Elior Group SA (ELIOR) Earnings Call Transcript & Summary

Hello and welcome to the Elior 2021 final year results. Please note, this conference is being recorded. [Operator Instructions] I will now hand over to your host, Philippe Guillemot, Elior Group's CEO, to begin today's conference. Thank you.

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 full year 2021 results. As usual, we will take questions after our presentation. I invite you to read the disclaimer on Slide 1, which is an integral part of our presentation. First and foremost, I take this opportunity to thank Elior's excellent teams. This has been an unprecedented year for the entire catering sector, but during it all they have shown steadfast dedication everywhere we operate in both our catering and service activities. They are standing by our clients and guests, ready to help them, face this unparalleled crisis safely. At the same time, this crisis has posed new challenges. Our teams also showed true talent and a real spirit of innovation with solutions in response to our guests new expectations. I will provide several concrete examples of them in today's presentation. On the agenda today, I will share with you the key highlights of our fiscal year 2020/'21. Then Esther will provide you with a review of Elior's financial results. In the third part of this presentation, I will provide details as to how we are able now to face opportunities as part of our strategic update and set ambitions for 2024. As you will see on Slide 5, we had a strong rebound in the fourth quarter. Between July and September, Elior recorded its best quarter since the pandemic began with revenues equivalent to 85% of dues generated over the same period in 2018/'19. This reflects a more favorable operating environment as the vaccination campaign progressed in all the countries where we operate. For the full fiscal year 2020/'21, every month, was impacted by COVID-19 compared to only 7 months the year before. Despite these extremely unfavorable conditions, we managed to lower our operating loss through relentless and effective cost control efforts. Adjusted EBITDA loss improved to EUR 64 million, slightly better than a year ago with a loss of EUR 69 million. Our free cash flow generation was EUR 13 million compared to a loss of EUR 15 million for the same period a year ago. We have set things in motion everywhere to accelerate our transformation. Today, Elior is perfectly organized for a return to sustainable profitable growth based notably on an optimized cost structure and new offers that are even more suited to market expectations. I will go over this with you after Esther has reviewed Elior's financial results with you. Esther?

