Elis SA (ELIS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to Elis 2022 Half Year Results Presentation. [Operator Instructions] I would now like to turn the conference over to the CEO of Elis, Xavier Martire. Please go ahead.

Yes. Thank you and welcome to Elis 2022 half year results call, which is also webcasted and recorded. So 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 half year results. Then I will hand over to Louis, who will detail the full year financial performance. I will then come back to provide you with an update on our CSR advances and on our updated views on 2022. Finally, we will have a Q&A session to answer all of your questions and after our call, as usual, Nicolas Buron will be available to answer any of your questions offline. Before we start, please take the time to read the disclaimer. So I'm very happy to report a solid first half year performance, driven by a stronger-than-expected top-line activity and efficient pricing adjustments. Organic revenue growth was strong at plus 26.6% in H1, driven by the pickup in hospitality and by good activity momentum in our 3 other end markets: Healthcare, Industry and Trade & Services. In the first half, the group has successfully adjusted its prices in the context of very strong inflation of the cost base and we come back to this in detail in the presentation. This along with good operational performance across the board led to plus EUR 118 million increase in EBITDA year-on-year in terms of margin. This corresponds to a decrease of 100 bps, in line with expectations. EBIT margin was up EUR 101 million, which represented a plus 350 bps margin improvement in the first half. Headline net income was up plus EUR 82 million, up more than 120% year-on-year. Free cash flow was at EUR 70 million, in line with expectations. This good set of financial results allowed us to raise our guidance for the full year. Organic growth is now expected in a plus 18% to plus 20% range compared to previous guidance of between 13% and plus 15%. EBITDA margin is still expected at 33.5%. EBIT is now expected above EUR 530 million compared to our previous guidance of around EUR 500 million. Headline net result is now expected above EUR 1.45 per share compared to around EUR 1.35 before. Free cash flow is still expected at around EUR 200 million. And finally, we expect deleveraging to accelerate and year-end financial leverage ratio should be down alpha term at around 2.5x compared to around 2.6x in our previous guidance. Moving on to the next slide. Let's first look at hospitality, which was one of the main moving parts for the year. It has shown tremendous pickup in the first half despite a slight impact from the Omicron variant during the first weeks of the year. Overall, we are now nearly back to 2019 level. In France and Spain, you can see on the graph that volumes are already above pre-crisis level, while the U.K. still saw a strong minus 8% below. On top of this good first half performance, summer is looking good. July was strong and bookings looked good for August and September. Aside from activity, we have been able to adjust our prices to reflect the increase of our cost base. And it is fair to say that the good activity momentum of our clients probably helped the pricing discussions we had in the first half. Moving on to the next slide. Let's now take a look at Healthcare, where activity continued to be good. Due to some structural activity drivers, the main one being the increasing need for hygiene, translating into more linen consumption at our clients, which means they get a clean change more often than they used to. Furthermore, textile is back in surgery blocks in replacement of disposable items and the switch was driven by the 3 main reasons. First, the need for hospitals to secure the supply chain, disposable garments being sourced in Asia with many unreliable suppliers. Second, the will to improve employee's comfort, textile garment being way more comfortable to wear and disposables. And third, environmental considerations as our offer is obviously much superior to disposable garments. Finally, we won many new contracts due to our recognized reliability and quality of service on the market. This also contributed to the growth in the first half. The only negative point we can flag for the half is in Brazil, where the exceptional underground contract progressively came to an end. In terms of pricing, healthcare is probably where the discussions with the clients were the most difficult in the first half, especially in Germany and in Scandinavia. Industry and Trade & Services now, where activity level was very satisfactory too. Structural trends for more hygiene and traceability remains very strong. Our offers for soap, hydro-alcoholic gels, pest control solutions are perfectly aligned with these 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 pandemic. Furthermore, Elis is able to efficiently address the growing part of clients that is looking for more responsible product and services with a limited environmental impact. 