Type of ratings: Corporate
Rating value: EF2
License: EthiFinance Ratings
Type of ratings: Corporate
Rating value: EF2
License: EthiFinance Ratings
EthiFinance Ratings initiates coverage of Verallia assigning an EF2 rating to its NEU CP instrument (which is for an amount of up to €400m).
In line with our updated methodology, the materials & chemicals industry has high ESG risks (heatmap score of between 4 and 5) given its impact on the environment, which constrains our industry assessment. Meanwhile, our assessment of the company’s ESG policy is neutral (company ESG score of between 1 and 4), resulting in our rating being constrained by industry-related ESG considerations.
Based in Paris, France, Verallia is the world’s No. 3 manufacturer of glass packaging. The group produces a wide range of glass bottles, containers and jars for around 10,000 customers, ranging from local wine producers to global food and beverage brands. For the 12 months to end-June 2022, the company reported revenues of c. €3.0bn with EBITDA of €761m, registering an EthiFinance Ratings adjusted net debt-to-EBITDA ratio of 2.3x.
INDUSTRY RISK ASSESSMENT
In recent years, demand for glass packaging has been driven by favourable structural market trends. These include (i) growing demand for European wines and spirits in Asia and the US, (ii) economic growth and its positive impact on consumption in general in Latin American countries, and (iii) the growing trend for replacing plastic with glass, largely due to the brand image of glass and the associated health and environmental benefits.
In Europe in 2021, the glass packaging sector recorded 6.7% growth vs 2020 (and +5.4% vs 2019), with strong growth in all market segments (alcoholic and non-alcoholic drinks) while the food packaging segment, which during the pandemic benefited from lockdown measures and work from home, declined by some 2.0% but was 6.7% above the 2019 level. In 2021, glass gained 1 pt of market share vs other packaging material for food & beverage.
Demand for Verallia’s products is rather resilient, as demonstrated during the Covid crisis: in 2020, Verallia reported revenues down by only 1.9% with volume down by c. 1.4%.
The glass packaging industry is highly capital-intensive. Verallia’s activities necessitate high annual capex (c. 10% of sales or around €250m per year) to maintain the quality of its assets.
Furthermore, these activities require a significant amount of raw materials, including recycled glass and silica sand, as well as energy, the prices for which tend to be volatile. Energy represented c. 17% of the cost of sales in 2021 or c. €375m (with c. 55% stemming from gas). The group has a comprehensive hedging policy in place which mitigates the impact of energy price fluctuations and has some ability to pass on cost inflation to clients. In terms of volatility, again demand is rather resilient, as demonstrated during Covid.
Given the presence of the group in Latam , which contributed to c. 11.5% to consolidated revenues in 2021, its results may be negatively affected by adverse currency fluctuations.
Verallia’s market shares are quite well protected by high barriers for new entrants, as well as by a highly diversified portfolio of clients with which the company has strong and longstanding relationships. Currently, given the level of demand in Europe (as detailed above), there are some tensions for glass packaging supply.
COMPANY'S COMPETITIVE POSITIONING
Verallia has a special focus on wine and spirits (around 60% of sales), being the No. 1 glass packager in Europe and No. 2 in Latam. This premium positioning delivers higher margins than competitors while reducing substitution risks from other containers like metal and plastic. Over the long term, we expect Verallia to continue to benefit from its positioning, with increasing exports from European wine and spirits producers, as well as from its presence in Latin America, including Brazil, Argentina and Chile.
In terms of geography, Verallia has a rather limited diversification with France, Italy, Spain and Germany together contributing c. 80% of consolidated revenues in FY21 and Latam broadly 11%.
In terms of product diversification, Verallia supplies various segments with glass packaging for food & beverages with still wine contributing c. 36% of 2021 revenues, sparkling wine c. 12%, spirits c. 12%, beer c. 13%, soft drinks c. 11%, and food c. 16%.
Verallia reported €50m & €90m of sales in Ukraine & Russia respectively in 2021. The exposure to Ukraine is at this stage manageable in our view, as is that to Russia, which is for Verallia mostly a local market.
Verallia has been listed on Euronext Paris since October 2019, and is owned by BWSA (c. 28.0%), BPI France (c. 7.5%), and employees (c. 4.1%), with a free-float of c. 56.7% at end-June 2022. As of 08 November 2022, Verallia had a market capitalization of €3.4bn.
Verallia’s indebtedness stems from its former private ownership & leveraged buy-out transaction following its spin-off from Saint-Gobain in 2015.
We consider that Verallia has a rather prudent financial policy and strong ESG policy in place.
We consider that the group’s management has a strong track record, as highlighted by the gradual improvement in profitability, with EBITDAR margin increasing from 20.4% in FY16 to 25.4% in FY21. The improvement in profitability goes along with a decrease in indebtedness; EthiFinance Ratings’ net adjusted leverage ratio for Verallia has decreased from 5.0x at end-2016 to 2.7x at end-2021 (and further to 2.3x as of June 2022).
