive effect on the margin, and that is what we see in this quarter. You see that the activity operating leverage is very strong in this quarter with EUR 57.7 million. So we are benefiting fully here from the volume impact and the dynamic of the volumes of more than 10%. And we have also positive impact of stock variation quite specific also to the quarter with inflation on the stock inflational costs impacting also the stock variation, especially when we compare ourselves to Q1 2021.

Now the spread you see is negative, minus EUR 34.1 million. We have a very strong inflation in cost in Q1 and especially when we compare to Q1 2021, but we see inflation continue very strongly. It's not yet fully covered by selling price increases, as you can see, as we are still negative despite a positive mix contribution. Now the net productivity, so with our internal PAP program, with EUR 6.9 million contribution to the EBITDA. Is this quarter a bit below our target? That, if you remember, is to be superior 2% of production cash cost reduction, but quite close at 1.8%.

Foreign exchange rates for the first time since I joined is neutral. We have seen quite strong foreign currencies in Latin America. I mean, the Brazilian Real has been pretty strong in the quarter compared to 1 year ago, and this more than compensate any other impact. And in the other items, pretty natural. It's an addition of positives and negatives from this year and previous year. One -- but all in all, it's almost 0 this quarter, including some bad debt provision on Ukraine and the donations for Ukraine that Michel mentioned. But this is offset by other positives, including some insurance reimbursement on our Argentinian fire that we had last year.

Now moving to the cash and the net debt. We've seen further reduction in the net debt in absolute, moving from EUR 1.2684 billion at the end of 2021 to EUR 1.2218 billion at the end of the quarter. And the leverage is now 1.7x the last 12 months. Adjusted EBITDA at the end of March, which is a very good improvement compared to 1 year ago, where we are 2.1x and to previous year 1.9x. So we are confirming here that we are an investment-grade trajectory.

So now if we look at the financial structure, so no big change this time compared to the last time we spoke. You know that in 2021, we worked on rebalancing our financing and our financial structure between debt market and bank financing. So we have now a very balanced financial structure, as you can see with our 2 sustainability-linked bonds and also diversified maturities, which is very important for the group financing, of course. You know -- important to know that a significant part of the group floating rate exposure is hedged to fixed. That is 83%, and even 100% of our long-term debt is fully fixed. And you can see in the [ nominal ] rates that we have very good rates here, interest rates for the total. And our total available liquidity is very comfortable at EUR 897 million at the end of March.

[Michel Giannuzzi, executive]

Thank you very much, Nathalie. Let's conclude with a review on the 2022 guidance. Of course, I mean, as usual, this guidance is subject to kind of stabilization of what we see today, both in terms of direct and indirect consequences of the war in Ukraine, which, as you all know, is creating quite a lot of volatility and which could, of course, have an impact on our forecast. But given what we see today and the current market evolution that we see. First of all, we confirm, as you clearly understand, that our revenue will grow significantly this year. Our revenue will be more than double-digit growth going forward. And the goal we have for our company is to produce as much as we can until December 31. I mean, basically, everything we produce is sold and if there is a slight, if there were a slight slowdown in the market, which from speaking, we don't see right now, that will be not a bad at all situation because we need to replenish at some point our inventory.

The second, of course, the main item of the guidance is the adjusted EBITDA. We confirm that we will keep increasing our prices to pass the inflation of cost to our customers step by step. And we have already in April this year, so this month, have a second round of price increases. We communicated last time that the first quarter we aimed at increasing our prices by double-digit, which we did. And we're going to go for another round of price increases in Q2, which is another mid-teens, so more than double-digit price increase in Q2 this year in order to pass the inflation of cost to our customers. So step by step, the goal for us, as you know, is always to end the year with a positive spread despite the fact that the time -- the time we need, sorry, to pass the inflation to our customers. And this will lead for an adjusted EBITDA above EUR 700 million.

As you have seen with the 3 pillars, the biggest contributors to this improvement of EBITDA being the growth and the PAP. We aim a mutual spread for the year. So on the top of this, we are clearly working hard as you can see also on our ESG road map and the implementation of this road map is on track. Therefore, this is a more longer-term view, but we also look at the long-term perspective in this respect.

So this is the end of our presentation. I propose now to take your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Lars Kjellberg of Crédit Suisse.

