Recorded. For the duration of the call, your lines will be on listen only. However, there will be an opportunity to ask questions towards the end of the call. If you require assistance at any time, please press star 0 on your telephone keypad to be connected with an operator. I will now hand you over to your host, Michel Giannuzzi, CEO of Verallia, to begin today's conference. Thank you.
Well, thank you very much, good afternoon, everyone, and welcome to our call for the first half of the year results. I do hope that you and your families are doing well, that you are not too severely hit by the COVID-19 pandemic. I will share the presentation tonight with Didier Fontaine, Verallia Group CFO. I'm very pleased to report a strong performance in H1 that shows the resilience of the group in the context of the COVID-19 pandemic. Our revenue, as they are reported, stand up at EUR 1,275,000,000, which is down 4.1% versus last year, first half of the year. The organic decline in the first half of this year is only 0.9%. Even if we include Argentina, which you know is a hyperinflation country, the organic decline is only 2.7% versus the first half of last year.
Quite a strong top-line performance in the context of the pandemic. Our Q2 reported revenue were down 9.6% to EUR 630 million, and on an organic basis, it's only 5.4% drop in Q2 this year compared to Q2 last year, after a good Q1, as you remember. When we talk about the profitability and the adjusted EBITDA performance, our adjusted EBITDA was down to EUR 299 million, in line with the revenue decline, and the margin basically dropped 10 basis points at 23.4% for the first half of the year, compared to 23.5% last year. We've kept deleveraging the company during the semester, and our net debt leverage ratio is down to 2.5 times adjusted EBITDA for the last 12 months, compared to 2.6 times at the end of December last year and 2.9 times a year ago.
We did pay a dividend to 87% of our shares in the way of a share dividend, and the treasury impact for the shareholders that have opted for the cash payment will be only EUR 13 million, or has been only EUR 13 million in July. Last but not least, we've announced during the second quarter the implementation of a transformation plan in France to adapt our organization to the market changes and to improve the competitiveness of our operations in France. Moving to the next slide. What have we done during the COVID-19 pandemic? We've kept managing the business continuity plans very tightly with all our factories being operational throughout the semester. No factory was shut down. We've kept serving our customers whose role is essential throughout the food industry supply chain. Since the end of the lockdown in many countries, we progressively are returning to the office.
We still have good share of employees havig home office works, and we've constantly updated our health protocols to make sure that the health and safety of our employees is always protected as best as we can. We are quite pleased to report that so far we've been able to ensure a good level of hygiene and health measures in all our factories and work offices. The second thing on page five is about the initiatives that were taken throughout the organization led by our people on the floor in the countries, where since the beginning of the pandemic, there's been a huge solidarity move from all our employees. Not only, as you remember, we've given some personal protection equipments. We bought some hydroalcoholic solutions for the hospitals. We provided also some medical equipments to some hospitals by buying them.
Even in some cases, in some countries, we provided some transportation to the hospital personnel. On the top of this, we've made also some donations to some NGOs that have been supporting people that were in distress or in difficulties during the period. You have here three examples that we are quite proud of to report. The first one is La Maison des Femmes. They're all coming from what has been done in France recently. La Maison des Femmes in France, in Saint Denis, where we are supporting this organization that is helping women in difficulty and victims of violence. During the COVID-19, unfortunately, there has been a surge of violence at home, in some cases. We've also supported Covidom, which has been a home monitoring platform to help unjam the hospitals from the people that were having some symptoms of COVID.
They have been able to set up in a record time this platform with 2,500 volunteers, which has been a great solidarity move from a lot of medical professionals. Last but not least, we are also supporting the Secours Populaire Français, who's helping jobless or homeless people to not only sometimes find a shelter, but also provide food to them. This has been done in association with the local communities in the areas where our factories are implemented. These are our three examples coming from France, but we have plenty of examples in all the countries. Altogether, the funds provided by the executive management team and myself was set up at EUR 1.6 million, has been or will be completely donated in a couple of days to help those initiatives.
This has been a strong solidarity and very impactful move inside the company, which I'm very pleased to report on behalf of the 10,000 employees of Verallia. Another great success during the second quarter is despite the turmoil linked to the pandemic, we've maintained our decision to offer almost all our employees shareholder ownership program that was, I would say, discussed at the time of the IPO last year. With two things. First of all, this is the fifth time we offer such an employee ownership program to employees, but in the past, it was limited to a smaller number of countries. We expanded to eight countries nowadays, including some big countries like Italy, that in the past for technical reasons, couldn't join.
We have now extended to the maximum number of countries where it makes sense and it's possible technically to offer employee ownership programs. The second thing, we boosted the matching contribution from the company up to EUR 3,000 per employee, which is in addition of a 20% discount on the share price, providing an attractive investment for many employees that have decided to invest in the company. As a result of this program, we got a 42% participation rate amongst all eligible employees worldwide, which is quite a significant participation rate. In France, the participation rate was 77%, which is even higher, but there has been more, I would say, use or more knowledge about this program in France than maybe in other countries.
You can see that in Spain it was 50%, and in the countries of Italy and Brazil, where it was the first time we had such a program, we had even up to 30% subscription rate. Now, this means that at the end of this employee ownership plan that was done during the quarter, the employees now hold 3.3% of the Verallia share capital. Moving to next slide on page seven. You have here another, I think, strong information, important information, sorry, about the dividend payment that took place in the first half of the year where 87% of our shareholders have opted for a share dividend rather than a cash dividend.
Our main shareholders, Apollo, Brasil Warrant, Instituto de Bem-Estar e Sucesso, Bpifrance Participations and the employee ownership fund, Verallia FCPE, have all opted for the share-based payment of the dividend, which means that the capital has been increased as of July 9th up to 123,272,819 shares. You can see on this split, on this donut, the split of the main shareholder base, post-dividend payment. This is an estimated split indeed, since this could have changed slightly during that period. The last highlight, if you want, of the semester is related to France. You will see from Didier's comments that France has been more impacted than other countries due to the pandemic. However, we were already before COVID-19 facing some slight overcapacity in France, and also we had the plan to improve the competitiveness of our operations in France before COVID-19.
