Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Elis Full Year 2022 Results 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, Mr. Martire, CEO. Please go ahead, sir.

Thank you. Good morning, and welcome to this 2022 annual results presentation, which is also webcasted and recorded. I'm Xavier Martire, CEO of Elis, and I am in Paris with our CFO, Louis Guyot. As an overview of the 2022 business highlights, I will hand over to Louis. He will detail the year's financial performance. I will then come back to provide you with an update on our recent CSR achievements and then share with you our views on 2023. Finally, we'll 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, as usual, please take the time to read the disclaimer. So I'm very happy to report a very solid financial performance in '22 with almost all our financial KPIs at record level, which is an achievement I'm very proud of given the difficult environment with macroeconomic and geopolitical instability as well as strong inflation. 2022 was a year of a strong revenue increase for Elis, with growth of plus 25%, of which 21% on an organic basis to reach more than EUR 3.8 billion, reflecting the high number of new contract wins in Industry and Trade & Services, a rebound in Hospitality and pricing adjustments notably to offset surging energy costs. The group reached record EBITDA level at nearly EUR 1.3 billion, up 20%, while the dilutive effect from inflation had a negative effect on margin, which as expected, was down to 33%, but this should start to reverse in 2023. EBIT reached a record level of EUR 544 million, up 40%, along with 150 bps EBIT margin improvement. Net income and headline net income all reached record level too in '22, and EPS was up 57% year-on-year at EUR 1.54 per share. Free cash flow was better than expected at EUR 225 million, nearly at least year's record level despite significant headwinds from change in working cap requirement due to the strong top line increase. And finally, financial leverage ratio decreased 0.5x to 2.5x at the end of December, and we expect this material deleveraging trend to continue in 2023. This great set of results will allow us to propose distribution of a dividend of EUR 0.41 per share at the next AGM, up plus 10% year-on-year. Business wise, the main topic of the year was obviously inflation. Our challenge, like many other businesses, was to quickly adjust our pricing to contain the impact on our profitability. I will come back to this shortly. But in a nutshell, we have been very efficient on this issue. We managed to nearly offset, in euro terms, the plus 11% inflation of our cost base by a plus 7% price effect, while maintaining very strong commercial momentum. Through '22, we have been able to negotiate fixed rate tariff for energy supply for 2023 and the following year. This, along with a stronger embedded price effect that is already in the books for the year, and the absence of any sign of slowdown, leaves us very optimistic for 2023 and we expect further improvement of all our financial KPIs for this year. I will come back to this at the end of this presentation. The next slide provides a bridge between 2021 and 2022, which increased plus 25% year-on-year. 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 the sharp rebound in Hospitality that we recorded, especially from Q2 '22 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 a very large part of the inflation of our cost base. These pricing adjustments have been negotiated through '22 with a strong ramp up over the year and an even stronger embedded effect entering into 2023, with another set of price adjustments being implemented since January 1. Our Mexican acquisition closed in July contributed EUR 50 million in 2022. Nearly another EUR 50 million correspond to the acquisition we announced in Germany, Denmark and Chile in H1 last year. Lastly, FX was very favorable last year with an impact of nearly EUR 40 million in revenue in '22, essentially due to the evolution of the Brazilian real. Moving on to the next slide. I'm very satisfied with how we have been able to handle inflation, even so our pricing negotiation often generated some minor lag between cost increase and revenue uplift. This clearly highlights Elis' pricing power, which is a key component of our business model and 1 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 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. As an example, we charge only between EUR 5 and EUR 10 for the linen of the hotel room. So compared to the actual price of a hotel room, you can see that the cost of our service is not very material. Also, service is fundamental. When looking at our other end markets, the cost of our service is actually even less material for our clients than in Hospitality. So bottom line, when we apply 10% to 20% price increase, we are talking about EUR 1 and EUR 2 more for a hotel room that is often sold for more than EUR 200 a night. So this is virtually not material for our clients. Additionally, in most cases and in most geographies, pricing negotiations were made a lot easier by the fact that average room prices also significantly increased over 2022. Third and last, alternative solution to our services are very limited. Reinsourcing is not really an option, and we don't see this happening in our markets as it would result in a higher cost 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 improvement throughout '22 with a good summer season and a very strong year-end. The first weeks of '23 look very promising too with a good activity during winter holidays. 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. In '23, the comparable base in Q1 would be easy as Q1 last year 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 it. 