Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Elis 2021 Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Xavier Martire, CEO of Elis. Please go ahead.

Thank you. Good morning, and welcome to Elis 2021 Full Year Results Call, which is also webcasted and recorded. I'm Xavier Martire, CEO of Elis, and I'm here in Paris with our CFO, Louis Guyot. I will start this presentation by sharing the main highlights of our full year results. Then I will hand over to Louis, he will detail the full year financial performance. I will then come back to provide you with an update on our CSR advances, present an acquisition we also announced this morning and then share with you our views on '22. Finally, we will have a Q&A session to answer all of your questions and at our call, Nicolas Buron, will be available to answer any of your questions off-line. Before we start, please take the time to read the disclaimer. So I'm very happy to report a very satisfactory 2021 performance by Elis. We saw some pickup in activity, leading to organic revenue growth of 7.4%. The Group also improved its profitability with EBITDA margin up 70 basis points at 34.5% and EBIT margin improvement gaining 240 basis points at 12.7%. Headline net results was up 60% at EUR 223 million, and we delivered record free cash flow after lease payments of EUR 228 million, enabling the Group to decrease its net debt by EUR 135 million and to reach a financial leverage ratio at 3x at year-end under the new definition. These good results enable the resumption of a dividend payment of EUR 0.37 per share with the option of payment in Elis shares. This good financial performance was notably driven by the improvement of Elis growth profile on the back of the crisis. We have clearly identified an increasing need for hygiene, traceability, employee safety and for more responsible products and services, Elis has been very active commercially to provide adequate offers to its clients in both the workwear and hygiene and well-being segments. We also benefited from the sharp recovery of the hospitality industry that started in the spring of 2021 with a very limited impact from the Omicron virus. I will provide a detailed view on our 2022 outlook later in this presentation. But in a nutshell, I want to say that I feel very confident in our capacity to deliver double-digit organic growth this year. The current situation in Ukraine is not something that should have an impact on our 2022 top line, unless things really get out of hand, in which case, I am afraid we would have other concerns than Elis organic growth evolution. With no surprise, our main uncertainty today is the gas price, which is an important component of our cost base and that has recently evolved very erratically. It is, therefore, difficult to have an educated view on the rest of the year. Nevertheless, assuming that this price should remain at a high level temporarily impacting our EBITDA margin, we believe we will deliver EBIT of around EUR 500 million and that 2022 headline net income per share should increase by more than 40%. And altogether, the Group's strong deleveraging is expected to continue in '22. I will come back to this later. Moving on to the next slide. Let's first take a look at Healthcare, with activities now back to normal levels due to some structural activity drivers. One example is the textile contract we signed for surgery blocks in replacement of disposable items, the switch is driven by at least 3 main reasons: First, the need for hospitals to secure the supply chain, disposable garment were being sourced in Asia with many unreliable suppliers. Second, the way to improve employees comfort, textile garment being way more comfortable to wear than disposables. And third, environmental consideration as our offer is obviously much more competitive in this area than disposable garments. Another structural growth driver for Healthcare is the increasing 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. We were also very active commercially in the nursing home market, leading to strong activity growth with these clients. And finally, we managed to convert some of the exceptional overgowns contracts we signed at the beginning of the pandemic in Brazil into long-term contracts. Industry and Trade & Services now were the need for hygiene and trustability is very strong, too. Our offers for soap, hydro-alcoholic gels, pest control solutions are perfectly aligned with the new needs of our clients. We also noted a marked increase in linen consumption at our clients with a higher number of changes since the beginning of the crisis. Furthermore, Elis is able to efficiently address the growing part of our clients that is looking for more responsible products and services with a limited environmental impact. 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 all. As a leader in the industry with a very strong network density, Elis offers 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. We still see some additional rebound potential going forward as working from home still has an impact on our collective catering clients and on our facility management clients. Moving on to the next slide. Let's look at Hospitality, our third end market. The graph on the slide clearly shows a strong activity rebound that started in April '21. This was driven initially by strong domestic tourism and then by cross-European tourism. The summer season was good, and we started to see some activity related to professional travel in September, including business reps and trade shows. On top of this activity pickup, we managed to pass on some material price increase to our clients to reflect the inflation we started to see early in '21 on some components such as wages. Moving on to the next slide, we provide details on the flat linen volume evolution for the 3 main contributors, which are France, Spain and the U.K. and Ireland. The dark blue lines are for '19. The light blue for '20, the light green for '21 and the dark green for '22. You can clearly see the sharp recovery from mid-May '21, following the lifting of lockdown measures in Europe, along with the reopening of borders. You can also notice that the impact from Omicron was very limited and that activity continued to improve in Q1 this year, nearly returning to pre-crisis levels, which is obviously very good news. Moving on to the next slide. The crisis has been an acid test of supplier reliability and it is undisputable that Elis demonstrated both strong service reliability and commercial proximity. We have maintained above par quality of service even during lockdowns or recent labor shortfall, thanks to the strong commitment of our employees and our operational flexibility. Furthermore, the sharp and unpredictable pickup of volume in plants during recovery phases can sometimes be challenging to, 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. They view us as a local reliable partner who listens to their needs and who can act as a trustworthy partner in difficult time. All the efforts put in place over the last year to improve service quality are bearing 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 7%, underscoring the success of the measures that were implemented. Moving on to the next slide. EBITDA increased by more than EUR 100 million in '21, corresponding to 70 bps increase year-on-year and to nearly 100 bps more than in 2019, demonstrating strong operational leverage. The Group benefited from the structural long-term cost-saving measures implemented in H2 2020. The lighter cost base, therefore, partly explains the good profitability performance. But we have also continued to deliver strong operational performance with significant variable cost adjustments and productivity gain in our plants. Finally, we were able to maintain a good pricing dynamics in our markets, despite some impacts from inflation at the end of '21, especially the sharp increase in gas prices in November and December and some wage inflation following labor shortage in some countries, notably in the U.K. Let's now take a look at our M&A activity in '21, which had plus 1.2% impact on revenue last year. We maintained good momentum and closed 5 deals. 2 deals were acquisition in the Pest Control segment to start the service in countries where we were not offering it, PestGuard in Ireland and Chrisal in Denmark. One deal in Washroom in the U.K., where we acquired 2 washrooms in September '21. And one deal in Cleanroom in Belgium, where we acquired Scaldis, one of the European leader on the [ ultra-clean ] market with EUR 13 million of revenue. Finally, we acquired textile part of Blesk InCare Russia, bearing, we already acquired much part of the company back in 2019. This leads me to say a few words on our operations in Russia, where we operate 9 small plants and generate revenue of around EUR 20 million. We obviously are monitoring the situation in the region extremely carefully and have complied with international sanctions that have been enforced. Our business there is cash positive and has enough inventory to be autonomous for a year. Furthermore, we are not present in Ukraine, and we are hoping for a quick resolution of this conflict, of course, and we'll provide updates if necessary. To conclude this first part, let me remind you that M&A is a very important part in Elis' DNA. It allows us either to consolidate our existing position or to strengthen our market share, enter new geographies or launch new services. This table provides a summary of what we have done in terms of M&A over the last decade. I would like to underscore the very successful track record we have built year after year in terms of both acquiring and integrating assets and by doing so, creating value for our shareholders. I will now hand over to Louis to comment further the financial results.

