Elior Group SA (ELIOR) Earnings Call Transcript & Summary

Hello, and welcome to the Elior Group Third Quarter 2021-'22 revenues. Please note, this conference is being recorded. [Operator Instructions] I will now hand over to your host, Bernard Gault, Chairman and CEO; and Esther Gaide, Group Chief Financial Officer, to begin today's conference. Thank you.

Thank you, Stefano. Good afternoon, ladies and gentlemen. Thank you for attending, and welcome to Elior Group's Third Quarter '21-'22 revenue conference call. I am joined, as was said, by Esther Gaide, whom every one of you know; and Kimberly Stewart, the famous Head of Investor Relations. We have provided detailed financial information in our press release issued earlier today and which is, as you know, available on Elior's website. I'm going to make a short introduction, and then I will leave the floor to Esther for a brief overview of our top line performance during the third quarter and the first 9 months. The aim of this conference call is to allow maximum time for us to answer your questions. First of all, first remark, I'm pleased to say that we recorded a strong top line performance in the third quarter. We have been posting double-digit organic growth for a few quarters in a row, gradually closing the gap towards pre-COVID levels, even exceeding them in indication. Esther will give you more details shortly. And before that, I would like to give you an update on where we stand, both operationally and strategically. Back in May, at the half-year stage, we announced a bold margin recovery plan in the face of very high and persisting inflation. As a reminder, this is based on 4 main priorities: Priority number one, worldwide price negotiations beyond usual indexation clauses; priority number two, creation of new, more sustainable products and services offerings in close collaboration with our clients; priority number three, systematic review of our contracts with regard to the profitability level; and priority number four, as ever, ever tighter control of operating costs. Let's not underestimate the nature of the challenge for Elior. Indeed, it's important to remember that cost plus contracts make up only circa 20% of our portfolio in both the U.S. and U.K., while they're nearly inexistent in France, Italy and Spain. Our teams worldwide are doing an excellent job rolling out this plan. I'm pleased by the progress made to date. We have renegotiated 47% of our contract, an increase over the 37% indicated back in May. On the strategic front, we've announced the -- that we've launched a strategic review process that we've announced earlier in July this month. The entire Board, including me as a Chairman and its advisers, are fully mobilized to watch this goal. It's early days in the process, and we'll, of course, keep you informed when appropriate. Looking ahead with confidence, I now hand you over to Esther for a review of our third quarter top line performance as well as a reminder of the financial guidance for the full year, which we are maintaining. Esther?

Thank you, Bernard, and good afternoon, everyone. As Bernard said, our top line continued to bounce back in the third quarter of the current fiscal year. We recorded revenues of nearly EUR 1.2 billion in third quarter versus EUR 900 million a year ago, reflecting an organic growth of 25%. All 5 geographies recorded double-digit organic growth. Expressed as a percentage of fiscal year 2018-'19, thus pre-COVID, third quarter revenues stood at 93% versus 87% in second quarter and 85% in first quarter. All 3 markets contributed to this positive quarter-on-quarter momentum. B&I revenues stood at 84% of pre-COVID levels, up from 74% in second quarter when recovery stalled because of Omicron, if you remember. Education revenues reached the 105% mark, up from 101% in second quarter, thereby confirming a full recovery from the impact of the pandemic. Lastly, Health and Welfare revenues stood at 96%, up from 94% in second quarter, therefore, also benefiting from less stringent government COVID protocols. For the first 9 months, revenue came to EUR 3.4 billion versus EUR 2.8 billion for the same period last year. This 22.9% year-on-year increase reflects an organic growth of 20.3%, a 3% positive ForEx impact on the back of the weaker euro as well as in of 0.4% negative scope impact, mostly due to the disposal of our stake in CRCL in India. Let's now consider how all 3 drivers of organic growth played out positively. Like-for-like revenues rose 18.2%, a significant rebound compared with a 6.1% decline a year earlier, again reflecting a far more favorable context across the board. Furthermore, business development helped boost the revenues by 10.1%, a vast improvement over the 5.7% increase a year ago. Finally, our retention rate stood at 92% exactly at the end of June, up from 91.3% at the end of March. Liquidity was stable at EUR 437 million at June 30, 2022, compared to EUR 444 million at March 2022. Now a few words about the outlook for fourth quarter. As you know, July and August are seasonally quiet in contract catering and therefore, a lot is at play in September alone. Inflationary pressures remain very high, including wages increases in France with recurrent wage increases averaging 2.2% over the full year with an exit rate of 3.7% of inflation end of September. It will take some time to see the full benefits of our contract renegotiations, which are progressing well with more to be done. With all that in mind and without new unknowns on the COVID front, we are maintaining our guidance for the full year, which is as follows: At least 16% organic revenue growth; adjusted EBITDA near breakeven, excluding Preferred Meals; CapEx below 2% of revenues. Thank you very much for your attention. Bernard and I are now ready to answer your questions. Yes. Go ahead.

