Verallia SAS

F:1VRA

Earnings Call Transcript 2020-Q2

[Operator]

[Operator Instructions] I will now hand you over to your host, Michel Giannuzzi, CEO of Verallia, to begin today's conference. Thank you.

[Michel Giannuzzi, Chairman & CEO]

Well, thank you very much and good afternoon, everyone, and welcome to our call for the first half of the year results. I do hope that you and your families are doing well and that you are not too severely hit by the COVID-19 pandemic. I will share the presentation tonight with Didier Fontaine, Verallia Group CFO. And I'm very pleased report strong performance in H1 that shows the resilience of the group in the context of the COVID-19 pandemic. Revenue, as they are reported, stand up at EUR 1.275 billion, which is down 4.1% versus last year, first half of the year. But the organic decline in the first half of this year is only 0.9%. And even if we exclude Argentina, which you know is a hyperinflation country, the organic decline is only 2.7% versus the first half of last year, so quite a strong top line performance in the context of the pandemic. Our Q2 reported revenue were down 9.6% to EUR 630 million. And on an organic basis, it's only 5.4% drop in Q2 this year compared to Q2 last year, after a good Q1 as you remember. When we talk about the profitability and the adjusted EBITDA performance, our adjusted EBITDA was down to EUR 299 million, in line with the revenue decline. And the margin basically dropped 10 basis points at 23.4% for the first half of the year compared to 23.5% last year. We've kept deleveraging the company during the semester. And our net debt leverage ratio is down to 2.5x adjusted EBITDA for the last 12 months compared to 2.6x at the end of December last year and 2.9x a year ago. We did pay a dividend to 87% of our shares in the way of a share dividend. And the treasury impact for the shareholders that have opted for the cash payment will be only EUR 13 million or has been only EUR 13 million in July. And last but not least, we've announced during the quarter, second quarter, the implementation of the transformation plan in France to adapt our organization to the market changes and to improve the competitiveness of our operations in France. So moving to the next slide, what are we doing during the COVID pandemic? We've kept managing the business continuity plan very tightly, with all our factories being operational throughout the semester. No factory was shut down, which kept serving our customers, whose role is essential throughout the food industry supply chain. Since the end of the lockdown in many countries, we progressively are returning to the office, while we still have a good share of our employees having home office work. And we've constantly -- constantly, sorry, updated our health protocols to make sure that the health and safety of our employees is always protected as best as we can. And we are quite pleased to report that so far, we've been able to ensure a good level of hygiene and health measures in all our factories and home office -- and work office, sorry. The second thing on Page 5 is about the initiatives that we have taken throughout the organization, led by our people in the floor in the countries where, since the beginning of the pandemic, there's been a huge solidarity move from all our employees. And not only as you remember, we've given some personal protection equipment, some, we bought some hydraulic solutions for the hospitals. We provided also some medical equipments to some hospitals by buying them. Even in some cases, in some countries, we provided some transportation to the hospital personnel. On the top of this, we've made also some donations to some NGOs that have been supporting people that were in distress or in difficulty during the period. And you have here 3 examples that we are quite proud of to report. The first one is La Maison des Femmes in France. They are all coming from what has been known in France recently. La Maison des Femmes in France, in Saint-Denis, where we have [indiscernible] -- are supporting this organization that is helping women in difficulty and victims of violence. And during the COVID-19 unfortunately, there has been a surge of violence at home in some cases. We've also supported Covidom, which has been a home monitoring platform to help unjam the hospitals from the people that were having some symptoms of COVID. And they have been able to set up in a record time this platform with 2,500 volunteers, which has been a great solidarity move from a lot of medical professionals. And last but not least where we are also supporting the Secours populaire francais, who's helping jobless or homeless people to not only sometimes find shelter, but also provide food to them. And this has been done with, in association with the local communities in the areas where our factories are implemented. So these are 3 examples coming from France, but we have plenty of examples in all the countries. And altogether, the funds provided by the executive management team and myself was set up to EUR 1.6 million has been or will be completely donated in a couple of days to help those initiatives. So this has been a strong solidarity and a very impactful move inside the company, which I am very pleased to report on behalf of the 10,000 employees of Verallia. Now another great success during the second quarter is despite the turmoil linked to the pandemic, we've maintained our decision to offer all -- almost all our employees a shareholder ownership program that was, I would say, discussed at the time of the IPO last year and with 2 things: First of all, this is the fifth time we offer such an employee ownership program to employees, but in the past it was limited to a smaller number of countries. So we expanded to 8 countries, nowadays including some big countries like Italy, that in the past, for political reasons, could not join. So we have now extended to the maximum number of countries where it makes sense, and it's possible technically to offer employee ownership programs. The second thing, we boosted the matching contribution from the company, up EUR 3,000 per employee, which is in addition of a 20% discount on the share price, providing an attractive investment for many employees that have decided to invest in the company. So as a result of this program, we got a 42% participation rate amongst all eligible employees worldwide, which is quite a significant participation rate. Here in France, this participation rate was 77%, which is even higher. But there has been more, I would say, use or more knowledge about this program in France than maybe in other countries. You can see that in Spain, it was 50%. And in the countries of Italy and Brazil where it was the first time we had such a program, we had even up to 30% subscription rate. Now this means that at the end of this employee ownership plan that was done during the quarter, the employees now hold 3.3% of Verallia's share capital. Moving to next slide on Page 7. You have here another, I think, strong information -- important information, sorry, about the dividend payment that took place in the first half of the year, where 87% of our shareholders have opted for a share dividend rather than a cash dividend. Our main shareholders, Apollo, Brasil Warrant Administrao de Bens e Empresas, Bpifrance Participations, and the employee ownership fund, FCPE Verallia, have all opted for the share-based payment of the dividend, which means that the capital has been increased as of July 9 up to 123,272,819 shares. And you can see on this split on this doughnut, the split of the main shareholder base, post-dividend payment. And this is an estimated split indeed since this could have changed slightly during that period. So the last information that -- the last highlight shot of this semester is related to France. You will see from Didier's comments that France has been more impacted than other countries due to the pandemic. However, we were already, before COVID-19, facing some slight overcapacity in France. And also, we had the plan to improve the competitiveness of our operations in France before COVID-19. Of course, the sharp decrease of the French market has not helped, just the opposite. It has just reinforced the need to transform our setup and our operation in France. And the decision has been taken not, to not rebuild one of the 3 furnaces of the Cognac plant, which is -- will reach its end of life at the end of this year. And this will basically eliminate some excess capacity we have in our French operations, and of course better load all the other plants in France. And the second thing we've announced through this plan is also the change in the production organizations in all the plants in France, all the glassmaking plants in France, we have 7 of them, where we will implement the same process flow organization as the one we have in all other factories throughout the world, which has been a key element in the success of our improvements in our operations everywhere in the world and which was a little behind in France. So this will, believe, make the French operations more competitive going forward. We as a responsible company will favor voluntary departures, like early cessations of activity, like early retirements, helping people maybe to set up their own businesses for those of them that would like to do so. And altogether, it concerns 150 jobs and positions that should be made redundant at the end of the year. So these highlights being mentioned, now I will hand over to Didier, who is going to go through the financial results of this semester.

