Elior Group SA (ELIOR) Earnings Call Transcript & Summary

Hello, and welcome to the Elior Half Year 2022-2023 Financial Results. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]. I will now hand over the call to your host, Didier Grandpre, Group CFO, to begin today's conference. Thank you.

Thank you, Caroline. Good morning, ladies and gentlemen. Welcome to Elior Group's half year results presentation. I'm joined today by Philippe Ronceau, 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 invite you to read the disclaimer on Slide 2, which is an integral part of our presentation. Turning to Slide 3, today's agenda. I will make a short introduction before covering our half year results in detail. Then I will share with you a review of our business, including progress made with our self-help initiatives in France and in the integration of Derichebourg Multiservices. Finally, I will conclude with our latest outlook before answering your questions. I would like to kick off the presentation with our half year key highlights on Slide 5. First, we delivered strong organic growth of plus 14.1% in the first half with plus 11.7% in the first quarter followed by plus 16.5% in the second quarter. Second, our adjusted EBITDA margin increased by 240 basis points year-on-year to reach 1.7%. Third, our free cash flow now stated after lease payments improved substantially from minus EUR 96 million in the first half of last year, to minus EUR 15 million this year. Then in a particularly challenging macro context, we continued our price renegotiation efforts, securing an extra EUR 144 million of annualized price increases during the first half. Hence, a cumulative total of EUR 283 million at the end of March. We have made also good progress on all 4 areas of self-help initiatives in France, namely Central Kitchen, B&I productivity, Procurement and SG&A. Last but not least, after the end of the first half on April 18, we completed the acquisition of Derichebourg Multiservices. Let's now review Elior's half year results in detail. Starting on Slide 7. Consolidated revenue amounted to EUR 2.48 billion compared to EUR 2.24 billion a year ago. The 10.7% year-on-year increase reflects. A strong organic growth of 14.1%, a negative 5.2% perimeter impact related to the exit of Preferred Meals in the U.S. A positive 1.8% currency impact. On the right side of the slide, the International segment revenue reached EUR 1.37 billion up 15.7% organically. Revenue generated outside France accounted for 55% of the total versus 56% a year ago. In France, revenue reached EUR 1.1 billion, up 12.1%, both on a reported basis and organically. The residual concessions activity is not sold with areas reported under Corporate and Other segment, generated revenues of EUR 7 million compared with EUR 6 million last year. Taking a closer look at the drivers of organic growth on Slide 8. Like-for-like growth was robust with a plus 12.5%, comprising, a volume growth of plus 8%, of which plus 5.9% from a COVID catch-up effect and price increases of plus 4.5%, reflecting both standard indexation and renegotiations. Commercial momentum has remained strong, with opening boosting revenues by plus 10.3% in the first half versus plus 9.9% last year. On the other hand, contract losses reduced revenue by minus 7.4%, reflecting a retention rate of 92.6% excluding voluntary exits, and leading to a net new development of plus 2.9%. Voluntary exits of loss-making contracts reduced revenue of minus 1.3%. Total closings reduced revenue by minus 8.7%, and an overall reduction rate of 91.3% at the end of March, unchanged year-on-year. Elior Group is operationally profitable again. To the left of Slide 9, you can see the adjusted EBITDA increased by EUR 57 million from a loss of EUR 16 million in the first half of last year, to a profit of EUR 41 million this year. This was driven by a strong improvement, both in France and internationally. For Corporate and Other, adjusted EBITDA was a loss of EUR 6 million, a strong improvement from a EUR 10 million loss a year ago. This reflects, first, a sizable reduction in overhead costs and residual concession activities being profitable again. Overall, you can see to the right of the slide that group adjusted EBITDA margin was up plus 240 basis points from minus 0.7% in the first half of last year to plus 1.7% this year. Let's now consider the various drivers of operating profitability improvement on Slide 10. The closure of Preferred Meals in the U.S. translated into an EBITDA uplift of EUR 21 million. This was a noncore loss-making industrial activity. We managed to convert some of the old contracts into cooking side contracts, and these are profitable. The combined positive impact of Omicron catch-up and price increases totaling EUR 154 million is offsetting the impact of inflation of minus EUR 147 million. Operating efficiencies, including voluntary exits of unprofitable contracts contributed EUR 20 million of profitability improvement, of which as in France, thanks to self-help measures. Net new development, excluding voluntary exits, is contributing positively to group's operating profitability, with an accretive