Verallia SA

PAR:VRLA

Earnings Call Transcript 2021-Q1

[Operator]

Hello and welcome to the Verallia '21 Q1 Analyst Call.My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions]I will now hand over to your host, Michel Giannuzzi, to begin today's conference. Thank you.

[Michel Giannuzzi, Chairman & CEO]

Thank you very much. Good morning, everyone, and thank you very much for attending this call on Q1 results for Verallia.I will be sharing my presentation with Nathalie Delbreuve, group CFO.And let's start right now with just a quick reminder about the Verallia profile as of today. As you can see, we are the European leader in the glass packaging industry. And Europe, extending Europe, including Ukraine and Russia, represents around 90% of Verallia's turnover last year. We are #2 in Latin America that represented, last year, 10% of our turnover. In Latin America, we are present in 3 countries, Brazil, Argentina and Chile. And we are the third largest glass packaging company in the world.On the left-hand side of the chart, you see that we have a very diversified end market exposure. We cover all segments of the market in the glass packaging industry, with some preference in the still wine segment which represented last year 35% of our sales. And this is mostly due to historical and geographical reasons since we are present in the 3 largest wine-producing countries in the world, namely Italy, France and Spain. However, you see that all the other segments are pretty well balanced, which allows us to diversify our end market exposure as well as our very broad exposure in 11 different countries where we are present. That is providing some resilience to the company profile.We employ right now around 10,000 people in -- around the world. We have 32 glass plants with 58 furnaces. I'm pleased to announce that we started in the first quarter this year the 2 new furnaces of Italy and Spain that were put on hold last year. So they started quite nicely, and as we speak, they are producing good glass, which is a good news indeed. And also the news of the quarter is that we have just signed -- I will come back to this. We have just signed a strategic partnership with a cullet recycler in Germany, which means that today -- or very soon, we're going to have 9 cullet recycling centers supporting our operations. And cullet is very important. It's part of our ESG road map in terms of how we can contribute to less CO2 emissions in the world.So this short introduction being made, let's move to some changes we had during the quarter on the capital structure. You probably have noticed that, during 1 of the last -- during the last [ ABB ] of Apollo, the Apollo share in the capital of the company has decreased through the Horizon Investment holding to 28%. And as you know, this is an ongoing trend that we've seen since the IPO. And during that transaction, the company decided to buy 1.7% of the share capital, which amounted around EUR 60 million. And that was done in March 2021.We are going -- also, as we did for the last 5 years, we are going to launch the sixth employee ownership program in May 2021. It's one of our -- also one of our ESG goals to increase the employee ownership participation, and we aim at reaching 5% of shares owned by employees by 2025. This was disclosed in our ESG road map in January, if you remember. So we will start the subscription period very soon, next week actually, and that will last a little bit more than 2 weeks. It will be available for 8 countries in the world. And it will -- about 8,000 employees are eligible to this program. The program, as the previous years, will propose a subscription price 20% -- with a 20% discounts compared to the last 20 trading days ending this week. And the employer, the company contribution, matching contribution, could go up to EUR 2,000 for the investments that will be made by the employees in this employee ownership program. So again, it's in line with our social objectives to increase employee ownership in our company. I'll remind you that, at the end of -- as you can see on this chart, at the end of last year, employees, through the group saving plan, was holding 3.2% of the company shares.Now another good news of the quarter. We got confirmed and signed by SBTi on our target objectives to reduce our CO2 emissions. If you remember, we announced in January -- on the 21st of January this year, we announced our objectives in terms of CO2 emissions reductions. That will mean for us, in order to comply with the COP21 objectives and to end up with a well-below-2 degrees global warming effect, we are going to reduce our CO2 emissions by 27.5% between 2019 and 2030. And this target that we set ourselves in January has been fully endorsed and confirmed and signed by SBTi. So we are probably one of the few, if not the only one company, that have such an ambitious target that has been completely confirmed by SBTi, so we are very proud of that and we are working very hard to now make it happen.The next important move during the quarter was the strategic partnership we just announced on Monday this week with REMONDIS, our partner in Germany. The objective of this partnership is to put together some cullet operations in order to have some better coverage and a better, I will say, supply of cullet for Verallia. And that will also allow REMONDIS to benefit from our existing cullet plant in the South of Germany, a region where they were probably not as strong as in the North, so we have complementary