[Didier Fontaine, Chief Financial Officer]

Yes. Thank you, Michel, and thank you very much to all of you for joining this call. I'm going to structure my presentation in 3 parts, first as you roll, by the way. First, reviewing the revenue numbers at group level and then by segment, then move on to profitability with the same breakdown, and finally conclude with our cash performance for CapEx results and capital structure review. So now let's move to Slide 10. So first of all, what we can see is that despite the COVID-19, Verallia has shown a lot of resilience. And as a consequence has been able to deliver revenue, which is only slightly declined in H1 '20 versus H1 '19 on organic basis. For H1 '20, Verallia reached revenue of EUR 1.275 billion to be compared with EUR 1.329 billion in the first half of 2019. This additional highlighted that. This represents a drop in reported sales of 4.1%. Nevertheless, if we exclude the negative ForEx impact, which by the way has been sizable, especially in the second quarter as we have no scope impact, i.e., on an organic basis, the sales drop is limited to a slight organic contraction of 0.9%. And if we exclude Argentina, you know the [indiscernible] is supported by the high level of inflation, is minus 2.7%. However, beyond the big picture of the first half, we have seen 2 different trends between Q1 and Q2. And if we go into more details, the first element I would like to draw your attention upon is the bucket volumes, the red one on the left-hand side. This is all negative on the bridge at minus EUR 56 million. And that's where the breakdown between Q1 and Q2 is important. Because if in the first quarter, as you remember for our last call, volumes were slightly positive and we were showing a 4% positive organic growth. The picture in Q2 has been -- and we alerted you at the time and we anticipated it, the picture I said has been different in Q2. The drop in volumes reached 7.9% in the second quarter, leading to a minus 5.4% organic sales decline, with a drop happening essentially in April and May period during which the COVID crisis fully materialized. Comparatively, June was much better. The second point, in addition to the drop experienced in volume, the mix deteriorated over the first half of the year, mainly driven by the France performance. Actually, we say a mix of 2 natures, number one, the product mix, and second one, the country mix. The result of that being lower volumes sold in sparkling wine and especially spirits, and this has been associated to a shift by customers, especially in France and Spain towards less premium products, meaning cheaper products. The green bucket price/mix, we have increased globally everywhere, but at a different level. And still being boosted by Argentina, which should present a good portion of this increase, boosted by inflation. It's still a challenge in Argentina, where inflation is significant, and where fighting for price increases is not option. To conclude on that bridge and in line with the recent past semesters, we also have been penalized, especially in Q2 by exchange rate variation coming almost [indiscernible] from Latin America. The impact was solely negative EUR 42.1 million, representing minus 3.2% of sales. Primarily due to, I would say, the usual suspect, Argentina, which is still in hyperinflation mode. But as well more surprisingly from the Brazilian reals, which lost in average between H1 '19 and H1 '20, 25% of its value, whereas it has been mostly stable over the past years. Now let's move to the Page 11 and to see more detailed information by segment. So we're going to start by SWE, Southern and Western Europe, as you remember, Iberia, Italy and France. Revenue in SWE dropped by minus 5.2% on the reported and organic business, reaching EUR 880 million, actually after a nice, quite a nice performance in the first quarter in Iberia and Italy, revenue declines in all the countries in the second quarter. While highlighting that in the beginning, but the most notable drop happened in France, where volumes started to decrease already in the first quarter as we [indiscernible] end of April. And this is where the, in this country where the exposure to premium products, sparkling wine and spirits is the highest. Speaking about product and if we look by product category, the [direction] in H2 is the condition what we said and we saw in the Q1, namely strong dynamism in food jars in SWE, but as well in the rest of the group, while the sparkling and the special spirits suffered the most at, they are penalized by the shutdown or the very low activity of the hotel, restaurant and coffee -- cafe, sorry, sector. Consequently, and Michel highlighted that in the previous slide, we have launched a transformation plan in France to adapt the organization to the market changes and to improve its competitiveness. Now if we move to Page 12 on Northern and Eastern Europe, which comparatively performed well, with a reported revenue which increased by 3.1% and amounting to EUR 283 million. Foreign exchange had only a material negative impact, essentially coming from the Polish zloty and the Russian ruble. The robust performance has been driven by the combination of a good segment mix, which is food jars, but as well non-alcoholic beverage, especially water, which as I said did globally pretty well at group level, but they have been the driving factor of the continuing dynamism of NEE in Q2 after an already strong Q1. Mix was good, especially in Germany, on beer. And sales price increases, especially in Eastern Europe, catching up with the weaker first half '19. Now the third segment, closing on Latin America, Page 13. Factually, reported revenue dropped by 12.2%, especially in future gains, strongly penalized by the unfavorable evolution of the local currency. This represents a EUR 42 million negative ForEx impact. Again, usual suspect, Argentine peso. But the Brazilian real, which I pointed out earlier, has been uncommon over the past years. I will come back to that later on, on the EBITDA. But going forward, I mean there is no reason to be more optimistic on the reshape of those 2 currencies for next semester. But if we exclude this negative impact, the sale increased by 20.8%. And if you remove the boost from inflation in Argentina, this is still plus 5%, which is still sizable. This is a result of what? This is a result of first volume increase in wine, in Argentina and Chile, still wine, offsetting a softening Brazil market. We have seen that certainly in the second part of the month of March, April and May, especially on the beer side. But the country has been showing some positive signs of recovery over the past 2 months. As regards to the sales price increases, this -- they continue to contribute positively everywhere in the region, particularly in Argentina where I said it's not optional if you want to continue business, where the pricing [indiscernible] very active. And I want to just, to highlight that every quarter, that I want to highlight the point of the drop, that optimism