Hello, and welcome to Verallia's first quarter 2020 results presentation. My name is Judy, and I'll be your operator for today's event. Please note that this conference is being recorded, and for the duration of the call, your lines will be on listen only. 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 question. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand you over to your host to begin today's conference. Your first speaker will be Michel Giannuzzi, followed by Didier Fontaine. Thank you.
Good afternoon, everyone, and thank you very much for joining us for this presentation of Verallia first quarter 2020 results. Before moving on to the financial highlights, I would like to firstly express my sympathy and solidarity with those particularly hit by the COVID-19 crisis, and convey my gratitude to those risking their own health to respond to this epidemic. I propose to start with page three, which is the financial highlights of the quarter. As you will see from later on presentation from Didier, we have a very good start of the year with a limited impact from the COVID-19 pandemic. Our reported revenue were at EUR 645 million, at 1.9% versus prior year. The sustained organic growth of 4% versus Q1 2019 was quite impressive, in the current environment.
Even if we exclude the positive impact of hyperinflation in Argentina, we still enjoyed a 2% organic growth in the quarter. Our adjusted EBITDA was up 6.5% at EUR 151 million. This increase was up by 9.6% at constant exchange rate and scope versus the prior year. Our adjusted EBITDA margin was at 23.5% for the quarter, up 103 basis points compared to the Q1 2019. As you know, Verallia is a very strong cash generative company, and we continue to deliver the company during the quarter. Our ratio net debt leverage and ratio of debt to EBITDA, was reduced from 2.6 at the end of December 31 to 2.5 x last 12 months adjusted EBITDA at the end of March 2020.
Given the COVID-19 epidemic, we have limited visibility on what's going on in the next few months, and therefore we withdrew, as you know, our 2020 guidance. However, we stood firm on our proposal to pay a dividend of EUR 0.85 per share, either in cash or new shares at shareholders' option. That will be subject, of course, to the shareholders' general meeting, which will take place on June 10th. Let's move maybe to the next page four, where we will see the main impact or the main event of the quarter, which is the COVID-19 and the short-term priorities we took. As we have no operations in Asia and China in particular, the first country that started to be hit by COVID-19 was Italy for Verallia. I have to say that I'm quite impressed by the way our Italian colleagues first reacted to this pandemic.
Thereafter, we have immediately implemented a crisis management organization, not just in Italy, but across all areas with three clear, immediate priorities. The first priority is obvious. We want to preserve our employees' health and safety. The second priority is to ensure the business continuity to continue to serve our customers. The third priority, short-term priority, is to protect our financial strength. On the top of these immediate priorities, I have to say that I'm very proud of the spontaneous reaction of our employees that have shown a lot of solidarity with very local initiatives to support the people in their local communities where they live and work by providing some very nice support to those people that were severely hit by the COVID-19. We'll see that in a few slides. Moving on to the next slide, which is slide five.
The priority number one, is to preserve our employees' health and safety. Immediately in all sites, we took measures to guarantee employees' health and safety that are stricter than public authority guidelines at that time. We immediately asked all the support functions, either in the offices or in the plants, to, as much as possible, work from their home office. We, of course, implemented social distancing. We implemented very strong hygienic measures everywhere, including the canteen and the locker rooms. We've checked employee temperatures at the entrance of the factory gates. We've avoided, as much as possible, face-to-face meetings, opting for calls. We have reorganized our shift handovers in the production facilities to avoid to have too many people in the local rooms at the same time.
We restricted access to our suppliers and, of course, our customers, too, during that period. These are a few examples of what was done, and I think I'm glad to report that out of the 10,000 employees that Verallia currently employs, we've had to report so far only about 15 people contaminated by COVID-19, and none of them have been in a very serious health situation. If I move to the next slide on page six, the second priority was to ensure business continuity to better serve our customers. First, I'd like to remind you that our activity has been considered as essential for the food and beverage chain, and all our sites have been able to continue to produce during that period and still are. Therefore, we had no factory shutdown at all.
I'm quite pleased to say that, even though we have had to slow down some production lines in some areas where the demand was lower, all the furnaces are continuing to work as normal. You know that our business model is local, very decentralized organization to better serve our customers. This decentralized organization provided us a lot of agility and reactivity in this crisis situation. The business continuity plans have been very swiftly and timely implemented in all plants, all countries, in a very remarkable way. I personally had daily calls with all the division general managers to review the situation. We had a call with executive committees every other day to review the situation and take appropriate actions.
We also have some coordinated effort at the corporate table, sharing the best practices, especially on health and safety, where our group health and safety coordinator, made sure that all the knowledge and the experience of our Italian colleagues was very fastly disseminated across the organization to the other divisions, to the other areas. We even had some examples where the Italian colleagues had some stock of masks that could be transferred to the Spanish colleagues that were lacking masks, as an example of the things that were done. The group purchasing also made sure that we managed very efficiently and very rapidly, a good supply of personal protective equipment.
Last but not least, Didier Fontaine's organization with all the financial community, have implemented a very strict daily monitoring of the cash position, the customer payments, with the sales force being involved indeed, and a tight follow-up on the supply chain as well. These were the immediate measures that we took to ensure business continuity, and I think it has provided us a very strong thank you from our customers that we have been served very well during that period. As you know, during crisis, communication is key, we reinforced big time our communication schedules. At area or division level, there were internal video or conference calls in the regions. At the group level, I personally had weekly video calls and written information, cash information, at the group level. I also wrote a weekly letter to the board, to update them on the situation.
