Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the H1 2023 Results Presentation. [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. Please go ahead.

Thank you. Good afternoon, and welcome to Elis 2023 half year results 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. After an overview of the H1 '23 business highlights, I will hand over to Louis. He will detail our 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 the remainder of 2023. Finally, we will have a Q&A session to answer your questions. And after our call, Nicolas Buron will be available to answer any of your questions offline. Before we start, please take the time to read the disclaimer. So I'm very happy to report a very solid financial performance in the first half with improvement of all profitabilities, KPIs and further deleveraging. Top line momentum continued with a growth of 17.8%, of which 15.2% on an organic basis to reach more than EUR 2.1 billion, which is a record number for first half. EBITDA reached nearly EUR 700 million, up more than 20% at 33.2%, a 90 basis point improvement. EBIT reached EUR 315 million, up 36%, along with EBIT margin improvement of 200 basis points to more than 15%. H1 headline net income per share was up more than 25% at EUR 0.78. Free cash flow was at EUR 17 million, which is normal for our first half and perfectly in line with our full-year guidance. Finally, financial leverage ratio continued to decrease to 2.4x at the end of June, and this trend will accelerate in H2 to reach 2.1x at the end of the year. Commercial momentum was very good this half with a record of new contracts signed in Workwear. Hospitality activity was satisfactory and benefited from a favorable comparable base in the first quarter. And generally, all our markets continue to be well oriented and we saw little to no slowdown from the recent events in France. Pricing also contributed to this good performance. The adjustments negotiated throughout 2022 to offset the inflation of our cost base as well as the additional adjustments implemented since the bugging of '23 led to a price effect of around 11% in H1. On top of that, the group continued to deliver productivity gains in the first half and the significant volume increase generated significant operating leverage in H1. This good set of results allowed us to upgrade our '23 outlook and raise our profitability objectives for the full year. I will come back to this at the end of the presentation. The next slide provides a bridge between H1 '22 and H1 '23 revenue, which increased plus 18% year-on-year. Volumes were up plus 4.6% and contributed to the growth for nearly EUR 85 million. This can be broken down between around 2.6% or EUR 47 million corresponding to growth driven by good commercial dynamism and another 2% corresponding to the catch-up in hospitality on the back of an easy comparable base, which brought EUR 36 million of additional revenue in Q1. Around 60% of the total EUR 317 million increase year-on-year came from pricing with both the embedded effect of the adjustment negotiated throughout '22 and the new set of price adjustments that have been implemented since January 1 to offset the inflation of our cost base. Our Mexican acquisition closed in July '22, contributed EUR 55 million in H1 and other acquisitions contributed another EUR 10 million. So a total impact of plus 3.6% in H1 revenue. Lastly, FX had a minus 1% impact on revenue in Q1, which corresponds to a shortfall of EUR 20 million, especially due to the evolution of the Swedish krona and the British pound. Moving on to the next slide. Hospitality continued to show steady improvement in H1, with France showing the strongest momentum, especially in Paris. Denmark was also strong. And growth on the French Atlantic side was a bit softer. Southern Europe was helped by a very low comparable base, but momentum remain limited compared to France. It's also worth noting that the recent turmoil in some French suburbs had little to no effect on our clients' activity. Furthermore, pricing was also very satisfactory and was purely facilitated by our good quality of service and by the fact that our clients have also increased their pricing over the last 12 months. As far as new bids and contract renewal are concerned, we have been increasingly selective in our approach, especially in the U.K. and Germany, even if this sometimes means letting some contracts go or not finding a new one. Finally, as I already mentioned, the comparable base in Q1 was easy as Q1 2022 was somewhat impacted by the Omicron variant. This led to an additional EUR 35 million catch-up in the quarter -- in the first quarter. Moving on to the next slide. We signed a record number of new Workwear contracts in the first half. This reflects the accelerating outsourcing trend that we have noted since the pandemic and the change in market standards, often driven by new regulations. These changes have been intensified by Elis, and we reinforced our workforce to capture as many opportunities as possible in all markets and in every country. We expect this trend to continue going forward, and we see many other pockets of growth across our different businesses. As an example, we are being proactive in opening the nursing home market in both Spain and the U.K., where we launched dedicated offers under the responsibility of a specific sales force. Unlike other countries such as France, those markets are still largely fragmented among small independent players that usually in-source washing. We currently observe some market consolidation