over there, in an environment that remains highly inflationary and politically/economically, there is a big discussion about the Argentine debt coming up, [indiscernible], which is at the moment which is very fluid, [indiscernible] of fluid. Now that we have covered the top line, let's move on to review the adjusted EBITDA, and we're going to move, by the group on the Slide 14. As introduced by Michel, the adjusted EBITDA decreased by 4.5% in the first half of the year, reaching EUR 299 million. If we exclude the ForEx conversion impact, it remained flat in value. This good performance is driven by: number one, our ability to contain volume decreases. And on top of that, June was a good month; second one is still a positive pricing/cost spread, confirming the point of 4 pillar, and which is linked to our dynamic pricing policy. And finally our third pillar, which is our capability to pursue our productivity plan and therefore reduce on a permanent basis, on a structural basis, our cost base and by being more efficient. The performance from the plant, led to a net reduction in cash production costs of EUR 19 million in the first half of 2020. Remember, our target is a net reduction on a yearly basis of 2%. This represent a 2.3% improvement. Back to the bridge analysis. If you go to the activity bucket of the bridge, we see this is strongly negative. The EUR 26 million, actually negative, correspond to first, the weaker sales volume compared to H1 2019 and mainly the drop in volumes sold by 7.9% in Q2. This was partially offset by comparatively, a lower destocking over the same period, H1 versus -- '19 versus H1 '20. This reduced decreased inventories is mechanically almost due to a planned furnaces repair scheduled for 2019. That was -- this is a different schedule, nothing really linked to the COVID. This is planned well in advance. The plant is covering more or less the same number of furnaces per year, but with a different quarterly timing. In H1 '20 and it happened in Q1, only one furnace shut down for repairs was scheduled and happened, compared to 5 furnaces repaired in H1 20 -- in H1 '19. The consequence of that is that in H1 '20 and H1 '19, especially in Q2, we sold our products for inventory reduction, not by a production increase. This is very important because the plan for furnace repair exists, and Michel said that, for every time he said, is between 5 to 7 furnaces a year. Then on the contrary, in H2 '20, these furnaces shut down for repairs will take place, compared to none in H2 '19. To be exactly the reverse effect, it would trigger an event to a reduction in H2 '20 compared to the same period in 2019. We will cover that trend later on. As you can see, exchange rate was significantly negative. Again, the vast majority of the impact happened in Q2. It was driven by the real depreciation, as well as the continued devaluation of the peso. The other category includes the COVID-19 direct extra cost for EUR 3.5 million. I will stop by there, just to give you what is the -- where we perceive, we measure the COVID impact for the first half of 2020. We consider the way we measure it for the company, it was around EUR 14 million cost. EUR 11 million was -- were recorded in EBITDA. EUR 3 million basically the donation. And the extra equipment were recording as nonrecurring. So the EUR 299 million includes EUR 11 million of COVID impact in, basically 3 buckets. Bucket #1 is activity. Under activity, we have specific roles. When the activity of plant goes beyond a certain level, the under-activity is, it is not being booked on the product but recovered through P&L. So this is in our bucket activity. The #2 has been averaging, not because our policy to hedge is to hedge the full year in advance, almost. So clearly given the low activity we have been are at, we took it in line with the averaging. And then #3 is what you have there, in other, which are the extra direct cost for EUR 3.5 million, which are basically logistics and delayed or increased start-up cost on our 2 brownfield projects, which we are targeting to start in April, May and we have not started yet. So back to the turnover, you saw the direct COVID costs, plus some positive one-offs that happened in '19, such as an insurance refund in Portugal or some claims won with customers, and anticipated maintenance in '20 to prepare for the shutdown of the second half. So despite those impacts, adjusted EBITDA margin decreased only very marginally to 23.4% compared to 23.5% in H1 '19. On the quarterly basis, the margin was maintained at 23% in Q2 '20, to be compared with 23.5% in Q1 '20 and 24.5% in Q2 '19. Just 2 words before exiting the corporate slide. On the net income. The net income, which reached plus EUR 79 million, which is by the way, higher than the same net income last year, I wanted to say towards on it, it's better despite a decrease in operating income as you know. And the restructuring charge, we took a restructuring charge linked to the transformation plan of EUR 19 million, 1-9, booked in Q1, and linked to the -- sorry, in Q2 and linked to the transformation plan in France. But this performance on the net income is coming essentially from the significant improvement in the net financial income, following our debt reduction in value and the improvement reached on the interest spread as well. Now let's move to the Slide 15 and reviewing the performance in SWE. In SWE, we reported an adjusted EBITDA of EUR 196 million, down 10.9% compared to the same period last year. This decrease is mainly due to France, where as we discussed on the top line, we experienced a sharper drop in sales, the highest level of underactivity booked in the activity bucket and the strongest product mix degradation. I want to repeat that this is, in particular, the consequence of the decline in sales of premium product in sparkling and in spirits. I discuss that when I review the top line with you. On the other hand, Spain, Portugal and Italy show a good resilience with a stable adjusted EBITDA in the first half. In terms of margin, SWE margin went down to 22.2% versus 23.7% in H1 '19. This is again vastly coming from the France results. I will not repeat it again, but I'm insisting that's the reason why we are launching a transformation plan in France, to adapt the organization again and improve the competitiveness. Now if we move to the Slide 16 on NEE performance, on the back of a good top line, the adjusted EBITDA amounted to EUR 69 million in H1 '20, which compare very favorably to the EUR 60 million in H1 2019, which is a 15.1% increase. In addition to that, EBITDA margin, it reached a good, very strong 20.4 -- 20.3% (sic) [23.4%] compared to 21.8% in H1 '19. The 3 pillars worked very well in this BU, this business unit, in H1: top line, good product mix, offsetting softer sales in Q2, strong contribution from the food jars and the softdrink sector, selling price increased implemented especially to catch up in Eastern Europe, catch up with a weaker H1 '19 as I mentioned when we reviewed the top line, and an