Elior Group SA (ELIOR) Earnings Call Transcript & Summary

Welcome to Elior Group's First Half 2020 to 2021 Results Conference Call. I remind you that today's call is recorded. Hosting today's call is Elior's CEO, Philippe Guillemot; and CFO, Esther Gaide. I will now turn the call over to Philippe Guillemot for opening remarks. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us today. Esther Gaide, our Group CFO, and I will comment on Elior Group's first half 2020/'21 results. As usual, we will take questions after our presentation. I invite you to read the disclaimer, which is an integral part of our presentation. I would like to take this opportunity to express my appreciation for the terrific dedication that our teams in contract catering and cleaning activities have made throughout this long pandemic. Our teams in every country where we operate are poised to adapt to our clients' needs. We are squarely focused on the future and continue to accelerate our transformation. Starting on Slide 3. In the first half of the current fiscal year, Elior Group remained impacted by the COVID-19 pandemic in all the countries where we operate. On an organic basis, revenue declined by 22.3% year-on-year. While our volumes remain dependent upon restriction measures taken to curtail the latest pandemic wave, we continue to proactively manage our cost base. This is reflected in our adjusted EBITA drop-through of 14% for the first half of the current fiscal year, a significant improvement compared to 22% in the second half of our previous fiscal year. Thanks to astute management of our CapEx and working capital requirements, we generated EUR 31 million of free cash flow in the first half, a strong achievement. The agility of our teams was also further reflected in the leveraging of our strong portfolio of central production units spread over North America, France, Italy and Spain. This is part of the ongoing deployment of our many new offers, particularly in the B&I segment, adapting to the evolving needs of our existing clients and guests while unlocking new growth opportunities brought about by the pandemic. Our post-COVID optimism is underpinned by a solid liquidity of EUR 819 million at March 31, 2021, including EUR 225 million from a state guaranteed loan opportunistically secured in March. Elior was demonstrating its agility well before the pandemic. We initiated our transformation with the unveiling of the New Elior plan, as illustrated on Slide 4, which I presented to you 18 months ago. The pandemic has been a catalyst for us to accelerate our strategic plan. By speeding up the rollout of our 5 value creation drivers in the New Elior plan, the group will be ideally positioned to drive value from renewed volume growth in the post-COVID environment. Today, I will illustrate some of the progress we have made on our value creation drivers 1 to 4. Esther will cover our value creation 5 in her presentation. Over the next few slides, you will see how we are leveraging our extensive central production units to enhance our business mix, value-creation driver 1, as well as improve our value proposition, value creation driver 2, while at the same time, rigorously optimizing our cost, value creation driver 4. Now turning to Slide 5. One of Elior Group's key differentiators is our strong portfolio with nearly 180 central production units, of which we have nearly 90 in the U.S. alone, as shown on the right of the slide. These are both owned or leased by Elior or owned by our clients. We produce both fresh and frozen meals. In some cases, the shelf life of fresh meal is extended, thanks to modified atmosphere packaging. By leveraging these existing assets, while little incremental CapEx -- with little incremental CapEx, we achieved 3 main goals. Firstly, constantly revamping our customers' experience for existing clients in all our markets; secondly, attracting new clients, notably first-time outsourcers, those typically too small for an on-site kitchen; and last but not least, redeploying our production capacity between market segments to drive more opportunities as illustrated on the slide. This is a cultural shift in the way our industry has historically operated as illustrated in our North American operation. Let's take a closer look. Turning to Slide 6. The realignment and accountability in our North American operation over the past 2 years has delivered an organizational structure that builds upon our proven track record. For example, our Prepared Meals Company is dedicated to preparing quality packaged meals as per our clients' requirements. Additionally, as part of our Kitchen On Demand in the U.S., our TRIO Community Meals, often referred to as Meals on Wheels, we provided meals for clients like the Red Cross and the City of Miami during the pandemic. Our teams developed Mealtime Multipack for virtual K-12 students, providing nutritional breakfast and lunch for the week, thereby ensuring that we deliver on our strong health belief, that every child deserves a great meal. These solutions have given us further confidence in our ability to drive growth and profitability in North America for the post-COVID reality. To support these ambitions, the Kitchen On Demand Strategy Council has been put in place, ensuring that we leverage our collective efforts to drive full capacity utilization. Work streams have been identified to accelerate our entrance into new markets and, more importantly, applying cross-market segment teamwork. We have launched several pilot offerings across multiple market segments, and we will continue to expand our footprint across the U.S.A., underpinned by our full cross-team collaboration. Meanwhile, our teams in Italy continued to innovate, as you will see on Slide 7. One of our flagship Italian brands, iColti has culinary experience dating back 30 years. Today, it offers 400 recipes tailored to all tastes and diets, bringing the variety of meals choices our guests desire. It is also at the front