operations together. So by creating this joint venture, we'll secure long-term supply of cullet for Verallia plants in Germany. And as you know, this is also one very important commitment we have and objective we have taken in our ESG road map to increase step by step our cullets usage rate from 49% in 2019 up to 59% in 2025.By the way, I'm quite pleased to report that our cullet usage rate has increased last year quite significantly, 2.2 points more than 2019, reaching 51.6%. And we will keep working also on any way to increase cullets usage in our operations. This is not only good for our CO2 emissions, but it's also good for our energy consumption and therefore improving also our P&L results.To -- moving to another interesting information I'd like to share with you today. It's the McKinsey packaging survey that was made in December 2020, so quite a recent one, about sustainable packaging materials. This survey, which is very interesting, and I'm sure it's available on Internet for the full report, is basically talking about what are the most sustainable packaging and what are the consumer trends today.To summarize the survey. I mean what they found is that more and more value on packaging is put on food safety and hygiene, and the safety -- sustainability concern is increasing in the eyes of all consumers. And a vast majority of consumers, by the way, are prepared to pay more for more sustainable packaging. Now there is not yet a clear view on what is the most sustainable packaging yet, but clearly they understand what is the most unsustainable packaging material. And here on this graph you can see that, especially in West Europe, in countries where we are present, when we ask how sustainable do you think each of these packaging materials is, glass bottles and jar in United Kingdom, France, Germany and Italy is ranked as #1 most sustainable packaging. So that's quite encouraging. I've always said that you know very well that glass is infinitely recyclable, and this is very well understood from the consumers. And on top of the sustainability and the recyclability of glass, you know that also, from the health point of view, this is a material that is very interesting for protecting the content of the bottle, of the jar. So this survey was done in 10 countries, with more than 10,000 consumers, so it's very relevant and very interesting. And I encourage you to have a look, if you're interested, to the original report, which I'm sure you can find on the Internet.Last but not least, one, another initial interesting information and innovation that we had launched at Verallia with one of our customers, Fleury Michon, is ready-to-eat meals. You know that the -- or the ready to meat -- I mean, food, industry is a growing trend. And here the innovation is really by offering reusable innovative glass-made dish which -- with a new shape which is not common in glass. Previously these were done in ceramic or -- and ceramic is not very good for recyclability, whereas glass, you can recycle forever. And therefore, through a joint development we have made with Fleury Michon, Fleury Michon has been able to put on the market this nice dish made of glass which can be reused and eventually recycled, which was not the case for the previous packaging.So glass is a trendy product, as we said before, and we are clearly contributing to promote this material.Now moving to finance, let's look at how we performed in Q1. And first of all, you know very well that in most countries Q1 was still a challenging period, from a health point of view, with still some lockdown measures in many countries; and reduced activity in hotels, cafes and restaurants, which by the way we are not expecting -- at the end of last year, we were not expecting a third wave, but like everybody, we had to adjust.So in this, I will say, still challenging health period, we were quite pleased to report a limited revenue decrease. Minus 2% at constant exchange rates and scope in terms of organic growth was, I think, not too bad given the fact that a year ago, in the first quarter in 2020, before the pandemic, we had a 4% organic growth. So we had a very strong comparison base in Q1 last year, and therefore, the minus 2% compared to the plus 4% of Q1 last year, I think, is a decent [ objective ]. We have maintained our EBITDA at EUR 152 million, the same level as last year given the drop of sales. And we have -- as a result, we have strongly improved our adjusted EBITDA margin by 161 basis points, getting above the 25% target that we have set with 25.1% EBITDA margin in Q1, which is an encouraging start of the year, in the quarter which is always -- as you know, the first quarter is always a slow quarter in the year, yes.We've kept generating cash and deleveraging the company. And at the end of the -- at the end of March, we were at 2.1x last-12-month EBITDA compared to 2.5x a year ago, at the same period in March 2020, and 2.0x at the end of December. And that includes the EUR 60 million of share buyback that we mentioned before that were acquired in March this year.So we will confirm and we are confirming that we are still in line to meet our 2021 objectives, the one we confirmed in January -- sorry, in February. And we will -- despite the uncertainty and the volatility that we still see in some market, we will work internally a lot to achieve at least a 25% EBITDA margin this year.Now this being said, I will hand over to Nathalie, who will go through the financial results in detail.