improvement and a catching up in this short performance, thanks to the contribution deployment of the PAP plan. And we keep the best for the end, the performance in Latin America on Page 17. The adjusted EBITDA grew by 2.5% on a reported basis, despite a significant currency depreciation. But at constant exchange rate, it will have significantly increased by 42.3%, supported by the Argentina top line and following the inflation recovery. And here as well, the full deployment and the full impact of our 3 pillars: volume growth in Argentina and Chile, I described when we commented the sales performance in the region. Positive inflation spread, and it is a no-brainer, it's not an option as I said. You need to go and fight to increase your pricing in a very freed environment. Thanks to the still very dynamic pricing policy, not only in Argentina, but all across the region, each country showing a positive spread. And I say, especially in Argentina, which remain a very highly inflation environment. And the third pillar, I think Latin America is going to do very well in the continuous rollout of our performance action plan. And this is leading in each country in a strong improvement in the operation in the region. The margin is following the same direction, reaching 30.6% from 26.2% in H1 '19, representing a rise of 440 basis points. As you notice it, the ForEx conversion impact has been sizable. And I want to say it again, that we are not optimistic for the remaining part of the year, given the politic and economical uncertainties of the region, especially the unexpected struggle that Brazil is going through at the time. However, at the conclusion of Latin America, I want to say that we are very pleased with the way our 3 pillars are being rolled out in the region and by the quality of our fundamentals over there. We covered the top line. We covered the results. As you know, cash is really king. Let's move on the cash performance. Starting by the Capex. I'd like to repeat it systematically. As an introduction, we have set up a very disciplined process for CapEx monitoring. And I think in a period of uncertainty and volatility, it is more than ever, important. And given the current circumstances, I can tell you that all investments remain more than ever, under tight control, from both an execution and a cash outflow perspective. When you look at the graph, in H1 '20 the total booked, this is booked CapEx, amounted to EUR 91.5 million, a number which is slightly lower at the same number on the right-hand side, a EUR 97.4 million which happened in H1 2019. Number are similar in size, but they differ actually with the breakdown. Nothing new how it is something we already highlighted at the end of the year and in Q1. We have lower recurring CapEx in H1 '20. It's linked essentially to the different timing of your furnace renovation. I say 6 -- sorry, 5 in H1 of 2019, only 1 in H1 '20, 6 in H2 '20. Please, I'd like to remember that was-- let me remind you the key concept driving our CapEx management: discipline. We are committed to meet our target of a recurring CapEx at a maximum of 8% of sales. The second difference on the breakdown is clearly the strategic investment in H1 '20. They are much higher as planned, and they are essentially in relation with the 2 brownfield investment in Spain and Italy, which originally was supposed to start up in end of Q2 and now they have been delayed given the current situation, and they will be starting up, depending on market needs. After CapEx, let's look at the cash flow. The cash flow from the operations for the period amounted to EUR 138 million, and there is 2 ways to look at that. The first way is to see the bottle half empty, and think that is EUR 58 million below last year. And the second one is to see the bottle half-full and think this is a damn good result, given the pressure on Q2 on the top line, the EBITDA, the stock management, the customer management and the supply management. So to go back to the EUR 58 million decline, first of all, this is explained by the decrease in adjusted EBITDA by almost EUR 14 million. The #2 is we expect that, we explained that to you at the beginning, we were expecting, and this is happening, a much higher cash investment on CapEx in H1 compared to -- '20 compared to FY '19, given the profile especially of the spendings on our brownfield. This is EUR 35 million additional cash-out there. And if you look at the bottom, we highlighted a line called CapEx working capital. You see how we spend, in addition to the booked, EUR 12 million in '19, EUR 50 million in H1 '20. Again, no surprise, we anticipate it, we manage it. Nevertheless, when you look at that, the EUR 58 million, you could be saying, okay, that's half empty. Now when you look at the working capital requirements, we managed pretty well. There had been a 7-day decline in sales day despite significant reduction in our balance sheet factoring. One of our [point of] focus has been customer collection follow-up, which has been better in the value and in percentage of sales compared to H1 2019. Please note as well that we have given special attention to our supplier base, number one, by playing the role of a big corporation, ensuring that payments were done on time. But secondly, by making sure that we were not creating difficulties or our supply chain were not put in difficulties. Lastly, we delivered a cash conversion level of 69% which is a very robust number. Now if you move to last slide, sorry, to the Slide 21, not the last one. You will have to stand with me another slide after that. Michel pointed out we continue to deleverage. Despite a drop in adjusted EBITDA, we continue to deleverage. We are at 2.9% last year if we exclude the shareholder loan. We are 2.6x at the end of December, and we're at 2.5x at the end of June, essentially through the cash generation. Now the last one, just update on our financial structure, our capital structure, did not change over the last quarter. The only item that had changed is the commercial paper. If you remember, we were almost at EUR 200 million at year-end. We're almost at EUR 200 million at Q1, and we are now at EUR 39 million at the end of H1. Actually, on our program, it's doing well but there is very little appetite during the COVID crisis for non-investment-grade company. However, we benefit from a Term Loan A, 5-year maturity. RCF 1, by the way as you know, we drew on it to compensate the commercial paper drop. And we set up in April a new RCF with a maturity of 12 plus 6 months, 18 months. And at the end of the day, the conclusion is that this will bring us with a very solid liquidity, almost EUR 900 million, shy EUR 800,000, that's a shame. And liquidity, I repeat being calculated as a cash in hand, the undrawn revolving credit facility, minus the outstanding commercial paper. Therefore, a good liquidity, a comfortable liquidity, but backed by very close monitoring of the cash element of our businesses. I would like to thank you all for listening, and I give the floor back to Michel.

