© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Okay. So let's get started. Good morning, everyone, and thank you very much for attending this 2019 financial results of Verallia. This presentation will be recorded and will be audiocasted, if some people want to hear them later. So I will share this presentation with Didier Fontaine, the group CFO; and I'm Michel Giannuzzi, the group CEO and Chairman of the Board. So we will start with some key financial highlights and key initiatives during the last quarter of the year. Then we'll move to the financial sections with the results presented and -- by Didier, and I will make a conclusion and outlook on 2020 financials outlook. So just as a reminder, first of all, Verallia, as you all know, is the leading glass making, glass packaging company in Europe, and Europe represents about 90% of our sales. In Europe, our organization is divided in 2 segments, South and West Europe, which is made of France, Spain, Portugal and Italy. And then we have North and East Europe, which is made of Germany, Poland, Ukraine and Russia. And then we are #2 in Latin America, which makes about 10% of our sales. And Latin America is made of 4 countries, Brazil, Chile and Argentina. And then we are the third largest player in the glass packaging industry. The [ donut ] about the end markets that we serve has not evolved significantly since the IPO time. You see that we are still strongly exposed to the wine segments with wine and spirits altogether, representing 58% of our sales. We are also presenting the food packaging and then beer and soft drinks make the rest of the sales. We have 32 glass making factories, 57 furnaces, 8 cullet treatment centers in the group, and we employ around 10,000 employees in 11 different countries. So this is just a recap or a reminder of Verallia Group profile. If we move now to the financial results and the key figures for 2019. The sales were at EUR 2.586 billion, which is a 9.1% organic growth. You know that Argentina is an hyperinflation country, and even if we exclude Argentina that is boosting the organic growth of the group, excluding Argentina is still 7.2%, which is a fair growth, we believe. The adjusted EBITDA at the end of last year was EUR 615 million, which is a 23.8% margin, up 130 basis points compared to the prior year 2018. The net income has reached EUR 125 million, and again, this is more than double of the year before. We are at EUR 48 million of net income in 2018. So -- and despite some one-off costs related to the IPO, that Didier will cover. We have a very strong cash conversion. I'll remind you the cash provision is EBITDA minus CapEx divided by EBITDA at 59%, which is exactly the same as the year before, despite the 2 strategic investments or, at least, the 3 strategic investments that we had last year, Jacutinga, a new project in Brazil, and the start of the 2 new furnaces in Europe, in Italy and Spain. The leverage at the end of the year, thanks to this very strong cash flow generation, was at 2.6x EBITDA compared to 3.1x EBITDA the year before. So strong deleveraging during the year as anticipated. And as communicated at the IPO time, we will propose to the general assembly, the shareholders general assembly, to pay a dividend of EUR 0.85 per share, which in total makes EUR 100 million of net cash out for dividend payments. All these financial results are fully in line with revised guidance that we provided after the Q3 results in November. And as you see on the bottom of this page, I'll give you more color on the outlook for 2020. But despite some headwinds that we had since the IPO, we are still confident about the 2020 outlook. So moving to also the change of governance linked to the IPO. This is a refresher of the fact that, first of all, just 2 months after the IPO, we were joining the SBF 120 Index. We are very proud of that. It was very fast and beyond our expectation, if I want to say, and this is, of course, enhancing the visibility of the company for the financial investors. The Board of Directors has changed that IPO times. You see now that Apollo has 3 seats, even though, we still have 55.3% -- still own 55.3% of the shares of the company, they have reduced their number of board seats to 3 members now with, of course, a strong rise of the number of independent board members. We now have 5 independent board members that have joined during the -- just after the IPO, at IPO time. BPI is still represented with [ 1 more seat ] And very recently, actually, this week, we have appointed the 2 employee representatives at the board. One, Dieter Muller, is coming from the European Works Council that has been designated by the European Works Council, he's German. And the other one, Sylvain Artigau, has been designated by the French Organizations. You see that the 3 audit committees are all chaired by, by the way, by ladies that are independent ladies. And we respect -- we fully respect the [ SBF Index code], by having a majority of independent board members, especially, at the Audit Committee and the Nomination and Remuneration Committees. And we've launched, at IPO times, a Sustainable Development Committee, just to highlight how important is sustainability in our company, and it's really taken at the highest level of governance in the company. Another interesting thing which happened post IPO is the change of the shareholders' structure that was controlling the company at the time of IPO between Apollo and BPI. We work, as you remember, in the same holding company. Post-IPO, we decided to split, and now Bpifrance owns the shares of Verallia directly, no longer through the holding company, and Apollo is the same, owns the share of Verallia directly through Horizon Holding -- Investment Holding Company, that has all the shares of Verallia. And you see that the public float is today 21% of the company with still the strong presence of our Brazilian investor, BWSA, that also joined the board with 1 board seat. In the last quarter, we had the opportunity to inaugurate reconstructed furnace in Burgos, in Spain. That was a major investments. Not only we built this furnace, but we also expanded the size of it. So this is part of the marginal CapEx that are recurring CapEx, but are enabling us to increase our capacity. And this is one of the largest furnace in Europe actually. The capacity increase was up by 7% from 560 million bottles per year to 600 million bottles per year. This is -- this plant is very well-located in the La Mancha region, which is a Spanish main -- one producing region. And also, we are -- we will continue to invest in this site with an additional EUR 10 million of investment this year to renovate the second furnace on this site.Last year, we also -- part of our commitment to sustainable development and to the circular economy, as you know, we are investing regularly in improving the cullet treatment facility. The cullet is the used glass that we collect post use, post-consumer use. We have, with a partner, set up a joint venture near Madrid, which is Calcin Iberico, where we have 49%, our partner has 51%. And this plant is a brand new plant, state-of-the-art to treat cullet, and of course, this cullet will be then sent to our Azuqueca factory or Burgos factory in Spain, in order to be able to recycle the glass that we collect on the market. Altogether, just for you to know, we have invested in the last 2 years about EUR 12.5 million of CapEx in cullet facilities, not just this one, but also, upgrading and expanding the capacity of our cullet plants in France and Italy. This being said, now we'll hand over the microphone to Didier, who will go through the financial results.