Thank you, Xavier. First, let me go through the usual revenue breakdown by activity and market and geography to illustrate the Group's high level of diversification, which provides us with a highly resilient model in times of crisis. In terms of activity, Flat linen and workwear, each represented 40% of total '21 revenues. In terms of end markets, Industry Trade & Services, Healthcare represented a combined contribution of more than 80% of our sales with Hospitality significantly lower. Finally, in terms of geographies, our well-balanced footprint was the real pool over the last 2 years. Scandinavia, Central Europe, Latin America proved to be very resilient and acted a strong buffer for the Group during the pandemic when the decrease in hospitality impacted France, Southern Europe and U.K. In the way you look at the graph, you will see that Elis positioning is well balanced, which significantly contributes to its resilience through the crisis. This 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. Next slide, let's take a look at the '21 monthly organic growth evolution. We clearly see the sharp increase from April onwards, which is a consequence of, first, the 2020 base where activity started to drop in March. And second, the 2021 restriction that we have put in place in January and February before being progressively lifted. Additionally, we clearly see that Omicron had virtually no impact on our business. Another way to look at it. Revenue by region now, the performance of France, U.K., Ireland, Southern Europe is mostly a consequence of the level of hospitality in terms of region mix with activity significantly picking up on the back of easy comps. But the growth is not limited to that. And it's worth mentioning that in '21, outside this recovering hospitality volumes, the core organic growth is above 3% as a result of -- as mentioned by Xavier. New services proposed to customers, development of outsourcing and better retention of the clients. The best example to illustrate this dynamism is certainly Latin America, where organic growth was plus 14% in '21 after already plus 5.4% in 2020, which was the most in Hospitality in the region. Now looking at EBITDA margin, one of our main satisfaction in the way we handle the situation during the pandemic is a very efficient operational adjustments, quickly implemented by our teams to maintain a high level of productivity. This resulted in '21 EBITDA margin being 90 bps above pre-pandemic level, which is 2019. We have been able to improve or maintain margin in most geographies, reflecting Elis' operational excellence with a window in optimizing logistics and factory efficiency. This also reflects the in-depth and sustainable cost savings efforts achieved in the second half of 2020, which generated significant operating leverage in 2021 with 90 bps margin expansion at Group level compared to '19. I would like to stress that our sales teams were not affected by the cost savings efforts. So the commercial dynamism going forward remains intact. Before looking at the full P&L, let me quickly touch base on D&A. As a remainder, Linen CapEx represents 2/3 of total CapEx, and is depreciated over a 3-years period. It implies that the evolution in Linen CapEx can have a material impact on next year's D&A. Looking at the graph, you see that the columns represent yearly CapEx, the blue being the industrial CapEx, the green being the linen CapEx. The decrease in industrial CapEx between '19 and '20 was due to the end of the 3-years CapEx program dedicated to Berendsen as well as some cancellation of capacity projects after the crisis started. The decrease in linen CapEx, however, was solely due to the sanitary crisis. And you remember that Linen is a strong amortizer for cash flow. All-in, there was a EUR 95 million decrease in CapEx between '19 and '20 with a 3-year depreciation cycle. It means that the Group DNA, the orange line will remain broadly stable between '20, '21, '22, although linen CapEx increased in '21 as a result of activity pickup and workwear contracts won. The D&A stability contributed to improve EBIT margin from 10% in '20 to nearly 13% in '21, and you understand that this trend will continue in '22. Let's now look at the full P&L. We already have commented on revenue EBITDA and D&A. So let's start with EBIT, which was up 240 bps in '21. I have just explained, the strong improvement reflects both the increase in EBITDA margin and the stabilization of the D&A. Below EBIT, the decrease in amortization of intangibles reflects the end of the Berendsen trademark amortization scheme in '20 following the Elis bonding in all our countries, including Scandinavia. Then current operating income and expense is back to normal after a very high number in '20 linked to COVID-19 incremental cost and some first restructuring costs. In '21, it corresponds mainly to acquisition costs and some usual restructuring costs. Financial result is almost normative. It includes EUR 80 million of