Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Elis Full-Year 2022 Revenue Conference Call. [Operator Instructions] Please be advised 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. I'm Xavier Martire, CEO of Elis. And I'm here in Paris with our CFO, Louis Guyot. I will comment first on the Q4 revenue numbers, and we'll then provide you with an update on our full year guidance. And finally, we have -- 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. Q4 revenue increased plus 20.7% of which 15.7% organic. This quarter capped a revenue record breaking year for Elis at EUR 3.82 billion with more than 25% growth and 21% on an organic basis. In Q4, the growth was driven by: first, solid activity of our hospitality clients, especially in Paris during the recent holiday season; second, very good commercial momentum with many new contract wins and some specific initiatives to launch additional services or address new markets in some of our geographies; and third, the ramp-up of price increases to offset the inflation of our cost base with a full year positive impact slightly above 7% as a result of our negotiations with clients throughout 2022. Our full year results will be published on the 8th of March. And today, we can reiterate all the indications we gave regarding 2022 at the end of October, when we commented on our Q3 revenue. As far as '23 is concerned, what we see so far is encouraging to date. We still don't see anything suggesting a slowdown in our different end markets, and we expect organic growth of at least plus 10% driven by a strong price effect in '23 -- a stronger price effect in '23 than in '22. Also, the different hedges we put in place during '22 should allow us to better control the inflation of our cost base, and we therefore expect all of our key financial metrics to improve this coming year. Finally, financial leverage will continue to go down in 2023. Moving on to the next slide. Let's look at the breakdown of full year and Q4 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 nearly 30% organic growth in 2022. 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, both on wages and energy prices. Central Europe and Scandinavia both delivered double-digit organic growth numbers. Even though the share of Hospitality there is more limited, [ holding ] on pricing dynamics and commercial momentum. Latin America delivered around 9% organic growth in '22. There was no Hospitality office there as the activity in the region is almost entirely with Healthcare and industry clients, and we still see the effect of the absence of some temporary contracts that we signed back in 2020 and that progressively came to an end over the past year. Broadly speaking, organic growth in all regions was also fueled by strong commercial dynamism, which led to new contract wins and churn improvements. The next slide provides a bridge between 2021 and 2022 revenue numbers. Nearly half of the total EUR 800 million increase from 1 year to the next, came from higher volumes. This is a consequence of both a sharp rebound in hospitality that we recorded, especially from Q2 2022 onwards. And the uplift from our commercial initiatives on our other end markets. The 2022 price effect represented a total of nearly EUR 260 million of additional revenue to offset the inflation of our cost base. These pricing adjustments have been negotiated throughout 2022, with a strong ramp up over the year and an even stronger embedded effects entering into 2023. Our Mexican acquisition closed in July contributed to EUR 50 million in 2022. So remaining EUR 45 million corresponding to the acquisitions we announced in Germany, Denmark and Chile. Last, FX had an impact of nearly EUR 40 million on revenue in 2022, essentially due to the evolution of the Brazilian real. Moving on to the next slide. Even so, our negotiations often result in pricing implementation time lines, we generate some [indiscernible] lag between cost increase and revenue uplift. I'm very satisfied with how we have been able to undersee inflation. This clearly highlights Elis pricing power, which is a key component of our business model and one of the group's biggest trends. 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 can not operate without P&L. The same goes for industrial clients. Uniform are very often mandatory and they need our service to properly run their business. Second, the cost of our service represent only a fairly small component in our clients' P&L. As an example, we charge only between EUR 5 and EUR 10 for the linen of hotel room. So compared to the actual price of hotel room, you can see that the cost of our service is not very material also our services fundamental. Third and last, alternative solutions to our services are very limited. Rate in-sourcing is not really an option, and we don't see this happening in our market as it would result in higher costs for our clients. Furthermore, 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 explain why we have been successful with our pricing adjustments in 2022. Moving on to the next slide. Hospitality has shown steady gradual improvements throughout 2022 with a very strong year-end. Activity is now above its 2019 level in both France and Spain. And in the U.K., we are still a touch below where we were. But in most cases and in more geographies, pricing negotiations were made a lot easier by the fact that average room prices have also significantly increased over 2022. Looking to '23, we expect a pretty easy comparable base in Q1 as Q1 '22 was somewhat impacted by the Omicron variant. This should lead to a favorable effect of around EUR 50 million fully in the first quarter. Moving on to the next slide, our 3 other end markets. Healthcare, Industry and Trade & Services were strong in 2022 due to some structural activity drivers and to a record year in terms of commercial activity for Elis. 