I think on this one, we scored and we showed the very strong reactivity and agility of the company. The third priority, moving to slide number seven, is to protect our financial strength. We have, at the end of March 2020, a very solid balance sheet and liquidity. As I said before, we have continued to deleverage the company to 2.5 x last 12 months adjusted EBITDA, which is well below the maximum leverage covenant at 5 x. At the end of March, we had EUR 528 million available liquidity with a very healthy debt maturity profile. We also increased our financial ability by setting up a EUR 250 million additional Revolving Credit Facility as of Friday last week, which is April 24th. This is giving us a lot of strengthening to our balance sheet and liquidity situation.
Moving on to the next slide on page eight, I have to say that it's during crisis that you see people bringing the best out of them. I've witnessed personally many inspiring acts of solidarity that I would like to share with you and that were very spontaneous from our people. It started with the lots of local donations for hospitals, medical staff, firemen, retirement homes, people in need, homeless people, and low-income families. Most of the things were very basic equipment or food or hygienic protective clothes or clothing, sorry, that we gave to those people in need. We also provided some local services, for example, to the truck drivers in Germany and Spain, providing some and building some specific restrooms and showers for them.
In Ukraine, where we have our own bus transportation company or services, if you want, we have organized transportation for the medical teams that are going to the hospital of Zorya where we are living close by. As a boost to these local initiatives, the executive committee and myself have renounced on 15% of the annual compensation for the executive committee and 50% of my annual compensation to create a fund of EUR 1.6 million that will be used to support these local initiatives. Moving on to the next slide. Maybe leaving the COVID-19 for two minutes, there are other things that happened quite nicely during the first quarter. The first one was the reconstruction of the furnace in Chile, which started at the end of last year and the furnace restarted on time on February 20th this year, just before the COVID crisis.
It's a major investment for the region. We invested about $40 million to not only reconstruct a best-in-class with the most modern technology furnace, but we also took advantage of this big job to upgrade the factory and add a new production line in our Rosario site in Chile. This will increase our capacity in this country by around 50,000 tons. This, if you remember, this is a factory which is mainly addressing the wine market. These new investments will give us more flexibility with more production lines producing up to six different types of packaging simultaneously. We've also upgraded inspection machines to enforce our quality and safety in the factory.
Even if Chile is really on the other side of the globe, I have to say that I'm quite impressed by the very good startup of this big job on February 20th, which was really on time as scheduled. That was a very good achievement for the LatAm team. On a more longer term, there was another initiative on page 10, which I would like to bring to your attention, which is, again, very interesting. It's one of the very important initiatives for the industry where an association of the main European glass packaging producers have set up together a project under the European Federation sponsorship to build a large-scale hybrid oxy-fuel furnace, which will be running on 80% electricity. Today, most furnaces run more or less 80% on gas and 20% on electricity.
The purpose, which is an R&D project, is to be able to have a large-scale furnace. Large-scale means a furnace producing 300 tons of glass per day, which is a very good size furnace. Being able to produce high-quality products with electricity as a main energy source. This is a technical challenge for our industry, but it's a way to decarbonize our industry. This is a project that is going to start in the coming months with, of course, if the R&D project is successful, potential deployment after the first results, and this is in year 2023. Just as a reminder, this industry has already done a lot to reduce the energy consumption and the emissions of CO₂.
In the last 50 years, we reduced the energy consumption by 70%, reduced the emissions of CO₂ by 50%, and the glass packaging is about 30% lighter than what it was 50 years ago. This is a major milestone, a major breakthrough initiative to go much further into decarbonization of our industry. This is also in line with the other major initiative that we took at European level, which is to increase the glass collection up to 90%. As you probably remember, every time we can increase by 10 points the ratio of cullet, which is the used glass, into our furnace, we can reduce the CO₂ emissions by 5%.
Therefore, today, we collect in Europe 66% of used glass, and we, as an industry with partners, various partners, the retailers, the brands, the local municipalities, have a project to increase this collection ratio from 66% to 90% in order to use more recycled glass in our furnace and therefore reduce our CO₂ emissions as well. These are long-term projects that have been pursuing despite the short-term hiccups linked to the COVID-19. These were the main highlights of the quarter for Verallia and for the industry. I will hand over next page to Didier Fontaine, who will present the financial results.
Thank you, Michel, thank you very much to all of you for joining the call. My presentation will be structured under three parts. As usual, number one, we're going to start by reviewing the revenue numbers at group level. I will then move to profitability as part two, and I will conclude on the cash performance with a review of our strong financial structure, which is there to address the current crisis. As you know, liquidity is more than ever a point of focus for everyone and for us as well. Before moving to slide 12, and as Michel mentioned it earlier, I would just like to highlight that in general terms, despite the first direct impact of the COVID-19 epidemic on our March sales, we're reporting a solid quarterly set of results, with increased sales and improved profitability. I'm moving to slide 12.
Overall, we can see that in a good start of the year, with so far limited impact from the COVID-19 epidemic. The initial direct impacts have only been felt in March and even second part of March. The group achieved a revenue of EUR 645 million, which compare to EUR 633 million in the first quarter of 2019. This is a reported growth of 1.9%, which represent an organic growth of 4%, and as Michel pointed out, 2% if we exclude Argentina. The first element on which I would like to spend a bit more time is the category, "activity" that you see are slightly negative on the bridge. Slightly negative despite volume sold, which are showing a small increase. Actually, the decline in French sales, where the selling prices and the sell mix are higher than the group average, has therefore negatively impacted the activity box.