of innovation with modified atmosphere packaging or MAP capabilities. Combining these technology that extends meals' shelf-life with the extensive iColti offerings represent a unique selling point for Elior Italy. With MAP, we are able to profitably address clients up to 150 kilometers away from our central production unit. Building upon the Food 360 solution, we have -- that we started developing 3 years ago, we launched Urban360 a few months ago. It is a fully unattended catering solution suited for sites of any size and ideally positioned for small catering spaces. Semi-attended sites where footfall may vary greatly from one day to the next are addressed with our market offer, addressing companies with between 100 to 300 employees. Small and midsized companies form an essential part of the Italian economy. The share of employment generated by SMEs is 78% compared to the European Union average of 67%. The difference is even more pronounced for -- at the smaller end of the spectrum, 45% of employment in Italy versus 30% for the EU average. Everything, therefore, comes together as a profitable growth opportunity for us. IColti, great variety of recipes, MAP technology for extended territorial coverage, on-site agility with 3 different ways of delivering meals to our guests, and finally, a direct sales force, which is externalized and rewarded on client retention. During the first half of our fiscal year, as you will see on Slide 8, we acquired Nestor, a start-up in France that complements our B&I offering and expands Elior's addressable market with new catering solutions that are more flexible with regard to the location and time, yet inflexible in terms of quality. Nestor had operated exclusively in the B2C market, delivering more than 10,000 meals per week to individual customers at their workplace and home. With Elior, the startup will now only cater to the B2B market, refocusing its activity on group deliveries to B&I clients. This acquisition bolsters Elior's range of catering solution for its B&I customers that are seeking to diversify their offerings or meet the needs of their employees working from home. Nestor is a new growth driver to attract new customers, in particular small and midsized companies that lack the necessary infrastructure to produce fresh, varied and healthy meals. Elior brings robust experience and rigorous protocols in hygiene and food safety that is increasingly a key priority for our clients and guests. While we share the same values and culinary experience, Nestor's approach expands our range of offers and thus meets the diverse needs of our customers and our guests. Behind all our efforts, sustainability remains a top priority and a key focus for us during the pandemic. Turning to Slide 9. Every day at Elior, we passionately accompany our guest transition towards better food choices that reduce the impact on society, people and the environment, with offerings that are healthy, respect the environment and give people enjoyable dining experiences. We now have a clear road map with measurable and strictly applied key performance indicators that are built around our 4 pillars of responsibility, those where we can have the most impact. These solid fundamentals are an effort made our teams that has -- made by our teams has been recognized by third parties. For example, we are ranked the best contract caterer by the French business magazine, Le Point, and we have achieved the highest Gaïa rating in our sector. Our CSR framework provides our teams with a means to measure their sustainability efforts, which is an integral part of our client retention and winning new business. During the first half of our fiscal year, we have taken this approach even further with new commitments on carbon. Elior's carbon strategy enables us to act upon our climate contributions every day, at every site. As you will see on Slide 10, I'm delighted to present to you Elior's new carbon commitments. We are proudly committed to achieve a 12% reduction in our carbon footprint per meal by 2025. These efforts are fully aligned with the Paris climate accord. At Elior, we have an active role in the transition to a less carbon-intensive society. Our 12% carbon footprint reduction will be achieved through a 30% decrease in food waste, and we will increase our use of renewable electricity, so that by 2025, 80% of our energy use will come from renewable sources. All the while, we will be decreasing our energy consumption. We are also lowering the CO2 footprint of our menus, while respecting local culinary cultures. A key element in this effort is adapting our menus. For example, reducing red meat to lower environmentally impacting animal protein or vegetable proteins. Before handing you over to Esther, let's now look at how our solid fundamentals, accelerated transformation and sustainability commitments all translates in a strong commercial momentum. In the first half of 2021, our business development has been dynamic. We have won and renewed a multiple of contract, as you may see on Slide 11. I will highlight just a few of them. In France, We won our seventh Amazon contract as well as the prestigious Ferrandi culinary & hotel management school, while Elior Services renewed our contract at the Airbus University and won a contract for all the public hospitals in Grenoble. In North America, we are delighted with the win of the Allegheny Health Network in Pennsylvania that confirms our strong offering in health and welfare in the U.S. Meanwhile, in the U.K., we were awarded 49 of British Telecom sites nationwide. In Italy, we continue to win contracts with fashion houses, Balenciaga. And in Spain, we won contracts for 53 public schools in Murcia and 12 in Aragon. Our overall retention rate at March 31, 2021 was 91% stable year-on-year. We see a strong increase in new business opportunities over the coming months. With that, I now hand you over to Esther, who will go over Elior Group's financial results. Esther?

