Elis SA (ELIS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Elis Half Year 2021 Results Call. [Operator Instructions] I would now like to hand the conference over to the CEO, Xavier Martire. Please go ahead.

Good afternoon, everyone. I am Xavier Martire, CEO of Elis. Welcome to our H1 2021 results conference call, which is also webcasted. The speakers on this call will be Louis Guyot, CFO, and myself. So after an overview of the H1 2021 business highlights, I will hand over to Louis, who will detail the first half financial performance. I will then come back to provide you with an update on our news flow and share with you our updated views on 2021. So let me start with the highlights of our H1 2021 performance, which was just like our 2020 full year results, very satisfactory, given the unprecedented crisis we are going through. H1 organic revenue was up 1.3% with nearly 20% growth in Q2. EBITDA margin was up 80 basis points at 33.3%. EBIT margin was up 140 basis points, and net results was up 36% at EUR 67 million and free cash flow after lease payments was very good at EUR 91 million, up 62% year-on-year, enabling the group to decrease its net debt by EUR 78 million. So this performance was notably driven by the improvement of Elis growth profile on the back of the crisis. There is clearly an increasing need for hygiene, employee safety and traceability, and Elis has been very active commercially to provide adequate offers to its clients. Furthermore, we saw some uncertainties remain around the rise of the delta variant. It is fair to say that hospitality is recovering. And finally, we have been very efficient in managing our cost base and improving our productivity and efficiency in all geographies during the first half. These elements enable us to revise our 2021 outlook upwards. We now expect full year organic revenue growth to be in plus 5% to plus 6% range. EBITDA margin should be at circa 34.5%, and free cash flow should be between EUR 200 million and EUR 230 million. This should lead to 3.3x net debt-to-EBITDA ratio at year-end, down 0.4x year-on-year. Moving on to the next slide. Let's start by looking at the performance of our hospitality end markets, which is, as you know, our most impacted market by the crisis. As a reminder, the reason why Q1 was tough is twofold. First, the comparable base was very difficult, given January and February 2020 were 2 strong months. Second, many lockdown measures were implemented in Europe in March 2020, considerably impacting international travels. Since May 2021, activity has rebounded sharply. This was driven initially by strong domestic tourism and then by cross-European tourism. It is very likely that the summer season will be good, and we recorded good volume numbers in the first weeks of July. Hospitality activity linked with business travel remained subdued in H1, and we only expect to start to see some positive news flow regarding the organization of seminars, congresses and trade shows in the second semester and especially, in H1 next year. This will obviously need to be confirmed, and we don't want to be too optimistic. As a reminder, our contract structure with hotels is fully variable, which means we charge our clients on a piece-by-piece basis based on what they ordered. Conversely, when activity is low, hotel immediately decreases its linen bill, which explains why we were able to keep a good level of pricing in H1, despite the pressure. Moving on to the next slide. What you see here is evolution of our hospitality volumes in the 3 countries in which hospitality has the greatest share in the mix. France, Spain and the U.K., which combined account for around 75% of our total hospitality revenue. The dark blue lines are for 2019, the light blue for 2020 and the green for 2021. You can clearly see the sharp recovery from mid-May following the lifting of lockdown measures in Europe along with the reopening of borders. You can also notice that activity continued to improve in the first weeks of July, meaning that the rise of the Delta variant has only very limited impact on our activity, implying that both domestic and European tourism continued to improve. Therefore, we expect volumes during the summer to be on average circa minus 25% compared to pre-crisis level. Moving on to the next slide. Let's now look at health care where activity is now back to normal levels. We don't notice any more rescheduling of non-COVID-related treatments as was the case before, which explains the rise in volumes. We also noticed what we consider to be some structural activity drivers. One example is the textile contracts we signed for surgery blocks in replacement of disposable items. The switch is motivated by at least 3 main reasons. First, the need for hospitals to secure the supply chain, disposable garment being sourced in Asia with mainly nonreliable supplier and shortage last year. Second, by the way to improve employees' comfort, textile garments being way more comfortable to wear than disposables. Third, [indiscernible] considerations as our offer is obviously way more competitive in this area than disposable garments. Another structural growth driver for healthcare is increasing of need for hygiene, translating into more linen consumption at our clients, which means they would get a clean change more often than they used to. These drivers have contributed to the pickup in volume noted in H1. On top of that, we still have some exceptional overground contracts in Brazil. Also volumes has