Thank you, Philippe. Good morning, everyone. As Philippe mentioned, we had a short rebound in the fourth quarter, as you will see on Slide 7. Consolidated revenues in the fourth quarter 2021 increased to EUR 907 million, compared to EUR 836 million a year ago. The 8.9% increase in organic growth was driven by our international operations, where revenues increased 16.8% in the fourth quarter with a strong rebound in the U.K. Spain and North America. The U.S. dollar exchange rate was relatively stable during the fourth quarter. Turning to Slide 8 for the full fiscal year 2021 consolidated revenues. Fiscal year 2021 was fully impacted by the pandemic, while 2020 was impacted for only 7 months. This resulted in a 7% year-on-year decline in revenues, of which 5.3% organically. We had a U.S. dollar currency headwind of 1.6%. Revenue generation evolved according to local health protocols during the year. Overall, France performed slightly better than our international operations, with all businesses generating revenues still below pre-pandemic levels. Now let's take a look at Elior's retention for the full year 2021. Like-for-like revenues were down 2.9%, a significant on the 16.7% drop recorded a year earlier at the peak of the pandemic. New business development boosted revenues by 6.2% versus 5.2% last year. Lost contracts accounted for 8.6% decline in revenues, which notably reflects companies not reopening their sites after the pandemic peak last year. The resulting retention rate at September 30, 2021, was 91.4%. This is 1% minus 8.6% for lost contracts as per the formula below the chart. It is slightly down compared to 91.8% at September 30, 2020. As Philippe mentioned earlier, we had a strong rebound in the fourth quarter, notably in September. Taking a closer look on Slide 10, you will see that our drop-through improved from 36% in September 2020 to 40% in September 2021, compared to pre-pandemic September 2019. This reflects our rigorous focus and agility in controlling costs. Philippe will provide you with additional details on how this positions us well going forward. Turning to Slide 11. Overall, for the full year 2021, Elior Group adjusted EBITDA margin was stable at minus 1.7%, despite the decrease in revenues, thanks to strict operating cost control. International EBITDA loss improved compared with a year ago to an adjusted EBITDA loss of 1.1% compared to a loss of 1.4% a year ago. While in France, the adjusted EBITDA margin loss was 1.2% compared to 0.7% a year ago. In France, the residual costs for employees penalizes the drop-through compared with other programs in the other countries where we operate. Corporate and other EBITDA improved by EUR 5 million compared to last year as a result of better cost management in businesses not sold with the disposal of areas despite being closed for the majority of the year. Moving on the profit and loss statement on Slide 12. We already covered the first 3 lines. There was a EUR 5 million share-based compensation, noncash charge related to employees' long-term incentive programs. An impairment of goodwill was not deemed necessary this year compared to EUR 123 million a year ago. For the fiscal year 2020, we had a restructuring charge of EUR 117 million, notably due to the planned reduction in early 2000 position in France. This was spread out on a nearly 1,200 B&I sites to anticipate the lasting impact from the increase in working from home. Finally, between internal mobility and natural turnover, the actual number of redundancies needed was lower, allowing us to reserve -- to reverse the 2020 provision by EUR 26 million in 2021. Furthermore, we accrued for an additional restructuring in Continental Europe, resulting in a total net nonrecurring charge of minus EUR 1 million for 2020/'21. Net financial interest charges increased to EUR 44 million compared to EUR 38 million a year ago, reflecting a higher average level of debt year-on-year, together with a higher interest expense linked to our increased leverage. The net result from continuing operations amounted to a loss of EUR 120 million. Taking into account the net results from discontinued operations and minority interest, the Group share of net result was a loss of EUR 100 million versus a loss of EUR 483 million a year ago. Taking a closer look on Elior's income taxes on Slide 13. In France, the added value tax rate was cut by 50% as of January 2021, explaining the main decrease in current taxes. In deferred taxes, we recognized deferred tax assets in some countries. Therefore, total income tax for the fiscal year 2021 was an income of EUR 12 million compared with an expense of EUR 83 million last fiscal year, mainly due to deferred tax asset depreciations related to losses incurred because of the pandemic. Let's now take a closer look at Elior Group free cash flow on Slide 15. Starting from an EBITDA of EUR 100 million, we deduct EUR 62 million for CapEx, as we maintain strict control of our capital allocation. CapEx expense represents 1.7% of revenue. We had a positive change in working capital of EUR 60 million, of which I will go into more detail shortly. Other cash items included mainly restructuring payments related to France. After taxes paid, we had a free cash flow of EUR 13 million. I would now like to take the time to provide you with a bit more color on Elior's operating working capital movements over the last 4 years on Slide 15. You can see that during the full year 2018 and full year 2019, our operating working capital was globally around 0, impacted by some changes in French tax credit and employees. The geographical mix explains mainly the balance on our operating working capital. Over the 2 last years, operating working capital reflected some exceptional swings due to the pandemic such as the deferred payment of social charges in France and in the U.S.A. and value-added taxes in the U.K. Cash management and allocation is Elior's fixed value creation rather. We have and will continue our efforts to efficiently manage our operating working capital, making sure Elior achieves low working capital requirements. Turning to Slide 16, you will see our net financial debt, including IFRS 16 was EUR 995 million at the end of September 2020. Considering the intensity of the pandemic, the group showed its capacity to manage cash, with net debt increasing only by EUR 113 million. This includes higher interest and financial fees. The next test of the covenants governing the Group's senior debt and French state-guaranteed loan will be in November 2022 based on financial results as of September 30, 2022. Now turning to Slide 17 to review Elior's liquidity. Post disposal of areas, Elior at had a liquidity level well above its normal needs. As part of our recent refinancing, which I will cover shortly, we adjusted our liquidity to a level in line with our needs. At the end of September 2021, Elior's available liquidity amounted to EUR 539 million compared with EUR 630 million at the end of September 2020. This includes cash of EUR 80 million and total available -- and revolving credit facilities of EUR 350 million. Remaining available credit lines amount to EUR 109 million. Taking a closer look at our successful refinancing on Slide 18. Before the refinancing, our debt term was mainly in mid '23, with an average cost of debt of 3% for '22. After our refinancing completed in July, our debt maturity is now spread over the coming years with most of terms in 2025 and 2026. Now turning to my last slide for today. For fiscal 2021, 2022, we expect organic growth of at least 18% and an adjusted EBITDA margin between 2% and 2.5%, with CapEx around 2.5% of revenues. Of course, this is based on the assumption that the health situation does not require additional restrictive as protocols that impact our businesses. With that, I now hand you over to Philippe, who will provide you with an update of Elior's strategy.