Thank you, Michel, and good morning to everyone. My presentation will be divided in 3 parts: first, revenue corporate -- I mean, consolidated and by business segment; then, profitability, and as cash is king, as said the bankers, we're going to look at the cash performance. Again, just to repeat what Michel said, very strong reported revenue, 7% increase, once again, hit a little bit by Forex. We have been hit by Forex, especially in Latin America, offset and in Argentina, especially offset, partly by Eastern Europe, where the hryvna and the ruble has appreciated. But overall, if you remove the Forex and a little bit of perimeter impact, for those who are not aware, we sold or disposed of our facility in Algeria in mid-2018. So it's a minor change. But if you exclude that, 9.1% organic growth. And if we exclude Argentina, because inflation in Argentina was 54% last year, it's still a very, very robust 7.2% organic, excluding Argentina, organic growth. Now this is, again, split on our 3 pillars. You're going to see those 3 pillars in the profitability slide: #1 is activity, volumes are growing; second one is a blend of price increases, again, mainly to offset cost base increase in energy and raw material; and the third point is value-added pricing, especially, on the mix and especially [ hitting ] our SWE business segment. So at the end of the day, I don't think you have a lot of things to show for profile with this kind of organic growth. Now if we split by business segment. Let's start by SWE. What we should say, this is comprising of Portugal, Spain, France and Italy. 6.4% reported -- 6.5% reported. And by the way, when we are talking about 7.2% or 9% organic, there's not a single business segment which is below 6.5%. So 6.5% in SWE all across the board. There's not one country which is worse than the other or less good than the other at that stage. This is addressing all product segments. If you want to get details in term of premium in France, a very strong year on still wine and champagne. Italy, all the businesses, all the products have been positively impacted. And Spain is more around beers, spirits and jars. And again, volume, price -- value-added pricing, this is all across the board for the 3 segments. Now when you look at NEE. NEE, very strong 9%. If you remove the depreciation of the hryvna and the ruble, it's still a very strong 7.6%. Here, 2 different profiles. First, the market in Germany is very strong, and we captured that. We are very strong in beer and wine. And the good news is, again, in Russia, where we stand, because Russia is a big country, where we stand, the market is booming, and we have improved significantly operations so that we can capture this growth. And the same split still volume, the value-add pricing and price increases are the same 3 pillars we have to support the top line. Latin America -- South America is always -- Carnaval next is week in Brazil, but you see the carnival all year long. Reported revenue, 7.5%. I said 54% inflation. Devaluation, if you remind, last year, we closed December '18 at the peso at 43, we closed December '19 at the peso at 67. So if you remove that Forex, which is around EUR 54 million hit on the top line, you reach 29.4% increase. If you remove Argentina because Argentina is a bit outside the boundaries, you still have for the rest of Latam an increase of 12.6%, which is still very significant. We are benefiting from what? Well, I have been thinking for very good position in Argentina because despite the difficulties that the country is facing, the operations are doing very well from a business perspective, from a commercial perspective, from an operational perspective. Brazil is very strong because the market is pulling a lot. And we have been launching our new plant in H1 in Jacutinga in Gerais, on time, on cost and the ramp-up was even more efficient than expected. So we have a lot of good news in those countries. And especially, you're going to see that when you look at the profit, we have been able in Argentina to price more in prices than the inflation. Now we covered the revenue. Let's move now to the adjusted EBITDA. As Michel said, we are exactly -- we deliver internally exactly what we wanted to deliver the operations and deliver exactly what we wanted them to deliver. So first of all, you have the reported growth in EBITDA of 13.2%. And again, I'm insisting on the 3 pillars that have been discussed during the IPO that have been delivering. #1 is operating leverage volume, there. #2 is positive spread, there. #3 is productivity, there. And this is -- we started in '18, we confirmed in '19, this is what you're going to see in the future. So when you look at the percentage, if you remove as well the exchange rate, again, massive at LatAm, the growth is not anymore, 13.2% is 16%. And the margin -- so we are moving from EUR 543 million to EUR 615 million, and the margin is moving from 22.5% to 23.8%. Just a number, at the end of 2016, we were at 20.4%, 20.3%. Again, when you look at the 3 pillars. Activity, the number is only EUR 2 million, why? Simply because in term of sales, we increased a lot, however, the market flow is booming. We have to stock massively to address the market. If you remember what happened last year, at the end of '18. At the end of '18, we anticipated a little bit that the market was going to pull very strongly in '19. We increased inventories. Inventories in '18 increased by 7%. So we ended the year with a lot of inventories. Nevertheless, not enough to address the growth of the market, and we have to destock 5% in '19. So all across the board, between '18 and '19, 12% reduction in inventories. And in our business, which is heavy in fixed costs, this is a massive number of under absorption of the peso. The top line, the growth from volume is partly offset by the destocking, but the fundamentals of the market are there. The market is still pulling significantly. Price mix and cost inflation. You need to gather the 2 together, you see the cost inflation has been pretty substantial. We know raw material, we know energy, especially in the first half of the year. Again, we've been able to address that via -- and we are generating a positive trend via either price increases, value-added pricing and a positive mix. Now one of the backbone of the company is our capability to reduce our cost base via productivity, PAP. We set, as a target, 2% of cash production costs. 