Hello and welcome to the Verallia Quarter Three 2022 Financial Results Analyst call. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand over the call to your host, Patrice Lucas, the CEO, and Nathalie Delbreuve, the CFO, to begin today's conference. Thank you.
Good morning, ladies and gentlemen. I hope that you and your family are fine. As always, it is a pleasure for Nathalie and myself to go through this presentation and to present to you our Q3 results and our key highlights of the quarter. To start with, as usual, as an introduction, this is our ID card. We are the number one in Europe, number two in Latin America, number three worldwide. We are doing business in 11 countries with 32 glass plants, 58 furnaces, nine cullet recycling centers, three decoration plants. Thanks to all of that, with our 10,000 employees, we are producing about 16 billion bottles and jars per year. One of the key points is our diversified and balanced end market.
As you know that we have more than 10,000 customers and that we are playing on the key segments and all the key segments of our food and beverage market, still wine, sparkling wine, spirits, beer, soft drinks, and food. To go with the key highlights of the quarter, what I would like to start with is about some product and innovation recognition. The first one is about this Flûte Gothique, which is produced by Verallia France in Elbeuf, and who had the pleasure to get the winner of the Formes de Luxe 2020-2022 award inside the wine and spirits bottles category. This is, as usual, a clear demonstration on how we want to be creative and propose services, solutions to our customers. The second example is quite interesting.
It is a clear demonstration that we have some opportunities to gain market share from some packaging competitive solution. Here we have an example. We are able to switch from one aluminum to glass, and this was done for Laiterie Reims, a key partner, for the past 10 years. Another key element is we had the opportunity to have a first environment day in all our plants and offices. This was a great day. The opportunity to share with all our employees all the initiatives we are making in each of our plants. Here you have some different examples.
In each of our plants, we had many sessions, many examples presented to the employees, and it is a way of strengthening the importance of our ESG roadmaps to all our employees and to have everybody proud about what we are doing. Going into that direction, the next topic is we took the time as well to complete a full CSR report, which is a key document to understand our CSR strategy. To give sense, to give clear orientations, and again, to have everybody understand what we want to do, what is our vision, and what will be the next format. Want to tell you that this document is available on our website. You can find it in the media part of our website. I think it is quite useful.
We have a very good synthesis here of all the initiatives we are taking, and we want to develop throughout the different pillars we have identified. Another clear example of how serious we are about environment, on how we are pushing all the opportunities for us to reduce our emissions. Here you have two examples, initiatives that we have launched. One is in Lannion plant in France, where we are going to launch in 2023 an ORC, Organic Rankine Cycle. This technology is going to allow us to use the waste heat from our furnace fumes and will be converted into electricity. By doing so, we will be able to use and reduce 10% of the plant consumptions.
Another one is about photovoltaic systems we are going to implement in 2023 in 5 plants in Italy and in Mondego, in our Mondego plant in Portugal. It is going to contribute to a reduction of CO2 emission per year. In Italy, it's gonna be close to 8,000 tons. In Portugal, it will be more than 3,000. You see the energy autonomy that this will provide to Italy. Four percent in Italy and 14% in Portugal.
This is a clear example of all the initiatives, and we have much more on that, which is guiding us, which is confirming how serious we are about our roadmap towards decarbonization and with the commitment we took for 2030 objective, which I remind you is -46% CO2 reduction compared to 2019. A quick view on our industrial projects. In July, I presented to you an update. Here, this is what is new. Just taking another example of debottlenecking we are implementing. You know that capacity is a challenge in order to address the customer demand. We are working on a continuous improvement mode toward efficiency of our production lines.
As well, each time we have the opportunity to make a small improvement by debottlenecking making our lines, obviously it's providing higher output. Here, this is one of the examples. We had this integration of the new line 44 in Beaune, which is leading to an additional production capacity of 10 million bottles per year for wine, spirits market mainly. Then on our key projects. Jacutinga two. Just want to confirm to you that we are on track and very well on track. The lighting of the new furnace will be done in November nine. Then we will ramp up in production to start production to be sold early December. In Campo Bom and in Pescia, nothing new.
Still on track as we presented during July conf call. On our new furnaces technology, here again, we are on track towards our 2030 CO2 roadmap. Electrical furnace in Cognac is moving forward. We are on the project implementation. On the hybrid furnace, just want to confirm to you that we have chosen Zaragoza to be the location with this first implementation. Here again, we are on track, and we plan to start production end of 2024. Moving to our results of Q3 and at the end of September. We can say that we have a strong growth in revenue and a solid cash generation. Revenue is +24.5% increase at the end of September compared to last year.
In Q3, we had a +26.5%. Adjusted EBITDA at the end of September is at EUR 654 million, +24% compared to the same period of last year, and with a margin at 26%. Last, we keep on reducing our net debt ratio. At the end of September, for the last 12 months, we are reaching 1.1 leverage. Now I'm going to let the floor to Nathalie, who is going to present in detail some financial results.
