Elior Group SA (ELIOR) Earnings Call Transcript & Summary

Hello, and welcome to the Elior Third Quarter 2022/23 Revenues Conference Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Didier Grandpre, Group CFO, to begin today's conference. Thank you.

Thank you. Good afternoon, everyone. Thank you for joining us on this call at short notice. As part of our quarterly internal reporting and forecasting process, it became clear that our adjusted EBITA margin for the current fiscal year was going to be below guidance that's why we published sooner than initially scheduled. Let's address this first before commenting on our third quarter revenue and then opening up the call for Q&A. We are talking about 3 new contracts totaling about EUR 200 million worth of annual revenue, 2 in Italy and 1 in France. The main contract is an onboard train catering for the state-owned national operator in Italy. The contract was renewed at the end of 2022 and began in its new shape in May. The revised offering is implying higher mobilization costs than planned. Though the gaps are small per train, they become material in aggregate, given the large scale of the contract. We've been quick at addressing this issue at the highest level of management, but it won't be resolved until after the summer. The 2 other contracts are smaller, the Ministry of Defense in Italy and jails in France. Both started earlier this fiscal year with, again, mobilization costs higher than foreseen. While we had forecasted the benefits of corrective measures in the second half, this will actually take longer to bear fruit as we are dealing with a public sector in both cases, and we are also a subcontractors for the prisons in France. On a more positive note, our new CEO is making strong progress with the overhaul of our entire organization in France, both in terms of structure and operations, both in multi-services and contract catering. To date, we've already secured recurring annual cost reductions of EUR 24 million per annum starting next fiscal year, with a large proportion as early as October. Out of this EUR 24 million, EUR 15 million relate to the integration of DMS, including at HQ level. The rest, EUR 9 million, relates to the new organization being put in place for contract catering in France. The revamping process is ongoing, and we are off to a strong start. Now a few words on third quarter revenue. First of all, you have probably noticed our new reporting segments, catering and multi-services. This actually reflects our new organization today. Third quarter organic growth of plus 8.8% was solid despite a tougher year-on-year base after the Omicron recovery effect in the first half. All levers are contributing: volumes were plus 2.4%; second, prices for plus 5.2% versus 4.5% in H1; and third, net new business of plus 3.1%. Regarding prices, it's important to bear in mind 2 things: first, our P&L contracts on annual indexation clauses, which calculation is structurally backward looking. Second, in the public sector, we have 2 big waves in terms of annual indexation. The new school year in education and the new calendar year in administration. This means that we should be able to embark good pricing momentum into next year. Finally, I also wanted to flag the 1-year extension of almost 90% of our senior banking facilities, now maturing in July 2026 at the same time as our bond. This was done at no extra cost and without new conditions. Thank you very much for your attention. I'm now ready to answer your questions.

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

If I could ask three questions, please. Firstly, of the -- first off, I guess, the lowered guidance. To what extent is the -- if you could sort of attribute the lower guidance to higher-than-expected lag between cost inflation and pricing versus the 3 contracts that you've detailed already, that would be helpful. Secondly, in terms of the voluntary contract losses, -- can you give an indication of how much of the contract base has yet to be renegotiated, and so for how many more quarters we could expect the voluntary losses could persist for? And then lastly, a follow-up on the synergies. Can you outline just a little more about what the components of the EUR 24 million are and clarify how much of this would be visible in the FY '24 P&L, please?

Okay. Thank you. So let's start with the first one. Actually, this is what we -- we have now just presented. The main reason for the update of the guidance is coming from these contracts. So as a matter of fact, they have a significant impact considering the size of the contract. As explained, we have obviously taken all action at the highest level of the organization to make this impact as short as possible. So there are, of course, actions that have been taken by the management. Sometimes it requires as well discussions with the customer, which is also a reason why it takes a bit more time than initially expected. To your second question, as a matter of fact, we should consider that we have renegotiated the full base of our contracts. That's why -- and this is also something that we shared in the previous call -- that's why we are not following any more, as such, the percentage of contracts that have been renegotiated, because I would say, aside the fixed price contracts, which again represent a very small proportion of our contracts, all contracts have been subject, and even the fixed one, fixed price one, by the way, have been rediscussed, at least with the customers. And some of them have been already renegotiated several times. So now -- and you have seen, as part as well of our communication, that the effort to renegotiate the contract continues. We are adding EUR 20 million in the third quarter compared to the situation at the end of March. So it illustrates the fact that this is really a continuous effort. Of course, the context is more favorable with some contracts, especially with the private customers. It's more challenging with the public contracts. And regarding those, now we are looking forward the next contractual revision milestones, which are in particular the start of the new school year, around the end of the summer, beginning of the new school year, September. And then we have as well a major milestone at the end of this calendar year. Then regarding your last question about the synergies. So at this stage, they are mainly focused on the optimization of our structure at HQ level and as well regarding the operations in France. So as we presented with our H1 results, the integration started with where, let's say, the main activities are taking place, so France representing roughly 85% of Derichebourg Multiservices activities. This was the primary focus. So the EUR 24 million of cost reductions are coming from this geographical perimeter, which includes as well headquarters. And EUR 15 million are directly related to the foreseen synergies as part of the integration between DMS and Elior Services and as well the organization decided by our new CEO. And then we have EUR 9 million which relate to the acceleration of the evolution of the organization in France. And maybe one last comment on this is that this is, of course, an ongoing process. In particular, we have -- we are currently running the budget cycle for the next fiscal year. We have, as part of this exercise, let's say, confirmed the identification of some synergies that were identified as well as part of the project before the signature of this deal. So for instance, related to the interim, that should -- that is a new service offered by Derichebourg Multiservices that should benefit to Elior Services as well to the contract catering activities. And we have another example around the maintenance, for instance, for the central kitchen, can be as well for the building, which is again a new service offered by Derichebourg Multiservices. So we are still working [indiscernible] in process, confirming the first step the items, reviewing the baseline, and then we'll quantify the part of the synergies. And we will, I would say, give to ourselves an objective for the implementation of the synergies as part of the next fiscal year.

