Good morning, everyone. Thank you very much for attending this 2019 financial results of Verallia. This presentation will be recorded and will be audiocasted, if some people want to hear them later. I will share this presentation with Didier Fontaine, the Group CFO, and I'm Michel Giannuzzi, the Group CEO and Chairman of the Board. We will start with some key financial highlights and key initiatives during the last quarter of the year. We'll move to the financial sections with the results presented by Didier, and I will make a conclusion and outlook on 2020 financials outlook. Just as a reminder, first of all, Verallia, as you all know, is the leading glass packaging company in Europe, and Europe represents about 90% of our sales.
In Europe, our organization is divided in two segments, South and West Europe, which is made of France, Spain, Portugal, and Italy. We have North and East Europe, which is made of Germany, Poland, Ukraine, and Russia. We are number two in Latin America, which makes about 10% of our sales. Latin America is made of four countries, Brazil, Chile, and Argentina. We are the third largest player in the glass packaging industry. The donut about the end markets that we serve has not evolved significantly since the IPO time. You see that we are still strongly exposed to the wine segments with wine and spirits all together representing 58% of our sales. We are also present in the food packaging and beer and soft drinks make the rest of the sales.
We have 32 glass-making factories, 57 furnaces, eight colored treatment centers in the group, and we employ around 10,000 employees in 11 different countries. This is just a recap or reminder of Verallia group profile. If we move now to the financial results and the key figures for 2019, the sales were at EUR 2,586,000,000, which is a 9.1% organic growth. You know that Argentina is in a hyperinflation country, and even if we exclude Argentina, that is boosting the organic growth, the organic growth of the group, excluding Argentina, is still 7.2%, which is a fair growth, we believe. The adjusted EBITDA at the end of last year was EUR 650 million, which is a 23.8% margin, up 130 basis points compared to the prior year, 2018. The net income has reached EUR 125 million. Again, this is more than double of the year before.
We had EUR 48 million of net income in 2018. Despite some one-off costs related to the IPO that Didier will cover, w e have a very strong cash conversion. I remind you the cash conversion is EBITDA minus CapEx divided by EBITDA at 59%, which is exactly the same as the year before, despite the two strategic investments, or three strategic investments that we had last year, Jacutinga, a new project in Brazil, and the start of the two new furnaces in Europe, in Italy and Spain. The leverage at the end of the year, thanks to this very strong cash flow generation, was at 2.6x EBITDA compared to 3.1x EBITDA the year before. Strong deleveraging during the year as anticipated.
As communicated at the IPO time, we will propose to the shareholders' general assembly to pay a dividend of EUR 0.85 per share, which in totals makes EUR 100 million of net cash out for dividend payments. All these financial results are fully in line with the revised guidance that we provided after the Q3 results in November. As you see on the bottom of this page, I'll give you more color on the outlook for 2020, despite some headwinds that we had since the IPO, we are still confident about the 2020 outlook. Moving to also the change of governance linked to the IPO. This is a refresher of the fact that, first of all, just two months after the IPO, we were joining the SBF 120 index. We are very proud of that.
It was very fast and beyond our expectation, if I want to say, and this is, of course, enhancing the visibility of the company for the financial investors. The board of directors has changed at IPO times. You see now that Apollo has three seats. Even though we still own 55.3% of the shares of the company, they have reduced their number of board seats to three members now with, of course, a strong rise of the number of independent board members. We now have five independent board members that have joined just after the IPO, at IPO time. BPI is still represented with one board seat. Very recently, actually this week, we have appointed the two employee representatives at the board. One, Dieter Müller, is coming from the European Works Council, has been designated by the European Works Council, he's German.
The other one, Sylvain Artigau, has been designated by the French organizations. You see that the three audit committees are all chaired, by the way, by ladies that are independent ladies. We fully respect the Afep-MEDEF Code by having a majority of independent board members, especially at the audit committee and the nomination and remuneration committees. We've launched, at IPO times, a sustainable development committee just to highlight how important is sustainability in our company, and it's really taken at the highest level of governance in the company. Another interesting thing which happened post-IPO is the change of the shareholders structure that was controlling the company at the time of IPO between Apollo and BPI. They were, if you remember, in the same holding company.
Post IPO, we decided to split and now Bpifrance owns the shares of Verallia directly, no longer through the holding company. Apollo is the same, owns the share of Verallia directly through Horizon Investment Holdings company that has all the shares of Verallia. You see that the public float is today 21% of the company with still the strong presence of our Brazilian investor, BWSA, that also joined the board with one board seat. In the last quarter, we had the opportunity to inaugurate a reconstructed furnace in Burgos, in Spain. That was a major investment. Not only we rebuilt this furnace, but we also expanded the size of this furnace. This is part of the marginal CapEx that are recurring CapEx, but are enabling us to increase our capacity. This is one of the largest furnaces in Europe, actually.
The capacity increase was up by 7%, from 560 million bottles per year to 600 million bottles per year. This plant is very well located in La Mancha region, which is a Spanish main wine-producing region. Also we will continue to invest in this site with an additional EUR 10 million of investment this year to renovate the second furnace on the site. Last year, part of our commitment to sustainable development and to the circular economy, as you know, we are investing regularly in improving the cullet treatment facility. The cullet is the used glass that we collect post consumer use. We have, with a partner, set up a joint venture near Madrid, which is Calcín Ibérico, where we have 49%, our partner has 51%. This plant is a brand new plant, state of the art, to treat cullet.
Of course, this cullet will be then sent to our Azuqueca factory or Burgos factory in Spain in order to be able to recycle the glass that we collect on the market. Altogether, just for you know, we have invested in the last two years about EUR 12.5 million of CapEx in cullet facilities. Not just this one, but also upgrading and expanding the capacity of our cullet plants in France and Italy. This being said, now I will hand over the microphone to Didier, who will go through the financial results.