Hello, good morning and good afternoon, everyone, and thank you for attending this call. This is a pleasure to me to present to you these good numbers for Verallia for this Q3. First, if we look at the top line, we see continuous strong growth, so strong organic growth. Sorry, you see on this bridge that the organic growth is +24.4%, in line with H1 growth, and that it is mostly driven by price and mix. In terms of volumes, we have positive numbers of EUR 33.2 million. It's still up in volumes, but we have Q3 volumes slightly down as expected, and it is mainly due to furnace repairs.
Price mix pillar is very significant. We have around 20% of price effect in the nine months, and we benefit in H1. If we benefit from the selling price increases that we have run in Europe in H1 mainly. You know that we had two waves of price increases in Europe. If we move to Latin America, there are regular selling price increases to follow with the inflation. The mix continues to positively contribute. You also see that the Forex impact is still positive.
If we go to the EBITDA performance. The EBITDA is moving from EUR 527.6 million at the end of September 2021, up to EUR 654.1 million at the end of September 2022. Looking at the bridge here, you see that activity spread and net productivity pillars are green and contribute significantly to the nice improvement we see in this EBITDA. First for the activity and operating leverage, we are still on what we were presenting to you at the end of H1. Positive volume impact, but mostly stemming from H1 as we commented, and a positive impact on the stock variation.
Now, the price mixed cost spread is the main contributing one and increased since H1. You see here EUR 46.6 million. We see continuous cost inflation in costs, mostly linked to raw material and energy. We continue to be able to offset this cost inflation by both price and mix. If we focus on Europe, we are benefiting again from the selling price increases and we have still just a slightly negative price cost spread, but we are getting closer to a positive one. In Latin America, we have a very dynamic selling price variation and a very positive spread. The net productivity, EUR 22.3 million.
We are reaching 1.9% reduction of production cash costs. We were at 1.8% in June, and you know that we are aiming, of course, at reaching 2% by the end of the year as it is our strategy. Now, the foreign exchange and other, very quickly, they are slightly negative. In the foreign exchange rate, it's mainly stemming from Argentina. Other effects continue to be positive. We have so many items in the other columns, but in the end, quite a low number, and it includes EUR 0.5 million of donations to Ukraine. In the end, Adjusted EBITDA margin at 26%. Now, with these good results, we continue to deleverage the company.
The net debt has reached EUR 921.6 million at the end of September. The leverage is now 1.1 times, in fact, 1.15, when it was 1.5 times at the end of June. A very strong and a good performance and a strong cash delivery. Now, the financial structure. Here, there is no change compared to previous quarter. You remember, we have a well-balanced sourcing of our financing with between debt markets and banks and bank you know liquidity.
We have issued one year ago, last year, two sustainability-linked bonds, for EUR 500 million each, with nominal rates that at a very good level, and you have that in the table. We have our term loan and revolving credit facility, so very well balanced sourcing. In the end, the availability, available liquidity of the group now reaches EUR 1.2 billion at the end of September.
Last but not least, about our guidance for 2022. First of all, I would like to say that I'm proud of the results we have delivered. I would like to thank the teams which have been working hard, as you can imagine, to deliver this Q3 performance. Thanks to this Q3 performance and the higher visibility we have over the rest of the year, we are upgrading our guidance. On the revenue, we are saying that we are going to close the year around the 25%, so around 25% growth. On the Adjusted EBITDA, we are going to close above EUR 820 million.
Again, quite proud about what the team is doing in Brazil with this project launch project management and the launch of this new furnace in Jacutinga, which will start on November ninth. Thanks a lot for your attention. I think now we can move to the Q&A session. Again, our pleasure for Nathalie and I to answer to your questions.
Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. We will take the first question from line, Guillaume Muros. The line is open now. Please go ahead.
Hello. Hello, everyone. Good morning, and thanks for taking my questions. I have five in total. The first question will be if we can decouple the sales price increases for the European Union and for Latin America. I know that for the European Union, you guided or you previously announced this price increase for Latin America. What sort of price increase are we talking about? Still on this price mix effect, my second question will be if you can give us a hint on how much the mix effect contributes at the group level, and how basically are you managing that internally sorting between products and our clients. My third question will be on energy consumption and energy supplies going forward.
You mentioned these initiatives that are taking place, well in Italy, in Portugal, and going forward in Spain with the hybrid furnace. Moreover in the short medium term, can we get an update on how are your plants, particularly in Europe, being equipped to potentially face some curtailment of natural gas? Then, fourth question, can we also have an update on your employee engagement level, particularly in France? Are there some social disruptions there? Have you increased salaries? Fifth and last question, sorry, quite a lot of questions, on M&A. If we can get as well an update on the M&A environment, because we have seen beginning of October, one of your competitors, Zignago Vetro, announce a small acquisition in Italy.