going on along with an overall professionalization of the industry. These bigger players that EMEA generally hope to transition to outsourcing linen washing, and we work on with them in that process. In the healthcare market, we have also signed several new contracts with public hospitals in the U.K., France and Brazil in the first semester. The post-COVID environment remains very favorable for Elis with the increasing need for hygiene in general, notably for pest control and clean room business which continue to deliver strong double-digit growth in H1 to reach cumulative revenue of nearly EUR 130 million in the first half. Elis is already the European leader in reusable cleanroom garments, cleaning systems, googles and related contamination control solutions. Our existing client base provides us with many cross-selling opportunities in these very technical, highly profitable markets. We also continue to roll out the offering of our services to small clients. As of today, we only address small clients in fewer than 10 countries. Our ability to efficiently serve small clients is essentially linked to the density we have in a specific country. Therefore, as we grow steadily everywhere organically and through M&A, our density is also improving year after year, and we will be able to serve small clients in more and more countries going forward. This should contribute to margin expansion in the future as a very efficient logistics in place with service to small clients generally lead to good margins. We are currently deploying our offer for small clients in Sweden and Brazil. Moving on to the next slide. I'm very satisfied with how we have been able to offset inflation in the first half. This clearly highlights Elis pricing power, which is a key component of our business model and one of the group's biggest strengths. I want to give you some color on the reasons for this success. Part of the reason why we have always managed to efficiently pass through the 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 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 businesses. Third, 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 hotel room depending on whether we are talking about low budget hotel or palace, so compared to the actual price of the hotel room, you can see that the cost of our service is not very much high, 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 hospitality. So bottom line, when we apply a 10% or 20% price increase, we are talking about between EUR 1 and EUR 2 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 and in more geographies, pricing negotiations were made a lot easier by the fact that average room prices have also significantly increased over the last 2 years. Fourth and last, alternative solutions to our services are very limited. The re-insourcing is not really an option, and we don't see this happening in our markets as it would result in higher costs for our clients. Furthermore, 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, as 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 adjustment in this challenging cost environment. Moving on to the next slide. Our pricing dynamics going forward will be essentially impacted by the increase in salaries. Energy will have only a slight impact. As a reminder, salaries remain by far the most important contributor to our cost base at around 60% of total costs, whereas energy costs only accounts for around 10%. In 2023, our energy bill will be slightly higher than '22 because a share of our '22 volumes have been negotiated before the energy crisis so at low prices. All in, we expect the inflation of our costs to be at plus 9% in '23. As far as next year is concerned, wages will continue to significantly increase in all geographies. This will mechanically impact our cost base way more than the decrease in energy costs. Therefore, there is no reason why we would not continue to pass on some pricing adjustments in '24. Moving on to the next slide. It is fair to say that the quality of our commercial relationship first relies on the quality of the service we provide to our customers. Therefore, maturing our client satisfaction is a priority. To do this, we run almost 100,000 surveys per year with specific follow-up campaigns with unsatisfied clients. Client satisfaction is an important KPI for the incentive plan of every plant manager, and we continuously launch new initiatives to optimize the overall satisfaction rate. As an example, we are currently rolling out a new CRM tool and further improving the digitalization of our customer experience. During the recent pandemic, by the way, it is demonstrated both strong service reliability and commercial proximity. Let's have a look on the different geographies of the group. So France first, where organic revenue growth was plus 13.5% in the first half. This was driven by several factors. First, a good level of activity in hospitality, especially in Paris. Second, very good commercial momentum as shown by the record number of new Workwear contracts signed during H1. The new volumes come with a very good profitability level. Third, a good pricing level corresponding to the carryforward effect of the adjustment negotiated last year and some new adjustment to offset cost inflation in '23. That said, we noted an increase in the corporate default rate, which returned to the precrisis level and the development of working from home still have a negative impact on some clients such as [indiscernible]. Margin was up 190 bps because of the neutral balance of