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 employees' uniforms and do not want to take the risk of letting their employees do it 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., or services for small clients in Sweden and 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. And finally, the post-COVID environment remains very favorable for Elis with increasing need for hygiene, sourcing security, and traceability translating into higher revenue for the group. Moving on to the next slide to talk more about inflation, which was obviously 1 of the main topics for 2022. Overall, our cost base increased around plus 11% with energy costs representing a cost increase of EUR 140 million, around 50% of the total inflation-related cost increase for the year. This does not come as a surprise and reflects the surge in gas, electricity and fuel prices over the last 18 months or so. Throughout 2022, we progressively negotiated fixed energy tariffs. So we should now be immune to such market price peaks. I will come back to that in a minute. Personnel costs, which represent Elis' main cost line, increased around EUR 85 million in 2022, so around a plus 6% increase. Other items represent a combined additional cost of around EUR 50 million. So all in, the impact from inflation on our cost base was around EUR 275 million in 2022, with H2 being of course higher than H1. We had a full half effect of some wage increases that were implemented during H1, and some additional wage increases that kicked in, in a number of countries such as Germany from October onwards and France from August onwards. Moving on to the next slide, let me give you some details on gas and electricity pricing, which has been steady to some extent a stress factor for the market. As we just saw, energy, especially gas, was the main contributor to the cost base increase in 2022. In '22, only half of our gas volumes were hedged, meaning that we paid the spot price for the remaining half in a somewhat irrational market. Throughout the year, we have negotiated fixed rate tariffs starting in H2 2022, and covering '23, '24 and '25 volumes. As far as '23 is concerned, 95% of our gas volumes are hedged at around EUR 80 per megawatt hour and 90% of our electricity volumes are hedged at EUR 235 per megawatt hour. All in, this fixed price going forward makes me feel reasonably relaxed about gas pricing for the coming years. And this EUR 340 million energy bill that we recorded in '22, should increase at a slower pace than revenue in '23. Looking beyond '23, the energy bill should somewhat stabilize, as our internal policy is now to secure tariff for gas and electricity for the years ahead. 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 '22 EBITDA and EBITDA margin. On the left-hand side chart, we can see that the EUR 275 million increase in our cost base was largely offset by price increases with a rebound in Hospitality activity contributed to nearly EUR 150 million in EBITDA, increase in 2022. As usual, we also recorded some good productivity gains with some specific action plans leading to a reduction of around 8% of our energy consumption, which contributed to EUR 35 million total productivity gain. At the end of the day, we delivered EUR 210 million increase in EBITDA for the year. 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 nearly EUR 260 million of additional revenue coming from pricing to offset inflation do not contribute to margin. This had minus 320 bps negative effect on margin in '22. This was partially compensated by the positive effect from strong activity volumes and from productivity gains. Overall, EBITDA increased by more than EUR 200 million with a controlled EBITDA margin decrease of 150 bps, in line with our guidance. Moving on to the next slide. Let's have a look at the EBITDA performance in our different geographies. The first general comment is that inflation, of course, impacted margin in all geographies. However, geographies where top line growth was strong due to the recovery in Hospitality could somewhat control this margin decline, such as France and the U.K. and Ireland, where margin was down only minus 70 bps, as well as Southern Europe with minus 140 bps. In Central Europe, pricing negotiations were tough in Germany, especially with large public healthcare players, which account for a significant part of revenue. In Northern Europe, also Hospitality is a profitable business. It is less profitable than our other businesses in the region and the rebound in Hospitality, therefore, had a dilutive effect on margin. LatAm, finally, delivered margin improvement of 30 bps driven by the accretive effect from our newly acquired operations in Mexico. Let's now look at our M&A activity in '22. We closed 4 major deals, including the Mexican acquisition early July. In March, we acquired Jöckel in Germany, a player with revenue of around EUR 20 million in the Healthcare market, further enhancing our position in this market. Also in March, we acquired Golden Clean in Chile, which was the #2 player in the market, enabling us to further consolidate the market and strengthen our leadership position in the country. In May, we acquired Centralvaskeriet in Denmark, a player that offers Flat Linen for clients in Hospitality as well as Workwear and Mats. The acquisition reinforced our #1 position in Denmark. Part of our acquisition strategy is also to open new geographies regularly, especially in LatAm, where we acquired the leader of the Mexican market in July. I will come back to this on the next slide. And all in, these acquisitions had an impact of plus 3.1% on our 2022 revenue. So moving on to the next slide. I already had the opportunity to present to you several times the acquisition in Mexico that we finalized early July. I'm very happy with the rollout of the integration plan and by the current trading that is currently significantly above budget. As a reminder, we acquired a century old family business and the only player in the country with a national network. The group is a market leader and 20x larger than the #2. 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. Management has been in place for more than 20 years and stayed on board with some earnouts to align their interest with ours in the coming years. The company delivered revenue of EUR 85 million in '21 and EUR 50 million in only 6 months in '22, which is very encouraging. Historical organic revenue growth was generally above 10%, and both EBITDA margin and EBIT margin are best-in-class. In the second half of '22, EBITDA margin was at 42%, which is among the best Elis countries. 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. Most industrial companies are still buying their uniform. 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 very big market in Mexico with 25% more rooms in the country than in France. Most of the hotels still don't outsource washing of their linen. So we also see some significant growth potential there. The Healthcare market is also growing on the back of public funding with modern hospitals and clinics being constructed, which therefore represents another area of potential growth for us. So this concludes the first part of the presentation, and let me now hand over to Louis for a presentation of the 2022 financials.