[Nathalie Delbreuve, Chief Financial Officer]

Thank you very much, Michel. And thank you very much to all of you for joining this call.So let me walk you through the quarter publication. As usual, I will comment revenue then profitability and to conclude on our net debt leverage and then financial structure.So looking at our sales, you can see that we limited the sales decrease, as our organic growth is showing minus 2%. We have a very high comparison basis from last year. As Michel mentioned, we had enjoyed a plus 4% organic growth in the first quarter 2020. We had a quarter and with disruptions coming from the lockdown measures in all the -- Verallia's countries, so indeed quite a low quarter, and you can see that the volume impact is negative with EUR 32.5 million. The price and mix pillar is positive but with moderate sales price increases. This is exactly what we were expecting, as we are coming from a year with a lower cost basis. And in fact, in the quarter, we enjoyed a very positive mix that supported our top line and also, you will see, our EBITDA. Now the foreign exchange impact is very negative, minus 4.1%. Here as well we compare ourselves, in the currency we're exposed to, to a pre-pandemic situation last year. Latin -- Lat Am currencies decreased significantly last year after the pandemic started, so here also quite a high comparison basis.And if we move now more to by countries. In fact, Italy was pretty well resisting and in South and Western Europe. And France and Iberia sales were stronger hit, with in -- France operations impacted by social movements until the end of February. And in Northern and Eastern Europe, our sales dropped in all the countries, with a quite difficult market in Germany. Then Latin America is still enjoying very dynamic growth in volumes, good price/mix, so really Latin America is still a very good and dynamic market for us in the context.Now moving to the EBITDA bridge, you can see that we maintained our EBITDA margin at the same level as Q1 2020; and thus improving significantly the EBITDA margin from 23.5%, up to 25.1%. Then what we see is the activity pillar is negative by EUR 30.4 million. Here we already discussed the sales volumes. And we also had impact of destocking in the quarter with several furnace repairs. We had 5 furnace repairs in the quarter compared to only 1 in Q1 2020. It's seasonality and the timing of the furnace repairs throughout the year that is different in 2021 compared to 2020.The spread and price/mix is significantly positive, as you can see. We had -- saw moderate price increase but still some price increase, positive mix and cost basis. We also enjoy a good comparison with previous year, so here a strong pillar still delivering positive. The net productivity also delivered. You know that our target is to reduce our production cash cost basis by 2% on a sustainable basis, and here we reached 2.2%. That is bringing an additional EUR 9 million to our quarter EBITDA. Then exchange rates, commented already, and here I mean with a negative impact in our EBITDA in the quarter. And other -- some other items that are positive. The main one to comment is some tax impacts in France, where we benefited from a tax [indiscernible] I mean some measures in France to reduce -- that is reducing our taxes.So all that leads to a leverage that is fully in line with our guidance. You can see that our net debt is EUR 1.2966 billion. And with a last-12-months adjusted EBITDA of EUR 626 million, this leads to a leverage of 2.1x, to be compared to 2.5x 1 year ago and to 2x at the end of the year 2020. If you take into account the EUR 60 million share buybacks which we did in March, then without this impact, we even deleveraged a bit the company.Now our financial structure that you can see here. We have still -- of course, the term loan is our main debt, and the credit -- revolving credit facility. We decided not to extend the second revolving credit facility, which we implemented during the pandemic last year. We had 6 months -- a possibility of extension, but as you can see, our liquidity is very strong, and even cash on our balance sheet. And since we enjoy this strong liquidity, and you've seen the good performance that we have, we are looking -- and we may consider green funding that would be perfectly in line with our ESG strategy that you know is very important for us and would also be a way to diversify funding sources for us.