inflationary impact and some further productivity gains, especially on logistics, water and energy consumption. Moving on to the next slide. Central Europe delivered organic revenue growth of nearly 19%. Price effect was especially strong as a lot of negotiations initiated in '22, took some time to unfold and were implemented either late last year or from January 1 onwards this year. Development of work were continued, driven by outsourcing, but we continue to be very disciplined on the pricing side, even though this sometimes means losing some new contract opportunities or not honoring an existing contract. As an example, we decided to terminate some contracts with German hospitals. We did not accept price adjustments that were mandatory to offset the inflation of our costs. As a reminder, another very strong increase of the German minimum legal wage was implemented at the end of '22, forcing us to negotiate further pricing adjustments. Despite this, margin was flat in the region at 29.5%, which is a satisfactory performance. The high share of healthcare clients is the mix was definitively a drag given the major financial constraints in this industry. Scandinavia & Eastern Europe now. So organic growth was at plus 11.5% in H1 '23. Activity was good in hospitality, especially in Denmark, outsourcing in the region continues to show good momentum and many new contracts were signed, especially in workwear, including the cleanroom business. Finally, Baltic States and Finland were well-oriented. Pricing in the region is lower than in other geographies due to the high share of healthcare clients in the mix. Therefore, the inflation of our costs was not fully compensated, which resulted in an EBITDA margin decrease of 50 bps. For the [indiscernible] so deep dilutive on margin. That said, profitability in the region remains very high at 35.5%. Moving on to the next slide. Performance was satisfactory in the U.K. and Ireland, with organic revenue growth of plus 18.5% and EBITDA margin just a bit short of 30%. Organic momentum was driven by, first, market share improvement in health care, thanks to the quality and reliability of our service. Second, we delivered further growth in workwear for industry, which underscores the success of our commercial investments despite the decline in economic activity in the U.K. And third, we maintain great pricing discipline in hospitality and assume some contract losses in certain cases. EBITDA margin is slightly down in H1 compared to H1 '22. U.K. margin was up, but margin in Ireland was down as H1 2022 was boosted by the tail end of pandemic-related subsidies. [indiscernible] stated for this one-off, the region's margin was up in the first half. Moving on to the next slide. The success story continues in Latin America with a plus 10.9% organic revenue growth in H1 and plus 200 bps EBITDA margin improvement at 34.4%, well above the group's average margin for the first time. We continue to open the market in the region with many new clients outsourcing for the first time. We also made further operational progress in the region and improve many of our industrial KPIs. Finally, we are extremely happy with the first year of integration of our Mexican acquisition. So far, it has been a complete success. The results are above our initial expectations and contribute to the region's strong performance. I will come back to this in a minute. But just before that, let's say, word on Southern Europe, which also posted an excellent performance in H1 with organic revenue growth of plus 19.4% and EBITDA margin up 320 bps. The rebound of volume in hospitality largely explains this performance. Even if activity was not that strong, H1 '23 benefited from a very favorable comparable base and operating leverage explains a significant part of the margin improvement in the first half. This, along with strong pricing discipline and productivity gains led to margin improvement to above pre-crisis level. Moving on to the next slide. M&A activity was a bit subdued in H1, but our M&A strategy remains the same. We aim at consolidating our existing positions as much as possible and two, regularly open new geographies. Since the IPO, we have been closing around 8 acquisitions per year on average with constant discipline in terms of price, which means these small bolt-ons have little to no impact on our financial leverage. The reason for the quiet market is very likely due to the fact that potential sellers want to wait for surely normalized annual results before putting their assets on the market. Nevertheless, in H1, we acquired a nice B2B business in Italy with operations across the whole country and revenue of circa EUR 5 million per year. As far as the Mexican acquisition is concerned, revenue was up plus 18% in H1 at EUR 55 million with EBITDA margin above 40% among the best in this countries. As a reminder, it is the only player in the country with a national network. The group is a market leader, 20x bigger than the #2. Activity is very resilient and stable with health care clients accounting for more than 85% of total revenue. There are 11 plants, 12 distribution centers through optimized coverage with a total of 2,600 employees. Management has been in place for more than 20 years and stayed on board. Going forward, we believe we will have the opportunity to develop outsourcing in hospitality and in Workwear for industry as the current level is very low. So this concludes the first part of the presentation, and let me now hand over to Louis for a presentation of the first half financials.