been steadily decreasing year-on-year. Industry and Trade & Services now. We are satisfied to record an activity improvement since May, and the need for hygiene and traceability is very strong in this end market, too. Our offer for soap, hydroalcoholic gel and pest control solutions are very successful. We also noted a marked increase in linen consumption at our clients with a higher number of changes since the beginning of the crisis. Finally, outsourcing is another strong growth driver for us in Eastern Europe, Southern Europe and LatAm, where more and more companies decide to manage the washing of their employees' uniforms and do not want to take the risk of letting their employees do it or not at home. As a leader in the industry with a very strong network density, this offers a second to none reliability in supply. This is a key factor, given that without our uniforms, most of our clients simply cannot operate their business. The only remaining drag in our Industry and Trade & Services is due to remote working with fewer employees at the office, meaning less consumables ordered and lower activity for collective catering clients. Moving on to the next slide. The crisis has been a real test for suppliers for liability, and it is undisputable that it is demonstrated both a strong service reliability and commercial proximity. We have maintained perfect service even during lockdowns, thanks to the strong commitment of our employees and all our plants that remained open, operated without any issue. Furthermore, the sharp and unpredictable pickup of volumes in the plants during recovery phases can sometimes be challenging, too, but we have been very efficient and successfully delivered to our clients. We were also flexible and adapted our invoicing terms to the reality of our customers with discounts or temporary suspension granted. This will very likely durably reinforce our relationship with our clients. The viewers as a local, reliable partner who listens to their needs, and we can act as a trustworthy partner in difficult times. All the efforts put in place over the last year to improve service quality bear fruit. It was a real area of focus, notably for industry workwear in the U.K., and we are very happy with the progress made, which led to the normalization of the churn rate in the country to circa 5%, totally in line with group average. Moving on to the next slide. We believe that Elis growth profile has structurally improved compared to what it was 2 years ago. We have already discussed on our better churn rate, the structural increasing need by clients for hygiene products and pest control and the acceleration in uniform working outsourcing. I also want to mention the steady development of the nursing home market because of the hedging of the population and the increasing share of Elis fast-growing market in our mix, which mechanically helps to accelerate growth in the group overall. Finally, it is worth noting that an increasing number of tenders come with CSR components received where Elis as an industry leader is well advanced compared to its small competitors. Therefore, without even considering the strong effect on top line growth for the rebound in hospitality, we believe that Elis normative growth will be structurally above 3.5% in the future to be compared to the 2.5% to 3.5% range that we used to put forward. Moving on to the next slide. EBITDA increased by EUR 20 million in H1, corresponding to 80 bps increase year-on-year and demonstrating strong operational leverage. The group benefited from the structural long-term cost-saving measures implemented in H2 last year. The lighter cost base, therefore, partly explains the good profitability performance, but we have also continued to deliver strong operational performance with significant productivity gain in our plants. Finally, we were able to maintain a good pricing dynamics in our markets in the context of limited impact from inflation in H1, despite some impact here and there, especially on wages following labor shortage in some countries and notably, in the U.K. Let me now say a few words geography by geography. So in France, we delivered circa 2% organic growth in H1 with a strong Q2 at plus 25%. Hospitality posted a mixed performance with tourism on the seaside or at the mountain well-oriented, mostly driven by domestic travelers, but tourism in Paris is subdued because of the very limited number of international travelers in the country. Health care is back to growth with activity back to normal and some new contracts sign in replacement of disposable solutions, as I previously discussed. Industry and Trade & Services delivered very good performance with some clients in pharma or in food processing, which almost offset the weaker performance seen with collective catering or facility management clients. EBITDA margin in France is at 36.3%, up 120 bps, which is slightly more than what we delivered at group level. This is due to the lighter cost base, the profitability improvement in the plant, but also to the high share of small clients in the mix. These small clients generally have a fixed fee contract, which are very profitable in a context where activity may not have fully come back to normative level. All these drivers more than offset the negative impact from our hospitality plants where volumes are not fully recovered. In Central Europe, organic growth was down minus 2% in H1 with flat EBITDA margin year-on-year. The lower share of hospitality in the mix led to