[Michel Giannuzzi, Chairman & CEO]

Okay, thank you very much, Nathalie.So as a conclusion. During the first quarter, as you understood, we had a slight organic decrease of revenue of minus 2%, I repeat, compared to plus 4% in Q1 last year, so I would say, a tough comp base to be taken into account. We've been able to maintain our adjusted EBITDA at 152 million -- to EUR 152 million, with a strong margin expansion of 161 basis points, which puts the company EBITDA margin above 25% target already in Q1. We've kept deleveraging the company. And as I mentioned before, the 2 furnaces that were put on hold have started quite nicely at the end of Q1. Therefore, we will enjoy and benefit from the additional production, as of Q2, with these 2 smooth start-ups in Spain and Italy.And this makes us confident that we can confirm today the 2021 objectives that were communicated to you some time ago and despite still some kind of uncertainty in the environment. Those objectives, I'll remind you, are that we expect the volumes to be back to 2019 levels, pre pandemic, leading to positive organic growth. We expect an adjusted EBITDA around EUR 650 million with more than 25% EBITDA margin. And I'll remind you that we've decided and communicated last time that we will build a new furnace in Brazil, in Jacutinga plant. The additional strategic CapEx of EUR 60 million will be split between this year and next year, and we expect this new furnace to start at the end of next year.So -- and last but not least, Nathalie mentioned that we are also considering or we may consider, depending on market conditions, using green funding, sustainability-linked instruments, to diversify our source of funding and also leverage all the good work that has been done by the company on our ESG road map. And this will be something to be looked at in the coming weeks.So thank you very much for your attention. And that's it for our side, so maybe we're going to now take your questions.

[Operator]

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

[Matthias Pfeifenberger, Research Analyst]

Ladies and Michel, a couple of questions from my side. So firstly, on the PAP savings, you're trending above target. Can we expect that for the full year as well you'll continue that pace? And then secondly, on the cullet joint venture, can we really expect better or improved supplies? Will you also be able to improve the cullet usage by, let's say, 2%, 3% this year?And then just a small one. You mentioned there is still destocking in the first quarter. So I think, in the Q4, you spoke about lots of restocking to be done because your stocks are very low, so can we expect that from the next quarters onwards?

[Nathalie Delbreuve, Chief Financial Officer]

So for the PAP. Indeed we've been performing above the 2% for this quarter and also previously, but our target remains 2%. You know that we are -- when we take PAP, we are considering all the positive actions but also all the negative industrial variances that we have, so it's really a net improvement in our cash cost basis. So the 2% is still our target and it's...

[Michel Giannuzzi, Chairman & CEO]

Now regarding the cullet, Matthias, a great question. Clearly, I mean, we've done very well last year, by the way, to increase our cullet usage rate. We -- with this partnership with REMONDIS, it's more a long-term partnership and a strategic partnership. It's not going to have such a significant impact short term because we were already working with REMONDIS as a supplier, but at least, as cullet becomes more and more important in our eyes, this will secure our long-term supply of cullet in Germany. And that's the most important thing to remember about this partnership. And regarding the cullet increase this year, as you know, the situation is very different, depending on the countries. And the areas where we have the lowest cullet collections rate are usually in Latin America or in Russia. And that's where we have to work together with local municipalities, customers, retailers to find systems that in most countries don't exist to be able to collect more cullet. So it's -- again it's not a short-term action but step by step. It's part of our continuous improvement road map. We will keep increasing our cullets usage rate.Now the third question, regarding destocking. Clearly, as Nathalie mentioned to you -- and the timing is always something that can change year after year, but the timing of the furnace repairs was heavily weighed on H2 last year. If you remember, we had 6, out of the 7, repairs that were in H2 last year. And unfortunately, the timing was also quite heavily weighted on the H1 this year. We -- with 5 furnaces to be repaired in H1 this year. So therefore, since we were all -- if you remember, we were all taken by surprise by the strong rebound in Q3 last year, we ended up in Q4 with very low inventory. With the new furnace being stopped in Q1 this year, we had no chance to rebuild inventory. Actually we stepped -- we kept, sorry, reducing our inventory, so which means that we are not happy with the low level of inventory we have today. We will not be able to restock a lot in Q2 because Q2 -- Q1 is a small quarter, but Q2 and Q3 are big quarters or bigger quarters. So we will not be able to restock too much in Q2 or Q3, but certainly, at the end of the year, we want to rebalance our inventory and increase again our inventory to a more normalized level. So the restocking will probably happen more in H2 than in H1, in other words.