Thank you, Xavier. Good afternoon, 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. Whichever way you look at this graph, you will see that Elis' positioning is well-balanced, which contributes significantly with resilience. In terms of activity, flat linen and Workwear, hygiene & well-being represent 46%, 37%, on 17% 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 roughly wait for 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 switch with, on the one hand, Central Europe, Scandinavia being more mature on the other end, Southern Europe, Latin America, offering higher growth prospects. There's good diversification in terms of activity, client geographies, does not come out by chance. It is a consequence of a long-term strategy backed by product innovation, commercial and M&A. Moving on to the next slide. Let's look at the evolution of organic growth on EBITDA margin by geography. Xavier just spent some time going through every region's organic growth, some profitability evolution. So I will pass quickly on that one. Let's just keep in mind that organic growth was above 15% driven by 10.6% price effect to offset inflation with some differences between countries, depending on the local evolution of wages. Catch-up in hospitality also add 50% uplift on revenue with France, U.K. and Southern Europe, the beneficiaries of this catch-up. As far as EBITDA margin is concerned, it is interesting to note that margin in every geography is now converging with group average, with fewer discrepancies between countries and in the past. In terms of share on your revenue share, you should bear in mind that there are some different base effects between geographies. Some of them had a significant share of their 22 energy price fixed meaning a low 22 days and others paid the spot price, meaning 22-basis was much higher. This contributes to explain the margin dynamics in H1 this year were done by reach. Let's now look at the full P&L. Below EBITDA, we already largely commented, all aggregates show strong growth compared to H1 '22. In the first half, G&A only increased by 11%, reflecting the decrease in net CapEx recorded in '20 and '21 and the inertia in industrial CapEx depreciation in relation to inflation, depreciation period being much stronger than linin. This led to a 15.1% EBIT margin, a level that we consider normative. The main items between EBIT and operating income are as follows. First, expenses related to free share plans corresponding to the requirements of the IFRS 2 accounting standard. They are stable in '23 compared to '22 at EUR 10 million. Second, amortization of intangible assets recognized in a business combination, mainly related to the goodwill allocation of Berendsen in '23, [ they ] are stable compared to last year. Third, noncurrent operating expenses, which are increasing, driven by the revaluation of the earn-out related to the Mexican acquisition indeed. The new forecast is well above the initial expectation, leading to an uplift of the forecasted earnout, which is a P&L treatment, not a balance sheet one. Fourth and last, please remember that we booked a EUR 59 million goodwill impairment in H1 last year regarding our assets in Russia. Furthermore, net financial expense was at EUR 57 million, more or less in line with the cash interest paid. Please remember that in '22, the base was very low with EUR 14 million of ForEx's gains. Tax rate is normative at 26%. We expect the same for the full year. At the end of the day, net income increased by nearly 106% year-on-year at around EUR 139 million. Next slide, you see the H1 headline net income per share. The main items related are the usual ones. PPA depreciation, noncash expense share plans and noncurrent operating income and expense, mostly corresponding to the revolution of the earnout related to Mexico. So all in headline net income sounds at EUR 198 million, up 33% year-on-year, which is an EPS of EUR 0.55, EUR 0.78 on a fully diluted basis, up 32% from 26%, respectively, versus last year. The fully diluted number of shares takes into account potential dilutive effect from the pre-share plans on the 2 convertibles in which case, we'll sort the virtual interest expense. Let's now take a look at the H1 cash flow statement, which was stable compared to last year at EUR 17 million and reflects the normal seasonality of our business just below EBITDA EUR 7 million correspond to some litigation and damages, which is pretty standard for nonrecurring. CapEx stood at EUR 414 million in '23, EUR 93 million more than last year. As a percentage of revenue, it's 19.7% compared to 18% last year. This ratio reflects the return to a normative seasonality of our activities with more than 50% of the investments made in the first half of the year to prepare the season. As a remainder, in '22, only 45% of the investments we have made in the first half due to weak hospitality activity in H1 and to supplier delays linked to the disruption of the global supply chain. In '23, the change in working capital is strongly negative at EUR 86 million, similar to last year, which reflects the strong growth of the revenue on the calendar. The cash collection remains pretty good at [ 54 ] days, more or less similar to last year. All other items in the table are normative. In terms of capital allocation, we spent EUR 62 million in M&A in the first half, which is for a large part, the first earnout paid for the Mexican acquisition. We paid dividend for EUR 62 million, bearing in mind that 35% of the rights were exercised in favor of the payment in shares as the option was available. At the end of the day, net financial debt increased by EUR 97 million in the quarter to EUR 3.275 billion corresponds to a leverage of 2.4 at the end of June. Let's have a look at the profile of the debt. Technically speaking, you see that we are always in the process of fine-tuning the structure of the debt with several targets. First, to have well-split schedules with maturities longer, up to 35, as you can see on the graph. Second, diversity of pockets. As you have seen, we have issued a securitization program in June on a new 12-year USPP in July. Third, optimize the interest paid, so that it shall not increase too much. And of course, fourth, manage the liquidity of the group with the safety net. As of now, we are comfortable to reimburse the bond of October '23 and April '24. This strategy on the profile of leverage should allow us to be investment grade at short term. And as you know, S&P put us on positive outlook in March '23. So moving to the next slide. Net financial leverage decreased to 2.4x at the end of June compared to 2.7x last year in June and 2.5x end of '22. This decrease is now totally normal for the first half given the seasonal pattern of the business with cash mostly generated during the second half of the year. As a reminder, the pandemic had the negative impact on the 20 ratio. But since then, deleveraging has accelerated, and we expect to be around 2.1x at the end of '23. As we forecast continuous EBITDA growth and debt reduction, financial leverage ratio will continue to decrease in the coming years, which is consistent with the strategy followed since 2019. Well, to conclude this session. Top line momentum continue to be very good with 15% organic revenue growth driven by very good commercial momentum in Workwear for industry and pricing adjustments tied to inflation. Second, a very strong profitability improvement in EBITDA margin and EBIT margin, up 90 bps on 200 bps, respectively. Third, headline net income on EPS continued to rise significantly. And finally, financial leverage continued to decrease to 2.4x at the end of June, down 3x compared to the previous year. We expect this leverage to go down to 2.1x at year-end. I will now hand back to Xavier who will give you an update on our CSR achievements in the first half.