[Lars Kjellberg, analyst]

I just want to come back a bit to your guidance. I mean you made EUR 183 million in the first quarter with a EUR 34 million negative spread, and you expect that spread to be neutral by year-end. What are you then factoring in for potential negatives? Because obviously, you're multiplying the first quarter with 4 [indiscernible] well ahead of EUR 700 million. And maybe you can provide some clarity on the stock variation if that's a major component in Q1 that you don't expect to be repeated in the following quarters which could explain some of that relatively what seems to be cautious full year number?

[Michel Giannuzzi, executive]

Lars. Thanks for your questions. So first of all, I mean, we always very clearly indicated that our guidance was a floor. And the EUR 700 million is a minimum that we are guiding. Some of our competitors or others are not guiding at all. But we are guiding in a way that will provide you -- we provided you, sorry, with a floor at EUR 700 million of EBITDA, which we thought in February when we announced it was already a challenge given all the uncertainty. And that was, if you remember, just 1 week before the war started in Ukraine. So that was, I think, quite already a bold statement. Clearly, we confirm that will be above EUR 700 million.

I mean, now how much you move [ above ] EUR 700 million, I mean we are only the 21st of April. So there is still almost 8 months to go. And many things can happen, especially in the current very volatile and predictable environment. So this is why we are a bit cautious. But as you understood, we'll be well above EUR 700 million EBITDA going forward. Having said that, there is always, as usual, some uncertainty regarding the ForEx, which has been neutral for the first time in many quarters this quarter, but could turn negative second part of the year. There are some actions in Brazil, for example. And the Brazilian Real has been very strong. surprisingly strong so far. This could change. So many things can happen on this side.

We still have, I remind you. a little bit of our energy cost that is not hedged. 10%, roughly speaking, in -- going forward this year is not hedged. So we've seen some crazy energy prices spikes in a few weeks in March, getting to levels that were just unbelievably high. So there's still a little bit of uncertainty here. So we factor in all our forecast, if you want, all these uncertainties. And this is why we prefer to guide you with the floor and I think that we'll -- we aim at, of course, being as above as possible above EUR 700 million.

[Nathalie Delbreuve, executive]

Regarding your point, Lars, on stock variation. Absolutely, this is a good question. Thank you. In fact, yes, you know the rotation of our stock when we are comparing ourselves to Q1 2021, where inflation was not yet really started last year. We have a higher impact -- positive impact of valuation in Q1, and we do not factor that in for the other quarters. And also in Q1, we had last year in a comparison basis as well in the activity pillar some fixed costs not covered for the start of our 2 new plants in Europe, Azuqueca in Spain, and in Italy as well. And these ones were not fully operational in Q1 and they are in the rest of the year. So indeed, the activity pillar is with some especially strong positive impact in the Q1, which you will not see every quarter.

[Lars Kjellberg, analyst]

Just a couple of follow-ups, if I may. Are you having -- I mean, last year, you had a very heavy furnace rebuild in H1 and Q1 specifically. Can you share with us if there's going to be any real big quarters this year. And also on the comment, Michel, when you talked about you're not seeing any slowdown, 10% growth was extraordinaire. I appreciate in Q1 last was somewhat soft. But I mean, how should we think about volumes for the full year? Or how do you see it near term? And how do you think about that in the balance of the year? .

[Michel Giannuzzi, executive]

So for your first question regarding the furnace repair, we -- if you remember in 2021 and 2020, we had quite unbalanced furnace repair during the year. In 2020, they were more towards the end of the year and it was due to the pandemic. And 2021, it was more towards the first semester. This year, we are more on a balanced speed between H1, sorry, and H2. So that shouldn't be -- shouldn't have a material -- real material impact on our production and sales.

Regarding the sales volume forecast, as I said, when we look at our customers forecast, that are extremely bullish, extremely strong. I mean you've seen the report on some of our customers. Yesterday, one of our largest beer customer reported double-digit growth in Europe of their sales and they came to [indiscernible]. We see in the spirit for sparkling wine, also very, very strong demand on our customer side. So we are not at all concerned by the strong demand. If anything, it's just the opposite, it's too strong. And we are very unfortunately disappointed not to be able to serve better our customers because we are short of capacity.

Now despite the fact that, as you know, we've started 2 new furnaces last year in Q1 that are, of course, helping us achieve this strong growth this year. Now we have the full benefit Q1 this year compared to Q1 last year. It was the first quarter of the start of those furnaces. Now going forward, of course, the comparison base will be less favorable than what it has been in Q1. But still, we do everything we can to produce -- to serve our customers, and we don't see any near-term or even long-term trend that should indicate a cool down or less demand from the market.