Thank you, Xavier. Good morning, everyone. Let me first 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. Either way you look at the graph, you will see that Elis' positioning is well balanced and complementary, which contributes significantly to its resilience. In terms of activity, Flat Linen and Workwear represent 45% and 37% of revenue, respectively. Looking at our end markets, Hospitality is now back to a normative level on our 4 end markets, which all have different growth drivers, each weighed for nearly 1/4 of our activity, which is a key strength in times of crisis. In terms of geographies, France represents a bit less than 1/3 of our total turnover, and we have a balanced mix with, and the other 1 Central Europe and Scandinavia being more mature and stable. On the other hand, Southern Europe and Latin America offering higher opportunities for outsourcing. This good diversification in terms of activity, clients, and 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. Moving on to the next slide. Let's look at the evolution of organic growth on the EBITDA margin by geography. Some general comments first. As Xavier explained earlier, the spectacular organic growth of 21% was pushed by a stronger pricing impact contributing for 8%, and the recovery in Hospitality for circa 10%, the rest coming from the regular trend of commercial dynamism, development of resourcing, CSR-linked contract wins, and churn improvement. In terms of EBITDA, despite 20% growth, we recorded, as expected, 1.5 point decrease in the margin. The main reason is the lag in implementing price adjustments given how sudden the inflation was in '22. At the end of the day, we could not fully compensate in euro, the increase of our cost base with the pricing adjustments. You know that we expect to reverse that in '23. Margin evolution by region, depending on the speed to pass inflation into prices, depending on how cultural that is in the country, especially when they are the bigger part of large clients, public clients and Healthcare clients, with whom the negotiation can be more complicated and longer. Now we're diving geography by geography. In France, revenue was up 25% organically. Hospitality was 1/3 of the portfolio before COVID. So of course, the rebound is contributing a lot, especially as we are above '19 levels, but globally, all end markets showed very good commercial momentum, especially Workwear and Pest Control. Margin wise, the strong rise in energy price in '22 weighted on our cost. Gas purchases were not hedged and we had strong volumes in Flat Linen business, which is highly gas-intensive. So even with a good pricing dynamic, there was a lag between inflation and price adjustments, leading to minus 70 bps in EBITDA margin. In Central Europe, revenue was up 15% on an organic basis. Hospitality rebound contributed to strong growth in Switzerland and Belux, but everywhere the development of Workwear is impressive with double-digit organic in Netherlands and Poland, for example. In Germany, pricing momentum was very good in Hospitality, but remained insufficient in Healthcare and Workwear, considering the inflation level. If you remember, the minimum wage increased by 25% in '22. That said, commercial development remains dynamic, especially in industrial Workwear and Hospitality. Profitability wise, the COVID-related absenteeism, which is paid by the companies, and recruitment difficulties had an impact on our logistics and workshop productivity. Furthermore, price adjustment negotiations were more difficult with big clients in Healthcare and Workwear, which represents a significant part of the region's revenue. This led to minus 290 bps in EBITDA margin at 29.6%. Scandinavia and Eastern Europe revenue was up 15% on an organic basis. All countries in the region posted strong organic revenue growth. Pricing negotiations took longer due to mix of clients, but eventually came to a positive conclusion. Hospitality sharply rebounded in Denmark and Sweden through '22, and commercial momentum is strong, notably in Workwear. Just like Central Europe, profitability was impacted by COVID-related absenteeism. The lag in implementing price adjustments for our big clients in Healthcare and Workwear and the pickup in Hospitality that had a dilutive effect on margin led to a decrease of 230 bps in EBITDA margin, which at 36.2%, remains a very good level. In the U.K. and Ireland, revenue was up 29% on an organic basis. Activity in Hospitality continued to pick up, although the pace was slower than in the other regions. However, pricing momentum is well oriented in the region, especially in Hospitality and Healthcare. Extra capacity is limited and most players focus on pricing rather than volumes. Furthermore, we are still improving the churn rate, while the commercial developments are strong in Healthcare and in Workwear business. However, the strong inflation, while offset in value by the rebound in Hospitality and pricing dynamics, had a dilutive effect on margins. This led to minus 70 bps adjusted EBITDA margin decrease at 30%. In Latin America, revenue was up 48.3%, of which 15% of currency effect and 25% corresponding to the acquisition of the leader in Mexican market, consolidated since July. Pricing dynamic was good in the regions, but volumes were slightly down following the end of temporary contracts signed in Brazil during the pandemic. As far as EBITDA margin is concerned, the acquisition in Mexico market had a negative effect on margin. Furthermore, productivity is improving in all countries and inflation has been easing, which generates a favorable effect on the back of strong pricing adjustments that have been kicking in with a time lag. All in, EBITDA margin of the region was up 30 bps compared to '21 at 33.5%. In Southern Europe, finally, revenue was up 40.1% organically. The region has a high exposure to Hospitality and the market rebound in activities for '22 to hold growth. In Workwear, good commercial momentum continued on the back of an acceleration of outsourcing. Last, pricing momentum in the region was satisfactory. However, EBITDA margin was down 140 bps compared to '21 at 27.2%. Just like France, the cost base was impacted by the fact that gas purchases were unhedged and by the high share of flat linen, which is more gas-intensive. Let's now look at the full P&L. We already have commented on '22 revenue and EBITDA, up 25% and 20%, respectively. Below EBITDA, all aggregates showed strong growth compared to '21. G&A only increased by 8%, which triggers a very material EBIT margin improvement at 14.2%, up 150 bps, which corresponds to EUR 155 million increase. This G&A evolution did not come as a surprise. We announced this back in '20. It is a direct consequence of the lower linen CapEx investment during COVID years, with an impact over the 3-year depreciation