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. Furthermore, we saw tangible signs of reindustrialization in Europe like in microelectronics. We also signed some contracts with car battery manufacturers. We decided to come back to Europe with the construction of big plants. This is obviously a very good sign for us. And finally, on the pricing side, negotiations were quite successful. And we efficiently adjusted our prices to reflect the inflation of our costs. Moving on to the next slide to talk more about inflation, which is obviously one of the main topics of the first half. Overall, our cost base increased around plus 9% with energy costs representing around EUR 50 million cost increase. Around 50% of the total inflation-related cost increased in the first half. This does not come as a surprise and reflects the surge in gas, electricity and food prices over the last 12 months or so. Personnel costs, which represent Elis main top line increased around EUR 35 million in H1. That means between plus 4% and plus 5%. Other items represent a combined additional cost of around EUR 15 million. So all in, the impact from inflation on our cost base was around EUR 100 million in the first half. We already know that in this situation, this inflation level will be slightly higher in the second half with some additional wage increase fitting in a number of countries such as Germany from October onwards and from August onwards. Furthermore, we will also record the full half effect of some wage increase that we're implemented during H1. Therefore, just like we did in the first half, we will continue to adjust our pricing in the second half to offset this additional cost. Moving on to the next slide. Let me elaborate on Elis pricing power, which is a key component of our business model and one of the group's biggest strength. In the first half, overall price effect was just below 6%. This allowed us to offset inflation in euros, so around EUR 100 million as we just saw. This is a very solid achievement. Also there is clearly a lag effect between when costs increase in our P&L and when the additional pricing kicks in. Our negotiation often results in pricing implementation timelines, so not everything was implemented from January 1 onwards. That said, I feel very satisfied with our capacity to adjust our pricing. And I want to give you some color on the reasons of this success. First, our services are essential for clients' activity. Hotels and hospitals simply cannot operate without linen. Same goes for industrial clients, uniforms are very often mandatory and they need our service to properly run their business. Second, the cost of our service only represented a fairly small component in our clients' P&L. And third and last, our competitors have more or less the same cost base as ours. And there is no risk of disruption from an alternative way of providing the service. It means that everybody is facing the same inflation problem. And we have noticed overall rational behavior from our competitors in most of our markets. These 3 reasons combined explained why we have been successful with our pricing adjustments in the first half. Moving on to the next slide. Let's have a look at 2 bridges, which provide a good summary of the impact of inflation and pricing on our H1 EBITDA and EBITDA margin. On the left-hand side chart, we can see that the nearly plus EUR 100 million increase of our cost was nearly totally offset by price increases. The rebound in hospitality activity combined contributed another EUR 100 million in EBITDA increase in H1. And we also recorded some good productivity gains in H1 with some specific action plans leading to a reduction of around 10% of our energy consumption, which represented -- which corresponded to EUR 11 million gain. Now looking at EBITDA margin on the right-hand side chart. The fact that we only offset the amount of inflation in euro terms led to a mechanical dilutive effect on EBITDA margin as the EUR 100 million additional revenue coming from pricing to offset inflation do not contribute to margin. This had a minus 220 bps negative effect on margin in H1. This was partially compensated by the positive effect from strong activity volumes and from productivity gains. Overall, EBITDA margin decreased by 100 bps, in-line with full year guidance. Moving on to the next slide. Let's have a look at the EBITDA performance in our different geographies. In France, organic growth was strong at around 34%, along with 370 bps EBITDA margin improvement with a strong rebound in hospitality generating some operating leverage. Pricing adjustments were also pretty efficient in the country. In Central Europe, the decrease in margin is due to Germany where pricing discussions were difficult despite good organic revenue growth in the region. In Scandinavia and Eastern Europe, organic growth was around 17%, but EBITDA margin showed a minus 310 bps decline in H1. The rebound in Hospitality had a dilutive effect on margin as this end market delivered below rate profitability in the region. Furthermore, the lag effect in implementing price increase is longer as most of our clients in the region are big clients with internal processes leading to longer