Thank you, Michel. Good morning to everyone. My presentation will be divided in three parts. First, revenue, consolidated and by business segment, then profitability, and as cash is king, as said the bankers, we're going to look at the cash performance. Again, just to repeat what Michel said, very strong reported revenue, 7% increase. Once again, hit a little bit by forex. We have been hit by forex, especially in Latin America, and in Argentina especially, offset partly by Eastern Europe, where the hryvnia and the ruble has appreciated. Overall, if you remove the forex and a little bit of perimeter impact, for those who are not aware, we sold or we disposed of our facility in Algeria in May 2018, so it's a minor change. If we exclude that, 9.1% organic growth.
If we exclude Argentina, because inflation in Argentina was 54% last year, it is still a very robust 7.2% organic, excluding Argentina, organic growth. This is again split on our three pillars. You are going to see those three pillars in the profitability slides. Number one is activity. Volumes are growing. Second one is a blend of price increases, again, mainly to offset cost base increase, energy and raw material. The third point is value-added pricing, especially on the mix and especially in our SWE business segment. So at the end of the day, I do not think you have a lot of industry for profile with kind of organic growth. If we split by business segment, let us start by SWE. What Michel said, this is comprising of Portugal, Spain, France, and Italy, 6.4 % reported, 6.5% reported.
By the way, when we are talking about 7.2% or 9% organic, there's not a single business segment which is below 6.5%. So 6.5% in SWE. All across the board, there's not one country which is worse than the other or less good than the other at this stage. This is addressing all product segments. If you want to get detail in terms of premium in France, a very strong year on still wine and champagne. Italy, all the businesses, all the products have been positively impacted, and in Spain is more around beers, spirits, and jars. Again, volume, price, value-added pricing. This is all across the board for the three segments. Now when you look at NEE, NEE very strong, 9%. If you remove the depreciation of the hryvnia and the ruble is still a very strong 7.6%. Here, two different profiles.
The market in Germany is very strong and we capture that. We are very strong in beer and wine. The good news is, again, in Russia, where we stand, because Russia is a big country, where we stand the market is booming and we have improved significantly operations so that we can capture this growth. The same split still, volume, value-added pricing, and price increases. They are the same three pillars we have to support the top line. Latin America is always, well, carnival is next week in Brazil, but it's still carnival all year long. Reported revenue 7.5%. I said, 54% inflation. The devaluation, if you remind last year, we closed December 2018 with the peso at 43 , we closed December 2019 with the peso at 67.
If you remove that forex, which is around EUR 54 million hit on the top line, you reach a 29.4% increase. If you remove Argentina, because Argentina is a bit outside the boundaries, you still have for the rest of LATAM an increase of 12.6%, which is still very significant. We're benefiting from what? We're benefiting from very good positioning in Argentina because despite the difficulties that the country is facing, the operations are doing very well from a business perspective, from a commercial perspective, from an operational perspective. Brazil is very strong because the market is pulling a lot and you know we have been launching our new plant in H1, Jacutinga and Minas Gerais on time, on course, and the ramp-up was even more efficient than expected.
We have a lot of good news in those countries and especially you're going to see that when you look at the profit. We have been able in Argentina to pass more in prices than the inflation. We covered the revenue. Let's move now to the adjusted EBITDA. As Michel said, we deliver internally exactly what we wanted to deliver. The operations are delivering exactly what we wanted them to deliver. First of all, you have a reported growth in EBITDA of 13.2%. Again, I'm insisting on the three pillars that have been discussed during the IPO that have been delivering. Number one is operating leverage, volume, there. Number two is positive spread, there. Number three is productivity, there. This is, we started in 2018, we confirm in 2019, this is what you're going to see in the future.
When you look at the percentage, if you remove as well the exchange rate, again, massively LATAM, the growth is not anymore 13.2%, it is 16%. The margin, we're moving from EUR 543 million to EUR 615 million, the margin is moving from 22.5% to 23.8%. Just a number, at the end of 2016, we were at 20.4%, 20.3%. Again, when you look at the three pillars, activity, the number is only EUR 2 million. Why? Simply because in terms of sales, we increased a lot. However, the market was booming. We have to destock massively to address the market. If you remember what happened last year at the end of 2018, at the end of 2018, we anticipated a little bit that the market was going to pull very strong in 2019. We increased inventories. Inventories in 2018 increased by 7%.
We ended the year with a lot of inventories. Nevertheless, not enough to address the growth of the market, and we have to destock 5% in 2019. All across the board between 2018 and 2019, 12% reduction inventories. In our business which is heavy in fixed cost, this is a massive number, an absorption of fixed cost. The top line, the growth from volume is partly offset by the destocking. The fundamentals of the market are there. The market is still pulling significantly. Price mix and cost inflation. You need to gather the two together. You see the cost inflation has been pretty substantial. We know raw material, we know energy, especially in the first half of the year. Again, we have been able to address that and we are generating a positive spread via either price increases, value-added pricing, and a positive mix.
One of the backbone of the company is our capability to reduce our cost base via productivity, PAP. We said as a target, 2% of cash production cost, 2% of EUR 1.8 billion is EUR 36 million. We deliver net EUR 41 million. Why net? Of course, some countries can face some difficulties. We're looking at net. We want to have a net hitting the bottom line. The growth has been EUR 43 million. Some industrial variances of - EUR 3 million give a net of EUR 41 million. The EUR 41 million is as well all across the board. The strategy is not to have some at 1.5%, some at 2%. It's all across the board, want a minimum by plant of 2%. The good, the worse, 2% minimum. Exactly what we deliver. Exchange rate, as I mentioned it to you, essentially LATAM and essentially Argentina.
On the other, we should have expected a positive number because you have the impact of the IFRS 16. However, number one, we have some positive happenings in 2018, one-shot, such as subsidiary grants refunds that had not happened in 2019, so that was a one-shot, so you're missing that. The second one is that the life and the daily life of an industrial company, we have to do some heavy recurring maintenance, not extending the lifetime of the furnace, but just keeping the furnace in good shape. This is going there, so this is expense. At the end of the day, the takeaway is the three pillars have been working. That was our message during the IPO. They've been working in 2018, they've been working in 2019, and they'll be working going forward. If we split by region again.