period. This effect will therefore continue in '23. The main items between EBIT and operating income are as follows: first, expenses related to free-share plans correspond to the requirements of the IFRS 2 accounting standards, that accounts for circa EUR 20 million per year. Second, the amortization of intangible assets recognized in a business combination is mainly related to the goodwill allocation of Berendsen. In '22, the aggregate was stable compared to '21, circa EUR 80 million. Third, goodwill impairment at the end of June in accordance with the 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 26.3% WACC compared to 11.4% at the end of '21. And last, noncurrent operating expenses amounted to EUR 9 million in '22, now stabilized at a low level. Furthermore, net financial expense was down around EUR 4 million on year at EUR 87 million despite the various recent refinancing. Digital tax rate is normalizing around 28%. You know that this shall go down to 26% with the French tax severe discipline, half in '23, and the rest in '24. At the end of the day, net income increased by nearly 80% year-on-year at EUR 205 million. Now let's have a look at pretax ROCE, which is defined as EBIT divided by capital employed. A detailed breakdown of the capital employed that we use is the way labeled in the appendix of this presentation. Beginning '22, it stood at EUR 4.6 billion because it excludes EUR 1.5 billion of goodwill recognized in relation with the group's last LBO holding company back in 2007 which, therefore, was not invested into Elis' operation on this illustrated from the capital employed. In '22, ROCE before tax was 11.6%, compared to 8.4% in '21. If you take a normative tax of 25%, '22 ROCE was 8.8%. Moving on to the next slide. ROCE is obviously a KPI we look at carefully, as it measures the value creation from our investments. We use it daily when making an investment decision, for example, an industrial investment or a big contract, where significant linen must be purchased or when contemplating an acquisition. For example, 10% ROCE after tax means just below 8x EBIT for an acquisition. We use it also to monitor the long-term value creation. For example, starting at 9% after Berendsen deal, we had a regular improvement since, of course, hindered during COVID. But clearly, today, on its way to our targeted 15%. Moving on to the next slide. I'm now looking at '22 headline net income per share. The main items restated are the same as usual, PPA depreciation, noncash IFRS 2 expense for LTIP, and the noncurrent operating income and expenses, which were very limited in '22. Additionally, we restated the goodwill impairment as well as a positive effect coming from the early repurchase of the '23 convertible bond. So all in, headline net income standards EUR 353 million, up nearly 60% year-on-year, which corresponds to an EPS of EUR 1.54 and EUR 1.46 on a fully diluted basis, both KPIs are up more than 50% year-on-year. The fully diluted number of shares takes into account the potential dilutive effect from the convertible on the LTIP, in which case we also restated the convertible interest expense, of course. Moving on to the next slide, you can see that Elis has on average been delivering more than 11% EPS increase per year since IPO from less than EUR 0.70 to nearly EUR 1.05. We expect this trend to continue going forward. It is important to note that except in COVID years, the group delivered EPS growth every year, including when we made some major acquisitions like Indusal, La Blesoise, and Berendsen in '16 and '17. Let's now look at the cash flow statement with the free cash flow at EUR 225 million in '22, in line with '21, despite strong headwinds in the working capital. CapEx stood at EUR 692 million in '22, which corresponds to 18.1% of revenue, meaning in the region where we want to be. Net CapEx increased by around EUR 122 million, notably driven by the linen on the back of volumes recovery and inflation on linen of circa 20%. Change in working capital was strongly negative, around minus EUR 53 million, reflecting the impact on trade receivables of the strong activity pickup and high inventories, both in terms of volumes and price in the context of tension on the worldwide supply chain. However, the group recorded good cash collection ratio. Average payment time was 53 days end of the year. All other items in the table are normative. In terms of capital allocation, we spent EUR 222 million in M&A in '22, mainly corresponding to the acquisition in Mexico, which pro forma EBIT is around EUR 20 million. We paid dividend in cash for EUR 23 million, as 60% of the rights were exercised in favor of the payment in shares. So at the end of the day, net financial debt increased by EUR 34 million to just below EUR 3.2 billion at year-end. Looking at the debt structure, we don't have any refinancing maturity before April '24. The financing is diversified with well-spread maturities on everything at a fixed rate, which is circa 2%. To limit the future interest to be paid, our strategy is to reduce the debt in absolute value, so as to minimize the amount to refinance every year and rapidly obtain an investment-grade rating to reduce the spread. Last year, September, Moody's already upgraded rating from B2 to B1, which is a good signal of course. We will be committed to continue to reduce the group's perceived risk profile in the future, as we believe it has been 1 key reason for the underperformance of the stock since '18. And deleveraging the balance sheet is obviously the name of the game. So moving on to the next slide. Net financial leverage continued to decrease in '22, and we reached 2.5x at the end of December, exactly 2.46x, down 0.5x year-on-year. As a reminder, financial leverage remained above 3x between '17 and '19, as we implemented a 3-year CapEx plan to upgrade Berendsen network. Then the pandemic started in '20 with a negative impact on the '20 ratio. But since then, deleveraging has accelerated and we shall be just above 2x at the end of '23, which is probably a good level to be around. Well, to conclude this financial section, the key message. Top line growth was very strong with 21% organic revenue growth driven by recovering Hospitality, good commercial momentum and pricing adjustments tied to the inflation. Second, top line -- EBITDA margin was down at 33%, mostly due to the lag effect between the sudden cost increase and pricing adjustments, but EBIT margin was up above 14%. Third, our EPS KPIs, basic and fully diluted, both showed more than 50% improvement year-on-year. Finally, financial deleveraging accelerated and leverage stands at 2.5x at the end of December, down 0.5x compared to the previous year. We expect the deleveraging to go down to 2.1x in '23. Let me now hand back to Xavier, who will give you an update on our CSR achievements in '22.