Thank you, Philippe. Let's start off with Slide 13. Consolidated revenues for the first half 2021 was EUR 1.9 billion compared with EUR 2.5 billion a year ago. The 22% year-on-year drop in organic revenues reflects the impact from the ongoing pandemic, which includes the U.K. full lockdown during January and February; in Italy, schools closed at the second half of March; and in France, further lockdowns towards the end of March. There was a 1.7% currency headwind, notably attributable to the U.S. dollar. Let's now take a closer look on our first half revenues on Slide 14. To the left of the slide, we have Elior's geographic segment split. All the countries where we operate were affected by the stricter public health measures taken since last fall to stem the spike in the global pandemic. France benefited from a more favorable mix skewed towards education and health care with a good contribution from Elior Services. International revenues were impacted by the stringent lockdown measures in the U.K., while the delay in federal funding significantly impacted emergency meals programs in the U.S. Italy was also affected but proved more resilient than other countries, thanks to a B&I client mix largely skewed towards the industrial sector, thus less exposed to those working from home. As you will see on the right of the slide, the B&I market continued to suffer the most from the public health measures that require working from home. Education performed better than B&I despite complete school closures in the U.K. in January and February and in Italy in the second half of March. Keeping schools open was an absolute priority for the French government until the implementation of stricter COVID-19 protocols at the end of March. In health care, contract catering remained impacted by the closure of areas usually open to the public, such as hospital cafeterias and lower room occupancy rates due to COVID-19 health protocols. Meanwhile, Elior Services continued to show resilience, thanks to solutions adapted to the pandemic. Let's now turning to the EBITA analysis on Slide 15. Consolidated adjusted EBITA from continuing operations for first half 2021 was a loss of EUR 25 million compared with a EUR 52 million profit a year earlier. In France, adjusted EBITA was a loss of EUR 4 million compared with a EUR 30 million profit a year earlier. Compared with furlough programs in the other countries where we operate, in France, the residual cost for employees penalizes the drop-through. In the International segment, adjusted EBITA was a loss of EUR 12 million compared with EUR 26 million profit in first half '19/'20, reflecting lower volumes in North America, the U.K. and Spain but with improved flexibility on cost. Adjusted EBITA margin was a negative 1.3% compared to the positive 2.1% achieved in the first half '19/'20, while significantly better than negative 8% in the second half of last year. In other words, our 14% adjusted EBITA drop-through in the first half this year marked a strong improvement from 22% in the second half last year reflecting our rigorous focus and agility in controlling costs. Moving on to the next slide, further down our P&L on Slide 16. EBITA was a loss of EUR 34 million versus EUR 40 million profit a year earlier. The net loss from continuing operations amounted to EUR 53 million, largely reflecting the EBITA reduction. No impairment of goodwill was deemed necessary. Recurring expenses were well under control from EUR 6 million last year to EUR 3 million this year. I will come back to interest and tax in more details on the next 2 slides. Taking into account the net result from discontinued operations and minority interest, the group share of net result was a loss of EUR 53 million versus EUR 17 million loss a year ago. Coming back to the financial results on Slide 17. Net financial interest charges increased from EUR 13 million a year ago to EUR 20 million this year, reflecting 2 things: an higher average level of debt year-on-year, the cost and impact of the covenant holiday obtained in November 2020. Therefore, resulting in net financial expenses of EUR 20 million for the first half 2021 compared with EUR 17 million a year earlier. Now turning to Slide 18. The group's income tax expense from continuing operations improved by EUR 19 million year-on-year from a net expense of EUR 15 million last year to a net gain of EUR 4 million this year. This reflects the lower CVAE rate applicable in France from 1st of January '21. The decrease in current tax was linked to lower results. Deferred tax relates to the recognition of deferred tax credits on incurred losses in the U.S. and the U.K. Let's now take a closer look at Elior Group's free cash flow analysis on Slide 19. Starting from an EBITA of EUR 57 million, we deduct EUR 29 million of CapEx, which we'll take a closer look at on the next slide. We had a positive change in working capital of EUR 12 million, thanks to the strong management of our operational activities, while the securitization program brought an EUR 18 million inflow. We paid U.S. minority shareholders as per the agreement signed in 2018. Other cash items include, notably, the cash outlays related to restructuring plans. After taxes paid, we had a free cash flow of EUR 31 million. Getting back to Elior CapEx evolution on Slide 20. You have Elior's CapEx since 2017, excluding Areas, our former concession business, which was more capital intensive than our current businesses that include contract catering and services. In the first half of 2021, CapEx was EUR 29 million, representing only 1.5% of revenue, well below the 2.2% in the first half of last year. As shown on this slide, we have reduced the group's CapEx spend, thanks to the implementation in 2018 of a rigorous investment process allowing us to strictly control our capital allocation. Turning to Slide 21, you will see our net debt -- financial debt pre-IFRS 16, which was EUR 796 million at the end of March 2021 compared with EUR 767 million at the end of September 2020. Including the impact from IFRS 16, Elior Group's net debt was EUR 1.038 billion compared with EUR 995 million at September 30, 2020. Considering the intensity of the pandemic, the group showed its capacity to manage cash with net debt increasing by -- only by EUR 29 million. The next covenant test governing the group's senior debt and the state-guaranteed loan will be based on our financial results at September 30, 2022. Now turning to my last slide for today. At the end of March 2021, our liquidity was EUR 594 million compared with EUR 630 million at the end of September 2020. With the addition of the French state guaranteed loan for EUR 225 million obtained in March, Elior's available liquidity at the end of the first half amounted to EUR 819 million. I now hand you back to Philippe for some concluding remarks.

