Elior Group SA (ELIOR) Earnings Call Transcript & Summary

Thank you for standing by. Good morning, everyone, and welcome to Elior Group's Full Year 2022/2023 Financial Results Conference Call. Please note, this call is being recorded. [Operator Instructions] The management discussion and the slide presentation plus the analyst question-and-answer session are being broadcasted live over the Internet. Today's call will start with an introduction from Daniel Derichebourg, Chairman and CEO. He will address you in France. Didier Grandpre, Chief Financial Officer, will summarize key points in English. After this introduction, Didier Grandpre will then carry on with the usual presentation before answering your questions. Mr. Derichebourg, please go ahead.

[Foreign Language]

Thank you, Daniel. I will summarize the key points. So then I started with the personal history when he started his career at 16 years old, helping his father cleaning out basement. Then this was a progressive and fantastic ramp-up until this activity became, Derichebourg recycling with turnover, which was around EUR 5 billion, generating a material EBITDA. Derichebourg is also well rated with BB+ from Standard & Poor's. Then on this basis, he wanted to take the challenge around Elior and became the main shareholder and the Chairman and CEO on April 18, with the first priority to turn around the activity. He identified quite a lot of opportunities that we are addressing one after the other. One of his message was also that he noted, quite a gap between the field and overall management up to a Board level and he has worked on streamlining, better connecting with the different levels of the organization. So then one of the actions, starting with our organization was to renew the management in France and in Italy with the same spirit to reduce the level of organization and streamline the different levels. A key focus has been on the 3 contracts that we discussed as well around our call in July with Itinere, that was a significant difficulty regarding the ramp-up of a new contract as well as the Ministry of Defense that should be terminated at the end of the contract in 2025. Then the third one is being still addressed, that concerns the presence in France, but with a good hope to get it solved during this fiscal year. And then one key outcome of all these actions is that you -- as you know, this deal started with the assumption to generate a little bit more than EUR 30 million savings at the end of fiscal year 2026. We have generated already almost EUR 30 million on annualized savings at the end of this fiscal year, which led us to increase the total expected savings up to EUR 56 million at the end of 2026. So giving himself and the company 2, 3 years to put it fully back on track. Again, a lot have been achieved over the first 6 months, still to come. And then one important message as well is that for the time being, he does not get any compensation. He plans to do this when the company will earn a sufficient level of money that could unlock some dividends and some compensation for himself. So thank you, Daniel, for this input. I propose to continue with our financial presentation, started as usual on Slide 2. So 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 the Slide 2, which is an integral part of our presentation. So as you heard from Daniel fiscal year 2022/'23 has been a key turning point for Elior. We became operationally profitable again. We closed the DMS acquisition in April, together with the arrival of Daniel, our new Chairman and CEO since then. So this has led to a strong upward revision in target synergies and a clear commitment to deleveraging. So I will make a short introduction before covering our full year results in detail. Then I will share with you a review of our business, including how we successfully address all levels of profitability. And finally, I will conclude with our outlook for fiscal 2023/'24 and beyond before answering your questions. So we have delivered according to guidance with a strong organic growth of 11.2% versus our latest objective of at least plus 10%. With an adjusted EBITA margin up 220 basis points year-on-year, turning positive to reach 1.1% compared with our latest target of around 1%. We also recorded a normalized free cash flow of minus EUR 20 million, a significant improvement from minus EUR 124 million a year ago. As announced at the end of July, we extended the maturity of 89% of our bond debt now maturing in July 2026, in line with our bond. We swiftly started integrating DMS and our new Chairman and CEO, launched further restructuring. This led to EUR 7 million of cost synergies being recorded in just 6 months with an annualized amount standing at EUR 27 million at the end of September 2023. Let's now review Elior's full year results in detail. Starting on Slide 7. Consolidated revenue amounted to EUR 5.22 billion compared to EUR 4.45 billion a year ago. This plus 17.3% year-on-year increase reflects, first, the strong organic growth of 11.2%, a plus 6% perimeter impact that I will detail shortly and a small currency impact. Regarding the scope, we have -- the exit of Preferred Meals, a loss-making noncore business in the U.S. that reduced revenue by EUR 188 million in fiscal '23, and the acquisition of DMS that has been consolidated since April 18, and that since then increased revenue by EUR 447 million. As a complement, we have provided pro forma figures in Appendix of both