negotiations. It means that we expect a significantly higher price effect in the region in H2 as the negotiated price increase we had a ramp up or be implemented in the second half. In the U.K. and Ireland, the rebound in hospitality was strong. We also recorded further reduction of our churn in workwear and Industry and Trade & Services. Pricing was also good to offset the inflation of our cost base. And altogether, this led to a nearly 40% organic growth in H1 with stable margin. Southern Europe performance was driven by the strong rebound in hospitality, which is by far the main contributor to the region's revenue. Organic growth was at nearly 60%, enabling operating leverage with EBITDA margin up 80 bps in H1, which is very encouraging. Also, we have not yet come back to pre-crisis level. Finally, Latin America organic growth was nearly 9%, with margin down 110 bps as we expected following the end of some very profitable temporary contracts that we signed at the beginning of the pandemic. Moving on to the next slide. Let me give you some details on gas pricing, which has been and still is a stress factor for the market. As we already saw, gas was for Elis the main contributor to the cost base including H1. We explained in March that half of our gas volumes were hedged in 2022, meaning that we would pay the spot price for the remaining half. The average spot price we paid in H1 was EUR 93 per megawatt hour, so slightly below our EUR 100 assumption. It is important to note that we have now signed some additional hedging contracts for the end of this year 2022. So we can confirm that the average spot price for the year should be in the region of EUR 100 per megawatt hour, in line with what we said in March. Furthermore, we have signed hedging contracts for '23 and beyond. In '23, 85% of our volumes are hedged at EUR 80 per megawatt hour. In '24, 1/3 of our volumes are hedged at EUR 65 per megawatt hour. And finally in '25, 20% of our volumes are hedged at EUR 50 per megawatt hour. All in, this values hedged makes me feel reasonably relaxed about gas prices. However, moving on to the next slide. The risk of gas shortage in Europe has recently made the news connected to the conflict in Ukraine and the result in geopolitical turmoil. From our perspective, the risk seems to be limited for Elis. First, our activity has always been considered as essential as we provide linen for businesses that are essential themselves such as hospitals and the pharmaceutical or food processing industry. So until now, like during the pandemic, we have always been able to obtain exemptions to keep our plants open even when strict lockdowns were in place in Europe. Therefore, we feel confident that should bode non-impairment affected measures of powering degrees. Elis would likely face the least stringent ones given the essential nature of its activity. Furthermore, you should have in mind that we could easily deal with gas shortage over 2 or 3 days per week. Such activity measures would be implementing during the winter season, which is a least busy period of the year for Elis. When we do not have a shift at night or over the weekend, implying we have spare capacity at the time of the year. Let's now take a look at our M&A activity in the first half of the year. So we maintained good momentum and closed 3 deals plus the Mexican acquisition in early July. In March, in Chile, we acquired Golden Ken, the former #2 of the market, enabling us to further consolidate the market and strengthened our leadership position in the country. Also in March, we acquired Yokel in Germany, a player with revenue of around EUR 20 million in the healthcare market, further enhancing our position in this market. And in May, we acquired Santander in Denmark, a player that offers flattening for clients in hospitality as well as workwear and mask. This acquisition reinforced our #1 position in Denmark. This acquisition as well as those acquisitions we closed in H2 last year had an impact of plus 1.5% on H1 revenue. Moving on to the next slide. We are now in Mexico, as we finalized in early July, the acquisition of the market leader, a century old family business. It is the only player in the country with a national network. The company delivered revenue of EUR 85 million in '21 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. There are 11 plants and 12 distribution centers to optimize the coverage with a total of 2,600 employees. The management of the acquired business 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 us. Going forward, our objective is to continue to deliver double-digit organic growth in the country. And by doing so, 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 accelerate the move towards the rental model. Hospitality is also a 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 their linen. 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 will present another area of potential growth for us. Furthermore, as I said earlier, the Mexican market is very fragmented. So we will have consolidation opportunities going forward to further boost our growth. Let me now hand over to Louis.

