Elior Group SA (ELIOR) Earnings Call Transcript & Summary

Hello, and welcome to the Elior Group First Quarter 2022-'23 Revenues Conference Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mrs. Esther Gaide, Group Chief Financial Officer, to begin today's conference. Thank you.

Thank you, operator. Good afternoon, ladies and gentlemen. Welcome to Elior Group's First Quarter 2022-2023 Revenue Conference Call. I'm joined by [indiscernible], Group Financial Officer; and Kimberly Stewart, Head of Investor Relations. We have provided detailed financial information in our press release issued earlier today, which is available on Elior's website. I am going to make a few comments about our first quarter revenues and the outlook for the rest of the year before concluding with a quick update about our key strategic initiatives. Then we will be available to answer your questions. Revenues reached EUR 1.2 billion in the first quarter, growing organically by 11.7%, in line with our expectations. Like-for-like increased by 10.2%, reflecting price increases of 3.8%. Elior is still benefiting from the COVID volume recovery effect bearing in mind the impact of Omicron's first wave a year ago, notably to our French operations. Business development has remained strong, contributing to an organic growth of 10%. The retention rate was 91.5% at the end of December 2022, up slightly versus 91.3% a year ago despite voluntary exits. Excluding voluntary exits of unprofitable contracts, retention would have achieved 92.6%. In France, revenues were at EUR 533 million, up 9% organically. Internationally, revenues totaled EUR 688 million, up 14% organically. In the U.S.A., organic growth was boosted by the conversion of former Preferred Meals contracts into new cook-on-site contracts. B&I organic growth jumped 16.2%, while education improved by 85% (sic) [ 8.5% ]. And health and welfare rose by 9%, reflecting the Omicron recovery effect year-on-year as well as price increases. Elior available liquidity as of December 31, 2022, was in line with our expectations, due to the seasonal working capital requirements and amid strong organic growth, notably the conversion of Preferred Meals contracts to cook on-site in the U.S.A. As for the outlook for the rest of the year, we expect the COVID catchup effect to continue into the second quarter before normalizing in the second half of our fiscal year. At the same time, our strong commercial momentum and the price increases negotiated with our clients should continue to support organic growth. Inflationary pressures remain high, notably with regards to food costs. We are continuing to actively engage with our clients to mitigate these, particularly in the public sector, notably in France. All in all, and assuming a stable public cash situation, we maintain our guidance for the full year with at least an 8% organic revenue growth, generating an adjusted EBITDA margin between 1.5% and 2% and a CapEx between 1.5% and 1.7% of revenues. We are also maintaining our 2024 ambitions, which you may find in detail in the press release. Before opening up for your questions, a few points regarding our key strategic initiatives. At the end of November, when we announced our full year '21-'22 results, we presented 4 key areas of self-help initiatives, initiatives to improve profitability in France. Tangible improvement measures are now being rolled out. We will, of course, provide a detailed update at the time of our half year results. Lastly, the project to acquire Derichebourg Multiservices, which aims to accelerate Elior's turnaround, is proceeding according to the initial timetable. This should lead to an extraordinary general meeting of shareholders taking last place sometime between April and May. As required by law, the relevant employee representatives within the Group have been informed and consulted with respect to the transaction. Thank you for your attention. We are now ready to answer your questions. Operator, would you please take the first question?

[Operator Instructions] The first question comes from the line of Leo Carrington calling from Citi.

If I might ask 2, firstly, on the retention rate in Q1, that -- well, I appreciate the year-over-year comparison is a step down from Q3 and what was implied for Q4. So first question would be how do you expect the retention rate to progress over the rest of the year? Is Q1 a number that we should extrapolate for the rest of the year? Or do you think there will be an improvement? Secondly, on the contract losses on renegotiation, it seems around 6% of contracts that were renegotiated contributed to 1% contract losses. Is that the same kind of run rate that could be expected for the year here? And also, how does this compare to your expectations going into the quarter as to contract losses?

So first, on the contract losses, it's a very small amount. I'm not sure your computation -- I mean, we haven't been looking at that like that just because it's really a customer by customer that we look at that. And for the time being, as we have exactly the same kind of trend, which is we have very few losses because customers prefer to renegotiate with us than move to another supplier because you need to go through a tender in any case, you end up with higher expense. So we are in line with what we expected totally. And actually, again, it's really customer by customer. Second point -- and the first thing is when we discuss with customers, we see that most of them are willing to when they can, and we can come back on public contracts when they can, they prefer to stay with us. The second point on the retention, we compare quarter-to-quarter because from one quarter to another, it's very different. We expect the retention rate to remain high. And the reason why and why we are confident it's because the development rate. As you may recall, last year, it was the first time in the last 5 years that the retention -- the development rate was positive, which means in net, we were gaining more contracts than we lost. And that's what we see also in Q1, which is a very good news for us.