our press release and this presentation. Pro forma revenue reached EUR 5.8 billion, of which 72% in contract catering and 28% in Multiservices. This reflects a more balanced group compared to a split that was around 90-10 before DMS. All three drivers contributed to strong organic growth. Like-for-like growth was robust at plus 9.6%, including volume growth of plus 5.1%, which was fueled by Omicron recovery effect and an average price increases of plus 4.5%. The commercial momentum remained strong in fiscal '23, with openings -- boosting revenue by 9.6%, following a plus 9.8% in fiscal '22. On the other hand, contract losses reduced revenue by 6.4%, reflecting a retention rate of 93.6%, excluding voluntary exits. Finally, voluntary exits of loss-making contracts reduced revenue further by 1.6%. Slide 9 shows a major achievement in fiscal '23 with Elior Group being operationally profitable again. Adjusted EBITA increased by EUR 107 million from a loss of EUR 48 million last year to a profit of EUR 59 million this year. Similarly, group's adjusted EBITA margin was up plus 220 basis points from minus 1.1% last year to plus 1.1% this year. Let's now move to the next slide to consider the various drivers of operating profitability improvement in detail. First, we recorded and highly elevated inflation that reduced EBITA by EUR 264 million. Against these, several drivers, starting with the price increases, that amounted to EUR 201 million, corresponding to -- pass-through rate of 76%. This actually improved significantly from 69% in the first half to 85% in the second half, illustrating the trend towards lower net inflation gap. In addition, volume increases had a positive EBITA impact of EUR 51 million, leveraging our cost base. On top of that, net development contributed to an EBITA uplift of EUR 7 million more than last year despite the ramp-up issues on a smaller number of large contracts that we already mentioned. Voluntary exits of loss-making contracts contributed to an EBITA increase of EUR 2 million as we seriously reviewed our portfolio of legacy contracts. In summary, prices, volumes and net debt development almost entirely offset the Inflation impact. On top of that, we continue to deploy operating efficiency measures around procurement, logistics, productivity and SG&A. This translated into an EBITA improvement of EUR 50 million. The EUR 50 million included EUR 7 million of synergies already in this fiscal year '23. And finally, the exit of Preferred Meals in the U.S. had a positive EBITA impact of EUR 42 million, while other scope impacts, mostly DMS added EUR 21 million. Let's now look at the rest of the income statement, starting from EBITA at EUR 33 million. So nonrecurring charges totaled EUR 81 million, which is a significant reduction from EUR 309 million last year. This year, they include goodwill impairment losses related to catering in France and Spain for EUR 47 million, restructuring costs for EUR 22 million and the DMS acquisition cost for EUR 10 million. Net financial charges amounted to EUR 78 million versus EUR 26 million last year, reflecting the increase in both average debt and financial costs. Last year's financial result benefited as well from a foreign exchange gain. Income tax was a profit of EUR 29 million versus a loss of EUR 36 million a year ago. This included this year deferred tax assets for EUR 40 million in France coming from DMS. The full breakdown of income tax can be found in the Appendix. All in all, net result group share was a loss of minus EUR 93 million, much improved versus a loss of EUR 427 million last year. Now on Slide 12, looking at the free cash flow. So starting with the adjusted EBITDA that amounted to EUR 212 million in fiscal '23. CapEx totaled EUR 77 million, equivalent to 1.5% of revenue, which is slightly above the 1.4% from last year. IFRS 16 lease payments reached EUR 77 million, broadly unchanged year-on-year, including DMS. Net change in working capital was negative EUR 66 million. It is important to note that this includes a temporary negative movement of EUR 38 million related to factoring and securitization. This is just a calendar issue that will mechanically reverse in full during the first half of fiscal '24. Therefore, adding back this EUR 28 million to the reported free cash flow of minus EUR 58 million, gives a normalized free cash flow of minus EUR 20 million, very close to breakeven. Nonrecurring cash expenses of EUR 40 million reflects mainly the exit of Preferred Meals last year. The acquisition and integration and DMS this year as well as restructuring in Continental Europe, mostly France. Next slide shows a free cash flow improvement of EUR 104 million year-on-year. It comes first and foremost from EUR 101 million improvement in adjusted EBITDA. This makes us confident in our ability to continue to deleverage as we continue to improve profitability. I've already commented on CapEx and working capital movements, tax paid benefited from a 50% reduction in the French CVAE tax rate starting January 1, 2023. Moving to the net debt. The reversible working capital movements that I previously mentioned, mechanically increased net debt at the end of September. Excluding this, normalized net debt reached EUR 1.36 billion versus EUR 1.22 billion reported a year ago. DMS brought a net debt of EUR 41 million, including balance sheet factoring and IFRS 16 lease liabilities. The overall IFRS 16 debt reduced by EUR 19 million during the year. On