[Michel Giannuzzi, Chairman & CEO]

Thank you very much, Didier. Let's move to the conclusion and the outlook for 2020. So if we, as you heard very carefully the position from Didier, you can really, I think take away the fact that this COVID crisis has enabled Verallia to leverage strength and demonstrate its resilience. Just remind you that until Q1, and if you go back to Q1 report and press release, we were enjoying another growth quarter with a 4% organic growth in Q1, and another quarter of continuous EBITDA margin improvement by more than 100 basis points. And for '20, like everybody else, we were taken by surprise, this COVID-19 in Q2. But despite this, the performance of H1 is very solid. And as I said, we limited the decrease of revenue to 4.1% on a reported basis, but only 0.9% organically.Our adjusted EBITDA margin has been more or less stable, just dropping by 10 basis points, 9 basis points to be precise, in H1. And as Didier mentioned, that was very strongly linked to the French market performance and depremiumization, if you want, which is I think only a short-term issue because the long-term mega-trend of premiumization, I don't think, is at stake here. But in the short term, where people are not going to celebrate parties in hotels or restaurants or cafés that are closed and are locked down at home and not having any party at home either, you can then understand that spirit and champagne are probably less consumed than in any other year. But this will come back, we are very confident about that. But it has hit France quite strongly during the quarter. We've kept generating strong cash flows, deleveraging the company. And we've taken very sharp and immediate actions to reorganize our French operation in line with the market conditions and strengthen the competitivity -- competitiveness, sorry, of our French operations. So it's been a very radiant first half of the year. If you look -- if you remember in April, we withdrew our annual guidance for this year in terms of financial guidance. Now based on the -- and I mentioned at that time that we thought that Q2 will be the lowest quarter of the year, and we should see some progressive recovery going forward in Q3 and Q4. We are still in this mindset and in this mood. And based on the strong performance of H1, we are going to provide the guidance for 2020 outlook. Of course, this is based on the assumption there will be -- there won't be another huge wave of lockdown, a second wave of lockdown in H2, but that things will keep normalizing as they normalize right now with still a little bit of uncertainty. So it's a difficult exercise to forecast, but as I said, Q2 should be a low point in terms of volume drop. The full year 2020, we believe, would materialize with a volume drop of around 5%. We expect to have an adjusted EBITDA for 2020 slightly above the one of 2018, 2, 3 years ago that amounted to EUR 543 million, bearing in mind that we have, as Didier mentioned, a lot more repairs of furnaces, rebuild of furnaces in H2 that will take place this year in H2 compared to last year, where we didn't have any. And the fact that we want to keep managing our working capital, and especially our inventory, very tightly, not building unused and -- in excess, sorry, inventory in the second half of the year. So therefore we'll keep tightening our inventory and controlling our inventory on a proactive way. We will also in H2 implement our transformation plan in France. We are on track in terms of timing, and we expect to have gone through the process by the end of the year this year. Now, just reminding you that the restructuring provision has already been taken in H1, so we don't expect any new provision to be needed in H2. So this is for 2020 outlook. If you remember, we also provided at the time of the IPO a midterm guidance, and I would like to come back to this guidance that we provided, now 9 months ago. The first item on the guidance was the organic sales growth, where we were expecting at that time a 3% to 5% CAGR growth rate during the period of 2020 to 2022. More or less, half of that will come -- was supposed to come from volume increase, in line with the market growth that we've seen in the 4 years prior to the IPO last year. And half of that would have come from price increase which should have ensured a positive spread above the inflation. Now given the fact that COVID-19 has severely hurt the market consumption this year, and given the fact that we are entering in a much more moderate inflation rate in our industry this year and probably next year as well, we clearly believe that this objective of organic sales growth between 3% and 5% is no longer valid. Now we are not going yet to propose another objective until we see more clearly how the major economies will recover next year and the years after. So in due time, we will probably come back to this objective, but right now this objective of organic growth is no longer valid. However, the other 4 objectives that we mentioned and we took at the time of IPO are still very valid in our mind. First of all, achieving at least a 25% EBITDA margin by 2022 is still a good target that we confirm. The recurring CapEx on sales ratio at around 8% per annum is also, as you understood from Didier's presentation, very much under control and will be maintained. We will keep proposing to the annual shareholder assembly to pay a dividend of at least EUR 100 million and probably with a payout ratio above 40%. And the leverage of the company, as you've seen, is below 3x and we believe that it should be in the coming years between 2 and 3x of the annualized EBITDA -- adjusted EBITDA of the company. So we are maintaining 4 out of the 5 midterm objectives, and we'll come back in due time when we have more visibility on of market recovery and the macroeconomic situation to confirm the midyear top line growth objective. So we see that's the end of our presentation. Now we are open to answer your questions. Thank you very much for your attendance.

[Operator]

[Operator Instructions] The first question will come from Matthias Pfeifenberger calling from Deutsche Bank.

[Matthias Pfeifenberger, Research Analyst]

Congrats to the resilient results. 3 questions -- 3 questions from my side. So the first is basically, can you give us any color on June and July run rates for organic revenue growth? And is there actually a risk in the LatAm business that there is a lag because obviously the virus has taken some time to spread there? Is there some risk for the third quarter in light of the very positive development in the second quarter?

[Michel Giannuzzi, Chairman & CEO]

Okay. Thank you very much, Matthias, for your question. I will give you some precise numbers because we've seen that some companies are reporting more precise numbers month by month. As Didier mentioned, the worst months were to do with most of April, which was down 14%, and -- talking about the reported revenue, altogether. 14% versus the prior year, April. The month of May was the lowest, the trough at minus 18% versus prior year. And we were supposedly -- we are surprised -- sorry, positively surprised by some good performance in June with even a 4% increase versus prior year in June. So as you remember during Q1 results presentations, we thought that we would end up the quarter of Q2 with a double-digit drop in sales. Actually, it's slightly below 10%, thanks to a strong June. And July is not completed yet, but is, will be more or less at par with last year, so quite a nice trend in the last 2 months. However, 1 month or 2 months doesn't make a summer. And to be very frank with you, when we talk with our customers, we are not clear about whether it's some restocking in the supply chain. So it's just a restocking effect because after the lockdown of hotels, cafe and restaurants, you remember that represents 30% of our customers' business, more or less. There could be some restocking in the supply chain. Of course, we are helped by the fact that hotels, cafes and restaurants are reopened and consumers are consuming again. So these are precise numbers about the month-by-month recovery, if I can say so. So there is still very, very much unknown about, especially on West Europe which are big countries for tourism: Iberia, Italy, and also France, where this year because of the -- of course the difficulty to travel, we expect a lot less tourists than the years before. And this could have an impact on the, of course, domestic consumption in those countries during the summer. So this is why we are a bit cautious on the outlook, especially in those regions and those countries. Regarding the LatAm lag, it's clear that LatAm is still struggling regarding the pandemic, with some start and go, stop and start, stop and factory in terms of lockdowns, depending on the countries and even depending on the cities in the countries. We have not a lot of visibility again in the coming months. But we think that at some point, LatAm with some delay maybe, will also be able to release some constraints in the lockdown on the business. So maybe Didier, you want to add anything?