adjusted EBITDA margin of nearly 4%. Let's now look at the rest of the income statement. Last year's first half was impacted by impairment charges. This year, the amount of nonrecurring charges is limited to minus EUR 17 million reflecting transaction cost in relation to the acquisition of the Derichebourg Multiservices as well as restructuring in the U.S. because of the Preferred Meal. Net financial expense amounted to minus EUR 35 million versus minus EUR 21 million last year, reflecting the increase in both average debt and financial cost. Income tax was a charge of EUR 3 million compared to a charge of EUR 40 million -- EUR 46 million a year ago. In France, the CVAE, the tax on value-added was reduced by half on January 1, 2023. A full breakdown of income tax can be found in the appendix. All in all, net group share was a loss of minus EUR 23 million, a strong improvement from minus EUR 266 million last year. Now on Slide 12. Free cash flow was negative in H1 at minus EUR 15 million, which is a substantial improvement from minus EUR 96 million in the first half of last year. This improvement is mainly driven by 3 items. First, adjusted EBITDA, which reached EUR 110 million and was up 67% or EUR 40 million from EUR 66 million a year ago. Second, the change in operating working capital. Seasonality typically implies an outflow in H1, and this year was no different with minus EUR 45 million, however, EUR 24 million lower than last year. The full breakdown of working capital movement is provided in the appendix, where you can see the impact that the strong organic growth has had on client receivables. Third, nonrecurring cash items of EUR 15 million this year were lower than the EUR 26 million last year. They are related to past restructuring plans in Continental Europe, and the exit of Preferred Meals in the U.S. Then CapEx of EUR 32 million was stable year-on-year. Finally, the payment of leases recognized under IFRS 16 are included in our new definition of free cash flow since they are considered operating rather than financing in nature, they amounted to EUR 33 million in the first half, EUR 4 million lower than a year ago, thanks to the exit of Preferred Meals in the U.S. Now on Slide 13. The strong year-on-year improvement in the free cash flow means net debt is only marginally higher from EUR 1.22 billion at the end of September 2022 to EUR 1.25 billion at the end of March 2023. Leverage ratio was 7.1x pro forma EBITDA at the end of March, below the 7.5x covenant. Finally, to conclude this review of our half year results with Slide 14. The available liquidity came to EUR 393 million, broadly stable compared with EUR 399 million at the end of September 2022. Now I would like to move on to the next section of this presentation with a business review. Starting with Slide 16. The macro context has been challenging, particularly with food inflation running at double digits in all countries where we operate. As a reminder, cost-plus contracts account for less than 10% of our global portfolio in revenue terms and are only formed in the U.S. and in the U.K. P&L contracts with the public sector represents about 1/3 of the total, and renegotiations have been particularly challenging in France. Despite a favorable decision from the Council of State back in September last year. So we have been facing important hurdles, both structural and situational. Despite this, we have had successes, gradually improving our pass-through rate, i.e., the share of the inflation impact passed through price increases. Indeed, an increase from 44% in the previous fiscal year, to 69% in the first half of the current fiscal year. You can see continued renegotiation momentum, securing an additional EUR 144 million of annualized price increases in the first half, bringing the cumulative total to EUR 283 million at the end of March. Now considering another important area of focus for us on Slide 17. Six months ago, when presenting our full year results, we introduced self-help initiatives aiming at improving the profitability of our catering activities in France. The cost saving opportunity is material in all 4 areas of action, each contributing between 20% to 30% of the total. I'm pleased to say that we have made good progress in the past 6 months with Central Kitchens and B&I Productivity being the most advanced at this stage, both totaling slightly over 50% of the opportunity. Over the next 2 slides, I'm going to review each of the 4 areas in more detail. Starting with Central Kitchens on Slide 18. With the help of a consulting firm, we came up with an ambitious plan to optimize our Central Kitchens, which are key differentiating assets for Elior. Simply put, the aim is to use this better, addressing all processes in terms of production and logistics. Let me give you a couple of examples to illustrate. Production, we are standardizing our offerings by reducing the number of options available with a close list of 100 priority recipes, targeting 80% of the effective food supply. Logistics with expert software we can optimize delivery runs during the day, taking into account all of the individual contractual constraints, ultimately