[Operator]

Next question comes from the line of Francisco Ruiz of BNP.

[Francisco Ruiz, analyst]

So I have some follow-up on the previous questions. and also another one. So on the volume side, I mean, you commented that demand is quite strong, but 2 questions here. The first one is, is there anything else, I mean, apart from this amount, I mean, I don't know, is [indiscernible] from the clients on scarcity of glass and some stockpiling, small competitors stopping due to the high energy costs that have helped yourselves and probably other bigger companies to have such a big level of volumes. And until how much could you maintain this level of activity with the capacity that you have? .

The second question is for Nathalie, if she could be more precise on the real stockpile stock impact in EBITDA. I mean -- or you could give us a data on drop-through, the [indiscernible] drop-through that we are going to see in the following quarters? And the last question is on prices. you've commented that you're increasing prices by mid-10s. So this year, the gap -- sorry, this quarter, the gap has been EUR 30 million. So that means an extra 5% would offset this situation. So do you expect a worsening of the situation in terms of inflation for following quarters or could we assume a positive price gap for the year?

[Michel Giannuzzi, executive]

Okay. Thank you, Paco. I will probably take question 1 and 3, and I will let Nathalie answer your question 2. So regarding the Q1, what happened in Q1, it's true that some competitors reduced their production or didn't start furnaces that were expected to start due to very high energy cost. But I think under the market pressure, because the market is so strong, eventually, everybody has operated their factories at full speed in order to serve the customers and the market. And that has had no impact on us given the fact that, for us, in any case, I repeat, we have to, unfortunately, arbitrate and allocate approaching to our customers given the fact that we can't serve them all as they would like to. So therefore, we, as I said, are producing at the maximum possible level in terms of production output. And we will continue to do so until 31st of December, whatever the market situation is. And I repeat, the market situation only looks very positive, very dynamic right now. So no concern whatsoever regarding the top line.

Regarding the prices. I think it's very important to understand that our -- I always mentioned that our goal is to have a positive spread. This is one of the 3 pillars that is part of our strategy, is to repeat, improve our EBITDA, thanks to activity growth, thanks to PAP, but also thanks to a positive spread, at least the spread should not be negative. Now you are perfectly right, the spread has been negative in Q1 because we didn't pass the full amount of price increases that is sufficient to cover the inflation of cost, I repeat inflation of cost post hedging, which means that our customers are already benefiting from our hedging policy, but that was already a challenge. I remember -- I remind you, sorry, that in November, December last year when we started to talk to our customers about a double-digit price increase, starting by our own sales people. Nobody -- nobody has lived long enough to have seen such double-digit price increase.

You have to go back in the '70s. And these people are longer in the business. So in Europe, I mean, in Europe. Of course, that's not at all the case in Latin America. So it has been a first shock in November, December when sales people went to our customers talking about such high level of price increases. Now first of all, unfortunately, the facts and the energy prices that everybody can check every day, just confirming that what we're asking for is clearly not enough to completely offset the impact of energy on our P&L. So this was clearly explained to our customers, explained to everyone. And that's why we have said to our customers. And we -- this is the first round of price increase and we have to go for another run of price increase that we have already communicated, I mean to our customers in April, which is another double-digit price increase for Q2 and it's more in the mid-teens than the low double digit that we are taking for Q2. And this will enable us to catch up the EUR 34 million negative spread that you mentioned.

Going forward, the goal is to end up the year with a positive spread. Now positive spread, I repeat one more time, positive spread for Verallia is still an advantage compared to the spot price for our customers because it means that they benefit from the hedging that Verallia took which means, in other words, that in 2023, Verallia will have to increase prices again because the hedging is a financial instrument that is only there to buy time in order to pass progressively price increases rather than passing in one shot the full amount of price increases that we should pass in order to be in line with the spot prices on the market.

So this is clearly what we intend to do, and this is not at all different from what we've been seeing since last year in October during the Capital Market Day in October after the Q3 results and in February after the full year results.

[Francisco Ruiz, analyst]

Sorry, a follow-up on the -- sorry, Nathalie. Are the rest of players following you in terms of price increases in the same amount in the same way?