Thank you, Esther. In December 2019, we presented our new strategic plan called New Elior 2024, based on 5 value creation drivers. Here, they are just as a reminder. While the pandemic has profoundly disrupted our business, it has not called into questions our fundamentals or our strategy, quite the opposite. It has given us an opportunity to show that our value creation drivers make sense more than ever. They allow us to weather the pandemic and to accelerate our transformation. Even though we have enlisted all our management teams to reduce these drivers and adjust our priorities to make sure we focus on the actions that will enable us to fully benefit from the recovery. Let me give you some color on how we are progressing on each of our 5 value-creation drivers. . On Slide 23, let's have a look at how we are addressing the most impacted segment of the market, the business and industry. Because of COVID-19, the business and industry market needed particular attention. White collar revenues represented 18% of our 2018/'19 revenues. We think that work from home will impact this market by around 20%. Thus, in concrete terms, the other impact for a year could be around 4% of our 2018/'19 Group revenues. This structural loss could be compensated by 3 levels: an increase in the capture rates in our restaurants, an increase in the average ticket price and an increase in the addressable B&I market. Before the pandemic, our white collar B&I restaurant in dense urban market had a capture rate of around 50%. In other words, nearly half of employees who came to the office every day did not eat lunch on site. During the crisis, we created menus and offers that better fit the new needs of our guests and our clients. The key word here is flexibility. Our new offers are more flexible in terms of when and where you can eat with no compromise on quality. As the results today, as employees gradually return to the office, we now capture a much higher percentage of employees coming to the office from 60% to 75%. Even though work from home, is up 1 additional day per week on average. We are also seeing an increase in the average ticket price as employees wish to treat themselves. In fact, our restaurants are a key factor in attracting employees back to the office. And there is more. Turning to Slide 24. With this new more flexible offers, we are expanding the size of the B&I addressable market. Until recently, Elior targeted companies with at least 150 guests per day. Now with our more flexible, agile and digital offers, we can offer attractive solutions to small and midsized companies. For example, this expands our traditional market in France by EUR 1.3 billion and by EUR 500 million in Italy. As you will see on Slide 25, our team in Italy saw this opportunity back in 2018. Italy's economy is based on a dense network of small- and medium-sized companies, notably in the north. As a result, our local team developed innovative and more flexible offers very early on. This includes smart fridges as well as recipes and menus that use modified atmosphere packaging, map technology to extend shelf life. So pandemic allowed us to speed up the rollout of these offers as they help clients create a better work environment with our food service solutions. For all these reasons, we are confident in our ability to more than compensate for the revenue loss from the increase in working from home in B&I. As you will see on Slide 26, corporate social responsibility remains at the heart of our value proposition. During the pandemic, we maintained our CSR commitments. For the first time, we announced concrete CO2 reduction targets based on specific action plans that we divide and are implemented locally by our operations teams in every country where we operate. In 2020/'21, we continued to make progress with our extra-financial indicators, as shown on Slide 27. For example, being consistent with our mission to deliver healthy food, 100% of our operations have implemented a detailed nutritional information program on site. The best example of this is a large-scale rollout of Nutri-Score in France. We pioneered this tool in 2019 when we launched it for B&I and then for school in 2020. We have now rolled out Nutri-Score at 642 B&I side on top of 455 schools. As shown on Slide 29, at Elior, we accelerated innovation to better