Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Q3 2022 Revenue Presentation Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Xavier Martire. Please go ahead.

Thank you. Good evening, and welcome to this trading update presentation, which is also webcasted and recorded. So I am Xavier Martire, CEO of Elis. And I am here in Paris with our CFO, Louis Guyot. I will first comment on the Q3 revenue numbers, and we'll then provide you with an update on our full year guidance. And finally, we will have a Q&A session to answer your questions. And after 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 another quarter of strong revenue growth for Elis revenue increased by plus 22.8%, of which 17% organic. This growth was driven by solid activity of our hospitality clients during the summer, very good commercial momentum in all our geographies and also by significant price increase to offset the inflation of our cost base. The bulk of this inflation comes from the increase in energy prices. As you recently noticed, the price of gas and electricity peaked during summer, which led to an additional EUR 35 million increase in our cost base for full year 2022 compared to what we estimated at the end of the first half. To offset this, we launched new pricing initiatives that will be implemented gradually between October this year and January '23. This means that if you had all the price increase negotiated throughout '22 that will roll over next year and the new price increase already negotiated for next year, you should get to a price effect for Elis in '23 that is above '22. This higher revenue and cost numbers in Q3 led us to slightly update some of our full year guidance numbers. We now expect organic revenue growth for the full year at above plus 20% compared to between plus 18% and plus 20% before. The dilutive effect from inflation should have an additional [ 50 ] bps impact on our 2022 EBITDA margin, which should be at 33%. All our other objectives in euro terms are confirmed. EBIT should be above EUR 530 million. Headline net income per share should be above EUR 1.45. Free cash flow after lease payments should be at circa EUR 200 million. And the financial leverage ratio, as of end of December '22 should be at circa 2.5x, significantly down year-on-year. Moving on to the next slide. Let's first look at the breakdown of Q3 organic revenue growth by geography. Every region posted strong numbers, especially those where the share of hospitality in the mix is high, like in France or in Southern Europe. In the U.K. and Ireland, we recorded more than plus 21% organic growth in Q3. This was due to an especially strong price effect on top of the rebound in occupancy rates to offset the very strong inflation in the region. Central Europe and Scandinavia both delivered double-digit organic revenue growth numbers, even though the share of hospitality there is more limited, relying on pricing dynamics and commercial momentum. Latin America delivered around 7% organic growth, no hospitality [indiscernible] there as the activity in the region is almost entirely with healthcare and industry clients, and we still see the effect from the absence of some temporary contracts that we signed back in 2020 and that progressively came to an end over the last year. The next slide provides an update on our activity in our 3 most important hospitality regions. You can see that activity has been strong throughout the summer. France and Southern Europe are now at or above 2019 levels, whereas the U.K. still below around 20%. Our clients remain very optimistic for Q4, and we expect a pretty easy comparable base in Q1, '23, as Q1, '22 was somewhat impacted by the Omicron variant. Finally, pricing discipline was strong in this market to offset the inflation of our cost base. Negotiations are never easy, but it is fair to say that our clients, mostly big hotel groups have been receptive and constructive. Moving on to the next slide, our 3 other end markets: Healthcare, Industry and Trade & Services continued to be good due to some structural activity driver. Outsourcing is one strong growth driver for us in Eastern Europe, Southern Europe and LatAm, where more and more companies have decided to manage the washing of their employee uniforms and do not want to take the risk of letting their employees do it or not at home. As a leader in the industry with a very strong network density, Elis offered second to none reliability and supply. This is a key factor given that without our uniforms, most of our clients simply cannot operate their business. We continue to roll out to some other countries services that have already been deployed in France, such as pest control, washroom, as well as services for care homes and services for small clients. We also continued to record an improvement in our churn rate, [ providing ] our efforts to always maintain very high standards in terms of service quality and reliability. Finally, the post COVID environment remains very favorable to Elis with the increasing need for hygiene, [ sourcing ] security and traceability translating into higher revenue for the Group. Moving on to the next slide, so everyone expects a slowdown in Europe in 2023. We still haven't seen any signs suggesting the beginning of a downturn in any of our markets. But in any case, I would like to remind you of Elis' very resilient pattern. In Industry, first, most of our clients are operating in very resilient sectors such as food processing or pharmaceuticals. Furthermore, with the fixed invoicing methodology we have in place with this client, 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 in Industry, we charge our clients with the fixed fee regardless of their activity level. Therefore, this end market is very resilient, too. At the end of the day, we consider that only hospitality end markets, which account for circa 25% of total revenue, could be somewhat impacted by a global economic slowdown even if we continue to see many construction or upgrade projects in the hotel sector in all our geographies, which should be a mitigating factor in case of downturn. To illustrate this resilient pattern, even during very strong