refinancing costs occurred in H2 with the revolver and the bond refinancing. Tax paid is also nearly normative. It corresponds to a circa 26% tax rate to which we add around EUR 5 million of the French civil tax. Finally, net result is EUR 115 million, and headline net income, EUR 223 million, up 60% year-on-year. It corresponds to around EUR 1 per share. Moving to the next slide, I remind you of the way we calculate the current net results submitted has not changed ever. The main items are stated for the calculation are the same. PPA depreciation, non-cash IFRS 2 expense for free-share plan and non-current operating income and expense, including mostly restructuring costs and the acquisition-related costs, all these restated from the tax effect. Let's now take a look at the cash flow statement, which is one of the biggest satisfaction of the year. It stood at a record level of EUR 228 million in '21 despite the fact that the top line was not yet fully recovered from the pandemic 2021. Starting with the top of the table, EBITDA was up around EUR 100 million, then which is the cash effect of the non-recurring items we previously discussed. CapEx was up EUR 76 million. It stood at 18.7% of revenue, mainly due to Linen as a result of the needs to cover the recovery of hospitality during summer peak and the implementation of all the new workwear contracts Xavier previously mentioned. Change in working capital was up EUR 10 million despite good activity at year-end with a very strong performance of cash collection, the DSO stands at a record level of 51 days. Net interest paid is almost normative. It embeds a small amount corresponding to the setup cost of new financing. Tax paid corresponds to a yearly rate of circa 28%, still above the normative of 25%, due to the mix of countries, you have still some loss-making countries ending up not paying taxes. Below free cash flow, we spent nearly EUR 95 million on M&A. This amount includes around EUR 10 million of earn-outs from previous transactions. The Group did a small capital increase reserved to its employees, which turned out to be very successful and had a EUR 11 million impact on cash flow. Finally, the other aggregate encompasses some technical effects that has a ForEx effect and the accounting treatment of the debt, including the convertible bond. At the end of the day, debt decreased by EUR 135 million in '21 and by EUR 227 million since the beginning of the pandemic, which is, of course, a great achievement. Now looking in depth at the debt structure. As a reminder, we took advantage of the excellent condition in the market in '21 to reshape our debt. It means we have now a debt which is long on the chip with only fixed rate circa 1.5%. You can also see on the chart that the next significant maturity is '23. The bank debt is only used for liquidity and our strategy is simply to roll over the next maturity forward with the objective of maximum EUR 500 million maturity per year, which is an amount quite easy to refinance. As far as financial leverage is concerned, the refinancing of the revolving line led to a new leverage ratio calculation to take into account the evolution of the IFRS standards since we signed our previous contract. The calculation is more straightforward, simply corresponds to the net debt divided by EBITDA pro forma of the acquisitions. It stands at 3x year-end '21, whereas the old leverage formula would have been 3.26x. Moving to the next slide, it's fair to say that our financial profile has shown strong resilience during the pandemic, highlighted by the EUR 227 million decrease in debt since 2019. We also optimized both the cost of the maturity profile of our debt structure. I also would like to remind that we obtained some waivers on our debt covenants at the beginning of the crisis quite easily, and it was purely precautionary as it turned out that we could have lived without said waivers as our leverage ratio always remained below the covenant through the pandemic. In '21, we reinitiated our debt rolling forward strategy and partially refinanced a bond in Q3 as well as our bank revolver line. This very sound financial profile is recognized by the different rating agencies, DBRS maintained its BBB rating through the pandemic and Standard & Poor's improved our rating to BB+ last October. Well, to conclude this section, top line growth was very strong on the back of both hospitality recovery and our improved growth profile, as mentioned by Xavier. The open rational adjustments on structural cost savings made during the pandemic generated significant operating leverage, leading to nearly 1 point EBITDA margin increase versus '19. We have a record '21 free cash flow at EUR 228 million, which led to a total decrease in debt of EUR 227 million over the 2 years of the pandemic. And finally, financial leverage stands at 3x, and will be significantly below 3x by the end of '22. Now I will hand back to Xavier, who will give you an update on our CSR achievements.