On the first topic, I was referring to the deliberate contract terminations, which had a 1.1 percentage point impact. My -- given that that's not been disclosed before, my analysis, I suppose, was based on that being purely incremental and landing in the quarter.

Yes. So -- you may recall that at the end of September 2022, meaning at the end of our previous fiscal year, we had almost no impact of voluntary exits. We communicated actually the retention rate with and without the voluntary exit. It was at that time a 0.1 point impact. Some contracts have been actually exited at the end of September. So that's why you see the impact of these voluntary exits in Q1. And you're right to say that this is about 1.1 point. And this is what you should expect along the year, considering that since they have been exited at the end of September, they will impact the full fiscal year 2023.

Okay. So the full year FY '23 impact should be something like 1.1%, i.e...

Well, that's what we expect now. Again, as I mentioned it's going to be customer by customer...

Is this why [indiscernible] to achieve?

As you know, what was left -- the big chunk of what we need to discuss now is on public contracts. And that's something that's difficult to exit. So it's very difficult to forecast how that stuff is going to be closing in the end. But still, this impact we have in Q1 because it started in September, we are pretty sure should be around that.

Okay. And last clarification, if I may, Esther, when you said your retention rate to remain high, do you see the H2 '22, 95% as a level that could be achieved in the remaining quarters of the year or thereabouts?

We hope so. If you recall, what we guided a long time ago with Philippe Guillemot, we said that one of our goals, objectives was to have -- to increase our retention rate because that's the recipe for success in terms of improving margins. When you retain customers, it's usually better than when you have new customers because the first years of a contract, is always -- you need to adjust to the customer. And usually, your margin is not as good as when you retain a customer.

The next question comes from the line of Pravin Gondhale calling from Barclays.

First one is on net new business development. So it was around about 1.5% positive in Q1. How much of that is retained Preferred Meals revenue, which was converted to on-site catering and treated as a new business wins? And then the second one is on what's your outlook on the H1 margins and then the free cash flow through the year -- development through the year?

I will not be able to give you more color on the second point. As you know, we are on a Q1 revenue call. The Preferred Meals, [indiscernible], maybe you can answer that, Preferred Meals, on the net development -- net business development?

So it's -- the Preferred Meals is around 3% organic growth on international part. So it's 3% out of the 14%for international.

Okay. So on an underlying basis, is it correct to assume that at the group level, the net new business development was nearly flat, excluding Preferred Meals, is that correct?

It should remain slightly positive because we have 2.6% at the level of a group and international just representing a bit more than half of the revenue.

Right. Okay. That's helpful. Secondly, then on the free cash flow or liquidity progression through the year, basically, the liquidity was down to EUR 307 million in Q1. Can you just give us some more colors on the moving parts of that and your expectation of the free cash flow through the year?

I will not be able to give you any guidance on the free cash flow. As you know, we haven't been guiding on the free cash flow this year. As we mentioned, the liquidity is totally in line with our expectations. And the main reason is the seasonal working capital requirements. As you know, we have the -- I mean, the growth -- the organic growth is important, and that has impacts on the working capital.

[Operator Instructions] This question comes from the line of Andre Juillard calling from Deutsche Bank.

Just one to come back on the cash burn that you had in Q1. If my calculation is right, you burned, more or less, EUR 92 million in Q1 versus EUR 39 million in Q1 '22. Just wanted to understand where the difference was coming from.

So -- actually, the main driver of cash consumption and the difference between this year and last year is around the receivables. So we had actually a stronger organic growth in France in the month -- in the last 2 months of the quarter because as a matter of fact, considering our average payment terms, what comps are the last 2 months of the quarter, so namely in November and December of this year, where last year, we have been impacted by the COVID, in particular, in France. So this is one element. And the second one is that we have been converting the former Preferred Meals contract into new cook on-site that started at the beginning of the school year. And here, we have to build completely the new working capital, which is also different compared to what was last year.

Okay. But that means that you'll have a negative effect, more or less, all year long coming from Preferred Meals?