a softer rebound in Q2 at [ 6% ]. In Healthcare, volumes have been picking up, and we signed some new contracts, driving the growth of this end market. In Industry and Trade & Services, Germany and the Netherlands were somewhat more impacted by the H1 2021 lockdown measures compared to the other countries and the previous containment measures enforced last year. This notably explains why H1 revenue is down organically. Margin remains stable in H1 and further productivity gains have been achieved in the region, especially in Germany. Moving on to Scandinavia and Eastern Europe, we see a similar performance with organic revenue down minus 1.3% in H1 and margin at 39%, down minus 20 bps. Hospitality has been steadily picking up over the semester. Apart from Copenhagen and Stockholm, where hospitality is mostly driven by international tourism, volumes are back to 2019 level in all other hospitality plants in the region. In Sweden, Industry was a bit disappointing in H1 and remained impacted by the slowdown of international trade, resulting in lower exports. In Eastern Europe, coming back to what I mentioned earlier, Workwear outsourcing is very dynamic, and we recorded very strong commercial activity, resulting in double-digit organic growth in the Baltic states in H1. Scandinavia and Eastern Europe is still our most profitable region with a high margin at 39%. Some logistical optimization project has been implemented in H1, driving further productivity gains. U.K. & Ireland now, where H1 was very satisfactory. H1 organic growth was up 3.7% with Q2 showing strong acceleration at plus 46%. Hospitality has been rebounding very significantly since May with strong domestic tourism, and the U.K. is a country where we noted the sharpest recovery in the group during H1. Industry and Trade & Services remained impacted by the subdued activity in catering, which represents a significant part of our mix. But most importantly, the improvement of our quality of service continued and our churn level in the country reached a record low 5%, in line with global average, underscoring all the efforts implemented since the acquisition of Berendsen to improve what is our most profitable end market in the country. We also are seeing some contracts signed by our commercial teams, which we decided to strengthen a year ago, despite the situation. In Healthcare, activity with NHS hospitals improved in H1, and we also signed some new contracts, which contributed to the growth of the region. But it is fair to say that what we are the products of is the above 30% EBITDA margin we delivered in H1, up 450 bps year-on-year, demonstrating the great success of the turnaround plan we put in place after the Berendsen acquisition. Over the last 3 years, we have considerably improved productivity and quality of service while decreasing the cost structure and being very strict on the pricing side, especially in hospitality where margin was too low. Moving on to Southern Europe, where around 60% of our revenue normally comes from hospitality clients. H1 organic revenue decreased minus 2%, with a market recovery in Q2 at plus 43% as a result of the rebound in European trade. Workwear industry was up double-digit in H1, thanks to the very strong outsourcing dynamic with food processing and pharma players. Also, organic revenue was down in H1. EBITDA margin significantly recovered at plus 25.4%, up 240 bps year-on-year. As a reminder, last year's margin was impacted by the lag in the implementation of some operational adjustments due to prevailing labor procedures in the country. Consequently, the improvement seen in H1 does not come as a surprise, and looking into H2, we expect further strong increase in volumes, which should drive full year margin further up. To conclude this, let's touch base on Latin America, where organic growth was very good in H1 at plus 16%, with margin remaining high at 33.5%, slightly above group average, also showing 150 bps decrease due to some exceptional highly profitable contracts in H1 last year. As we are currently converting these short-term contracts into longer term ones, we also slightly decreased our pricing condition, which explains the margin drop. However, we expect full year margin to be broadly in line with last year's number, despite very strong inflation in Brazil, notably due to the weakness of the real. As usual, in this kind of situation, we put in place immediately a dedicated action plan to optimize pricing. Finally, commercial activity remains very dynamic in Workwear, driven again by pharma and food processing clients. Let's now take a look at our M&A activity in H1, which had a plus 1.4% impact on the revenue. We only closed one deal, [indiscernible] in March, a [indiscernible] company with revenue of circa EUR 10 million and strong profitability. It is one of the European players on the packaging market and provides Workwear for clients with specific needs such as in medical, pharmaceutical, microelectronics and aerospace. Then we announced yesterday, the acquisition of PestGuard, an Irish pest control business with revenue of circa EUR 3 million. This will contribute to diversify our product and service portfolio in Ireland, a market that became important for us since the acquisition of Kings Laundry last year. Looking into H2, the pipe is currently very full, to say the least. And consequently, we should expect more M&A activity in the coming months. So I will now hand over to Louis to comment further on the financial results.