top of free cash flow already discussed, interest paid and financial fees amounted to EUR 66 million. Finally, net acquisitions of EUR 21 million reflect the buyout of minority interest in Elior North America for around 2/3. The rest mainly relates to the acquisition of Cater To You Food Services in the U.S. This slide shows deleveraging is already well underway. At the end of September 2023, our leverage ratio was 5.4x based on reported net debt of nearly EUR 1.4 billion, and covenant EBITDA of EUR 258 million. This was comfortably below our covenant test level of 6x and also shows further improvement from 7.1x at the end of March 2023. Although we are confident in our ability to continue to improve profitability and free cash flow generation, we recently, for comfort, loosening our end March 2024 covenant. The test level is now 5.25x versus 4.5x previously. The test level at the end of September 2024 and beyond remains unchanged at 4.5x. Available liquidity came to EUR 313 million at the end of September 2023 versus EUR 399 million a year ago. DMS brought in EUR 47 million of available liquidity when liquidity evolved along the same free cash flow interest and net acquisition drivers [indiscernible] net debt. Just to confirm, the EUR 38 million temporary working capital movement has no impact on liquidity. The liquidity benefited from EUR 8 million of additional funding from securitization. The program, as it stands, was due to expire on October 2024. During the summer, we extended the securitization program to October 2025 on the same basis. Now I would like to move to the next section of this presentation with a business review. Starting on Slide 18 with a bit of context. This graph shows actual food cost inflation suffered by our catering activities. More precisely, it is the average year-on-year food inflation during the wall of fiscal '22 and then each of the 4 quarters of fiscal '23. So just to be clear, the end points [indiscernible] Q4 averages, not exit rates at the end of Q4. So clearly, the macro context is improving as food inflation is decelerating. It peaked in Q1 in the U.S. and in Q2 in Europe. And you can see the rate of deceleration has increased in Q4 compared to Q3. Our #1 priority today is to continue to deleverage through relentless effort on all levels of profitability improvement for sound and sustainable free cash flow generation. Let's address these 5 levers in more detail. Starting on Slide 20 with price momentum. In fiscal '23, we renegotiated during the year, price increases of EUR 173 million generated along the year, 24% more than the year before. More importantly, we have entered fiscal '24 with already secured price increases totaling EUR 79 million. This represents a solid base to build upon as the year plays out. To the right, the other important figure is plus 6.3%. It represents the materialization of what we are expecting for the new school year price revision campaign in France. I believe this illustrates 3 important points: first, this revision will be valid for the next 12 months; second, it was calculating looking back 12 months and capturing the peak of inflation that we saw previously; and third, it was set when inflation deceleration was gathering pace. Moving to voluntary exits. In the past 2 years, we have recorded strong commercial momentum with development close to 10% in each of fiscal '22 and fiscal '23. In fiscal '22, net development contributed EUR 108 million of revenue and EUR 5 million of EBITA. In other words, 3% of growth at a 4.6% margin. In fiscal '23, net development contributed EUR 144 million of revenue and EUR 4 million of EBITA. That represents 3.2% of growth and 4.9% margin, a bit better than last year despite the already mentioned ramp-up issues. Towards the end of fiscal 2022, interaction to the observed in inflation, we embarked on the rationalization of our portfolio of legacy contracts, where we haven't been able to obtain a good enough price, we have chosen to exit the contract when possible. In fiscal '23, that meant losing EUR 70 million of revenues while adding EUR 2 million of EBITA. So if you look at the overall picture on a net-net basis, we added EUR 74 million of revenue and EUR 9 million of EBITA and a very healthy 12.1% margin. We will continue to rationalize our legacy portfolio in fiscal '24 as we continue to favor profitability of our growth. Moving to next slide. Relatively low-margin industry like ours, it is essential to keep a tight control on costs. This became true critical -- fully critical with first COVID than the surge in inflation. This has always been a key area of focus for Elior and even more so in recent months with our new management. In fiscal '23, we delivered EUR 50 million of overall cost savings, including EUR 7 million of synergies, which is a strong achievement in just 6 months since the DMS deal closed and Daniel arrived. Excluding these synergies, we delivered EUR 43 million of cost savings, about the same amount as last year. Delivering as much in year 2 and year 1 is a strong achievement. On the far right of the slide, you can see the various areas of actions. You might recall that we covered this in detail during our first half results presentation. The point I would like to make today is that our cost-based optimization is broad-based with procurement savings, operating efficiencies and SG&A reduction. More importantly, efficiencies cover all our geographies. As you can see on the middle of