Thank you, Louis. As you probably know, this is a real actor of the circular economy, promoting usage rather than ownership, which creates a real virtuous pattern. It means that we always search for extending durability when conserving our products. This can be achieved through maintenance and lending, and we also work very hard on the reuse of the end-of-life articles. We are totally convinced that these efforts will bring further organic growth opportunities in the future, given that 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 offer that exist on the market such as do-it-yourself washing and disposable or single-use products. We are fundamentally 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 CO2 emissions and the exemplarity of their supplies with regard to CSR subject. Our business model, together with our efforts to improve our CSR approach at every lawyer of Elis is becoming a real competitive advantage for us. As an example, you see on the slide some recent client wins, 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 demonstrated that. We have run -- we have been running a number of studies to better assess the decrease in CO2 emissions when using our service compared to buying textiles and washing in-house or to disposable solutions. As an example, using reusable untoward decreased CO2 emission by more than 30% compared to the disposable paper solution. Similarly, the use of high usable hospitals suites in healthcare establishments allows a reduction of up to 62% in CO2 emissions compared to disposable ones which are generally short in Asia. And finally, our rental and washing solution for Workwear allows our clients to decrease CO2 emissions by 37% compared to a situation in which they would buy and wash the uniform themselves. Moving on to the next slide, let me provide you with some examples of projects we implemented recently. First, I would like to say a few words about the Workwear to Workwear project. We are now capable of using all uniforms instead of simply throwing them away. By completely dismantling the linen in order to reconstruct a fiber board that will then be used to manufacture new uniforms. This project has been launched in France in '22, and we are aiming at rolling it out across the group in the future. Second, we launched a new collection of soap or paper dispensers at least 100% made from recycle plastics. Let me also provide you with an invitation. Since 2019, we decreased our CO2 emissions by nearly 20% and conscious of the environmental challenges with regard to climate change, Elis is committed to an approach to reduce its emissions that is in line with Paris agreement to contribute to keeping the increase in temperature below 1.5 degrees compared to preindustrial levels. The group will thus present its climate objectives during the webcast organized on September 4, '23. So detail of these events are on our website. Some more examples on the next slide, with the acceleration of the green transition of our logistic feet towards alternative agents. And more generally, the decrease in the environmental impact of our logistics. The number of our alternative vehicles are more than doubled over the last 2 years, with more than 700 vehicles to date. At the same time, we also deployed the project aiming at optimizing logistic routes, which means fewer kilometers and therefore, lower fuel consumption. Finally, as you know, we established 2 years ago, a dedicated CSR committee linked to the Supervisory Board, and we also have a CSR director who reports directly to me. Furthermore, the long-term incentive plans for our top 500 executives come with CSR. These achievements have been rewarded by most of ESG rating agencies. Elis was rated A minus carbon disclosure project for its second year of reporting. We also obtained a better scoring by EcoVadis, and the gold level of sub-5% of 100,000 asset companies. And finally, we also progress in our sustainalytics and Gaïa Index. Now before moving to our 2023 outlook. Let's have a quick look at these graphs 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 emphasis the resilience of our business model and our strong pricing power. The backbone of our resilience is twofold: further 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, which is a very narrow range, less 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 in on with top line growth. That means that conversely, they mechanically go down during bad top-line years with a favorable impact on cash generation. This led to 2 very strong years for cash generation during the COVID years, in 2020 and '21. Then 2022 free cash flow was nearly at 2021 level at around EUR 230 million, and we expect free cash flow to improve by at least EUR 30 million in '23, and 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. The good financial