Thank you, Xavier. First, let me go through the usual revenue breakdown by activity and market geography to illustrate the group's high level of diversification. H1 2021 numbers are in the outer cycle and the '19 numbers are in the inner cycle. So you can have an idea of the impact of the crisis on our mix with a decrease in hospitality and flattening in share. In H1 '21, Industrial, Hospitality and Healthcare represented a combined contribution of more than 85% of our sales with Hospitality significantly declining. Either way, if you look at the graph, you will see that Elis offer well-balanced positioning, which significantly contributes with resilience through the crisis. This is a good diversification in terms of activity client geographies, does not come about by chance. It is a consequence of a long-term strategy backed by product innovation, commercial efficiency and M&A. On the next slide. Let's have a look at the H1 '21 monthly organic growth evolution. We clearly see the impact from the difficult comparable base we faced in Q1 as Jan and Feb '20 were very strong, circa 5% organic versus '19. Activity started to decline from March 20 onwards and April was the weakest month due to the lockdown measures in Europe at circa minus 33% versus '19 organic. Activities then started to resume from the end of May '20 onwards, as lockdown measures were lifted with minus 17% in June. So in the first half, the monthly organic growth evolution is mostly a reflection of this past year of activity. Industry, Healthcare, Trade Services are today trading globally in line with the pre-crisis level, whilst hospitality steadily catching up, although still significantly below '19 levels. Let's look now at H1 '21 revenue by region. Xavier already commented in every geography. What clearly stands out here is the performance of LatAm at 16.3% organic, bearing in mind that H1 '20 was already up 4%. This illustrates again the virtues of our geographical diversification as other geographies have not returned to pre-crisis level yet. Now looking at EBITDA margin performance by region. We have been able to improve our maintained margin in most geographies, reflecting Elis operational excellence with a real now in optimizing logistics and workshop efficiency. This also reflects the index cost-saving efforts achieved in the second half of last year, which generated significant operating leverage in H1 with 80 bps margin expansion at group level. This performance is even more remarkable, given that margin was already up 20 bps in H1 '20 versus '19. On the same topic, geographies, which achieved a strong margin growth in H1 last year, managed to either improve margins further occupied at a high level in H1 this year. This accounts for Central Europe, Scandinavia, Italy, Europe and Latin America. Furthermore, the geographies with a high share of hospitality in the mix, which is [indiscernible], of course, in H1 last year have either reached a level higher than precrisis like the U.K. and Ireland by 2 points or have come back to pre-crisis level like France or partially offset the loss like Southern Europe. Before looking at the full P&L, let me quickly touch base on G&A. It's a bit tricky. As a reminder, linen CapEx normally represents around 2/3 of total CapEx and are depreciated over a 3-year period in average. It implies that the evolution in CapEx can have a material impact on next year's G&A. Looking at the graph, the columns represent yearly CapEx, the blue being the industrial CapEx and the green being the linen CapEx. The decrease in industrial CapEx between '19 and '20 was due to the end of the 3-year CapEx program dedicated to Berendsen as well as some cancellation of capacity projects after the credit starter. But the decrease in linen is linked to linen CapEx. It was solely due to the [indiscernible] crisis with minus 22%, where organic growth was minus 13%, 1-3. All in, there was a EUR 95 million decrease in linen CapEx between '19 and '20. With a 3-year depreciation cycle, it means that group G&A, which is the orange line on the chart, will remain broadly stable in Europe between '20, '21 and '22, although linen CapEx is positively increasing in '21 as a result of activity pickup and uniform contract won. This G&A stability will, of course, very favorably impact EBIT this year and next one. Now let's look at the full P&L. We already have commented on revenue, EBITDA and the G&A. So let's start with EBIT, which was up 140 bps in H1. As explained, this strong improvement reflects both the increase in EBITDA margin and the stabilization of the G&A. The decrease in amortization of intangibles reflects the end of the Berendsen trademark amortization following the Elis rebranding in all our countries, including Scandinavia. Noncurrent operating income and expense is back to normal after a very high number in H1 '20 linked to COVID-19 incremental costs on some first restructuring costs. Financial result is normative with no refinancing in H1. Tax paid was EUR 12 million in H1 with the effect of credit tax positive evaluation -- evolution. Finally, net result is EUR 17.1 million and headline net income is EUR 67.1 million, up 36% year-on-year. Speaking of what a kind reminder on the way we calculate said headline net result. The main items restated for this calculation are the same as usual. PPA depreciation, noncash IFRS 2 expense or share plans and noncurrent operating income and expenses. As a remainder, H1 '19 headline net income was EUR 102 million. So we still have some catching up to do. Well, let's look now at the cash flow statement. We showed a EUR 35 million improvement for the free cash flow year-on-year, which is, of course, another nice achievement of the first half. Starting at the top of the table, EBITDA was up around EUR 20 million in value, which is a good start, although there is still a lot to catch up. Then we see the cash effect of the exceptional items we previously discussed coming to normal. CapEx is up EUR 23 million in H1 '21. As a reminder, they were significantly done in 2020 because of the crisis. We are now back to a normal level of investment with the implementation of all the new Workwear contracts Xavier previously mentioned, and the preparation of the summer season by growing the linen inventory. Change in working capital was up EUR 25 million. Inventory are down due to the high base in H1 last year. And furthermore, we made additional efforts on cash collection with DSO still improving at 55 days. Tax paid corresponds to a yearly rate of circa 25%, reflecting the changes I mentioned in French tax regulation. And finally, lease and liability payments are up EUR 12 million year-on-year at 45%, which is a normative level. This increase reflects some payment deferral we negotiated last year during the crisis. At the end of the day, free cash flow was up EUR 35 million at EUR 91 million, which is a very strong performance. Finally, let's have a look at our debt. First, I'd like to highlight that Elis reduced debt by EUR 78 million in H1 and by EUR 160 million over the last 12 months. Now looking in depth at the debt structure. As a reminder, we took advantage of the excellent condition of the market in '19 to refinance some of our debt. This led to reduced average cost that is now around 1.5% and fully fixed. You can see on the chart that the next major maturity is in '23. We are currently studying some refinancing opportunities for these lines. It shall come with the reduction of the costs, especially for the [indiscernible] at 1.875% as our market conditions are better now. As far as financial leverage is concerned, the ratio at the end of June was 3.6x below the pre-wave debt covenant of 3.75x. With this cash generation pattern and seasonality, we believe we will be at 3.3x at year-end and below 3x at the end of '22, as a mechanical consequence of expected EBITDA increase on expected debt reduction. Well, to conclude this financial section, let's underline that organic growth was up 1.3% in H1, above expectation, with a very strong acceleration in Q2 on the back of the recovery of Hospitality. Healthcare and [indiscernible] are back to normal. Strong operating leverage led to EBITDA margin and EBIT margin increasing by 80 bps and 140 bps, respectively, on the back of the cost savings measures implemented last year and further operational progress made this semester. Free cash flow improved 62% year-on-year at EUR 91 million and net debt decreased by EUR 78 million, highlighting the strong resilience of the business. This will pave the way for an acceleration in leverage ratio reduction in the next 18 months. I will now hand back to Xavier who will give you an update on our CSC achievements, and we'll present our updated '21 outlook.