the slide, savings were broadly equally split between France and international. Let's now move on the next slide to spend more time on synergies. Cost synergy opportunities have increased significantly since we first announced our intention to acquire DMS back in December 2022. This reflects the arrival of our new Chairman and CEO as well as Boris Derichebourg taking on leadership of all catering activities in France. The scope of opportunities now includes group's corporate function, both Catering and Multiservices in France and Multiservices in Spain and Portugal. On the right side of the chart, you can see what has been already achieved in just 6 months, notably the implementation of a new operational organization in France. With EUR 27 million of annualized cost synergies at the end of September 2023, we have, in effect, already surpassed our initial target of EUR 18 million. Today, we are raising our cost synergies target to EUR 44 million, taking our overall target to EUR 56 million. In France, with the right organization and the right regional mapping now in place, we are going to start extracting developments in energies, whose targets remain unchanged at EUR 12 million. Before introducing our outlook for fiscal '24, let's now look at where we really exited fiscal '23 in terms of adjusted EBITA margin, considering what we can take for granted. So starting from our reported margin of 1.1%. We can for sure first look at DMS on a pro forma basis as if it has been consolidated over 12 months. This adds 10 basis points of margin. Second, we can add the annualization of synergies at the end of September. This adds 30 bps of margins. Finally, we can also adjust for contract ramp-up issues that have been formally resolved. This adds 40 bps of margin. Therefore, in total, these 3 demands represent 80 bps of margin, hence a normalized EBITA margin of 1.9%, which represents a solid base for further uplift. This leads to the final section. Starting with the outlook on Slide 26. The activity is globally encouraging across Catering and Multiservices in all countries where we operate. Volume growth will normalize in fiscal '24 after benefiting from an Omicron catch-up effect last year. We have entered fiscal '24 with a solid EUR 79 million base of secured price increases to based upon. As I mentioned before, commercial development will continue to be accompanied by a rationalization of our Legacy portfolio. Year-on-year inflation remains high by historical standards, but there has been a marked deceleration in all our geographies in recent months, which is a relief. Beyond the macro context, all our levers of profitability improvement will continue to be firmly activated with a strong vigor introduced by our new leadership. With all that said, we have set ourselves the following objectives for fiscal '24. Achieved organic revenue growth of between 4% and 5% with an adjusted EBITA margin of around 2.5%, so that we can close the year with a net debt EBITDA leverage ratio of around 4x. In the midterm, we now aim for total annualized recurring synergies of EUR 56 million by fiscal 2026. Also, we confirm our priority given to deleveraging with a new target net debt EBITDA ratio below 3x at the end of September 2026. Now on Slide 27. This was previously shown in appendix, but we have decided to bring it up. We have a chance to add some comments on the different moving parts of the free cash flow. So for fiscal '24, at this stage, we currently anticipate the CapEx to range from 1.7% to 2%, a small step-up from levels seen in the past 2 years, supporting our estate of central kitchen and to extract further efficiencies. On the commercial development front, we have proven our ability to deliver good growth without large CapEx spending. Net change in working capital ranging from plus EUR 60 million to plus EUR 80 million. Bearing in mind, we have already told you EUR 38 million will mechanically come back during H1. So after 2 years of very strong volume growth, we expect more favorable working capital movements, supported by ongoing initiatives to further improve the invoicing and collection cycle. Nonrecurring cash expenses of between EUR 20 million to EUR 25 million, much less than in fiscal '23 and supporting our new cost synergy target. All-in cost of net financing at around 4.8%, including off balance sheet securitization and factoring. Now on Slide 28 with some concluding remarks. I cannot emphasize enough how much of a turning point the arrival of Daniel has been for the group. He has a strong track record turning around companies in the business services sector, dealing with both private and public sector clients in an industry where margins are pretty thin. Furthermore, Derichebourg SA owns 48.3% of Elior Group and it is bound by both a lockup and standstill. So our core shareholder is here to stay with a large vested interest in the success of Elior. The acquisition of DMS has reinforced the strategic positioning of Elior. We have now a more balanced business with a stronger and more diverse services activity, complementary client bases and plenty of opportunities to cross-sell. In terms of cost, again, there is today a focus on cost optimization like never before at Elior. All in all, our latest results and outlook show that Elior's turnaround is firmly underway with a clear path to free cash flow generation and deleveraging. I'm now ready to answer your questions. Operator, could you please take the first one?

