Elis SA (ELIS) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to Elis First Quarter 2023 Revenue Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Xavier Martire, Chief Executive Officer. Please go ahead.

Thank you. Good afternoon, and welcome to Elis 2023 Q1 revenue presentation, which is also webcasted and recorded. I'm Xavier Martire, CEO of Elis and I am here in Paris with our CFO, Louis Guyot. I will first comment on the Q1 revenue numbers, and we'll then provide you with an update on our full year guidance. Then 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 offline. Before we start, please take the time to read the disclaimer. So I'm very happy to report a very solid performance in the first quarter with a revenue increase of plus 21.7%, of which 18.3% on an organic basis to reach more than EUR 1 billion in sales in Q1. This good momentum reflects very good commercial activity this quarter with a record of new contracts signed in euro terms, mostly in Industry and Trade & Services. Hospitality continued to rebound on the back of a favorable comparable base, especially in Southern Europe and in France. Pricing also contributed to this good performance as the adjustments negotiated throughout '22 to offset the inflation of our cost base as well as the additional adjustments implemented since the beginning of 2023, led to a price effect of around plus 11% in Q1, in line with our assumption that the full year pricing effect, combined with better control of cost base inflation will lead to margin improvement in '23. Generally, all our markets continue to be well oriented, and we see no sign of slowdown across our geographies. The only minor issue that we could flag would be that April was just a tough quarter in hospitality. Aside from that, all lights are green and the Q1 trading activity make us increasingly confident regarding the outlook we gave for '23 at the beginning of March. We expect another year of strong organic growth with marked improvement of all main financial KPIs and further deleveraging, I will come back to this at the end of this presentation. Moving on to the next slide. Let's look at the evolution of Q1 organic revenue growth by geography, which all delivered double-digit performance. First, hospitality was well oriented on the back of an easy comparable base at Q1 2022 was still impacted by the Omicron variant. Therefore, all geographies with a significant share of hospitality were positively impacted such as Southern Europe. Second, price effect was strongly across the board and especially in Germany and in the U.K. and Ireland to offset last year's significant cost increase. This led to more than plus 20% organic growth in Q1 in these 2 geographies. Third, commercial activity was good in France and in the Nordics with organic revenue growth of nearly 16% in both geographies. Finally, inflation in LatAm is much lower than in Europe. This led to an organic performance in the region, lower than in the other geographies. The next slide provides a bridge between Q1 2022 and Q1 2023 revenue, which increased plus 22% year-on-year. Half of the total EUR 180 million increase year-on-year came from pricing with both the embedded effect of the adjustments negotiated throughout '22 and the new set of price adjustments that has been implemented since January 1 to offset inflation of our cost base. Higher volumes contributed to this growth for around EUR 60 million. This is a consequence of a plus 3% volume growth of our business, driven by good commercial dynamism, which corresponds to around EUR 25 million year-on-year as well as the effects of the easy comparable base in hospitality, which brought another EUR 36 million of additional revenue in Q1. Also, we noted a slight deceleration over the last few weeks. Our Mexican acquisition closed in July 22, contributed EUR 26 million in Q1 and other acquisition closed in 2022 contributed another EUR 8 million. Lastly, FX had a slightly negative effect in Q1, especially due to the evolution of the British pound and the Swedish krona. Moving on to the next slide. I'm very satisfied with how we have been able to handle inflation. 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 for this success. First, I would like to remind you that inflation is a factor we deal with every year and not only since the energy crisis last year. We already had some challenging years in terms of pass-through like in 2019 when we saw a very significant increase in minimum legal wage across many European countries. Part of the reason why we have always managed to efficiency pass-through inflation of our cost base to our clients, is because we always have been very transparent with them, disclosing our main cost inductors such as minimum wage and energy price. At the end of the day, the price of these cost items are public data, so it was easy for our clients to understand the evolution of our cost base. Second, our services are essential to our client 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. Third, the cost of our service represents on new fairly small component in our client P&L. As an example, we are only between EUR 5 to EUR 15 for the linen of hotel room depending on whether we are talking about economical hotel or palace. 