SWE, 15.4% increase from EUR 357 million to EUR 412 million. Again, the three spread, the three pillars work perfectly well. PAP spread positive and volume. This has been efficient all across the board again. You have a positive impact of IFRS 16 and you're moving to almost 100 basis points. If you remove the IFRS 16, you will be moving from 21.6% last year to 22.5%. Still almost 100 basis points increase, again, thanks to the three pillars. Now, if you look at NEE, 13.4% increase reported, 11.6% if you remove forex, from EUR 110 million to EUR 125 million. Performance in Germany, performance in Poland, performance in Ukraine, performance in Russia, this is , you can see those numbers are much higher than the reported or the organic growth in revenue everywhere. Each business segment has performed in EBITDA higher than its growth in sales organically.
Again, 9% growth in EBITDA, sorry, in sales, 13.4% growth in EBITDA. Brazil, let's spend some time on it. Brazil reported figures only 2.8%, sorry, LATAM , 2.8% increase. If you remove the forex, you're reaching 24.8% increase, reaching EUR 96 million compared to EUR 77 million last year. Maybe you can focus on a little bit of disappointment on the margin, 31.2% last year, 29.8% this year. It's just a mechanic effect of the dilutive effect of price increases. When you're increasing massively pricing to offset inflation, one-to-one is dilutive at bottom line percentage-wise. Clearly, it's accretive in EBITDA because spread was positive in Argentina, which is a very good sign that the business is sound, but it's dilutive in presentation. If you look at the others, Brazil is doing extremely well.
The market is very strong, and our new plants and the current plants are performing very well. Now let's see how those impact cash. To start by cash, we start by the big cash consumer, which is CapEx. CapEx is very simple, it's about process and discipline. First, we establish very clear and simple KPIs on what are the financial KPIs that trigger investment. You can see on the left-hand side, we spent last year, we booked last year EUR 225 million of CapEx. This year we booked EUR 253 million, which is a 12% increase, driven mainly by the strategic CapEx. Last year, the EUR 26 million was Jacutinga, and the EUR 46 million this year is essentially comprising of Villa Poma and Azuqueca.
You know that we are launching two brownfield that will come live end of the first half of the year with a full impact in term of top line in the second half. That explain the growth. You see that in term of recurring, we are still at 8%, and that's what is going to happen forward. The good news is in the EUR 207 million, there is a new furnace in Chile. You know we have been revamping the furnace in Chile, which by the way, have been heating up yesterday, which is very good news because again, in a country where it's difficult, this is bringing additional capacity for the group at a very competitive price. Process and discipline, that's triggered the CapEx spendings. You're going to see, I'm going to talk about cash on CapEx, and you see that might have an impact.
Now, let's look at the operating cash flow. Very strong, EUR 108 million above last year. If you look, this is significantly higher than EBITDA. You know you have the financial paradigm that say working capital is increasing with the activity. This is proven to be wrong again. Honestly, in my life, if you want to work on working capital, you can work on working capital. The financial paradigm is more a matter of weakness than something else. Okay. Despite total CapEx, operating cash flow is much stronger. Why? Because we have been able to work and improve the working capital on two aspects. Aspect number one, inventories. We have been reducing the inventories, therefore the need for working capital by almost EUR 20 million this year. On the top of that, I was mentioning cash on CapEx.
The cash out on CapEx, despite having booked more CapEx this year than last year, booked has been the same. Meaning what? Meaning that we have been able to improve the terms and conditions on CapEx payments. Point number two, we have been able to plan better the CapEx. The benefit of that is that we have been a positive variance on working capital on CapEx. Meaning as well that next year, don't expect such a good performance because next year, with the two big furnaces starting in the middle of the year, I will not have this capability to extend the payment terms and the conditions. The total CapEx booked will be higher, and the cash cost on CapEx will be significantly higher. At the end of the day, very strong cash conversion, 59%, as Michel said, despite higher book CapEx.
Adjusting EBITDA, fueling the operating cash flow, the positive change in working capital. Good discipline everywhere. Again, confirming that this company can generate a lot of cash despite investing heavily. The consequence of EBITDA, the consequence of operating cash flow show you that, number one, we're reaching a debt of EUR 1,591,000,000, comprising, which is an improvement of EUR 118 million compared to last year. If you add IFRS 16, because IFRS 16 is a EUR 53 million notional debt, you are EUR 171 million like-for-like debt reduction. We have been consistently deleveraging half a turn since 2017. We continue to deleverage half a turn. Next year, it will be a bit lower because we are going to pay dividend, but the trend remain the same.
Two seconds on our capital structure, because together with the IPO, of course, we have been revisiting our capital structure and upgrading it. In parallel, if you remember that we have been able to be upgraded by Standard & Poor's and Moody's, respectively, BB- and Ba3. We have been using that or using the IPO process to revamp our capital structure. Number one, by terminating Term Loan B and Term Loan C, changing that with unsecured loans, longer term, five years bullet, 2024, and cheaper, in average, 100 basis points cheaper. We are now using much more commercial paper than we have been using. Last year, you see this year we're using EUR 188 million. Last year, same period, we were EUR 80 million. This is extremely cheap financing. I think the market is very open to that.
At the end of the day, the total cost of debt for the company going forward is less than 2%. The liquidity is, of course, remaining very strong because our revolving credit facility at EUR 500 million is not drawn. Going forward, that can be helpful. Okay, that was all for me, and I leave it back to Michel.