performance that the group delivered is a result of the network density strategy we have been deploying for many years. This map shows we are #1 in the majority of our 29 countries, sometimes #2 and very hardly #3. When we enter a new country, we aim at becoming the market leader immediately or over a short period of time after the first acquisition. Being #1 allows us to operate a denser network which eventually leads to efficiency gains for us and offer a second-to-none supply security for all our clients. At the end of the day, the true network density is both a key competitive advantage for us and a high barrier to entry for other competitors as replicating such network is virtually impossible. Moving on to the next slide. We did notice some effect of the economic slowdown in the U.K., but we still do not see anything supporting the case for general slowdown in Europe. But if such slowdown were to come, 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 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 the temporary and limited activity slowdown at our client level. Second, health care is by nature. Third, trade and services were just like in industry, we charge our clients with a fixed fee regardless of their activity level. Fourth, this market is very resilient, too. At the end of the day, we consider that only our hospitality end markets, which account 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. 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 structural increasing needs by clients for hygiene products, possibility and sourcing security that obviously strengthens after the pandemic and contribute to accelerating the development of hotels. The need for a more secure supply chain also materialize at some clients reshored 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 some semiconductor manufacturers that recently increased their capacity in Europe. 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 the act to accelerate the group's overall growth. It's worth repeating 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 competitors. These 3 drivers are essentially market driven, but we also are active on our side to further bolster our growth. First, we -- the increasing share of our revenue that is generated in countries with strong organic revenue growth, such as 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 last year will be another catalyst. Second, as we saw earlier in the presentation, we are working to open new markets to develop our product offering and to roll out the launch of all our services to as many clients as possible. We are very confident that these internal initiatives combined with sustainably positive market trends will support our organic growth going forward. So now let's talk about our 2023 outlook that we presented in March, compared to May and are now upgrading. The good efforts we made to neutralize the impact of inflation in H1 as well as the productivity gains we achieved led to good EBITDA margin performance in the first half. This allowed us to raise our full year 2023 profitability objectives. We now expect EBITDA margin to be up 70 bps compared to plus 50 bps and EBIT to be above EUR 660 million compared to above EUR 650 million before. Headline net income should be above EUR 410 million, EUR 5 million more above the previous target. We also specify our organic revenue growth guidance to circa 12% in the middle of the plus 11% plus 13% range we provided initially. As mentioned before in the presentation, our pricing discipline in all countries sometimes led to volume losses that will have an impact slightly below 1% for the full year. FX should also be a slightly stronger headwind than what we initially had in mind. 2023 free cash flow is still expected above EUR 260 million and financial leverage at year-end still expected at 2.1x. Before we move on to Q&A, let me remind you that we will present our 2030 climate targets on September 4th. And on this occasion, we'll take the opportunity to provide you with a trading update on summer activity. To conclude, I would like to highlight the main takeaways of this presentation. So it is delivered strong financial performance in H1 2023 with the improvement of all profitability KPIs and further deleveraging. It underscores once again our ability to neutralize the impact of inflation with significant pricing adjustments, together with strong operating leverage and productivity gains. These good results allow us to raise our full-year 2023 profitability objectives with higher targets for EBITDA margin, EBIT and headline net results. Finally, we will provide a trading update and announce our climate objectives during a webcast on September 4. 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] There seems to be no questions at this time. Please continue.