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 represents around 30% of the revenue. Our 4 end markets are well balanced in H1 with hospitality coming back to a more normative level. Either way if you look at this graph, you will see that Elis positioning is well balanced, which significantly contributes to its resilience. This good diversification in terms of activity, clients on 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. Now, looking at H1 '22 organic revenue growth by region. The group is a record high at 26.6% in H1, with circa 17% coming from the recovery in Hospitality, circa 6% from our pricing and circa 5% coming from other volume growth in our 3 other end markets, healthcare industry in Elis, underscoring our new organic growth profile, which is significantly higher than what we delivered before the pandemic. The strong performance of France, U.K., Ireland and Southern Europe benefits from pickup in hospitality. Significant pricing adjustments also drove the growth, especially in U.K., Ireland, where inflation was stronger. Organic growth was very high, was in the mid-teens in Central Europe and Scandinavia, where the share of hospitality is lower. In Latin America, the end of the top value contracts signed during the pandemic had a minus 2% impact on organic growth. Now -- looking at EBITDA margin performance by region, which Xavier already commented on at length. Margin evolution by region is a factor of the share on the profitability of hospitality as well of the share between small and larger clients. The way this EBIT is compensated from one country to another might also have an impact on margin. That was typically the case in Germany in the first half. It is worth noting that over time, margins tend to converge towards the group average. That is the case for U.K., Ireland that was at 30% in H1, which is 2 points above H1 '19. Southern Europe, although still below the pre-crisis level is also catching up. And Latin America is now at group level, which is 3 points above H1 '19. Let's now look at the full P&L. We already have commented on H1 revenue and EBITDA, up 30% and 26%, respectively. Below EBITDA, most lines are quasi fixed, which drove a strong pickup in all aggregates. Thus, D&A only increased by 5%, which triggers a very material EBIT margin improvement at 13%, up 3.5 points, which corresponds to more than EUR 100 million increase in EBIT. On June 30, in accordance with accounting standards and although our forecast for the country has not materially changed since the end of last year, we booked EUR 59 million goodwill impairment regarding our assets in Russia based on a 26% watch compared to 11% end of last year. It's worth noting that due to ForEx evolution in H1, this EUR 59 million goodwill impairment is actually above the invested capital in the country. Furthermore, financial expense was only EUR 29 million, which is EUR 13 million lower compared to last year, mainly due to foreign exchange gains in Russia, Mexico, Brazil. Finally, headline net income increased by EUR 82 million in H1. The reconciliation between net income and headline net income is presented on the next slide. The main items restated for the calculation are the same as usual, PPA depreciation, non-cash IFRS 2 expense for free-share plan and non-current operating income and expense, which were very limited in H1. Additionally, we decided to restate the goodwill impairment as well as the positive foreign exchange gains recorded in H1 that I just mentioned. Let's now take a look at the cash flow statement with a free cash flow at plus EUR 17 million in H1, which is typical of the first half, considering the seasonality of the cash in our business. For example, as a remainder, H1 '19 free cash flow was at minus EUR 20 million. You remember that H1 2021 was not typical as we recorded an unusual positive change in working capital requirement. This semester, CapEx stood at just 18% of revenue at EUR 320 million. It's a touch low how this reflects the careful approach we took with investments at the beginning of the year when the sanitary situation with Omicron was still uncertain. Furthermore, delivery time has increased following the global supply chain disruption. Therefore part of our linen were still in the inventory in June 30, that inventories increased by EUR 25 million in H1. This partly explained the significant negative change in working capital requirement. The other reason is the mechanical increase of the trade resalable following the strong pickup in activity; even DSO remained very good at 55 days. All other items in the table are normative, leading to EUR 17 million free cash flow. In terms of capital allocation, we spent EUR 32 million on M&A in H1 and EUR 33 million for dividends, bearing in mind that 60% of the rides for dividends were exercised in favor of the payment in shares of the scrip option was available. At the end of the day, net financial debt increased by EUR 45 million in the last year to around below EUR 3.2 billion. Let's look now in depth at the debt structure. You remember we have continually fine-tuned the structure of the debt, which is now all debt market, all fixed, all bullet with a good spread over the years. The average duration is past 4 years and the average interest rate 1.8%. In H1, we issued a 5-year EUR 300 million bond on a 10-year $175 million USPP. With these 2 operations, we have already secured the liquidity to reform the EUR 450 million, bond due February 23. Now, the next maturity we will need to refinance is a EUR 400 million non-convertible bond due October 23 and the credit market for Zach products seems much more open than from that bond. After this, the next maturity will be the EUR 500 million February 24 bond. But given our debt is decreasing by around EUR 150 million per year, we believe we will be able to reduce our co-financing needs by then, so not for finance, 1 for 1. Moving to the next slide. The leverage continued to decrease in H1 we reached 2.7x at June 30, significantly down. As a reminder, financial leverage remains above 3x between '17 and '19 as we implemented a 3-year CapEx plan to put the parental network back on trip shortly after the acquisition. Then the pandemic started in '20 with a negative impact on the ratio, mainly because of the lack of top-line, but then deleveraging has accelerated. And we are now significantly below 3x with the new guidance of 2.5x by the end of the year. We expect, of course, this trajectory to continue in the coming years as we are committed to further deleveraging the business. To conclude this section, top line growth was very strong with 27% organic revenue growth with hospitality recovery contributing circa 17%, efficient pricing adjustment contributing circa 6% and improved growth profile contributing circa 4%. EBITDA was up EUR 118 million with margin down 1 point, mostly due to the lag effect between cost increase and pricing adjustment. EBIT was up by a stronger 3.5 points to 13% margin and headline net income up 122% at nearly EUR 150 million. Finally, financial leverage stood at 2.7x at the end of June and shale target 2.5x by the end of '22. I will now hand back to Xavier, who will give you an update on our CSR achievements in the first half.