Thank you, Didier. Now it's time to conclude. First of all, to wrap up on and comment or add comments to Didier's presentation. You've seen these results have been fully in line with what we said at the time of the announcement of the third quarter results. It's illustrating, I think the success of our strategy, which I remind you is based on four pillars. First of all, disciplined growth, means growth that is profitable and sustainable. Secondly, a lot of our improvements come from our own self-helped operational excellence initiatives. Thirdly, we invest in this business. We believe in this business, and despite the strong investments that we make in this business, because the investments have been wise and very well targeted, we enjoy strong cash flow generation and strong cash flow conversion. Last but not least, it's all about company culture.
This is a result of the 10,000 employees of Verallia that are getting more and more everyday entrepreneurial, owning this company, and wanting to lead the industry with best-in-class performance in this company. This, in a financial way, is translated in the three pillars that Didier keeps repeating. First one is we have the positive contribution of volume growth with the leverage impact of the volume. Secondly, the spread is positive, the inflation spread is positive, and we're going to be positive. Thirdly, I repeat, the self-help initiatives on productivity are paying off every year. This model is not going to change. It's a continuation of what we've done, and we're going to do more and better every year.
Before I give you an outlook of 2020, let's first of all say that, since the IPO, although we are not present in China or in Asia, the major event has been the coronavirus impact. That is not impacting us or our suppliers directly, but some of our customers are somehow, to some extent, impacted by this. We are not exposed as such directly to this issue, but indirectly through some of our customers. Despite this comment, I would like to say that we are, of course, extending our sympathy to all the people and the families that are facing tough conditions in the present times in this area. Even though we are not directly impacted, we are supporting them from our greatest sympathy.
This being said, despite this kind of adverse or headwind that we see from some of our customers, we maintain our guidance that we gave you six months ago now, which is to look for an organic growth between 3% and 5% this year. It's in line with our long-term outlook. Despite also the fact that the inflation cost will be much more moderate this year than it used to be the year before, therefore, the price increases that we have to pass to our customers to end up with a positive spread and to pass through the inflation, of course, to our customers, will be much lower than what you've seen before in the year's presentation. Despite this, I would say lower price increases, this probably lower growth also due to this, we believe we will grow organically between 3% and 5% this year.
With probably, as you know, the benefits of the new capacity being installed in the middle of the year in Spain and Italy, that should enable us to capture some of the growth. We are going to deliver an EBITDA above EUR 650 million, adjusted EBITDA above EUR 650 million, in 2020. This is our forecast, of course, and we will clearly, as Didier explained, control the capital investment. The recurring investments will be at 8% of sales and, of course, excluding the right of use, which is the application of the IFRS 16. The total CapEx that includes the two strategic projects that we mentioned, Villa Poma and Azuqueca in Spain and Italy, are going to bring the total CapEx amount to EUR 270 million compared to EUR 253 million this year.
As Didier mentioned, the cash outflow linked to this strategic CapEx will be significantly more than last year because those CapEx will be completed. Those two strategic projects will be completed in the middle of the year. Despite all this, we believe we continue to generate a lot of cash, and we'll continue to leverage the company by around 0.4x , including dividend payments or post-dividend payments, to be clear, which means that we will probably end up the year with a leverage around 2.2x adjusted EBITDA. This is our outlook, which I think is confirming the confidence we have in this company. Now that we've finished our presentation, we would like to maybe to take your questions and answer them as well.
We'll start with the questions from the room, and then after, since we are on an audio cast, we will get the questions from the phone.
If you'd like to ask a question, please press star one now.
There's a microphone that will be circulating, so don't hesitate to use it.
Thank you. This is Paco Ruiz from Exane. Thank you for the presentation and congratulations for the results. I have three questions to make. First one is, looking at the outlook that you put here, if we assume that the PAP will continue in the same trend of a 2% of the cash cost, this will significantly mean EUR 35 million. This is merely practically reaching this EUR 650 million on an EBITDA. You commented that the price will not be as big as in 2019, probably you still expect a positive price impact and operating leverage should recover. Is this a very conservative thing, or I'm missing something on this calculation?
This is a floor, as you understood, because you said it will be greater than EUR 650 million. It's just the beginning of the year. We have no visibility on the exchange rate, for example. Just talking about the exchange rate, you've seen that in the last two years, we've been strongly impacted by exchange rate, which have had a negative impact on our results. Your PAP calculation is right. The spread that we are aiming at, we've said it at the time of the IPO, will be slightly positive. We are not looking for huge spread, positive spread, I would say. If you take just a euro plus spread and EUR 35 million, you are at EUR 650, you are right. Now, you know our life, we cannot forecast what the exchange rate will be, and that's why it's a floor.
There just EUR 15 million forecast last year, I mean 2019, EUR 32 million the year before. Just cautious about it. As Michel said, it's the beginning of the year. We're looking at it favorably compared to this year.
The second question is, if you could be a little bit more precise on what's going to be the impact of CapEx or cash CapEx for this year, and also in terms of taxes, I mean the cash taxes. We haven't seen a much difference between the P&L and the cash flow in 2019, where during the IPO you see that there are going to be some fiscal credits.
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Okay. Merci. Okay. If you look at cash CapEx over the past two years, and you play with the book CapEx, more or less the payables. You spend on average EUR 230 million in 2018 and 2019. We are going to spend probably around EUR 280 million, EUR 285 million, EUR 290 million, depending on the year, but in 2020. Massively more, essentially because, as Michel said, the largest investment will be completed in the middle of the year. The largest investment being essentially Villa Poma and Azuqueca brownfield projects. As regard to cash taxes, you see that EUR 59 million this year versus EUR 39 million, we expect probably to go around EUR 80 million next year.
The last question is regarding the Jacutinga ramp-up. You started mid- 2019. How is it evolving and if you have recovered part of the lost ground that you have at the beginning of the year when you publish first half results?