economic downturn, I want to remind you that Elis delivered flat organic revenue in [ 2007 and '08 ] at the time, where the economy was in a downturn through developed countries. Moving on to the next slide. The main highlight of the quarter was the surge in energy costs. The graph presents the gas and electricity price since the beginning of the year with a sharp increase in Q3, which corresponds to right [ hand ] side of the yellow line. At the end of the first half, both energy and gas price were in line with our full year estimate. But prices then basically doubled in Q3, meaning that 9-month average price is now above what we factored in. The consequence of this energy cost increase in Q3 is that our full year '22 cost base new estimate is now higher by around EUR 35 million compared to what we discussed when we presented our H1 result at the end of July. Of the EUR 35 million, EUR 25 million come from direct cost for gas and electricity, some other energy-related cost items also increased, such as paper pulp, which price is now up around 30% year-on-year. All in, this represent an additional EUR 5 million increase compared to our estimates at the end of July. And finally, personnel costs are also above earlier estimates by around EUR 5 million. Therefore, to offset this higher-than-expected inflation, the Group has launched some new negotiation with our clients to clinch additional price adjustments. In B2B, these adjustments are never immediate, and there is always a lag effect. [ On average ] additional pricing corresponding to circa EUR 25 million of additional revenue for '22 has partially been implemented since the beginning of October, and the remainder will be implemented from 1st January 2023. Overall, we now expect the '22 price effect to be around plus 7%. And given what has already been negotiated for '23, plus the whole forward effect of what has been implemented over '22, there is no doubt that '23 price effect will be higher. Moving on to the next slide, [ given the so ] our negotiation often results in pricing implementation time lines, which generates a minor lag between cost increase and revenue uplift. I am very satisfied with how we have been able to handle inflation so far. This clearly highlights Elis' pricing power, which is a key component of our business model and one of the Group's biggest strength. I want to give you some color on the reasons of this success. First, our services are essential to our clients' activity. Hotels and hospitals simply cannot operate without Linen. The 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 represents only 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 services. 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 explain why we have been successful with our pricing adjustments in the first half. So now let's talk about the 2022 guidance, starting with organic growth. We now expect organic revenue growth to be above plus 20% compared to the indication of between plus 18% and plus 20% given at the end of July, which was already above what we had in mind when we released our '21 results in March. Once again, this upgrade is based on: first, the significant pricing adjustments we efficiently put in place to offset the inflation of our cost base; second, the better-than-expected commercial momentum seen in Q3; and third, a slightly better-than-expected activity in hospitality. The main underlying assumption to this new guidance is that there will be no emergence of a new variant in Q4. Now looking at 2023. Organic growth should be very good again, even if we factor in a strong slowdown in Europe with a minus 2% impact on the top line, in line with what we observed back in 2008 or 2009, we expect organic growth of at least plus 10% for next year, twice as much as the current consensus figure. This results from the combined effect of pricing for plus 8%, plus 9% of hospitality catch-up in Q1, '23 for up to 2% and volume growth from commercial activity of around plus 3%. As far as the other financial indicators for '22 are concerned, we now estimate the full year EBITDA margin will be down minus 150 bps at 33%. This is 50 bps below what we had in mind at the end of July when we presented our H1 results. This slight downgrade is a result of both the dilutive effect from the additional price increase to offset inflation and from the lag effect in the new pricing implementation schedule. That said, all expectations are all maintained in euro terms. EBIT will be above EUR 530 million, and headline net income per share will be above EUR 1.45 per share, both significantly up year-on-year. Finally, we confirm that free cash flow will be around EUR 200 million, with a strong improvement in EBITDA to be offset by a negative change in working capital requirement. We are also confirming our year-end target for financial leverage ratio of 2.5x, which will represent a reduction in leverage of minus 0.5x year-on-year. We were already close to this level at the end of September with a financial leverage ratio at 2.6x. On the same topic, we want to firmly commit to continue to deleverage the company. The steady growth in EBITDA and the decrease of our net debt in euro terms should mechanically led to a financial leverage ratio of close to 2x at the end of '23 and below 2x in '24. This should quickly make Elis eligible for investment grade rating consideration. We therefore aim at obtaining such rating and maintaining it afterwards. Looking at the debt structure, we don't have any refinancing maturity before April '24. The financing is diversified with well-spread maturities and everything at a fixed rate. We strongly believe that further improving the financial rating of the company and ultimately obtaining an investment grade rating will limit the impact from rising interest rates on our yearly interest costs in the coming years. Last month, Moody's already upgraded its rating from BA2 to BA1, which is a good sign. We will be committed to continue to reduce the Group's [ perceived ] risk profile in the future. So this concludes this presentation. I thank you all for your attention. And we can now move on to the Q&A. Operator, back to you.