Of course, the sharp decrease of the French market has not helped. Just the opposite. It has just reinforced the need to transform our setup and our operation in France. The decision has been taken to not rebuild one of the three furnaces of the Cognac plant, which will reach its end of life at the end of this year. This will basically eliminate some excess capacity we have in our French operations, and of course, better load all the other plants in France.
The second thing we've announced with this plan is also the change in the production organizations in all the plants in France, all the glass-making plants in France, we have seven of them, where we will implement the same process co-organization as the one we have in all other factories across the world, which has been a key element in the success of our improvements in our operations everywhere in the world, and which was a little behind in France. This will, believe, make the French operations more competitive going forward. We, as a responsible company, will favor voluntary departures, like early cessations of activity, like early retirements, helping people maybe to set up their own businesses for those of them that would like to do so. All together, it concerns 150 jobs and positions that should be made redundant at the end of the year.
These highlights being mentioned, now I will hand over to Didier, who is going to go through the financial results of this semester.
Yes. Thank you, Michel, thank you very much to all of you for joining this call. I'm going to structure my presentation in three parts. First, as usual, by the way, first reviewing the revenue numbers at group level and then by segment, then move on profitability with the same breakdown, and finally conclude with our cash performance for CapEx results and capital structure review. Now let's move to slide 10. First of all, what we can see is that despite the COVID-19, Verallia has shown a lot of resilience, and as a consequence, has been able to deliver revenue, which is only slightly declining H1 2020 versus H1 2019 on organic business. For H1 2020, Verallia reached revenue EUR 1,275 million, to be compared with EUR 1,325.9 million in the first half of 2019.
This, as Michel highlighted, represents a drop in reported sales of 4.1%. Nevertheless, if we exclude the negative FX impact, which, by the way, has been sizable, especially on the second quarter, as we have no scope impact, i.e., on an organic basis, the sales drop is limited to a slight organic contraction of 0.9%. If we exclude Argentina, you know the Argentine sales are supported by the high level inflation, is minus 2.7%. However, beyond the big picture of the first half, we have seen two different trends between Q1 and Q2. If we go into more details, the first element I would like to draw your attention upon is the bucket volumes, the red one on the left-hand side. This is highly negative on the bridge at minus EUR 56 million. That's where the breakdown between Q1 and Q2 is important.
If in the first quarter, as you remember from our last call, volumes were slightly positive, and we were showing a 4% positive organic growth. The picture in Q2 has been, and we alerted you at the time, and we anticipated it, different in Q2. The drop in volumes reached 7.9% in the second quarter, leading to a -5.4% organic sales decline, with a drop happening essentially in April and May, period during which the COVID crisis fully materialized. Comparatively, June was much better. The second point, in addition to the drop experienced in volume, the mix deteriorated over the first half of the year, mainly driven by the France performance. Actually, we say mix of two natures. Number 1, a product mix, and second one, a country mix.
The result of that being lower volumes sold in sparkling wine and especially in spirits. This has been associated to a shift by customers, especially in France and Spain, towards less premium products, meaning cheaper products. The green bucket price mix, we increased globally everywhere, but at a different level. Still being boosted by Argentina, which represents a good portion of this increase, boosted by inflation, is still a challenge in Argentina, where inflation is significant, and we're fighting for price increases is not an option.
To conclude on that bridge, in line with the recent past semesters, we also have been penalized, especially in Q2, by exchange rates variation coming almost as usual from Latin America. The impact was strongly negative, EUR 42.1 million, representing -3.2% of sales, primarily due to, I would say, the usual suspect, Argentina, which is still as in hyperinflation mode, but as well, more surprisingly, from the Brazilian real, which lost on average between S1 2019 and S1 2020, 25% of its value, whereas it has been mostly stable over the past years. Let's move to page 11 and to see more detailed information by segment. We're going to start by SWE, Southern and Western Europe. As you remember, Iberia, Italy, and France. Revenue in SWE dropped by -5.2% on the reported and organic basis, reaching EUR 880 million.
After quite a nice performance in the first quarter in Iberia and Italy, revenue declines in all the countries in the second quarter. We are liking that in the beginning, but the most notable drop happened in France, where volumes started to decrease already in the first quarter, as we explained our publication end of April. This is in this country where the exposure to premium products, sparkling wine and spirits, is the highest. Speaking about product, and if we look by product category, the erosion in Q2 is a continuation of what we say, and we saw in the Q1, namely, strong dynamism in food jars in SWE, but as well in the rest of the group, while the sparkling and especially the spirits suffer the most as they are penalized by the shutdown or the very low activity of the hotel restaurant and cafe sector.
Consequently, Michel highlighted that in the previous slide, we have launched a transformation plan in France to adapt the organization to the market changes and to improve its competitiveness. If we move to page 12 on Northern and Eastern Europe, which comparatively performed well with reported revenue, which increased by 3.1%, amounting to EUR 283 million. Foreign exchange had only materially negative impact, essentially coming from the Polish zloty and the Russian ruble. The robust performance has been driven by the combination of a good segment mix with disco jars, but as well non-alcoholic beverages, especially mineral water, which, as I said, did globally pretty well at group level, but here have been a driving factor of the continued dynamism of N&EE in Q2 after an already strong Q1.
Mix was good, especially in Germany on beer and sales price increases, especially in Eastern Europe, catching up with a weaker first half 2019. The third segment, focusing on Latin America, page 13. Reported revenue dropped by 12.2%, especially in Q2 again, strongly penalized by the unfavorable evolution of the local currency. This represents a EUR 42 million negative price impact. Usual suspect, Argentine peso. The Brazilian real, which I pointed out earlier, has been uncommon over the past years. I will come back that later on the EBITDA, but going forward, there is no reason to be more optimistic on the evolution of those two currency for next semester. If we exclude this negative impact, the sale increased by 20.8%. If you remove the boost from inflation in Argentina, this is still, plus 5%, which is still sizable.