meet the needs of our clients and guests. At Elior, innovation is everyone's job. Our innovation platform, Life4 is now a tool widely shared, as shown by the significant increase in connections. The number of projects available to be replicated has more than doubled in 2021 compared to 2020. Let's have a look at the 6 innovations that have been awarded this year. For example, the smart card designed by Elior service in France. It was developed for the healthcare sector and is now used at more than 50 sites. This card improves hospital room rounds that are monitored in real time and quickly sends alerts when something is out of order. Another example is the healthy at home offer developed in the U.S. for the healthcare sector, which delivers personalized meals to discharge hospital patients. One final example is Easy Q, a tool developed by our team in Spain. It monitors food quality and safety along the entire supply chain from farm to fork. Our innovation strategy is at the heart of our retention objective, which is our value creation driver #3. Now turning to Slide 31. You will see all of the initiatives that we have implemented to improve our retention rate from currently 91.4% to around 95% by 2024. For example, we changed our incentive to reward for client retention as much as new business development. We fully deployed our CRM and are now using connected data to flag clients at risk. And last, we are deploying a B2B portal to gain client trust through transparency on contract execution. Let's now talk about VCD 4. Even though we have rather well managed costs during the pandemic, the recovery phase comes with inflation on food and labor. The main challenge of this fiscal year will be to pass through higher than usual cost inflation to our clients. As you can see on Slide 32, our revenues split by contract types will require negotiation with the vast majority of our clients that extend beyond contractual terms. This is the reason why given the time lag induced by these negotiations, our fiscal year 2021/'22 will not be linear. First half results will be a much heavier impact than our second half. Once we have passed the inflation on to our clients, we will be well on our way to deliver the profitability increase coming with revenue recovery. As you can see on Slide 33, the 240 basis points margin improvement due to organization optimization done during COVID will be partially reinvested in development and new offers. The geographical mix evolution will offset the slightly negative balance in inflation. So our EBITA margin will improve by around 100 basis to around 4.6% in 2024, when we expect revenue to be back to pre-COVID level. Let's talk about our last fifth value creation driver, cash management. The key issue we are focusing on, as you will see on Slide 34, is organic growth divided by CapEx in percentage of revenue. We plan to increase it within a range of 2 and 3x. Therefore, Elior's low working capital requirements, combined with strict capital expenditure provide us with an attractive and sustainable cash generation profile, underpinning our ability to create value for our shareholders. Our updated New Elior 2024 strategic plan has enabled us to reaffirm our value creation drivers defined in 2019. Our objective is to accelerate and amplify our development to return to our pre-pandemic revenue and generate a significantly higher adjusted EBITDA margin. Our ambition for 2024 are, an annual organic revenue growth of at least 7% for the fiscal year 2022/'23 and 2023/'24. An adjusted EBITA margin of around 4.6% in 2023/'24. An organic growth divided by CapEx in percentage of revenue that we plan to increase in the range of 2 to 3x. And last, the resumption of dividend payments based on fiscal year '22/'23 results. At the heart of our ambition and value proposition, Elior reaffirms its CSR commitment, as illustrated by our objective to reduce our carbon footprint by 12%. Food waste will be reduced by 30% and our energy mix will be 80% renewable. Priority will be given to our team's development and their skills to support our businesses transformation. Embarking all our teams, Elior Group has launched a project, steered by the executive committee to collectively define our resonant. With that, we conclude our presentation, and Esther and I are now ready to answer your questions.