[Didier Fontaine, Chief Financial Officer]

Yes. I think on LatAm performance, we need to be always cautious about the bottom line. Just give you one number on the real, Matthias, you understand. The average Brazilian values for S1 -- and not us, everyone, is at a rate of EUR 1 for BRL 5.4. Today, clearly we are today at BRL 6.1, BRL 6.2. So the ForEx, the conversion will impact. I mean at the end of the day, the EBITDA will be hit by the conversion impact much more in the second part of the year than the first part of the year. And honestly, it's a matter of time for Argentina to see the sense [indiscernible] dollar is today at 80% above the current dollar in Argentina. So mechanically, the ForEx will take care of it in those regions. That's independent of the top line. But the bottom line, you're going to see some conversion impact in the second half that can [indiscernible] Maybe I'm too negative, but I'm expecting that to be severe.

[Matthias Pfeifenberger, Research Analyst]

Okay, but that's -- my question was more on the organic sales, but fair enough. Maybe some add-on, maybe on the pricing. What has been the like-for-like pricing in the second quarter x Argentina? And then related to that, we've seen some news flow selectively on collect costs increasing. Have you faced some of this in terms of the collection rates being -- basically collection being shut down in a lockdown? Is that an ongoing concern? Or is that easing already?

[Michel Giannuzzi, Chairman & CEO]

So regarding pricing, first of all, we don't report on pricing as such in a detailed way. It's usually price and mix together. And as you've seen, we've been hit with negative mix impact. The pricing was, as Didier mentioned, [indiscernible] depending on the countries, the dynamics of the countries. But at the end of the semester, at the end of the day, what is important is we ended up with a positive spread. And as you know, we negotiate prices in our business, except in Latin America where negotiations can --are taking place much more regularly than once a year. In Europe, we usually negotiate once a year and negotiations are behind us. So we are pretty, I would say, confident that what we see, what we saw in H1 in terms of pricing will stand firm for H2. Regarding your second question on collect, it's true that in some areas but very limited regional areas, during the lockdown some companies have difficulty to collect, collects. And therefore there could have been, in some areas, some tension. We, frankly speaking, we didn't feel this pressure or retention on the current market. And as such right now, if there had been, maybe some tension somewhere in some areas, we don't see them anymore. So we personally -- as the area, we don't see a lot of pressure on the current side.

[Matthias Pfeifenberger, Research Analyst]

Okay. Can I just come back on the pricing? Because at the IPO, there was a lot of distrust in your ability to price up in times of weak volumes. And now today you mentioned actually a positive spread. You mentioned positive pricing in Eastern Europe. And you also mentioned negative mix because of France. So can we assume that like for like was still positive on the pricing side in the second quarter?

[Michel Giannuzzi, Chairman & CEO]

Yes, yes, absolutely.

[Operator]

And the next caller in the queue will be Charles Scotti calling from Kepler.

[Charles-Louis Scotti]

Yes. I'm going to shoot questions. Just the first one, can you quantify the impact on EBITDA in H1 of lower destocking? And destocking is going to be much higher in H2. Can you also give us guidance on what should we expect in terms of EBITDA impact? The second topic, can you clarify a little bit if the COVID-related impacts has been booked in the adjusted EBITDA of the company? And can you tell us if you have benefited, and also the amounts from state-backed measures regarding your partial unemployment? And my last question is on raw materials tailwinds as you have focused on small clients that are probably less straight and aggressive on prices. Shall we expect significant [indiscernible] in H2 and especially in 2021?

[Michel Giannuzzi, Chairman & CEO]

Okay, Charles. On the lower destocking, it's just fixed costs absorption. That's [indiscernible] why I will not give the numbers, because you would see what my fixed costs by plants are. But the impact is of more than EUR 10 million impact one way or the other.

[Didier Fontaine, Chief Financial Officer]

Okay. And regarding the COVID impact, as I said, estimated again by the company and followed by the company, it's EUR 14 million, 1-4. EUR 3 million of those EUR 14 million is outside the adjusted EBITDA and nonrecurring. As I said, it's donation and specific equipment PPE. EUR 11 million of that is EBITDA. Okay. As regards specific measure and short-term employment, very, very, very limited.

[Michel Giannuzzi, Chairman & CEO]

We've acted very -- we have acted very responsibly as a company, forcing first people to use the bank hours. So in some countries, we have a system where people are flexing the hours, with the bank hours season. So first of all, people were asked to empty their accounts on bank hours. Secondly, we also pushed people to take holidays as much as possible or n[indiscernible] France and only in some factories that are -- had a much bigger drop in activity than others where that was not sufficient. We asked for a small partial unemployment and state aid unemployment system, but this was very marginal for the company. Now regarding raw material?

[Didier Fontaine, Chief Financial Officer]

Raw material, I think we -- on H2, we are benefiting. I mean first, we have short-term and long-term contracts, long term contracts. There are a lot of index, short-term contract. So we are seeing raw material flat for the coming second half of the year. We don't expect raw material, I mean -- not energy raw material. We don't expect a surge in raw material in the second half. More were to push it down, to push it down going forward.

[Charles-Louis Scotti]

Sorry, my mistake, mine was just to -- the question was rather on energy cost, actually.

[Didier Fontaine, Chief Financial Officer]

Energy, I mean energy, we have a very transparent and very structured policy. Energy, we are adding it. So clearly we are today, you know the numbers as I know. You are clearly missing the opportunity of not being hedged, the one with speculative and not hedging, today is benefiting from a very low energy cost. This is not the purpose of the company, and I say several times, that you win once and when you lose, you lose big time. And that's -- I don't think the shareholders will let the company, will take a speculative position. Having said that, you are right, today the cost of energy is lower than our hedge cost and it will probably go further down next year and probably, we will probably be a little bit higher than the market. But honestly, nobody knows, nobody knows what will be the spot next year. Because if you look at the price of gas today and the future next year, there is still several euros of difference by TTF. So you can speculate and remain open and expecting the spot not to increase, or you hedge. That's what we are doing. But the average cost of energy next year should be probably lower than this year. Hence the -- on pricing, and that's what Michel was saying when we said, it's difficult for us to project an organic growth including sales price increases higher. Because we expect on price, because we are covering costs, we don't expect price increase to be as high to cover energy, which is flat or going down. And I would like to add one thing on the inventory destocking, because destocking is -- can be -- how can I say it? It's related to the shutdown [indiscernible], but it's very -- we are doing that as well very proactively. Because we want to have that company slimmer with the right inventories and the right quality of [indiscernible] . It's good for the liquidity, it's good for the balance sheet. And when you having the right inventory and the market resumes, your [indiscernible].