[Operator Instructions] Our first question comes the line of Leo Carrington of Citi.

If I could ask, firstly, on the retention rate in Q3, it appears to have sharply improved to what would be the best level since 2018. Are there any positive one-offs that could have flattened this figure? Or put differently, is this sort of a level that we could expect going forward?

Yes. Yes. The answer is yes.

I'll let you answer first. Go ahead.

Yes, the answer is yes. This is sort of normalized. And there's no -- there's always a little one-off here on the positive side, on the negative side, but it's sort of even out. And this is normalized level, and we're looking forward to even further improve this.

And as you know, we have been pushing for the last years in the development. And we have also incentivized people on the development. So the retention is something that has been on focus for the last 3 years. And I mean, we felt it's a very positive thing for all our commercial people and our operations people.

Okay. Second question. I was going to ask around the contract renegotiations, if you could give some more color on the progress by sector and region? And also the process, is the renegotiation a relatively simple process of just introducing a inflation escalation clause? Or is it a more fundamental renegotiation that will take time? And how many clients or what proportion of clients are choosing to -- choosing to accelerate their retendering of a contract rather than negotiate with you?

So if I may, the first thing if they go to retender, they will get a strong increase on the first place. So on the first place, if they're happy with their supplier, when we come back, come to them and say, we want to renegotiate and it's a full process on all customers, okay? Well, they at least listen because as you may know, when you go to tender, it takes a while. So in terms of how it progresses, globally at the group level, I think Bernard as mentioned that we were at 47% of contracts successfully renegotiated. By the end of September, we want to be at 2/3. And by the end of the year, by December, we hope to be at -- I mean we are aiming to be at 90%. So it's a progress that is on the 5 continents, 5 countries. We are actually working very sharply on that. We are looking at the performance every month. Some countries are ahead of the others because they started before. It's probably the case in the U.K. It's also the case, the U.S. is already at 2/3. So we are monitoring that. It's also a change of mindset in some countries like, for instance, in France, because they were not used to go back to their customers and to ask for money. We -- nobody has been living in inflation -- in inflation time before, except the old people like myself. But in any case, I think it's something we need to learn. And actually, I'm pretty sure we've been explaining that in France we have been using some consultants to help our teams to make progresses in that topic. And we are very glad to see that it's progressing, and that we will go further with them to keep on the good work that has been done so far. So I think that's where we are and probably more to come.

Okay. And last question from me. In terms of the strategic assessment around the scope for cooperation between Elior and Derichebourg. Are there any tangible areas to mention at this stage? Or are you still at an early stage?

It's too early to discuss this, right? I mean we chose not to comment on this, neither on the scope nor on the calendar, but we're not doing this for fun, right? We are doing this for the right reasons, and we want to do this on an accelerated basis, we'll put it this way, right? We're very serious about this.

And the next question is coming from the line of Harry Martin from Bernstein.

Three questions for me is a lot, if that's okay. Just to start on the full-year guidance for organic growth. For Q3, I think I calculate we're roughly 7% below 2019 on an organic basis. To get to 16% looks like it takes a slight step back in Q4. Is that just normal seasonality? Or is there anything else that is being built into that guidance? My second question is on net new -- is on new business wins. So on the gross wins, it looks like you could do about 10% contribution this year, which would amount to about EUR 400 million, which is pretty much back to 2019 levels. Is there any reason why we shouldn't expect that, that number can grow further from here? And then the final question on the balance sheet. It looks like you've paid back EUR 30 million on the revolver. How are you feeling about the balance sheet after a good quarter of recovery? And what are your sort of thoughts on where the leverage will be at the end of the year?

Okay. Esther, these are the questions for you, I feel that. Q4.

Okay. So on Q4 guidance, Q3 was very strong last year. So we have a basis which is strong. You need to -- I mean you know that.

Q4. Correct.

Q4, Q4, yes. Sorry. Q4 -- Q4 was very last year. So the comparison with Q4 this year, the base, that is the starting point is higher. Second, we have...

To be clear, Q4 last year was 85% of benchmark 2019, okay? So it's a higher base to grow from.