2% of EUR 1.8 billion is EUR 36 million. We delivered net EUR 41 million. Why net? Because, of course, some countries are the -- can face some difficulties. So we're looking at net. We want to have the net hitting the bottom line. So the growth has been EUR 43 million, some industrial balances of minus EUR 3 million, give a net of EUR 41 million. And the EUR 41 million is as well all across the board. The strategy is not to have some at 1.5%, some at 2%, it is all across the board. We want a minimum, by plant, of 2%. The good, the worst, 2% minimum, exactly what we delivered. Exchange rate, as I mentioned it to you, essentially, LatAm, and essentially, Argentina. On the other, we should have expected a positive number because you have the impact of the IFRS 16. However, number one, we have some positive happenings in '18, one shot, such as subsidiary grants, refunds that have not happened in '19. So that was a one shot. So you're missing that. The second one is that the life -- and the life of initial company, we have to do some heavy recurring maintenance, not extending the lifetime of the furnace, but just keeping the furnace in good shape. This is going there. So this is expense. But at the end of the day, the takeaway is the 3 pillars have been working, that was the message during the IPO. They've been working in '18, they've been working in '19, and they'll be working going forward. Now if we split by region again. SWE, 15.4% increase from EUR 357 million to EUR 412 million. Again, the 3 spread, the 3 pillars have worked perfectly well. PAP, spread positive and volume. And this has been efficient all across the board again. But you have a positive impact of IFRS 16, and you're moving almost 200 basis points. If you remove the IFRS 16, so you will be moving from 21.6% last year to 22.5% (sic) [23.5%]. So still almost 200 basis points increase. Again, thanks to the 3 pillars. Now if you look at NEE. 13.4% increase reported, 11.6%, if you remove the -- if you remove Forex, from EUR 110 million to EUR 125 million. Performance in Germany, performance in Poland, performance in Ukraine, performance in Russia versus -- and you can see those numbers are much higher than the reported or the organic growth in revenue everywhere. Each business segment has performing EBITDA higher than its growth in sales organically. Again, 9% growth, 13%, 13.4% -- 9% growth in EBITDA, you saw in sales, 13.4% growth in EBITDA. Now Brazil because Brazil, let's spend some time on it. Brazil reported figures only 2.8% -- sorry, Latam, 2.8% increase. But if you remove the Forex, you're reaching 24.8% increase, reaching EUR 96 million compared to EUR 77 million last year. And maybe you can focus on a little bit of disappointment on the margin, 31.2% last year, 29.3% this year. It's just a mechanic effect of the dilutive effect of price increases. When you're increasing massive repricing to offset inflation, 1:1 is dilutive at bottom line percentage-wise. Clearly, it's accretive in EBITDA because spread was positive in Argentina, which is a good -- very good sign that the business is sound, but it's dilutive in presentation. Now if you look at the others. Brazil is doing extremely well. The market is very strong, and our new plants and the different plants are performing very well. Now let's see how those impact cash. And to start by cash, we start by the big cash consumer, which is Capex. CapEx is very simple. It's about process and shipping. Firstly, we established very clear and simple KPIs on what are the financial KPIs that trigger investment? You can see on the left-hand side, we spent last year -- we booked last year EUR 225 million of Capex. This year, we booked EUR 253 million, which is a 12% increase, driven mainly by the strategic Capex. Last year, the EUR 26 million was Jacutinga and the EUR 46 million this year is essentially comprising of Villa Poma and Azuqueca. You know that we are launching 2 brownfield that will become live end of the first half of the year with a full impact in term of top line in the second half. So that explain the growth. You see that in term of recurring, we are still at 8% and that's what is going to happen forward. The good news is, in the EUR 207 million, there is a new furnace in Chile, you know we have been revamping the furnace in Chile, which, by the way, have been heating up yesterday, which is very good news because, again, in a country, where this is difficult, this is bringing additional capacity for the group at a very competitive price. So process and discipline. That's triggered the CapEx spendings. And you're going to see -- I'm going to talk about cash on CapEx, and you see that might have an impact. Now let's look at the operating cash flow. Very strong, EUR 108 million above last year. And if you look, this is significantly higher than EBITDA. And you know those financial [indiscernible] say, working capital is increasing with the activity. This is proven to be wrong again. But what I have seen in my life, if you want to work on working capital, we can work on capital working. This financial paradigm is more matter of fitness than something else. Okay. Despite total Capex, operating cash flow is much stronger, why? Because we've been able to work and improve the working capital on 2 aspects. Aspect #1, inventories. We have been reducing the inventories, therefore, the need for working capital by almost EUR 20 million this year. On the top of that, I was mentioning cash on Capex. The cash out on CapEx, despite having booked more CapEx this year than last year booked, has been the same. Meaning what? Meaning that we have been able to improve the terms and condition on CapEx payments. And point #2, I've been able to plan it to the Capex. The benefit of that is that you have been -- we've been a positive variance on working capital and Capex. Meaning as well that next year, don't expect such a good performance, because next year, with the 2 big furnaces starting in the middle of the year, I will not have this capability to extend the payment terms and the conditions. So the total CapEx booked will be higher, and the cash cost on CapEx will be significantly higher. So at the end of the day, very strong cash conversion, 59%, as Michel said, despite higher booked Capex, adjusted EBITDA fueling the operating cash flow, but a positive change in working capital. So good discipline everywhere. Again, confirming that this company can generate a lot of cash, despite investing heavily. Now the consequence of EBITDA, the consequence of operating cash flow show you that, number one, we are reaching a debt of EUR 1.591 billion comprising, which is an improvement of EUR 118 million compared to last year. And if you add IFRS 16 because IFRS 16 is a EUR 53 million notional debt, you are EUR 171 million like-for-like debt reduction. We have been consistently deleveraging alpha term since '17, we continue to deleverage alpha term. And next year, it will be a bit lower because we are going to pay dividend, but the trend remain the same. 2 seconds on our capital structure because together with the IPO, of course, we have been revisiting our capital structure and upgrading it. And in parallel, if you remember that we have been able to be upgraded by Standard & Poor's and Moody's, respectively, BB- and B3. We have been using that or using the IPO process to revamp our capital structure. Number one, by terminating term B -- Term Loan B and Term Loan C, changing that with unsecured loans, longer term, 5 years bullet, 2024 and cheaper in average, 100 basis points cheaper. We're now using much more commercial paper than we have been using. Last year, you see -- this year, we're using EUR 188 million. Last year, same period, we were EUR 80 million, and this is extremely cheap financing. I think the market is very open to that. So again, the -- cost of debt for the company going forward is less than 2%. And the liquidity is, of course, remaining very strong because our revolving credit facility, a EUR 500 million is not drawn. And going forward, that can be helpful. Okay. That was all for me, and I leave it back to Michel.