In a nutshell, the French drop has triggered a negative country mix. If we're looking by segment. In Southern and Western Europe, excluding France, therefore basically Iberia and Italy, demand levels remain dynamic, particularly food goods, beer and water. Italy and Iberia posted positive growth over the quarter. As far as France is concerned, at the beginning of the quarter, activities in France were affected primarily by the national strikes related to the pension reform, associated to a decline in demand from customer exporting to China. This decline became more pronounced from mid-March onwards due to the reduced workforce available on site as a direct impact from COVID-19 that came along with associated confinement. On the Northern and Eastern Europe side, all the region has been driven by food goods and new water markets. Germany, Ukraine, and Russia show all of them positive organic growth in Q1.
As far as Latin America is concerned, all the countries reported positive growth for the quarter. Nevertheless, the situation took a downturn from mid-March onwards, particularly in Brazil, which is going through a challenging political and sanitary context. As a summary, there has been a deceleration in organic growth in March. We reach overall 4%, but end of February, the 4% was 5.9% and only 0.4% in March. Most of the softening actually was related to the on-trade channel, to which we are only exposed for one-third of our activity. As you know, this market encompasses hotels, cafes and bars, restaurants, which indeed are suffering heavily from lockdowns. In terms of pricing policy at group level, you know it's an important point for us. Although and as expected, the sales price increases at the start of the year were more moderate than the previous year.
They were in line with our expectations. The weight of Argentina, which still in hyperinflation, is noticeable as the price/mix impact represents EUR 11 million over the quarter. Again, we have been impacted by a negative ForEx hit of 2.1% in the first quarter, which is a negative EUR 13 million, and this is mainly to the depreciation of the LatAm currency. We are used to the Argentinian peso going down, but here it was notably Brazil, and this drop has intensified in March. You know the numbers, but as an illustration, the Brazilian real dropped by 19% in average in March 2020 versus March 2019. April is currently showing in Brazil a further significant drop of the Brazilian real.
Now, since we have covered the revenue aspect, we're going to move to the adjusted EBITDA on slide 13. Adjusted EBITDA grew by 6.5% in the first quarter, reaching EUR 151 million. Organically, it increased by 9.6%. Again, this increase is relying on our three pillars. Again, "activity" is negative despite more volume sold over the quarter, as it has been penalized by the unfavorable country mix that I mentioned in the previous slide. This is essentially linked to the lower sales in France.
The pillar number two, the positive price cost spread, albeit price increase, as I said earlier, has been moderated compared to prior year, is still well positive. Finally, our third pillar, our Performance Action Plan, our capability to reduce our cash cost base via productivity. The PAP led to a net reduction in cash production cost by EUR 8 million in the first quarter of 2020. As you are familiar with it now, I'm going to present it in three different buckets. The pure cash savings generated by your hundreds of products in portfolio through the Performance Action Plan.
This reach EUR 13 million, well in excess of the 2% of production cash cost reduction target of 2%. Those were, however, partly offset by an amount of EUR 5 million inclusive of first, I will say what you call industrial variances, that mainly come with the day-to-day usage of our industrial setup and machines, and eventually clean up when is necessary. In that case, we need to adapt by limitation in production linked to the March steep slowdown and associated as well to the confinement setup of the workforce, especially in France. Despite those impacts, again, the adjusted EBITDA margin increased by 103 basis points to reach a robust 23.5%. If I go to page 14, very briefly, I'm going to focus onwards on our cash performance and our de-leveraging efforts as cash is king, especially in those days.
If I'm going to slide 15, during the first quarter of the year, we have continued to de-leverage. Our net debt reached EUR 1,774,000,000 at the end of March 2020, which is a 2.5 x leverage of adjusted EBITDA for the last 12 months. This compares very favorably to the 3.1 x of March 2019, the 2.6 x of December 31st, 2019, which is confirming our half-term per year de-leveraging ability. For information purposes, this leverage ratio remains well below the maximum leverage ratio set out in Verallia group financing documentation, which is set at 5 x adjusted EBITDA. Now, if I'm moving to slide 16, as I mentioned at the beginning of this presentation, Verallia has a strong financial structure that underpins its resilience in these critical times.
Like Michel, together with Michel, I am with my team monitoring both at central and very importantly at operational level, daily and accurately, the cash position of the group. We are consistently seeking at optimizing our financial structure to the best. This is why on March 30th, last month, the group drew EUR 200 million from its EUR 700 million revolving credit facility for six months ahead of the upcoming maturities of four new commercial papers, which, by the way, explain the high level of cash in the balance sheet at the end of March.
As you probably know, the commercial paper market is currently closed for non-investment grade companies in France. EUR 196 million of commercial paper at the end of March is today reduced at lower than EUR 150 million. Sum of liquidity, it amounts to EUR 528 million, which compared to our debt, is at a very comfortable level.
A reminder of liquidity, which is simply calculated as the cash plus the drawn portion of the RCF, for the revolving credit facility, minus the outstanding commercial paper. End of last week, we have been revisiting our capital structure to reinforce our liquidity, and have decided to restore the usual level of undrawn credit facilities. I'm pleased to announce that the group has successfully set up on April 24th, 2020, an additional EUR 250 million revolving line of credits with one-year maturity, extendable by six months at the option of group discretion. The syndicate of banks that I want to thank for their support and reactivity is made of eight core Europeans, and we have on purpose limited the number of banks partnering. Under current unusual circumstances, it has been a good common effort.
That concludes my presentation, and I want to thank you for listening, and I give the floor back to Michel.
Thank you very much, Didier. I propose to move to the last slide of the presentation on page 18. As you've understood from Didier's presentation, we've had a very solid Q1 financial results, which we are very pleased and very proud to report about, especially in the given circumstances. The organic growth was very remarkable at 4%, even excluding Argentina, it was a strong 2% organic growth. We've continued to improve our adjusted EBITDA margin to 23.5%, with more than 100 basis points improvement versus the prior year. As you know, we continue to generate cash and deleveraging the company to 2.5 x last 12 months adjusted EBITDA. That was a very good position to face and to start entering into the second quarter, which will be much tougher, as we all know.