Thank you, Esther. To conclude on Slide 24, our volume trends continue to be contingent upon the public health situation in the countries where we operate. Our focus remains squarely on what we can control, notably our operating cost and cash management. In parallel, we are focused on accelerating our transformation, launching new offers and pursuing new growth opportunities, notably by leveraging our large portfolio of central production units. In the short term, with vaccination numbers rising and public health restrictions gradually easing to different degrees, we expect to see contrasting business trends in the second half of our fiscal year. We foresee more favorable trading conditions in the U.S. and the U.K., where first dose vaccinations levels are well ahead of France, Italy and Spain. Furthermore, taking into account the seasonality of our business, we expect the prevailing operating conditions in September to be key. In the medium term, once COVID-19 restrictions are lifted, I remain confident that our excellent positioning and streamlined operating cost structure will enable us to return to solid growth and generate even better margins than before the crisis. With that, we conclude our presentation. Esther and I are ready to answer your questions.

[Operator Instructions] And the first question comes from the line of Geoffrey d'Halluin from Bank of America.

This is Geoffrey d'Halluin from BofA Securities. Three questions, please, if I may. The first one is on the top line development. Just would like to know if you can share with us the exit rate you had in March in terms of organic revenue growth? And maybe any comments you can provide for the month of April. Secondly, we've seen a drop-through of about 14% in the first half of the year, so I guess it was 22% in the second half last year. Just would like to know if you -- how do you need to think about profitability in the second half of the year? If you can share with us your any thoughts. And thirdly, you mentioned a strong increase in terms of new business pipeline. Just wondering how we need to think about the first-time outsourcing opportunities for you and especially by geographies and by segments.