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. When looking at our other end markets, the cost of our service is actually even less material for clients and hospitability. So bottom line, when we apply a plus 10% or plus 20% price increase, we are talking about between EUR 1 and EUR 3 more for hotel room that is often sold for more than EUR 300 a night. So this is virtually not material for our clients. Additionally, in most cases, in more geographies, pricing negotiations were made a lot year by the fact that average room prices have also significantly increased over the last 2 years. Fourth and not alternative solutions to our services are very limited. Re-insourcing 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 of, 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 4 reasons combined explain why we have been successful with our pricing adjustments in this challenging cost environment. Moving on to the next slide. Hospitality continued to show steady improvement in Q1 with all geographies showing good momentum. As I already mentioned, the comparable base in Q1 was easy as Q1 2022 was somewhat impacted by the Omicron variant. This led to around EUR 35 additional million catch-up in the quarter. Also, we noted a slight deseriation over the last weeks, probably due to the social unrest in some countries. Furthermore, pricing was also very satisfactory and was fairly facilitated by the fact that our clients have also significantly increased their pricing over the last 12 months. Moving on to the next slide. Let me give you some examples of initiatives we have recently implemented to capture additional organic growth. First, we regularly continue to roll out the offering of our services to small clients. As of today, we only address more clients in less than 10 countries. Our ability to efficiently sell small clients is essentially linked to the density we have in a specific country. Therefore, as we grow [TDD] everywhere organically or through M&A, our density is also improving year-after-year, and we will be able to sell small clients in more and more countries going forward. This should contribute to margin expansion in the future as the very efficient logistics in place with service to small clients generally leads to good margins. We are currently deploying our offer for small clients in Sweden and Brazil. Second, we are being proactive in opening the nursing home market in both Spain and the U.K., which, unlike other countries, such as France or Germany are still largely fragmented among small independent players that usually insource washing. We currently observe some market consolidation going on along with overall professionalization of the industry. These larger players that they may generally help to transition to outsourcing linen washing, and we work in and with them in that process. Third, the post-COVID have not remained very favorable for Elis with increasing need for hygiene, in general, and notably for pest control and cleanroom business, which have delivered year-on-year growth of around plus 20% since the pandemic to reach cumulative revenue of EUR 250 million in 2022. Elis is already the leader, the European leader in reusable cleanroom garments, cleaning systems, googles and related contamination control solutions. Our existing client base provide us with many cross-selling opportunities in this very technical, highly profitable markets. Finally, we have reinforced our commercial team for the washroom market in Poland. It is already a good market share in the workwear and mass market, but less so in the washroom market. We, therefore, have many cross-selling opportunities with our existing clients in the country. Now before moving to our 2023 outlook. Let's have a quick look at this graph that we present every quarter. 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 emphases 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 the resilient profile was significantly improved with the acquisition of Berendsen and the addition of new countries in Central Europe and Scandinavia. Consequently, you can see on the graph that margin has constantly been evolving at high and stable levels within a narrow range, a very narrow range, regardless of external events and taking into consideration, of course, the impact of IFRS 16 from 2019 onwards. On top of that, one very interesting characteristic of our business that we saw in 2020 is that linen investments come hand-in-hand with top line growth. That means that conversely, they mechanically go down during bad top line years with a favorable impact on cash generation. This led to 2 very strong years for cash generation during the COVID year in 2020 and 2021. Then '22, free cash flow was nearly at '21 level at around EUR 230 million, and we expect free cash flow to improve by at least EUR 30 million in 2023. Going forward, it should continue to improve every year on the back of top line dynamism and progressive normalization of change in working capital requirement. Moving on to the next slide. I remember that a few months ago, all market strategies were totally convinced that we would see a similar recession in 2023. At that time, we said that we were not seeing anything in our numbers suggesting such a slowdown. Today, it seems that these strategies are somewhat more bullish and expecting to the soft recession scenario. From our standpoint, we still do not see anything supporting that. But 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 weight management. Furthermore, with the fixed 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. And third, trade and 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 hospitality end markets, which account for 25% of total revenue. It 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 a downturn. 