Given the fact that we have very limited visibility on the market and our customers' orders, we've decided on March 7th to withdraw the 2020 guidance. We will nevertheless continue to take the very strong adaptation measures that we've taken so far, with a lot of discipline and a lot of agility from our teams. The first is to continue to preserve our employees' health and safety. The second thing is we will, of course, variabilize as much our costs. We will continue to have a very accurate daily monitoring of cash and supply chain. We will, of course, continue to adjust our CapEx and investments to what we need to do in the future without compromising the future.
Basically, the two strategic projects that we've launched will be completed this year, but we will start the new furnaces, the new capacities, only when we think we will need them. We might have a slight delay in the startup. Last but not least, we have decided to maintain our 2019 dividend at EUR 0.85 per share in cash or in shares, together with the reinforced liquidity, as Didier mentioned, with this new revolving credit line of EUR 250 million that was signed on Friday last week. We enter in a much tougher second quarter, we believe, but with strong assets and a strong organization in place to face the strong weather or the difficult weather. We are very confident that beyond the second quarter, when lockdowns will be released a bit everywhere, normal life should resume at some point.
Thank you very much for listening to this call. I propose now to move to the Q&A sessions.
Thank you, Michel. Just a reminder, if you would like to ask a question or make a comment on today's call, please press star one on your telephone keypad. The first question comes from the line of Matthias Pfeifenberger from Deutsche Bank. Matthias, you are now unmuted. You may now ask your question.
Good evening, gents. Couple of questions from my side, if I may. Firstly, trying to see how deep the double-digit decline is going to be in the second quarter. My question is to the Southwest European division. Is the on-trade channel there basically at zero, or is there some base load going on, and what is the compensation via the off-trade channel?
Thank you for the question, Matthias. As Didier indicated, we estimate, and this is a rough estimate, and it can change from one country to the other quite significantly. But on average, for Verallia Group, the on-trade channel represents about one-third of our business, versus two-third on the retail side off-trade channel. On the on-trade channel, this is the sales of our customers, but our customers are also, I would say, having to manage their own supply chain. Even though, as you know, all the bars and restaurants and cafes are closed in many countries and will still be closed for a couple of weeks. Some of them in France, for example, have completely stopped bottling for a few weeks, but are now resuming bottling activities in anticipation for the restart and the reopening of those HoReCa channels. In other countries, also the same.
We've had a big slowdown, which will continue probably in April and May. I wouldn't say it's zero, otherwise it would mean, just making the math, that we lose one third of our sales.
we said it will be a double-digit drop, but we don't believe at this point in time that it will be a 33 drop in sales.
Yeah. Exactly. Countries like Northern Europe and Sweden, they're still open and maybe a quick feedback from my side here in Austria, because it just came out today, Austria will resume going to restaurants in a party of four from the 15th of May onwards. It's basically we're one of the earlier countries, and it's basically resuming as we speak. My next question would be on the drop-through. Now with this double-digit decline, obviously maybe being about whatever, 10%-15%, how can we think about the drop-through in light of that you said previously you can also produce to some degree on stock, you can reduce the utilization a bit on the furnace side, and there's also cost measures. How do you think about the drop-through in light of the high fixed cost shares and these items?
Okay. I will let Didier maybe handle this answer. Didier-
Yeah
to take it?
Yes. First, you're right. I think you know we are repairing furnaces, manning furnaces on a yearly basis. This is the first line of amortization of, we say, quote unquote, under activity. Instead of having two months stoppage, you might have three months stoppage, then you are able to offset or mitigate the impact. We are not looking at, we are very careful because this a double-edged sword. You can still produce and put that in your inventories, need to make sure those are good products and that you're able to sell it because it's a future problem if you are just producing for the sake of putting that in the balance sheet. We are very careful to continue to produce, producing the right product so that there is no future aid.
The first defense clearly is reducing the number of lines available. When there is downtime, make it a little bit longer, postponing some startups where you're not heating the furnaces, so it's not expensive. That's basically what we're doing, and there is a mitigating effect on that. Yes.
Okay. I have got a couple of smaller questions. Actually, let's say the work has been resumed in Europe in the third quarter. Do you expect a catch-up effect maybe in the fourth quarter, or is this seasonally too little in terms of importance, and can you confirm that Q2 is seasonally the strongest quarter? My last one would be, what about the ability to redirect volumes from France, Italy, and Spain, given the limited shipping radius?
Regarding the catch-up in the third quarter, fourth quarter, I'm not sure in our industry there will be, at least for us, there will be a lot of catch-up to be frank.
Yeah.
The wine or the spirits that people have not drunk, I'm not sure they're going to drink two times more in the future. Our customers, as I said before, to some extent, have also managed their inventory in order to mitigate the very sharp closing of all hotel, restaurants, and cafe. We are rather cautious on what you call the catch-up or the rebound effect in this industry. Frankly, that's why we don't give guidance anymore, because nobody knows and we don't have the crystal ball. We don't expect a strong rebound in Q3 or Q4 to higher levels than last year. I think it will be a progressive recovery, if you want, of the demand from our customers.
Yeah.
The strongest quarter is actually Q3 normally.
Okay
that's when people go on holiday and spend more time at bars, restaurant and so on. We also know that there will be a consequence on the travels and the way people will spend their holidays this year, probably less travels and less, especially in countries like Spain, Italy, where a lot of tourism activity, they will probably be suffering a little more.