Okay. Thank you for your question. So turning a bit on April, I will not give you any information. The only comment I can make, and that's what we commented on the education in France, I don't know if you know exactly what's going on in France as far as education is concerned. Till beginning of March, I think France managed to let all schools open all in [indiscernible]. Unfortunately, starting in March, new COVID protocols was put in place, by which classes were closed at the first case of COVID. On top, in April, we had a third week of vacation for all the whole countries. So from 2, we went to 3. And since the end of the vacation period, we still have the protocols we had in March. So classes closed at first cases. And all schools from high school and above are -- have half gauge, so this means that we have half presence compared to pre-COVID situation. So that's the context we are in. I just zoomed on this one. But as I have commented, you see very well that countries are different. I think U.S. and U.K. are far more advanced with the vaccination, and as a consequence, are lifting restrictions much faster than we are in France. It takes France for white collars. I think people -- the world today is working from home till June 9, and it will start to be lifted on June 9. And gradually, we'll see people coming back to the office. As far as the top line is concerned, you have the organic growth numbers, so I have not much to add. I think it's obviously a negative number compared to last year, unfortunately. Drop through, 14%. It's clear that we have very well flexed our cost, and we are really becoming expert at flexing costs and negotiating with our customers what we have to negotiate. Is this as indication that profitability will improve post-COVID? Yes, definitely. And as I said, what we envision is to have a higher margin post COVID when we'll be back at the revenue we had before COVID, which was around EUR 5 billion. New business pipeline, it's everywhere. I think there are opportunities in -- obviously, first, we are very obviously consistent with our strategy. VCD 1 is really -- we chase business in the segments where we have decided to be in, and we see opportunities definitely in every geographies. And the current qualified pipeline we have is significantly higher this year than it was last year the same period of the year. So this indicates that given our success rate, I think we should have a good year in terms of development. This, combined with the retention rate with -- okay, is stable compared to last year, but we are, again, committed to see improvement in the future, in the short future, should -- yes, definitely create a good momentum on our top line post COVID.

The next question comes from the line of James Ainley from Citi.

I had 3 questions as well, please. I wanted to just drill into your comments a bit more on new business. Is it fair to say that net new business is still negative? And how are you thinking about the kind of path to improving that retention from 91%? What's your sort of target or expectation about that in the medium term? And do you think positive net new business is possible in the next year? Secondly, can you talk about the investments in central kitchens and delivery and how that might impact CapEx going forward? Clearly, it was very low in the first half. But how should we think about sort of the medium-term run rate on CapEx given those sort of ongoing investments? And then third, could you comment on -- you mentioned there about the drop-through in the first half, and the scope for medium-term improvement in market margins. But should we expect a similar level of drop-through in the second half of the year?

Okay. So let's take your -- well, first, yes, we are net positive. But again, you have the like-for-like -- if you do the bridge today, the picture is blurred because of the like-for-like being negative because of COVID. But the net of what we lose versus what we win is definitely positive, hopefully. Okay. Retention rate, what's behind retention rate? Our retention rate are clear initiatives that have started to be implemented 2 years ago. Again, I keep repeating. First, we have dedicated people in our organization on the back of operations people looking at contracts coming for renewal 18 months ahead of the renewal to ensure that we are well positioned to renew the contract. We have invested in our CRM system to have the high-quality data into it and be able to even generate what we call vulnerability maps. We do postmortems. Now it's a systematic approach. Every time we lose the business or even sometimes when we win to understand on what basis we have won. So I think it's a systematic approach that will lead to this retention rate improvement, okay? And we are confident it will happen. And by the way, we have another internal metric, which is the renewal rate, which is a proxy for retention rate. If you do a quick math, assume you have out of 100 of revenue, 20 coming from renewal. If you apply the renewal rate on this 20 and you add to the 80, you end with the retention rate, okay, to make it simple. So given what I see with our renewal rate, which is at the highest ever, I assume that this at some point will translate into the retention rate.

And just to interrupt that, do you think you have now addressed most of the contracts that you maybe thought of as vulnerable? In other words, have you addressed the historic legacy issues now and therefore, we should start to see progression in that retention rate?

As we got rid of contracts we wanted to get rid of, the one which was the most significant, yes, yes. But again, we are in the contract business. So it's an everyday battle. I think our revenue is made of 14,000 contracts. So one contract would be a great contract today and for different circumstances suddenly be an issue, and this will lead to discussion and negotiation with the customers. So it's -- if you are -- it's not a static situation. I'm not in a business where I have an asset, which is a portfolio of contracts, and life is okay. It's a dynamic picture. I think it's -- and especially with COVID, you have noticed that assumptions we used to sign contracts were obviously not met anymore, and this is for months. So we had to enter into negotiations. Drop-through. Will drop-through will be the same in H2 than H1? First, we are in a seasonal business. So you have to take this into account, because obviously, and you saw -- too early to say. Obviously, we continue to be very systematic in our management of cost and our flexibilization of cost to adapt to revenue, whatever it is. The other thing we are clearly paying attention to is after the drop-through is a flow-through. So the fact that when we have EUR 1 -- additional -- EUR 1 additional of revenue, additional euro of revenue, it translate in EBITA, right.