Okay. Then we have the seasonality. We have -- last year, we had a strong July. August is always very slow, and we need to have a very strong September. September represents 44% of sales of the Q4. So it's -- that's why we are -- I mean we have a forecast which is okay with the guidance we gave you. We hope it will be better, but still summer to go through. On the new business wins, I don't know what you got the EUR 400 million, but what we see is that we have a very good retention rate, and we have a net development, which is also positive. And we will give you numbers when we publish the full year, which is a very good KPI for us because it was something that was very -- was one of the top priorities to make sure that we get people -- we kept the customers on the retention, but that we're also developing furthermore. On the balance sheet, as you know, we have a waiver for September. And then we have, in March, a covenant of 7.5%. We have refinanced the full debt last year in -- during the -- I think in June -- June-July. You know my topic is following the cash, making sure we are generating cash, following up on the working cap, generating EBITDA. And that's the main topic for today. We haven't changed what we feel about on the leverage. But still, it's a little bit, we'll see when we close the full year where we stand.

I mean on the new business development, I was taking the 10.1% revenue boost from business development in the first 9 months of this year that you mentioned in the release, and just said. I'm just saying if you had a similar amount in the fourth quarter, then 10% on last year's revenues would be about EUR 400 million. Is that the right way to think about it?

I don't have the forecast in detail to check that. What I know is that my retention is also very high in -- for the forecast as I've got today.

Next question comes from the line of Simon LeChipre from Stifel.

Two questions, please. First of all, a follow-up on the retention rate. Any specific country driving the improvements? And if you could remind us of your midterm targets and the time line for this target? And secondly, on Preferred Meals, any update you can share with us? And do you have a better view on the potential exceptional costs implied by the closing and the selling of the business?

So on the retention rate, everybody is progressing. All the countries are progressing. All of them are progressing. Really, it's...

Including the U.S., which is at a high level. I mean, we've been sitting through these meetings and explaining that we felt that our retention numbers were not that far away from the best-of-class numbers. If you take Compass, the only reason why there is a difference is the product mix. But if you look country by country, we are -- we're pretty much in line with Compass.

And the second question was on the update of PMC. For the time being, we feel we are on the right track. And for the time being, there's no change on what we have disclosed as of March.

Yes, we might even have good surprise. We could say that, right? I mean in terms of how much -- what is the net result of the PMC shutdown, to put it this way, right? It's certainly, calendar-wise and money-wise, according to plan or better.

The next question comes from the line of [ Mitch Stenning ] from [indiscernible]

Congratulations on the results. I just had 3 questions. The first being, obviously, electricity prices base load in France is reaching all-time highs, in particular, overnight, and gas prices are very high. And I know the company reports that although it operates a lot from client sites, it is contractually responsible for its electricity and gas costs. I'm just wondering how you're managing those on a spot and forward basis and what impact they're having to margins?

We cook -- the good news is we cook. So we use electricity and we use gas. Let's -- as you know, we have a chef-centric organization. I don't have -- I mean what I know is -- I don't have the breakdown with me -- I mean the cost of energy. I know it's a very small part of the cost of goods sold in our case.

We can give you -- are we prepared to give the number, Esther?

Yes, we'll try to get you that amount, but it's -- the main topic is on food. Main topic is on food because it's the most part of the COGS. And as you know, as everybody in the market, we are having inflation on the goods. We have also shortages on the goods. We have -- and that's the main topic. And for that, it's -- I think it's probably -- that's the main topic we have. I'm talking about COGS.

Right. So small, but unhedged. I've got it. And the next question is just obviously in the interim numbers. We have a breakdown of the current liquidity, which we can see. And so it looks like the company has used the receivables securitization line where there was capacity and used that excess capacity in order to pay down the RCF. Is that right? And is that because of any relationship issues with the banks?

No, no, no. The securitization is used, as we've been using that for the last at least 3, 4 years. It's fully used. We are selling our receivables for France and Spain fully. And we are financing -- we are financing the working cap with that. There is no special thing that has been done in June. It's what we do every month.

Got it. So it's just selling receivables to pay down the RCF.

It's really the way we are managing, and it's fully disclosed. And it's -- and one of the reasons it's why it's -- because it's less expensive than the rest, the rest of the debt.

Got it. And then also final question. For the quarter, are you able to give us any sort of high-level guidance on where free cash flow came out? And then that's it for me.

Now if we didn't give you in the guidance, we're not going to give it to you, right. The only thing I can tell you, we are following that very, very, very carefully.

The next question comes from the line of Manu Nair from Chenavari.

I have 2 questions, actually. First of all, on the contract renegotiations. Are there any specific segments which are lagging, for example, on the renegotiation front? Is the education sector, for example, lagging? Or is there anything you can say about the negotiations within each sector?