[Operator Instructions] We'll take now our first question from Julien Richer from Kepler.

A few questions for me. In terms of organic growth for 2024, could you please give us your view on the price impact you expect in '24 and the net new business contribution you expect also? Second question on France. Is it possible to have a few details on profitability evolution in France in terms of margin where you think you will be able to learn in the medium term? And the last point, what amount of cost efficiency do you expect for 2024? Thank you.

I'm not sure I would be able to provide all the detailed answer, but let me share many of the main drivers on these 3 fronts. So first, regarding the organic growth, we will have the same drivers at play as in fiscal 2023. The volume recovery was more important in 2023 that we expect in 2024, although there will be some continuity. Second, we will have some benefits from the price increases. So as I explained, out of EUR 173 million of renegotiation we had in fiscal '23, EUR 79 million will actually apply to fiscal 2024, so they will benefit from the revenue growth in the new fiscal year. Then we expect the commercial development to keep its good momentum. When we look at the past, it was close to 10% in fiscal 2022, almost at the same level in 2023. So we see this as a positive trend. But in parallel, as we favor the profitability of our growth, we will continue with our portfolio rationalization. So then moving to France, we have been focusing in terms of cost synergies, especially on this geography for -- during the first semester, meaning in fiscal '23. So we have now the cost structure in place with a new combined organization for services, an optimized organization as well for capturing. They are based on the same organizational streamlined principle. Now they will generate the full year, the annualized synergy that we have mentioned at the end of September, and this will mostly benefit to France, including, by the way, the headquarters. Then your last question was about cost efficiencies. So we are -- we'll continue as well what has been initiated since 2022. I think that globally speaking, you should really look at those 3 elements: organic growth, margin development, cost opportunities implementation as a continuum. I mean, some started in 2022 with a good impact already in 2023. They still need to be completed in terms of deployment. Here, I'm thinking about all what we have initiatives around the flexibilization of labor in some of our restaurants, but we are now addressing all activities to generate the similar optimization. We have complemented this kind of initiative as well with a stronger focus on procurement as well as some initiatives about the rationalization of our references, all this in order to get better prices from our suppliers. This is complemented with the optimization as well of our supply chain. We are reviewing the logistics flows. So all this will contribute to cost efficiencies next year on top of the simplification of the organization.

Sorry, just a quick follow-up on the price points because you -- so we get the EUR 79 million, but it's equivalent to 1.5% of your revenue in '23. And Pierre talking about 3% to 5% increase in prices in '24. So does it mean that you are below what others have been able to negotiate? Or is it just because it takes into account only France education and this kind of stuff and something is missing in the equation?

So actually, we are really looking at the different geographies. As you have seen in 2023, the inflation profile has been different, I mean has started decelerating at a different pace in the different countries. So what we have factored in our guidance in terms of EBITA margin for next year and growth is actually the combination of all the situations that are a bit different from one country to another one. So what we expect is a continuity in the deceleration in inflation. It will not disappear. And then what we wanted to illustrate with a plus 6%, plus 3% in education was actually that there is a step when the contracts are due to renegotiation that you get actually the price increase, but we could not get through renegotiation for these public contracts.