Thank you, Didier. So now it's time to conclude. First of all, I mean, to wrap up on -- and comment or add comments to Didier's presentation. You've seen these results have been fully in line with what we said at the time of the announcement of the third quarter results. It's illustrating, I think, the success of our strategy, which I remind you is based on 4 pillars. First of all, disciplined growth means growth that is profitable and sustainable. Secondly, a lot of our improvements come from our own self-helped operational excellence initiatives. Thirdly, we invest in this business. We will invest this business. And despite the strong investments that we make in this business, because the investments have been wise and very well targeted, we enjoy strong cash flow generation and strong cash flow conversion. And last, but not least, it's all about company culture. This is the results of the 10,000 employees of Verallia that are getting more and more every day, entrepreneurial, owning this company and wanting to lead the industry with best-in-class performance in this company. So this, in a financial way, is translated into 3 pillars that Didier keeps repeating. The first one is, we have the positive contribution of volume growth with the leverage impact of the volume. Secondly, the spread is positive. The inflation spread is positive, and will continue to be positive. And thirdly, I repeat the self-help initiatives on productivity are paying off every year. So this model is not going to change. It's a continuation of what we've done and are going to do more and better every year. Now before I give you an outlook of 2020, let's, first of all, say that since the IPO, although we are not present in China or in Asia, the major event has been the Coronavirus impact. That is not impacting us or our suppliers directly, but some of our customers are somehow -- to some extent, impacted by this. So we are not exposed as such directly to this issue, but indirectly through some of our customers. Despite this comment, I would like to say that we are, of course, extending our sympathy to all the people and the families that are facing tough conditions in the present times in this area. And even though, we are not directly impacted, we are supporting them from -- with our sympathy. So this being said, despite this kind of adverse or headwind that we see from some of our customers, we maintain our guidance that we gave you 3 -- 6 months ago now, which is to look for an organic growth between 3% and 5% this year. So it's in line with our long-term outlook. Despite also the fact that the inflation cost will be much more moderate this year than it used to be the year before, therefore, the price increases that we have to pass to our customers to end up with a positive spread and to pass-through the inflation of cost to our customers will be much more lower than what you've seen before in this presentation. So despite this, I would say, lower price increases is for the lower growth also due to this. We will -- we believe we will grow organically between 3% and 5% this year. With probably, as you know, the benefits of the new capacity being installed in the middle of the year in Spain and Italy that should enable us to capture some of the growth. We are going to deliver an EBITDA above EUR 650 million, adjusted EBITDA above EUR 650 million in 2020, and this is our forecast, of course. And we will clearly, as Didier explain, control the capital investments. The recurring investments will be at 8% of sales and, of course, excluding the right of use, which is the application of the IFRS 16. The total Capex that includes the 2 strategic projects that we mentioned, Villa Poma and Azuqueca in Spain and Italy, are going to bring the total CapEx amount to EUR 270 million compared to EUR 253 million this year. And as Didier mentioned, the cash outflow linked to the strategic CapEx will be significantly more than last year because those CapEx will be completed, both strategic projects will be completed in the middle of the year. Despite all this, we believe, we'll continue to generate a lot of cash, and we continue to deleverage the company by around 0.4x, including dividend payments or post-dividend payments, to be clear, which means that we will probably end up the year with a leverage around 2.2x adjusted EBITDA. So this is our outlook, which I think is confirming the confidence we have in this company. And now that we've finished our presentation, I would like maybe to take your questions, and answer them as well. So we'll start with questions from the room. And after -- since we are on audio cast, we will get the questions from the phone.
[Operator Instructions]
So there is microphone that we'll be circulating. So don't hesitate to use it.
This is Paco Ruiz from Exane. Congratulations for the results. I have 3 questions, please. First one is, looking at the outlook that you would hear, and if we assume that the PAP will continue in the same trend of a 2% of a cash cost, this will significantly mean EUR 35 million. So this is mainly practically reaching this EUR 650 million on EBITDA. So you commented that the price will not be as big as in 2019, but probably, do you still expect a positive price impact and operating leverage should recover? So is this a very, very conservative thing or I'm missing something on this calculation?
I mean, this is a floor, as you understood, because we said we would be greater than EUR 650 million. It's just the beginning of the year, and we have no visibility on the exchange rate, for example. And just talking about the exchange rate, you've seen that in the last 2 years, we've been strongly impacted by exchange rates, which have had a negative impact on our results. But your PAP calculation is right. The spreads that we are aiming at, we've said it at the time of the IPO, would be slightly positive. We are not looking for a huge spread -- positive spread, I would say. So if you take just 0 plus spread and EUR 35 million, you are EUR 650 million, you're right. But now you know over the life, we cannot forecast what the exchange rate will be and that's why it's a floor.
Just a [indiscernible] forex last year, I mean, '19, EUR 32 million the year before. This push us about 8x. But as we should say, due to picking up the year' [indiscernible] we're looking at February 3 compared to this year.
Okay. The second question is if you could be a little more precise on what's going to be the impact of CapEx or cash CapEx for this year? And also, in terms of taxes, I mean, the cash taxes, we haven't seen a much difference between the P&L and the cash flow in '19, where during the IPO, you'll see that there's going to be some fiscal credits.
Okay. If you look at cash CapEx over the past 2 years and you play with the book Capex, more or less the payables, you spend an average EUR 230 million in '18 and '19, whereas, we are going to spend probably around EUR 280 million, EUR 285 million, EUR 290 million, depending on the year-end. But in 2020 -- so massively more, essentially because, as Michel said, the investment, the largest investment will be completed in the middle of the year. The largest investment being essentially Villa Poma and Azuqueca brownfield projects. As regard to cash taxes, you see that EUR 59 million this year versus EUR 39 million, we expect probably to go around EUR 80 million next year, [ 8-0.]
And the last question is regarding the Jacutinga ramp up. So you started mid '19. So how it's evolving? And if you have recovered part of the lost ground that you had at the beginning of the year. When would you published first half result?