Many thanks.
Thanks a lot, Guillaume. Quite a lot of fruitful questions. Thanks for that. Maybe Nathalie, you take-
Yes.
You take the first one, and I will take the last one. Starting with
Yeah
Nathalie.
Hello, Guillaume. Nice to hear you. Thank you for all these questions. On the price effect, you're perfectly right to, I would say, distinguish between Europe and Latin America because we don't have. Even if Europe inflation is now increasing to double-digit figures or closing double-digit figures, inflation is still higher, of course, in Latin America that have been inflation countries. In fact, in Europe, we are still a bit below 20%. We would be more in the range of 18%, but you know that we have two waves of sales price increases, so there is a carryover effect of the second wave.
In Latin America, we are in higher numbers, with, of course, Argentina being very specific with the hyperinflation. In Latin America, even in Brazil and Chile, we are above the 20%. That's why overall on average, we land close to the 20%.
Thanks, Nathalie. About everything which is related to energy, let's step back maybe. You know, our strategy is quite clear, that we were using fuel in the past. We moved to gas, and then our long-term view is to move from gas to electricity, thanks to the new technology we are going to implement, and this is gonna start with the two furnaces we have just announced here, so the electrical furnace in Cognac at the end of 2023, and then the first hybrid furnace at the end of 2024 in Zaragoza. We'll enter in a period where we are going to deploy this technology when we'll have to replace furnaces, and this is gonna be a major contributor to our decarbonization roadmap.
This is going to take place between, let's say, 2025 and 2030. Again, it is gonna be a first pillar, a strong pillar to contribute to the -46% CO2 reduction. We were fuel, we are in gas, and we are moving towards electricity. We have a kind of specific situation right now with you know, this risk of gas shortage, and this is why we have decided as a temporary measure to ensure business continuity and to be ready to use an additional 20% of fuel, allowing us to reduce our gas consumption simply by 20%. This was a backup plan that we are executing right now.
We are just on that, and we said, if you remember in July, that we have done a lot of work to make sure that this was feasible on most of our furnaces in Europe. Again, this is the case. We have been preparing ourself for that. Now we are ramping up from now, as I speak, till the end of the year to a level of 20%. As we need visibility, and we need to be organized for all the supply chain, logistics topics and all of that, we have decided that we are going to use for the first semester next year 20% of fuel. This is a way to ensure business continuity.
This is a way to get this agility we need within this chaotic world where things could change from one day to the other. First of all, protecting our business continuity. I want to be clear that it is a temporary measure, that our long term view is still to move to green electricity and to contribute again to our CO2 roadmap, and to be the front runner in the glass industry to do so. About France, you mentioned social disruption, salary increase and all of that. I would say that we have done the job. We have done the job already because in France, we had a first salary increase at beginning of the year for the 2021, let's say, inflation impact.
As usual, at the beginning of the year, you make the salary increase. We have anticipated some salary increase in July due to the exceptional situation of inflation we are facing in France. We have increased by 4.5% the salary in July, which is an anticipation of what we would've done in January 2023. Now we are going to have a second round or the final negotiation based on that at the end of the year, beginning of next year. I would say that we do not see any disruption linked to that in our manufacturing location in France. Last, about M&A.
I mean, as we have already said, M&A is on the table. We are looking at any opportunities. Nothing new to say on that. Nothing new to report to you today on that. This is part of what we are looking at. I remind you that our capital allocation is number one, our organic growth, both capacity and technology, for CO2 reduction. Two, it's about M&A. If we have an opportunity and we are actively looking for it, we'll take it. Three, this is all about shareholders' remuneration with, you know, our dividend policy, and some share buyback opportunity when we think it will be appropriate.
Many thanks.
That's all.
Many thanks for all of these answers. If I can just add one follow-up to the first questions I asked on price mix. Are you planning to increase prices again for the end of the year or beginning of next year?
What I said on that, and I can repeat, obviously, is that, you know, what is important for us now is to prepare 2023. We start to have a good visibility of what could be, will be our cost in 2023, thanks to our hedging policy, but we still have to do some homework. Obviously, as you can imagine, we are going to enter in the budget process for 2023, and in the weeks to come we have a clear view on that.
What we want to do is really to have this good visibility on inflation, to share that with our commercial forces, and then to go and anticipate as much as possible the discussion with our customers, which will give the customers the opportunity to get visibility, to give to the customers the ability to integrate that in their own, in their own budget process, in their own discussion with their own customer. We are going to be pragmatic on that based on the discussion country by country, customer by customer. In some cases, we may have to increase in Q4. In some cases it's gonna be in Q1. We are going to be pragmatic.