This is the result of what? This is the result of first volume increasing in wine in Argentina and Chile, still wine, offsetting the softening Brazilian market. We have seen that softening in the second part of the months of March, April, and May, especially on the beer side. The country has been showing some positive signs of recovery over the past two months. As regards to the sales price increases, they continue to contribute positively everywhere in the region, particularly in Argentina, where I said it's not optional if you want to continue business, where the pricing policy is still very active. I want just to highlight, as I am highlighting that every quarter, but I want to highlight the quality of the job that our team is doing over there in an environment that remains highly inflationary and politically/economically.
You know there is a big discussion about the Argentine debt coming up August 1st, which is environment which is very fluid. English way of fluid. That we have covered the top line, let's move on to review the adjusted EBITDA. We're going to move by the group on slide 14. As introduced by Michel, the adjusted EBITDA decreased by 4.5% in the first half of the year, reaching EUR 299 million. If we exclude the Forex conversion impact, it remains flat in value. This good performance is driven by, number one, our ability to contain volume decreases. On top of that, June was a good month. Second one is still a positive pricing cost spread, confirming the quarter four pillar. Which is linked to our dynamic pricing policy.
Finally, our third pillar, which is our capability to pursue our productivity plan and therefore reduce on a permanent basis, on a structural basis, our cost base by being more efficient. The performance action plan, PAP, led to a net reduction in cash production cost of EUR 19 million in the first half of 2020. Remember, our target is a net reduction on a yearly basis of 2%. This represents a 2.3% improvement. Back to the bridge analysis. If we go to the activity bucket of the bridge, we see this is strongly negative. The EUR 26 million actually negative correspond to, first, the weaker sales volume compared to H1 2019, and mainly the drop in volume sold by 7.9% in Q2. This was partially offset by comparatively a lower destocking over the same period, H1 2019 versus H1 2020.
This reduced decreased inventories is mechanically, almost, due to a planned furnaces repair schedule for 2019. This is a different schedule. Nothing really linked to the COVID-19. This is planned well in advance. The plant is covering more or less the same number of furnaces per year with a different quarterly timing. In H1 '20, it happened in Q1, only one furnace shut down for repairs was scheduled and happened, compared to five furnaces repair in H1 '19. The consequence of that is that in H1 '19, especially in Q2, we store our products for inventory reduction, not via production increase. This is very important because the plan for furnace repair exists, Michel said that very time. He said between five to seven furnaces a year.
On the contrary, in H2 2020, 6 furnaces shut down for repairs will take place compared to none in H2 2019. To be exactly the reverse effect, it will trigger an eventual reduction in H2 2020 compared to the same period in 2019. We will cover that trend later on. As you can see, exchange rate was significantly negative. The vast majority of the impact happened in Q2. It was driven by the Real depreciation as well as the continued devaluation of the Peso. The other category includes the COVID-19 direct extra cost for EUR 3.5 million. I will stop by there just to give you what is the way we perceive, we measure the COVID impact for the first half of 2020. We consider the way we measure it for the company, it was around EUR 14 million in cost. EUR 11 million were recorded in adjusted EBITDA.
EUR 3 million, basically, the donation and the extra equipment we're recording as non-recurring. The EUR 299 million includes EUR 11 million of COVID impact in basically three buckets. Bucket number one, in activity. Under activity, you know we have specific rules. When the activity of plant goes beyond a certain level, the under activity is not being booked on the product, but recorded through P&L. This is in our bucket activity. Number two has been over-hedging, because your policy to hedge is to hedge the full year in advance, almost. Clearly, given the low activity, we have been over-hedged, so we took it in line with the over-hedging.
The number 3 is what you have there, in other, which are the extra direct cost for EUR 3.5 million, which are basically logistic and delayed or increased start-up costs on those 2 brownfield projects, which we are targeting to start in April, May, and we are not started yet. Back to the core number. You have the direct COVID-19 cost plus some positive one-off that happened in 2019, such as insurance refund in Portugal or some claims won with customers and anticipated maintenance in 2020 to prepare for the shutdown of the second half. Despite those impacts, the adjusted EBITDA margin decreased only very marginally to 23.4% compared to 23.5% in H1 2019. On the quarterly basis, the margin was maintained at 23% in Q2 2020, to be compared with 23.5% in Q1 2020, and 24.5% in Q2 2019.
Just two words before exiting the corporate slide on the net income. The net income, which reached EUR +79 million, which is by the way, higher than the same net income last year. I wanted to say two words on it. It's better despite a decrease in operating income, as you know, and the restructuring charge. We took a restructuring charge linked to the transformation plan of EUR 19 million, one, nine, booked in Q1, and linked to the. Sorry, in Q2, and linked to the transformation plan in France. This performance on net income is coming essentially from the significant improvement in the net financial income following our debt reduction in value and the improvement reached on the interest spread as well. Let's move to the slide 15, and reviewing the performance in SWE.
In SWE, we reported an adjusted EBITDA of EUR 196 million, down 10.9% compared to the same period last year. This decrease is mainly due to France, where, as we discussed on the top line, we experienced the sharpest drop in sales, the highest level of under activity booked in the activity bucket, and the strongest product mix degradation. I want to repeat that this is in particular the consequence of the decline in sales of premium product in sparkling and in spirits. I discussed that when I reviewed the top line with you. On the other hand, Spain, Portugal, and Italy show a good resilience with a stable adjusted EBITDA in the first half. In terms of margin, SWE margin went down to 22.2% versus 23.7% in H1-19. This is again vastly coming from the France results.
I will not repeat it again. I'm insisting that's the reason why we are launching a transformation plan in France to adapt the organization again and improve the competitiveness. If we move to the slide 16 on N&EE performance. On the back of a good top line, the adjusted EBITDA amounted to €69 million in H1 '20, which compare very favorably to the €60 million in H1 2019, which is a 15.1% increase. In terms of margin, it reached a good, very strong 20.3% compared to 21.8% in H1 '19. The three pillars worked very well in this business unit in H1. Top line, good product mix, offsetting softer sales in Q2. Strong contribution from the food jars and the soft drinks sector.