Our first question comes from the line of Geoffrey d'Halluin of Bank of America.

Two questions from my side, please. First of all, could you share with us the cadence of the margins development you expect for 2022? So I guess, you said you would expect the first half to be impacted by inflation pressure, so which means maybe going to be second half weighted. So just if you can share a bit a bit of comments about that, and maybe then in terms of organic revenue growth? And my second question is regarding the 2024 targets. I mean, you mentioned, I guess, in the Slide 33, you would expect to invest about 120 bps in development and new offers. Could you just share a bit with us what could be the impact in terms of top line for this new offering?

Okay. Thank you for your questions. Yes. As I have indicated, the fiscal year '21/'22 will not be linear. And you're right, deeply pointed for 2 reasons. One, because the revenue recovery is supposed to accelerate throughout the year, I think, and we'll be even more pronounced in H2 than H1. And second, because as inflation comes with the revenue recovery, there is a time line in passing through this inflation to our customers, which requires negotiations, will have an impact in H2. So I think that's something, obviously, we are -- we anticipate. Now how much this inflation will be? How much pass-through we will be able to have in H1 is the very much depending on how we progress on our negotiations, which are just going on. So I think it's a bit premature to anticipate what will be exactly the margin in H1 and H2. But over the fiscal year, I think we should obviously have passed through our inflation to our clients. As far as reinvesting, as you understand, we are very much pressing the gas pedal on innovation. As I said, we are not fatalist on the B&I sector. We consider that there is ample room for recovery and beyond. We have now demonstrated there is room for market expansion -- addressable market expansion with the small and medium businesses. These business models obviously required to invest in new skills, new technologies that we have already started to do. As an example, when we acquired the modified atmosphere technologies through a small acquisition in Italy 3 years ago, it was part of this plan. So we will continue to do so. We will reinforce our teams in skills that are needed to support the business model. As an example, the go-to-market is different. I think you don't sell to small and medium businesses the same way you sell to large corporation. So that's what we mean by this reinvestment. As far as West should translate into, I think the growth revenue increase -- the organic growth revenue increase we expect in the future and mirrors this investment, 7%, obviously, will not happen if we don't reinvest part of our savings into this new innovation and food service solutions.

Okay. And maybe just a quick follow-up on that point. Do you see any, I would say, first time outsourcing opportunities for the company emerging in the next coming quarters here, please?

Our first outsourcing is more pronounced in markets which are -- have a lower level of outsourcing, typically in the U.S. It's less the case in Europe, even though we see it in Europe. And we are obviously investing time and manage to convert potential customers from self-operated to outsourcing. It's clear that I think the environment is rather favorable. I think so the pandemic, many clients -- potential clients who used to do their own catering realize that they have difficulties to staff, they have difficulty to get the supply on time. So again, I think we have the economies of scale. We have the muscle in order to weather out the bumpy environment we are in. So it's clear, there is a time where first outsourcing should happen and is definitely now.

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

Two questions, please. First one is on retention. You're talking about a target of 95%. How should we think about the build of that retention from 2021 onwards? And I guess what I'm trying to understand is, do you still have some challenging contracts that you think will weigh on that retention rate in 2022? Or could we see that retention to snap back quite quickly? The second question is, I just want to understand a bit more about the components of that 7% organic revenue growth target. How much of it is underpinned by ongoing normalization of the contract base through 2023 and 2024? How much is new business, how much is retention? So just trying to get the components, please.

Okay. As far as retention is concerned, for the past fiscal year, it's clear that we have had a higher number of clients, who didn't reopen their sites. So it was clearly a headwind that has impacted our ability to improve retention. Nevertheless, this now is, I hope, behind us. We have less of it in the future. We have -- you have to understand that our geographical mix makes this 95% definitely a challenge. I think if -- historically, what we observe is that the retention rate is much higher in the U.S. than in Europe. Because of the average length and duration of the contract, the churn in general and so on. So setting an objective 95%, this means that we have really to be benchmarked in Europe in retaining our existing customers in France, Spain, Italy and U.K. where we operate. And that's the focus of the whole organization. And we are planning to show -- to move the needle starting this year and reach this around 95% target by '24. As far as development, the 7% development, there could be still some like-for-like coming from catch-up to recover level of revenue in '22/'23, but not in '22/'24 or far less. The net development will drive this 7% increase. And on top, there could be inflation. And again, it's based on some inflation in assumption that -- okay, maybe proven wrong in one way or another, but I think it's a mix of the 3, in fact. It's a mix of the 3. Definitely what drives the 7% is a clear ambition on net development. As you know, historically, we have been champions in development, not so much in retention, and our plan is to continue to be champions in development, and this combined with higher retention to have a much higher net development.