Thank you, Louis. So I will now spend some time talking about our CSR policy, which is a real asset for Elis. As you probably know, Elis is a real actor of the circular economy, promoting usage rather than ownership, which creates a real virtuous pattern. It means that we always search for longer durability when conserving our products. This can be achieved through maintenance and lending, and we also work very hard on the reuse and end-of-life articles. We are totally convinced that these efforts will bring further organic growth opportunity in the future, given our clients are increasingly concerned about this subject. Moving on to the next slide, our circular approach is an alternative option to far less environmentally friendly offers that exist on the market such as do-it-yourself washing and disposable or single-use products. We are fundamentally convinced that our CSR approach will be an increasingly important growth driver as we see more and more tenders with significant CSR components. As an example, we recently won contracts with Amsterdam municipality in the Netherlands and with Gavleborg, region in Sweden, mainly thanks to the quality of our value proposition on this environmental criteria. Moving on to the next slide. We help our clients reduce their CO2 emissions and some in-depth studies clearly demonstrate that. As an example, using a reusable hand towel decrease the CO2 emissions by more than 30% compared to a disposable paper solution. In the same way, our rental and washing solution for workwear allows our clients to decrease CO2 emissions by 37% compared to a situation where they would buy and wash their uniforms themselves. Moving on to the next slide. We continue to work on many other different CSR aspects in '21. Let me give you a sample. As you can see on left-hand side of the slide, we have many internal and external initiatives and commitments to further promote the circular economy. The Group is also conscious of the environmental challenges with regard to climate change. Year after year, our efforts are being recognized by good and improving grades with counterparts such as CDP, EcoVadis, MSCI or Gaia. Elis wants to commit to an approach to reduce its emissions that is in line with the Paris agreement to contribute to keeping the increase in temperature below 1.5 degree compared to pre-industrial levels. The Group with us present climate objectives that are aligned with the methodology of the science-based target initiative at end '22. Once defined, this climate objective will be submitted to the shareholder approval in the same climate resumption. At the coming AGM on May 19, '22, the Group will propose to its shareholders a nonbinding advisory resolution in order to validate this approach. Moving on to the next slide. It is fair to say that CSR is taking a major role in our day-to-day business. To illustrate that, we significantly improved CSR governance in '21 with the creation of our CSR committee and the appointment of a CSR Director who will directly report to me, underscoring the importance of these subjects for the Group. We have also deployed an ambitious plan across the Group to further improve security at work through the implementation of 10 safety golden rules. We also launched a plan to accelerate the transition towards electric or biogas vehicles based on the precise road map. Finally, we signed our first EUR 900 million sustainability linked revolving credit facility in November, demonstrating that CSR touch all the feed of the company. To conclude this CSR section, let me provide you with a quick update on our different objectives set for 2025. Overall, the '21 performance is in line with our road map for every item. I will give just a few examples. So since 2010, we decreased our energy consumption and our water consumption by more than 20% and 40% respectively. We are also working on parity and women now account for more than 1/3 of our managers. And finally, nearly 75% of our textile products are being recycled, meaning that we are perfectly in line with the 80% target set for 2025. Let's now talk about the acquisition, we are also announcing this morning. So we are very happy to announce that Elis is entering Mexico and is, therefore, further developing its footprint in Latin America. As a reminder, the first big move we made in LatAm was in 2014 in Brazil. We then enter Chile in '15, Colombia in '17 and so Mexico in '22. This development strategy in Latin America has reinforced Elis' growth profile, all markets in the region have very strong outsourcing potential. And as you can see on the top right graph, we have constantly delivered high single to double-digit organic growth rates over the last 6 years. The markets in Latin America are all very fragmented, which give us the opportunity to further consolidate our positions and continue to increase our market share. Our activity in the region is also very stable, thanks to the high share of healthcare clients in our mix, which represents around 75% of total revenue in LatAm. And most importantly, we have a very good track record in integrating assets in the region through the implementation of Elis' best practices across the newly acquired businesses. This is clearly demonstrated by the impressive EBITDA margin improvements we have been able to deliver in the regencies 2015 from circa 21% to more than 33% today. In particular, expansion in Brazil, perfectly illustrates our success in the region and our capacity to deliver profitable growth in new countries. We entered the country in 2012 with the opening of a commercial office to better understand and test the market. Once convinced of the potential of the market, we made our first acquisition in 2014, since then, we made 10 acquisitions in the country with good organic revenue growth rate along with profitability improvement from nearly 22% in 2016 to nearly 36% in 2021, meaning that the margin in Brazil is now above group margin, and we will do our best to replicate the branded and success story in Mexico. Moving on to the next slide. We enter Mexico with the acquisition of the market leader, the century-old family business. It is the only player in the country with a national network. Its management has been in place for more than 20 years, and will stay on board in the coming years with some earn-outs to align their interest with ours. The company delivered revenue of EUR 74 million in 2021, with historical organic revenue growth generally above 10%. It is already a very profitable business with EBITDA and EBIT margin at 38% and 18%, respectively. Activity is very resilient and stable with healthcare clients accounting for more than 85% of total revenue. The next slide shows a map of the country with the plant network, the company is operating. There are 11 and 12 distribution centers to optimize the coverage with a total of 2,600 employees who will join Elis with this acquisition. Mexico is a country with more than 130 million inhabitants. Historical inflation has remained fairly limited, and the unemployment rate is below 4%, underscoring the solidity and stability of the economy, which ranks #15 in the world. It is steadily growing, directly driven by U.S. activity. Therefore, with this acquisition, Elis will be indirectly linked to the dynamism of the U.S. economy. Finally, it is interesting to see that the pandemic had only very limited impact on the country economy. Going forward, our objective is to continue to deliver double-digit organic growth in the country and by doing so, to further improve the Group's organic growth profile. The outsourcing potential in the country is big, especially in workwear. The vast majority of industrial companies are still buying their uniforms. So we will do our best to open the market like we did in Brazil and to accelerate the move towards the rental model. Hospitality is also very big market in Mexico with 25% more rooms in the country than in France. Most of the hotels still don't outsource the washing of the linen and so we also see some significant growth potential there. The healthcare end market is also growing on the back of public funding with modern hospitals and clinics being constructed, which therefore represents another area of potential growth for us. And furthermore, as I said earlier, the Mexican market is very fragmented. So we will have consolidation opportunities going forward to further boost our growth. Moving on to the next slide. Multiples paid for this acquisition are very reasonable, 5.6x 2021 EBITDA and 12x 2021 EBIT. We will rely on the very experienced management to drive the development of the company in the next 3 years with a line interest thanks to earn outs at lower multiples than the acquisition multiples. The closing of the transaction should be before the end of July '22. Now before moving to our 