[Operator Instructions] We will now take the first question, and it comes from the line of Madeleine Jobber from Morgan Stanley.

Just 2, to start with from me. So firstly, in the bridge that you give your organic growth for FY '23, the minus 2% to 0% impact from an economic slowdown. Do you mind just talking us through your assumptions between the different end markets there? Should we be considering similar end market dynamics to what you mentioned in the global financial crisis or considering your exposure may be slightly different now what we should be considering there? And then secondly, on electricity hedging. Is this something that you're considering? Have you been able to put any in place? And what are your thoughts for that going forward?

Okay. Thank you for the question. So in the bridge '23, I think, by the way, that we have been quite conservative in our assumption that it could be minus 2% because minus 2%, it is what we observed in the last big crisis in Europe, but we didn't have at all the same breakdown of activity and the same balanced portfolio. I think that in 2007 or '08, we had probably more than 80% of the business made only in France. It's now not at all the case. We have only 1/3 in France. And we benefit from some better geographies like close to EUR 0.5 billion now of revenue in LatAm, that will be not impacted by the recession in Europe, for instance. We have also now a nice exposure in the Eastern part of Europe with a strong organic growth, thanks to outsourcing. So for all these reasons, I think that even in case of a big recession like in 2008, the impact will be probably more limited than what we suffered 15 years ago, so minus 2%. Nevertheless, it's probably cautious to say that it could be 2%. In terms of breakdown by end market was your question. As we said, I consider that hospitality will be the end market, where we will have the biggest impact in case of slowdown. For the rest, it will be very, very limited, nothing in Healthcare, limited in Trade and Services, only if we have more bankruptcy, for instance, of small customers, but it will be limited. And Industry, as we said, we have so many exposure to end markets that are not really cyclical like food processing or pharmaceutical industry that we are quite confident in our resilient activity with Industry. So to summarize, I do hope that minus 2% is really a [ worst ] case, and obviously a very cautious approach when we see how the mix of activity is now much more well balanced than 15 years ago, and it will be probably hospitality that could be the most impacted. Second question, hedging for electricity. Yes, clearly, it is something that we are looking for with the same kind of strategy than what we decided for gas. At this stage, it's not yet down because when we were in position to decide, yes or not to take hedge, the price on the market were totally crazy. And honestly, we don't have yet any offer at acceptable price. So we are still waiting for some better price on the market to hedge electricity, and the offer we receive today seems to be too high. So -- but it is our willingness, as we did for gas to have a hedging policy also for electricity.

One moment, please. We will now take the next question, and it comes from the line of Christoph Greulich from Berenberg.

Three from my side, please. Just a quick follow-up on the energy costs. So I assume the main part of the additional cost came from the electricity side, given that you have the hedges in place for the gas. So when we look at the chart and also at today's prices, I mean, the prices have come down again quite a lot from those peak levels in Q3. So just trying to understand a bit what is your working assumption for the electricity price in Q4 that leads to your EBITDA guidance? And then also just to understand the additional price increases that you're now implementing, are those temporary surcharges? Or are those structural price changes? Then just the second one, yes, now on this guidance for about 150 basis points lower EBITDA margin this year compared to '21. If you could provide any like statement or kind of guidance on how much of the loss margin you think you can recover next year? And then lastly, on the churn rate improvement that you mentioned, could you quantify them in any way?