Okay. Okay. So you see the real, if you like, change going through the businesses around retention because you've always been able to win the new business. It's just been a question of improving the retention to support the net?

Yes. Exactly.

[Operator Instructions] Next question comes from the line of Richard Clarke from Bernstein.

Just want to focus a little bit on the organic growth guidance first. You say up 18%. By my math that takes you about 9% below 2019. So the exit rate in September was down 13%. So that seems quite a small improvement from September into the next year. So maybe if you can maybe talk about by geography and region, why such a small jump up? Is anything going to be stepping backwards. And then secondly, maybe more specifically on that, your health care revenues in Q4 only at 92%. Compass said yesterday that their healthcare revenues were trading above 2019 levels in Europe. So what's that last 8% you're missing in healthcare today? Is that some of those contracts that haven't reopened or you actually used to have a volume recovery? And then last question, just coming back to Slide 33, you kindly provided the bridge from FY '19, but just wondering if you could help us on the bridge from FY '21 or FY '22? How much of that optimization of cost has already been realized? How much of the reinvestment has already been done? What is the impact on pricing so far? So what are we -- from the 2% to 2.5% back up to the 4.6%. What does that look like by those various buckets? I realize there's a volume recovery in there as well, but how much of those buckets have already been spent and realized?

Okay. Well, as far as organic growth for the current fiscal year, plus 18%. Again, you have to see how we have performed during the pandemic. And as you have noticed, we may have decreased -- a lower decrease of revenue than some competitors. So I think this goes -- obviously, with -- if you take as an example, the U.S. In the U.S., given our portfolio of business, we have been much more resilient for the pandemic than our peers. We were not much exposed to B&I. And we had some businesses which even benefited from the pandemic, as the community meals, as an example, and the emergency meals during COVID. So that's how you should read our numbers. So the 18% makes perfectly sense given the portfolio we have of business, and the exposure of each of our geography to the most impacted segment of the market, which is B&I. As far as healthcare is concerned, why we are not posting a revenue higher than pre-COVID as our large competitor does. What we see in short stay is that public is not back into hospitals and clinics, and we had some of our activity, which was performed with cafeterias hosting public, which are not invited anymore to come to hospitals and clinics. There are even restrictions in some countries. If you take Spain, you could have 10 people visiting parents. Now it's restricted to one. So this obviously has an impact. And as far as care home is concerned, that's something we see very much in Europe. I think the occupancy rate is not yet back to where it was pre-COVID. And it will take a few months, I think, to see the vacant bed to be occupied again. So it's just a question of time. It's just a question of time. As far as the bridge is concerned on Page 33, most of the cost optimization has already been performed, so the COVID crisis. That's, by the way, the reason why we've been able to post net loss lower in fiscal year 2021, '19-'20, even though revenue dropped by EUR 270 million. So this is behind us. How much we are reinvesting, is done gradually and is done at a pace which is consistent with our revenue increase. So I think we manage it. And in some cases, we anyway press the gas pedal, as I said, if you take the B&I sector on the small and medium businesses, we are going to reinvest in order to find new growth areas to compensate for the structural loss due to work from home.

Okay. Just maybe just a quick follow-up. So if I was to bridge from 2022 to 2024, the 2.25% to the 4.6%. That's all volume recovery then. There's no more cost savings to drive that. That all comes from the operational leverage.

There is some restructuring that will take place this fiscal year that has been provisioned by the way. So there will still be some cost reductions this year, even though I said -- yes, most of it has already been achieved. And then on the world, obviously, the cost savings will be done. So we are not going to streamline anymore our organizational structure. This will be behind us.

[Operator Instructions] Next question comes from the line of Jaafar Mestari of BNP Paribas.