2022 outlook, I would like to show this graph that we have been presenting twice a year since the 2015 IPO. There you see the evolution of the top line and the group performance over the last 2 decades, underscoring the resilience of the group. The backbone of our resilience is twofold, further diversified geographical footprint with France representing 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 improving the acquisition of Berendsen and the addition of new countries in Central Europe and in Scandinavia. Consequently, you can see on the graph that margins are constantly been evolving at high and stable levels with 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 hand-in-hand with top line growth. That means that conversely, they mechanically go down during bad top line year 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 228 million in 2021. Moving on to the next slide, I would like to return to our significantly improved growth profile compared to before the pandemic. We have already discussed our better churn rate, the structural increasing need by clients for hygiene products and pest control and the acceleration in uniform washing outsourcing. I also want to mention the steady development of the nursing home market because of the adding of the population and the increasing share of Elis fast growing market in our mix, which mechanically helps to accelerate group overall growth. Finally, it is worth noting that an increasing number of tenders come on CSR components, This is 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 from the rebound in hospitality, which I will detail on the next slide, we believe that Elis normative growth will be structurally above 3.5% in the future, up from the 2.5% to 3.5% range that we used to communicate on. Let's now turn to the mechanical effect that rebound in hospitality will have on our 2022 organic growth. The graph presents the difference between the level of activity in '21 compared to the normative level of 2019. As you can see, there was still around EUR 350 million of revenue shortfall in '21, which represents a very strong growth pocket for 2022 as we believe we will close a large part of this EUR 350 million gap with a very strong effect expected in H1 this year due to the easier comp. So now let's talk about our 2022 guidance, starting with organic growth. We expect organic revenue growth to be very strong between 13% and 15%. In hospitality, we currently assume that activity will be circa minus 20% below its 2019 level in H1 and that activity will continue to steadily improve in H2. Looking at the current trading since the beginning of the year, we feel comfortable with our assumptions. On top of that, we believe the group will benefit from the improvement of our growth profile that I commented on in depth earlier in this presentation. This concerned Healthcare, Industry and Trade & Services only. Finally, the price effect will also be very material in 2022. As a consequence of the strong inflation, which is a good transition to the 2 -- the next 2 slides, as I want to give you more color regarding our pricing power. So it's very important to bear in mind that non-volatile and anticipated inflation such as wage inflation and salaries is easy to be passed through to our customers as early as 1st January with sometimes the second increase as of 1st of July. In this situation, the lag effect between the time our costs start to increase and the time of price increase as well is very limited. This means that the margin impact is very limited too. This is typically what we saw in 2019 where wages increased very significantly in many European countries. Nevertheless, we kept the margin stable that year. What makes things more difficult for us is when inflation is more volatile, which has been the case over the last few months for energy costs. The most important factor for us is gas. Currently, we hedged circa 50% of our gas consumption for the year, meaning that we pay spot the remaining 50%, which correspond to 1 million megawatt hour. Gas price started to soar in Q4 last year, especially in December and this continued in Q1 this year, meaning that the impact of this increase will only be accounted for in our pricing index at the end of '22 and in '23. Furthermore, most of the one-on-one negotiations we had with our large customer where no pricing formulas are involved took place in the last month of '21. Therefore, the price increase implemented with this customer from January 1, '22 and they did a limited impact in gas price. Consequently, the lag effect will be very significant in 2022, but we shall catch up in 2023. Moving on to the next slide. Let's take a more in-depth look at the gas situation. Over the last decade and until July 2021, the gas price per megawatt hour has remained in a corridor of between EUR 15 to EUR 30. In Q3, we started to see the price begin to increase to abnormal levels following the decrease in volume coming from Russia in H2 at around EUR 70 per megawatt. Then gas price started to really sore mid-December to reach more than EUR 100 in February, and the war in Ukraine obviously contributes to maintain them at a very high level. As for our 2022 numbers are concerned, we had to make an assumption regarding the evolution of gas price even through the current situation in Ukraine makes any prediction very difficult. Nevertheless, we assume that gas price will stabilize for the remainder of the full year at the average price recorded between January 1, '22 and yesterday, so at a level around EUR 100 per megawatt hour. Looking at 2022 EBITDA now, due to the sudden increase in gas pricing at the end of 2021, which we have not yet passed through to our customers, we expect 2022 EBITDA margin to decrease to 33.5%, which corresponds to the 2019 level. As I just said, this corresponds a scenario where gas price will stabilize for the remainder of the year at around EUR 100 per megawatt hour. Now should gas price remain significantly above this EUR 100 level in H1 and should, therefore, call into question our assumption for the year for the cost of the gas, we would act on our pricing as early as this summer or even before, with an additional plus 1% increase passed on to our customer for every EUR 30 tranche above EUR 100 per megawatt hour. In that respect, we have a review close with most of our customers as of July 1. Let's now look at our 2022 outlook for EBIT and EPS, which are very strong. EBIT shot up nearly 30% at EUR 500 million, with D&A only slightly increasing, as Louis explained earlier. Headline net results per share should show around 40% improvement at circa EUR 1.35 per share. And as far as 2022 free cash flow is concerned, it should be at circa EUR 200 million. There will be 2 negative effects this year. The first one will be on linen CapEx with cotton price and freight costs showing strong inflation. The second one will be the effect of working capital requirement of the strong increase in activity. Nevertheless, this should not modify our deleveraging trajectory, and we expect our net debt-to-EBITDA ratio to decrease by [ 0.4x ] in 2022 to 2.6x at year end. Now let's look at the mid-term beyond 2022. Let me first remind you that excluding any effect from the catch-up in hospitality, the group will deliver at least 3.5% organic growth on a normative level. And as far as EBITDA margin is concerned, we believe the 2022 decline will be reversed in 2023. There are 2 ways for this. If the gas price go down to a more reasonable level at around EUR 60, EUR 70, which, by the way, will still be around 3x the 10-year average, then our margin will mechanically return to the 2021 level. But if gas price happened to remain where they are today, this will then constitute a new normal and stabilize situation and the price increase will be implemented from H2 2022 onwards would bring 2023 EBITDA margin back to the '21 level. To conclude, I would like to highlight the main takeaways of this long presentation. First, the very good operational and financial performance delivered in '21. Second, the enhanced organic growth profile of Elis in a post-pandemic environment is a major asset, enabling the acceleration of the group deleveraging. Third, even so gas prices are something we will continue to monitor, we expect 2020 to be a year of double-digit organic revenue growth and a strong earnings improvement. Last but not least, Elis continues its expansion in Latin America with the acquisition of the leader of the market in Mexico, a company that delivers both strong organic growth and high profitability. This concludes this very detailed presentation, but we felt it was important to provide you with all this information. I thank you all for your attention, and we can now move on to the Q&A session. We will be happy to answer to your question.