Selling price increase implemented, especially to catch up in Eastern Europe, catch up with a weaker H1-19, as I mentioned when we reviewed the top line. An improvement and the catching up in this raw performance, thanks to the continuation deployment of the performance action plan. We keep the best for the end, the performance in Latin America on page 17. The adjusted EBITDA grew by 2.5% on an reported basis, despite a significant currency depreciation. At constant exchange rate, it will have significantly increased by 42.3%. Supported by the Argentina top line and following the inflation recovery. Here as well, the full deployment and the full impact of our three pillars. Volume growth in Argentina and Chile are described when we commented the sales performance on the region. Positive inflation spread, and it's a no-brainer. It's not an option, as I said.
You need to go and fight to increase your pricing in a very fluid environment. Thanks to the still very dynamic pricing policy, not only in Argentina but all across the region, each country showing a positive spread. I say especially in Argentina, which remain a very highly inflation environment. The third pillar, I think Latin America is doing very well in the continuous rollout of our performance action plan, and this is leading in each country in a strong improvement in the operation in the region. The margin is following the same direction, reaching 30.6% from 26.2% in H1 2019, representing a rise of 440 basis points.
As you notice it, the ForEx conversion impact has been sizable, and I want to say it again, that we are not optimistic for the remaining part of the year, given the political and economic uncertainties of the region, especially the unexpected struggle that Brazil is going through at the time. However, as a conclusion on Latin America, I want to say that we are very pleased with the way our three pillars are being rolled out in the region and by the quality of our fundamentals over there. We covered the top line, we covered the results. As you know, cash is royalty. Let's move on to cash performance. Starting by the CapEx. I like to repeat it systematically. As an introduction, we have set up a very disciplined process for CapEx monitoring, and I think in a period of uncertainties and volatility, it's more than ever important.
Given the current circumstances, I can tell you that all investment remain more than ever under tight control from both an execution and a cash flow perspective. When you look at the graph, in H1 2020, the total booked, this is booked CapEx, amounted to EUR 91.5 million, number which is slightly lower than the same number on the right-hand side at EUR 97.4 million, which happened in H1 2019. Numbers are similar in size, but they differ actually through the breakdown. Nothing new or different, we already highlighted at the end of the year and in Q1. We have lower recurring CapEx in H1 2020. It's linked essentially to the different timing of a furnace renovation. I said six, sorry, five in H1 2019, only one in H1 2020, six in H2 2020.
Let me remind you the key concept driving our CapEx management. Discipline. We are committed to meet our target of a recurring CapEx at a maximum of 8% of sales. The second difference on the breakdown is clearly the strategic investment in H1 2020. They are much higher as planned, and they are essentially in relation with the two brownfield investment in Spain and Italy, which originally was supposed to start up in end of Q2, and now they have been delayed given the current situation, and they will be starting up depending on market needs. After CapEx, let's look at the cash flow. The cash flow from the operations for the period amounted to €138 million. There is two ways to look at that.
The first way is to see the bottle half empty, and think that is EUR 58 million below last year. The second one is to see the bottle half full and think this is a damn good result given the pressure in Q2 on the top line, the EBITDA, the stock management, the customer management, and the supply management. To go back to the EUR 58 million decline, first of all, this is explained by the decrease in adjusted EBITDA by almost EUR 14 million. The number 2 is we expect that, we explained that to you at the beginning. We were expecting, and this is happening, a much higher cash disbursement on CapEx in H1 2020 compared to H1 2019, given the profile, especially of the spendings on our brownfield. This is EUR 35 million additional cash out there.
If you look at the bottom, we highlighted a line called CapEx working capital. You see how we spend, in addition to the booked EUR 11 million-EUR 12 million in 2019, is EUR 50 million in H1 2020. Again, no surprise. We anticipate it, we manage it. Nevertheless, when you look at that, the EUR 58 million, you could be saying, "Okay, that's half empty." Now, when you look at the working capital requirements, we managed pretty well. There has been a seven days decline in sales day despite significant reduction in off-balance sheet factoring. One of our perpetual focus has been customer collection follow-up, which has been better in value and in percentage of sales compared to H1 2019. Please note as well that we have given a special attention to supplier base. Number one, by playing the role of a big corporation, ensuring that payments were done on time.
Secondly, by making sure that we were not creating difficulties or supply chain were not put in difficulties. Lastly, we deliver a cash conversion level of 69%, which is a very robust number. If you move to the last slide. Sorry, to the slide 21, not the last one. You will have to stay with me on the other slide after that. Michel pointed out, we continue to leverage. Despite a drop in adjusted EBITDA, we continue to leverage. We were at 2.9 last year if we exclude the share of the loan. We are 2.6 times at the end of December, and we are 2.5 times at the end of June, essentially through the cash generation. The last one, just update on the financial structure, capital structure. Didn't change over the last quarter. The only item that has changed is the commercial paper.
If you remember, we were almost at EUR 200 million at year-end. We're almost at EUR 200 million at Q1. We are now at EUR 39 million at the end of H1. Actually, our program is doing well. There is very little appetite during the COVID-19 crisis for non-investment-grade company. However, we benefit from term loan A, 5-year maturity, RCF 1. By the way, we drew on it to compensate the commercial paper drop. We set up in April a new RCF with a maturity of 12 plus 6 months, 18 months. At the end of the day, the conclusion is that this will bring us with a very solid liquidity, almost EUR 900 million, shy EUR 800,000. That's a shame. Liquidity I repeat being calculated as cash, plus the undrawn revolving credit facility minus the outstanding commercial paper.
A good liquidity, a comfort liquidity, but backed by a very close monitoring of the cash element of our businesses. I would like to thank you all for listening, I give the floor back to Michel.