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 regardless of room prices. Moving on to the next slide, I would like to come back to our significantly improved growth profile compared to before the pandemic. We have already discussed the structurally increasing needs by clients for hygiene products, traceability and sourcing securities that obviously strengthened after the pandemic and contribute to accelerating the development of outsourcing. The need for a more secured supply chain also materialized as some clients reach our 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 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 that an increasing number of tenders come with CSR components, an area in which Elis as an industry leader providing circular services is well advanced compared to its small competitor. These 3 drivers are essentially market driven, but we also are active on our side to further bolster our growth. Third, the increasing share of our revenue that is generated in countries with strong organic revenue growth, such as Latin America, in Eastern Europe, will mechanically contribute to the improvement of the gross group total organic growth. In this respect, the deal we finalized in Mexico last year will be another catalyst. Second, as we saw earlier in the presentation, we are working hard to open new markets to develop our product offering and to roll out the range of our services to as many clients as possible. And we are very confident that this internal initiative, combined with sustainably positive market trends will support our organic growth going forward. Moving on to the next slide. And before looking at the 2023 outlook. Let me give you some detail on gas and electricity pricing, which has been, and speeds to some extent, a stress factor for the market. As you know, energy & specially gas was the main contributor to the cost base increase that year and will continue to be a significant factor in '23. 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 a fixed rate tariffs starting in H2 '22 and covering '23, '24 and '25 volume. As of today, 95% of our gas volumes are hedged at around EUR 75 per megawatt hour and 90% of our electricity volumes are hedged at EUR 225 per megawatt hour. All in, these fixed prices going forward make me feel reasonably relaxed about gas pricing for the coming years. And the 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 policies now to secure our tariffs for gas and electricity for the year ahead. So now let's talk about our 2023 outlook. The good trading performance we delivered in the first quarter has reinforced our confidence regarding all the indications that we gave in March. So as a reminder, we expect organic growth to be strong between plus 11% and plus 13%. The 2 percentage point difference between 11% and 13% corresponds to a potential impact of a slowdown in Europe, which we don't see right now, as I said. Adjusted EBITDA margin should be up around 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 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 the 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 the 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 cap requirement. As far as debt is concerned, we expect the financial leverage ratio to be at around 2.1x at the end of '23. We believe that this deleveraging trajectory should quickly make Elis eligible for investment-grade rating consideration. Before we move on to the Q&A session, I would like to highlight the main takeaways of this presentation. First, so it is continued to see good momentum in Q1 with strong activity across all geographies. Pricing was strong in Q1 at plus 11%, driven by the carryforward effect of pricing adjustments implemented '22, and those put in place in January 1, '23. Under cost, once again our valuable commercial relationship, allowing us to adjust to many external contracts. Also, we noticed some growth certainly in hospitality over the last weeks. We still don't see any sign of slowdown across our markets and geographies. All these elements combined make us increasingly confident in achieving another year of profitable growth in '23, meeting all our full year targets and pursuing the deleveraging of our balance sheet. 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] Our first question comes from Annelies Vermeulen with Morgan Stanley.