I've got a couple, if that's okay. The first one is on -- well, both of them on organic growth. So very, very ambitious 7%. I don't think the level any of your peers have ever achieved at least since '09. So breaking that down, you said you want 95% retention. Is it fair to assume that you're not budgeting more than 2% or 3% inflation. So implicitly, you need to do 9% or 10% gross new business. Or would you actually say we're now assuming inflation, which is structurally higher for the medium term? And maybe then as a follow-up, depending on what your answer is on debt implied new business, you probably want to do more or less 9%, 10% then which is almost EUR 0.5 billion each year. I know you mentioned how your historical new wins were very strong. But more current at this moment, are there any advanced indicators that you're able to share, for example, the total value of the pipeline of your currently qualifying and then taking through the funnel to effectively be able to sign EUR 0.5 billion of contracts in less than 1 year.

Okay. Yes. So the underlying inflation assumption -- the underlying inflation assumption behind the 7% is, you're right, it's between 2%, 3%, no more. So it's the kind of inflation we have enjoyed in the past years and not the one we are seeing these days. So yes, definitely this doesn't require an improvement of net development or an increase of retention and to continue to be -- we used to be a double-digit development rate in this company. So we just resume with what we have always done in the past. And the pipeline we have today is very much consistent with this objective. So I think so far, no reason to think that we are not going to deliver it this year, at least for the development -- Now this year, obviously, the picture is a bit blurred with the like-for-like, which mirrors the revenue recovery post pandemic.

Okay. So that pipeline you have right now includes that. You have a couple of years of that, that you're working on?

Yes. Yes. Just for your information, just to -- the shortest incentive of the debt management of the company is indexed on net development starting this year. Align the reward system with the objective I have shared with you today.

[Operator Instructions] Next question comes from the line of Sabrina Blanc of Societe Generale.

Sorry, coming back on the -- what you just said about the short-term incentives. Do you -- could you provide more details on that? What do you mean first by net development? And secondly, how do you include there the CapEx? And you understand my question behind that is the risk to see inflation in terms of CapEx?

Well, first, what we measure is absolute numbers, the net of how much additional revenue minus the revenue we've lost. So it's really by how much we grow the absolute value of annual revenue as a consequence of development and retention. As far as CapEx is concerned, we guided at 2.5% for the year. So this means that the 1.7%, we do not consider what we need in order to have the development rate we expect and retention rate we expect. So yes, CapEx are going to increase, but they are not -- they will still be under control. And as you may have understood, I think over the years, we have implemented very strict control on capital allocation, and we pay careful attention to the payback of the capital we spend, and we will continue to do so. And what matters anywhere in the future is a ratio I've mentioned. Organic growth divided by CapEx in percentage revenue that we want to bring between 2x to 3x which means that, obviously, we don't limit our CapEx as long as it is generating growth and there are opportunities for growth. Okay.

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

I just wanted to follow up on those incentive points. Could you just sort of flesh out in a lot more detail at the broad range of incentives that you're asking people to follow, and I suppose the concern might be that, historically, as you said, the group has had much stronger new business growth. But clearly, there was a phase in the business where a lot of low or unprofitable businesses was signed as well. So can you talk about the package of incentives that is going to incentivize the right behaviors and the right type of contracts to be signed, please?

So you're right. I think we have not indexed 100% of resort incentive on net development because as you rightly pinpointed, it would be an invitation to sign unprofitable contracts. We still keep a significant portion of the short-term incentive indexed on what we call simplified cash flow, which is EBITDA minus CapEx -- EBITDA minus CapEx. So I think there is a right between profitability and development. And on top, we keep 1 KPI on DSO to ensure that we stay focused on cash and managing our working capital. And as you have seen, we have significantly improved our working cap, which is now negative. So to ensure that when revenue will recover, I think we won't have to spend money to fund that working cap.

[Operator Instructions]

Okay. So if there is no more questions, again, thank you very much for attending this call and your questions. I think -- as you see, I think we have to take the opportunity of this pandemic to accelerate our transformation and profile Elior Group to really fully benefit from the revenue recovery that will come with the post pandemic. And even though in the meantime, there could be still some challenge with the fifth wave, which now has become a reality in Europe. But nevertheless, we are very confident and our team, our -- all our teams are fully aligned on the objective and the ambition I have shared with you today. Thank you very much.

Thank you. Bye.

Thank you for joining today's call. You may now disconnect.