[Charles-Louis Scotti]

Just one follow-up question, it would be my last question. But considering the strong beat in H1, the EUR 545 million EBITDA guidance for the year seems a little bit conservative, I would say. Have you taken voluntarily cautious volume consumption for the rest of the year? Or is it -- does it just reflect the optimum FX headwind?

[Michel Giannuzzi, Chairman & CEO]

No, Charles. We -- I think it's the best guess we have today on volume. So volume is more cautious next year. I think around 5% drop in volume is neither bullish nor bearish expectation is what we see going forward. Although I repeat, there is a lot of uncertainty, and our customers are not helping us a lot in forecasting, to be frank with you. Now -- so the top line is already difficult to forecast. But on the EBITDA side, first of all, I remind you that we see a slightly old [indiscernible] 43. So this is basically like a floor. And this includes 2 big unknown for H2 -- not unknown, but one which we know, and another one which we don't know. The one we know is the destocking that led, Didier mentioned several times, that is huge for H2 compared to what happened last year. So we are talking about [indiscernible] of variance in terms of inventory variation. And as you understood, since we're going to stop 5 -- 6, sorry, in H2 this year, there will be a lot of destocking. The second thing is the change, the exchange rate that -- this one is completely unknown, and we don't -- this is only translation impact. It's not a transaction impact. Therefore, it's not hedged. And therefore it's -- the only thing we know and Didier was very clear about it, is that it can only be worse than what we've seen in terms of impact in H1. So we expect a much bigger hit on the exchange rate side than the EUR 30 million hit we took on the EBITDA in H1. So that's the -- so that's the reason why you can't take -- and I remind you also that we also have a stronger H1 and H2 in terms of both sales and EBITDA. This is more of the seasonality of the business.

[Operator]

And the next caller will be Lars Kjellberg calling from Crédit Suisse.

[Lars F. Kjellberg, Research Analyst]

I just wanted to continue a bit on the guidance. Maybe I missed this, but I do think you called out almost an 8% drop in volumes sold in the second quarter. What was it in the first half? And the question really that I'm trying to get an understanding with -- on is when you talk about 5% down for the full year, it seems as if you -- kind of the math works out, you're not expecting any volume recovery in H2 versus what you experienced in H1, even with the COVID-significant impact in Q2. And also on the previous questions about I left the delta is the significant and destock converters, stock building you did last year. But also, can you call out what is your view on the actual costs springing down the furnaces or bringing them up again? I mean, 6 furnaces in the second half versus 0 in itself can, I guess lead to significantly higher costs, just related to the furnace rebuild stop and start.

[Didier Fontaine, Chief Financial Officer]

Well, regarding the numbers, you got it. I mean the Q2 sales dropped by 9.6% or 9.7%. So you got the numbers right, and there's no difference in this one. And now the recovery we see in Q3 and Q4 is compared to Q2, which I think is close to 10% down, where usually the average basically you're expecting something like more around 5% drop in H2, with still, I repeat, quite a lot of unknown about Q3 and in South and West Europe because of the tourism impact. And Q4 is traditionally always a small quarter, but this is the [indiscernible] of the business. So we expect sequentially some progressive recovery, but not the business or the economy bouncing back to the same level as the one we had last year. So it is our assumption to for the H -- for the second half of the year. Now regarding -- sorry?

[Lars F. Kjellberg, Research Analyst]

No, I was going to say the same goes for mix, I suppose. So you still have an adverse mix for the corporation?

[Didier Fontaine, Chief Financial Officer]

Absolutely. I mean, there have been a lot of articles in France but not more recently, but the Champagne region being very strongly hit by the fact that people are not again partying and consuming champagne as they used to. And there will be strongly hit this year and probably also next year on the champagne side, probably of course less than Q2, but still significant. Regarding your second question about the furnace, let me maybe explain more in detail what does it mean. After 12 or 13 years of production life, the furnace is worn out, and has to be stopped to either: Don't replace it, is what we do is, one of the furnaces in Cognac; or to be rebuilt. So basically you knock it down and you completely rebuild the brand-new furnace. So this is something that we -- if you look at our track record, we repaired and rebuilt 5 or 6 furnaces a year, every year. We have -- and this is very steady. I mean this is an ongoing repair. Now in the past until last year, just to have it, to put it on the field, because we're sold out and we're short of capacity, the goal was try to repair and reconstruct the policies in the shortest period of time as possible. And during that time, I mean people are either the maintenance people are working because they do other maintenance activities on the site. So you do some very big maintenance activities. Everything has been planned of course in advance. And some production people are usually taking off, vacation or [indiscernible] put on banked hours systems and so. So this is the way we do it. What is going to change this year compared to what we used to do in the prior years is we are going to extend the shutdown of the furnace, rather than trying to speed up the furnace repair in the shortest possible time, this [indiscernible] we're going to take more time in order to adjust for the lower level of demand in the market. So we are adjusting in other words the capacity that we have to the level of demand in the market. So -- and this will have, of course some costs because we are not going to absorb those fixed costs of the people that are basically not producing in some cases, or because we don't absorb the volume that we used to absorb in terms of fixes cost absorption. But this is something that we clearly mentioned, that this is how we and the most efficient way, by the way, to adjust the capacity. Of course, we've already taken the decision not to start the 2 brown furnaces, the [indiscernible] furnaces in Villa Poma in Italy and Azuqueca, Spain until we see the demand of the market back to a higher level. But beyond all of this, first, an immediate decision we took in Q2, the best way for us to adjust our capacity down, to adjust down for capacity, own capacity is to extend the stoppage period of the financial years.

[Lars F. Kjellberg, Research Analyst]

Got it. Just one final question for me, the flow-based organization that you're talking about, you're now putting into place in France, I appreciate 150 jobs will be lost in the process. Aside from that phasing itself, what sort of benefits does this give you? And if you can put that in some sort of monetary terms, what you're now doing in France for the group?