Thank you very much, Didier. Let's move maybe to conclusion and the outlook for 2020. If you heard very carefully, the position from Didier, you can really, I think, take away the fact that this COVID crisis has enabled Verallia to leverage its strength and demonstrate its resilience. Just remind you that until Q1, and if you go back to Q1 report and press release, we were enjoying another growth quarter with a 4% organic growth in Q1 and another quarter of continuous EBITDA margin improvement by more than 100 basis points. Unfortunately, like everybody else, we were taken by surprise with COVID-19 in Q2. Despite this, the performance of H1 is very solid, and as I said, we limited the decrease of revenue to 4.1% on a reported basis, but only 0.9% organically.
Our adjusted EBITDA margin has been more or less stable, just dropping by 10 basis points, nine basis points, to be precise, in H1. As Didier mentioned, that was very strongly linked to the French market performance and, de-premium if you want, which is, I think, only a short-term issue. The long-term mega trend of premiumization, I don't think is at stake here, but in the short term, when people are not going to celebrate parties in hotels or restaurants or cafes that are closed and are locked down at home and not having any party at home either, you can understand that spirits and champagne are probably less consumed than in any other year. This will come back. We are very confident about that, but it has hit France quite strongly during the quarter. We've kept generating strong cash flows, leveraging the company.
We've taken very sharp and immediate actions to reorganize our French operations in line with the market conditions and strengthen the competitiveness of our French operations. It's been a very resilient first half of the year. If you remember in April, we withdrew our annual guidance for this year in terms of financial guidance. Now, I mentioned at that time that we thought that Q2 would be the lowest quarter of the year, and we should see some progressive recovery going forward in Q3 and Q4. We are still in this mindset and in this mood, and based on the strong performance of H1, we are going to provide the guidance for 2020 outlook.
Of course, this is based on the assumption there won't be another huge wave of lockdown, a second wave of lockdown in H2. The things will keep normalizing as they normalize right now, with still a little bit of uncertainty. It's a difficult exercise to forecast. As I said, Q2 should be a low point in terms of volume drop. The full year 2020, we believe will materialize with a volume drop of around 5%. We expect to have an adjusted EBITDA for 2020 slightly above the one of 2018, two years ago, that amounted to EUR 543 million. Bearing in mind that we have, as Didier mentioned, a lot more repairs of furnaces, or rebuild of furnaces in H2. That will take place this year in H2 compared to last year, where we didn't have any.
The fact that we want to keep managing our working capital and especially our inventory very tightly, not building unused and in excess inventory in the second half of the year. Therefore, we'll keep tightening our inventory and controlling our inventory on a proactive way. We will also, in H2, implement our transformation plan in France. We are on track in terms of timing, and we expect to have gone through the process by the end of the year, this year. Just reminding you that the restructuring provision has already been taken in H1. We don't expect any new provision to be needed in H2. This is for 2020 outlook. If you remember, we also provided at the time of the IPO, a midterm guidance, and I would like to come back to this guidance that we provided now nine months ago.
The first item on the guidance was the organic sales growth, where we were expecting at that time a 3%-5% CAGR growth rate during the period 2020 to 2022. More or less, half of that was supposed to come from volume increase in line with the market growth that we've seen the four years prior to the IPO last year. Half of that would have come from price increase, which would have ensured positive spread above inflation. Given the fact that COVID-19 has severely hurt the market consumption this year, and given the fact that we are entering in a much more moderate inflation rate in our industry this year and probably next year as well, we clearly believe that this objective of organic sales growth between 3% and 5% is no longer valid.
We are not going yet to propose another objective until we see more clearly how the major economies will recover next year and the years after. In due time, we will probably come back to this objective. Right now, this objective of organic growth is no longer valid. The other four objectives that we mentioned and we took at the time of IPO are still very valid in our mind. First of all, achieving at least a 25% EBITDA margin by 2022 is still a good target that we confirm. The recurring CapEx on sales ratio at around 8% per annum is also, as you understood from Didier's presentation, very much under control and will be maintained. We will keep proposing to the annual shareholder assembly to pay a dividend of at least EUR 1 million and probably with a payout ratio above 40%.
The leverage of the company, as you've seen, is below 3 times, and we believe that it should be in the coming years between two and three times of the annualized EBITDA, adjusted EBITDA of the company. We are maintaining four out of the five midterm objectives, and we'll come back in due time when we have more visibility on the market recovery and the macroeconomic situation to confirm maybe a top-line group objective. This is the end of our presentation. Now we are open to answer your questions. Thank you very much for your attendance.
Ladies and gentlemen, if you wish to submit a question on the phone, you can press star one on your telephone keypad. Please ensure your phone is unmuted locally so that I may announce your name and advise when to ask your question. Again, that is star one on your telephone keypad if you wish to ask a question. We do have some callers coming in. The first question will come from Matthias Pfeifenberger, calling from Deutsche Bank. Matthias, when you are ready, please go ahead. Your line is open.
Yeah. Good evening, gents. Congrats to the resilient results. Three questions.
Hello, Matthias.
Hi. Three questions from my side. The first is basically, can you give us any color on June and July run rates for organic revenue growth? Is there actually a risk in the LATAM business that there is a lag. Obviously, the virus has taken some time to spread there. Is there some risk for the third quarter in light of the very positive development in the second quarter?
Okay. Thank you very much, Matthias, for your question. I will give you some precise number because we've seen that some companies are reporting more precise numbers month by month. As Didier mentioned, the worst months were in Q2, with month of April, which was down 14%. I'm talking about the reported revenue altogether. 14% versus the prior year, April. The month of May was the lowest, the trough at -18% versus prior year. We were positively surprised by some good performance in June with even a 4% increase versus the prior year in June. As you remember, during Q1 results presentations, we thought that we would end up the quarter Q2 with a double-digit drop in sales. Actually, it's slightly below 10%, thanks to a strong June. July is not completed yet, but it will be more or less at par with last year.
Quite a nice trend in last two months. However, one month or two months doesn't make a summer. To be very frank with you, when we talk with our customers, we are not clear about whether there is some restocking in the supply chain.
It's just a restocking effect because after the lockdown of hotels, café and restaurants, if you remember, that represents 30% of our customers' business, more or less. There could be some restocking in the supply chain. Of course, we are helped by the fact that hotels, café and restaurants are reopened and consumers are consuming again. These are precise numbers about the month-by-month recovery, if I can say so.