Let me remind you that at the end of the day, what we are looking at is, and this is our defensive line, is to be spread positive. This is what we are going to. This is our key objective, and this is what we are going to build in the weeks to come for 2023.
Many thanks.
Thank you.
Thank you.
Thank you. We will take the next question from line Alexandre. The line is open now. Please go ahead.
Thank you for taking my call and congrats for the results. I had a quick one regarding your guidance for your 2022 million target above EUR 820 million. This would implicate for Q4 an EBITDA margin in the range of low-to-mid 20%, which is down quarter-on-quarter and year-on-year. I assume that you anticipate for the lag maybe in passing through in Europe, although you previously stated that the gap is nearing to zero. Could you please make some comment on this? Thank you.
Could you survive?
Yes. Could you please repeat?
Yeah.
Because we didn't get it, the end of your question.
That's sorry. Regarding your EBITDA guidance, I get that this would implicate a 24%-25% margin on the full year, so something low to mid-20% margin in the Q4, which is down compared to this quarter and last year.
Mm-hmm.
Do you anticipate for the lag in passing through inflation in Europe? Because you said previously that the gap is nearing to zero.
Mm-hmm. No, yes. Clear. It's your question is about the margin in fourth quarter. In fact, we have every year a lower margin in the last quarter. Remember that December is quite a half month, so it's more some seasonality. First there is seasonality in our margins always in the fourth quarter. If you take 2021, if I remember, it was 23.1% margin in the last quarter.
Yes, thank you. It's still down year-over-year. Do you expect some sort of lag in passing through this inflation in Europe?
In fact, we are passing through, and as Patrice explained, discussion on prices in Europe are also about the relationship with the customers and the timing of the prices, price increases between end of this year and Q3. I mean, that's the comment that Patrice just made. No, it would not be linked to some lag here. In Q4, we will also have the carryover effect, you know, of the price increases that we already passed. It's more seasonality here that we are facing.
Yeah. Thank you. Very clear. Better than my side.
Thank you. We will take the next question from the line, Jean-François Delcaire from ODDO. The line is open now. Please go ahead.
Yes. Good morning, Jean-François Delcaire speaking from ODDO BHF. First question regarding the spread. You mentioned a little negative spread impact in Europe despite the increase of the pricing. Do you expect to have a positive spread impact in Europe or not? The third question concerns the volume evolution. Do you see some better volume in Q3, and what do you expect for the volume for 2023? My third question concerns the trend for next year in terms of growth in terms of volume and pricing due to the macro environment. My last question, can you make an update for your plan expected for 2024?
Do you keep the same target presented to us a few months ago for 2024 in terms of growth and terms of margin? Thank you.
Okay.
Thanks a lot, Jean-François Delcaire. First, spread in Europe positive, the answer is yes. I want to be clear on that, and this is what we are monitoring, and we have the action for that. The answer is yes. About volumes evolution. In Q3, we did a little bit better than expected. In Q4, and again, this is a big question behind. We do not see any volume reduction compared to same period market, we don't see any reduction in the demand, to be clear. This is what we see for 2023 as well.
I want to remind you that in the even in the worst situation, so referring to COVID, for instance, the food and beverage market is quite resilient. To remind you that in 2020, with a strong COVID impact, the market was just down by -1.8%. We do not see that. Food and beverage is very resilient market. I think this is one of the strengths again of Verallia, thanks to our customer portfolio, we are not dependent from one customer performance. I think this is a strong protection for us, and we are able to manage that and through that. Again, no reduction of the demand at the door. We do not see that. Obviously, we are vigilant.
We are taking all the different signals from the market, but want to be clear that I do not see that right now for the end of this year and for next year. You know that the global industry, and Verallia in particular, is facing quite low inventory. Our main objective today is to produce, and produce. Every single bottle which is going to produce is going to serve the top line to satisfy customer demand, or it will be an opportunity to rebuild some inventory, which will better serve our customers. I do not see that at all.
About pricing for 2023, I cannot be definitive on that, but I mean, I can say that ballpark we see in 2023, something in the range, some order of magnitude of 2022. For the 2024 target, I guess that you are referring to the targets which we are presenting during the Capital Markets Day.
Yes.
Here obviously, the world has changed, and this inflationary context has moved the baseline. It is right for the top line, and the growth we are speaking about, and it is right as well for the margin of EBITDA. What we are committing is to deliver the implicit number which were behind the assumption. We are still on that, and I'm very confident that we will meet all of them. It will come the time where we will have to redefine a new strategic plan to cover, let's say, 2025-2030 period. We'll come obviously with a new set of objectives.
Maybe one just one additional comment. Patrice commented the volumes, the demand. Now, very specifically, in H2, you know, this year, we see some reduction in volumes because of our ability to serve those volumes. We remember we have 5 furnace maintenances.