The next question comes from the line of Jaafar Mestari from Exane BNP Paribas.

I've got just 2 questions on your outlook for the remainder of the year. And then if that's okay, I'd love to ask a follow up on retention after that. So just on that outlook, which is qualitative, and I appreciate that the visibility is limited. But 2 points, it looks like you're almost giving explicit guidance. So firstly, on France business and industry, September is very big, very important. And last year, September was very strong. Are you suggesting that your B&I clients are indicating that the return to the office this year is not guaranteed to be as strong as September 2020? And secondly, the second market, which you already started talking about, which looks like you're giving very explicit direction there, France education, that the new health protocols, I think you said, have been in place since mid-March. So over the last 2 months, could you help us understand how much worse your education business was trending, please?

Okay. Well, as far as the outlook is concerned, yes, I think you have understood why we cannot give a quantitative guidance. What [ we've seen ] is that September will be key, definitely will be key to our numbers. We may make the assumption that schools will be back to normal. As far as B&I is concerned, it could be more contrasted. Last year was good. We had a good month in September last year. But I think people have learned in the meantime, and we have a wide spectrum of behavior from one client to another. Some, even without waiting September, want all their employees to be back to the office 100% because they want to stop what has happened for months with a very clear back-to-the-office message. At the opposite, we have clients who are trying to rethink the organization and are seriously contemplating having people working from home 2, 3 days per week. So the sum of this diverse approach from one client to another that will -- at the end will end with our volume number. So it's still premature. You have to keep in mind that in some geographies, visibility is not so high. As I said earlier, in France, working from home is the norm till June 9. And as you understand, June 9 is very close to July, August, which is a vacation period. So companies are still adjusting their plans for September in many geographies. And by the way, I could ask you the question. You are in London, I assume? What's the situation? Are you back to the office?

I'm happy to report that I'm in the office today. [ I can't say ] this is anecdotal.

Okay. Good. No, no, but that's important, because that's what drives the volume at the end of the day. And I don't know what my competitors are telling you about September and how they see September. So again, more important, rather than try to emulate the crystal ball, it's more important to be able to adapt very fast to whatever volume we'll have, up or down.

And then on education, please, you're saying it's been live and the changes have happened. Could you help us a bit more on how that has been?

If you take March, it's clear that when you start to close classes at the first case of COVID, you had thousands of classes that have been closed. And keep in mind that in March, we were still in the increase of cases in France, which led to the lockdown. So It was not a good situation, definitely not a good situation, much better after the extended vacation from 2 to 3 weeks, much better.

And then sorry to take so much time, but on retention, you made a couple of comments that were interesting. So retention, as you said, is a product of how many contracts actually are up for renewal. And if you have more, then retention mechanically has the risk of being lower, and then you multiply that by renewal rates or I guess, if I understand correctly, you're talking about a success rate in each renewal. So -- and you then suggested that renewal rate or success rate was at its highest ever. So does that mean that you're currently facing a really big number of contracts coming up for renewal? And to the earlier point...

No. No. No.

Okay. So I didn't get that, apologies.

No. No. What I said is that for the one who are coming for renewal, our ability to renew, so our success rate, if you want, is at the highest ever. As -- but this doesn't mean that we have more coming for renewal. I think it's -- and by the way, it's very seasonal. So you cannot just take one quarter or half a year, I think it's a seasonal -- the renewal of the contract, if you take education as an example, it's very often coming in H2 because people want to have renewed their contract to start the new school year.

So can you help me understand why the effective retention is only 91% if success rate is high and the number of contracts coming up is not particularly high?

Because you are looking back 12 months backwards, and we are still impacted by some businesses we let go 12 months ago.

Okay. So success rate was not great. But right now, it is at its highest ever?

Yes. On the one we decided -- again, going back to your earlier question, we are not anymore in a situation where we have to definitely let go some large contracts. So what we have, we want to renew, obviously, on some basis, economic basis with our customers. And as we are in this situation, as I said, we are rather successful in renewing the contracts we want to renew.

The next question comes from the line of Leo Carrington from Credit Suisse.