Well, on Jacutinga, as Didier mentioned, we were really exactly where we wanted to be in terms of CapEx spending. We started exactly on the date that we planned to start. Actually the ramp-up has been impressive, very very fast. Much faster than one would have expected. It's been, frankly speaking, one of the successes of last year. You know that this Jacutinga project was also due to the relocation and the closure of our downtown facility in São Paulo. By doing so, we've increased a little bit our capacity in Brazil. Given the fact that the market is very dynamic, we're going to enjoy some better growth this year in 2020 than we had last year.
By the way, one of the things I would like to draw your attention to, when you look at the big swing of inventory between end of 2018 and 2019, one of the reasons why we built inventory in 2018 was also to prepare the closure of Fabe, the downtown São Paulo facility, and transfer the business. That was part of the ramp-up of inventory in 2018, which we don't expect to see such swings inventory going forward.
Thank you.
Yes.
I have two or three questions as well. It's Fraser Donlon from Berenberg. When you look at your core Europe exposure, how satisfied are you with the margin improvement you've seen this year, kind of ex- IFRS 16? Because obviously it's been a great market, 6.5%-7.5% organic growth in North and South Western Europe. Is the margin improvement you're seeing kind of in line with what you expected? Or could you have done more? That would be my first question.
Well, on this one, as Didier mentioned, we are very pleased that it's not one region on one segment of the market that drove this improvement. It was really a general improvement across the board in all countries, all segments of the market. Both Europe, by the way, and Latin America. Latin America, even in Argentina, which as you know, is a difficult country right now. We are doing extremely well in our business. The only impact is the exchange rate when you convert the Argentinian peso that has strongly devalued into euros. In local currencies, we are doing extremely well in Argentina. To come to your point, we are very pleased and very satisfied that all businesses in Europe and in South America have improved last year. All the segments contributed to this improvement.
On the other side, you know very well that our midterm guidance is we want to exceed 25% of EBITDA margin. That says that we still have some room for improvements that we have well identified, especially thanks to the productivity action plans or the Performance Action Plans that we are every year deploying throughout the company.
On the organic growth side, when you look at the 3%- 5% over the next two years, is that at constant currency?
Yes.
What trajectory do you see? A lot of your peers are talking about in Europe, maybe 1%-1.5% price increases next year. What kind of assumptions are you making there when you talk about the 3%-5% and kind of roughly do you expect to be at the higher or lower end? I know you've got new volumes coming to market.
Well, coming down from 7.2%, excluding Argentina last year, organic growth, this is part of Productivity Action Plan, by the way, shutting down lights. Contribution to saving the environment and saving the planet. You take it the way you want. Usually, it goes together, by the way, huh? I'm sure they will restore the lighting very soon. Now, to take your point, sorry, what was the question?
The question was about the-
I got lost.
The 3%-5% organic growth versus the pricing.
The 3.5% is much lower than what we had last year. We grew last year 7.2% excluding Argentina. By itself, it's a more reasonable growth rate going forward, which will be supported by new capacity. As you know, we were sold out. The fact that we bring new capacity, either through debottlenecking or a small marginal furnace expansion, as you've seen from the Burgos case I presented this morning. The two new projects in Villa Poma and Azuqueca, in Spain and Italy, are going to help us support this growth. Now, the market growth will be probably around 2%. That's what we estimate. You can expect the price increases across the board to be in the vicinity between 1% and 2% in Europe. Now, in South America, it's quite different. Inflation is much higher.
In Europe, that's more or less the ballpark range that you have. It varies from one country to the other, but that's more or less. It's much less than last year, to put it this way.
Final one from me. In terms of the dynamics of margin in each region, are you still, I would say, more excited or interested by Southern Western Europe in terms of what really drives the improvement midterm, i.e., you kind of see more upside there? Obviously, your mix there is very favorable too, with the wines and so on.
Yeah, the margin improvements potential is more or less the same everywhere. I mean, the beauty of the performance action plans is that you work on your costs. As I explained at the IPO time, when we have 32 glass-making factories, there's always a number one and number 32. You could say, okay, the number 32 has an easier job because he can catch up, or he should catch up, towards the best-in-class, which is true from that point of view. On the other hand, the reason why the number one is number one is because usually you have better teams, more knowledge, more so on. We can tackle much more sophisticated or more complex issues than the last factories cannot tackle. That's why Didier explained that every factory has a goal to improve its cash cost by at least 2%. Every.
Whether you are number one or number 32, you have the same goal. I repeat, the best-in-class have more talent, more know-how, and better skills to go further than the laggards that will probably benefit from benchmarking the others.
Sorry. Very final one now. Just, obviously, you're delivering quite nicely 2x-3x target capital structure. How do you view capital allocation? There isn't really much to acquire in Europe, but just more broadly in the midterm, is it dividends, or do you see opportunity for M&A?
Well, yes. On this one, we have not changed our view on this subject since the IPO time. We will look for acquisitions. Not just for the sake of acquisitions, by the way. We're being very disciplined on what we're looking at. I mean, just take an example. It's public information. One of our competitor is selling its operations in Australia, New Zealand. Well, we didn't even look at it because, for us, we don't think it's going to create synergies and help grow our business in a sustainable and durable way. It's not because it's a bad business at all, but just that we don't see the synergies that we could get from such an acquisition. We are not going to chase any acquisition. We have strong views on the companies we like to acquire. They are not necessarily for sale, as you know.
If there are opportunities that arise, we'll be certainly looking at them. If we don't find a good use of cash, we said very clearly that we target to leverage the company between 2x and 3x . If we go below 2x , we'll either buy back shares or pay special dividends or increase our dividend policy. This is not for this year, probably, at least not for the time being, the question.
Thank you.
For questions via audio line, please press star one.
Hello. Charles Scotti, Kepler Cheuvreux. Two questions. The first one on U.S. tariff. Have you seen any impact of U.S. tariff on the European product? Have you seen any pre-buy effect in 2019? My second question on the capacity extension. How much they will contribute to your 3%-5% organic sales growth in 2020? Is it fair to assume a 1% boost on a full year basis in 2020? Thank you.