[Michel Giannuzzi, executive]

Well, I mean, every company has their own policy. Some people are doing it differently. I mean that's everybody's business. But I would say, the inflation balance equation is probably even worse for all our competitors. We believe we have a pretty good hedging strategy because we implemented it in 2018, and it's a 3-year rolling strategy. Therefore, we believe we are pretty well hedged to be, say, simple. Some of our competitors are probably not as well hedged and we are. Therefore, their spread -- negative spread is even probably worse than ours, and we see that at least for the listed peers in the coming days.

And we see that clearly, everybody has at least the willingness, what we've seen to recover partly the inflation of cost through price increases. So it's done in different ways. I mean every company has a different way to tackle it and to discuss it with its customers. But at the end of the day, everybody has the same financial equation in front of himself.

[Nathalie Delbreuve, executive]

Okay. Okay. So Paco to give you more color on the fall-through, because indeed this Q1 fall-through is very strong. So again, some specifics to this quarter with the fixed cost we had last year in the first quarter, not fully absorbed by -- for our 2 new European furnaces that you won't have this positive gap in the coming quarters. And on the stock variation, we are indeed comparing ourselves to Q1 that was without inflation. So all the stock movements were at lower cost per tonne. So if we move forward during the year, you can go back to our usual fall-through that is around the 50%, which you know from us.

[Operator]

The next question comes from the line of Guillaume Muros of Societe Generale.

[Guillaume Muros, analyst]

I have one follow-up on cost inflation and second question on ESG. The first follow-up on cost inflation. Besides energy, are you experiencing inflation in other direct production costs, namely raw materials and/or payrolls? And what kind of implications would this have? And the second one on ESG. This is a more generic question, but do you think that looking at the current conjuncture and uncertainty regarding the supply of certain energy sources like natural gas, do you think that some CO2 emission reduction, CapEx and/or ESG initiatives like your Reuse one could be accelerated going forward? And the second point there is, do you think that public authorities and decision-makers are taking -- or are you seeing them taking any action?

[Nathalie Delbreuve, executive]

Okay. Hello, Guillaume, thank you for your questions. So I'll answer the first one on cost inflation on other factors and energy. So yes, absolutely, we are seeing the cost inflation actually on all the lines. The second -- I mean, the strong ones after energy are -- is still packaging, and we are seeing almost 30% increase in the packaging when we are comparing ourselves to last year. Now we see also increase in raw material, also double digit. And part of that is due to soda ash, but also some inflation coming on cullet, on transportation. So I mean, inflation is indeed on all our cost lines.

[Michel Giannuzzi, executive]

Okay. So regarding ESG, Guillaume. So first of all, of course, on the Reuse, Reuse is an initiative that is interesting to monitor because I think it's an opportunity, as I mentioned before to grow our market against other packaging materials like plastics. But as you know, also, it takes time because you need to build a strong ecosystem with the brand, with the retailers, with the people that are going to collect -- the transportation companies and the cleaning companies that are going to collect and clean the packaging. And therefore, it is not a short-term answer to the question. But it's interesting to keep pushing it even if it's a long-term situation.

Now regarding the public authorities, I think if anything, this war in Ukraine has pushed Europe to accelerate the transition away from fossil energy towards more renewable energies, which is completely in line with our ESG road map. So actually, if anything, that should help us long term, of course, it's not a short-term answer because it takes time, but it should take -- it should help us long term to implement our road map. And I repeat, this is mostly about the third pillar, which is the use of renewable energy or low carbon energy and not a fossil energy.

So everything which is going on right now with the gas or the fuel being supplied out of Russia is pushing Europe, I repeat, to move faster and invest more in renewable or low-carbon energies. So that will benefit, of course, to us because it's part of our road map.

[Guillaume Muros, analyst]

Okay. But just a small follow-up there. And over the short term, namely over 2023, 2024? And do you see because we saw the letter from the [indiscernible] -- the [indiscernible] sorry, asking for more public action being taken. Do you see any risk on your operations coming from these shortages -- possible shortages in energy in Europe? .

[Michel Giannuzzi, executive]

The letter -- for everybody's benefit, the letter you are, I suppose, referring to is the later that the European Glass Association has sent to the European Commission highlighting the fact that glass packaging is part of the food chain. And therefore, as for during the pandemic, we are part of an essential activity, and therefore, should be protected, should there be some gas supply issues, especially when we're talking about the gas coming from Russia. Everybody understands. So this data was to highlight the fact that this industry, I repeat similar to what happened -- similarly to what happened during the pandemic is an essential industry for the population. And therefore, should there be some restrictions on gas supply. This industry should be protected. So that's what it meant.