[Operator Instructions] And the first question comes from the line of Simona Sarli from Bank of America.

So a couple of follow-up regarding gas increases. So you mentioned that 50% is hedged. If you could kindly remind us a little bit of your hedging policy. If I'm not mistaken, you use also framework agreements. So when will they expire? And also for your 2022 EBITDA and free cash flow guidance, as you said, you are assuming that the average gas prices will remain at EUR 100 per megawatt hour. So at the moment, we are significantly above that. Can you give us maybe if you have run a sensitivity analysis on the impact on guidance, both for free cash flow and margins in case, for example, it is like 10% or 20% higher? And what it is implying also in terms of average price increases applied to clients and the average wage inflation?

Yes. So if we start with gas hedge policy, it's a good question. So what we used to have is a balanced approach in the past, you can see that the volatility of gas price was very limited in the past. So we always try to have a part of the consumption hedge and the part floating to be sure that we will not miss any big event. We have to decide summer of [ '21 ], what do we do with the hedge policy. And as you can see on the -- if we come back to the graph of the evolution of the gas price, during summer '21, when it was time to take the decision for '22, the gas price was above EUR 40 per megawatt that means by far above the last 10 years range. So we decided then not to cover everything only the half, so of course, when we have the result of the course after, it's easier to see that it was not a good decision. But it doesn't change significantly the situation for us on the midterm because every hedge system you can have is limited in time. So to answer to the second question, the second half of the consumption is hedged until the end of '22. And in '23, we will be back to a situation where we pay the gas at the level of the market of the spot price like the other players, by the way, even if they have a partner hedge in '22, everybody will have to manage this in '23. And so the question now, the second part of your question is, of course, what happened if the situation of the gas remains very high above what we said with 100 rate for the year. We perfectly know that the current situation is today above the 100, we are this morning around 200, a little more than 200. By the way, it was quite interesting to see that it has decreased yesterday by 5% despite the announcement of the U.S. to stop to buying Russia products. Nevertheless, the market decreased a little. Nobody knows what will happen in Ukraine. So we don't know. Nobody knows. We have seen, for instance, if you remind what happened in December, during 1 week in December, the price was above 180. And 3 weeks after, it was close to 70. So that means that you have a huge volatility in energy price in gas. So we have proposed on the Slide 48, we have disclosed, what is our assumption for the evolution of the gas price for the year. By the way, we expect to finish the year close to 70. It's not so far from globally speaking, the future expectation of the market. So starting with a crazy price in March, probably in a range close to 180 and slowly declining to reach this 70 for the end of the year. It is how we estimate the average of EUR 100 for the full year. Now if it is above, it's not impossible, of course. What we say is to give you the magnitude of the effort we will have to do in terms of price increase to explain that to protect the margin of the group. We had to increase by 1% in a range, every EUR 30 on the gas price. We are quite comfortable with these efforts to deliver, if we compare what we have been able to achieve in the past. We did it in 2019 quite easily. By the way, we have been quite efficient also in winter '21 and beginning of '22 to implement extra pricing to both take into account wage increase quite everywhere in Germany. We know also that in October, the new minimum wage will significantly increase in Germany. It was a mess in U.K. due to shortage of people. And in a range, we are paying much more for our employees in U.K. Every country has increased their minimum wage due to inflation, we have also more cost in wages in every country. And we have been able to pass. In average it's already an effort by nearly around 4%. The price increase in average in '22 yet decided yet accepted by the market and the customer represent an extra growth of 4%. If you compare with the past, we were able to pass around 1% linked to the level of inflation and for now, what is already negotiated is 4%. So that means that if we need to do the same kind of effort. So let's imagine, we stay at EUR 200 for eternity. So it's more or less a new effort of 3% to 4% to make, and we will do it. So we will start some new negotiations and not in July, even in April. So we have already some internal meeting to define the action plan of the group, and we'll start to talk again about price with customers during spring because this energy stay at this level, it is a new normative level, and we will make the effort to adapt the -- our pricing policy. So of course, we will have some lag effect for sure in '22, we will have some lag effect in comparison to this volatility in gas price and our ability to increase our prices. But that's why it was important for us to give you some comfort with the mid long-term view on the group because for '23, we have absolutely no doubt about our ability to adapt the price increase to the situation. So we could have some lag effect in '22 in case of a crazy situation for the gas, but with a very limited impact in '23.

And if I may, just one more question, and that is related to hospitality. In 2022, your organic growth guidance is based on the assumption that hospitality will be 20% below the 2019 level in H1. Can you explain why are you expecting this division sequentially deteriorate versus the minus 15% in Q4?

It is linked to the small impact of Omicron for the first month, because we -- it's clear, you totally -- it's true that we were better than that in the end of the year '21. Nevertheless, in December and January, we had also some country with some difficulties linked to Omicron variant. You know that in U.K., you have some measures to decrease the level of activities, the same small impact also in France and in Spain. But it will be limited. And that's why we say that when we see the beginning of the year, we are very confident with this estimation of minus 20% for the full semester, because we provide, by the way, in the presentation, you have the evolution of the volumes detailed in our key countries, so France, Spain and U.K. Ireland. And you can see that in the last weeks, we were quite close to 2019. So it's clear that we can be quite optimistic. Nevertheless, it's more cautious to take this assumption of minus 20% for the first semester, taking into account that in January, where the gap was, of course, above the 20% due to Omicron. It is now lower than 20%. So that's why we consider that in the second semester, we will start to see and continue to see a regular improvement in the activity.

Next question comes from the line of Nicolas Tabor from Stifel.

The first question would be, could you give us more visibility on your relative difficulty or ease to pass on price increase depending on the different segments? I mean is it easier or more difficult in hospitality and healthcare and what are the key drivers there? And how should we think about them? Then just coming back on the risk on the price increase of the gas price. So basically, what you mean is that if you have an increase of the average price for the full year for Europe, you will have compensated in H2 but not completely in Q2, right, because you will only go back to your 3.5% margin target in H2 with a small lag effect. Is that right? And then as a last question, can you give us maybe more visibility on what was the rationale for the sellers to sell the Mexican business? I mean it looks great in terms of growth, in terms of margin and so on. So what did you sell? How did you get that deal and another competitor, for instance?