[Nathalie Delbreuve, Chief Financial Officer]

Especially with our 2 new furnaces that are now ramping up and will be fully operational in the second half of the year.

[Operator]

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

[Lars F. Kjellberg, Research Analyst]

I just wanted to continue a bit with the furnace rebuild. I think you called out 5 furnaces already in Q1. And could you quantify the impact of that on your production and equally so the EBITDA? And assuming then you're going to be more stable, should that in part be net positive in Q2? The other one I was thinking a bit about is your guidance. Of course, you're now already above 25% in a challenged quarter from a cost perspective, again with activity being a meaningful drag. Are you seeing 26% in sight? That's my first 2 questions. I have 2 more follow-ups, please, if I may.

[Michel Giannuzzi, Chairman & CEO]

Well, regarding the furnace rebuild. I mean it's not in Q1. It's H1, but we'll -- in Q1, we still -- we have already made quite a few repairs already. So clearly we -- as I said, we have not been able to stock. It's actually we destocked. We reduced our inventory in the first quarter, which as you see -- as you saw, sorry, from the EBITDA bridge that Nathalie presented is, of course, having a negative impact on our EBITDA. Now going forward, we will clearly have a more stable rest of the year with less stoppages due furnace repairs. And we will then be able to absorb better the fixed costs that we have not been able to absorb fully in Q1. And of course, this is all good news because, I mean, the biggest, I will say, part of the year with the biggest number of stoppages is behind us.Now this leads to the second question that you asked. I mean we are already at 25%. Okay, clearly, I mean, as I said before, I mean, 25% was the -- if you remember, the 2022 objective. So we're going to achieve it this year. And I mean it will be certainly we'll keep improving between 25% and 26%. Now 26% is not out of reach, but it's probably a bit early to confirm that. We'll see and wait how strong is the rebound that we expect to come in Q2 and Q3 before maybe giving you a more precise guidance on the EBITDA margin, but clearly it will be above 25%, as you understood.

[Lars F. Kjellberg, Research Analyst]

Got it. I just wanted to hear your views also on the potential impacts of the French frost. And we're hearing, vineyards, some have been sharply decimated and expecting poor production; and also an interesting survey that you've presented of consumers really preferring glass. And at the same time, it seems as if your beverage sort of container is really moving into metals, where the growth is very strong. How do we reconcile those two, consumer preferences versus companies taking a different view and putting things in a different pack?

[Michel Giannuzzi, Chairman & CEO]