That means that we have been quite clear, and I'm quite happy if everything has been well understood. So thank you for your participation tonight and your attention, and I wish you a wonderful summer and give you [indiscernible] for beginning of September for the update of the activity and the presentation of our climate action plan, but I think that we have some questions now.

[Operator Instructions] And our first question comes from the line of Christoph Greulich from Berenberg.

Three from my side, please. Firstly, you mentioned that the high pricing discipline has led to some contract losses. So could you provide us with some color on how the churn rate has evolved? And is it correct to assume that these contracts have not been picked up by your competitors? And then secondly, on the free cash flow guidance, just to clarify, this implies a working capital inflow in H2? And then lastly, on the financial result, is it fair to assume that it should be fairly stable in H2 compared to H1? Or do you expect any kind of material sequential change there?

So first question. So as I said, we consider that the level of volume that we have lost due to this pricing strategy, it was mainly, by the way, in U.K. and Germany. It's slightly below 1%. So you can guess that it is 1% churn more. And yes, each time the customer will never reinsource because you would not make some savings. So that means that he has been able to find a small competitor that has decided to take the volume. And then you had 2 questions for Louis, one for the working cap and the one for...

Seasonality of the cash flow -- working cap, you remember that it's always very negative in H1, always very positive in H2. So that will be the case. You can see seasonality, for example, of last year. So I want to give you the full detail. But yes, positive inflow for working capital. For interest, we gave some guidance for full year, we are expecting cash there, around EUR 90 million. We are still there. There is the kind of seasonality of the coupon that we pay so that with the amount you see in H1, you can guess that we have much less to pay in H2 for the cash interest.

[Operator Instructions] You have a question from the line of Annelies Vermeulen from Morgan Stanley.

I just have a couple of questions. So I'm just trying to better understand the sort of the margin upgrade given at the Q1, you were still talking about 50 basis points. So this sort of 20 basis points difference in sort of your expected margin for this year. What exactly has changed in the last couple of months? Is it better pricing that you got at the midpoint? Is it the productivity gains that you talked about? I'm just wondering where that delta has come from? And then secondly, on the M&A pipeline. So you've mentioned sellers are holding off on selling because they want to have a year of normalized results. So do you think that as we're now sort of a year post-COVID, is that is something that might pick up in the second half? Or do you think it will be more of a 2024 story before you see more of those deals come back? And then just one more to finish as well. The -- you've talked about the regionalization of supply chains and reshoring into Europe. I think you talked about that on the last call as well. I'm just wondering if you're seeing that come through yet in volumes or activities? Or is it more something again, you're expecting over the next 12, 24 months to see the benefit from that? Any anecdotal evidence that you're seeing of that would be helpful.

So if we start with EBITDA improvement of the guidance, so it's clear that we are more comfortable end of July than after the first quarter to have a better view on where we are. But clearly, the driver of the nice performance slightly above our expectations is productivity and efficiency. We have been very efficient. So not only to make some improvement in logistic, energy consumption and so on, but what is quite also interesting in the first semester is to highlight the fact that all the new volumes, so the additional volumes received in the different plants has been very well managed, and we are very profitable. So it has reinforced also the operating leverage, thanks to the increase of the volume. So it's not related to pricing, where we have more or less delivered what we wanted, not less, not more. The second question for M&A. I think that it is more in 2024 that we can expect more deals to come. If we have a view on the pipe, they would probably -- it's quite not very important with some potential closing before the end of the year '23 and a lot of family will wait for the full year '23 results before having discussion and negotiation with us. So I think that we'll have a more normative year of M&A in '24. And your last question, it's -- we see a trend that is quite interesting. We have some examples, and we gave example relating to all the subjects of electric car, and the impact with the mega battery plant and so on, and we sign, if you remember, a big contract in Sweden. But we have also some quite interesting new contracts signed in Workwear for cleanroom and for microelectronics. So at the end, it's quite complex at this stage to isolate this sole impact to give you a precise figure just for this impact. I think that it is more important to highlight that it contributes to the global very good momentum we have in the commercial terms and the number of new contracts signed globally in Workwear in Europe. And so it is one of the reasons why we have seen this success in the recent months.

Your next question comes from the line of Ben Wild from Deutsche Bank.

Three questions from my side as well. Just on the selectivity that you flagged in Germany with the health care clients, in the U.K. with hospitality clients. Is this -- some of your customers becoming incrementally more price-sensitive over versus recent quarters? Or is it just a reflection of customers not accepting the level of price increase that you need as a result of the cost base inflation you faced? Second question is the volume growth in Q2 is obviously slightly weaker than Q1. Is that slowdown entirely related to that selectivity that you've mentioned? And then third question, perhaps for Louis. On the CapEx guide for this year, just given the strong energy and wage-related price increases you put through, why is your textile investments and other investments still so high as a proportion of revenue? And how can we think about that going forward?