If I might ask a follow up on retention rates. You sort of called retention rate stable year-over-year, but it seems to be 1 or 2 percentage points lower than H1 '20. Your answer to Jaafar just now implies there was some sort of voluntary exits still weighing on the retention rate. Can you quantify that to give a better idea of your estimates of an underlying retention rate? And secondly, on retention, have you seen any tailwinds from delayed processes, delayed retenders? This is something one of your peers has mentioned. I wonder if it plays into the retention rate at all for you. And then second question on a different topic on innovation. With the Nestor acquisition, how does this tie into your other offers like Urban360? And do you feel that -- it feels like most your recent acquisitions in this kind of space or innovation, as you say, in the space have been in Europe. Is Europe the market that most needs the innovation in order to win tenders? Or is this just reflective where the opportunities are and where your footprint is?

Well, retention, obviously, I have the breakdown, but I won't give you the exact number of how much this contract will [indiscernible] into the retention. I just keep repeating that based on what we see today, it's likely that the retention rate will improve in the short term. As far as delays in contract renewal that may have been the tailwind, I won't say so because it may have been the case last year. But this year, I think companies living in this COVID is a new normal. So they don't delay anymore their renewal of contract or even they may even accelerate it, considering that, yes, launching a request for quotation and a bidding process is a way to change their suppliers. So I think today, we are not any more in this situation of statical, people don't move. It's behind us. The market is very dynamic again. As far as innovation is concerned, it's everywhere, but you are right that in Europe, that's definitely where the B&I business has to be reinvented the fastest, I think. And when we see -- we had already trends in B&I in Europe, far ahead of what's going on in the U.S. If you go take London as an example, it's clear that I think the food trend are definitely there, and we need to answer to them. And the variety of food service solutions we have to deploy to address the needs of our guests is definitely wider right now in Europe than it is in the U.S.

The next question comes from the line of Andre Juillard from Deutsche Bank.

Most of my questions have already been solved, but I wanted to come back on retention rate one more time, sorry. 91% is a high number, but it's below your major competitors. So I just wanted to ask you, what is your theoretical targets midterm for retention? And how do you expect to deliver that? Second question was about external growth. So you bought Nestor in France this year. And I wanted to have more color about the development of these new solutions. And could you communicate if you have a dedicated envelope or firepower for external growth in the future?

Okay. Well, as far as retention rate is concerned, I will reiterate what I said when we presented our '19/'24, 5-year plan, which obviously has been updated since. The objective remains to be at 95% of retention rate.

In which [ year ], if I may...

Over the period of the plan, which was '19/'24, well, we have been a bit obviously challenged by the pandemic. But the time horizon is more or less the same, maybe 1 year later, but I think as quick as possible, and it was in the initial plan at the latest by '24, we need to be at 95%. And how, same thing, I send you back to the slide I had during my -- on my presentation in December 2019. I think there are 5 key initiatives that I've already mentioned earlier, which are behind this improvement. So real change on how we manage the business and how we use the data we collect in our CRM to improve this retention rate, which start with the renewal rate that I've mentioned earlier. As far as acquisition, you mentioned Nestor, the modified atmosphere technology, I mentioned in Italy was an acquisition too. We acquired a small business who had experts of that technology. So the kind of M&A we are doing right now are not maybe the usual one you have in mind, but they are very tactical. We are talking about small tickets, which can create a lot of value. And we are as disciplined in our M&A capital allocation that we're in our CapEx. And we have very strict ratios on how fast we want our money to be back, and that's how we look at it. So we see opportunities of this tactical moves. And here, given the amount, I think we have as far -- yes, we have -- and now we're big enough to do it. I think it's -- we are not limited at all.

The next question comes from the line of Johanna Jourdain from ODDO.

Three questions from my side, please. The first one regarding the free cash flow generation. So you had positive generation H1, especially in Q2. Do you expect this positive free cash flow generation to continue for H2 and to be positive for the full year? My second question is about the M&A strategy. At the moment, what do you miss in terms of offer, in terms of capabilities that they drive some further acquisitions? And my last question is about the use of central kitchen. Just would like to understand how easy is it to use the CPUs from the education segment for the B&I customers? Does it require some negotiation with clients, for instance, on adaptation of capability?