Well, the first point, about the frost, is an important question because, of course, this has had a major impact or will have a major impact in the French winemakers' activity. And just for everybody to remember: [ According ] to the recent, I will say, frost that took place in France a few weeks ago, the wine industry is expecting up to 30% drop in the harvest this year in France, grape harvest for wine. This is the first estimate at this stage. This estimate will have to be, of course, confirmed or changed probably by summer, depending on how the weather does and what is -- the potential recoveries. So we will have the better view probably only in summer, but this is the first estimate that was put, yes, in the market.Now just for you to understand. The consumers and the activity on the consumer side is completely independent from the harvest. I mean consumers drink wine a good year or bad year. In terms of harvest, [ they drink the consumer wine they want to drink ], which doesn't change a lot from 1 year to the other. So what is changing is basically the bottling activity. Now for you to understand: For this year, the bottling will mostly be done on the harvest of last year. And last year in France was a good harvest. I mean the harvest last year in France was above the 5-year average, and therefore, there is stock of juice, if I can say so, that is ready to be bottled this year. I mean -- just to give some numbers: I mean the last 5 years' average in France for the harvest was 44.5 million hectoliters. And last year, it was a good year with 46.7 million hectoliters. So there is already a stock of juice to be bottled for this year, so this year, it's not so much an issue but might have a slight drop of bottling activity at the end of the year if some makers wants to push back the bottling activity into next year, but we expect a minimum impact this year.Now the bigger impact could be seen next year, depending on the confirmation or not of the impact of the frost, but again, if you remember what happened with the Trump taxes that penalized strongly the exports of French wine, this has been compensated by exports from Italy which was not subject to the wine taxes as France was impacted. And therefore, what we lost in the last 2 years in France exports to the U.S. was somehow gained by the Italian wine makers, exporters. And because we are very -- we are very strong in those 3 countries, France, Spain and Italy, for Verallia we've been able to mitigate the impact of the tax Trump's -- sorry, the Trump taxes, sorry, that impacted France. For the wine is about the same. What will happen is, especially for the traders, they will import bulk wine from Italy and Spain, which is there's always a little bit of trading between countries, so they will probably import bulk wine from neighborhood countries Spain and Italy, to be bottled in France in order to make up for the shortfall of the harvest. So of course, this is mostly for cheap wine, [ untreatable ] wines, but this is what happens during those periods. And therefore, it's a bit early to estimate how big will be the impact next year. There are -- there could be an impact in France -- or there should be some impact in France, but this impact should be somehow mitigated by, on the one hand, the bulk imports from neighborhood countries; and on the other hand, the shortfall compensation by Italy and Spain [ bottles ].Now the third -- the last point you asked is about the survey. I mean, the survey, as I said before, there is no unanimity behind -- sorry, between the consumers that have been surveyed about what is the most sustainable packaging. There is unanimity about what is the most unsustainable packaging but not about the most sustainable packaging. Glass clearly is a very preferred packaging, especially in West Europe. However, clearly the cans, the aluminum cans, are also sustainable packaging. That makes sense in some cases. So the one thing which is sure, that is clearly the combined packaging between plastic, paper, aluminum foil or the plastics are clearly not the right packaging. So yes. I mean glass is well favored, so is can to some extent, but the competition does not really apply in the same segments. I mean you know very well can is probably more for nonalcoholic beverages and beer. And in those segments, the glass is mostly used for premium products, where can is probably more for [ untreatable ] products, so we are not exactly addressing the same market.

[Lars F. Kjellberg, Research Analyst]

If I may, a slightly detailed question but returning to what you said about a 30% drop in French wine production as an estimate. What is your exposure to French wine, specifically in the context of the group or South, West Europe? How would -- all other things being isolated, how would 30% translate into your business?

[Michel Giannuzzi, Chairman & CEO]

Well, this is why, I mean, I -- we don't provide you a precise answer, because it's very hard to calculate. I'm just trying to explain to you how it works and the drivers, and there are so many factors to be taken into account. The 30% drop is in the harvest, not in the -- not necessarily in the wine bottling. That's first thing you need to understand. By the way, a good example is champagne. In champagne -- because there is overstock of champagne due to the fact that, last year, the champagne sales dropped by 18% -- the consumption, sorry, dropped by 18%. Champagne producers had already decided to cut on the harvest in order not to harvest too much, in order to, I would say, control better the level of inventory. Therefore, for the champagne area, [ I'll point out ] it will have no impact at all. We know already that it will have no impact because decision was made before to cut on the harvest for champagne.So it's really hard to explain. I mean you see that we have a 35% exposure to the wine segment at group level. And France is probably slightly above this percentage, but at the end, the -- even in France, as I explained before, some of the juice that will not be bottled could be imported from neighboring countries. And bottles could be also substituted by imports from Italy or Spain. So very -- it's not that I don't want to answer. It's just that it's quite hard right now to put a real figure on that. And last but not least, I mean, the harvest, the 30%, is the first estimate which again will have to be confirmed by summer.

[Operator]

The next question comes from the line of Francisco Ruiz calling from Exane.

[Francisco Ruiz, Research Analyst]

I have 3 questions. The first one is, I mean, you've mentioned that you have started with the ramp-up phase of the 2 new furnaces in Spain and Italy. Have we seen any negative impact, on EBITDA, of this ramp-up? Or could we see something in Q2? The second question is in the costs side because, if we look at the breakdown on EBITDA, we see the positive pricing, but also the cost has a positive contribution. So could you detail a little bit more on this, if it's just the hedging on energy? Or we have seen something else, like, for example, the revenues from the French restructuring. And the last question is if you could give us a number in terms of the level of stocks that you have right now.