Okay
The third question, sorry, can you remind me the third question? I didn't have time to take notes.
I think I've asked enough anyways. I put myself back in line and let the others ask some questions. Thanks a lot.
Okay. Thank you. Thank you much, yes.
Perfect. The next question comes from the line of Francisco Ruiz from Exane. Francisco, you are now unmuted. You may now ask your question.
Hello, good afternoon, and thank you for taking my questions. I have three questions. The first one is on the efficiency plan. Remember during the IPO, you commented that the efficiency plan is not heavily linked to production. How do you expect this PAP to evolve in the following months? The second one is, if you could give us a little more detail on the cash flow generation. Mainly what has been the working capital and the CapEx in this quarter. The last question is, if you could give us some detail if you have any facility already stopped, and you could do some selective stoppage of production in the coming months in order to adapt production to demand. Thank you.
Okay. Maybe I will take the first question on PAP and let Didier talk about the CapEx evolution, and I will also speak about the selective stoppage. I'll take number one and three, and Didier will speak probably about the CapEx. Regarding the PAP, as Didier mentioned, we had a very strong Q1 on PAP with 13 million gross PAP, which is well above the 2% target that we have. Even if it's more difficult, let's be clear, because the people are very busy fixing the short-term absence level or customer demand changes and so on and so forth. We are more than ever committed to deliver this strong 2% cost reduction on the PAP side. As far as I'm concerned, this is still a very valid objective, so we are not giving up on this one.
I will take your third question regarding selective stoppage. Didier mentioned, I think that was something we covered during the IPO road shows. We are refurbishing every year six furnaces that are completely knocked down and rebuilt. On the top of this, we had planned to increase the capacity before COVID-19 with two new furnaces to be started, one in Azuqueca in Spain and one in Villa Poma in Italy. Obviously, the two brownfield projects, the strategic projects, even though they will be completed this year, will be started only when the demand will be back to where it should be. Which means it will be probably delayed. The startup of those two new capacities will be delayed. Regarding the existing capacities, we will adjust our capacity to extend, wherever it makes sense, the furnace stoppages to a longer period.
Usually, it takes, depending on the furnaces, between 7-10 weeks to rebuild a furnace. We will consider extending, in some areas, the furnace stoppages to, of course, reduce our capacity in order to have the other lines, the other production lines, run as efficiently and at a nominal level as much as possible. This will be our strategy to adjust the capacity to the market demand by, not starting new capacity, first of all, and secondly, by extending the planned factory rebuild period to a few more weeks for each of them. Yes?
Yeah. Could you accelerate some refurbishing of planning for next year to this year in order to do the same with the same aim?
Well, accelerating, maybe not. Maybe stopping a bit earlier, yes. From a cash point of view, we have no interest to spend money upfront to rebuild furnaces that we won't use immediately afterwards. We might consider stopping some furnaces that were, for example, supposed to start beginning of 2021. We stop them maybe one month earlier. When I say extended, it's either extending by delaying the restart or extending by anticipating the stoppage by one month or so, or two. That will be considered as well. Yes.
Okay. Very clear.
Didier, you want to talk CapEx?
Yes. CapEx and working capital, Francisco, good afternoon. On the working capital, we are going to talk variance about variances. Actually, on working capital, first of all, we have used less non-recourse factoring in Q1 2020 than Q1 2019, essentially, because France level of sell drop and France sells is a big user of factoring. Despite that, we have been able to improve the variance, we burn cash in working capital because normally there's a growth between Q4 and Q1, the Q4, N minus one, and Q1 between 6% and 7%. That was the case. In 2019, the working capital worsened EUR 8 million more than this year. We have been able to be better in terms of working capital management despite using less factoring, which is mechanical, we have been better. On the CapEx, a little bit different.
We told you that we are going to expect a cash CapEx much higher this year than last year, especially based on the fact that we have the two big strategic CapExes. Actually, we spent EUR 20 million more in cash in CapEx this quarter versus Q1 2019, EUR 77 million cash CapEx out versus EUR 55 the year before same quarter. That was as expected. Clearly, going forward, the CapEx level is monitored very carefully, the timing, the phasing, as Michel pointed out. We are looking at that very carefully. In Q1, that was as per plan. Starting to invest and spending a bit more cash than the year before. Overall, if you look at the free cash flow of Q1, it has been after taxes and interest charges, it has been positive.
Okay. Thank you very much.
Maybe I will come back to the question from Matthias regarding the quarter, the Q2 being a strong quarter. Maybe I should correct what I said. Actually, last year, Q2 was a stronger quarter than Q3, and it was the strongest quarter of the year. We don't expect this year to be the same. That's why I was mentioning Q3 will probably be higher than Q2 because of the big shortfall in Q2 this year. Sorry for the confusion, Matthias, but just want to correct what I said. Last year, you were right. Last year, Q2 was stronger than Q3. This year, because of the double-digit drop that we expect to see in Q2, we think Q3 will be slightly higher. Sorry for the miscommunication.
Thank you, Francisco, for that question. The next question comes from the line of Charles Scotti from Kepler. Charles, you're now unmuted. You may now ask your question.
Yes, hello. Good evening. I hope you are safe and healthy. I've got four questions, please. The first one, can you share with us the organic sales trend in the second half of March and the beginning of April? My second question on the French market, which seems to be more affected than other countries. Is it a production issue or is it because of the demand is more impacted? My third question, a follow-up question on the drop through. Is it fair to assume a 50%, 5-0 drop through as you guided during the IPO, or can we expect a lower drop through because of the Chalon's stoppage? And the last one, can we expect the wine and sparkling wine demand to be more resilient? Because regardless of the demand, winemakers will have to bottle it anyway. Thank you.