Well, on Jacutinga, as Didier mentioned, we were really exactly where we wanted to be in terms of CapEx spending. We were exactly -- we started exactly on the date that we planned to start and actually, the ramp-up has been impressive, very, very fast, much, much faster than one would have expected. So it's been, frankly speaking, one of the successes of last year. There is no more -- I mean, and this -- that this Jacutinga project was also due to the relocation and the closure of our downtown facility in São Paulo. So by doing so, we've increased a little bit our capacity in Brazil. And given the fact that the market is very dynamic, we're going to enjoy some better growth next year -- sorry, this year in 2020 than we had last year. By the way, one of the reasons I would like to draw your attention to -- one of the things I would like to draw your attention to, when you look at the big swing of inventory between end of 2018 and 2019, one of the fact that -- one of the reasons why we built inventory in '18 was also to prepare the closure of Fabi, the downtown São Paulo facility and transfer the business. So that was part of the ramp-up of inventory in 2018, which we don't expect to see such swings in inventory going forward.
Yes I have 2 or 3 questions as well. It's [ Fray Dollmann ] from Berenberg. So, I mean, when you look at your core Europe exposure, how satisfied are you with the margin improvement you've seen this year, kind of ex IFRS 16 because, obviously, it's been a great market, 6.5% to 7.5% organic growth in North and South Western Europe. So is the margin [ when ] you're seeing is kind of in line with what you expected? Or could you've done more? Yes, that will be my first question.
Well, on this one, as Didier mentioned, I mean, we are very pleased that it's not one region on one segment of the market that drove this improvement. It was really a general improvement across the board, in all countries, all segments of the market. Both Europe, by the way, and Latin America. And Latin America, even in Argentina, which, as you know, is a difficult country right now, we are doing extremely well in our business. The only impact is the exchange rate when you convert the Argentinian peso that has strongly devaluated into euros. But in local currencies, we are doing extremely well in Argentina. So to come to your point, we are very pleased and very satisfied that all businesses in Europe and in South America have improved last year. And all the segments contributed to this improvement. Now on the other side, you know very well that our midterm guidance is what -- exceed 25% of EBITDA margin. So that says that we still have some room for improvements that we have well identified, especially thanks to the productivity action plans or the performance action plans that we are every year deploying with throughout the company.
And then on the organic growth side. When you look at the 3% to 5% over the next 2 years, is that a constant currency? And then what trajectory do you see a lot of your peers are talking about in Europe, maybe 1% to 1.5% price increases next year? What kind of assumptions are you making there when you talk about the 3% to 5%? And kind of roughly do you expect to get a higher or low end? I know you've got new volumes coming to market.
Well, coming down from 7.2% -- excluding Argentina, last year, organic growth for -- it is part of Productivity Action Plan, by the way, shedding on light. Our contribution to the environment, saving the environment and saving the planet. So you take it the way you want. Usually, it goes together, by the way. So I'm sure they will restore the lighting very soon. No, to take your point, I mean -- sorry, what was the question?
The question was on the 3% to 5% on your growth versus the pricing?
Yes. Okay. So the 3.5% is much lower than what we had last year. We grew last year 7.2%, excluding Argentina. So by itself, it's a more reasonable growth rate going forward, which will be supported by new capacity. As you know, we were sold out. And the fact that we bring new capacity is through debottlenecking or a small marginal furnace expansion, as you've seen from the brokers case, I presented this after -- this morning. The 2 new projects are in Villa Poma and Azuqueca, in Spain and Italy, are going to help us fuel or support this growth. Now the market growth will be probably around 2%. That's what our -- we estimate, and you can expect the price increases across the board to be in the vicinity between 1% and 2% in Europe. Now in South America, it's quite different. Inflation is much higher. So -- but in Europe, that's more or less the ballpark range that you have. It varies from one country to the other, but that's more is the -- so it's much lower than last year, to put it this way.
And final one for me. In terms of the dynamics of margin in each region, are you still, I would say, more excited or ingested by South and Western Europe in terms of what really drives the improvement midterm? Are you kind of seeing more upside there? Obviously, your mix there is very favorable too with the wines and so.
Yes, the margin improvements potential is more or less the same everywhere. I mean, the beauty of the Performance Action Plan is that you work on your costs, and as I explained at the IPO time, when you have -- we have 32 glass making factories, there is always a #1 and #32. So you could say, okay, the number 32 has an easier way -- an easier job because it can catch up. It should catch up towards the best-in-class, which is true from that point of view. But on the other hand, the reason why the #1 is #1 is because, usually, you have better teams, more knowledge, more [indiscernible]. So we can tackle much more sophisticated or more complex issues than the last factories cannot tackle. So what are -- and that's why, Didier, explained that every factory has a goal to improve its cash cost by at least 2%, every, whether you are #1 or #32, you have the same goal, because I repeat the best-in-class are have talent, more know-how and better skills to go further than the laggards that will probably benefit from benchmarking the others.
Sorry, very final one now. So just -- obviously, you're delivering quite nicely, 2x to 3x target capital structure. How do you view kind of capital allocation? There isn't really much to acquire it in Europe. But just more broadly, in the midterm, is it dividends? Or do you see opportunities for M&A?
Well, yes, on this one, we are -- we have not changed our view on this subject since the IPO time. We will look for acquisitions, not just for the sake of acquisitions, by the way, we've been very disciplined on what we're looking at. I mean, just take an example, I mean, it's public information. One of our competitors is selling its operations in North Australia, New Zealand. Well, we didn't even look at it because, for us, we don't think it's going to create synergies and help grow our business in a sustainable and durable way. It's not because it's about business at all, but just that we don't see the synergies that we could get from such an acquisition. So we are [ looking ] to chase any acquisition. We have a strong view on the companies we'd like to acquire. Now they are not necessarily for sale, as you know. But there will be other opportunities that arise, we'll be certainly looking at them. And if we don't find a good use of cash. We said very clearly that we target to leverage the company between 2x and 3x. So if you go below 2x, we'll either buy back shares or pay special dividends or increase our dividend policy. But this is not for this year is probably, at least, not for the time being, the question.
[Operator Instructions]
Charles-Louis Scotti, Kepler Cheuvreux. Two question, the first one on U.S. tariffs. Have you seen any impact of U.S. tariffs from the European product? Have you seen any prebuy effect in 2019? And my second question on the capacity expansion. How much they will contribute to your 3% to 5% targeted sales cost in 2020? Is it fair to assume a 1% boost on a full year basis in '20?