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 is that we always search for longer durability when conserving 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 this effort will bring further organic growth opportunities in the future, given our clients are increasingly concerned about these subjects. Moving on to the next slide. Our circular approach is an alternative option to far less environmentally friendly offers that exist on the market such as do-it-yourself washing and disposable or single-use products. We are firmly convinced that our CSR approach will be an increasingly important growth driver, and we already see more and more tenders with significant CSR components as our clients are more and more careful about their indirect CO2 emissions and the exemplarity of their supplies with regard to CSR subjects. Our business model, together with our efforts to improve our CSR approach at every layer of Elis, is becoming a real competitive advantage for us. As an example, you see on the slide some clients who we recently won contract with, mainly thanks to the quality of our proposal on CSR criteria. Moving on to the next slide. We help our clients reduce their CO2 emissions and some in-depth studies clearly demonstrate that. We have been running several studies to better assess the decrease in CO2 emissions when using our service compared to buying textile and washing in-house or to disposable solutions. As an example, using reusable hand towel decreases CO2 emission by more than 30% compared to a disposable paper solution. Similarly, the use of reusable hospital scrub suits in health care establishments allows an up to 62% reduction in CO2 emissions compared to disposable ones that are sold generally in Asia. And finally, our rental and washing solution for Workwear allows our clients to decrease their CO2 emission by 37% compared to a situation where they would buy and wash their uniform themselves. Moving on to the next slide. Let me provide you with some examples of projects we implemented or continued to roll out in '22. First, I would like to say a few words about the workwear-to-workwear project. We are now capable of reusing all uniforms instead of simply throwing them away by completely dismantling the demand to reconstruct a fiber ball that will be used to manufacture new uniforms. This project has been launched in France in 2022, and we are aiming at rolling it across the group in the future. Second, we launched a new collection of soap or paper dispensers that is 100% made from recycled plastic. Some more examples: With the acceleration of the green transition of our logistic fleet towards alternative vehicles and more generally, the decrease in the environmental impact of our logistics, the number of our alternative vehicles have more than doubled, nearly tripled over the last 2 years with 715 vehicles to date. We also deployed a project aiming at optimizing logistic routes, which means lower kilometers, and therefore, lower fuel consumption. Finally, as you know, we now have a dedicated CSR committee linked to the supervisory board and the CSR Director directly reports to me. Furthermore, the LTI program for our top 500 executives comes with CSR criteria. Moving on to the next slide. Let me now provide you with a quick update on our different objectives set for '25. Overall, the '22 performance is at least in line with our road map for every item, and we continue to deliver some impressive results regarding our water and energy consumption. Furthermore, our direct CO2 emissions, so Scope 1 and 2, have decreased by 25% over the last 10 years, with an acceleration in the decrease over the last few years as we are down 18% since 2019. Finally, water consumption per kilogram of linen wash went down 43% since 2010. These achievements have been rewarded by most of ESG rating agencies. Elis was rated A minus by the Carbon Disclosure Project, a rating improvement compared to '21. We also obtained a Platinum certification by EcoVadis after 5 consecutive years at Gold level, which ramps us among the top 100% of 90,000 assessed companies. And finally, we also progress in our Sustainalytics and Gaia ratings. So now before moving to our 2023 outlook, I would like to show this graph that we have been presenting at least twice a year since the 2015 IPO. There you see the evolution of top line and margin performance over the last 2 decades. And it is fair to say that the last few years have clearly emphasized the strength and resilience of our business model. The backbone of this resilience is twofold: first, the diversified geographical footprint with France representing less than 1/3 of our business; and second, the diversified portfolio of clients in terms of size and end markets. It is worth noting that this resilient profile was significantly 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 a very narrow range regardless of external events and taking into consideration the impact of IFRS 16 from 2019 onwards. On top of that, 1 very interesting characteristic of our business that we saw in 2020 is that linen investments come and then end 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 strong years for cash generation during the COVID years. And as we explained, 2022 free cash flow was nearly at '21 level, and I expect steady free cash flow growth going forward on the back