Of course, we have developed at Verallia our own business continuity plans in case the worst would happen and we should be under allocation in order to make sure that we keep maximizing the use of the energy that we'll get at the end and, of course, operate as much as possible our plants, depending on the decisions of the commission -- or the government in Europe.

[Operator]

The next question comes on end of Peter Testa of One Investment.

[Peter Testa, analyst]

I've got 3 questions, please. One, maybe just coming back to this inventory adjustment impact, please. Just to be clear, is it sort of EUR 10 million, EUR 20 million? I mean what sort of magnitude is it, please?

[Nathalie Delbreuve, executive]

Okay. So it's in between, Peter, if I may. It's in between.

[Peter Testa, analyst]

Okay. Fine. That's great. And then just on the price mix part -- I mean mix, if you work it out, is around 4%, and you can therefore try to understand that the price cost equation in the quarter was maybe as significant as minus 50, excluding mix. If you look at the price increases that you put through -- I understand from the past that not all of them earned through in the quarter, so you still have some, say, carryover impact of the first price increases. And then you put up prices again in April a significant amount. I was wondering if you could just help us understand, firstly, whether my comment on the price cost is more or less correct. And then secondly, how the carryover effect still has to work through? How you expect the rest of the price increases to work through? And are there any also carryover cost factors, which still haven't been felt in Q1?

[Michel Giannuzzi, executive]

Peter, I'm not sure I understand your point about carryover of cost. I mean, can you clarify this because -- your comment about the price, I understand, but I don't understand about the cost carryover.

[Peter Testa, analyst]

Yes. I didn't know whether, for example, all of your packaging contracts were effectively felt in Q1 or whether you still expected some packaging and freight and other cost increases to carry on sequentially because of what's going on in Ukraine, creating shortages, energy inflation and so on.

[Michel Giannuzzi, executive]

Okay. So I think -- thanks for clarification. I think regarding the price, I think it's pretty clear. I think I can repeat, but I think you got the point we've had a double-digit price increase in Q1. And then we're going to ask for another double-digit around mid-teens price increase in Q2. Of course, it will not happen all in April 1, but going forward, this will help us for the year to end up with a positive spread. Regarding the cost, then, it's a bit more, I would say, we need to grow more in a granular way in a more detailed way to understand better what's going on the cost side. The biggest cost factor right now, which has the biggest impact, is energy cost. This one, as you know, we are hedged for 85% to 90% for the next quarters of our mix, okay? But we still have 5% to -- sorry about 10% of our energy needs that are not covered yet for, especially Q3 and Q4.

So this is, to some extent, subject to market prices evolution. The cost of, for example, packaging, I'm talking about the pallets, for example, the interlayers, plastic interlayers and pallets that we use to ship our products to our customers, these are spot prices costs. I mean we don't have on this packaging materials. We don't have any long-term contract. We don't have any hedging. And therefore, on this one, every day the price can change. Then same thing for the transportation costs. Transportation & Packaging altogether represented in 2021 around 12% of our cost. Transportation cost is not -- is a spot price, depends on the fuel price, depends on the availability of trucks and truck drivers. It depends on many things. Therefore, this one is completely open to evolutions on a day-by-day basis.

And then you have in between, you have the raw material costs that are -- some of them covered with annual contracts. Therefore, we have visibility on some of those costs for the rest of the year. And some of them are not based on your cost -- sorry, on annual cost, but more on a month-by-month revision. Suppliers, in some cases, doing that we do, having either an energy surcharge or an adjustment of a price on a quarterly basis, depending on the evolution, of course, of their own cost drivers. So that's why we have, probably going forward, still some volatility and some uncertainty on the cost evolution side. And this is why we provide a floor of EUR 700 million and not a more precise number because we need to factor in our guidance the fact that things can see change.

[Peter Testa, analyst]

Okay. But maybe just on the 2 points. First it was a more or less right in terms of the mix, in fact, looking at the pure price cost In Q1.

[Michel Giannuzzi, executive]

Well, the mix has been positive. I mean you have a double [ this rate ] here we are. We have a double digit, of course, a price impact. And the mix has been also positive in Q1.

[Nathalie Delbreuve, executive]

Yes, it's positive in the 24% pricing -- sorry, top line increases. You have volume prices and around 4% of mix in part...