What I propose is probably I will take the question number two and four, and I will let probably Didier give you the trend on the sales trend in the second part of March and April, as well as the drop through. Regarding the French market, what happened in France is a bit different from what happened in the other countries, to be frank. The suddenness that took place in France to put people on lockdown with restricted activities and restricted moves from the people was much bigger than what we saw in the other countries, like, for example, Italy and Spain. Therefore, we had a much bigger drop of demand in France than in the other countries, Italy and Spain, to name them, for example, as the head countries.
On top of this, I have to say we had a much higher absenteeism from our workforce in France than we have seen in the other countries. The slowdown or the reduction of sales in France is mostly due to the drop of orders from our customers. To some extent, we also have adjusted our production down, not because just of the drop of orders, but also because of the absenteeism that we had in our factories. As I said before, one of the maybe characteristics of the French market, it's probably more premium than other markets. If I just take example of Champagne, the Champagne producers have shut down their bottling facilities for a couple of weeks.
They have restarted in April, but they immediately stopped their bottling activities because Champagne was very severely impacted by the closure of hotel, restaurant, and cafe, for example, and the fact that it's not the time when people want to drink Champagne at home when they are in a lockdown situation. We saw about the same strong impact on the spirits segment in France. The French spirit market is quite strong, especially at export. We believe that our main spirit customers that are especially exporting spirits to Asia or even the U.S., have also suffered quite a lot from a drop of their markets. Therefore, I think it's fair to say that the French market has probably been more impacted than the other markets because of the product mix, and also because of the strong lockdown measures that have been requested by the government.
To answer your question four about wine and sparkling wine. It is true that, especially in the sparkling wine, our customers had to empty their barrels in order to prepare for the next harvest. That's one of the reasons why they restarted bottling, for example. They will, of course, put the sparkling wine and to some extent, the wine as well in reserve for the future years. We might see some bottling activity restarting again. Again, it's very hard right now to forecast what our customers are going to do. We have, especially in the wine segment, a lot of small customers. This is where we have the biggest number of customers, and they have quite a limited visibility on their own sales. They navigate from one week to the other with sometimes very changing demands and orders.
The good thing about Verallia is that we are probably very flexible. We are, I think, quite good at following up their demand and adjusting our production line to the real need. As Didier mentioned before, we don't build stock for the sake of building stock. We build the right stock for them. We don't have a lot of visibility on what they're going to do to be frank. Now I will hand over to Didier, who's going to talk about the trends in March and April.
Yes. I go step back and I come back to what I said during the presentation on slide 12. The organic growth, if we exclude Argentina, has been 3.7% in January, February. As we said, it has been 0.4% in March. If we exclude Argentina, the organic growth has been negative in March by 1.1%. 3.7% January, February, and 1.1% negative in March. Going forward, it's happened essentially in the second half of March in France and in LatAm, especially Brazil. Now, April, we're seeing all the countries being impacted at different levels, depending on their exposure to that product. However, the organic growth should be negative as well from a top-line perspective by double-digit numbers in April. That's the pace we are seeing today. Okay.
Now, you have a question about the fall through, the drop through. Clearly, when we see volume going up, we expect a 50% contribution because we do not expect to put fixed cost in front of that. On the other hand, when volume are going down, we are putting a lot of measures in place that should enable us to mitigate. No, we are not expecting a 50% negative fall through from a sales differential into EBITDA differential. It should be much lower than that. It will have an impact, of course, because we are a fixed cost business. We are working on supply costs, we're looking about flexibility of labor, we're looking about stopping furnaces, reducing the fixed cost base of the plants, of the lines.
There's a lot of initiatives that were taken to be able to flexibilize our fixed cost base and even our cost base generally speaking. Therefore, no, it will not be a 50% drop through, lower than that.
Okay. Thank you very much. Just one follow-up question, please, on raw materials. I know that you have very strict hedging policy, when should we expect some positive impact of the decline of raw material prices?
I take it, Michel. Raw material is different. Are you talking energy, raw material?
Sorry. My mistake. Energy cost.
Okay. Well, energy cost, to be totally transparent with you, we hedge 2020 based on 2019. Currently today, our hedge cost is higher than the spot. You know we have a policy for N plus one to be fully hedged, N plus two at 70%-50%, N plus three between 50% and 25%. Unfortunately, this year, we are almost locked with pricing that's higher than the spot price. The spot price on gas, for example, is a total nonsense, and it's driven as well by the fact that there is a very low level of activity. When are we going to benefit? Probably in a very limited impact. We have some because we kept some flexibility, a little bit, but very minor. No, we don't expect a positive impact this year.
We are losing an opportunity. We're losing an opportunity, but from a pure risk management, I think we are safer to hedge than not to hedge and be speculative. We are running our strategy. The objective is not to be at the best price ever, it's to have a good long-term view on our cost base.
Okay. Sure. Thank you very much.
You remember this policy on the hedging has enabled us to give the right targets for price increase to our sales force. This, as you've seen from Didier's presentation, has enabled us to have a positive spread. This is really key of our strategy. The three pillars of the strategy is growth, positive spread, and PAP. We've delivered on the three pillars in Q1.
Thank you.
Thank you, Charles, for that question. The next question will be coming from the line of Jean Belanger from Société Générale. Jean, you're now unmuted. You may now ask your question.
Yeah. Hi. Good evening, Michel. Good evening, Didier. I had a quick one on M&A. I know that, of course, this is not at the top of your agenda, but could you consider that the current situation could lead to some attractive opportunities in some countries in Latin America?