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 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 continue to roll out specific initiatives in some countries, including services that have already been deployed in France, such as services for care homes in Spain and in the U.K. and services for small clients in Sweden and in Brazil. We also continue to record an improvement in our churn rate especially in the U.K., rewarding our efforts to always maintain very high standards in terms of service quality and reliability. Finally, the post-COVID [indiscernible] months remains very favorable for Elis with the increasing need for hygiene, sourcing security and crossability translating into higher revenue for the group. Now let me go through the usual revenue breakdown by activity, end markets and geographies to illustrate the group's high level of diversification which provide us with a highly resilient model in terms of crisis. As the way you look at this graph, you will see that Elis' positioning is well balanced which significantly contributes to its resilience. In terms of activity, fat linen and Workwear represents 45% and 37% of revenue respectively. Our 4 end market are always well balanced with hospitality now back to a more normative level. In terms of geographies, France represents less than 1/3 of our total turnover, and we have a balanced mix with -- on the -- 1 on Central Europe and Scandinavia being more mature and on the other hand, Southern Europe and Latin America, offering higher growth prospects. This good diversification in terms of activity, clients and geographies does not come about it by chance. It is a consequence of a long-term strategy backed by product innovation, commercial efficiency and M&A. Moving on to the next slide. Also, everyone expects a slowdown in Europe in 2023. We still don't see 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, a large part of our clients operate in a very resilient sectors such as food processing, pharmaceuticals and waste management. 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 natural; third, Trade & Services were just like in industry, we charge our clients with a 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 our Hospitality end market, which accounts for 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. Looking to '23. Our hospitality clients seem quite confident. You should also keep in mind that we are fundamentally less cyclical than hotel players as the main reason why RevPAR goes down in terms of crisis is a decrease in hotel prices, not occupancy rates and we charge based on occupancy regardless of home prices. Moving on to the full year outlook. I can confirm today all the indications we gave for 2022 back in October. Full year EBITDA margin will be down minus 150 bps at 33% as 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. EBIT will be above EUR 530 million, significantly up year-on-year. Headline net income per share will be above EUR 1.45 per share, significantly up year-on-year, too. And finally, we confirm that free cash flow will be around EUR 200 million. Actually, it should be well above. This will lead to a financial leverage ratio of 2.5x, which will represent a reduction leverage of 0.5x year-on-year. Now looking at 2023. Let me first reiterate the comment I made on organic growth in October. Even if we factor in a strong slowdown in Europe with minus 2% impact on the top line, in line with what we observed back in 2008 to '09. We expect organic growth of at least 10% of -- for 2023. These results from the combined effect of pricing for plus 8% or plus 9% of the hospitality catch up in Q1 that I mentioned earlier in this presentation, for up to plus 2%, and a volume growth from commercial activity of around plus 3%. As far as the other financial metrics are concerned, we will provide an outlook for 2023 when we release our '22 full year results on the 8th of March. But I can already tell you that we expect an improvement of all our key financial metrics, EBITDA margin, EBIT margin, EPS and free cash flow. More especially on EBITDA margins, different hedges we put in place during '22 will allow us to better control the inflation of our cost base, which should lead to margin improvement of the magnitude that will depend on the geographical mix of the top line increase. As far as debt is concerned, we don't have any refinancing maturity before April 2024. The financing is diversified with well-balanced maturities and everything at a fixed rate. We strongly believe that the deleveraging trajectory that we anticipate should quickly make Elis eligible for investment-grade rating consideration. Moody's already upgraded its rating from BA2 to BA1 last September, which is a good sign. So this concludes this presentation. I thank you all for your attention, and we can now move on to the Q&A.