Thank you, Louis. Before I go through some of our CSR achievements in H1, I would like to come back on the virtuous pattern of our business model. As you probably know, Elis is a real actor of the circular economy, promoting usage rather than ownership. It means that we always search for longer durability when conceiving our products. Our industrial processes are optimized, and we use 2x less water, energy and washing products per kilo than for washing at home. We also work very hard on the rare usage of end-of-life articles, and we are totally convinced that these efforts will bring further organic growth opportunities in the future. Moving on to the next slide. We continued to work on several different CSR aspects in the first half, and let me give you a sample. Following the creation of the CSR Committee, we have appointed a CSR director who directly reports to me. And furthermore, we made some strong commitments to achieve carbon neutrality in Sweden and in the U.K. in 2035 and 2045, respectively. Additionally, we joined the ambition for climate program organized by the French Association of Private Enterprise Asset, and we partnered with the NHS in the U.K. for the Cup 26 that will take place in Glasgow. Finally, internally, we continued to deploy electric vehicles based on the precise road map. We pursued the rollout of Elis golden rules aiming at preventing work-related accidents, and we launched the recruitment of the sale promotion of our Elis Foundation, helping the serving students. Now before moving to our 2021 outlook, I would like to come back on this graph that we have been presenting twice a year since the IPO. There, you see the evolution of the top line and the margin performance over the last 2 decades, underscoring the resilience of the group. The backbone of our resilience is twofold. First, diversified geographical footprint, with France representing now less than 1/3 of our business. And second, the diversified portfolio of clients in terms of size and end markets. It is worth noting that this resilient profile was significantly improved with the acquisition of Berendsen and the addition of new countries in Central Europe and Scandinavia. Consequently, you can see on the graph that margin has constantly been evolving at high and stable levels within a 200 basis point range regardless of external events and taking into consideration the impact of IFRS 16 from 2019 onwards. On top of that, one very interesting characteristic of our business that we saw in 2020 is that linen investments come on and on with top line growth. That means that conversely, they mechanically go down during bad top line years with a favorable impact on cash generation. Speaking about cash, we are on a very good trajectory with a steady improvement over the last 3 years from EUR 154 million in 2018 to EUR 217 million in 2020, and '21 should be another year of strong cash generation. So now let's talk about 2021, starting with organic growth. We raised our guidance from plus 3% to plus 5% to plus 6% range. Let me explain what our rationale is. The rationale for this revised guidance is mostly based on the structural strengthening of our growth profile that I widely commented on the first part of this presentation. This concerns Healthcare, Industry and Trade & Services only. As far as Hospitality is concerned, we currently assume that activity will be circa minus 25% below its 2019 level during the '21 summer season and circa minus 30% until the end of '21. What we know so far, looking at our activity in the first weeks of July is that the summer season should be decent so we feel comfortable with our assumptions. Finally, we haven't changed our other underlying assumptions around the many uncertainties that remain around the crisis, such as the spreading of the delta variant, efficiency of the vaccination campaign and the rebound in the international travel among others. Now looking at 2021 EBITDA and free cash flow. So we believe EBITDA margin should be at circa 34.5% in '21. This reflects both the operating leverage from the cost savings measures we implemented in H2 2020 and Elis operational excellence in '21. As far as free cash flow after its payments is concerned, it should be between EUR 200 million and EUR 230 million. The main variable being the change in working capital we will get at year-end, depending on our November and December activity. Well, this concludes the presentation, and thank you all for your attention, and we can now move on to the Q&A session.