Okay. On the U.S. tariff, as everybody remembers, this happened in the middle of our roadshow last year. This was the news of the roadshow for us, which was completely unexpected, as you can imagine. It's way too early to really understand what has been the impact. The reason being that we know some of our customers had anticipated, to some extent, this tariff impact, so build up some inventory. On the other side, we know for sure that, for example, the French wine exporters have been quite strongly penalized, at least for the bulk of the market. We know that on the other side, the premium wines have been doing very well last year. You know that we are quite strong in the premium segments rather than the bulk of the market. It has an impact.
It doesn't have, yet, a huge impact on our customers, but it's probably a bit early to say, given the changes in inventories and the supply chain between us and the final customer. As I mentioned during the IPO times, for the premium products, consumers will continue to buy them even if there's a price increase due to tariffs. For more sensitive segments or more sensitive products on the market, on the price side, there might be some volume impact. Just one thing to remember, on the other side, remember that excluded from the tariffs in France, the champagne and cognac, so we are not impacted on the champagne and spirit side in France. I excluded from the tariffs the Italian wines.
It's a bit complicated to follow, but the fact that we are strong in Italy and the fact that Italian exporters to the U.S. are going to benefit from less exports from France, means that at the Verallia level, we might have also some shifts from one country to the other, without necessarily feeling the full impact of the tariffs at a group level.
Yes, regarding the 3%-5%, you have a couple of buckets. Bucket number one is clearly the new furnaces. I would name basically Jacutinga full-year impact because you said it was not a full-year impact. Number two, the furnace in Chile, which has been heating up yesterday and will generate more growth in the coming nine months. The two brownfield, which are Azuqueca and Villa Poma. That's the first bucket. The second bucket, clearly is indirectly through the PAP, because we are improving yield, we are improving operation efficiency. Minimum you are expecting from that, I would say, really minimum is a 1% capacity increase per year. That's what you're expecting in minimum. That's what we have been delivering. CapEx free. Then you have the normal, what you see in the recurring, new equipment, new IS machines, triple gob, dual infrastructure, even more.
That's the three buckets you're seeing. One is investment, second one is efficiency, third one is greenfield/brownfield.
Thank you. Just one quick follow-up question on cullets. Can you remind us the share of cullets in your total raw materials, and how far can you still go, and what could be the benefits on your raw material cost?
Just a simple number. We are spending raw material around EUR 400 million. Half of that is cullet. Half of that cullet that we are using is clean and processed by us. It give us a little bit of leverage on improvement in trying to get the thinner and thinner parts. Four years, three years ago, we were stuck at 4 mm. Today, we are using less sand, we're down to 800 microns. Yes, we want to develop after one of the really better than users. We are treating more than users after the issue is probably the collection at European level.
The issue is that in Europe, we collect, on average, the industry collects 76% of the used glass. The European Federation, which by the way I am sharing, I set up a target of collecting 90%, 90, by 2030. In every country, we are working very hard with national associations, with the brands, with the trade to increase the capability of collecting glass, knowing that the glass makers, the glass packaging makers, are willing and able to use as much glass as we can collect. The issue is not really the treatment facilities capacity, but it is more the collection right now, which is at stake.
Do we have any additional questions from the room? If not, we'll take questions on the phone.
Thank you. Can you hear me okay? We received three questions on the webcast, and the three are from Kristof De Graeve, and he would like to know the following. Could you recapitulate the dynamics between building up inventory and destocking on the EBITDA margin?
It's pretty simple. We are having fixed cost when you put production inventory, basically you're transferring fixed cost to balance sheet, and then you're selling it. When you are producing and selling directly, you are transferring directly fixed costs to sales. When you are destocking, unfortunately, the top line is what it is, but you are using the fixed costs that were already in the balance sheet and not going through the normal production and P&L process.
Thank you very much. The second question would be as follows. I was somewhat late in the webcast, so probably you already tackled this subject, but I heard you saying that you were confirming the 2022 targets despite experiencing some headwinds since the IPO. Could you please elaborate a bit on those headwinds?
Well, I think we've been clear. During the IPO roadshow, we discovered these tariffs the U.S. made, especially on the wines and spirits in Europe. That was one surprise that came during the IPO roadshow. It didn't lead us to change our guidance. Since the IPO, we have faced now in Asia, and that has a knock-on impact on many other regions, this coronavirus issue, which is clearly slowing down the economies in many countries and at a worldwide level now. This was unexpected, too. Despite those headwinds, we still believe that our guidance is doable, and we didn't have any intention to modify it.
Lastly, could you please explain the mechanics behind the margin decline in LATAM, partly due to the dilutive impact of the sharp price increases implemented during the year? Does that mean the price increase led to a loss in volumes? Were you not able to compensate fully the increased input prices by price increases?
No, there's a basic mathematical principle. First of all, let's put things in perspective. Inflation in Argentina was 54%. We increased the pricing more than 54%. One for one give a percentage of that shows the fact that you need to increase much more. To get the percentage increase, you need to increase much more than just beating inflation. The higher the inflation is, the more you need to increase the pricing, not only to be spread positive, but to cope with the growth in percentage. From a one for one is dilutive in percentage, and 1.1 to one is dilutive in percentage. That's the case in Argentina. In Argentina, we are not losing volume. We are gaining, we are beating inflation, but we're not beating inflation by 5x . We are beating inflation by 1.1x .
Basically, this is dilutive in terms of percentage. That basic principle math.
Thank you very much. Those will be all the questions that we received on the online webcast. We will now be listening to the questions that we have received during the call.
Thank you. We do have a few questions from the audio line, and the first question comes from the line of Matthias Pfeifenberger from Deutsche Bank. Please go ahead.