Can you hear me?

Perfectly.

Great. I can't hear anything. So 3 questions, please. So firstly, on the hospitality weakness in April and through May, you mentioned that, that was due to the social process, was that majority in France? Or did you see it in other geographies as well? And how confident are you that it was purely due to that unrest rather than, say, an economic slowdown, which you say you're not seeing? And again, do you have much visibility on that going forward as we look ahead into the second quarter? And then secondly, on the sort of record contract wins, can you -- which I think you said within Industry and Trade and Services, is that increasing outsourcing levels? Or are you winning market share versus competitors? Or is it both? And then lastly, just on one of your strategic initiatives to focus on smaller clients in geographies where you have a good market share that margin improvement part of it. Is that purely due to scale, as you say, you get the benefits of the scale of the network? Or does your pricing tend to be better with the smaller customers as well relative to larger customers?

So hospitality first. So it's a very small deceleration. So that means that we have still a good level of activity, so I want to -- not to amplify too much the message over the small slowdown of the growth in the last weeks. And it was mainly France, a small impact also in Germany and in the U.K. So the 3 countries where we had this kind of protest, but mainly in France, of course, in Paris, it's clear that you see a garbage in the streets during some weeks, it's not a good advertising for tourism. We keep a very good level of confidence for the summer. It is the message given by our customers. It is also the message given by the big name of this industry when they present their results and so on. So our customer said that they have a good level of reservation for the summer. So we have absolutely no reason not to trust them and to be quite confident for the season. But obviously, it's too early to answer for this level of activity in summer, but it is a small deceleration. I don't want to give us too bad message on hospitality. For the level of contracts and the gain of new contracts in the other end markets. First, it's very important to highlight that we have not changed our pricing strategy. So it is not by decreasing prices that we have taken these additional volumes. So that means that in average, it is the same mix than usual in terms of a gain of market share and outsourcing, no major event behind this record level of new signature. And as I said, without any, any, any decrease of rent prices, even the opposite -- so we have kept, as usual, a solid level of price. But thanks to the quality of the offer of Elis and reliability of the service we provide, we have been able to sign a lot of contracts. With small customer, the comment I made with the margin improvement is for the long-term impact. So that means that it is not a big change in profitability with the small customer in Brazil or in [indiscernible] and it is always a long-term first year, so it will not change on the short term, the level of profitability. Nevertheless, it is important to highlight that it is a sum of all these initiatives that contribute to the reinforcement of the growth profile of the company for the long term.

Our next question comes from David Cerdan with Kepler.

Yes. Xavier, Louis, and Nicolas. I have a few questions for you, please. First one is the price effect. Which kind of price effect do you expect for the full year, it was 11% in Q1. Do you expect this level to be the same over the next quarters? Second question is regarding the margin improvement. Do you expect this plus 50 basis points be quite balanced between H1 and H2? Third question is regarding your energy prices, energy costs, sorry, you said that you expect a small increase. Is it in value or as a percentage of sales? And how much do electricity and gas represent as a percentage of sales? And the last question is regarding M&A. Have you changed your mind on M&A for 2023.

Okay. So price effect for the full year. So we keep the guidance, so 9% for the full year. It's quite normal to start with the bigger figures, of course, because we have a strong report effect of '22. If you remember, we -- after the summer, after the huge crisis on the energy market we had to renegotiate some additional price increase in Q4 '22. So of course, we will have the report effect in the beginning of the year '23, and it will be more balanced at the end of '23. So that's why this plus 11% in Q1 is totally in line with the full year guidance at plus 9% for the price effect in '23. In terms of M&A, the last question, so no, exactly the same strategy. So as we said, we never want to take any kind of guidance in terms of volume of M&A because we don't want to make deal just to make a deal. So it depends on opportunities. We have as always, a long list of target in the pipe where we are discussing, but we stay quite selective, and it will happen or not. So I can never predict this. No big lessons on the pipe, but the normal level of opportunity of small add-ons. Same priorities as always existing markets to consolidate our position is the way to be very profitable in our market to increase our market share. Thanks also not only to the organic growth, but also thanks to this small acquisition. And I will move the floor to Louis for the 2 other questions.

For the margin improvement, it's quite regular through the year with some favorable base as you remember for the summer because in '22, July growth, that was a big peak in the gas price. So that impacted us -- significantly to our people on the tougher productivity. So I would say that it shall be slightly a bigger improvement in H2 than in H1, but of the same kind of range. Regarding gas, electricity, globally, gas is in the region of 4.5% to sales, the bill of gas and the bill of electricity, 2.5% to sales, which is slightly lower than in '22. It gives you the answer that the growth of the bill is grew slower than the total revenue.

Okay. Just a follow-up question regarding M&A and deleverage. How do you reconciliate your objective to deleverage and be investment grade and lower your financial charges with the M&A?

So we have never said that we need to stop M&A to reach the target of strong deleveraging. And by the way, if you have a look on what happened in '22. In '22, we have strongly deleveraged the company, 0.5x with a big acquisition in Mexico. So that means that we are able to do both small M&A and deleveraging. So in '23, we are still looking for small bolt-ons. But we confirm that with a strong level of cash flow generation, and strong increase of the EBITDA in euro, we will have a natural and again, strong deleveraging for '23, so 2.1x. So that means that, of course, we will be below 2% for the year after, doing still continue to do some acquisitions. And when you have a look on the level of price paid for small bolt-on. If we pay around 4x or 5x maximum EBITDA, we are not so far from the 2x leverage. So at the end, the impact of the small bolt-on is very, very limited on the global average.

Our next question comes from Oscar Val Mas with JPMorgan.