Thank you, Louis. 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 concaving our products. This can be achieved through maintenance and mending and we also work very hard on the reuse of end-of-life articles. We are totally convinced that these efforts will bring further organic growth opportunities in the future, given our clients are increasingly concerned about this subject. In terms of performance, we target a set of ambitious objectives for 2025 to reduce our environmental footprint to further protect and value our employees and overall to have a positive impact on society. In March, we communicated on the 2021 full year numbers that you can see on the slide. And we are very proud of the progress that has already been made and we should be able to meet or even exceed our '25 targets. Moving on to the next slide, let's have a look at our main H1 CSR highlights. We have recorded several rating improvements with CSR agencies, underscoring the relevance and the efficiency of our actions. First, customer rating improved Elis ESG notation by 9 points at 15.5% with a low risk classification. Second, Elis grade with MSCI reached 7 in July '22 compared to 5.6 in 2020. Third, Elis obtained an A grade in the Verité40 index. Then after winning for 5 consecutive years, gold medal related to the -- it is obtained a platinum medal the highest possible reward. This medal plays Elis within the top 1% of the roughly 75,000 companies assessed by EcoVadis. On a separate topic, Elis committed 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 when you compare to preindustrial levels. The group will just present climate objectives that are aligned with the methodology of the sales-based target initiative at end '22. These climate objectives will be submitted in a say on climate resolution at the next General Shareholders' Meeting in May '23. At the General Shareholders Meeting held on May next year, the group has already proposed that shareholders support this strategic step and advisory resolution, this resolution was largely approved. Finally, some CSR has been implemented in the long-term incentive plans of the Executive Board and of Elis' top 400 managers. Now, before moving on to the update on our 2022, in the long-term incentive plans of the Executive Board and of Elis' top 400 managers. Now before moving on to the update on our 2022 outlook, I would like to show 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, the diversified geographical footprint with France, representing less than 1/3 of our business now 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 in Scandinavia. Consequently, you can see on the graph that margin has constantly been evolving at high and stable levels within 200 basis points range, regardless of external events and taking into consideration, of course, the impact of IFRS-16 from 2019 onwards. On top of that, one very interesting characteristic of our business as we saw in 2020; is that linen investment come ending 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. This led to 2 very true years for cash generation during the COVID years with free cash flow at EUR 280 million -- EUR 217 million in 2020 and EUR 228 million in '21. Moving on to the next slide. And before discussing '22 and beyond, I would like to give you further detail on the resilience of our business by going through our 4 end markets. We believe that given the persisting global uncertainties, it is worth underscoring again this resilience pattern of Elis. First industry, where the majority of our clients are operating in very resilient sectors such as food processing, pharmaceuticals or waste management. And furthermore, with the fixed fee invoicing methodology we have in place with these clients, we basically charge them for the inventory in place. It means we are not impacted in case of a temporary and limited activity slowdown at our clients. Second, healthcare is very resilient by nature. Third, trade and services were just like the industry, we charge our clients with a fixed fee regardless of their activity level. Therefore, this end market is very resilient too. The only downside is that some service such as hygiene services, mats or beverages can be considered nonessential by clients who would be looking at cutting their cost in an economic downturn. Finally, except during the pandemic, hospitality has been showing steady growth in the beginning of the century. This has been driven by the development of international tourism and global mobility, leading to the construction of new hotels or the upgrade of existing ones towards higher class tendons. To be either trade and pattern even during the economic downturn, I want to remind you that Elis maintained its organic revenue level in 2008 and 2007 without any difficulty. So 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 structurally increasing need by clients for hygiene products and pest control and the acceleration of uniform washing outsourcing. I also want to mention the steady development of the nursing home market because of hedging population and the increasing share of Elis fast-growing market in our mix, which mechanically helps to accelerate the group's overall growth. It's worth noting that an increasing number of tenders come with CSR components, a feed where as an industry leader is well advanced compared to its small competitors. The major driver will be the reindustrialization in Europe. The many shortages that appeared in Europe during the pandemic highlighted the importance of industry resilience in Europe and pave the way for some industrialization. This is clearly an opportunity for Elis. And as I told you before, we have already won some contracts last with a big semiconductor manufacturer that recently reopened a plant in Ireland. There should be more opportunities like this in the near future and this should further drive the growth of our workwear activity. Finally the increasing share of our revenue that is generated in countries with strong organic revenue growth, such as in Latin America or in Eastern Europe will mechanically contribute to the improvement of the group's total organic growth. In this respect, the deal we recently finalized in Mexico will be another catalyst. 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 facilities. We have maintained above par quality of service even during lockdowns or recent labor shortages. Thanks to the strong commitment of our employees and our operational flexibility. Furthermore, the sharp and unpredictable pickup of volume in plants during recovery phase 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 discount on temporary suspension granted. Our clients view us as a local, reliable partner, who listen to their needs and we can have as a trustworthy partner in difficult time. We can say today that our efforts during the pandemic have reinforced our relationship with our clients. And it has been a key factor in our capacity to efficiently adjust our pricing in H1. Finally, 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, underscoring the success of the measures that were implemented. So now let's talk about '22 guidance, starting with organic growth. We now expect organic revenue growth to be between plus 18% and plus 20%. So significantly above what we had in mind when we released our '21 results in March, which was between plus 13% and plus 15%. This upgrade is based first on the better-than-expected pickup in hospitality and the good prospect for the summer and September. Second, on the significant pricing adjustments we efficiently put in place to offset the inflation of our cost base. The main underlying assumption is that hospitality will be back to its 2019 level overall in H2. We therefore exclude the possibility of the emergence of a new variant sometime during H2, of course. As far as the other financial indicators are concerned, we confirmed that full year EBITDA margin will be down minus 100 bps at 33.5% and that 2022 free cash flow will be around EUR 200 million. However, we are improving our EBIT guidance from around EUR 500 million to above EUR 530 million. And we are also improving our headline net income per share from around EUR 1.35 per share to above EUR 1.45 per share. We are also upgrading our year-end target for financial leverage ratio from 2.6x to 2.5x. This would represent a minus 0.5x leverage reduction year-on-year. Before we move on to the Q&A session, I would like to highlight the main takeaway of this presentation. First, in a very uncertain macroeconomic context, Elis demonstrated again the resilience of its business model in H1. Second, our capacity to adjust our prices led to a limited EBITDA margin decline in H1 and good financial performance overall. And third, Elis enhanced organic growth profile is a post-pandemic environment is a major asset, enabling the acceleration of the group's deleveraging. This concludes this presentation. I thank you all for your attention and we can now move on to the Q&A.