Yes.
in H2 versus one last year. It's really a link to the timing of furnace, I guess.
Perfect. Thank you very much.
Thank you. As a reminder, if you would like to ask a question or make contribution on today's call, please press star one on your telephone keypad. We will take the next question from line Michele Filippini from Jefferies. The line is open now. Please go ahead.
Good morning. Congratulations on the strong results, and thank you for taking my question. I have three, partially already answered, so they might be a bit more specific. The first one is on demand in 2023, and I appreciate you don't expect like a slowdown since like glass packaging may be a resilient market. But considering that glass packaging gained market share over aluminum, probably because of like the sharp inflation in aluminum in 2021, and now that glass price is on the rise while aluminum is correcting. Do you expect a reversal or losing some market share on that? And then the second question is, another follow-up on the price increase target in 2023. So you're targeting the same quantum of, 2022.
My question is, do you expect like your competitors to follow like more or less the same quantum? If so, what gives you the confidence like they will follow with similar price increase? If not, are you concerned about losing market share against competitors now that demand and consumption may softening a bit entering into a recession? The last question, number three, is on cost inflation. You commented like that you've seen on a group average like circa 20%. That was like just to be clear in the first nine months of 2022. What do you expect for the rest of the year? Thank you so much.
Thanks a lot for these questions. On the demand on 2023, again, from the different contacts, from the different signals we got from the market, we do not see any reduction of the demand. I would say when I see our premium customers are doing well, we have a lot of pressure to deliver much more volumes. When I'm meeting customers, most of the time, they're asking me to deliver much more volume and how I can commit for next year. Obviously, you know that for the premium ones who are exporting in the U.S., but in other countries, they have quite a very positive impact with the weak euro today.
This is a positive point which is sustaining the demand. Can say that the harvest as well, if I want to be much more specific, was quite good compared to the last years in France mainly, but in Italy as well, a little bit less in Spain. All of that is supporting in my view the strong demand for the next month. Champagne especially, we're doing a record year. It's gonna be a +20%, let's say, as far as harvest is concerned compared to the previous years. All of that is giving us some very confidence in the demand we're gonna have in 2023.
About market share, I think it's obviously not something a real topic for us today as we really produce and we sell it. I do not have any strong examples where we see this move from one sustainable packaging solution to the other. We have some of it, but as I presented, we have others as well, which were moving from aluminum to glass. This is one of the example I presented during the key highlights. Again, vigilance on that, and I think what is at stake here is that we need to do our job to increase efficiency in production, to do our capacity increase, and then to deliver and satisfy all the customers.
Pricing for 2023, you know, our defensive line is quite positive, so it means that we're gonna have to do our homework to reach this objective. What I do believe, obviously I do not have any competitor data or competitor clarity on strategy. I want to be clear on that. The information I have is what I'm able to get from public information. I have the feeling that we are quite well positioned on the cost side, with what we are doing with our hedging policy, one, and two, with our path and what we are doing on a regular basis to improve our efficiency in everything we do.
My guess is that if we are looking for this positive spread, we should be better positioned than our competitors to protect our margin and towards what we're gonna ask to our customers for selling price increase. Again, this is what I'm feeling from the different communication which are public. At the end of the day, what I'm very concerned is how I'm going to defend profitability of Verallia. I think we have good arguments for that respecting customer relationships, because again, we are not here to do one good quarter or one good semester. All of that has to be put in perspective of what is our long-term strategy, long-term view.
This is important, I guess, for you guys as well, to make sure that we are giving you some visibility and that we are resilient with a strong commitment to progress period after period. The last question was, I mean.
Price increases in Europe, so around 20%, right? In fact, just to say again that we will see the full effect of the two price increases and especially of course the second one that was started in April. We also have some specific targeted price increases that will have their full benefit until year end.
Thank you so much, Patrice, for like the color. I know it's never nice to ask about like a competitor strategy. Nathalie, thank you as well. My question was more like, sorry, it's just because I throw you many questions at the same time. It's more like, about like the cost inflation, because like you mentioned at the beginning of the Q&A that 20% overall, and I wanted to ask if it was like, this 20% refers to the first nine months in 2022, and also if you have any color in terms of like, cost inflation for the rest of the year. Then, sorry, I've also like another follow-up question.
In terms of like, product mix effect, I guess in our recessionary period, you will have some headwind in terms of product mix, probably like customers will start to spend less on premium products. What do you expect on that? Thank you.
Okay. On cost inflation, in fact, the 20%, that's why, sorry, I thought you were talking about price, because when I mentioned 20% during my presentation, it was to comment the price, the price evolution, not the cost inflation. In fact overall for the group, our cost inflation is higher than 20%. We see what I commented is that we have seen in Q3 and we see in H2 further inflation mainly on raw materials and also slightly on energy. Mainly on raw materials.