[Nathalie Delbreuve, Chief Financial Officer]

Okay. So ramp-up. Indeed we started the 2 furnaces, and they were really starting in February. It's Villa Poma in Italy and Azuqueca in Spain. So in the quarter, the -- there is indeed a negative impact, as we have some fixed costs that are not covered by production, but it's quite limited. And the ramp-up is going well, is on track. It's usually about 3 months ramp-up maximum, 2, 3 months. So we expect indeed further -- I mean not optimized structure in Q2 and then a -- fully operational furnaces in the second semester, as I said. Now you are mentioning indeed the -- your second question, sorry, on the spread. Indeed we are enjoying still a good comparison and good cost level on the continuity of our last -- our previous year. And if -- for all of us to have in mind that again there was deflation in costs overall last year, but it also started after Q1, so when we compare ourselves with our hedging to Q1 2020, we are also with a positive comparison. And it will leverage out and decrease throughout the year. And then on our cost breakdown and cost policy, you know indeed that we have a very regular hedging policy. So we are hedging our energy costs and we are 100% hedged for this year. So we will continue to benefit from that. Now we see some inflation on packaging coming. Impact in Q1 was very, very limited, but we'll be careful in the rest of the year on that and we are also working on that one.You were mentioning also the French restructuring. In fact, do not forget that we also stopped 1 furnace, not restarted 1 furnace in cognac. So this transformation plan in France was also to adjust our cost base to a lower production in France. So this -- and this is going as planned. Now the plan is finished. And anyway, this is not shown in the spread pillar...

[Michel Giannuzzi, Chairman & CEO]

The level of stock, regarding the level of stock, Francisco. Clearly we are well below normalized level of stock. I will not discuss, for competitive reasons, where we are, but unfortunately I can only confess that we are well below what we would like the stocks to be. Even though we have improved a lot, our supply chain processes and our people are dedicated to do their best to serve our customers. We know we are not doing a very good job right now to serve customers to the level of service they are expecting from us, so that's a major short-term challenge. And hopefully, with the new capacity coming on stream with -- especially in Italy and Spain, we expect to find a more normalized, as I said, situation by H2. So in H2, we'll be able to rebuild inventory. Q2 will still be tight, if you want. Q2 is a dynamic quarter. And our goal is really to keep up producing at the same pace as the sales, but certainly in H2 we'll be able to rebuild some inventory to the normalized level that is expected.

[Francisco Ruiz, Research Analyst]

Just a follow-up on a previous question on the partnership that or the joint venture that you have signed in Germany. As you are going to have a minority stake, [ is this ] going to be any impact on the P&L for you?

[Michel Giannuzzi, Chairman & CEO]

No, it will have no impact. It will have -- it's still a marginal activity compared to the size of the group. So it's really more a strategic decision to secure our long-term supply of cullet, but it's not a financial, I will say, scheme that will boost or deteriorate the P&L of the company, so it has no material impact on our P&L or balance sheet. It's purely a strategic partnership.

[Operator]

[Operator Instructions] The next question comes from the line of Charles Scotti calling from Kepler.

[Charles-Louis Scotti]

Yes. 3 questions from my side. The first one, it's perhaps too early to answer, but do you see any surge in demand on the on-trade channel when the lockdown are lifted like it's the case in some European countries? Second question: Vidrala gave a cautious guidance for 2022 margin, [ a precautious message ] blaming energy costs, inflation and tough price negotiation. I'm just curious to hear your thoughts on this topic for 2022. And finally, on the share buyback, do you intend to buy back more shares from Apollo? Do you have any policy in place? Let's say we will buy 20% or 30% of the -- or the next share placing.