We'll take now our next question from Jaafar Mestari from BNP Paribas.

I've got 3, if that's okay. Firstly, in terms of the DMS net debt, the paragraph where you discussed that the consolidation of the DMS net debt was higher than initially anticipated, bigger IFRS 16 leases more factoring. Apologies if this sounds naive from the outside, but how material are these differences that you have to flag them? How do they materialize? And just to be crystal clear, should this have any bearing on effectively the valuation of DMS or the number of shares [indiscernible] issued the business. And then just on management changes in France. I think Mr. Derichebourg said in his introduction, he led off the vast majority of management positions in France. What's been the time line for that? And then my question here is when did the disruption happen? Is it still happening? Or are you now well beyond that point of making big changes in management positions? And just lastly, on the future. Obviously, a detailed budget for '24 was the priority. But I think you previously mentioned we could perhaps expect an update on the medium-term strategy and perhaps a plan, a 2-year plan, a 3-year plan at some point in 2024. Can we still expect that?

Okay. So starting with DMS net debt. Actually, the changes came from 2 elements. The first one is that there was a part of DMS factoring that cannot be temporarily considered as without recourse at the end of September 2023. And this led us to restate the opening debt back mid-April. This debt, as I explained, will actually disappear in the first half of 2024, so it's just a temporary impact. The second one is related to IFRS 16. So as part of our closing, we are reviewing actually all our IFRS 16 leases, which led to restate some of the leases, in particular, the one that we are between -- or let's say, what we are within Derichebourg has said previously. So this is actually an increase in the debt. But at the same time, this translates into additional leases for Elior that are compensated by an increase in the EBITDA. So meaning that globally, this is not all from a leverage ratio perspective. Then to your second question on the management. So these changes occurred around the summertime. Now the context in France is that the new organization, which has been designed is fully operational since the beginning of our new fiscal year. So we will enter fiscal year 2024 on -- with the simplified structure with closer link between the management and the operations. And now the regional directors are fully empowered to focus on the commercial development. Regarding the midterm strategy. So this is something we'll kind of address one step after the other. And we will, for sure, come back to you in due time with the time line for this item.

Okay. And just to clarify on the DMS net debt, everything you're flagging today with regards to factoring for the group, should we assume this is almost entirely the DMS timing of factoring?

So this is actually split between the DMS factoring and the securitization of Elior, a bit more from the -- actually from the factoring of DMS.

Okay. So everything reverts, thank you.

We'll take now our next question from Andre Juillard from Deutsche Bank.

First one is on the guidance. Could you please give us a little bit color and granularity on the plus 4% to 5% top line growth you've been giving for '24? Second one is on the CapEx level. You've been guiding for '24 1.72% of the revenues. Could you give us some more color about the midterm level you could expect? And could you, lastly, remind us what are the next refinancing you will have to do and what are your needs in terms of refinancing in general?

So regarding the guidance, as I indicated, we will continue to benefit from price increases and commercial development that will fuel the organic growth. As far as volume is concerned, we consider that the biggest impact was already obtained from last year since we exited the COVID recovery phase. Then one important aspect to take into account is that we want to continue to rationalize our legacy portfolio for loss-making contracts. So this will have a drag on the overall retention. But again, we give priority to profitability and free cash flow improvement over the level of revenue. So we rationalizing the portfolio is a priority for 2024. We expect this exercise to be mostly completed by the end of fiscal '24. So that's not a topic anymore in 2025. Then regarding the CapEx, we are expecting a slight increase in 2024 versus the last 2 years. When we look ahead or midterm, actually, we see that the DMS activities are more or less at the same level of CapEx as for our service activity that was within Elior before DMS acquisition, and which means that we -- they are lower definitive in contract catering, but we expect above 2% in the midterm. So in average, we should have a mix of the 2, which is, I would say, broadly around 2%, maybe slightly higher, but in that range. Then with the postponement of our bond debt at 89% to July 2026. Now we have -- this is the milestone, July '26, when we need to refinance both our net debt and our bond. So of course, this is something that we'll prepare a bit in advance, and it's not unusual to get these operations organized roughly 1 year before the milestone -- the maturity.

We'll take now our next question from [indiscernible].

I Just have a question. Can you elaborate about the reason behind your decision to negotiate further delay for the covenant test and especially the 4.5x net leverage.