[Operator Instructions] The first question from the line of Madeleine Jobber from Morgan Stanley.

Just a couple from me. So firstly, I know you mentioned sort of general rates versus COVID pre-COVID levels of hospitality. But I was just wondering if you had an exact exit rate or maybe how that developed through the months within the last quarter, that would be quite useful. Secondly, on the guidance, it was really useful to hear the level of hospitality you are expecting in the full year guidance. But would you be able to at all split out how much pricing or the level of pricing you've expected in that guidance as well? And then, just finally, on the reversal of those LATAM temporary contracts, just wondering how much is left unwind in the second half or if all of it is unwind in the first half?

Okay. So, first question about the pace of recovery in hospitality. So I think that you have everything more or less in the presentation. When you analyze the evolution of the volumes in France, Spain and U.K., it is on Page 5. And it represents more than 80% of the hospitality volume of the group. So you have more or less all the data there. What you can see is that we are back to 2019 since May more or less. So May and June, we were at 2019 in average very close to. Only in U.K., we are slightly below. In Spain, we are above, above in France also. So all in, we are there for 2 months now. And July is exactly in line, the volume in summer -- are very good. For the second question, in the guidance, what is the pricing effect? So pricing will increase in the second semester as you have understood due to some lag effect between cost increase and implementation of pricing. So for the full year, it will be slightly above what we delivered in the first semester. So you can take a 7% as a good proxy of the pricing effect for the full year. And the last question is for Louis, perhaps the evolution of the contract in LATAM?