Okay. So in terms of price increase, perhaps it's time to come back to the key question, why are we able to pass to the market the level of inflation? I think it is the key question that everybody shall have in mind, why we are able to do it? And then let's come back to the fundamentals. What could be the risk? First risk, do we have a competitor with another way to do the business that could allow him to avoid the inflation. The answer is no. Everybody have exactly the same way to operate. We need some labor. We need some energy, and you don't have a new technology somewhere that could give to a competitor a key advantage. It is even the opposite. We know that we are more efficient than the other due to the size of the group, the industrial efficiency and so on. So no risk to see a kind of Maverick coming with a new technology. Second risk, do you have a customer that could find a new way to have our service by doing itself or a new way to find some minerals and so on. The answer is no. They cannot in-source easily the service. And by the way, it would be stupid because in terms of cost, they would have also to spend money for labor and for energy. So no risk of disruption with customers that could use another way toward the service. Third question, is it possible for our customers to -- not to use our service and to decide that they can live without the service provided by Elis. The answer is also no. You cannot imagine hospitals or hotel without linen. You cannot imagine in the 3 players without uniform to protect employees or to give hygiene for their operators. So they cannot live without our service. And the last question also, important to take into consideration what is the weight of the service and it is [ invoiced ] in their P&L. In every end market is very limited. The sole exception is in hospitality, but then the beauty of hospitality, it is the freedom they have with price. It is a key subject. They are able to monitor their price every year -- every day, sorry. So that means that, for instance, if -- let's imagine we have to double the price due to the crazy situation with energy. So instead of having a cost of between EUR 15 to EUR 20 per room in hotel, it will become 40%. What will happen. They will not rent the room for EUR 150. They will want the room for EUR 170. That's all said. They have the pricing flexibility. So that's why at the end, we cannot be disrupted by a competitor. We cannot be disrupted by a new way of providing a textile solution, and the customer cannot live without the service and we have a limited impact in their P&L. So it is the reason why for the decade now, Elis has always been able to pass to the market, the evolution of the inflation. So of course, we have some time to time some lag effect. And you can imagine that it's never easy to negotiate with the customer such kind of price increase, and we can miss some months, but not more. So to give you, I think, a perfect example of the situation is what happened in U.K., for instance. In U.K., where we have the huge subject of both cost of wages due to the lack of workforce, we have been able to pay much more of our employees and the evolution of energy price. If you take our major customers, the biggest customer in U.K., so around GBP24 million per year of revenue. So it is a hospitality player, 25% of the business of EBIT in hospitality. You can imagine that the negotiation for price increase is always a key challenge with such kind of customer. We have been able to find an agreement with them for a price increase of 24%. They have accepted 24% price increase, of course, after 3 months of hard negotiations, but they have accepted plus 24% in the price because they need the quality of service of Elis. So I think that it is a key example and a good example of our ability to pass to the market, the inflation of our costs. On your question on H2 or Q2, so of course, a large part of an additional price increase would arrive in H2 if we still continue to have this crazy price of energy. Nevertheless, as I said, we are already working on action plans with our countries to be able to react immediately. So that means that we'll not wait for July to increase price. And if the situation in Ukraine remain so difficult and if the gas price remains so crazy, we will start to pass some price increase in April and May. And then the last question, Mexico. So I think it is more a question for the families and for me, on why they decided to sell. No, it's clearly also a subject of materially to have the money in the pocket, because the company was a result of a merger of the 3 main players 5 years ago, something like this with 3 different families. And of course, with some different interests and they wanted to attract the money of all they have built after this merger. So it's for them a question to securitize the money of the family. And as you know, you don't have a lot of buyers of flat linen business in the world and to be fair, we were quite alone in the negotiation with the family. So we have -- it's a long history with this company, the actual CEO of the company. So he's working for more than 30 years in the company. And as his family was friend with the legit family owner of Elis 30 years ago, he spent 6 months in Paris in Elis plant to be trained 30 years ago. So it's a nice story to see that for him, of course, it was quite obvious to sell to Elis, and we had some close relationship, and that's why we have been able to make this deal.

Next question comes from the line of Sylvia Barker from JPMorgan.

Maybe just on the organic guidance for '22 firstly. Can you maybe just break that guidance into pricing? It sounds like that's kind of 3% to 4% and the recovery within that EUR 350 million shortage and the growth elsewhere? And then secondly, just on CapEx and depreciation as we think about EUR 23 million, which I appreciate [ they fall ], but I suppose the EUR 100 million incremental CapEx in '22, I suppose roughly 1/3 of that will hit depreciation in '23. Is there anything else to be aware of as we think about the '23 EBIT and cash flow?

Sylvia, as mentioned, so we have the recovery of the hotels. It's a basic assumption. Can -- you see the graph where -- how much we have lost out of the EUR 900 million, how much we have recovered in '21. So you can make a kind of assumption. It's in the region of the, let's say, 8% of what you could get from hospitality recovery. Now speaking about pricing, as Xavier told you, we already got a 4% full year effect in the beginning of the year in which you can add another wave if the gas price gets up. If it does not, so we may remain at the 4% plus perhaps a bit more. So it gives you a core organic growth, which shall be above 3%, as mentioned for '21, even accelerating compared to '21. Second question is depreciation, that's a pretty one, because the linen is very straight with a 3-year depreciation period. But you understand that the other CapEx can have a very, very different depreciation timing between, I would say, 18 months to 50 years. So of course, the nature of the -- say the CapEx is the remainder. All that being said, the growth of depreciation for '23 shall be much lower than the total growth of the group. So that the margin EBIT shall improve again in '23.

Next question comes from the line of Anvesh Agrawal from Morgan Stanley.

The first is just a clarification of what you said on price. I didn't really quite got that. Did you say the price increase -- including price increase and recovery you're expecting around 12% growth in FY '22?

I'm not sure I understood -- your question I understand is going back to what I said about the split of organic growth in, say, let's say, so the 13% to 15% we mentioned. So it's -- you can see that in theory between hotel recoveries, pricing and core organic growth is the rest, I would say. And so we mentioned something in the region of 8% for hotels, something in the region of 4% for pricing, but it's all, of course, rough estimation. It depends again, of what we shall do with the next wave of pricing.

Okay. That's clear. And then just first on -- second question is on the working capital really. I mean you're obviously seeing a bigger unwind of the working capital as you go in next year. Is that also some of your sort of probably the payment terms normalizing because they remain all right during COVID or like what's driving that bigger working capital unwind because the core growth from your bridge is around 3%, right?

For working capital, the -- as you know, the main driver is the clients, the receivables, which is a big -- the bulk of the working capital and the balance sheet. And you have to compare November, December billing 1 year on the other. So you have to take an assumption of what will be the growth of November, December '22 versus '21. And you remember also that you may have a small calendar effect as the last day of the year, is a Saturday, which is, of course, not good for cash collection. That's what drives the assumption we described earlier.