of the top line dynamism and progressive normalization of change in working capital requirement. Moving on to the next slide. Also, everyone expects a slowdown in Europe this year. I want to repeat that we still don't see any sign 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 model. In Industry, first, a large part of our clients operate in very resilient sectors such as food processing, pharmaceuticals and waste management. Furthermore, with a 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 & Services, we're 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. So 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 constructions or upgrade projects in the hotel sector in all our geographies, which should be a mitigating factor in case of downturn. Looking to 2023, as I already said, the first 2 months of the year have been very encouraging. And our Hospitality clients seem quite confident for the rest of the year. You should also keep in mind that we are fundamentally less cyclical than hotel players as the main reason why RevPAR goes down in times of crisis is a decrease in hotel prices, not occupancy rates, and we charge based on occupancy and volume regardless of room prices. Moving on to the next slide, I would like to return to our significantly improved growth profile compared to before the pandemic. So we have already discussed our better churn rate, the structurally increasing need by clients for hygiene products, traceability, and the sourcing security that obviously came strongly after the pandemic and contributes to accelerate the development of outsourcing. The need for a more secure supply chain also materialized as some clients brought their production operation from Asia back to Europe. The main 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 like with a big semiconductor manufacturer that recently reopened the 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. I also want to mention the steady development of the nursing home market because of an aging population, and the increasing share of Elis' fast-growing market in our mix, which mechanically helps to accelerate the group's overall growth. It is worth repeating that an increasing number of tenders come with CSR components, an area in which Elis as an industry leader is well advanced compared to its small competitors. And 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 finalized in Mexico will be another catalyst. Moving on to the next slide. Also, winning some new contracts is nice. Keeping the existing contract is also key. Therefore, quality of service has always been a big focus for us. I'm very happy to note that our quality KPIs have constantly been improving over the last years, especially in the U.K., where all the efforts put in place in the acquisition of Berendsen are bearing fruits. It was a real area of focus, notably for Industry Workwear, and we are very happy with the progress made, which led to the normalization of the churn rates in the country. So now let's talk about our 2023 outlook, starting with organic growth that we still expect to be strong between plus 11% and plus 13%. This range corresponds to first price effect of at least plus 9%, with most of it corresponding to the additional pricing adjustments implemented since the 1st of January, so already in the books. Second, the Hospitality catch-up in Q1 that I mentioned earlier in the presentation. And third, volume growth from commercial activities. Adjusted EBITDA margin should be up around plus 50 bps, driven by top line dynamism, productivity gains, and the implementation of fixed price contracts for most energy items, which will allow us to better control the inflation of our cost base. Adjusted EBIT should increase by more than EUR 100 million to at least EUR 650 million, so a minimum increase of plus 20% year-on-year on the back of top line dynamism and a slight decrease in G&A as a percentage of revenue. Headline net income is expected above EUR 405 million, up at least plus 15% year-on-year, which corresponds to a fully diluted EPS of at least EUR 1.65 for 2023. On the cash side, we expect a first step-up of free cash flow to at least EUR 260 million, so up at least plus 16% year-on-year, driven by top line dynamism and progressive normalization of change in working capital requirement. As far as debt is concerned, we expect financial leverage ratio to be at around 2.1x at the end of '23. And we believe that the deleveraging trajectory should quickly make Elis eligible for investment-grade rating consideration. So before we move on to the Q&A session, I would like to highlight the main takeaways of this presentation. So in a difficult macro environment, Elis delivered strong financial performance in 2022 with the most financial metrics showing sharp improvement. It underscores, once again, our strong industry know-how and our valuable commercial relationships, allowing us to adjust to many external constraints. Our capacity to almost entirely offset inflation in euro terms led to a limited EBITDA margin decline in '22, and paved the way for margin improvement in '23. And finally, we accelerated the deleveraging of our balance sheet and intend to further decrease this leverage in '23. So this concludes the presentation. I thank you all for your attention, and we can now move on to the Q&A. Operator, back to you.