[Peter Testa, analyst]

Yes, and there's a substantial element of peak profit. Okay. And then on the price part, you've got some carryover from Q1 into Q2. You're now increasing -- you said circa mid-teens in Q2. I suppose if the packaging costs and so on increased, again, later on, you would carry on at this sort of quarterly basis, reviewing this quarterly. So your mid-teens cost increase includes, say, the latest element of cost? Or are you taking any forward view on some of these more spot elements?

[Michel Giannuzzi, executive]

So first of all, you are right. This is what we clearly indicated in our outlook in our press release, that we will monitor, of course, on a month-by-month or even quarter-by-quarter cost evolution. And our ambition is to, of course, keep adjusting our prices to reflect the inflation of costs. So should there be higher cost than expected, we will, of course, go for a further round of price increases. The goal for us is the spread. The goal for us is to end up with a positive spread for the year, knowing that this positive spread, I repeat one more time, is already giving our customers the benefit of what we did on the hedging side. So that's our goal. And if we need to go for a further round of price increases in H2 to maintain a positive spread for the year, we will do so. So that's the policy of the company.

I keep repeating, since the IPO, the business model of Verallia, and I repeat one more time, is pretty simple, but very -- we need -- we are very disciplined and very committed to this business model. Business model is based on 3 pillars on the EBITDA improvement. Growth, this is in a growing market with a growing company, and this growing -- this growth brings, of course, a contribution to the EBITDA improvement for the operating leverage, is based on PAP. Every year, we generate our 2% cash cost productivity, which is more than EUR 35 million of cost improvement and therefore, EBITDA improvement every year. And the third pillar is positive spread. Zero plus is positive, but a positive spread, which means that we fully benefit from the other 2 pillars. This is what we've been doing since 2019 and even before, actually before we listed since I joined this company in 2017. So that's the discipline we have implemented and we'll do whatever it takes, to take a famous quote, to make it happen.

[Peter Testa, analyst]

Okay. And the last question, please, is just on the Southwest Europe volume growth of more than 10%. Can you give some sense as to what the impact was of the Spanish and Italian lines that you said would start -- starts up in the quarter? And then maybe whether there's anything you can do debottlenecking our [indiscernible] to help with the demand equation that you talked about?

[Michel Giannuzzi, executive]

Well, no, that's a good point. I mean, it's from speaking, it's hard to quantify because the ramp-up of the 2 furnaces in Italy and Spain last year occurred during Q1, but it was not a step increase. It was a gradual increase. So therefore, the exact [indiscernible] we didn't make to [indiscernible] with you, and it's hard to believe. Now starting in Q2, we are more comparing comparable asset bases, comparable production capacities starting in Q2 without the full benefit of the additional capacity that we had in Q1. However, on top of this, the 10% comes also for the fact that we have kept, unfortunately, we say it's very unfortunate, but kept decreasing our inventory because the demand was so strong, we kept decreasing our inventory. So therefore, we would probably, I repeat, have less growth going forward, not because the market is not there, I repeat one more time, just because our capacity will be the limit.

[Peter Testa, analyst]

Okay. That's great. Well done managing in a very difficult environment.

[Operator]

The next question comes from the line of Fraser Donlon of Berenberg.

[Fraser Donlon, analyst]

A few questions from my side. First, could you just confirm that you don't expect any kind of impairment of the assets in Ukraine. The second question was on kind of pricing and customers. So I have the impression that your competitors are looking for much higher than the mid-teens price increase that you've mentioned in Q2. So are you finding any new customers or maybe higher quality customers coming to you and asking for your glass? The third question was on, let's say, more midterm pricing. Obviously, Glass Europe is going to see a big increase in the price of its glass in kind of 2023 even relative to, let's say, 2019. So do you kind of -- is there any concern internally about like imports or the [ threat ] of other markets adjacent to Europe, like, I don't know, North Africa or other parts of the world?

And then the final 2 questions, just on leverage. I know Michel, you kind of always used to make this comment that you wouldn't ideally run leverage below 2x. And I know we're kind of in an uncertain world, but does that suggest that you do see M&A opportunities out there right now, given where the leverage sits today? And then finally, on CapEx. What kind of inflation are you seeing in your kind of capital investments? Because I think you normally give this guidance kind of on the CapEx over sales and obviously, the sales figures this year will be quite somehow distorted. So I just wondered what you kind of expect there or what you're budgeting may be in absolute value. Sorry for the many questions and that's all from my side.