Thank you.
About product mix, so you know this is always quite difficult to anticipate the mix evolution and to put some clear data and forecast number on that. As a central assumption, we're always considering it a little bit neutral, let's say. In the execution, obviously, we are trying to deliver much more case by case, country by country. Again, we have a better product mix in Q3 compared to what we were expecting. Again, referring to how our premium customers are doing well with a euro weakness, all of that is opportunity to pull and to push the demand and increase our product mix.
This is a positive effect obviously we have.
Mm.
in Q3, and I do believe that this is a trend we're gonna see in the months to come as well.
Very clear. Thank you.
Thank you. We will take the next question from line, Fraser Donlon from Berenberg. The line is open now. Please go ahead.
Hi, Patrice and Nathalie. It's Fraser here from Berenberg. Just a few questions from my side. Thanks for the presentation. The first was just kind of a technical one, like on your hedging. Could you just kind of clarify if, you know, like in Verallia Spain, if you're hedging like the local gas prices or whether it's kind of still like overlaid with like Dutch TTF, just 'cause obviously you get quite big gaps in between the pricing in the different markets these days. The second question was on Brazil. I think I saw that one of your competitors adding some capacity in Brazil as well.
I just kind of wondered like if you could give a bit of a summary of the excess demand you're seeing in that market, or let's say the strength of the structural growth drivers there. Thirdly, on the switch to fuel, it's 20% of fuel. Given a different efficiency you might have in like fuel versus gas, could you maybe give us a bit of an idea of like what discount or cost saving using fuel over gas could give you? Finally, the fourth question was just on CapEx. What inflation do you see in your CapEx? Could you just give me a reminder of the kind of wallet which you're attributing to the Campo Bom and Pescia expansions in Italy? Those were my questions. Thank you very much.
Do not hesitate if we forget one, Fraser. Hi.
No, of course. Yeah.
Thank you for your questions. On hedging, in fact, you know, we continue to execute our policy, our strategy that is really very positive currently in this very volatile environment. Giving us visibility on the cost evolution and averaging out all the costs. In fact, what is changing is the same explanation as in July. What is changing more currently is the mix in our energies. This is temporary as we have been, in fact, introducing already now and into 2022 more fuel than we would have done.
Let's be clear, if we didn't have this, the energy crisis we face in Europe, and especially the risk to availability. As you know, we plan to introduce up to 20% of fuel in H1 2023. We have been adapting our hedging accordingly. Except for that, nothing really changing, maybe in Brazil.
On Brazil market, we see a growth in the market. Which is sustaining the local organic growth, I would say. We see as well a need for bottle localization where we have some opportunities to localize from some customers some production. We have these two pillars which are driving the local market increase. As you know, we are launching Jacutinga two , and this furnace is already planned to be fully utilized. This is what we are doing before launching a new furnace as it has quite a significant cost, and we are a fixed asset company and fixed cost company.
We need to make sure that everything is contracted with customers going launching production. This is what we're gonna see in Brazil. For the fuel, I just want to remind for the fuel that what we are doing with the additional fuel consumption is all about protecting our business.
Mm.
We just need to remind us.
Mm.
That, maybe today we see less risk of shortage due to.
Mm.
Different situation. The reserves are better, the climate so far in Europe, winter seems to be okay. Let's remind where we were in July. Maybe by the way, in a few weeks from now, the winter is going to be a bit tough. We are going to be back in this July situation.
Mm.
That's why we decided to go with this 20%, which is, I think, a good contribution for our industry to participate to this shortage potential situation. It is a real driver of ensuring business continuity and serving our customers. Once we have good visibility of the situation and that when we think that we are well protected to do our business, obviously we will revert that decision. We'll see how to revert that decision. You can understand that we need visibility. We need to be organized if we want to be efficient in our site, and we need to anticipate this kind of decision and not to move overnight from one to the other.
This is why it was important for us to secure all of that.
About inflation in CapEx, your first question. Yes, we see inflation in CapEx for sure. We see on CapEx, like, refractories, you know, or we see inflation above 20% because we have also, they use also a lot of energy. Up to now, we still see quite a strong inflation and at least similar to what we see in our costs.
Perfect. Thank you. Thanks for the answers. Just the last part of the last question was just kind of like, could you just remind me what the kind of wallet is for the Italy and Campo Bom expansions from a CapEx perspective?
It's the envelope. In fact, for a new plant is around EUR 80 million. I would say this is a minimum.
New furnace.
For a new furnace, sorry.
That's great. Thank you very much for all the answers.
Thank you. We will take the next question from line last from Creatives. The line is open now, please go ahead.