So we tracked what we call other sales, which is kind of in direct sales to clients, which is not usual. But they always have a small EUR 2 million per year and usually before pandemic and in the first half it was EUR 1.5 million only so nearly back to normal situation in Brazil.

The next question is from Benjamin Wild from Deutsche Bank.

Two related questions for me, please. It looks like the guidance is now implying that you're getting -- you'll get your margins in H2 '22 back to the levels you achieved in 2021. You've just given some guidance on the pricing. But can you help us understand some of the other moving parts there? What are you expecting from the additional cost base inflation you mentioned in H2 and other effects from operating leverage that you're clearly seeing and productivity improvements? The second question relates to how we should think about these price rises more broadly. How sticky are these price rises? And is it plausible that we see negative price growth if energy prices start to stabilize at lower levels?

So what we expect for the margin for the second semester. So we will keep more or less 100 basis points below '21 because we expect the full year with this decrease. So that means that we'll more or less deliver by the way the same margins in 2019. So what will happen in the second semester? Productivity, we should keep the same pace. The impact of volume will be more limited, of course, because the huge recovery was in the first semester, mainly in hospitality. And in price, the decrease of margin due to the lag effect between cost increase and price increase will be more limited in the second semester, despite the fact that, as we said, the inflation of costs will accelerate a little in the second semester because we know that wages will increase more in the second semester. You have the increase of minimum wage in France, 2% in 1 August and you will have the strong impact of the increase of minimum wage at EUR 12 per hour in Germany that will be applied in 1 October after an increase in 1 of July of 7% also in Germany. So it is the reason why we expect a little more inflation of costs in the second semester than the first one, but more price increase in the second semester than in the first semester. So the global effect of balance of inflation will be less de-favorable in margin in the second semester. But on the Elis the operating leverage will be more limited in the second semester because the basis of comparison of the recovery of hospitality will be lower. And then, the second part of your question. What happened if we have a kind of normalization of energy costs? Honestly, I would love to be in front of this situation. But I'm not sure that it is really what will happen in the coming weeks. But you have no doubts about our ability to keep our price and will not decrease our price because for small customers, we increased and we don't negotiate really to -- without giving some precise breakdown on what is related to energy and so on and so on. For some very big customers, we have put a part of the price increase that is related to the evolution of the gas price. But we have been clear also with them explaining that we have hedged a large part of the gas for '23, for instance, at a very costly level, EUR 80, EUR 85, even EUR 80. It is costly if you compare with 2 years ago. So that means that even if the gas price is decreasing below EUR 80, it is not our bet, but nobody knows. We have been quite transparent with customers. They know that we have hedged at EUR 80. And so we not apply the decrease of the gas price in '23 if it is below the EUR 80 per megawatt. All in, what is also totality and this is the reason why we -- I don't expect at all a decrease of price increase in '23 because these 2 additional reasons. First one, where we use some indexes. We know that indexes are an estimation of the last 12 months evolution of the price. So that means that the peak of the indexes for energy will come at the end of '22. And even if you have a decrease of the cost in '23, you will wait 12 months to see it in the index. So we are quite protected with that. And secondly, you will remember that the large part of our cost, normally, it is wages, wages of our cost in the P&L. And then in wages, it's totally clear that we will be faced in the coming quarters, so for '23. We also expect increase of wages at around of 5%, 6% probably. So with this, it will by far offset any risk of a price decrease due to a normalization of energy. So that's why for me, you have absolutely no scenario where Elis could be forced to decrease prices in '23 and even in '24.

The next question is from Christoph Greulich from Berenberg.

Three from my side, please. Firstly, with regard to the gas hedge. So I think you mentioned in the presentation that you are partially hedged for Q3 and Q4. Can you give us an indication on what percentage of the gas needs in H2, you're hedged for? Then with regards to the full year guidance of all the KPIs have been upgraded in euro terms, but not the free cash flow, so maybe just an explanation why free cash flow is not expected to be higher despite the higher EBIT? And then, lastly, on the pricing in Germany. So you mentioned that the negotiations have been more difficult. So is this rather a timing issue and you're confident that this will -- there will be a catch up in H2? Or is it more of a structural issue? And it's not really clear when you will be able to push through the higher prices there?