Yep.
There is still very much unknown about, especially on Southwest Europe, which are big countries for tourism, Iberia, Italy, and also France, where this year, because of the, of course, difficulty to travel, we expect a lot less tourists than the years before. This could have an impact on the, of course, domestic consumptions in those countries during the summer. This is why we are a bit cautious on the outlook, especially in those regions, in those countries. Regarding the LatAm lag, it's clear that LatAm is still struggling regarding the pandemic, with some stop and start in terms of lockdowns, depending on the countries and even depending on the cities in the countries.
We have not a lot of visibility again in the coming months, but we think that, at some point, LatAm with some delay maybe, will also be able to release some constraints in the lockdown in the business. Maybe Didier you want to add something?
I think on LatAm performance, we need to be always cautious about the bottom line. Just give you one number on the real, Matthias, you understand, the average Brazilian real used for S1, not us, everyone is at a rate of EUR 1 for 5.4 Brazilian real. Today, clearly we are today at 6.1, 6.2 Brazilian real. The Forex, the conversion will impact, at the end of the day, the EBITDA will be hit by the conversion impact much more in the second part of the year than the first part of the year. Honestly, it's a matter of time for Argentina to see the same stuff. The blue dollar is today at 80% above the current Argentine peso in Argentina. Mechanically, the Forex will take a hit in those regions.
That's independent of the top line, but the bottom line, you're going to see some conversion impact the second that get a bit maybe I'm too negative, but I'm expecting that to be severe.
My question was more on the organic sales, but fair enough. Maybe some add on the pricing. What has been the like-for-like pricing in the second quarter ex Argentina? Related to that, we've seen some news flow selectively on cullet costs increasing. Have you faced some of this in terms of the collection rates being basically collection being shut down in a lockdown? Is that an ongoing concern or is that easing already?
Regarding pricing, first of all, we don't report our pricing as such in a detailed way. It's usually price and mix together, and as you've seen, we've been hit with a negative mix impact. The pricing was, as Didier mentioned, very different depending on the countries, the dynamics of the countries. At the end of the semester, at the end of the day, what is important is we ended up with a positive spread. As you know, we negotiate prices in our business, except in Latin America, where negotiations are taking place much more regularly than once a year. In Europe, we usually negotiate once a year, and negotiations are behind us. We are pretty, I would say, confident that what we saw in H1 in terms of pricing will stand firm for H2.
Regarding your second question on cullet, it's true that in some areas, but very limited regional areas, during the lockdown, some companies had difficulty to cullet collection, and therefore there could have been, in some areas, some tension. Frankly speaking, we didn't feel this pressure or this tension on the current market. As such, right now, if there had been maybe some tension somewhere in some areas, we don't see them anymore. We personally, as Verallia, we don't see a lot of pressure on the cullet side.
Okay. Thanks a lot. Can I just come back on the pricing? At the IPO, there was a lot of distrust in your ability to price up in times of weak volumes, and now today you mentioned actually a positive spread. You mentioned positive pricing in Eastern Europe, and you also mentioned negative mix because of France. Can we assume that like for like was still positive on the pricing side in the second quarter?
Yes. Absolutely.
Okay. Thank you.
The next caller in the queue will be Charles Scotti, calling from Kepler. Charles, when you are ready, please go ahead with your question.
Yes. Hello, good evening, everyone. I've got three questions. The first one, can you quantify the impact on EBITDA in H1 of lower destocking? Destocking is going to be much higher in H2. Can you also give us guidance on what should we expect in terms of EBITDA impact? The second topic, can you clarify a little bit if the COVID-related impact has been booked in the adjusted EBITDA of the company? Can you tell us if you have benefited, and also the amount, from state-backed measures regarding partial unemployment? My last question is on raw materials tailwinds. As you have focused on small clients that are probably less strict and aggressive on prices, shall we expect significant raw material tailwinds in H2 and especially in 2021? Thank you.
Okay, Charles. On the lower destocking, just fixed cost absorption, just an option. I want to give the numbers because it will tell you what my fixed cost by tons are. The impact is more than EUR 10 million impact, one way or the other. Okay, regarding the COVID-19 impact, as I said, estimated again by the company and followed by the company, it's EUR 14 million, one, four. Three of the EUR 14 million is outside the adjusted EBITDA and non-recurring, as I said, is donation and specific equipment, PPE. EUR 11 million of that is hitting EBITDA. Okay, as regards specific measure and short-term employment, very limited.
Hello, Charles. We acted very responsibly as a company, forcing first people to use the bank hours. In some countries, we have a system where people are flexing the hours with the bank hour system. First of all, people were asked to empty their accounts on bank hours. Secondly, we've also pushed people to take holidays as much as possible or stay in France. Only in some factories that had a much bigger drop in activity than others, where that was not sufficient, we asked for a small partial unemployment and state aid unemployment system. This was very marginal for the company. Regarding raw material.
Raw material, I think on H2, we are benefiting. First we have short-term and long-term contracts. Long-term contracts are locked to index, short-term contracts too. We are seeing raw material flat for the coming second half of the year. We don't expect raw material, not energy raw material, we don't expect a surge in raw material in the second half. More work to push it down, going forward.
Sorry, my mistake. The question was rather on energy cost, actually.
Energy, we have a very transparent and very structured policy. Energy, we are hedging it. Clearly we are today, you know the numbers as I know, you are clearly missing the opportunity of not being hedged. The one who is speculative and not hedging today is benefiting from a very low energy cost. This is not the purpose of the company, and I say several times that you win one, and when you lose, you lose big time. I don't think a shareholder who invests in a company would take speculative position. Having said that, you're right, today, the cost of energy is lower than our edge cost, and it will probably go further down next year, and probably we will probably be a little bit higher than the market.