[Michel Giannuzzi, Chairman & CEO]

Charles, thank you for your questions. Now regarding the surge on the on-trade channel when there is a reopening of the cafes and hotels and restaurants. This is exactly what we saw in Q3 last year. If you remember, Q3 last year, everybody was taken by surprise by the big rebound, if you want, of demand when in -- after a tough Q2, in summer, most countries reopened cafes and restaurants. It's really hard to -- it's too early to say because this has not yet fully materialized, but -- and this is also one of the reasons why our supply chain people are struggling, because our customers' are still quite erratic, so we have to be extremely flexible and agile to be able to follow the demand. Some of our customers are building some inventory in anticipation or will be building inventory in anticipation of this reopening. Some customers are more cautious. They wait and see until the reopening will -- happen. And then therefore, after, it will be a huge pent-up demand that will come, as it happened, I repeat, in summer last year. But we all believe that -- I mean, when you talk around you -- I mean people are really so [indiscernible] at home that, if they can enjoy going back to cafes and restaurants, I think there will be a nice activity there. But no precise figure to give you, except that, based on our last year experience, in Q3, the rebound was very strong.Regarding 2022. I mean we don't comment on our competitors, as a policy, so I won't comment on what you just said, but our view is that we will keep applying the same strategy that we've done in the last few years, which is basically locking our cost base in -- around September, October. When we know very well our cost base, because we've hedged fully our energy costs for the following year, then we will define our pricing policy in order just to be responsible and [ pass the cost efficient ] to our customers. Now as we said, if you remember a few months ago, in some countries this year there was even a deflation. And therefore, the prices have been going down in Europe in some countries. Altogether in Europe, the prices this year has been sort of around flattish, okay? So no real price increase in Europe. That was not the case in Latin America and indeed where we had more inflation to cover full-price increases. So it's too early to say how big will be the inflation foreseen for 2022, but it won't change our policy. I mean, good or bad, we will apply the same policy.The third question, regarding the share buyback. I mean this -- I'll remind you that the objective of this share buyback was really to take advantage of this big block being put on the market to be able to acquire those shares and neutralize basically the future employee ownership programs or the future [ free shares ] programs and in order to avoid any further dilution, and these are -- this is [ what ] we did it. And we did it also because we believe that it was an interesting price for Verallia to acquire shares at this stage. So our general -- shareholder general assembly last year gave us the delegation to buy more shares should we want to buy more shares, so we have no technical or legal constraint on that side. And we -- you know very well that share buyback as well as increasing dividend is 1 of the 2 levers we use to return the excess cash we have to our shareholders. And you know very well that we are already this year at the bottom of the range with a 2.1x leverage ratio at the end of March. Therefore, we will be considering, if makes sense, share buybacks in the future, but there is no clear decision being made. It's just one of the possibilities we have, like the one we have to increase dividend year after year.

[Operator]

We have a final question from the line of Matthias Pfeifenberger calling from Deutsche Bank.

[Matthias Pfeifenberger, Research Analyst]

Just a follow-up. Can I summarize a bit? So basically you have no scope to restock in the first quarter and the second quarter. Vidrala is talking about cost inflation hitting their margins. And with the reopening, there -- probably won't much scope for restocking in the third quarter until, let's say, the furnaces come up in full scale. So my question is, why don't you raise prices? Because not everybody has the hedging policy in place. You're kind of on the safe side with regards to energy costs, but couldn't you raise prices more?

[Michel Giannuzzi, Chairman & CEO]

Well, everything is possible, Matthias. I mean we could do so, but you see that we've been constant in our policy. And we want to be fair with our customers too. I mean we don't want to take advantage of a short-term situation and be unfair with our customers. So we have long-lasting relationship and good relationships and good loyalty with our customers, so we are not going to take advantage of the short-term, I will say, opportunity to increase further prices. We work on the long-term relationship, and therefore, I don't think it will be fair to do so. So we'll keep applying the strategy I've just described and we're not going to deviate from that.

[Operator]

We have no further questions coming through on the phone lines now, so I'd like to hand the call back over to your hosts.

[Michel Giannuzzi, Chairman & CEO]

Okay, well, thank you very much, everyone, for participating to this call. And I wish you a good day, and more importantly, stay safe and healthy. Have a good day. Bye-bye.

[Nathalie Delbreuve, Chief Financial Officer]

Bye-bye.

[Operator]

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