Well, thank you, Jean, for asking the question. As you know, M&A, although it was not the central theme of our equity story at IPO time, is something that we've always said that we will consider if it makes sense for the company, if it makes sense for our customers, for our employees, and for our shareholders. Last year, as you can imagine, we were very busy with the IPO, so that was not the focus of last year. This year, the start of the year has been quite disturbed by COVID-19. This big shock to the global economy might push some family-owned businesses or smaller businesses to consider partnering with larger and well-managed and very successful company like Verallia in the future. We are going to, more than ever, actively look for M&A whenever we see opportunities.
Despite the short-term turbulences in Latin America, but for those of us that have lived and worked in Latin America for many decades, that's part of the, I would say, relativity of the region that we have to accept. This is, as you remember, this is a good area to invest in. Of course, if we see opportunities there, we will look at them very seriously.
Okay. Thanks a lot, Michel.
Perfect. The next question comes from the line of Lars Kjellberg from Credit Suisse. Lars, you're now unmuted and may now ask your question.
Thank you. Couple of questions from me. I just wanted to better understand the industrial variance we are talking about, the EUR 5 million. What's in that number and how we should view that going forward? Also, of course, China is gradually starting to reopen. Are your customers and your business starting to see any light at the end of the tunnel for the spirits business, the export business, specifically to China? I may have missed this, but did you specifically talk about the first quarter volumes in Europe? The final point for me would be on the risk as opposed to pricing, given we now have quite a weak environment, energy is a big tailwind. As you start negotiations for next year's pricing and given your hedging policy, should we view that as a risk generally to pricing?
Some of your competitors may not have had the same pricing policies or hedging policies.
Okay. Thank you very much, Lars. I will take the question about China and pricing, and maybe I will let Didier answer the industrial variance and the first quarter volume, to remind you on the first quarter volume. Regarding China, as you know, we are not directly exposed to China or even Asia, but we are indirectly through our customers that are exporting into this region. Now, as you well know, the biggest impact for them has been the fact that COVID-19 started during the Chinese New Year, which is a very important time of the year for our customers sitting in China, and therefore, their business has suffered from that. It seems that they are resuming, according to what we read, they are resuming sales in this country as well as the rest of Asia.
Again, I don't think the Chinese will drink the spirit that they have not drunk during Chinese New Year. It's a progressive recovery, but it will not catch up the lost volume of the first quarter. Regarding pricing for next year, it's hard to say. There's still a lot of things that can happen between now and next year. Let me remind you that we have in Europe, Latin America has a complete different system where prices are negotiated on an ad hoc basis, which could be every day or every month, let's say, in Argentina, for example, or every quarter in Brazil or every month also in Chile. Latin America is a bit different. In Europe, prices are negotiated usually once a year. We have about 20% of our business in Europe, which is based on long-term contracts with price indexation formulas.
For 20% of the business, it's more or less covered by formulas. Whether it's up and down, the formulas will tell us what the new price will be next year. For 80% of the remaining business, it's annual negotiation, which usually takes place between November and February of the following year. We will see what energy costs are in November, December. We'll see what the capacities on the market are at that time. We'll see what our customers are willing at that time to do. It's very early to say what will be the pricing dynamics, if you want, on the markets. We will see in due time, around the end of the year. It's hard to project again.
Appreciate that.
Didier, you want to take about this also?
Yes. Industrial variances. The EUR 5 million, when I make my comments, I do, the EUR 5 million was made of three buckets. Bucket number one is, generally speaking, industrial variances, which encompasses two types of it. Number one is the fact that you are not performing at the expected level of performance and the standard price of your product is not reached, and the real cost is higher than the standard cost. You have material variances. On the top of that, we are performing on a very regular basis, and I think it's some good business, a review of our inventory aging, basically depreciating some inventories that are not either good from-- We have too long as a duration, or they are not at the right quality. That's the second bucket with the first one, and we said that's the day-to-day of the business.
The third bucket is really linked today to what we are seeing, given the confinement and the restriction to have the right level of people available online. Meaning what? Meaning that, if in a given plant, I produce 10% less with the same level of fixed costs, especially on labor cost, indirect labor, I have two options. I call that under activity. Given to the COVID and the rest here, either I put that with my inventory cost, which is I put that in balance sheet, which is not financial sound, or I take it as under activity in my P&L. That's what has happened in March, and what has happened essentially in France, because we have a level of absenteeism that were high. Therefore, lines running with a lower production, instead of charging all the fixed costs to the adequate production is a plant-by-plant type of approach.
Clearly, the plant is running normally. Instead of taking that cost within the cost of production going into the average cost of inventories, we have put that in the P&L. That's probably something that can be discussed in the future, whether it's a non-recurring event or it's a recurring event. At March, we consider that as non-significant, we put that here as under activity in natural variances impacting the PAP.
Makes sense. Thank you.
You had a question on Europe activity. We don't give the breakdown. What I can tell you is that, as we said, Northern Europe was showing a positive organic growth. Italy and Spain altogether, that was partly offset by France.
Okay. Thank you.
Thank you, Lars, for that question. The next question comes from the line of James Rose from Barclays. James, you are now unmuted. You may now ask your question.
Hi, evening everyone. Could I talk about some trends in March and April, and could you talk about how the demand evolved in the off-trade part? Then maybe give us an idea of how demand has evolved by category, by differences between wine, beer, perhaps there's some offsets from food and water jars as well, by the sounds of it. Then lastly, on working capital, because you've got such a fragmented customer base of many smaller producers, have you got any concerns about receivables in the near term, or is there any help you can provide to those customers? Thanks.