Yes. It's clearly -- the performance is clearly uneven, right? I mean clearly, the public sector is a lot more difficult in the private sector. The reason is on a private sector contract, there is always the possibility or the leverage that you have to interrupt the contract, and that is the sufficient reason to sit down. If the client is happy with your service, he's not going to say -- is that -- the private sector contractor is just going to say, "Hey, okay, fine, let's sit down and discuss," because that's what people do with every of their suppliers and every of their clients, right? So in the public sector area, it's a very diversified type of venture. I mean some people are very rigid and say, okay, the contract doesn't provide for price negotiations. Sorry. We'll see you when the time comes. And we tell them, look, we got to operate [ than rust ] . So we're putting sometimes very strong negotiating leverage to bring them to the table. And that's -- that's what may take some time because you need to respect the client as a client. But at the same time, if the client is structurally loss-making, it's not a client anymore as far as I'm concerned, okay? So that's the difficult thing. And it's very -- the range of reactions and the range of speed at which you can move the negotiations is very diverse. And as you rightly guessed, for example, education, public sector, public sector education is mostly where the most difficult issues are, correct.

Sure. Just a point of clarification...

And of course, country-wise, it's as I already told the market, country-wise, it's France, Italy and Spain are more difficult than U.K. and U.S., right, obviously.

Sure. And just a point of clarification, actually. I think when you say 47% of contracts have been renegotiated, these are the contracts over and above the cost plus contract. So you're not including the cost plus contracts in that 47%, right? Just to confirm.

Well, the cost plus contracts don't need to be renegotiated because you reinvoiced what you've been expensing.

Okay. So when you said 47%, it's actually 47 % of the contract that needs to be renegotiated, just to clarify.

Correct.

Okay, sure. And finally, so I think that's a bit of a tricky one, I must say. I think you mentioned in the last call that you were close to appointing an external CEO, and that obviously has not happened. Of course, Derichebourg has now come on to the Board as well. But at that point, you also mentioned that you're in a strategic review. Now what does the strategic review exactly encompass? Is there a sale of the business on the cards here?

Well, as I told you, we're not at a stage where we are commenting on the scope of the strategic review. And this is totally obvious. Anyone else in our place would do the same, right? If I wanted to sell a business, assume I would want to, I wouldn't want to put a For Sale sign on it. And no one does that. So sorry, but this is a bit of a negative answer here, but we will tell you in due course when we're doing.

Sure, understood. I just want to clarify that.

Our next question comes from [indiscernible] from New York.

I just wanted to receive a clarification on the receivable financing. You said that you sell receivables for France and Spain in full. Just wanted to know if you essentially can draw on the receivable financing program up to 100% of your receivable, or 80% or 90% in the sense that you need to provide a minimum level of overcollateralization. And if you -- when this program expires in 2024, and I would assume that it gets rolled over, can you -- what's your capacity to expand it? Can you increase it like significantly? Or I mean, I guess it depends on your level of receivables, but receivables seems quite high.

So exactly, it depends on the level of receivables. When we expanded it, we were in the middle of the COVID. So actually, that was -- the line was at EUR 360 million, and it's still at EUR 360 million. I don't -- I mean it was very easy to renew that. Why? Because the banks love that kind of product. And because we have also a base of customer, which is high grade. There is no risk on our receivables. So there's no issue on that. So the way the mechanics works is that we take the full accounts receivable for France and Spain, and we sell it to the bank. And it works that way. So basically it's what we do, and it has been working for the last 6 years.

Okay. And just one last question on debt capacity. My understanding is from the bond documentation is that the capacity to expand the receivables financing is basically uncapped. There is no ceiling to expand it. While the capacity to raise secured debt, essentially priming the bond, it's like about EUR 50 million. And so is that correct?

Yes. But the thing is, again, the receivable line is until 2024. We are looking at right now to renew it for -- because we want -- some banks have asked to get into the program. And for the time being, we are not planning to change anything in the documentation or in the loans. And on the bond, we cannot change anything as you know.

[Operator Instructions] Our next question comes from the line of [indiscernible]from Barclays.

My first question is about the volumes and prices. Can you please give us a sense of like-for-like volumes versus 2019 levels as of today?

On volumes on what? I'm not sure I got your question.

So the business volumes compared to 2019 levels, where are they at present?

At present, they are at 95%.

Okay. And then my second question is about the FY '24 4% margin ambition. So what are your assumptions of underlying cost inflation within this 4% margin ambition? And then what are the current level of inflation that you are seeing in the business compared to those assumptions at present?