Thank you. Just have a couple questions on, your capabilities going into next year. You of course, Jacutinga 2 will start up but in Europe, I guess it's mostly about debottlenecking. How do you see the, you know, your capacity being able to meet demand trends, given that you're still sitting on very low inventories? Do you have any capabilities to really grow in Europe before Pescia starts up in 2024? I was just curious a bit about the new furnace technologies you know, at Cognac and the hybrid furnace, in terms of what capacity would potentially come out of those. Also if you have a view today, what it would cost to operate those and the potential premium prices for those being much less carbon intense, glass. Those were my first questions.
Okay. Thanks a lot, thanks a lot for this question. First one about Jacutinga. Yes, in Jacutinga, again, we are going to light the furnace on November ninth. We are going to ramping up to make the different setup. We plan to be able to start what we call good glass production December first, and then build some stock and start to deliver some customers. In other words, we do expect with a good ramp-up having a full year impact in Brazil for 2023. About the demand in Europe, you're right. No major capacity increase till Pescia, but we are making, as I presented in my presentation, some actions.
Each time we are making, for instance, an intermediate maintenance repair, as we have done this second semester for five furnaces, which is always an opportunity for us to do some improvement, to try to identify some actions to pull much more. It is marginal, but it is a part of the answer. Second, we have all the efficiency work that we have to do in our facilities. Here we have again some opportunity, especially in France. I would say that we have some opportunities to better improve efficiency, which will give us some additional free capacity. It is not something which is going to happen overnight, but this is something we are quite strongly determined to improve.
We have already some good examples to do so. About technology for both being hybrid and electrical. What we can say today is that first on the CapEx, we see that we have some additional CapEx costs, but I would consider them marginal compared to a traditional furnace. As it is new technology, we strongly believe that this add-on cost will be reduced over time. Especially, you know that we have a, let's say, a key advantage within our company is that we are able to design our own furnaces. For the first electrical one, we are working with Fives, a strategic partnership, process engineering partnership.
Then we are going to define the standards. For the next one, we strongly believe that we'll be able to reduce this gap. Even if it is marginal at the beginning, the add-on cost, we strongly believe that we'll reduce this gap. To be simple, we do not see any big difference. On the Opex, it is, let's say about the same, and it's difficult to have a definitive answer on that. From the theoretical point of view, we do not see any strong driver to have Opex cost on top of traditional furnace. Obviously, we're gonna have a learning curve, how to run with high level of efficiency, these furnaces. This is maybe this period of time where we could have some additional Opex.
What is gonna be key is the energy, the energy cost, obviously, and everything which is related with some PPA that we have to sign in order to run all the deployment we are planning, and which is on our CO2 roadmap, CO2 reduction roadmap.
Have you shared the capacity of Cognac one and the hybrid furnace?
What do you mean by that?
The capacity of how many tons of glass will you produce on these two new products?
Yeah. It's about electrical furnace. You know that the challenge of the electrical furnace is that we need to scale up the technology which does exist in the cosmetic, for instance, in pharma, so we are going to scale up that. The first one we are planning in Cognac, so it's gonna be a big scale up compared to what it does exist, but it's gonna be half of what we are doing in the traditional furnace.
Got it.
On the opposite-
The hybrid one.
On the hybrid furnace, it's gonna be similar as the traditional furnace.
Got it. Final question from me. Obviously, you had quite a lot of furnace rebuild activity in the third quarter. You're guiding towards only 1 rather than 4 in Q3. How should we think about the activity contribution in the fourth quarter? Again, it's a seasonally slower quarter from a demand perspective. As you said, you produce and produce and produce. Should we see any positive contribution there? Relating to Jacutinga, would there be any sort of meaningful startup-related costs that are being offset?
No. In fact, the activity, you should not expect a big activity in Q4, in the activity pillar, right? Because of the maintenance that we mentioned because of the low inventory. Jacutinga too is going to start really producing in December, so the impact is limited. It's very good. We are pleased we are exactly on time. It's mainly to ensure that we are full speed in close to full speed because there is also, of course, always a ramp up when you start the production for 2023.
All right. Thank you.
Thank you. We will take the next question from line. Francisco from BNP Paribas. The line is open now, please.
Hello. Good morning. Just two quick questions after all this, after this Q&A session. The first one is if you think that the current leverage could accelerate the organic expansion with some other furnaces or in some other countries. My second question is if you could give us an idea of how the competitive situation in Latin America is because you are adding two furnaces and there are other competitors increasing capacity as well. I don't know, you could give us an update on the situation there. Thank you.
The current leverage is, yes, it could support the acceleration of capacity increase. There is, you know, we have already quite a busy schedule, I would say, for the coming even months with the Jacutinga too. We have Campo Bom in Brazil next year, and then we have Pescia in Italy. We'll see what we do. There is a lead time of more than one year to start a new furnace, and the capacity for the teams to absorb. It's not only about cash, I would say, on that.