Yes, good morning, gents. Matthias from Deutsche Bank. Couple of questions from my side. Firstly, congrats on the results. I just continue on the path of Paco trying to see how really conservative the guidance is on the EBITDA, and especially maybe if you could help us quantify the effect of the destocking in 2019. Also, tell us if there is some good amount of restocking already taking place in 2020. Also, you mentioned on one other occasion that you are fully hedged already for 2020 for the gas costs. Maybe you can share some quantitative numbers in terms of what's the average benefit going to be in 2020 versus 2019. Related to that, is there any incremental EBITDA contribution from the new furnaces, or will this be compensated by ramp-up costs? Thanks.
Well, that's a long question, so I'll try to take note of all the points that you're mentioning. Forgive me, and don't hesitate to repeat part of your question if I didn't answer them properly. Now, in terms of EBITDA forecast, if it shows the starting point of your question, I think the comment that was made before is still valid. That's a floor. We said it will be above EUR 650 million. At this time of the year, it's too early to say if we will face additional headwinds. Just take an example, which we are currently living in France right now. There have been quite a lot of strikes since December due to the national reform of the pension schemes in France.
This has had some impact on our operations and also somehow this could have an impact if it lasts too long on the consumption of our customers. This is something that isn't known at this stage. It's part of the headwinds I was mentioning that we see and we manage. It might have an impact on the top line. Our goal is really to, of course, work hard on the cost side to minimize the net impact. This is something that we'll have to evaluate as we see the year progressing, if you want. Regarding the stocking, destocking, just to give you some numbers, you can make the math. In terms of tonnage, in 2019, we increased our inventory throughout the year by 74,000 tons.
2018.
Sorry, 2018.
2018, correct.
2018, we increased our inventory by 74,000 tons. In 2019, we decreased our inventory by 52,000 tons. As you know, in the P&L, you look at the variance of the variance if you make a bridge from one year to the other. The variance of decreased inventory in 2019 versus increased inventory in 2018 is altogether 126,000 tons. It's massive. Now, going forward, as we explained, even if we end up the year with a good level of inventory, we don't have strong views whether the inventory will slightly go up or go down. Why? Because we should, on the one hand, increase inventory because our sales are increasing. This is what Didier was mentioning. Our working capital should increase because our sales are growing.
On the other hand, we are working at the same time on our supply chain processes to be much more efficient in improving the customer service or maintaining a very good customer service with less inventory. The net result should not change dramatically the level of inventory during the year. Despite the seasonality, we have a little bit of seasonality, which you have to bear in mind, but from December to December, we don't expect a major change of inventory.
I think if you look at the three pillars, they will still be existing. This year you have seen the activity, so the volume growth have been offset by the destocking. Next year, we don't expect that because as Michel said, we expect more or less inventory to remain more or less stable compared to the closing of this year. Price increases and mix was significant in 2019 for the reason mentioned that the base costs are going to be much more moderate in terms of inflation. The spread will be positive, therefore contributing to bottom line, but not massively like this year. The PAP is the PAP, so we'll be generating at least 2% on the cash cost. That's it. In terms of our forecast as well, we took the assumption, might happen or not happen, that there will be another year of volatility in Argentina.
Those who are ready to bet against me on that, I'm ready to bet, because wait for the month of August and you're going to see that going down again 50%. We took that as an assumption. Clearly, this is impacting, though. We are not doing 2020 at ISO forex 2019. This is not going to happen. We don't see that happening.
Last but not least, just to give you some color about the reason why we are quite, to take your words, maybe conservative on the EBITDA side, is the additional volume growth coming from the two new furnaces is not at marginal cost. Differently from marginal CapEx improvements that are made through debottlenecking activities, where here, for very small CapEx or no CapEx at all, you bottleneck your factory and therefore you have a huge margin falling through directly to the bottom line. Here, those two new furnaces will require full cost set up, new teams to be trained. By the way, not just on the standard pattern. We are training the people as we speak. This is a ramping cost that we have to absorb, which of course, is one-off. You have the ramp-up of the factories themselves.
My point is, we will have to incur this year also some additional costs due to those two startups. Two startups in one year for two brownfields is not a small thing for us. My point is, if you put all these things together, then we believe that we are able to deliver more than EUR 650 million. Of course, we'll do our best to do more, but we don't want to commit too much at this time. It will be easier to see or to revise maybe our guidance, if need be, for the year if we see something that changes quite significantly.
Yeah, let's not change the tone of the guidance. It's not a defensive guidance. It's not we are worrying about the future. I think we have all the means, we have all the fundamentals for the three pillars that we'll be delivering. Let's not change the tone. We are in February, start of the year. We know where the consensus is. We give you above EUR 650 million. We don't look nervous. Let's not change the rule of the game.
Fair enough, gents. That's a really good explanation, like the destocking wiped out the operating leverage last year, and then you have the ramp-up cost for the two new furnaces. The missing piece, really, and maybe you can shed some color, is the gas cost dynamics.
Gas? The gas.
The gas or the CO2. The CO2, as you said, the CO2, the phase III is fully hedged at a cost which is lower than the current cost, but is very similar to 2019 because we took a hedge at the same time for the upcoming three years when we did it. There is no gain compared to 2019. Now we know more or less how much we are going to have to buy on the market because we are very steady. We know we have a buying between 600,000 or around 600,000 tons per year, and we know at what price, very similar to 2019.
Yeah, that's helpful adjustment on the energy cost because you have a rolling hedge for gas prices. I was just after the benefit of gas cost deflation because obviously the hedges will follow the spot prices with a certain lag, right?
That's clear. Today, the market is going down significantly. You know our strategy. Our strategy is not to be open and be doing on spot. We don't want to speculate, so we have gas pricing that are taken on a rolling basis, which are not exactly matching the drop in price. Clearly, and honestly, thanks to God, because if I were telling you that I'm fully exposed every day on the price of gas, electricity, the day is going down, I might be missing an opportunity, but the day is going up, now you're going to put a finger at us and saying, "Okay, guys, you are speculating." We are not speculating. Clearly, the spot price on gas and electricity is significantly down, and our hedging is a little bit higher than that. Rolling forward as well, that's I think the right way to look at that.