[Operator Instructions] And your first question comes from the line of Annelies Vermeulen from Morgan Stanley.

I have 3 questions, please. I'll take them 1 by 1. So firstly, going back to slides, I think, 9 and 10 on the cost base part. You mentioned you had cost base inflation of 11% in 2022. Given the hedging that you have in place and your expectations for wage cost inflation, particularly in Europe in 2023, what sort of percentage cost base increase should we be thinking about for 2023? And similarly, on the energy cost, you mentioned EUR 340 million of energy bill in 2022, and that this should be stable going forward. Again, based on the hedging you have in place, is EUR 340 million the right kind of level for 2023? Or will it be below that based on the hedging you have in place?

Okay. So just for -- if we start with energy, don't forget that the half of the volume were not hedged in '22. But the half that was hedged was with very low price, negotiated in 2020 or 2021. So that means that in average, the energy cost for the group in '23 will increase. It will increase less than the top line. So it's a positive effect for the margin. But nevertheless, it will increase. So all in, what we expect -- for the first part of your question, the evolution of the cost base for '23 is something close to the 9%. And it is what we have, for instance, for wages. So the expectation of wage increase at the group level in '23 is around 9%, and it is more or less what we will have also for energy and for all the other part of the cost base.

That's very helpful. And then secondly, thinking about your EBITDA margin. So you're guiding to 50 basis points increase for this year. Over what sort of time frame should we think about margins sort of going back above 34%, as it was the case previously. Is that something that will come in 2024? Or is that more of a medium-term trend as you further consolidate your markets? How should we think about that?

So we are presenting the guidance '23. So it's quite early stage to talk about margin '24. But nevertheless, we are still very comfortable to confirm that the margin should increase again in '24. And after that, it will come from a different point, improvement in some geographies, of course. And I think that we should also benefit from a decrease of the cost of energy. And thanks to the pricing power we have, you know, so that we are able not to decrease the prices in case of a strong decrease of energy price. So normally, we should still continue to increase regularly the margin after 2023. So it's not stupid to say that we will reach on the short midterm, the 34%.

That's great. And then just lastly, one specific one. If you think about those structural growth drivers that you outlined, specifically on some of the industrial production moving back to Europe. Could you comment a little bit on sort of which countries specifically that's benefiting? And also in which industries you're seeing that? I think you mentioned semiconductors as 1 of them. Any color on that would be helpful.

So I think that it will concern a lot of different countries and different industries. So we were talking about a semiconductor project in Ireland. By the way, we have the same nice story of semiconductor players increasing the activity in France. We have already talked about order behind electric car with a battery manufacturer where we signed a huge contract in Sweden. We have example also of reindustrialization of production of solar panel and you probably read last week that the big projects would come in the South of France. So we have a lot of example in many different industries, and it will concern a lot of different countries in Europe.

And your next question comes from the line of Sylvia Barker from JPMorgan.

Firstly, could I check your thoughts on depreciation for 2023, and then the step-up that we will see in 2024 just mechanically? And similarly, secondly, could you talk about the interest costs you will see on the P&L in 2023? How should we think about any impact from the hedges for gas and electricity on that interest line? And then finally, you mentioned that you've got a project optimizing route. What is the current state of play in terms of IT and kind of route planning and scheduling within the group? What countries kind of have that installed? What might be the upside? What might be the investment that you need if you were to upgrade the system there?

So I will start with route optimization. So the additional cost is marginal and totally included in the traditional CapEx line of the group. So no extra costs to be expected there. So today, it's concerned, we have started with France, where we have more than the half of the operations that have already the new IT system in place, and it will be progressively rolled out in all our geographies in the next 2 years maximum, which will concern all the countries. And for the 2 other questions, depreciation, interest costs, I will ask Louis to answer.

Yes. So on G&A, I guess you have your own model. It's linked to the fact that the linen is depreciated over 3 years. So if you have the math and with the guidance in euro in EBIT '23, you have understood that again in '23, depreciation will increase at a lower pace than top line, leading to another margin improvement in EBIT. Then a lot of factors can happen '24 or '25, but at the end of the day, you understand it shall normalize and evoluting in parallel. In terms of interest, both for P&L on the free cash flow, there shall be a small rise linked to the refinancing occurred in '22, that you have followed, but it shall be quite limited in terms of evolution. And your question regarding the impact of energy hedge. In fact, it's probably a shortcut we have taken. We are not hedging, we are buying in advance. So that has no impact on financial results.

Okay. So just to clarify, the financial results maybe kind of 90%, 95-ish for this year. If I could push you a bit, is that the right level?

Yes. Yes, yes. It makes sense.

[Operator Instructions] The question comes from the line of Christoph Greulich from Berenberg.

Two from my side, please. Yes, first, just a brief clarification on the convertible bond and the share count. So you've shown the share count on Slide 20. So the number that you have shown there for 2022, the fully diluted one, is that the 1 that you've been using for the EPS guidance for this year? And then just also on that numbers. So what exactly is included in that? Does that assume the full conversion of the convertible that was issued last year and no dilution from the old outstanding convertible that will mature this year? And then also maybe just to clarify that you don't have any intentions to buy back any of the convertible that was issued last year now that the share price is very close to the conversion price. And then secondly, if you just could provide a little bit of color on the M&A pipeline for this year and what are your plans?