I mean the ambition is in 2024. So for the time being, it's -- I'm not talking about -- we are talking about '23, '22 and then '23. We'll see. The level of inflation we see is different from -- for each country. We mentioned the level of wages in France. It's, I feel, well below what we see in other countries like in the U.S. So it is a mix between the different countries. And I don't have the line of inflation breakdown in the cost. Very, very difficult to capture, and I think I'm not the only one in the market. It's very difficult to capture the inflation we have on COGS because it's a mix.

Understood. And the last question is about the contract renegotiations, basically the pace and momentum. So 48 -- 47% contracts renegotiated so far, and you are aiming for 90% by December. Are these levels in line with expectations when you started the process of renegotiations? Is it a bit faster or slower than what you had previously thought?

To be completely frank with you, they are good way on the way of our expectations, but they are below our expectations, right? I mean -- and this is -- the reason is that the -- we talked about education, for example. I mean people -- people, when you come to them and say, let's increase the prices by 12% or 15% or 9%, people drag their feet, right? And there are plenty of ways when you're in the public sector to drag your feet. So we're slightly behind where we expected to be. We have a plan that sort of rolls out every week. And so we're following this. And to be completely honest with you, we're a little bit behind this. We hope to catch up in September. But it's the public sector. Again, that's the difficult thing. But sometimes you are surprised what you can do. I mean, you're surprised on the upside. Let me tell you why. I mean, in Spain, for example, the rules are the most rigid among the 3 countries, and the 3 countries are very rigid, but Spain is the most rigid of the 3 very rigid countries, right? And our Spanish team started saying, well, we cannot renegotiate a certain public sector education contract. And for months and weeks after weeks, they've been coming back and saying, you know what, we've been able -- we found reasonable people in front of us, and we've been able to renegotiate the prices sometimes significantly without a contract basis. So it's a very -- it's not the site. It's about -- it's about the relationship you have. It's about the quality of that relationship. It's about the quality of the salesperson on our side. It's about the good faith of these public sector representative on the other side.

Yes, that's really helpful.

Yes. Sorry, again, it's a [ knock-up ] -- very much so. And as much as we'd like to be, in facts.

The next question comes from the line of Beatrice Monti from Wellington.

Can you hear me?

Yes, sure.

Okay. Can you disclose what is the typical gross margin that you achieved on the contracts that you are renegotiating?

No. It's not -- we are trying our best, and we have obviously a target. In fact, what we do is we look at each and every contract. And we set targets for each and every contract to our sales representatives. So that does exist. I wouldn't call it typical because it starts from where we are, and it's sort of -- it sort of assesses where we should be, and it's a judgment -- it's a management judgment to what we think, but we're not disclosing this to the public. No. This is very much commercial, I wouldn't say, secret, but it's something that we don't disclose.

Okay. That's fine. Am I right, though, in my understanding that there is no automatic step-up linked to the inflation?

No. There is. In all contracts, we have this over so. But they are -- they are backwards looking, okay? And the formula is insufficient. When we're saying renegotiation, let's be crystal clear what we talk about. I mean in most contracts, we have an indexation clause. The problem is that the indexation clauses step in the year after the inflation has occurred. So while you've lost 12% or 13% margin before you know it. And when you're looking at contracts that have margins of this magnitude, you go from a decently profitable contract to 0 just by virtue of inflation. That's one thing. On top of that, when it comes to the indexation clauses, they are usually based on things that, frankly, with high inflation, don't work. I mean when you apply the indexation, instead of being 12%, it's, say, 6% or 5%. So that's the magnitude and that's the essence of the negotiation. It's timing and formula.

Okay. And one last one for me. What are the incentives to the sales when they have negotiated for contracts? Is it based maybe on repricing or on the profitability that they can achieve? What it is it?

It is done by -- it is targeted to the sales representatives at the basic level of client relationship people, right? And it's been designed on the basis of the improvements that there can be done over and above the normal indexation clauses. And it's contract by contract. So we've gone through each and every contract. We've set, we've added up, assume your sales rep if you'd have, say 10 contracts to negotiate, it's about the size of 10, 15 maximum. And you've been set an objective that is based contract-by-contract that triggers a bonus.

We have no more questions on the line. [Operator Instructions] We have no more questions on the line. I will hand back to Bernard.

Okay. Well, I want to thank you all of you for your attendance and your interest in this. The next publication will be our full year results to be published on the 23rd of November. In the meantime, we've got a lot of work to do on margins. As you know, that's been our focus, and which continues to be our focus. Looking forward to a little bit of rest and then go back to work. Wishing you very good holidays.

Bye.

Bye.

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