Next question comes from the line of Mourad Lahmidi from Exane.

So the first one is on the GDP growth environment that you are looking at in 2022. So I understand that your assumption doesn't take into account any recession. So maybe you could refresh our memories in terms of what was the organic growth of Elis during periods of economic recession, let's take the prime crisis, for instance. And the second question is on your interest costs in the P&L. What should we expect for 2022?

Yes. So it's all very difficult at detail to compare the 2 situations between the last big recession in Europe and in the world to '08 or '09. And the potential decrease of the GDP growth due to the actual crisis. So nobody knows. And you can see that some analysts say that we should -- instead of having a 4% GDP growth in Europe, it could be only 2% in 2022. We don't know. It's not a big drop. It's not a minus something as it was in 2008 or '09, but a smaller decrease. I think that we are so resilient that honestly, the impact for us will be quite limited. And even if you compare with what happened in 2008 or '09, where it was a big mess in the economy, Elis has been able to maintain the turnover and the activity. And I think that we were the worst year of organic growth was close to 0% in a context where we didn't have the rebound of the hospitality, we did not have the price effect that we mentioned and so on and so on. And we were at 0. And we didn't have also the positive mix of geography that we have now in our portfolio of countries. We didn't have all the new drivers of organic growth that allow us to have at least 1 point more on growth, future organic growth in the past month. So that's why we compare that honestly the potential slowdown of the economy in Europe for '22. It's not really a risk for the guidance of organic growth of Elis.

On interest, P&L, when you look at the exceptional of '21, you can assume [ EUR 8 million ].

Next question comes from the line of Rahul Chopra from HSBC.

I have 3 questions. First, in terms of the wage inflation, can you just remind us what is the kind of wage inflation that is baked into your current guidance? And basically, what is the number of employees in your compared to pre-pandemic levels, that would be helpful. My second question is in terms of stickiness of price. Just wanted to understand if the gas price to normalize towards the end of the year. Just wanted to understand, will there be a possibility that you'll be rolled forward that it will be sticky and it will continue to see the absolute prices with your customers on a more normalized basis going forward. And my final question is, could you just also remind us the number of customers who are on automatic price pass-through versus how much proportion of customers which actually you have manual adjustments, please.

So if we start, first subject wages. Everything is taken into account in the guidance. So that means that we perfectly knew that we had huge inflation in Europe with impact in the negotiation country by country. And so quite everywhere, we have proposed to our employees a bigger wage increase than usual, taking into account this inflation. It was the case in France in a rate we were above 3% instead of 1% or 1.5% in the past. In U.K., we have a huge increase of cost of employees, it's a double-digit impact of growth of increase of the salary in rate in U.K. mainly due to shortage. It -- in the south part of Europe also the wages have increased quite significantly. We expect a new increase in Germany because the new government announced that the new minimum wage will be at EUR 12 in October. And everything was known perfectly for months now, and so it's fully included in our guidance. Number of employees before crisis, we were at around 50,000 employees in the world. We have made some savings in fixed cost. And of course, we have decreased a little. But now we have a Mexico entering. So we will return quickly to this wage level of 50,000 employees. Gas price, so we will continue to monitor the situation. If the price of the gas are increasing, no subject to still continue to increase price. Even if the price are stabilized by the way, due to the increase -- the regular increase of official indexes because you have always a lag effect in the official index and they are taking into account the average last 12 months -- so you can imagine, of course, that we will be in a very good position at the end of '22 with the official index to pass through the automatic price increase formula that we have. And your last question, the threshold and the breakdown, sorry between contract with automatic index and the contracts where we negotiate and it's more manual as you said, it's more or less 50-50 in the turnover of the company.

Next question comes from the line of Christophe Chaput from ODDO.

Yes. I hope the line is good? Just to come back on the price increase by 4% you mentioned, which is supposed to offset the price of the increase of the gas on your margin. Does it also include fuel price and electricity? I assume, yes, but just to be sure.

Yes, yes. It takes into account every topics linked to energy, fuel for the trucks and electricity.

Okay. And could we say that the price increase in 2022 will be more or less the same in 2023, if you consider that you are not going to be hedged, let's say, for 2023? Do you need further price hike above 4% I mean. Is that correct?

It will depend on the evolution of the gas price. So if you have a gas price close to EUR 70 for '23, it's probably the impact that we will have on the price increase, you're perfectly right. Nobody knows. If we come back to EUR 30 as it was over the last 10 years, then it changed significantly the situation. So it will be linked to the evolution of the stabilized gas price for the midterm. But it can be the magnitude -- you're right, it can be the magnitude of the evolution of the prices in '23.

[Operator Instructions] Next question comes from the line of Ben Wild from Deutsche Bank.

Just a quick one from me. At the end of 2022, I believe the leverage ratio given your guidance is going to be at the lowest level since IPO. Could you just remind me, is there -- do you have a clear target to get to on the leverage ratio in the medium term? And secondly, and related just on capital allocation, should we be expecting, following the announcement this morning in Mexico, higher M&A spend in 2022 and 2023 versus '19, '20 and '21?

So the -- we are very happy to see the leverage coming back to this 2.6x at the end of '22. We perfectly know that it was a concern of the market in the past when we had a leverage of 3x. So we are very happy to see this deleveraging happening in '22. And the target is to be close to this 2.5x. That means that the question of what do we do with the cash will be more for '23. In terms of M&A expenses, so in '22, of course, we will have the cost of the acquisition in Mexico that it is not a classical bolt-on. So it's a bigger deal. And for the rest and for the future, today, we have quite a normal level of activity in the M&A team. So we should come back to a more regular level of M&A. So something around EUR 100 million per year in the future.

I would now like to hand the conference back over to Xavier Martire.

Okay. So thank you, everybody, for your attention. It was a long presentation, but we had a lot of information to share with you this morning. And the next communication will be for Q1 revenue on the 10th of May, and I wish you a good day. Thank you. Bye-bye.

That does conclude the conference for today. Thank you for participating. You may all disconnect.