[Michel Giannuzzi, Chairman & CEO]

Well, first of all, the 150 jobs position that will be related, 80 of them are related to the nonrebuild for the furnace in Cognac. So 80 of them is basically bring to the downsizing of the capacity in Cognac. The remaining 70, spread over the other 6 plants, okay? So you see 70 divided by 6, you're talking 10 to 15 jobs per plant who are basically optimization of the local organization. And the main concept basically is to having a flow of validation where you had, under the same responsibility, the people looking for production and quality from the furnace, down to the warehouse. Where today, France is still organized by process, which means that you have an organization for the furnace another organization for the whole-time workshop and the organization for the cool-down workshop. And this is of course not the best in terms of responsibilization and appointment of our people. And we have changed this organization already more than 2 years ago in the other factories. And we've seen of course a much more responsive organization, much more empowered organization. And that has led of course to improvements in quality, and adding a better quality because people react faster, and they feel more responsible throughout the whole production process about the quality, and of course in terms of the yield improvement and in terms of machine efficiency and production efficiency. So we are not going to give you precise numbers beyond the, just the job that are going to be eliminated, which is pure productivity. But it is beyond just the cost aspect that you can calculate. There is a clear side benefit in operating your plant at a much better quality level and have a much better overall efficiency level.

[Operator]

And the next question will come from Francisco Ruiz calling from Exane.

[Francisco Ruiz, Research Analyst]

I have 2 questions. The first one it's, again I'm sorry to insist, on EBITDA guidance for the full year. So assuming this EUR 543 million, or slightly above EUR 543 million, does imply a drop in margin, if I have a correct level of sales, of more than 300 basis points in H2, and compared to last year, almost 150 basis points? Are my conclusions correct? Or probably I'm doing something wrong here?

[Didier Fontaine, Chief Financial Officer]

No, actually it's a drop versus -- it's a drop versus H1 of around 200 basis points.

[Francisco Ruiz, Research Analyst]

Okay. Okay, good. The second question is on working capital and factoring. So if you could give us the data on factoring on this semester? And how do you expect the working capital to evolve with the furnaces, stock, et cetera, in H2?

[Didier Fontaine, Chief Financial Officer]

Nonrecourse factoring dropped by 8% in H1 in flows, essentially because where it dropped mainly is where the country's dropped in activity, essentially France. So going forward, it will -- it should resume with incredible of activity. However, and let's keep in mind that in front of us, we still have customers that are weak, [indiscernible] of liquidity with [PG with social channels.] So we need to be very careful. If the insurance credit that are covering the nonrecourse structuring program are pretty cool fit today. And they are not increasing their exposure. They are more reducing than increasing. So basically we don't expect to catch-up on the nonrecourse factoring. I think we should -- we're going to still be below last year in coverage, in value and in person of courage again. Now on the working capital, if you exclude that, as I said, that's very important for us, we are expecting -- we did much better working capital in the first half than last year. And in second half, we do destocking mechanically, because a lot of the furnace repair will happen in Q3, will have a full cash impact in the fourth quarter. So we do expect working capital to be an improvement compared to last year. Yes. And we are still foreseeing free cash flow to equity, which is above 3 digits now.

[Michel Giannuzzi, Chairman & CEO]

Which means that we'll keep deleveraging -- sorry, deleveraging and reducing the debt of the company in H2.

[Francisco Ruiz, Research Analyst]

Okay. And just a follow-up on the French plan, could you give us an idea of the payback of the EUR 19 million?

[Michel Giannuzzi, Chairman & CEO]

I would pass on this question for obvious reasons. We are in process of discussing with the union representatives as we speak. And until those negotiations are completed, if you allow me, Francisco, I will not answer your question.

[Francisco Ruiz, Research Analyst]

So the EUR 19 million is the cost of the full plan, or not?

[Michel Giannuzzi, Chairman & CEO]

No, no. There are many costs associated with it. It is not just the labor-related costs. There are also some reorganization costs of the site. So it's a package. But for obvious reasons I just mentioned, I'm not able to comment more in details right now as the negotiations are still ongoing. Sorry about that.

[Operator]

[Operator Instructions] The next caller will be James Rose (sic) [ Rosenthal ] calling from Barclays.

[James Steven Rosenthal, Research Analyst]

Just after a comment on the situation in France really, I mean why have you taken the decision to close there versus in other furnaces, you've just taken the decision to take longer to rebuild them? And I guess related to that, could you comment on the sort of broader supply/demand balance you're seeing in France and elsewhere in Europe, where the volume pressured? And what reactions of your competitors are, also?

[Michel Giannuzzi, Chairman & CEO]

Well, I mean I repeat one more time. I mean in France, this is the market that was already growing the least, if want to compare it to the other countries. We were already close to having excess capacity. And this COVID impact has clearly highlighted the fact that we will have a lot of excess capacity. And we have 2 furnaces out of the 3 in Cognac that were up for repair. One will be repaired in Q3 this year. It's one of the 6 furnaces that Didier mentioned, that will go for repair. But the second one which was planned to be a repair at beginning of next year, will not be repaired. So -- and again, because this furnace was dedicated to the wine segment, I would say the standard wine bottles that are -- that are clearly not performing as well as probably other segments of the market. So this the reason why this was the one furnace that was chosen. It was not a coincidence. It was the right furnace at the right time to be chosen for, unfortunately, restructuring. I'm not sure I understood your second question, James. Can you repeat it, please? Because on our side, the question was not that clear.

[James Steven Rosenthal, Research Analyst]

Just relating to what reactions are you seeing from competitors? Or are other competitors taking capacity out as well? And what's their response been on pricing in end markets?

[Michel Giannuzzi, Chairman & CEO]

Well, I mean at least the listed competitors have already reported. Two of them have already reported their numbers, so you can ask them directly the question. What we see right now is that in the marketplace, everyone that seems to be adjusting the capacity to the new level of demand. So and I repeat, given the fact that the prices are -- have been negotiated, most of them before COVID, I mean there is no big changes in pricing in the marketplace right now. So on the capacity side, everyone is either doing like we do, extending furnace stoppages for repair, or not rebuilding, or extending capacity as probably we could have done, or they we're thinking of doing last year when the market was sold out. And on the pricing side, since prices have been negotiated before COVID, it's been quite stable.

[Operator]

And I have no further callers in the queue at this time. [Operator Instructions] And it appears that's all we'll have for caller questions today. So I will return the call to your hosts.

[Michel Giannuzzi, Chairman & CEO]

Okay. So I would like to thank you very much for attending this call tonight, and for following the performance of Verallia. And I wish you all a good evening and especially for you and your families, a very good and strong health. Thank you very much, and I look forward to seeing you again soon. Have a good night. Bye-bye.

[Operator]

Thank you all for joining tonight's conference. You may now disconnect your lines.