Okay. On the U.S. tariff, as everybody remembers, this happened at the -- in the middle of our roadshow last year. So this was the news of the road show for us, which was completely unexpected, as you can imagine. It's really too early to really understand what has been the impact. The reason being that, we know some of our customers had anticipated, to some extent, this tariff impacts, so buildup of inventory. On the other side, we know for sure that, for example, the French wine exporters have been quite strongly penalized, at least, for the bulk of the market. We know that on the other side, the premium wines have been doing very well last year. And you know that we are quite strong in the premium segments rather than the bulk of the market. So it has an impact. It doesn't have yet a huge impact on our customers. But we -- it's probably a bit early to say, given the changes in inventories and the supply chain between us and the final customer. As I mentioned during the IPO times, for the premium products, the consumers will continue to buy even if there is a price increase due to tariffs. For the more sensitive price -- for more sensitive segments or more sensitive products on the market on the price side, there might be some, of course, volume impact. Just one thing to remember on the other side that -- remember that are excluded from the tariffs in France, the champagne and cognac. So we are not impacted on the champagne and spirit side in France. And I excluded from tariffs, the Italian wines. So it's a bit complicated to follow, but the fact that we are strong in Italy and is -- and the fact that Italian exposures to the U.S. are bit -- going to benefit from less exports from France, means that at the Verallia level, we might have also some shifts from one country to the other without necessarily feeling the full impact of the tariffs at the group level.
Yes. And regarding the 3% to 5%, you have a couple of buckets. Bucket #1 is cullet, the new furnaces would name, basically, Jacutinga full year impact because this year was not a full year impact. Number two, the furnace in Italy, essentially, which has been heating up yesterday and will generate more growth in the coming 9 months. And the 2 brownfield, which is -- which are, sorry, Azuqueca and Villa Poma. So that's the first bucket. The second bucket, clearly, is indirectly through the PAP because we are improving yield, we're improving operational efficiency. Minimum, you're expecting from that is minimum, I would say, really minimum is a 1% capacity increase per year. That's why as explaining [indiscernible], that's what we've been delivering, CapEx free, CapEx free. And then you have the normal, what you see in the recurring new equipment, new [indiscernible] machines, [indiscernible] even more. So that's the three buckets you're seeing. One is investment. Second one is efficiency. Third one is greenfield/brownfield.
Just 1 quick follow-up question on your -- on cullets. Can you remind us the share of cullets in your total raw materials? And how far can you still go? And what could be the benefits on your raw material cost?
Just a simple number, we are spending raw material around EUR 400 million. Half of that is cullet. And half of that cullet that we are using is clean and processed by us. So it gives us a little bit of leverage on improvement in trying to get the thinner and thinner parts. 4 years or [ 2 years ago ] or 3 years ago, we were set at 4 millimeters. Today, we are using less and so going down to 800 microns. So yes, we want to develop after one of the -- we're not really better than the others. We are creating more than the others after the issue is probably the collection, yes, European level.
The issue is that in Europe, we collect, on average, the industry collects 76% of the used glass. The European Commission, which by the way, I'm sharing, is a set up a target of collecting 90% by 2030. So in every country, we are working very hard with national associations, with the brands, with the trade to increase the capability of collecting glass, knowing that the glass makers, the glass packaging makers are willing and able to use as much glass as we can collect. So the issue is not really the treatment facilities capacity, but it's more the collection right now, which is at stake. Do we have additional questions from the room? If not, we'll take questions on the phone.
Can you hear me, okay? We received 3 questions on the webcast. And the 3 are from [ Christophe Douglas ]. And he would like to know the following. Could you recover today's dynamic between building up inventory and destocking on the EBITDA margin?
It's pretty simple. We are having fixed costs when put -- when you put inventories in -- when you put production inventory, basically, you're transferring fixed cost to balance sheet and then you're selling it. When you are producing and think, you're okay, you're transferring directly fixed cost to sales. When you are destocking[ unformal, ] the top line is there what it is, but you're using the fixed cost that were already in the balance sheet and not going for the normal production and P&L process.
The second question will be as follows: I was somewhat late in the webcast. So probably you already tackled this subject, but I heard you saying, that you are confirming the 2022 targets despite experiencing some headwinds since the IPO. Could you please elaborate a bit on those headwinds?
Well, I mean, I think we've been clear, I mean, during the IPO road show, we discovered these tariffs on the -- in the U.S. made on puts, especially on the wines and spirits in Europe. That was one surprise that came during the IPO to [ didn't ] lead us to change our guidance. And since the IPO, we have faced now in Asia, and that has a knock on impact on many other regions, this called [ Leveris ] issue, which is clearly slowing down the economies in many countries and at a worldwide level now. So this is -- this was unexpected too. But despite those headwinds, we still believe in our -- that our guidance is doable, and we didn't have any intention to modify it.
And lastly, could you please explain the mechanics behind the margin decline in Latam, partly due to the dilutive impact of the shop price increases implemented during the year? Does that mean the price increase led to a loss in volumes? Or were you not able to compensate fully the increased input prices, but price increases?
So no, it's just -- there's a basic mathematic principle. First of all, let's put the things perspective. Inflation in Argentina was 54%. We increased the pricing more than 54%. But one-for-one give a percentage of -- so that's just the fact that you need to increase much more. You should -- to get the percentage increase, you need to increase much more than just beating inflation. So the higher the inflation is, the more you need to increase the pricing, not only to be spread positive, but to cope with the growth in percentage. So from one-for-one is dilutive in percentage. And 1 for -- 1.1:1 is dilutive in percentage. That's the case in Argentina. In Argentina, while not losing volume, we are gaining. We are beating inflation, but we're not beating inflation by 5x and we're beating inflation by 1.1x. So basically, this is dilutive in terms of percentage. That's basic principal math.
Thank you very much. Those will be all the questions that were received on the online webcast. We'll now be listening to the questions that we have received during the call.
We do have a few questions from the audio line. And the first question comes from the line of Matthias Pfeifenberger from Deutsche Bank.