[Operator Instructions] The first question came from the line of David Cerdan.

David Cerdan from Kepler Cheuvreux. I have a few questions for you. Maybe just a clarity regarding depreciation. So is it correct that in 2022, the G&A should be quite stable compared to 2021 in value? And do you expect the G&A to convert to the CapEx? So this is my first question. My second question is regarding your growth profile. So you have explained that you have more opportunity of business. When you look at the geographies, do you contemplate some new [indiscernible] within your scope of activity, so a new country. And do you see some new services that you could deliver to your existing or some new clients?

Thank you, David. First question about depreciation. So please refer to the Page 24. Indeed, you see G&A and the P&L stable in '21. And if you are super accurate, you will see a very small increase in '22. We are speaking of low single digit. So I mean, it will probably help a lot to figure out what may be the EBIT, considering the assumption and top line on the EBITDA margin. Now with the question, G&A versus CapEx are the technical element since IFRS 16 reform, as you may be aware that the rent that you can see on the finance lease part in the cash flow statement in the region of EUR 90 million is more or less a part of the depreciation, which hasn't passed through. So at the very end of the day, depreciation defers from the CapEx with this part. On top of that, you have the lag of depreciation regarding the question versus CapEx, linked to the growth on the duration of the depreciation.

And then second part of your question, David, growth profile and evolution in the future for new geography and new services. So what we can say here is, clearly, you have understood that in the key drivers of our growth profile on top of what we said around linked to traceability, need of hygiene, outsourcing and so on. We have the mix of geographies that conduct to a better organic growth for the company. It's clear that today, the weight of a country where we have a solid organic growth like Latin America or Czech Public, Poland, Baltics and so on. It's quite important to explain this improvement of the long-term growth profile of Elis. So of course, we will stay agile to enter new geographies where we consider that we have the opportunity to have a strong level of organic growth. Of course, taking into account that we are always very cautious before opening a new country. It's not every time. If you remember, we made Brazil in '14, Chile in '15, Colombia in '16, and then new countries in Eastern part of Europe in '17 with Berendsen. So we are working to identify some potential of new country profile of good organic growth, but of course, keeping behavior very cautious. And for new services, same answer. So that means that, of course, to have a view on what is the profile of growth for Elis in the next 20 years, we are working on what could be some opportunity of new service. But we know also that we have a lot, a lot of countries where we have not rolled out all the opportunities we have in our portfolio of services. And I think that the example of the last acquisition made yesterday in Ireland to push pest control in these new country is a good example of what we can achieve. Even just by rolling out our existing services everywhere, we have a lot of countries where we don't have a lot of washroom, for instance. So we have a lot of countries where we have not yet launched a pest control. So I think that before launching a pure new service in our portfolio, we are working to deploy everywhere, all our know-how.

We have the next question from the line of Annelies Vermeulen from Morgan Stanley.

I have 3, please. So firstly, could you talk a little bit around the exit rate for July at a group level and divisionally as well and sort of current trading? I know, for hospitality, you've said that it's continued to ramp up in July. But given that the third quarter last year was a little bit better than you had expected, I'm just wondering to what extent you're coming up to a slightly tougher comp in that regard? Then secondly, around your comments around labor shortage in the U.K. and wage inflation. I know one of your competitors in the U.K. made some comments around this as well that they are struggling to hire people. And now that activity levels have picked up and therefore, service levels are falling. Could you talk a little bit around why you're not seeing your service levels fall? And how you're offsetting those pressures? And how you see that developing over the second half of the year? And then lastly, I think last year, you ended up with a sort of 10% to 15% headcount reduction for the full year. Could you update on to what extent those employees have been rehired? And how much below 2019 levels you are still today in terms of headcount?

Okay. So first question, activity in July. So I think that it's difficult to be more transparent than what we have been at this stage by giving all the level of activity in our hospitality plant week by week. And you have the figures for the 31st week of July. So I think that you have everything. And you can see that what was very important for us is to see that we still continue to grow the volumes in hospitality plants, despite all the bad noise around the delta variant situation. And it was especially very important for us to analyze the evolution of volumes in Spain or in U.K. In U.K., it was very important because they started first with the subject of delta variants. And you can see in the curve we have provided tonight that they have kept a strong level of activity. So that's why in July, we are very confident with the level of growth of the company. Of course, you have the comparison with the curve of 2020. And you can see that in hospitality, we're by far above the performance of 2020. And we said that we expect for hospitality in July and August, minus 25% in comparison to '19. And as I said, we are very comfortable with this assumption when we see a strong level of volume. Honestly, it's not an issue for us, and we have even some situation where we are back to the 2019 level. A lot of plants in some seasonal area where you have a lot of tourism are back to 2019. It is the case for Britain, France for the southwest coast in France, the West Coast in U.K., for the West Coast in Denmark or even in Sweden, a part of Stockholm. So we consider that we are very confident with what we said with a minus 25% in comparison to the normative level of 2019 in hospitality. For the other end markets, nothing special in July, totally in line with a good level of growth registered in the first semester. Second question, labor shortage in the U.K. and impact on service level. So you can easily understand that I will not make any comment on the statement of my main competitor in U.K. and the poor quality of service registered in the common -- in the last weeks due to shortage in their plants. It was not the case in Elis. So perhaps, it's a question of anticipation. So I think that we have been very, very proactive during the crisis to cut immediately some position and to decrease immediately some headcounts in U.K. in 2020. And we were totally sure and prepared to the strong rebound of hospitality for '21. And perhaps, we have more anticipated the preparation of the season '21 and well prepared our plants to this. Nevertheless, it's not easy. And for sure, the management team in U.K. has suffered and still suffer a lot to manage this peak in volumes. So it's very great achievements made by the -- all the team in U.K., but what is for us a key recognition of the quality of our service is to see that we receive today a lot of request from hotels for -- to sign new contracts with us in a context when they are not delivered by a lot of other players. So I think that for us, it's very nice signals that the market start to appreciate the reliability of Elis. So clearly, we have been very firm over the last years in the pricing strategy in hospitality in U.K. We have always said that we will not accept some crazy prices, and we have lost some volume in some cases with customers that didn't accept the price increase. We have assumed it, but I think that today, we start to see the merits of this strategy. We delivered a very good level of service. And we have some customers that have to come back despite the gap in pricing. So I'm not sure that it will be for the eternity, let's be reasonable. And perhaps, after the crisis and when the competitor will be able to be back with a good level of service, the question of price in U.K. will come back to be the priority. We will see. Nevertheless, we have very well managed the anticipation of the season, and despite the difficulties, we have been able to deliver a good level of service today in U.K. And that's why we received such kind of request, and it is a very positive signal for everybody. As I said, the team has delivered a strong effort to make this achievement. The third question is always very complex because we -- you know that we manage our headcount week by week to follow the level of activity. So it's very complex to answer to where are we in comparison to 2019 and so on. So I will not be able to give you some precise figures. But of course, you can imagine that due to the strong achievements in terms of margin, we have been able to monitor even more than the decrease of the volumes, the decrease of headcount.