[Nathalie Delbreuve, executive]

Okay. Thank you, Fraser. Don't hesitate if we forget 1 question because it was quite a long [indiscernible]. I will answer the first one. So in Ukraine, what is the situation -- in fact, our assets are fully preserved as we see as per today. But first, of course, our employees, as Michel mentioned, but also our assets. We have one plant. It's close to the Polish border. So today it's really safe. And as we explained out of the 2 furnaces, so we have cooled down 1 in order to preserve actually the furnace. That is exactly what we do when we have a heavy maintenance. So it's really fully there and operational in the future if the conditions permitted. And the second one is even producing, as we explained, as we started -- we started production actually on the request of local customers.

So as per today, to answer your questions -- your question, no, we don't see impairment of assets coming, and we are, of course, looking very, very closely. Now to remind that Ukraine, so it's one plant, and it's -- it was last year, a bit less than EUR 50 million sales out of the total of Verallia. So it's a pretty limited impact.

[Michel Giannuzzi, executive]

Fraser. I will take your question regarding pricing. I repeat one more time. Every competitor has its own pricing strategy based on their customer relationship and based on their customer contracts and based on their own hedging -- potentially hedging situation. So I mean, on this one, I will not comment. The only thing I can tell you is what we are doing and what is driving our strategy. And in that respect, we are very, I would say, of course, as you know very well, this business is a long-term business. We build relationship with our customers over decades. And we also know it's difficult for our customers to pass to their own customers, especially if they are dealing with the retail chains, the full amount of inflation. Therefore, that's why we are staggering the price increases over time in order to help them or give them time for them also to negotiate with their own customers.

And we are in the long-term business with them. There is no customer churn. As you know, this is a very stable industry in terms of customer base. And we are doing also our best, if you want to, support our customers by not, I would say, inflating their prices to -- of their cost, sorry, too strongly and too sharply in order to help them also negotiate with their own customers. So that's the reason why we think that our hedging policy right now is also benefiting to our customers and creating the -- or reinforcing the loyalty that we had with them for a long period of time.

Now regarding the potential substitution with imports from North Africa or other regions, I have to say this is probably the opposite because at the end, first of all, there has been some capacity destroyed in Ukraine and some factories have been either burned or stopped because of the war. So the capacity situation is even tighter than what it was in January before the war started. Secondly, when I look at the other markets, around the world. And I except Asia where I do admit we are not in Asia. So therefore, I will not comment on Asia, but it's far -- it's probably too far. And we don't see really imports from Asia because it's -- given the cost of shipments and you know the transportation cost. I mean the cost of the container today moved from maybe EUR 1,500 a year ago or 18 months ago to now almost $10,000 a container. So the cost of shipping now is prohibitive, not even mentioning the CO2 impact. But therefore, we don't see imports from Asia. We don't see imports from neighborhood regions because there is no capacity basically.

Therefore, the -- and there is no -- I repeat, no new capacity being announced and it takes 2 years to build a new capacity. So therefore, the market is going to be tight for unfortunately, or fortunately, I don't know how to say it for quite some time, I believe. Now in terms -- to answer your first question regarding leverage. Yes, we are -- we keep deleveraging the company. Now just to be clear, on the second half of the year, we will have probably less cash generation than in the first quarter because we will rebuild inventory hopefully. And therefore, our working capital should become the -- working at variance, sorry, should become negative. But we still want to keep some, of course, flexibility in order to seize any opportunity in acquisitions that might arise, especially in the current environment.

So again, no change compared to the very clear guidance we provided in October last year, which is, first of all, we invest for our own needs in terms of CapEx. We invest, of course, on the transition, the decarbonization of our industry, the ecological transition. And then we return the cash, the excess cash to shareholders through dividend increase. I think we are going to propose next month to the shareholder assembly a dividend increase of 10% at EUR 1.05. And we will also -- if there is still excess cash, consider share buybacks at some point.

[Nathalie Delbreuve, executive]

So if -- for your questions on CapEx, whether we see inflation on CapEx. So yes, we see inflation on CapEx compared to previous year. Now you know that our -- I mean, the target is to stay around 10% of total CapEx. Now, of course, with the price increases and inflation we'll see, but we expect to keep around this 10% for the full year. And we are, I mean, not going to slow down our -- or change our investment program for this year in total.