[Operator Instructions] We'll now take the first question, it comes from the line of Annelies Vermeulen from Morgan Stanley.

I have 2, please. So firstly, during the comments, you mentioned you've seen an improvement in the churn rate and also in your contract wins, lots of new contract wins. I was wondering if you're able to quantify either of those, what that churn rate looks like relative to history. And again, what your -- the pace of your contract wins compared to what you've seen in the past or any sort of anecdotal examples of that would be helpful. And then secondly, just on the assumptions around the 2023 organic revenue growth. Could you explain how you get to sort of this minus 2% scenario given, as you said, you did 0% in 2009 and arguably, business was perhaps more cyclically exposed back then than it was today. So what are the assumptions behind that minus 2% potentially?

Okay. So first question, churn rate and pace of new contracts. So it's between 5% and 6%. So a small improvement in comparison to the past, with a strong improvement in U.K. where we are close to this level. When you remember the starting point some years ago, we can be quite proud about the evolution of this performance in U.K. In terms of new contracts, we have kept a very solid momentum. So we don't see any signs of any slowdown and the level of signature is quite important. And that's why we -- when we see this evolution, we are totally in line with the long-term guidance we gave, if we exclude the recovery of the hospitality -- we say that for the long-term organic growth of Elis, we expect something around 4% or 3% volume, 1% price. So in the context where we would be back to a normal level of inflation, let's say, 2%. And today, with the performance we have and what we analyze, we are totally in line with this long-term guidance. The second part of your question, it's true that I follow you. In 2009, we posted in December 2008, something close to 0% in organic growth. I do believe also that now the portfolio of activity of Elis is better and with a very good level of diversification and better than what it was in 2009 or 2009, so 15 years ago because we have much more business in the north part of Europe with less hospitality. We have developed now close to EUR 0.5 billion in LatAm. So you could consider. It's true that this minus 2% is a quite very pessimistic scenario. And by the way, what I could add today is it's only a scenario because, as I said, we don't see anything, any signs of slowdown, any signs of beginning of any recession in our geographies. So it is just to put an assumption and as always, to try to have a cautious assumption.

We will now take the next question and it comes from the line of Sabrina Blanc from Societe Generale.

I have 1 -- 1 question is regarding the potential investment grade. If I remember correctly in the press release, you mentioned the word quickly. Could you provide some visibility and how you are confident concerning this point?

Well, as you are aware, we are in constant dialogue with Moody's and Standard & Poor's. So we have -- they have a very good view on the business, its trajectory. And they are very clear on the ties that could move the rating of Elis. Clearly, the key point is leverage, as you are aware. So my guess is that there are more likely scenario, which would be somehow it look positive in the coming, let's say, 6 months, which may be followed by a year or 12 months maximum period for upgrading to BA1. That is the best case scenario. Of course, they are the best case, which is faster, on the worst case, which is longer. But in theory, that's more or less the dialogue we are having with the Standard & Poor's, and then Moody's might follow.

We will now take the next question. It comes from the line of Simona Sarli from Bank of America.

Yes. I have 2. So in your presentation, you show a waterfall chart with the main factors contributing to organic revenue growth in 2022. And if you can comment maybe on the main differences if it is really different compared to Q4. And in particular, if you could comment on how price increase contributing to the organic revenue growth in Q4. The second question, it's again related to price increases. So clearly, you are getting substantial price increases in 2022 and also 2023 based on the current negotiations. How sustainable are those elevated prices even in a scenario where cost inflation and clearly, commodity prices are now normalizing? So if you could also comment on what you have achieved in the past?

Yes. So first part of your question, so we don't -- usually, we don't give the breakdown of the revenue -- of the increase of the revenue per quarter, it's quite complex. Just to give you the key trend to analyze what happened in Q4 in comparison to the full year. Of course, less volume due to the rebound of the Hospitality because in Q4 '21, it was not so bad. We started to see a slowdown in December with the first sign of Omicron, but it was not so bad. So as a result, the performance related to occupancy rates is less important in Q4 in comparison to the full year. And it is the opposite for prices because we have negotiated all over the year '22, some additional prices to follow the inflation. And so of course, it was slightly above the impact of prices in Q4 than for the full year '22. Now the second part of your question, very important is what is our level of confidence in the figures we provide for the expectation in price increase in '23. And it is very high, the level of confidence because first, a significant part is only mechanical links to the report effect of what has been negotiated in '22. Second part is applied in January '23 because after the crisis of the energy last summer, we negotiated in September, October, some additional price increase with all our main customers. And very often, we negotiated something with one part of the new price increase that will be applied in Q4 '22. And the second part in January '23. So it is the reason why we have a very, very clear view on what will be the impact of pricing in '23. And I'm very confident that we will be able to keep this level of prices despite the beginning of slowdown of the price of energy in the market today, because we have been quite transparent with all our main accounts, with all our big customers, we were totally transparent with the hedges put in place by the company. And so all the negotiations were with open book, and we were clear on the level of prices negotiated with fixed term and fixed condition for the full year '23. So it is the reason why we will not have any regrets from price decrease because it was clear that the condition we could offer for '23 were in line with the level of hedges negotiated by the company.

And if I can ask just a follow-up. Historically, did you have any instance where after a time of very elevated price inflation than in the following year, you had to pull back on prices.

No, never. So we don't have a lot of experience, to be honest, also. We don't have a lot of experience where such kind of huge inflation perhaps only in 2019 in some areas due to the inflation of wages. So it was the case in Spain, if you remember, 2019 with something close to 20%, 22% of increase of minimum wages. So we had to increase prices in this context. And -- but it was wages and wages, you have never, never a decrease of the wages. So that's why we have never had to decrease prices. By the way, it will be the same for the coming -- for the months to come because now what will be the key driver of the inflation of the cost in '23 will be, again, wages, and everybody knows that wages will never decrease. So that's why we are quite protected and I'm not afraid at all to have to negotiate a decrease of the previous condition.