Yes. I have 3 questions. So the first one, last time you had one of these calls, you talked about the German market potentially seeing a bit more challenges in health care on the pricing side. Could you update us on how pricing in Germany is going? That's the first question. The second question on CapEx related to your free cash flow guidance. Can you remind us what percentage of sales or what level of CapEx you're expecting in 2023 and how the cost of linen is evolving? And then the final question, I guess, is more structural, but you talked about pest control and clean rooms. Could you give us a sense of how big pest control is? And then can you remind us if you're approaching that end market independently? So are your -- at least technicians also doing pest control? Or are they separate?

So Germany first, it's still the most challenging market to increase price because we have more than 60% of the business in Germany is made with health care. And as you know, health care is the end market where the negotiations are the most challenging because they don't have the same freedom for their own prices than the other industry like hospitality, for instance, where hotels are able to change their price every day. It's not the same for public hospitals or nothing and on. So that's why the negotiation is quite challenging. In a context where it is a country where the level of inflation was the highest with not only the impact of energy, but also the impact of the minimum wage that increased by 25%, more or less in the last 12 months. So we are doing a very serious and good job, and it is the reason why, for instance, it is -- when you take Central Europe, it is one of the region where the level of growth is the highest. It is driven by the incredible level of a price increase in Germany. All in, we are at a 17% price increase in Germany in Q1. So you can see that it is a strong achievement. It's not yet enough to cover 100% of the balance of inflation in percentage. So we are still in the middle of some negotiation with our major accounts in health care. So we are doing a very good job. It's not the end of the party for Elis. But I think that we can be quite happy with the evolution of the negotiation in the first quarter. CapEx related to sales, you -- we still forecast something around 18.5% for the year '23. Evolution of linen inside. We are signing a lot of contracts. So that means that each time you know that more growth we have and more linen we have to invest. Nevertheless, some inductors are going in the right direction. Cost of logistics is decreasing significantly in '23 and the freight costs are more or less going back to their initial level of price in '21. So it's positive for linen CapEx. And the cotton is also decreasing. So that's why we can expect in the second semester to obtain some better conditions for the investments in linen, it will be below 13% of net sales. Pest control. It represents around EUR 50 million now in our portfolio, and we still have a part of the job that is done with a meticulous approach. So that means that it is a classical Elis technician that is doing both delivering the linen and making the service of pest control. When it is very simple when it is just to monitor if biocide has been written or not and so on. So when it is such kind of a check, we can leverage the logistic cost and use our classical Elis technician. For -- of course, each time it is a more sophisticated action to save the situation with the customer when you have a hard inflation or such bedbug hospitality and so on, of course, there, we will use some dedicated technician.

[Operator Instructions] Our next question comes from Christoph Greulich with Berenberg.

2 from my side, please. Firstly, on the pricing. So I have all the pricing initiatives for 2023 already been reflected in the Q1 revenues? Or is there anything else to come over the coming quarters? And then secondly, a follow-up on the record number of new contracts in Q1. So is this record with regard to the number of contracts? Or is it with regard to the kind of euro terms that come from the euros that come out of those contracts? And is it possible to put it into context, like how much higher the number of new contracts was compared to previous quarters or previous Q1 than you've seen in the past?

So pricing initiatives, the main part is already done. So it was the key negotiation with major accounts in January '23. And what we still have to deliver in the year is a classical price increase in the middle of the year that we have in some countries with a small and midsized accounts, but it is very classical as we did every year. So it's not a big challenge. So what was more challenging, of course, was a strong negotiation with our big accounts at the end of '22 and the remaining part, beginning of '23. So for that, it is done. So that means that the level of confidence to deliver the 9% for the full year is very, very, very high. And for your question in new sales, it is recording euro, not in number of contracts, in euro. And I don't have the precise figures with me on the -- how much it is above what we delivered in '22.

We can use perhaps with the trends that a level of signing of 8% for workwear, which gives you an idea of the magnitude of the sales cost.

[Operator Instructions] We're showing no further questions in queue at this time. I'd like to turn the call back to Xavier Martire for closing remarks.

Okay. Thank you for your interest. And next meeting together will be end of July for the H1 results. Thank you. Have a good evening. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.