Honestly, nobody knows what will be the spot next year, because if you look at the price of gas today and the future next year, there is still several years of difference by TTF. You can speculate and remain open and expecting the spot not to increase or you edge. That's what we are doing. The average cost of energy next year should be probably lower than this year. On pricing, and that's what Michel was saying when he say it's difficult for us to project an organic growth, including sales price increases higher because we expect on price, because we are covering cost, we don't expect price increase to be as high to cover energy, which is flat or going down. I would like to add one thing on the inventory destocking, because destocking can be, how can I say?
Is related to the shutdown of the furnace, but we are doing that as well, very proactively. We want to have that company slimmer with the right inventories and the right quality of services. It's good for the liquidity, it's good for the balance sheet. When you're having the right inventory and the market resume, your full throughput is much higher.
Thank you very much. Just one follow-up question. It could be my last question. Considering the strong beat in H1, the EUR 545 million EBITDA guidance for the year seems a little bit conservative, I would say. Have you taken voluntarily cautious volume assumption for the rest of the year, or does it just reflect the upcoming EBITDA headwind? Thank you.
No, shall we? I think it's the best guess we have today on volume. Volume, there is no cautiousness here. I think around 5% drop in volume is neither a bullish or bearish expectation, is what we see in going forward. Although, I repeat, there is a lot of uncertainty, and our customers are not helping us a lot in forecasting, to be frank with you. The top line is very difficult to forecast, but on the EBITDA side, first of all, I remind you that we say slightly above EUR 543. This is basically like a floor. This includes two big unknown for H2—not unknown, but one which we know and the other one which we don't know. The one we know is destocking that Didier mentioned several times, that is huge for H2 compared to what happened last year.
We are talking about billions of billions in terms of inventory variation. As you understood, since we are going to stop six furnaces in H2 this year, there will be a lot of destocking. The second thing is the exchange rate, that this one is completely unknown, and this is only translation impact. It is not a transaction impact, therefore it is not hedged. Therefore, the only thing we know, and Didier was very clear about it, is that it can only be worse than what we have seen in terms of impact in H1. We expect a much bigger hit on the exchange rate side than the EUR 13 million hit we took on the EBITDA in H1. That's the reason why. I remind you also that we also have a stronger H1 than H2 in terms of both sales and EBITDA.
This is more the seasonality of the business.
Okay. Very clear. Thank you very much.
The next caller will be Lars Kjellberg, calling from Credit Suisse. Lars, when you are ready, please go ahead with your question.
Yeah, thank you. I just wanted to continue a bit on the guidance. Maybe I missed this, but I did think you called out almost an 8% drop in volumes sold in the second quarter. What was it in the first half? The question really that I'm trying to get an understanding on is when you talk about 5% down for the full year, it seems as if the math works out, you're not expecting any volume recovery in H2 versus what you experienced in H1, even with the COVID significant impact in Q2. Also on the previous questions about, I guess the delta is significant in destocking versus stock building you did last year. Also, can you call out what is your view on the actual costs, bringing down the furnaces and bringing them up again?
Six furnaces in the second half as a zero in itself can, I guess, lead to significant higher costs just related to the furnace rebuild stop and start.
Well, regarding the numbers, you got it. The Q2 sales dropped by 9.6% or 9.7%. You got the numbers right, and there's no difference in this one. The recovery we see in Q3 and Q4 is compared to Q2, which I repeat, is close to 10% down. Where if you make the average, basically, you're expecting something like more along 5% drop in H2. Still, I repeat, quite a lot of unknown about Q3 in South and West Europe because of the tourism impact. Q4 is traditionally always a small quarter, but this is the seasonality of the business. We expect sequentially some progressive recovery, but not the business or the economy bouncing back to the same level as the one we had last year. This is our assumption for the second half of the year. Regarding-- Sorry?
I was going to say the same goes for mix, I suppose. We still have an adverse mix for the same reason.
Yes. Absolutely. There have been a lot of articles in France, for example, recently, about the Champagne region being very strongly hit by the fact that people are not, again, partying and consuming Champagne as they used to. They will be strongly hit this year, and probably also next year on the Champagne side. Probably, of course, less than Q2, but still significant. Regarding your second question about the furnace, let me explain more in detail what does it mean? After 12 or 13 years of production life, the furnace is worn out and has to be stopped to either don't replace it, is what we do is one of the furnaces in Cognac, or to be rebuilt. Basically, you knock it down, and you completely rebuild a brand-new furnace.
This is something that if you look at our track record, we repaired and rebuilt five or six furnaces a year every year. This is very steady. This is an ongoing repair. In the past, until last year, just for you to have a feel, because we were sold out and we were short of capacity, the goal was try to repair and reconstruct the furnaces in the shortest period of time as possible. During that time, the maintenance people are working because they do other maintenance activities on the site. We do some very big maintenance activities. Everything is being planned, of course, in advance, and some production people are taking off vacation or putting input on banked hour systems and so on. This is the way we do it.
What is going to change this year compared to what we used to do the prior years is we are going to extend the shutdown of the furnace. Rather than trying to speed up the furnace repair in the shortest possible time, the opposite, we're going to take more time in order to adjust for the lower level of demand in the market. We are adjusting, in other words, the capacity that we have to the level of demand in the market. This will have, of course, some cost because we are not going to absorb those fixed costs of the people that are basically not producing in some PCs or because we don't absorb the volume that we used to absorb in terms of fixed cost absorption.
Sure.
This is something that we clearly mentioned that this is our way and the most efficient way, by the way, to adjust the capacity. Of course, we've already taken the decision not to start the two brownfield furnaces in Villa Poma, Italy, and Azuqueca, Spain, until we see the demand of the market back to a higher level. Beyond all this first immediate decision we took in Q2, the best way for us to adjust down for capacity on capacity is to extend the stoppage period of the furnace rebuild.
Got it. Just one final question from me. The flow-based organization that you're talking about, you're now putting into place in France. Appreciate 150 jobs will be lost in the process. Aside from that saving itself, what sort of benefits does this give you? If you can put that in some sort of monetary terms, what you're now doing in France for the group.