I think for all people, we're not speculating.
Okay. My two final questions would be, you faced all these two headwinds, basically, and you're still facing them. You still kept the 3%-5% growth guidance. What's actually positively helping you? Is it the capacity ramps? Is it winning market share? What's helping you? Also on the cullet usage, you became a bit more explicit about it, more cautious, maybe at the IPO. Now you're saying you want to increase the cullet use. Can you give us a number? Is it like 2 percentage points in the medium term? Do you face some competition from new segments like dairy moving again into glass? Thanks.
We have talked about the headwinds because they are quite new compared to the IPO, but we didn't speak too much about the tailwind that we talked about during the IPO. The strong move away from plastics to glass, the shift from plastic to glass, is difficult to quantify, and as I said, it will not happen overnight. Clearly, glass is the preferred material because it's healthy, it's infinitely recyclable, and it gives an image of premium and quality that the other materials don't give. This is clearly a tailwind. Again, very difficult for us to quantify, but this is still here, and probably even stronger than six months ago. That's one thing which should help and mitigate some of the headwinds that we just mentioned. Regarding the cullet, we gave you the ratio of cullet use in our company.
I repeat, the limiting factor right now is not the cullet treatment, but it's the collection, which is not in our hands. We buy cullet that has been collected by third parties. It's a complex issue because you have to align a lot of different stakeholders, the municipalities, the brands, the retailers or hotel or restaurants, o n-trade and off-trade networks, and of course, the collectors. That's something we are working on. Ideally, we would like to at least increase the cullet ratio by one point a year. It doesn't seem a lot, but this is something which we believe should be doable. That's about it.
To come back on your point, I want to insist because the 3%-5% growth organically is going to be made a little bit of pricing, clearly. Volume, but again, volume, we have new capacities or like Jacutinga, full- year impact of new capacities. The efficiency, again, the PAP is bringing on side effect improvement on yield and operating efficiency. All that together make us comfortable to be able to capture more than the market growth.
Yeah. Thanks a lot, gents. Very helpful.
Thank you. Our next question comes from the line of James Rose from Barclays. Please go ahead.
Hi there. Just to pick up on the plastic to glass trends, please. Is there any more anecdotal evidence you can give us post the IPO that would indicate that? Secondly, at the IPO, I think you've mentioned there were some customers asking you to open capacity in the U.S. I wondered if you had any more thoughts about that in general. Thanks.
There is no real strong news post IPO regarding the trend of favoring glass versus other materials. The same trend is solid in the market, hard to quantify, but clearly in the mind of everybody, our customers, the consumers, and even the public authorities. No big change compared to what we discussed at IPO times. Regarding the U.S. market, clearly, it seems that there is a lack of glass in the U.S. market right now. For us to go there just to build one factory doesn't make sense, to be frank with you. That's not something we are considering as we speak. Adding a greenfield factory in the U.S. market just to be there doesn't seem to provide enough strategic interest to us at this stage. If we find other opportunities that are much bigger than this one, why not?
Making one acquisition or one factory in the U.S. is not for us sufficient to justify the investment in this country.
Okay. Thanks very much.
Thank you. The next question comes from the line of Paul Bradley from Citi. Please go ahead.
Hi, there. It's Paul Bradley at Citi. First, congratulations on the results. Very good to see you delivering all that you promised. Couple of quick ones from me. On the working capital side, could you let us know what your factoring balances were at the end of the year and whether you've made any changes to your factoring program? Secondly, I guess picking up on this plastic to glass point, one of your U.S. peers yesterday said in Brazilian beer, they've seen a move from glass towards cans. I just wonder if you're seeing the same in Brazil or if you're seeing anything in Europe, which is losing share for glass towards cans. Thank you.
What was the first question? Sorry, because I had a hard time to listen.
Sorry. Factoring.
Factoring. I was expecting the question. I didn't want to raise a red flag in front of everyone on the working capital. On non-reverse factoring, we factor EUR 315 million in 2018. We factor, in 2019, EUR 313 million.
Okay.
That's what we discussed at the time of the IPO. There was a ramp up and, of course, there will be an increase seasonally in the year. When you sell more, you factor more, but again, this is a service at a cheap price, and we're paying 1%. We're using it naturally. It's not a means for us to improve the working capital. It's just we're using where we have sales, 1% is still more expensive than what our bankers' friends are offering to us. We have 10,000 customers with a level of overdue, which is irrelevant, and the level extremely low for a company of our size. We have a very good customer base. Again, flat.
Number two, going to increase, probably going to be higher at the end of June because it's a strong quarter in terms of sales and very attractive in terms of pricing.
For your second question regarding Brazil, I've read this comment about the shifts from, maybe probable shift from glass to can. That's not at all what we see on the market. Let's be clear. The glass market in Brazil is very dynamic, fueled by, first of all, the beer segment, which is growing quite fast, by the way. More importantly, the consumer habits changing in Brazil, where it seems that our customers that are selling beer are selling a lot more one-way beer rather than the returnable beer. In other words, as you know, there is probably 20 terms when you have a returnable packaging versus one-way packaging, which is one off.
It seems that the consumers in Brazil are drinking more at home right now than they used to in public spaces. Therefore, the need for glass is quite strong. Actually, we have a strong demand from our customers in Brazil. I don't know if the growth of glass is bigger or less than the growth of can in Brazil, but I can tell you the growth of glass is very certain, is very strong. We do enjoy it. Now, in Europe, we'll see in a few months the official statistics from the federations, both glass and can federations. I'm sure we'll see if in Europe, there is some kind of substitution from glass to can. It doesn't seem to be the case, to be frank with you, but I don't know if I've heard any official statistics.
All right. Thank you.
That was our last question from the audio line. I'll hand the call back to yourselves. Thank you.
Okay. I think it's time to conclude. I would like to thank you very much again for attending this presentation and this discussion. Thank you very much. Have a good day.
Thank you.