Next question comes from Jaafar Mestari, calling from BNP Paribas.

I've got two for Didier. On the revenue figure, you mentioned the 3 new contracts are proving problematic. Could you just repeat that revenue figure, please? I think I heard EUR 100 million. Is that all 3 together? And presumably, that revenue contribution was already in your expected revenue guidance? So it's just a problems are new, not the revenue. And then on the new business. Voluntary exits, you're saying minus 1.9% -- the 1.9% impact has been ramping up over the last few quarters. Where is the max? At which point do you start having a stable impact and possibly reducing the impact of those voluntary exits once you're done assessing all the portfolio?

Okay. So regarding your first question. So the overall annualized revenue for this contract is about EUR 200 million. Actually, the activity related to this contract is actually part of -- was part of a forecast that supported the guidance in May and are still part of revenue for this year in particular. So now, as you said, the effort is really on addressing the operational challenges in terms of operating margin on these 3 contracts. Regarding the percentage of voluntary exits, I guess there are 2 ways to look at -- retention, if I may answer to this question more broadly, meaning that we see a retention momentum which is favorable, and retaining profitable clients is obviously a top priority for us. Then when we did contract on a voluntary basis, it's certainly for the sake of profitability improvement, considering as well the good commercial development momentum, so meaning from that perspective we are looking at it in terms of what is the best way to allocate our fixed cost operating structure to our contract portfolio, if you want. Then I don't see any specific contract or movement on our contract portfolio that would significantly increase this percentage in terms of impact on our retention or evolution of revenue.

Okay. So it stays around 2% for a couple of quarters and then presumably at some point it starts reducing completely?

Yes, exactly. I think it's a fair assumption.

[Operator Instructions] The next question comes from Andre Juillard, calling from Deutsche Bank.

Two questions, if I may. First one is to come back on the public contracts. Just to be clear on what are the issues, because we know that these are the most complicated contract, I wanted to be sure that you were in a good position to be able to pass inflation in the next few months. And could you clarify us the impact you're expecting from prices improvement and so on? Second question is about the leverage and the covenant. Could you remind us the new covenants you have at the end of the fiscal year and the issue that you could have in terms of refinancing on all that?

Okay. So on your first question, so as a reminder, as part of our contract portfolio, so we have 4 main contract types, always -- the ones that I present are the 2 extremes, which are the cost-plus, whereby we are able to actually pass through the inflation as costs increase, so which are the cost-plus contract mainly in the U.S. and U.K., and the other extreme, the fixed price, that we have mainly in Iberia and Italy. Then we have the big bulk of P&L contracts, which are split between private customers and public customers. And as far as public customers and the P&L contracts are concerned, we do have price revision clause to this contract that allows us at least to increase the prices as per the revision clause on a yearly basis. And that's why we have been always speaking about contract renegotiation, which is a kind of extra effort to go beyond the contractual price revision terms in order to close as quickly as possible the gap between the increase of the cost and the possibility to increase the prices towards our customers, what we have been more successful to do with our private customers than the public one, simply because I would say the contract is, for them, the best protection in terms of securing their costs on their side. Sure, it's an handicap on our side, but it's an advantage if you put yourself in the shoes of the customer. But now when we look at the profile of this particular contract, meaning the P&L for the public, they largely relate, not only, but largely relate to the education business. So that's why we are -- we are expecting a positive impact, with hopefully a price increase that will be more favorable than the cost increase at the beginning of the next fiscal year and as well at the end of the calendar year, some of the contracts that might have a clause revision term beginning of the calendar year, although the school year obviously is more around the end the end of the summer. So this is an exercise in terms of evaluation, which is still work in progress. As I mentioned earlier, we are in the middle of our budget cycle. So that's obviously one item each team are heavily working on in order to simulate the best they can -- because as a matter of fact, it's not one single clause for all the contracts. It may vary from one contract to another one. So that -- that's a bit a cumbersome exercise, and this is something that we will further review and maybe we'll be in a better position to provide more details with the full year publication.