You can have the debottlenecking actions that we made already.
Francisco, to complete on that matter. As you know, we have already a quite clear plan from now till 2024, in Latin America with Pescia, with our new technology as well. We are obviously working, start to think about what is gonna be the period between 2025 and 2030. I think this is what we, this is where we have some opportunities to develop further some capacity. We are going to work on that. This will be part, obviously, of a strategic plan we'll have to present at a point of time for 2025, from 2025 to 2030. This is, this is obviously on the agenda, and it is fully aligned with what we are mentioning about our capital allocation.
With a clear priority, which is developing our organic growth and the technology to support our CO2 reduction. We are fully on that. On Latin America, could you elaborate a little bit? Your question was not so clear to me. Sorry for that, Francisco. Francisco, do you hear us?
Sorry, his line has been dropped off from the question. Thank you.
Okay.
I think we have a question on the web.
We have question on the web. Okay.
Um.
Most of the questions on the web have been already answered, so obviously I will not read all of them. Maybe could you please provide an update on your hedging strategy and activities for next year? Do you change anything? No.
On hedging, as shared already, what is changing is in fact the mix in the energy, as we are introducing fuel. Except for that, we continue our strategy.
Thank you. Another question. Any particular reason you are seeing some of the partners move from aluminum packaging to glass packaging?
I think this is all about a few key topics, which is the sustainability seen from the end consumer of a glass packaging. We have some studies about that. I think this is as well related to food safety. You know that we have some studies as well from CSIR Institute, which are showing that if you are in PET or even in other substrates, you could have some migration. I think this is all about that. With something which is a trend, we do not see really growing quickly right now, but this is, for me, a social trend. This is all about the reuse.
The reuse, or ones where you are moving into such glass packaging solutions, you could open some doors for reuse.
Thank you. A question from Sébastien Monnier. Congratulations for the results. Given EUR 33 cash flow, only 1.1 net debt to EBITDA, and not any acquisition, what about share buyback implementation that was mentioned as consideration given valuation?
Thanks a lot, Sébastien. I know this is one of your favorite topics. No change in what we are saying about that. Let's see. Organic growth is a must, and we see that with the results we are delivering. Obviously each time we have an opportunity to put EUR 1 and to invest EUR 1 in our company, it is a good deal, and it is feeding our ability to get a sustainable growth. M&A, as we said, we are on it. But again, we're gonna see. We need to talk to. We are screening all the opportunities. Let's see what we, how we can move forward on that matter.
Again, as I said for the past years, this is on the agenda. Share buyback, this is the latest one, but it is part as well of our thinking, depending on how we see our plans with number one bracket organic and number two bracket, M&A.
Thank you.
Just one, maybe just, Sébastien, I think that's a solid balance sheet. In the current environment, it's as well a kind of safety, and it is quite interesting for us all.
Okay. Thank you. We have two more, and then I think we will, we'll leave you. One from Pierre Bosset. Verallia has some clear targets in terms of CO2 emission. However, will the new technologies, electric hybrid furnaces, lead to lower or higher energy consumption per bottle produced?
It should lead to lower. What is much more important is that it's gonna move us from gas intensive, so high level of CO2, let's say, at production level, to a very low level, giving a sign that we are going to link that with a green electricity contract that we are working on already. Yes, it's going to contribute significantly to this reduction.
Thank you, Patrice. The last one is a follow-up from Michele. Free cash flow generation. Can you please comment on the working capital and capital expenditures? The free cash flow generation is huge for the 9 months, around EUR 450 million, implicit calculation, given the net debt and the payment of dividends. What can we expect for Q4?
Thank you for this question. Yes, the free cash flow generation is strong, as we commented. This is two important comments on this, and thank you very much for this question indeed. First, the CapEx, we are still on our way to spend EUR 350 million, or to engage EUR 350 million CapEx for the year, which means we have a heavy H2 and we have a still heavy Q4. Indeed, we are in the middle of the road, let's say. We are at a very high level in terms of free cash flow, but there should be additional spending on CapEx.
On the WCR variation, it is contributing very positively still. If you remember our previous calls, in fact, our inventories are quite low and we do not really succeed in rebuilding inventories at a better level. On top, because of the maintenance furnace activity in H2, this would not be the time where we will do it. Yes, we have a strong WCR contribution from that and also from the inflation that is boosting our suppliers' side, of course.
This by the end of the year should maybe be a bit mitigated, but mostly it would be in 2023 that we will need to monitor that closely.
Thank you.
That was the last question?
Yeah.
Okay. I think if no more question, we can close the session. I would like to thank you all for your questions. most of all for your trust and confidence. you can be sure that the overall team is doing everything we can, and we are committing on that to deliver good numbers for the sake of the Verallia
. Thanks a lot. Take care. Bye-bye.