Matthias from Deutsche Bank. A couple of questions from my side. Firstly, congrats on the results. I just continue on the path of Paco, trying to see how really the conservative the guidance is on the EBITDA? And especially, maybe if you could help us quantify the effects of the destocking in 2019? Also, tell us, if there is some good amount of restocking already taking place in 2020? And then also, you mentioned on one other occasion that you are fully hedged already for 2020 for the gas cost. So maybe you can share some quantitative numbers in terms of what's the average benefit going to be in 2020 versus '19? And then related to that, is there any incremental EBITDA contribution from the new furnaces? Or will this be compensated by ramp up costs?
Well, that's a long question. So I've tried to note -- to take note of all the points that you're mentioning. So forgive me, and don't hesitate to repeat part of your question, if I didn't answer them properly. Now in terms of EBITDA forecast, you showed the starting point of your question. I mean, I think the comment that was made before is still valid. I mean, that's a floor -- we said it will be above EUR 650 million. At this time of the year, it's too early to say, if we will face additional headwinds. I mean, just take an example, which we are currently living in France right now. I mean, there have been quite a lot of strikes since December due to the national reform of the pension schemes in France. This has had some impact on our operations, and also, somehow to -- this could have an impact if it's lasts too long on the consumption of our customers. So this is something that is a known at this stage. We -- it's part of the headwinds, I was mentioning that, we see and we manage. We -- it might have an impact on the top line. Our goal is really to, of course, work hard on the cost side to minimize the net impact. But this is something that we'll have to evaluate as we see the year progressing, if you want. Now regarding the stocking, destocking, I mean, just to give you some numbers because I think -- so you can make the math. But in terms of tonnage in 2019, we increased our inventory throughout the year by 74,000 tonnes...
'18, 2018.
Sorry, 2018. And we increased our inventory by 74,000 tonnes. In 2019, we decreased our inventory by 52,000 tonnes. And as you know, in the P&L, you look at the variance of the variance, if you make a reach from 1 year to the other. So the variance of decreased inventory in 2019 versus increased inventory in 2018 is altogether 126 tonnes -- 26,000 tonnes. It's massive. Now going forward, as we explained, even if we ended the year with a global inventory, we don't have strong views, whether the inventory will slightly growth or go down. Why? Because we will, on the one hand -- we should, on the one hand, increase inventory because our sales are increasing. This is what Didier was mentioning, our working capital should be increased because our sales are growing. On the other hand, we are working at the same time on our supply chain processes to be much more efficient in improving the customer service or maintaining a very good customer service with less inventory. So the net result should not change dramatically the level of inventory during the year. That's not the least. Despite the synergy, we have a little bit of synergy, which you have to bear in mind. But from December to December, we don't expect a major change of inventory.
I think if you look at the 3 pillars, they will still be existing. This year, you have seen the activity, so the volume growth has been offset by the destocking. Next year, we don't expect that because, as Michel said, we expect more or less inventory to remain more or less stable compared to the closing of this year. Price increases was -- and mix was significant in '19 for the reason mentioned that the base costs are going to be much more moderate in terms of inflation. The spread will be positive, therefore, contributing to bottom line. But not necessarily like this year. And the PAP is the PAP. So we'll be generating at least 2% on the cash cost. So that's it. In terms of our forecast as well, we took the assumption might happen, not happen, that it will be another year of volatility in Argentina. And those who are ready to bet against me on that, I'm ready to bet because you wait for the month of August, and you're going to see that going down again 50%. So we took that as an abstention. Clearly, this is impacting, but we do not -- we are not doing '20 [ at for ex ] '19. This is not going to happen. We don't see that happening.
And last, but not least, just to give you some color about the reason why we are quite -- to take your words, maybe conservative on the EBITDA side, is the additional volume growth coming from the 2 new furnaces is not at marginal cost. Differently from marginal CapEx improvements that are made through debottlenecking activities were here for very small CapEx or no CapEx at all. You debottleneck your factory, and therefore, you have a huge margin pulling through directly to the bottom line. Here, both 2 new furnaces will require full costs setups. New teams to be trained, by the way, not just on the installed setup. We are training the people as we speak. So this is a ramping cost that we have to absorb which, of course, is one-off. But my point is, it's not -- and then you have the ramp-up of the factories themselves. So my point is, we will have to incur this year, also some additional costs due to those 2 startups and 2 startups in 1 year for 2 brownfields is not a small thing for us. So my point is if you put all these things together, I mean, we believe that we are able to deliver more than EUR 650 million. Of course, we'll do our best to do more, but we don't want to commit too much at this time. To be easier to see, to revise our -- maybe our guidance, if need be for the year. If we see something that changes quite significantly.
Yes, let not change the tone of the guidance. It's not a defensive guidance. It's not we are worrying about the future. I think we have all the means, we have all the fundamentals or the 3 pillars that we'll be delivering. Let's not change the tone. While in February, start of the year, we know what the consensus is. We give you above EUR 650 million. We don't look nervous. So let's not change the rule of the game.
Fair enough, sir. That's a really good explanation like the destocking wiped out the operating leverage last year and then you have the ramp-up costs for the 2 new furnaces. The missing piece really and maybe you can shed some color is the gas dynamics, gas cost dynamics?
The gas or the CO2. The CO2, as you said, and the CO2 the Phase III hedge at the price -- at the cost, which is lower than the current cost, but is very similar to '19 because we took hedge at the same time for the upcoming 3 years when we did it. So there is no -- it -- no gain compared to '19. Now we know more or less how much we are going to have to buy on the market because we are very steady. We now have a buying between 600,000 tonnes or around 600,000 tonnes per year and we know at what price, very similar to '19.
Yes, that's helpful adjustment on the energy cost because you have a rolling hedge for gas prices? And I was just -- after the benefit of gas cost deflation because, obviously, the hedges will follow the spot prices with a certain lag, right?
That's clear, but today, the market is going down significantly. But you know our strategy. And our strategy is not to be open, I mean -- and be doing on spot. We are -- we don't want to speculate. So we have gas pricing that are taken on rolling basis, which are not exactly matching the drop in price. So clearly -- and let's say, thanks to God because, if I were telling you that I'm fully exposed every day on the price of gas electricity, the day is going down. I might be missing an opportunity. But the day is going up. Now you're going to put the finger at us and saying, "okay, Didier, you're speculating." So we're not speculating. Clearly, the spot price on gas and electricity is significantly down, and our hedging is a little bit higher than that. But going forward as well, that's, I think, the right way to look at that, [indiscernible] people, we're not speculating.