Okay. So actually, so you should really look at this in as a recovery path, I mean, as a clear trend to reduce our deleveraging. So we started with 7.1x at the end of March 2023. We further reduced it to 5.4x at the end of March 2023 -- at the end of September 2023. This is a clear priority, and we target a leverage ratio around 4x EBITDA at the end of September 2024. We want to give us -- since we are still in the process of generating the synergy wanted to give us a bit of comfort around March 2024. So that's why we have loosened the ratio and the covenant at the midpoint between the 6x we had to respect at the end of September '23 and the 4.5x that we have to respect at the end of September '24. So at the comfort, we obtain versus 4.5x initially.

We'll take now our next question from Leo Carrington from Citi.

If I could start just to follow-up on the pricing for 2024. Would it be correct to say that there's potential for further price rises in FY '24 beyond what's already renegotiated i.e., the items, the EUR 79 million? Or put a different way, in terms of the organic growth guidance, what do you think the landing point will be for price increases for FY '24? And then in terms of the synergies, it would be quite helpful if you could give some more color on where the incremental cost synergies were versus those that were first identified? And then lastly, in terms of the midterm, now you have the business back on track. Do you see any obstacle to getting back to that 4% adjusted EBITA range that Elior saw in 2018? Thank you.

So starting with your first question. So actually, so this is a continuous process. We have many price revision milestone around the beginning of the school year. So this was the case in various geographies this year, benefiting to fiscal year 2024. We have traditionally as well another milestone, which is more toward the end of calendar year, something around December, January. So this one will contribute as well to fiscal year 2024. So we don't know yet to which extent they will impact 2024. I mean as far as inflation is concerned, we believe there is still a bit of unknown. So that's what we have factored in our guidance in terms of revenue growth for next year. That's the 2 main phases, September and then around end of December, January. And of course, you can have some contracts with an anniversary debt at any point in the year, that could be a further opportunity for price renegotiation. So moving to synergies. So for sure, we have taken into account what has been already achieved, which was a bit higher in terms of cost optimization around headquarter corporate functions. As well, we -- the rationalization, the optimization was a bit stronger around operations in both services and contract catering. We see as well some opportunities around real estate optimization. So that's all this we have considered, again, based on what has been already achieved, which is higher than what was even contemplated for the next 3 years that led us to increase the overall target from above EUR 30 million to EUR 57 million -- EUR 56 million, sorry. I'm sorry, could you please repeat your last question? I'm not sure I got it in full.

I was just referring to the midterm margins, 2025, 2026, and any obstacle at this point to getting back to the 4% range that you had before the pandemic?

I would say it's a bit premature to say. That's something we will work as part of the strategic plan that we are mentioning earlier during this Q&A session. What is for sure is that our priority is definitively on deleveraging. So that's why we are focused on the further evolution of this ratio down to below 3%, that is our target for end of fiscal year 2026.

We'll take now our next question from Pravin Gondhale from Barclays.

So firstly, on voluntary contract exits. So those have been creeping up in the last few quarters and are now around 1.5%, 1.6%. By when can we expect this to be done? Like -- so you said that by 2024, you expect this to be done with. But then what is your expectations for the impact on retention rate and organic growth this year from these exits related to 2023? And secondly, on the margins. So the new contract mobilization costs were a significant drag in 2023. You said that there is still one contract that is yet to be renegotiated. Does that 2.5% margin guidance assume any drag from that particular contract? And if free negotiations lands in Elior's favor, can we expect some upside to that 2.5% margin guidance?