Okay, James. Thank you very much for your question. I will answer the first question regarding the trend and a bit more, I would say, color on the business. I will let Didier talk about the working cap and what we are doing to protect, of course, our receivables and our cash generation. Regarding the trends in March and April, basically the trend that we started to see at the end of March as a strengthen was worsened, I don't know how to say it, in April with the same categories as in March that were doing very well, like jars for food, like beer to some extent in many countries. On the opposite, the categories that are doing the worst are clearly the spirits and the sparkling wine that are also linked to mostly HoReCa channel.
When we talk about the split between on-trade and off-trade, this is our honest assumption, and so it's a kind of estimate from our side because, of course, it's more the business of our customers. We estimate there is quite a significant difference between one country and the other. The country that we see with the highest share of on-trade business, with around 45% on-trade versus 55% off-trade, are countries like Iberia or Brazil or Latin America, more generally speaking, where on the opposite of the spectrum, you see countries in Northeast Europe with a much lower share of on-trade business, which we estimate about 20% only. When you talk about France and Italy, they are more in the vicinity of 35%-40%. The on-trade, off-trade business changes quite a lot by country.
Altogether, when we average it out, it's about one-third for the Verallia Group on-trade and two-third off-trade. I repeat, bars, for example, are most exclusively off-trade in the retail shops, whereas spirits are mostly on-trade or a big share of it is on-trade. That's what I can say on the business side. Maybe Didier, you want to comment on the customer-
On the receivable? Yes, on the receivable aspect. Clearly, as you say, we have a very diversified customer base. A big chunk of it was under the off-balance sheet or non-recourse factoring, meaning this is depending as well a lot on the risk insurance companies. Those ones, honestly, they are not playing their role. They are reducing some coverage. Clearly, it's something we're monitoring on a daily basis because for two reasons. Number one, we are not a bank. Number two, these customers we want to protect as well, but they have to make the effort, especially in a country like France, where they can have access to a state-sponsored type of loan. As of today, the overdues at the end of Q1 are very similar to the end of Q1 2019.
I think the worst is in front of us because, as we said, the drop in sales is coming in front of us. We need to be very careful. We are monitoring that. We have taken a very close look through the commercial people who are given tools to support, to anticipate going customer by customer. The only thing is from a pure number, a pure million standpoint, the overdues are the same as last year, same period, which is not satisfactory because really, clearly, we want it to go down in a normal environment. Clearly, it's a point of attention because it can derive, and you know what we call. We call the working capital the silent killer. You don't see it, you don't feel it, but at the end of the day, you don't get the money.
Okay. Thanks very much, Didier.
Thank you, James, for that question. The next question comes from the line of Markus Remis from RCB. Markus, you're now unmuted. You may now ask your question.
Good evening, gents. Two left from my side. Firstly, relating to the mix, and especially asking about the off-trade channels. To which extent are you concerned that we will see a deterioration of the mix of people opting for less premium, be it wine or spirits, you name it. Secondly, if you could clarify whether you have applied for any state aid measures, some sort of subsidies, moratoria to taxes in any of the countries you're operating in.
Well, regarding the mix, the biggest mix impact will be between categories rather than within categories, I believe. The mix within categories can happen, but I'm not sure how big it will be. The biggest impact will be probably the mix between categories. The fact that spirits are down, usually spirits and champagne have, for us, higher margins, and for our customers too, by the way, higher margins than, for example, beer segment. The negative mix that we could probably face, and it's too early to say, would probably come from the segment mix rather than the channel mix, if you want. Regarding the application for the state, maybe, Didier Fontaine, you want to mention what we've done.
As much as possible, what we've done, especially in France, we've used all the holidays and bank hours that people had, first of all, to adjust for the lower level of activity. Secondly, we have not applied for any state-supported loan or state-sponsored or guaranteed loan, probably as the companies at home. Usually, the only thing that we've used is partial and temporary layoffs when we had to adjust for a lower level of activity in some plants. That's basically what we've been doing. In the other countries, we've not had to ask for special support from the state either.
To add to Michel's point, that's the reason why the drop-through will not be 50% as well.
Right. Maybe one more on the dividend. The option to get new shares, that's essentially a scrip dividend. How should we think about the conversion price? Is that fixed in advance, or when would that be stipulated, how much new shares I get for the EUR 0.85?
This will be communicated very soon to the market. It's a very usual practice based on the current practice in this kind of share-based payments for dividends. We will communicate to the market the details of the way the share dividend will be calculated, knowing that you have plenty of time, because, I remind you, the shareholder general assembly will take place only on June 10th. We'll communicate probably next week about it. At the same time, we make public our resolutions for the board, for the general assembly, sorry.
Okay. All right. Thank you.
I think we have a written question, from Rosanna Burcheri, from Artemis. I will read it for you so that you get all the question together. We have 80% of the contract are volume-based on annual basis. Could there be a possibility of no volume discount at your end as volume targets will not be reached? The answer is clearly yes. We have a rebate system, which in many cases is volume-based, and therefore if volume, for some reasons is not at the expected level, the rebate might not be paid. Of course, this will be a negotiation at the end of the year, customer by customer. The answer is yes, there will be a reduction of rebate at the end of the year if the volumes are not met by our customers. Do we have another question, or are we
There are no further questions on the phone line, Michel. Sorry.
Okay. No worries. Thank you all for attending this long discussion and presentation. I much appreciate your time and your interest in Verallia. Again, thank you very much for following our performance, and I wish you all to stay in good health, in the coming weeks and months, and years to come. Have a good evening, all. Thank you very much.
Thank you very much.
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