[Operator]

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

[Lars Kjellberg, analyst]

Just to follow up. So on the last question, can you try to provide an absolute number on that CapEx number, considering that you you're obviously seeing significant price increases. So that 10% would, of course, translate to a much bigger number than we would have expected. And also just to gain some clarity, I think you said, Michel, a couple of things that I may be misheard, but I thought you said, first, the aspiration was neutral, price cost neutral for the year. And then you said a number of times, price cost positive, I just wanted to understand how you think about the full year or if that price cost positive was in the second half to achieve that neutral? Just to get some clarity on that.

[Michel Giannuzzi, executive]

I will answer directly your second question, Lars, and I will let Nathalie answer your first question regarding CapEx. So I mean, 0 is a positive number to start with, according to the math. I mean we -- the point is we'll be very happy if we end up the year with a 0 plus. Now, we'll do everything we do to be above 0 so, it will not be EUR 1 above 0, but we don't expect to have such a positive spread as we used to have in the past. That's my point. But clearly, we will aim and we will make sure that we end up with a positive spread. Sorry for the confusion, but it's pretty much methamatics that are coming...

[Nathalie Delbreuve, executive]

Background. So on CapEx, again, you can count around 10%. So that would be a bit more than EUR 300 million for the year.

[Unknown Executive]

We have no further questions on the line. We now move to written questions.

[Operator]

Thank you very much. I think we have some questions on the web. Many of them have already been answered. So I will try to -- because there are many of them. So first is from [ Inigo ]. Do you see risk of expropriation in Russia? And what is the value of the assets in Russia?

[Michel Giannuzzi, executive]

Okay. This one has not been answered. As you know, we have 2 small factories in the south of Russia in Volga region. Those 2 factories are, since the war, are working in a very autonomous manner. We have no exports out of Russia. It's a local business with local customers for the food industry, which is considered as essential by, of course, the Russian government as all other governments. And they are -- we have no expats there. So they are managed by our Russian teams. And the -- I repeat, they work in [indiscernible] they work in a completely autonomous manner. We don't transfer any cash. They are cash sufficient. They're autonomous, and they can run the business without any need of cash. So therefore, -- this is a situation that is compliant with the sanctions, of course, that have been decided by European Commission and the European states.

And the total value of our -- and I repeat that these assets are represented a more -- a bit less than 3% or around 3% of our sales last year. So it's not a significant -- it's not meaningful, I would say, operation for the size of Verallia. So the fixed asset value is less than EUR 50 million on the balance sheet. So again, that's not really material.

[Unknown Executive]

Thank you, Michel. So one that has not been answered probably is, how do you see the evolution of the spread impact quarter after quarter?

[Michel Giannuzzi, executive]

Okay. Well, this is part of the difficult questions that we cannot answer given what I explained before regarding the fact that some of our costs are based on the spot prices and are changing almost every day or every week. So depending on how those cost evolutions change in the coming months, we might have a positive spread sooner or later. For us, it doesn't change the goal. The goal is [ sort of ] a positive spread for the full year. And therefore, we will manage the business towards this goal.

[Unknown Executive]

Okay. Thank you. Regarding volumes, just a quick question. Where does it come from? Is it market share gains or higher demand? And if -- and do you think there are client inventory buildup in view of certain inflation?

[Michel Giannuzzi, executive]

Clearly, I mean, we don't even look at market share. It doesn't make any sense. At the end of day, the market is extremely dynamic. I repeat one more time. We can't serve overall our customers and we are not trying to gain market share. We are just trying to support our customers the best we can by selling everything they would like us to buy from us. And we like to buy a lot more than what we can sell. So the situation is this one. And I repeat, it's about every segment of the market. It is extremely dynamic. There is no 1 segment in the market that is lagging behind the others extremely strong everywhere in all segments with all customers. And I don't think as a consequence that customers don't even have the opportunity to build inventory. Maybe they would like to build inventory, but given the tightness of the market, the accounts they just don't.

[Unknown Executive]

And the last question, when you talk about mid-teens price increase in Q2, is this on top of the 10% plus or circa 10% in total in Q2?

[Michel Giannuzzi, executive]

No, it's on the top of the 10% of the Q1.

[Unknown Executive]

Okay. I think the rest have been already covered through the previous questions.

[Michel Giannuzzi, executive]

Okay. Well, I would like to thank you all for participating to this call this morning. Thank you very much for following our company, and I wish you all a very good day. Goodbye.

[Operator]

Thank you for joining today's call. You may now disconnect.