Verallia: 2020 First Quarter Results
Good start of the year with limited impact from the COVID-19 epidemic:
-1.9% growth in reported revenue
-Organic revenue growth of 4.0%
-23.5% adjusted EBITDA margin, up 103 basis points
-1.9% growth in reported revenue amounting to €645m compared to Q1 2019
-Sustained organicrevenuegrowth of 4.0% compared to Q1 2019
-Adjusted EBITDA growth reaching €151m, up 6.5% compared to Q1 2019 (+9.6% at constant exchange rates and scope)
-Improvement in adjusted EBITDA margin at 23.5%, up 103 basis points compared to Q1 2019
-Reduction in net debt leverage to 2.5x adjusted EBITDA for the last 12 months, compared to 2.6xas of December 31, 2019
-Withdrawal of the 2020 guidance due to the limited visibility linked to the COVID-19 epidemic
-Proposal to pay a dividend per share of €0.85, with payment in cash or in new shares
Verallia reports good results for the first quarter of 2020 with an increase in sales and an improvement in profitability, despite the impact of the COVID-19 epidemic on March sales. From the onset of the current health crisis, we were very prompt in our response to ensure the safety of our employees and guarantee business continuity for our customers by keeping all our production sites up and running. I wish to acknowledge and warmly thank all of our employees for their commitment and their spontaneous acts of solidarity. Even though it is now inevitable that this crisis will have a significant impact on the results for the next quarter and the year 2020, our financial strength and our resilient profile will enable us to address the situation with equanimity," commented Michel Giannuzzi, Chairman and CEO Verallia.
Adaptation plans to address the COVID-19 epidemic
Verallia reiterates that, from the outset of the COVID-19 crisis, all necessary measures have been undertaken to guarantee the safety and health of its employees worldwide and to ensure business continuity. Adaptation plans have been implemented at Group and country level to ensure the following priorities are met:
-Verallia immediately put in place all required health precautionary measures to prevent the spread of the virus at its production sites. In addition, remote work has been swiftly rolled out in all possible cases.
-Business continuity and production
-As a key supplier to the food industry, the Group has managed to maintain all of its production sites running, adapting its production volumes, and thus to serve its customers to the fullest extent possible. In Northern Europe, Italy and Iberia, the plants continued to operate at a sustained level. France and Latin America have been more affected.
2020 first quarter results
In the first quarter of the year, Verallia recordeda revenue of €645m,compared to €633m in the first quarter of 2019, an increase of 1.9% on a reported basis
The impact of the exchange rates variation was -2.1% over the first quarter (-€13m), primarily linked to the currency depreciation in Latin America, which was considerably more pronounced during the month of March.
At constant exchange rates and scope, revenue increased by 4.0% duringthe first quarter of the year (and by 2.0% excluding Argentina), with a deceleration in March: organic growth at the end of February amounted to +5.9% while it decreased to +0.4% in March, the initial impacts of the COVID-19 crisis only being felt at the end of the quarter. The activity evolution has been slightly negative (-€2.7m) on the quarter despite volumes sold showing a small increase. This can be explained by the higher decline in French sales, where the selling prices and the sales mix are higher than the Group's average.
The Group estimates that close to two-thirds of its consolidated sales are exposed to the off-trade channel, while one-third to the on-trade channel. This percentage varies quite significantly depending on the country and product family.
-In Southern and Western Europe, demand levels remained dynamic, particularly for food jars and beer bottles. Italy and Iberia posted positive growth over the quarter. At the beginning of the quarter, activities in France were affected by the national strikes related to the pension reform and by a decline in demand from customers exporting to China. This decline became more pronounced from mid-March onwards due to COVID-19 impact.
-The Northern and Eastern Europe region was driven by the food jars and mineral water markets. Germany, Ukraine and Russia showed positive organic growth in Q1.
-In Latin America, all countries reported positive growth for the quarter. The situation took a downturn from mid-March onwards, particularly in Brazil which is going through a challenging political and health context.
In terms of pricing policy at Group level, sales price increases were more moderate at the start of the year than the previous year and in line with expectations. The weight of Argentina, that is in hyperinflation, is noticeable as the price mix impact amounted to €11m over the quarter.
Adjusted EBITDA grew by 6.5% (+9.6% at constant exchange rates and scope) in the first quarter amounting to €151m. Despite a slightly negative activity impact, the adjusted EBITDA improved thanks to a positive spread1 and a net reduction in cash production costs (Performance Action Plan, PAP) of €8m in the first quarter of 2020. The first operational impacts related to COVID-19 remain insignificant at the end of March. The adjusted EBITDA margin increased by 103 basis points to 23.5%
During the first quarter of the year, Verallia continued its deleveraging. Net debt thus reached €1,574m at the end of March 2020, i.e. 2.5x adjusted EBITDA for the last 12 months, compared to 2.6xas of December 31, 2019. This leverage ratio remains well below the maximum leverage ratio set out in Verallia's Group financing documentation, which is at 5.0x adjusted EBITDA. On March 20, 2020, the Group drew €200m from its €500m Revolving Credit Facility ahead of the upcoming maturities of its "Neu Commercial Papers", the market of which is currently closed for non-investment grade companies in France. In addition, Verallia continues to benefit from strong liquidity2 of €528m as of March 31, 2020.
In order to reinforce its liquidity, Verallia successfully set up an additional €250m Revolving Credit line with a one-year maturity, extendable by six months at the Group's discretion, on April 24, 2020. The syndicate of banks that participated to this new source of financing includes Banco Santander, BNP Paribas, CACIB, CIC, Commerzbank, La Banque Postale, Rabobank and Société Générale.
Verallia: united and responsible
Given its financial strength and its resilience, Verallia does not intend to apply for the financial support offered by the French government (public loans or guarantees, deferrals of tax or social charges payments,…) in order to allow businesses that need them the most to benefit from those financial measures. Only after having used employees' holidays, banked hours or RTT (reduction of working hours) to the highest extent possible did Verallia implement partial unemployment measures, in the most responsible and restricted manner possible.
The management recognizes the remarkable commitment and responsiveness of all the Group's employees, as well as the teams' spontaneous movements of solidarity towards the local communities where the production sites are located, such as donations of hospital equipment, hydroalcoholic gels, protective clothing or masks.
In addition, Michel Giannuzzi, Verallia's CEO, has decided to contribute to the Group's collective effort by foregoing his 2020 variable compensation, which represents 50% of his total annual compensation. All other Executive Committee members also participate in this joint effort by renouncing 15% of their total annual compensation. This amount will be dedicated to additional donations at local level.
In this critical context associated with the COVID-19 epidemic, and as announced in the press release of April 7, the Group considers that its financial guidance for 2020 is no longer valid, given the uncertainty resulting from the depth of the crisis.
Verallia expects a significant impact of the COVID-19 crisis on its activities in the second quarter of 2020, resulting in a significant drop in sales volumes. However, the scale and complexity of this unprecedented health crisis together with the uncertainties concerning the end of such crisis do not, to date, enable the Group to precisely quantify the impact on customers and its activities for the year 2020.
In order to address this situation, Verallia is implementing measures to variabilize costs, to follow very accurately cash and supply chain, and proactively manage all investments. Recurring investments will be maintained at around 8% of annual consolidated revenue, which will be lower than expected, thus leading to an absolute amount of recurring investments lower than forecast. The building of the two strategic investments (construction of a new furnace with two production lines at the Villa Poma site in Italy and at the Azuqueca site in Spain) will be completed by the end of the year and their start-up will take place depending on market needs.