So sorry to interrupt you. Just to be sure that I understand well. Could you give us a kind of proportion of public contracts which are renegotiated or updated on a fiscal year basis, meaning in September or October, and the proportion of contracts which are renegotiated at the end of the civil year? I don't know if you have the information, but...

I'm not sure we have these details, but we can look for those and ask the teams. I mean the proportion is that you will have more contracts, especially for education, for sure, around the beginning of the school year. The other example that I have in mind that would be more at the beginning of the calendar year would be the contract of -- more for private education as a matter of fact. So I would say it's actually less applicable to the public contracts that we are looking at. And maybe the one that will be at the beginning of the calendar year would be more the ones related to administration. So and then to your second question of the leverage ratio that we should comply with at the end of September is 6x the last 12 months adjusted EBITA, and I think it's worth reminding, the EBITA that we will consider in this calculation at the end of September. So actually what we mean by last 12 months pro forma adjusted EBITA, I mean that is including the changes in scope, in and out, that we can have during the fiscal year. So as far as we are concerned, it means that in our leverage ratio at the end of September 2023, will take into account the full year EBITA of Derichebourg Multiservices. Although on a reported basis, the reported adjusted EBITA will include Derichebourg Multiservices only from April 18. And on top of this, we should be as well in a position to add annualized cost savings in relation to the acquisition. So that's 2 elements that we -- that's important to keep in mind. I mean, which makes us confident to be below 6x the last 12 months pro forma EBITA at the end of September.

Okay. And in terms of refinancing, can you just remind us, because I didn't understand very well what were the main timing. Because you said that the refinancing of the credit lines have been postponed to '26. Is that right?

Yes, that's right. So actually, through the refinancing in July 2021, we got 2 main maturities: the bond in July 2026 and the senior facilities in July 2025. And at the time of the signature, they were -- I mean, as part of the contract, we have this 1-year extension facility subject to the approval of the bank. So that's what we have extended to now July 2026. So -- which also makes sense in term of refinancing, because as a matter of fact, the 2 are to be refinanced together. I mean you have kind of cross-reference between the debt refinancing from the bank as well from the bond. So it makes sense. And it actually gives us a bit more time to work on our free cash flow generation, which is the top priority from our new CEO.

The next question comes from [indiscernible], calling from [indiscernible].

Just a couple of questions. Firstly, just on the A&E of the term loan last year. Could you just confirm that these are still based on the same margins?

I'm sorry. We did not hear your question very well. Could you repeat, please?

The interest rate for the term loan and the RCF, are these still the same? Or have they increased?

I don't know if the conditions are unchanged.

Okay. Great. And then secondly, appreciate the new reporting, but are you able to share for Elior stand-alone Q3 revenue split by Education, Business & Industry and Health & Welfare? I just want to try and understand the performance across each of these end markets.

So as a matter of fact, we had to update the operating segment, which means that we are not going to follow the split between B&I, Education and Health & Welfare separately. So I'm afraid we'll not be able to provide this detailed information any longer.

But just generally, are you seeing growth across each of these markets?

In terms of contract catering, I would say those 3 markets remain our focus. I mean there is no change from that perspective. It's just that we have considered that in terms of reporting, they are less relevant following the integration of Derichebourg Multiservices. But yes, we have -- I mean we have -- we can generally consider that we have now entered into a new norm in terms of activity in each of the 3 markets. So meaning in B&I, we see, especially in the service area, that compared to pre-COVID, we have roughly 1 additional day of home working. And we have to adjust our activities and our structure accordingly, which has been done. Then in terms of Education, we were back to normal. So now we are developing the areas which are, let's say, our target. And then in terms of health care, we might be missing a bit of activities from the cafeterias in some hospitals. This activity in some areas might be still a bit limited due to the lack of health care people, which is limiting the activities in those locations and the number of visitors. But I would say it's roughly -- it's globally marginal. So now, especially in B&I, we see, in particular, let's say, an increase in the average ticket price when the people are in the office as well a higher attendance online versus pre-COVID. And as well we see, let's say, some momentum as well in the recovery of what we consider the side activities around catering activities, complementary to, let's say, the traditional catering.

We currently have no questions coming through.[Operator Instructions] The next question comes from Julien Richer calling from Kepler Cheuvreux.

Just a very quick one. On the EUR 24 million of cost reduction you mentioned, is it a net or a gross amount, and if it's a gross amount, what is the cost attached to implementing it, please?

That's actually a net amount, but excluding the restructuring costs. So what I mean by this is that in some cases, you can have a synergy with a change in the organization, meaning you reduce some costs and you implement some other costs and then you have a positive net between the 2. So that's what I mean by net. But actually, it's not taking into account the restructuring costs, which are quite marginal at this stage. So that's really -- anyway, that's what you should expect in terms of contribution to the EBITA, considering that the restructuring cost will be accounted for below that line...

Okay. So the net-net is EUR 20 million-plus and that has to be taken into account?

Yes. That's a fair assumption [ for the margin ].

There are no further questions, so I will hand you back to your host to conclude today's conference.

Okay. So thank you, everyone, for your participation. The next call will be with the announcement of the full year results in November. Thank you very much, and have a great day.

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