Verallia's ESG strategy is based on quantified targets that aim to reduce its environmental impact as well as that of the glass industry. Centered around three core pillars, (i) enhance the circularity of glass packaging, (ii) significantly reduce CO2 emissions and (iii) provide a safe and inclusive place to work. Verallia aims at reducing its CO2 emissions (Scope 1&2) by 46% by 2030 vs 2019. Verallia intends to reduce its CO2 through greater use of cullet, lower use of carbon-based materials, reduced energy consumption for glass melting, and more use of green energy.
CASHFLOW AND LEVERAGE
Verallia posted strong growth in revenues for 1H22 (to €1.6bn) of 22.8% organic, of which 3.1% was linked to higher volume growth and 19.7% to increased prices & product mix. The group reported strong organic growth in all its geographic divisions.
The group was able to preserve its profitability with an EBITDA margin of 26.0% in line with the 1H21 level. EBITDA increased by 22.8% (organic growth) with c. 17.0% linked to volume, c. 4.1% to productivity gain along with favourable product mix & margin improvements.
In terms of cash-flow, Verallia has generated c. €263m of free cash-flow before dividends which amounted to c. €123m. The was no major impact from working capital variation in 1H22. Our net adjusted leverage decreased from 2.8x (1H21), to 2.6x (FY21) and 2.3x (1H22).
Verallia posted also a strong performance for the first nine months of 2022 with a 24.4% organic increase in revenues and EBITDA margin of 26.0% (flat vs same period last year). The net reported debt-to-EBITDA ratio was reduced to 1.1x from 1.5x at end-June 2022 and 1.9x at end-2021. EBITDA increased by 24.3% (organic growth) with c. 11.7% linked to volume, c. 4.2% to productivity gain along with favourable product mix & margin improvements. Verallia has raised its 2022 EBITDA guidance to €820m from €750/800m.
We expect Verallia to continue to generate positive free cash-flow after dividends over 2022-24 (our forecast period) and to maintain an EthiFinance Ratings’ net adjusted leverage near 2.0x, as well as to comply with its investment grade trajectory with a reported net leverage below 2.0x.
Verallia has recently announced the acquisition of Allied Glass for an enterprise value of £315m. Allied Glass is expected by Verallia to generate c. £150m of revenues in 2022. We expect no meaningful impact on Verallia’s financial profile from this acquisition.
Verallia had €1.8bn of gross reported debt at end-June 2022 which included €1.0bn of sustainability linked-notes (with maturity in 2028 & 2031) and €0.5bn of term loan maturing in October 2024. Verallia has €500m of undrawn RCF also maturing in October 2024. Verallia’s senior facilities include a covenant ratio for leverage, tested at the end of each half-year period, with a limit of 5.0x and computed as total net debt/pro forma consolidated EBITDA.
Our adjusted gross debt amounted to c. €2.4bn and included c. €0.5bn of adjustment related to the company’s off-balance sheet factoring program along with employee benefits (c. €90m at end-June 2022).
We assess the liquidity profile of Verallia as “Superior”, reflecting its strong refinancing profile and its high liquidity availability.
Liquidity features large undrawn revolving credit facilities, a long-term debt schedule profile with diversified maturities, and high cash on balance sheet, while we expect that Verallia will continue to generate strong free cash-flow.
CREDIT METRICS EXPECTED EVOLUTION (CMEE)
Our CMEE is Stable.
Factors that may (individually or collectively) impact the rating:
Positive factors (↑).
A rating upgrade to EF1 could be entailed by an improvement in Verallia’s financial profile or competitive positioning.
Negative factors (↓).
A downgrade to EF3 could be entailed by a deterioration in Verallia’s competitive positioning or in the event of worsening financial profile.
Rating initiation: Yes, at EF2 on 30 November 2022
Last rating action: n/a
Rating nature: Solicited NEU CP instrument rating
With rated entity or related third party participation: Yes. This rating report was published with being reviewed by the issuer.
With access to internal documents: No
With access to management: Yes
Ancillary services provided to the entity: No
Name of the rating committee chair: Marc Pierron, Senior Director
Material sources used to support the rating decision:
Annual and quarterly reports
IPO registration document
Discussions with Verallia management
Limitation of the Rating action:
EthiFinance Ratings believes the quality and quantity of information available on the rated entity is sufficient to provide a rating.
EthiFinance Ratings has no obligation to audit or verify the accuracy of data provided.
Our methodologies used for this rating are available at:
EthiFinance Ratings SL
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Rating action: New
Action date: 2022-11-30
Date last rating: 2022-11-30
Date first rating: 2022-11-30