Okay. So first technical question for gas hedge, it will represent 50% of the consumption in Q3 and 2/3 in Q4 and it is hedged at EUR 85 for the 2/3. For the free cash flow, perhaps, Louis, you can answer on this question, free cash flow guidance that has not been raised.

Yes, you saw the detail of the free cash flow in the first half. The key point is receivable, the working capital as it's highly linked to the growth or the dynamic of growth. So as the clients are paying at 55 days, the more you go, the more you have receivables in your account, starting with the EUR 600 million in the balance sheet. You can make an assumption of what will be the impact of the organic growth on the receivable accounts. So that's mainly the point. After that, we know there the kind of lag of top line getting into the free cash flow that's kind of normal.

And the third question with price increase in Germany specifically with healthcare. We are much more optimistic for the second part of the year and for '23 because what happened first, we know that we have a huge delay to negotiate such kind of price increase because we are talking with big accounts. And you cannot apply something without a negotiation, contract by contract. In the first semester, we -- it was quite difficult also because in the contract, we had a lot of contracts with some cap price increase, not more than 1.5% very often or even some contracts with 0 price increase load. So it was -- you can imagine that it was quite challenging to negotiate. And why we are more opportunistic because now we have some clear advice from our legal adviser that has given us some statement very clear on the fact that we can argue that we are in the middle of a first major case. And we are allowed to stop the contract or to negotiate price by far above what was indeed in the contract. And so we have started such kind of negotiation to explain that it is a first major case. And so we have a legal position in Germany that gave us full confidence. And we start to have some success to apply the reality of our cost increase in Germany. So we are much more optimistic for the second part of the year there. And in '23, we have already announced to the customer to prepare their budget for '23. A huge cost increase in Germany related to the impact of the increase of minimum wage. It will increase in 9 months. The minimum wage in Germany has increased by 25%. So you can imagine the shock for the industry like our industry, where we have a lot of blue color paid very close to the minimum wage. So it's already communicated to the market and to our customers in healthcare. And we published the legal statement; that allow us to go above what was the schedule in the contract.

[Operator Instructions] The question from the line of Sylvia Barker.

Can I just check on hedges. Have you hedged electricity auto as well or the other hedges related to gas specifically? Then on the refinancing of the convertible, I think Louis suggested that, that will be refinanced with another convertible. Can I just check what your plans are on that? And then, finally, just going back to 2009, Elis was very, very resilient. But Berendsen declined mid-single digits organically. Could you maybe just explain what happened at the Berendsen business in that crisis?

So for the last question, it will be quite complex or we could spend 1 hour to explain all the mistakes they made in the past. So no specific explanation to understand why they had a decline in the past, I don't know. But I'm pretty sure that it will not be the case for us. First, as we said, in 2008 and 2007, 2009 and so on, we were with a positive evolution of the top line. And now the profile of the company has been reinforced. We have much more new countries with a huge potential of outsourcing where we know that we drive organic growth by far above the overhead growth of the group. So I have absolutely no doubt about the reinforced profile of cabinet of the group. And for the specific case of Berendsen, honestly, what happened 15 years ago inside this company, I don't know. But you remember that in some cases, they had some strange decisions like exclude also small customer for instance and so on in U.K. So I don't know what they decided during the crisis, perhaps they didn't take the good decision. For the 2 other questions, price of electricity. It is partially done in some countries but not in our main countries where today, we consider that the price proposed by the market are totally crazy and probably linked to a specific crisis of today like in France where you know that we have 26 nuclear plants stopped for maintenance operation for the coming months. And so, of course, the price of electricity takes into account such kind of crazy momentum. And we have considered that it was not very clever to take some hedge on electricity in such a big country. So we have some hedges in some countries for electricity, but it is more limited than gas. And you remember, of course, also that the part of electricity is by far lower, much lower than the cost of the gas, of course in our P&L. So this subject is less important for us. And your last question was related to refinancing.

Well, this kind of improvement usually has a vocation to be rolled over. You understand that we are not mandatory as usual situation. And you know also that we are quite -- we can be quite innovative as you have seen with the USPP we just issued, so no decision taken so far.

There are no further questions at the moment. I will hand back the conference to Xavier Martire. Please go ahead, sir.

So thank you for your presence tonight and your attention and I wish you a wonder -- bye-bye.

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