Okay. My 2 final questions would be, you faced all these 2 headwinds, basically, and you're still facing them, hence, you still kept the 3% to 5% growth guidance. So what's actually positively helping you? Is it the capacity ramp? Is it winning market share? What's helping you? And then also on the cullet usage, you became a bit more explicit about it more cautious maybe at the IPO. Now you're saying you want to increase the cullet use. Can you give us a number? Is it like 1, 2 percentage points in the medium term? And also do you face some competition from new segments like dairy moving again into glass?
Well, we have talked about the headwinds because they are quite new compared to the IPO but we didn't speak too much about this tailwind that we talked about during the IPO. The strong move away from plastics to glass, the shift from plastic to glass, it's difficult to quantify. And as I said, it will not happen overnight. But clearly, glass is the preferred material because it's healthy, it's infinitely recyclable, and it gives an image of premium and quality that the other materials don't give. So this is clearly a tailwind. Again, very difficult for us to quantify, but that -- but this is still here and even probably, even stronger than 6 months ago. So that's one thing, which will -- should help and mitigate some of the headwinds that we just mentioned. Regarding the cullet, we gave you the ratio of cullet use in our company. Albeit, the limiting factor cullet right now is not the cullet treatment, but it's the collection, which is not in our hands. So we buy cullets that has been collected by third parties. And it's a complex issue because you have to align a lot of different stakeholders, the municipalities, the brands, the retailers or [indiscernible] or restaurants, so on-trade and off-trade networks and, of course, the collectors. So that's something we are working on. Ideally, we would like to at least increase the cullet ratio by 1 point a year. It doesn't seem a lot, but this is something, which we believe should be doable. And that's about it.
But to come back on your point. I want to insist, because the 3% to 5% growth organically is going to be made a little bit of pricing, clearly. Volume, but again, volume, we have new capacities or like [indiscernible] gas full year impact of new capacities. And this is today -- and the efficiency, again, the PAP is bringing on side effect improvement on yield and operating efficiency. All that together make us comfortable to be able to capture more than the market growth.
Our next question comes from the line of James Rose from Barclays.
Just to pick up on the plastic to glass trend, please. Is there any more anecdotal evidence you can give us post the IPO that would indicate that? And then secondly, at the IPO, I think you've mentioned there were some customers asking you to open capacity in the U.S. Just wondered if you had any more thoughts about that in general?
Well, there is no real strong news post-IPO regarding the trend of favoring glass versus other materials. I mean, the same trend is solid in the market. How to quantify, but clearly, in the mind of everybody, our customers, the consumers and even the public authorities. So -- but no big change compared to what we discussed at IPO times. Regarding the U.S. market, I mean, clearly, some cash. Clearly, there is a -- it seems that there is a lack of glass in the U.S. market right now. For us to go there just to build one factory doesn't make sense, to be frank with you. So that's not something we are considering as we speak. I mean, adding a greenfield factory in the U.S. market, just to be there doesn't seem to provide enough strategic interest to us at this stage. Now should we find other opportunities that are much bigger than this one, why not? But making one acquisition or one factory in the U.S. is not for us as sufficient to justify the investment in this country.
The next question comes from the line of Paul Bradley from Citi.
That's Paul Bradley at Citi. First, congratulations on the results. Very good to see you deliver on what you promised. A couple of quick ones from me. On the working capital side, could you let us know what your factoring balances were at the end of the year? And whether you've made any changes to your factoring program? And secondly, one of your, I guess, picking up on this plastic glass point, one of your U.S. peers yesterday said, in Brazilian beer, they've seen a move from glass towards cans. I just wonder if you're seeing the same in Brazil? Or if you're seeing anything in Europe, which is losing share for glass towards cans?
What was the first question, sorry, because I have a hard time to listen?
Sorry, factoring.
Factoring. I was expecting the question, I didn't want to raise the red flag in front of everyone on the working capital. We factor in 2018 on non reverse factoring, we factor EUR 315 million in '18. We factored in '19, EUR 313 million. So that's what we discussed at the time of the IPO. There was a ramp-up, and of course, there will be an increase seasonally in the year when you sell more, you factor more. But again, this is service at a cheap price, and we're paying 1%. And we are using it naturally, it's not a mean for us to improve the working capital. It's just we're using where we have sales, 1% is still more expensive than what our bankers friends are offering to us. So -- and we have 10,000 customers with a level of revenue, which is irrelevant, the level extremely low for company of our size. So this is -- we have a very good customer base. So again, flat. Number two, it's going to increase, probably going to be higher at the end of June because it's a strong quarter in terms of sales. And very attractive in terms of pricing.
For your second question regarding Brazil. I've read this comment about the shift from -- maybe probable shift from glass to can. That's not at all what we see on the market, let's be clear. The glass market in Brazil is very dynamic, fueled by, first of all, the beer segment, which is growing, growing quite fast, by the way. And more importantly, the consumer habit's changing in brazil, where it seems that our customers that are selling beer are selling a lot more one way beer, rather than the returnable beer. In other words, as you know, there's probably 20 terms when you have a returnable packaging versus one way packaging, which is a one-off. And it seems that the consumers in Brazil are drinking more at home right now than they used to in a public spaces. And therefore, the need for glass is quite strong. Actually, we have a strong demand from our customers in Brazil. So I don't know if the growth of the glass is bigger or less than the growth of can in Brazil, but I can tell you the growth of glass is very certain -- is very strong. And we do enjoy it. Now in Europe, I mean, we see, in a few months, the fish store statistics from the federations, both glass and can federations. I'm sure we'll see if we -- if in Europe, there is some kind of substation from glass to can. It doesn't seem to be the case, to be frank with you, but I don't know if you have yet any of those statistics.
That was our last question from the -- [ our July call. ] I'll hand the call back to you, sir. Thank you.
Okay. So I think it's time to conclude. And I would like to thank you very much again for attending this presentation and this discussion. Thank you very much, and have a good day.
Thank you.-