cutting the size of our fleet and optimizing staffing. By using our Central Kitchens more efficiently, we are gaining production capacity that we redeployed towards higher margin market segments outside education. This leads me to address how we are improving B&I productivity still on Slide 18. Because of COVID, working habits have evolved and white collar workers are now spending more time working from home than before the pandemic. This has led to patch-site occupancy during the week with the lowest point typically seen on Friday. With the help of another consultancy firm, we have designed an action plan to introduce more flexibility in working practices, which allows us to rightsize our teams. For example, some staff are very happy to work a full week condensed over 4 days. Optimizing shifts and tasks allow us to reduce the use of more costly interim staff and to not systematically replace departing staff. After a successful pilot covering 10 sites during the January to March period, we have now entered fully into the halo test. Now moving to procurement on Slide 20. All the measures we are taking to reduce our procurement costs, our direct consequence of a substantial increase in food prices and, to a lesser extent, energy prices. Let me give you a couple of concrete examples of what we are putting in place regarding SKU reduction and menu reengineering. Reduction of stuff keeping units, in B&I, reducing SKUs on ultrafresh products such as yogurts, for instance, by 20% represents annualized savings of 1%. Menu reengineering, changing the mix of oil in seasoning by reducing the share of olive oil while increasing the share of Rapeseed oil in the same proportion represents a seasoning cost reduction of 10%. Then we have always been vigilant with regard to waste management, not only as a mean to reduce costs but also as a socially responsible caterer. Regarding strategies, we are now monitoring our stocks more closely than ever before to prevent shortages and costly last-minute substitution. Also, just like we are renegotiating prices with our clients, we are systematically retendering contracts and renegotiating prices with our suppliers. Now concluding with SG&A savings. Reflecting history since inception in 1991, the group has ended up with 15 different legal entities for contract catering activities in France. We are simplifying this legacy organization by cutting this down to only 5. We are also removing 1 layer of management with the aim to have a more agile organization, this enables the streamlining of back-office functions. We are also now focusing on regions as opposed to market segments, bringing us even closer to our clients, a similar approach to what is being done in services with the integration of Derichebourg Multiservices. Speaking of Derichebourg Multiservices or DMS on Slide 20. The deal was approved almost unanimously by shareholders who voted at the AGM on the 18th of April. This led to Derichebourg SA, increasing its stake to 48.3%; and Daniel Derichebourg being appointed Chairman and CEO of the group. Why this deal? To accelerate the group's turnaround, which as we have just seen, is now well underway. How? First, by strengthening our strategic positioning, meaning, we are now an international leader and #1 in France in the field of contract catering and multi-services. And we will benefit from the high degree of complementarity between Elior Services and DMS. Complementarity of their customer bases, complementarity of their areas of activity, with the strengthening of their leadership in health care and increased diversification into other markets. Complementarity in the territorial network of activity. Second, by increasing our growth potential through cross-selling within the services business, cross-selling between catering and services, deploying new services in a greater number of new geographical areas. Third, by enhancing our financial profile with a mechanical reduction in our financial leverage. Fourth, by increasing value creation through extraction of synergies and I will come back to this shortly. Quickly on Slide 21, you can see what the new Elior Group looks like, EUR 5.2 billion of revenue last year pro forma. 134,000 employees present in 8 countries, including Germany and China. Now on Slide 22, with an overview of all areas of expertise as a catering and multiservices company and a focus on what DMS brings to the table. Elior Services essentially revolves around cleaning, facility management and concierge services with a strong expertise in this area. As for DMS, the various services offered can be grouped under 4 main categories. First, facility solutions, supporting clients day-to-day with their challenges in cleanliness, hygiene, multitechnical maintenance, security and even hospitality. Second, the urban solutions, DMS is a specialist in street lighting and urban infrastructure, assistance for cities in managing the urban environment in terms of lighting systems, mobility, safety and green spaces. Third, HR solutions. DMS addresses requirements from -- for recruitment needs and for supply of temporary staff. First, Aeronautic solutions, DMS operates