We have the next question from the line of Rahul Chopra from HSBC.

I have 3 questions. First, in terms of the free cash flow guidance. I think you have stepped up the guidance at the lower end of the range by EUR 5 million, but leaving largely unchanged due to the guidance. So just wanted to understand given your upgraded organic revenue guidance, why -- what's happening with the free cash flow in terms of delta? That's the first. Secondly, in terms of -- could you give a sense of what is the shape of recovery in the hospitality? We are looking at in maybe small hotel chains versus large hotel chains and with the seaside resorts, maybe some flavor in terms of what sort of pattern are you seeing? And finally, a question on June exit level. If I look at June exit level, it's running at 96% of 2019 numbers. Your guidance implies that -- so maybe just -- that's a sharp acceleration from May, where it was close to 86%. So I just wanted to understand the pickup in activity level in June, and what it means to -- for the rest of the year?

So I will take the second question first with hospitality, where you're coming from the sharp recovery. So you have understood that it is mainly driven by tourism. So it's clear that it will -- you will find the same level of improvement. Whatever is the origin of the hotel coming from big chain or not a big chain, the key subject is where is the hotel located? Is it in an area of tourism? And then you have a strong increase or is it a hotel linked to business travel and so on. And then the recovery is much more small. Even if you have some surprise that means that for instance, London in June, London city can be seen as a more hospitality business related to international travelers or business event. But it was not the case and the activity was very, very important due to internal tourism. So you had a lot of people coming from everywhere from the -- from U.K. to spend time with family 2 to 3 days to visit London, and so London became a new hub of domestic tourism. So that's why it's very complex to generalize something. But to summarize, clearly, the biggest rebound is coming from hotel dedicated to tourism. So close to coast or mountain, for instance. If you can precise perhaps your third question, it was not totally clear for us to understand your thoughts.

Yes. Sir, my third question was, if you look at June levels and related to 2019, that's running at 96% of 2019 numbers. And the guidance implies that you're talking about 3% to 5% -- sorry, 5% to 6% organic growth, which mean a slight deceleration in the second half. So just want to understand what's driving the recovery in June? Because if you look at May, May was at 86% of '19 levels and June was 96%. So I just wanted to understand is, was June particularly a much stronger month in terms of recovery and share? Should we expect to get a slowdown coming months? That's what I was after.

I think your question is around figuring out what may be some baseline. Perhaps, to illustrate, I will give you the seasonality of a normal year, which will be 2019. In 2019, you will have a start of the year. The smallest month will be EUR 250 million in February and then ramps up to July, August nearly EUR 300 million, and then going down to EUR 270 million in December. That gives you more or less the seasonality of the normal business in a normal year. On that, you had the activity for 1/4 of the business that has described as Xavier with regard with hotels. And we will -- you will have the shape of '20 and starting from that, the shape in '21, which is not far from the volume described at the beginning of the presentation. Then coming to your first question. You understand that when we guide for '21, we have very detailed model. So we figure out what may be the revenue, the margin, thanks to efficiency, productivity and so on. But when you go down to free cash flow, there is a very big line that is complex to assess. It's receivables part because if you want to calculate -- make a [indiscernible], it's November, December billing versus November, December of last year. And when you know on the base of what I just said that you are more between EUR 250 million and EUR 300 million per month. You understand that the shape of the recovery for the end of the year can have a very big impact. And then we are picking EUR 100 million kind of gap on the -- on this line of receivable. Are there mitigators, like providers or whatever, but it explains to you the gap between the EUR 200 million and the EUR 230 million. And while also a sharp recovery of top line is not always a good news at very short term in terms of cash flow.

We will take the next question from the line of Christoph Greulich from Berenberg.

I would like to start and come back once again to the G&A charge. I know we talked about this quite a bit, so apologies if this is getting a bit redundant. But the one thing I'm wondering is, we have seen this quite sharp drop in the CapEx spend. You have seen the start of the pandemic and the CapEx now being quite a lot lower than the D&A charge. So I'm just wondering why the D&A is not also falling down, but why you're saying it's going to stay stable. That's just my first question I was wondering.