Okay. So we start -- just if I may, a small comment, when you say that the impact and the increase in energy cost was mainly electricity for us because we have a new hedge position. Don't forget that the new hedge position is for Q4. So we start to have better hedging position in gas only starting of 1st of October. So for Q3, we suffered in both electricity and gas for the half of the volume in gas. Don't forget that we had this year, only the half of the gas hedged, and the second half was -- with spot price market. And so in Q3, the main deviation in euro is still coming from gas. That is the biggest part of our consumption of energy. For the end of the year, for Q4, so we will be close to 70% of gas that will be hedged. We were at 50% and now we'll be at 70%. So it is better, of course, [ less risk ]. But we still have 30% that will be floating for the Q4 and 100% floating for electricity. So our assumption to the -- for the new guidance of margin is the following: for October, of course, we know perfectly what is the situation, and it's right that if we have a look on the last 10 days, we have seen a very sharp decrease on the cost of energy in gas and electricity. And so we have already taken in our assumptions, the good news of October. Nevertheless, we are still very cautious for the November and December because everybody knows that this situation on the market is perhaps quite exceptional linked to the very good weather condition and all the stock of gas in Europe are full. But if in 2 weeks, we have a strong decrease of the temperatures, immediately, we should see the price of energy increase significantly. So that's why in our assumption, we have taken something quite cautious, we hope, with for November and December, a price close to what we had on the market in September. For how we negotiate some price increase, is it a temporary surcharge or a fixed increase? For Q4, what we try to negotiate is a part that will be a fixed price increase, a part linked to energy fee, so with a temporary surcharge. But we negotiate for January '23 to replace the temporary surcharge by a fixed amount. And so the goal for '23 as we will have a large part of the gas that will be hedged is to have a price increase fixed and not anymore an energy fee that could evaluate because the biggest part of our cost in energy is still gas, and it will be largely hedged for '23. Margin for '23 at this stage, I think it is too early because we have some quite confident on what we will be able to do in price and so on and so on. But we are still in the budget exercise with all the bottom-up approach and so on. So at this stage, it's too early to give you some precise guidance for '23. But of course, we can just say that, of course, we expect an improvement in '23 of the margin. And the churn rate, the magnitude of the improvement is close to [ 0.5 point of 0.5% ] more or less.

Just follow-up on the churn rate. So what is the percentage where we are today?

So we are slightly below [ 6% ] today.

We will now take the next question, one moment please, and it comes from the line of Oscar Val Mas from JPMorgan.

It's Oscar on behalf of Sylvia Barker. I have 2 questions. The first one, I saw you've increased the employee cost by [ EUR 5 billion ]. Could you touch upon how you see the minimum wage increases in Germany and other countries impacting your business? And then the second question is on your competitors. Have you seen any difficulties at your competitors, so that you're able to take share? Is that something that you think will materialize next year?

Okay. So the first subject, as you know, of course, wages is the main part of our P&L. So the impact can be absolutely a drama if a company is not able to pass into price this impact, and Germany is a good example. When we analyze our balance of inflation in 2 years, we are probably between 25% and 30% increase of cost in Germany due to this huge increase of minimum wage. And so we are doing the job to negotiate customer by customer to be very clear and open -- with an open book strategy in the negotiation to show what is the impact for us, and we will push a lot in Germany to increase the prices to offset this minimum wage. We have more or less the same situation in other countries. You remember in U.K., we had to increase significantly our package to offset the lack of workers. And so we had, as a consequence, we increase our price after that. In France, we have a regular increase of the minimum wage, of course, and it is also the reason why we have to increase our price. And the same in Spain, where we have some negotiation region-by-region that forced us to increase our price. So at the end, the impact for the industry can be offset, thanks to the pricing power of Elis. And then it is a transition for the second part of your question, it's clear that the competitors that will not be able or not brave enough to negotiate the sufficient level of price increase to mitigate their cost. We will have some strong issue. Our strategy will not be to open a kind of war to try to take a lot of market share by playing with price and so on. It's not our strategy. And we will be more -- much more focused on our own development and our own ability to protect our margin by putting the price at the level of cost increase. What could happen, of course, it's perhaps more opportunity in M&A with some families [ only better ], of course, but some families that could be quite tired after 2 years of COVID, strong inflation in costs, high level of difficulties to find some workers in some countries. It's not impossible that we could have more discussion for consolidation of the market in '23, but it's too early to give you some more precise trend.

So to clarify, no significant impact yet from competitors?