at all levels of the aircraft production chain and offers expert services based on the deep understanding of industrial context. Now on Slide 23. Our objective was and remains to extract at least EUR 30 million of recurring annualized synergies by the end of the fiscal year 2025, 2026, which will be the third full year post transaction. These are expected to be split between cost synergies representing 60% or EUR 18 million and revenue synergies for 40% or EUR 12 million. Cost synergies will come from reinternalizing margins, such as DMS's entering staff sourcing expertise to fulfill our own needs as well as rationalizing real estate, IT, purchasing, structure and operations. Revenue synergies will come from cross-selling opportunities within Elior Services and DMS and within catering and services. These top line synergies are only based on the existing client portfolio of the 2 parties. There will be, of course, new clients along the way that will come on top of the EUR 12 million that I've just mentioned. Slide 24, concluding with an update about the integration of DMS. It has been few months since the transaction occurred and yet the integration of DMS is already well underway. A new management team is already in place for all the similar activities between DMS and Elior Services in France, where we have also defined a combined regional organization for the entire new multiservices division. We have been setting up meet and greet sessions to foster cooperation between all teams, including catering. As you can understand, we have been busy. It's early days, and there is obviously much more to be done. For instance, we now integrate super functions, implement IT convergence, optimize real estate, and start extracting revenue synergies, and we will be replicating the integration approach being rolled out in France, in Spain and Portugal. Now moving to the final section of this presentation. On Slide 26, considering the outlook. I would like to start with some elements of context, to bear in mind before introducing our revised guidance for the full year. First, organic growth is expected to be weaker in the second half than in the first. While business development and price increases should continue to help, volume growth will slow after the Omicron catch-up that took place in the first half. Second, food price inflation still represents a significant headwind and pressure is expected to ease a little later than initially anticipated. Third, as mentioned earlier, renegotiation with the public sector in France remained challenging. First, DMS has been fully consolidated as of 18th of April, and its integration is off to a good start. Considering our first half results and everything I've just mentioned, we have fine-tuned our full year organic revenue growth assumption, now expected to be around plus 10%. There will be no impact from DMS here as it will be shown as a perimeter effect. The next 2 items are taking into account the consolidation of DMS. We anticipate adjusted EBITDA margin towards the lower end of the initial 1.5% to 2% target range. And CapEx should be equal to around 1.7% of full year revenues. We will announce our financial target for next year on the 22nd of November with the publication of our full year results for the current fiscal year. Given the transformative nature of the DMS acquisition, we will, in due course, also share our revised medium-term ambitions with respect to both financial and extra financial metrics. Now on Slide 27 with some concluding remarks. There is a sense of renewed optimism at Elior. Yes, inflation remains a strong headwind in the short term, particularly as volume growth will slow mechanically in the second half, softening operating leverage. That said, we have clearly turned a corner, returning to operating profitability, leading to a strong improvement in free cash flow. This represents a sound base of integration of DMS, a growing and profitable business, which will mechanically reduce our financial leverage as it was acquired debt-free. There is a cause for optimism about DMS. Its integration is off to a good start with prospects of extracting tangible cost synergies as early as the end of the current fiscal year. Looking further ahead, we are also optimistic about development synergies, again only considering our combined existing client base while also bearing in mind the strong commercial momentum that we have been maintaining lately. Finally, another cause for optimism is, of course, the renewed confidence of our largest shareholder, Derichebourg SA. With an increased stake in Elior and a new governance structure that will ensure balance and stability over the long term, we have a robust platform to create value for all stakeholders. Derichebourg SA's Founder, Daniel Derichebourg, an entrepreneur with a strong track record, he's also our new Chairman and CEO. He's, therefore, very directly interested in the long-term success of Elior and that might well be the greatest cause for optimism. This concludes our presentation. Thank you very much for your attention. I'm now ready to answer your questions. Caroline, could you please take the first one?