So to start. First question about the reason why we have seen some notes. I'm not sure that it is a big difference in the behavior customer. It's perhaps also the difference in our own behavior because with all the volume we received in the first quarter and so on, we had the opportunity to be perhaps more selective. And so we have some example. It's always a big name and -- so that's why it represents some million euro immediately when we decide not to continue to serve big hospitals in Germany, we are talking about for one contract, it can be more than EUR 1 million or EUR 2 million immediately. And the same with some major hotel chain in U.K. where we have kept a large part of the volume, but at the end, we were ready to lose a small part of the volume, but it can be quite sizable at the end due to the size of the global contract with these customers. So I think that this is more our own behavior that has changed, as we added in mind to protect the margin, we need absolutely to pass into our price, the evolution of our cost. The second question for the evolution of volume in Q2. It's very simple to understand. It is linked to a comparable basis. It was very easy in '22 for the first quarter because we have still the impact of Omicron variant with a low level of activity in hospitality quite everywhere. And of course, in the second quarter of '22, the activity noted was much better. And so when we compare the level of growth of volume in Q2, it's just a question of basis of comparison, not more. And the third question for Louis for textile CapEx.

Yes. Just to comment the second one. When you -- I guess, you have made the calculation of restating from the hotel recovery, which is not an exact cause you can guess, and you will see a quite stable volume growth Q1, Q2 between 2.5% and 3%. Linen CapEx, we can say that the price in linen is peaking in H1. So it has taken also some inflation, as you know, with the kind of a lag due to the negotiation. Now we see the price of Finland decreasing for H2. Besides, we have now a normal pattern in the orders on the reception of linen, which was not the case last year. For Flat linen, we are there -- before the season, so in H1, a lot and much less in H2. And second, as I mentioned, we had a lot of Workwear, nice contracts newly signed and then you have to buy upfront the linen for sale contracts that provide also some linin CapEx.

Okay. If I may, just a fourth quick question because you mentioned it during the presentation, and that's on pricing for next year. Obviously, it's very early stages, but maybe just coming back to that point, how -- what gives you confidence that you will be able to put through further price increases next year with the energy expense potentially decreasing next year?

So the first key criteria is always a breakdown of our cost base. As the wages represent by far the majority of our cost, 60% of the cost base. And as you know, the level of wage increase in Europe is still quite strong, we expect something all in around 9% as the impact in '23. So with some [indiscernible] and so on. And you can see that regularly, you have an increase of minimum wage in key countries like France, Spain, the same for U.K. also. They are talking about a new additional wage increase also in Germany. So all in, we will have a strong increase again on the wages in our countries. And it will largely offset the decrease of the energy because it is 6x bigger the weight of wages and energy. And so that's why at the end, we know that the global formula will come with something that will be positive. And so we will explain easily to the customer that we have to replicate this in our pricing strategy. And another thing that makes me very comfortable with this assumption for '24 is also to see what happened in '23 because you could argue that we should be under a very severe pressure even in '23 with customers asking some rebates because now we have some on the spot market, the energy coming back to a much lower level of prices. And we see in '23. And I think that you can see it on our financial performance in the first semester that we are very easily able to resist because we explained that we have so many other subjects that are increasing in '23 and notably wages that we cannot, and it would not be fair to decrease our prices. So that's why I have this level of comfort for '24.

Your next question comes from the line of Sabrina Blanc from Societe Generale.

And I have just one question, is regarding the level of leverage, you have mentioned 2.1x at the end of full year '23. You have already mentioned that you and -- you all could think about the potential use of cash. And -- can you come back on that? And to understand your priorities between potentially some share buybacks, some increased dividend or M&A?

So 2.1x is not the end of the story of the regime. And what we said is the discussion will take place with the board in September, and it is more for the strategy in -- starting in '24 and after than in '23. So that means that clearly, we'll still continue to deleverage at the 2.1x end of '23. And the question will come more when will be below 2x, so in '24. And then it's not yet decided. We will discuss about this subject in September. But short term, we don't change anything, we deleverage.

There are no further questions. I would like to hand back to Xavier for closing remarks.

No additional comments on my side. So thank you, everyone. I wish you a wonderful summer, as I said. And we have a meeting point beginning of September to comment the activity during summer and to present the climate action plan of the group. Good evening, everybody.

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