Okay. So regarding voluntary exit, so you are right to say that it started to impact more significantly 2023 because we -- this is also a journey. We -- this initiative started with a surge in the inflation. Of course, the first step is always to go to the customer and renegotiate the prices whenever feasible, in some cases, in turnout, but it was not possible, especially for the public contracts, and I think we have explained several times the context. So that's why you had a kind of full year impact of a decision that was taken more at the end of fiscal year '22 into fiscal year 2023. Again, it's still our priority to restore the profitability. If they are complementary voluntary exits that we need to decide, we will do so. That's true. As you say, it will impact a little bit the retention. But again, the priority is really free cash flow generation, net debt deleveraging. And if it implies exiting some contracts, so be it. Then regarding the margin. So we tried to give a little bit of color in the normalization of our EBITA margin at the end of September, around this 1.9% One element is actually the naturalization of the cost we had in fiscal year '23 following the resolution of the 2 main contracts, so this represents an incremental of 40 bps. If you recall, in July when we updated our guidance down to around 1%, so meaning 50 bps lower than the guidance from May, this was mainly driven by these 3 contracts. So I would say the gap between the normalization of EBITA margin at the end of September and our guidance for fiscal 2023 give you the order of magnitude that we still need to address with the last contract. And for sure, the efforts are still continuing in order to get it solved as quickly as possible and as Daniel mentioned at the beginning of the call, there is a strong action on this one, and we do hope that it will be solve as soon as possible in this current fiscal year. Then to your point on the margin, so there is still a bit of unknown. What we see is a good start in October compared to our assumptions. So we are still hopeful around this guidance, but I would say it's too early in the year to speculate further.

[Operator Instructions] We'll now take our next question from Simon LeChipre from Stifel.

Just one for me, please. In terms of cost inflation, what is your scenario? And what do you forecast in terms of average cost inflation for this year in the context of your 2.5% margin guidance, please?

So what we have seen is an inflation that started to decelerate a little bit earlier in the U.S. in -- at the end of Q1 in 2023. It was a little bit later, one quarter after in the rest of Europe. We see a continuous deceleration in Q4 versus Q3. We do have this trend to continue. That's what we have factored and it's really a country-by-country exercise because the profile is actually different from one country to another one. But this reduction in inflation is what we have factored in our EBITA margin guidance.

Okay. And perhaps asking the question another way, what is the current inflation that you see on average at a group level, if you are not keen to share any forecast.

So maybe I can tell you is that globally speaking, the inflation has been reduced by 2.5 percentage points in H2 versus H1. With as far as food is concerned, a decrease on the same time line by 7 percentage points.

We'll take now our next question from Christian Devismes from CIC.

Just a quick follow-up question on the voluntary exit from contract in 2024. Can we assume in 2024, the same impact on organic growth as in 2023? I mean, minus 1.6% because the question is obviously that we would like also to have an organic growth guidance excluding the impact of portfolio rationalization which is a bit difficult for us to monitor.

Yes. I understand that we are not really, let's say, looking at it with pieces, we're actually contemplating all the actions that we are taking in order to address this loss-making contract because this is what we're speaking about. So first, it's continuous effort on renegotiation, continuous effort on productivity improvement. So it will be at the end, the combination of the 2 that has been factored in this organic growth guidance between 4% and 5%. But I would say most importantly, associated to 2.5% of EBITA margin that can be the outcome of different actions, again, price increases, renegotiation or voluntary exit as an ultimate decision to take.

We'll take now our next question from Sabrina Blanc from Societe Generale.

[Technical Difficulty]

We don't hear you very well, Sabrina.

[Technical Difficulty]

I'm sorry, there is really a background noise [indiscernible] hear your voice.

Sorry, Can you hear me?

No we are we really struggling to hear you Sabrina.

Okay. Forget it. I will confirm it after.

So we'll take our next question from [indiscernible] from Morgan Stanley.

You may have answered this already. I joined a bit late. But on the margin guidance, there was an issue with the trend Italia contract had the impact on the margin previously. Is that issue resolved now and that's already taken into account in the 2.5% guidance that you're providing?

So just to be sure, are you referring to the 3 contracts we mentioned in July?

Yes.

Okay, yes. So this is already what we discussed. So 2 of them have been already solved. And we have factored the impact of a resolution in the normalized EBITA margin at the end of September of 1.9%, so meaning contribution of 40 bps expected into fiscal 2024. There is just one that is still a work in progress to kind of close the bridge.

Right. And if I recall, the main one was the trend Italia contract, is that among the two that was resolved?

Yes, yes. It was -- you might have missed Daniel's introduction [indiscernible] he was speaking french for you, but yes, he confirmed.

[Operator Instructions] We have no further questions, so I will hand you back to Didier to conclude today's conference.

Okay. So I believe this concludes our call today. Our next financial release will be on the 16th of May 2024 with our half year results. Until then, please do not hesitate to get in touch with us. Thank you. Have all a good day. Goodbye.

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