[Operator Instructions]. We will take the first question from the line of Jaafar Mestari from BNP Paribas.

I had 2 questions, if that's okay. Firstly, just on the margin guidance, if you could please talk us through the pluses and minuses here because if I'm correct, Derichebourg Multiservices had higher margins than Elior, at least on an EBITDA basis last year. So if you didn't include that consolidation in the full year '23 margin update, how much lower would your stand-alone margin be before consolidation, please? And then secondly, on new business development. In percentage, it's a bit above last year. It's 10.3%. But given your revenue base is much higher this year really in euros of millions, it's 20% above last year in terms of the new business you are bringing in. Can you maybe discuss some of the more forward-looking KPIs here. Most of your peers communicate some sort of color on how the contract signings are going, the ones they're securing for the future, not just what's in the last period. So how are those trending please, if you have any indications of future findings or pipeline?

Okay. Thank you, Jaafar. So I will start with the first one. And as you rightly said, there are different components, different moving parts in the evolution of our EBITDA margin as we have shared in the EBITDA bridge. So the main 2 items, I would say, regarding the headwinds that we are facing are, of course, the inflation that will continue to impact us a little longer than initially anticipated back in November. So this applies to food, of course, and maybe to a lesser extent, to staff cost. Then you have noticed that we have made good progress in renegotiation with the additional annualized EUR 144 million of renegotiation since the beginning of the semester. However, in the public sector in France we are still facing difficulties. We have been discussing this, I believe, several times, but we're quite hopeful back in November following the decision from the Council of State, which was reinforced by a strong incentive from the government to open the local organizations to renegotiate, to sit down, and renegotiate the contracts. As a matter of fact, it's not materializing as per our expectation back in November, and this is [ 1 11 ] but we have to take into account. Then on the other side, I would say more on the pluses side, we have been progressing well on the self-help initiative in France. As you have seen, and we -- we do expect these measures to be beneficial to the second semester as well. And by the way, operating efficiency measures have been taken also in other countries, and they are bearing fruit. And then the last element is we have in our revenue profile a strong month in September, that's a month where we start dedication activities, that the month where we get the impact of indexation that is part of a contractual term. So that's really all these elements that we have taken into account in our updated guidance and now are expecting full year '23, more at the lower end of the initial 1.5% to 2% range. And considering as well that DMS will be also actually consolidated as from -- at April '18, so which is a little bit more than 5 months. So regarding your second question, as a matter of fact, in our revised outlook considering the revenue, we are expecting H2, which is lower than H1, mainly due to the volume impact as H1 is the semester that will benefit from the volume recovery from COVID. Then we still expect price increases, I would say, at a stable level throughout the year. We had some good volume momentum in H1 in some businesses that we expect at a lower level in H2, and as far development is concerned we expect a sustainable contribution of net development until the end of the year.

And on the margin guidance, are you able to quantify what the margin would have been ex the report, again, maybe I'm wrong, it looks like the Derichebourg Multiservices helps a little bit, if it consolidated for 5 months. So just on the underlying trends in Elior's preexisting business, would you have moved the guidance down to 1.5%, 1.4% around those lines or even worse than that before the consolidation benefit, please?

Yes. So regarding the report first to -- just to remind ourselves that the only financials which are available at this stage are what has been published by Derichebourg last year. So they will publish their interim results for the first semester next week on the 24th of May. And as far as we are concerned, we plan to provide financial statement before the Q3 trading update on the 27th of July. So just to say that this has also at this stage a limited impact on the second semester and that we -- for the catering business, this is actually also where we have a reduction in terms of expected profitability around this 1.5%, which is the lower end of our initial margin guidance.

[Operator Instructions] It appears there's no further question at this time. I'll hand it back over to your host. Thank you.

Okay. So this concludes our call today. Our next financial release will be on July 27 with our revenue for the third quarter. Until then, do not hesitate to get in touch. Thank you.

We have a question.

We have a question. So it was not yet the end.

[Operator Instructions]. We will take the question from Andre Juillard from Deutsche Bank.

Two questions, if I may. Could you give us some color about the nonrecurring charges in H2 first? And in terms of consolidation of DMS, do we have to take it in consideration on H2 only or slightly more, just to clarify how you plan to do things?

So regarding the nonrecurring charges. So as a reminder, from P&L-wise, the amount was minus EUR 17 million in the first semester, including, in particular, the transaction costs related to the acquisition of DMS. So this one will be cashed out mainly in H2. I believe we have provided updated modeling details taking into account as well DMS. And as a matter of fact, we are confirming the range between minus EUR 35 million and minus EUR 45 million for the full year, considering that we are at minus 15% in the first semester. Then regarding how we integrate DMS. So there are different parts from revenue standpoint and organic growth. So for sure, we will report the revenue generated by the DMS activities in the second half as from April 18. However, this will not have any impact in the organic growth because till the first anniversary we will consider the DMS acquisition as a change in perimeter. So from that perspective, the updated outlook of around 10% is about contract catering activities for the current fiscal year. And then from P&L, so meaning EBITDA, net results as well as for the free cash flow, we will include DMS for all parts till the end of the year, starting again from April 18. So what we plan to do, this will be more towards the end of the fiscal year, is to provide as well a full restatement of DMS for the current fiscal year, so that we have a solid reference point in full year 2023, when we will come with a guidance for the next fiscal year 2023 to 2024 around the end of November this year.

That concludes today's call. I'll pass it back over to your host.

Thank you. So I wish you a very pleasant day. Goodbye.

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