Well, first of all, the 150 job position that will be eliminated, 80 of them are related to the non-rebuild of the furnace in Cognac. 80 of them is basically linked to the downsizing of the capacity in Cognac. The remaining 70 spread over the other six plants. Okay, you see 70 divided by six, you're talking about 10 to 15 jobs per plant, are basically optimization of the work organization. The main concept basically is to having a flow organization where you have, under the same responsibility, the people looking for production and quality from the furnace down to the warehouse. Where today, France is still organized by process, which means that you have an organization for the furnace, an organization for the hot end workshop, and an organization for the cool down workshop.
This is, of course, not the best in terms of responsibilization and empowerment of our people. We have changed this organization already more than two years ago in the other factories. We've seen, of course, much more responsive organization, much more empowered organization. That has led, of course, to improvements in quality, in adding a better quality because people react faster, and they feel more responsible throughout the whole production process about the quality. Of course, in terms of yield improvement and in terms of machine efficiency and production efficiency. We are not going to give you precise numbers beyond just the job that are going to be eliminated, which is pure productivity. There is beyond just the cost aspect that you can calculate.
There is a clear side benefit in operating your plant at a much better quality level and at a much better overall efficiency level.
Got it. Thank you.
The next question will come from Francisco Ruiz, calling from Exane. Francisco, when you are ready, please go ahead.
Hello, good afternoon. I have two questions. The first one is, again, I'm sorry to insist on the EBITDA guidance for the full year. Assuming this EUR 543 million or slightly above EUR 543 million, does imply a drop in margin if I have a correct level of sales of more than 300 basis points in H2 and compared to last year, almost 150 basis points. Am I calculating correct, or probably I'm doing something wrong here?
No, actually it's a drop versus H1 of around 200 basis points.
Okay. Good. The second question is on working capital and factoring. If you could give us the data on factoring on this semester, and how do you expect the working capital to evolve with the furnaces stock, et cetera, in H2?
Non-recourse factoring dropped by 8% in H1, in flows. Because where it dropped mainly is where the countries drop in activity, essentially France. Going forward, it should resume with increased level of activity. Let's keep in mind that in front of us, we still have customers that are weak, a wall of liquidity with PGE, with social charges. We need to be very careful. The insurance credit that are covering the non-recourse factoring program are pretty cold feet today, and they are not increasing the exposure. They are more reducing than increasing. Basically, we don't expect to catch up on the non-recourse factoring. I think we're going to still be below last year in coverage, in value and in percentage of coverage again. On the working capital, if you exclude that, as I said, that's very important for us.
We did much better on working capital in the first half than last year. In the second half, we will be stocking mechanically because a lot of the furnace repair will happen in Q3. We'll have a full cash impact in the fourth quarter. We do expect working capital to be an improvement compared to last year. Yes. We are still forecasting a free cash flow to equity, which is about three digits. Which means that we'll keep leveraging and reducing the debt of the company in H2.
Okay. Just a follow-up on the French plan. Could you give us an idea of the payback of the EUR 19 million?
I would pass on this question for obvious reasons. We are in the process of discussing with the union representatives as we speak. Until those negotiations are completed, if you allow me, Francisco, I will not answer your questions.
The EUR 19 million is the cost of the full plan or could be more?
No. There are many costs associated. It is not just the labor-related costs. There are also some reorganization costs of the site. It's a package. For obvious reasons I just mentioned, I'm not able to comment more in details right now as the negotiations are still ongoing. Sorry about that.
Okay. No, thank you very much.
Just another reminder, ladies and gentlemen, if you wish to submit a question, you can press star one on your telephone keypad now. Again, that is star one. The next caller will be James Rose calling from Barclays. James, when you are ready, your line is open. Please go ahead.
Hi there. Just after a comment on the situation in France, really. Why have you taken the decision to close there versus in other furnaces, you've just taken the decision to take longer to rebuild them? I guess related to that, could you comment on the sort of broader supply-demand balance you're seeing in France and elsewhere in Europe, whether it's volume pressures and what the actions of your competitors are also. Thank you.
Well, I repeat one more time. In France, this is the market that was already growing the least, if you want to compare to the other countries. We were already close to having excess capacity. This COVID-19 impact has clearly highlighted the fact that we will have a lot of excess capacity. We have two furnaces out of the three in Cognac that were up for repair. One will be repaired in Q3 this year. It's one of the six furnaces that Didier mentioned that will go for repair. The second one, which was planned to be repaired beginning of next year, will not be repaired. Again, because this furnace was dedicated to the wine segment, I would say the standard wine bottles that are clearly not performing as well as probably other segments of the market.
This is the reason why this was the one furnace that was chosen. It was not a coincidence. It was the right furnace at the right time to be chosen for, unfortunately, a restructuring. I'm not sure I understood your second question, James. Can you repeat it, please? Because on our side, the connection was not very clear.
Just relating to what reactions are you seeing from competitors? Are competitors taking capacity out as well? What's their response been on pricing in end markets?
Well, at least the listed competitors, two of them have already reported their numbers. You can ask them directly the question. What we see right now is that in the marketplace, everyone that seems to be adjusting the capacity to the new level of demand. I repeat, given the fact that the prices have been negotiated, most of them before COVID, there is no big changes in pricing in the marketplace right now. On the capacity side, everyone is either doing like we do, extending furnace stoppages for repair or not rebuilding or extending capacity as probably we could have done, or they were thinking of doing last year when the market was sold out. On the pricing side, since prices have been negotiated before COVID, it's been quite stable.
Okay. Thanks very much.
I have no further callers in the queue at this time. Just one more reminder, ladies and gentlemen. If you wish to submit a question, you can press star one on your telephone keypad now. We'll allow one more moment for questions if anyone to come in. Again, that is star one. It appears that's all we'll have for caller questions today, so I will return the call to your hosts.
Okay. I would like to thank you very much for attending this call tonight and for following the performance of Verallia. I wish you all a good evening and, especially for you and your family, a very good and strong health. Thank you very much, and I look forward to seeing you again soon. Have a good night. Bye-bye.
Thank you all for joining tonight's conference. You may now disconnect your lines.