Yes, thank you for your question. So Page 20, we provide detail of the way we calculate the share count, because there have been some questions around that. Very simply, we indeed take into account the full conversion of the new convertible bond. So you have all the elements plus the fuel emission in new shares of the potential LTIPs as if 100% was succeeded, which is kind of a worst case scenario, I would say, leading to 248 million number of shares.

Yes, 2 other questions. First, in terms of capital allocation financial strategy. So as we said, the clear priority is to deleverage, so to reduce the pressure of the debt, and so it will be more the strategy than to buy some shares to put shares in front of the impact of convertible. So your question is more for the future for probably '24 and the year after. What do we do with the excess cash? It's not yet decided. But clearly, the priority now is to deleverage. And after that, it will be time, of course, to decide what do we do with the excess of cash. More or less, how do we give back the money to the shareholders, whether through dividend, whether it is also something that is studied today to see if we can buy some shares to avoid the dilution related to the convertible. But as I said, it's not for '23, where the deleverage is clearly the priority. M&A, last part of your question, nothing special to comment. We have a classical activity with a classical number of potential deals that are studied. So we should deliver in '23, a classical year of small bolt-on, nothing special under the study now.

Yes, that's very helpful. Could I just quickly follow-up on the balance sheet side of things. So you've also given I think that the leverage guidance of 2.1x by the end of this year. So does that assume the convertible as debt or as equity?

It's debt, of course.

So that would be prior to any conversion?

Yes, absolutely.

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

I've got 2. Just firstly, on pricing. Obviously, you put through significant price rises in October and in January again. Just on the ongoing pricing discussions with your clients, are you still planning to put through further price rises in July as normal? And then thinking further forward, given the falling energy prices, even if we don't expect your pricing to actually fall, should we expect lower than normal price rises in the future to reflect that falling energy component? And then on the second question, I'll come back.

Okay. So we still expect a small price increase in July, because you know that for major customers, it is more in the beginning of the year, and we have a lot of countries where we move price at the beginning of the year. And we have some countries where we move prices in July, but it is more for small customers. So it's still expected to do it as a classical year in July, but the main part of the job in terms of price increase has been done. It is the reported impact of the negotiation auctioned in '22, and what has been agreed and implemented in January '23. So 1 part of your question, what could we expect in the years to come with energy that could decrease. I'm very optimistic on this topic because the large part of our cost is coming from wages and wages will still continue to increase probably quite significantly, by the way, in '23. You remember that we had, in our expectation, a plus 9% impact of wage increase. It is the half of our cost and so in that context, even if we have a small decrease of energy, it will never be significant in comparison to the strong increase of wages. So that's why we will never decrease the prices due to the energy impact. And if we are back in a normal world of low inflation, let's say 2%, we still continue to say that normally in this context, we can expect 1% price increase. It is what we had in the past. In the B2B world, it's quite classical to give a part of your productivity to the customers. So the classical year was 2% inflation, 1% price. So it will be probably less inflation coming from energy, but probably more coming from wages. Also due to the fact that you have a kind of lack of workforce, normally speaking, in Europe that will push and conduct to a regular wage increase. So that's why I consider that in the future, if we are back to a normal world, with 2% inflation, as I said, we will not have any kind of pressure due to energy and we will be able to increase normally our price by 1%.

That's a very helpful answer. Just secondly, on the cost base inflation, you've touched on that you expect wage inflation of 9% this year, a full 50% of the cost base. For the rest of the cost base, it seems somewhat conservative to assume close to 9% as well. Just any kind of color. Is there anything specific we should be aware of? Or is that kind of a -- is there a degree of caution baked into those assumptions?

No and you can take your own assumption, of course, to say that it is cautious or not. But today, when you analyze the level of inflation in Europe, we are not in a situation where we are back in a normal -- normal year, and 9% is not so far from the actual level of global inflation in our main markets. So that's why, for me, I don't know if it is so conservative, and the half of the cost for this is wages, and for wages, I'm sure that it will be close to 9%.

Okay. Very helpful. Just final question on the balance sheet. Just coming back, just to confirm, going forward, the kind of 2x net-debt/EBITDA range is the kind of target for the future. Is that correct?

It can be below. It can be below, because we will be very close to 2x at the end of '23, 2.1x. And when you take the natural trajectory of deleveraging of the group with the level of cash that we'll be able to deliver. So part, as I said, will be back to the shareholder, totally normal, but we have a trajectory of natural decrease of the leverage, so it will be below 2 after '23.

There are currently no further questions. I will hand the call back for closing remarks.

So thank you for your participation this morning. And as we said, Nicolas is available for any further questions. Thank you. Have a good day. Bye-bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.