What happens is that you have here a mix of depreciation between linen and Industrial. The point is that the industrial depreciation is still going up on the back of the program of '17, '18, '19, we occurred. So now implemented into the depreciation, that is going up. But the other line is a line depreciation which indeed is dropping very significantly on the back of CapEx reduction in '20. So what you have is a mix effect. And I mean, we cannot be more transparent by giving you the range or scale that even with [indiscernible], you can figure out the correct numbers.

Okay. That's great. Then I was wondering with the IFRS 2 charge. So we've seen it going up quite significantly in the year-over-year comparison. So is that purely related to the share price performance? Or what is driving that effect?

You are -- there you are referring to the P&L charge of IFRS 2?

Yes.

That is to the dilution impact of the free share program. Usually is pretty regular because we give to the top 500 free share program. And after 3 years, we checked that the criteria has been achieved, and we deliver them. What happens is that sometimes, we hope that the criteria will happen and they don't happen. And then you have a gap or you can have the reverse effect. So that explains why sometimes it can go up an upward. It's a mistake in forecast. That's the main effect you can have because upon that, imagine that all the criteria are validated every year. It can just go up with a number of people benefiting from such share.

So would you say, the number we've seen last year is kind of more the normalized one or the one that we see this year?

Well, the good numbers to look at is more or less the free share program given every year with a hit rate that you can assess, perhaps in an average of 75%. So I would say, EUR 50 million probably is a good way to look at it.

For the full year or for the half year?

Yes.

Okay. And then I was wondering on the inflation. You already made a comment earlier that you've seen a bit of labor inflation in the U.K. Obviously, we have a lot of inflationary pressures across a lot of different sectors at the moment. So just wondering what's your view on that on the second half of 2021? And maybe also for next year, do you think by passing on the higher cost that might give you a temporary boost at the organic growth? And can you quantify that in any way?

So we have the chance to have a larger part of our cost that is related to wages. And so for us, the key driver of inflation of our costs, it is the pressure on the cost of labor. So that's why we highlighted that where we have seen pressure in U.K., but it is still limited, to be honest. And we don't expect a full impact in H2 '21. For the more longer term, '22, it's for us a little too early to answer precisely to this question because we don't have the decision country by country on the what will be the increase of the minimum wage in our main geographies. And we will negotiate with our main supplier for the linen only during winter period. So it's too early to give a precise answer there. Of course, if we have some pressure of inflation on our cost, it will be exactly the same situation that what we did in 2019, and we will put in our prices, the impact of the inflation. And of course, it could even increase the level of organic growth due to this extra pricing effort. And you know that we operate in a few number of countries, 28 only, but where we operate, we want to be by far the leader and with a strong quality of relationship with our customers that allow us to have the pricing power without taking any risk to increase the churn. It is exactly what happened in 2019. If you remember, we had in '19 a strong increase of labor costs with a huge increase of minimum wage everywhere with famous plus 22% in Spain. It was also a year with a huge cost of energy, another important component of our P&L. And we protect the margin by pushing prices, and we decreased the churn in the same year. So that means that it has been fully accepted and understood by our customer. So that's why we are quite relaxed on this subject of inflation, and we don't expect a huge pressure for the coming quarter.

Okay. My last question is with regard to the competitive landscape. I remember that last year, you were saying with regard to M&A activities that you would rather wait for bankruptcies of smaller struggling competitors than to buy struggling business. So now I hear that you are getting them more active on the M&A side again. So I'm just wondering what have you seen in the competitive landscape? Has there been a pickup in bankruptcy rates? Or did that not really have [indiscernible]?

No. We have not seen any significant bankruptcy in our industry, not yet. Thanks probably to first average level of profitability of this industry that allow a lot of small players, even with not a very efficient asset to be profitable. And also thanks to all the governmental support everywhere, and you have seen that it's the same in quite all the industry. The level of bankruptcy has not increased during the crisis. So nevertheless, it can happen in -- now because governmental support will decrease progressively. And we can start to see some company dedicated to hospitality that could have some difficulties. We will see. Nevertheless, when we say that we have a strong pipeline of potential acquisition and that we expect a more important activity in H2, it's not really related to the crisis, if we are honest. And it's more -- I don't know if it is hard or not, but it is more conjunction of deals that are close to be achieved and that will come on the same semester or second semester instead of a more regular activity, but not really linked to the crisis, I think.

There are no further questions. I will hand back over the conference to Mr. Martire.

Okay. So thank you for your participation tonight. And you have seen that we are very -- not only very proud about the performance of the first semester, of course, but also very confident for the future and very confident when we see that the growth profile of the company has significantly improved, despite the variation we can have in the activity of hospitality. And that's why we are very confident for the future of the company. So thank you for your attention and have a good summer. Bye-bye.

This concludes the conference for today. Thank you for participating. You may all disconnect.