Okay. For free cash flow, yes, as you have noticed, we have a positive free cash flow in H1. And you remember what I said when we entered into the fiscal year, that our objective was be breakeven at minimum. At that time, we didn't know that we would have a second and third wave. So achieving what we have achieved in H1 is definitely a great performance. And we obviously are very focused to continue to manage our cash the way we have so far. And we'll see at the end. And again, as I said earlier, September will be a key month in H2. And I think depending what's going to happen in September, obviously, we'll have more or less -- we'll be more or less close to our objective. M&A, first, we are a leader in 3 countries out of 6 we are in, main one being 5. So I think we are not in strong need to swallow our smaller competitors, at least in France, Italy and Spain. And it could be opportunistic more than anything else, but it's not a strong need. In the U.K. and the U.S., it could be a different story, especially in the U.S. where we may see opportunities. Well, let's be clear, with our balance sheet as it is today, we are not -- even though when I decided to divest Areas in 2019, my main goal was to have the dry power to -- dry powder to be offensive in the market. I'm a bit back to where I used to be. So -- but anyway, we'll -- sooner or later, we'll be back to a ratio -- that leverage ratio that will allow us to be offensive in the market. For the time being, I don't see anything that we have missed that I really regret a lot. So hopefully, we still have time. As far as central kitchen and, again, I use the word central production unit to clearly indicate -- central kitchens are very often associated to education. And with this central production unit running, I want to be very clear. I think the tools you need to produce meals for B&I is not a tool you need to do education or Meals on Wheels. So we have some agility. But nevertheless, these are 2 different markets with 2 different needs and different menus, different volumes. So what we are doing is leveraging the asset we have. And again, kitchens are the one we own, the one we lease and the one we operate. And thanks to the crisis, we have more and more positive discussions with our customers who are open to see their asset underutilized, be used for other markets against, obviously, some fees on the use. So I think today, we are in a much better position, and it's already the case. Today, I have a very concrete example of customer kitchen that we are using to deliver to other customers. So before talking about CapEx, we have ample room by just using what we have, what we lease and what we operate.

The next question comes from the line of Vicki Stern from Barclays.

Just coming back on the response you gave to James' question earlier where you said net new businesses is clearly positive. So with a 91% retention rate, that implies your gross additions must be something like 9% or higher. I just wanted to check, firstly, that that's right. And presumably, with that, you're not -- any sort of contribution you see from those new signings today, but rather the sort of future value potential, I guess, once they have fully mobilized and we're back in sort of normal volume territory. And then related to that, just in the mix of those new contracts, just keen to hear what you're seeing regarding first-time outsourcing? Are you seeing a big pickup like some of your peers versus taking share from competitors, big and small?

Yes, you're right. I think your math is right. I think to have a net positive, it's clear that I need a high development rate. But keep in mind that in the industry, we have been historically the player having the highest development rate and unfortunately, combined with the lowest retention rate. So once I fix the retention rate, obviously, I intend to keep the high development rate. And again, you'll see the number at the end of the year. But today, again, the picture is blurred with like-for-like, which is negative, but it will not be the case forever. As far as who we are competing against, ironically, I think, yes, we are still competing against our peers, Compass, Sodexo, Aramark, but especially in the U.S. with Aramark, because in Europe, they are not really present where we are. But against the smaller players and the smaller players are weakened by this crisis. And even though in some geographies like France, they are still alive, thanks to all the subsidies, at the end, these subsidies will end. At some point, they will end. And likely starting this fall. So that's where things will become very interesting for a company like us.

And overall, though, your gross signings are higher than they were pre-COVID or they're around about the same levels? And also just then a comment on first-time outsourcing, if you're seeing that accelerate.

Well, our success rate is increasing on new development. I think we are more successful than we used to be before COVID when we bid and where we decide to bid. And again, as I said, our qualified pipeline, so pipeline made of opportunities we consider as good one, consistent with our VCD 1 is higher this year than last year. And as far as new -- first outsourcing, I think we see an increase, not as much as we would have expected, but there is an increase. So maybe it will be bigger. It's -- it varies a lot from geographies to geographies. But same comment, in Europe, companies are still under high subsidies and may not have started to challenge what they make and what they buy as they may have started to do it in the U.S.

There are no further questions in the queue, so I will now hand the call back to your host for any closing comments.

Okay. So if there is no further questions, again, thank you for attending this call. As you understand, I think we have -- we are managing very well through the crisis, and we are fully ready to leverage the end of this crisis and see our revenue and profitability increasing even higher than it was before crisis. And thanks to our dedicated team and very focused team and innovation. Thank you.

Thank you. Bye-bye.

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